Q3 2022 Olin Corp Earnings Call
Good morning, and welcome to Olin Corporation's third quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Following today's brief opening comments, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Steve Keenan Olin's.
Rector of Investor Relations. Please go ahead Steve.
Thank you Jerry.
Good morning, everyone and thank you for joining us today.
Before we begin let me remind you that this discussion along with the associated slides and the question and answer session that follows.
Include statements regarding estimates or expectations of future performance.
Please note that these are forward looking statements and that actual results could differ materially from those projected.
Some of the factors that could cause actual results to differ from our projections are described without limitations in the risk factors section of our most recent Form 10-K and in yesterday's third quarter earnings press release.
A copy of today's transcript and slides will be available on our website in the investors section under past events.
Our earnings press release, and other financial data and information are available under press releases.
With me. This morning are Scott Sutton, CEO , and Todd Slater Olin's CFO .
Scott will make some brief remarks, after which we'll be happy to take your questions I'll now turn the call over to Scott Sutton.
Thanks, Steve and good morning to everyone.
The Olin team is all about delivering on the opportunities we have two major opportunities before us.
I'll start with opportunity number one we are experiencing recessionary conditions and the opportunity is to show Owen will perform remarkably different than history may indicate.
Over the next four quarters, we forecast delivering more than $1 $1 billion of Levered free cash flow.
This is remarkably different.
Don't worry that we had to pull back from the ADC market, while prices cratered, creating a major P. D C value morass.
Don't worry that we had to optimize our epocrates participation to support our advanced partners, while Asia liquidity liquidity temporarily leeward others.
These necessary activities are respectful of our core theme to focus on value set.
Set our market participation based on the weak side of the issue you and by liquidity where necessary to lift the value of the E. C U E.
We did in the third quarter.
Similarly, Winchester did not participate in large replenishment to the channel alone, but instead lifted the outlook of this storied brand by preserving value.
Oh, one team is poised to March our way through all of these challenges and come out recession tested on the other side.
We are the leader and we demonstrated every day.
Opportunity number two is to multiply the value of our recession levered free cash flow.
We have reduced our share count by 14% over the last 12 months and by 10% over the last six months, we continue to deploy our levered free cash flow towards share repurchases and have a runway of $1.9 billion left on our share repos.
This authorization.
Possible outcome is that our share count is reduced to $100 million in a couple of years, our post recession normalized levered free cash flow is expected to be more than one $5 billion by banner.
Possible outcome being $15 plus per share of Levered free cash flow.
We have an excellent high value capital allocation plan before us and we will drive it every day.
Supporting these two opportunities as an investment grade balance sheet, which we are committing to maintain.
And more importantly, the best team in the business 8000, OLED employees, United in our leadership value question I really can't thank them enough.
So with that we'll take your questions now.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to you at this time, we will pause momentarily to assemble our off there.
Yeah.
The first question today comes from Kevin Mccarthy with vertical research partners. Please go ahead.
Yes. Good morning, Scott you put forth updated guidance for the fourth quarter, but also affirmed your EBITDA guidance range for a recession case scenario as you see these markets develop and unfold here. What do you think are the biggest sources of variability either on.
The upside or the downside as we move through the cycle.
Well you know Youre right.
Kevin we have reaffirmed our recession case guidance, which we see happening over the next year already and are running at now.
There's going to be lots of ups and downs across the product portfolio. As you know we run a contrarian model, where we let our market participation would be based on a weak market or the weak side of the E. C. You. So you've seen a D. C. For example go from.
Really high pricing to really low pricing in those kind of things are going to happen, but because we focus on the E. C. You were likely to be more balanced and in totality, what what there could be some alarm about Kevin is that we may have to take a couple of quarters down in order.
To support the shoulder quarters to be able to deliver more than $1 billion of levered free cash flow across the whole year I mean, no market segment really has good fundamentals right now so there's going to be some volatility.
And then you know I know, you're you're throttling back on on volumes in an effort to support the market that effort appears to be succeeding but nevertheless can you talk about what your operating rates were in the quarter in chlor alkali and epoxy and and how you see.
That utilization are progressing here in October .
Well you know, it's maybe instead of all of those operation rates I'll at least share with you what we're doing in our part C. So if you were to think about you know the web with operating rates all of our resin production facilities were running below 50%.
There in order to preserve value and remember a recession case I think we could move the whole company down to that level and so I would just say we have plenty of room left across the rest of the company to make a recession prediction come true.
Okay. Thanks very much.
The next question comes from Hassan Ahmed with Alembic Global. Please go ahead.
You know just wanted to revisit the Q4 guidance you know, particularly in light of a recessionary conditions in the Lake I mean look I I understand you know Q4 tends to be seasonally weak you guys. You know we've consistently talked about certain sort of markets you know be a D. D C you'd be at a bulk fee.
It does a decline we're not having to do that yet, but it could certainly happen you know as the recession plays out.
Is around sort of Chlor alkali pricing right you know obviously pricing has.
<unk> has been sort of thumb to both caustic and chlorine.
But you know one of the fears or investor concerns tends to be that look you know U S housing weakening D. D. C market you know a very weak up you know if we go into a recession, obviously industrial production will affect our caustic as well so in and that's sort of an environment.
How comfortable are you that pricing for chlorine and caustic at the very least would not go down.
Yeah, and this you know that setup is exactly what's what's happening now right I mean, PVC has become very weak and you know Unfortunately, you see the PVC players chase the strong side of the C U and other work.
Words, they're chasing caustic volume and they're willing to destroy their central value theme as their central long term values name of being in the PVC business to sell just a little bit of incremental E. D C or even V. C M into the marketplace is exactly.
Opposite to do our models and of course, we take exactly the opposite tactic right. We don't participate as much in the coring and derivative side under that case, we don't participate as much in the vinyls side and that tends to improve both.
<unk> of the EC you and you see that materialize with both rising caustic prices and lifting chlorine prices I think the there's the summary point underlying all of that is that you know, it's it's not the biggest concern.
That demand drops on both sides of the E C U because we exploit the difference between the relative conditions on each side of the EC you. So total demand can draw yet the difference between the quality of those markets can actually watch.
<unk>, which is where we do well.
Very helpful. Thank you so much Scott.
The next question comes from Alexia <unk> with Keybanc capital markets. Please go ahead.
Thanks, Good morning, everyone Scott.
Sure you saw there were some sizable.
Sizable caustic.
Increase nominations in Europe , $950 per ton or higher and but we've also recently seen a lower prices for power and natural gas in Europe , What's your outlook for for this European caustic.
<unk> price in Q4, and how might that help or what do you think.
Well I mean, the the caustic pricing in Europe is likely to stay elevated I think the factors on the other side of the equation or that you know, there's a lot more material moving out of Asia and out of China.
Trying to take advantage of that arbitrage gap. So you know we do see volumes moving that way at the same time you know cost.
Probably temporarily come come back down, but the reality is that you know as Asia demand may recover over the course of the next year I'm not saying, that's beginning now but when it does recover you know those trade flows tend to have pressure to go.
The other way and at the same time, you know I think we all know that we have a long winter to go through and Europe , and you know the conditions that drove the elevated energy pricing probably still persist. So net net through all that you're likely to see Europe stayed fairly elevated.
Thanks, and going back to domestic caustic market, what how is demand been in the last few months, how has third quarter in October perhaps trending on a year over year basis relative to normalized demand.
Yeah.
Well you know all of our volumes are down year over year caustic demand relative to supply has been fine I mean, there are some weakening factors are you know arising in those market places so it's not likely to get stronger.
But you know again, it'll actually I'd just go back to that doesn't necessarily matter in isolation, all that really matters is the relative quality of the markets on each side of the easy use what's the difference there and again that difference is you know.
Where we make our value from.
Thanks Scott.
The next question comes from Mike Sison with Wells Fargo. Please go ahead.
Okay.
Hey, guys.
Just curious in terms of your you know the volume declines in <unk> and in cabin and epoxy.
You know down about 17 29, what do you think the fundamental volume declines are in and I guess, the one way to think about it too is if your volumes are flat.
And your E C. P C. I R. It did improve what would your EBITDA would cause that could that should that have been up.
Year over year.
Yeah, and so if you're like if you're asking about sort of what's the fundamental decline in the market place, it's likely to be less than the decline in Olin volumes. Because you know remember you know Owen tends to eat Bose.
Shortfalls in demand from a production standpoint.
We may not completely eat it from a sales standpoint, because we go out and buy liquidity out of the market place at that moment to fill in that gap a little bit so youre going to see you know our production down more than the decline in the market place you'll still.
See our sales volume down more than the decline in the market place, but our sales volume declines aren't as big as our production volume declines.
Okay and then.
Right you know when I looked at the the last great recession looks like cost it did go up.
You know from from only two parts of one nine and then it seems like it's going to happen again potentially here can you maybe give us a little history lesson why it went up last time and and you know what you're seeing as as maybe the potential to go up again over the next six to nine months, yeah, Yeah, well I mean when the.
When the you know demand declines dramatically on the chlorine and chlorine derivatives side, you know relative to that sort of global industrial demand for caustic you know theres, just not enough caustic to satisfy that demand, even though that.
Demand has has declined a good a good bit.
The PVC producers sort of run out of runway trying to find a home for either you know the vinyls intermediates or the P. B C that supports that caustic production and it declines substantially so yeah, it's not it's not impossible that we end up.
Back then that same situation.
Thank you.
The next question comes from Frank Mitsch with Fermium Research. Please go ahead.
Good morning folks.
The buyback levels were very impressive in the third quarter. After a very impressive second quarter and you indicate its got it.
You could see the company at a 30% lower share count and a few years I'm just curious as to you know given the fact that you've been very clear that we're entering into a recessionary environment, what what investors might anticipate Owens, our pace of buybacks in the near and mid term to be.
Yeah, Yeah sure you know Frank I mean, we're going to target most of our Levered free cash flow toward share repurchases I mean, that's that's what we've done for most of this year you know that's what we're looking at here in the fourth quarter and.
That's what we're looking at next year as as well I mean, our balance sheet is in great. Great shape. We have you know a new expanded liquidity arrangement, even though we're making a commitment to stay investment grade you know we can.
We can hold those metrics through the recession. So it doesn't preclude any option and so it certainly does not preclude us from you know buying as many shares as as we can so if if you believe that $1.1 billion of Levered free cash flow.
So most of that is gonna go toward share repurchases.
Fantastic Fantastic and then.
I'm also looking at that recessionary.
Scenario of EBITDA, you indicated that you know in terms of cash flow could be 50 million of restructuring costs or restructuring actions I'm curious is that something that's a that's a.
Youre looking at you know in the in the in the near term and if so you know what what might that include.
Frank This is Todd you know that that would include restructure that 50 million includes restructuring costs as well as other costs such as some of the you know small investments that we've made will be made in you know the joint ventures that we expect to start early next year.
Here. So that's all encompassed in that kind of number.
Okay. Thank you so much.
Thanks.
The next question comes from Irene Vishwanathan with RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
When you think about the level for for Q EBITDA, you know looks around $450 million at the midpoint.
How much of that decline say, 15% to 20% sequentially would you attribute to seasonality.
And I guess as you're looking into Q1 or 23 mm.
Would you consider kind of Q4 is as a bottom level of profitability and maybe some improvement from Q1 or into Q1 or how should we think about the next couple of quarters. Thanks.
Okay.
This is Todd as you think about that.
I'll start with Winchester, the Winchester operations, you typically see you know holiday seasonal shutdowns at our facilities and you normally see Winchester as the weakest quarter is the fourth quarter. So that when you talk about seasonality that the effect in the fourth quarter on Winchester is really seasonality and.
When you think about the epoxy business clearly, it's a you know a value over volume strategy.
In the fourth quarter, especially in the Northern Hemisphere, you know construction is lower and traditionally you see a significant decline in epocrates demand. So there is that there is a significant seasonal factor and our policy as well in the Chlor alkali space typically.
Other than some demand.
You know for bleach and that's those seasonal items that are more summer.
You don't really see the level of seasonality out of core alkali that has much more to do around turnarounds.
Yes.
Okay. Thank you and if I can.
Just ask a follow up.
It appears that you know caustic soda as you noted a continues to be relatively tight.
Mainly because of the supply side.
Could you could you just elaborate that I mean on that I mean are you still seeing kind of strength in Europe , just given the weaker industrial activity.
And and and when you consider that that you're you're you're already operating your your epoxy another assets maybe at recessionary levels are you are you doing the same in Oh.
And Clorox why at this point or are you, saying that 50% operating rate or.
Maybe you can just elaborate on the utilization and Karaklis. Thanks, Yeah, Yeah. I mean, the first part of your question. There right. I mean, you know demand is definitely down and declining in Europe . It's just that supply has declined more band.
The man so that's the that's the situation.
And in Europe , No I mean, we we have a lot of room in our broad chlor alkali assets to continue to withdraw from certain points of the market. If we need to do that I mean, our expectation is that we do.
To do that right with you know recessionary conditions, you know only getting worse really from this unprecedented combination of events right you have to China long term demand locked down and you've got Europe demand really crippled by the war now that you know U S has got to do what it's gotta do to smashing.
Place and you know, we're likely to have to turn down some as at a certain point over a certain points of the next 12 months.
Thanks.
Yeah.
The next question comes from Steve Byrne with Bank of America. Please go ahead.
He is kind of at least some of their tiano filling in for Steve. Thanks for taking my.
My questions. So firstly I wanted to ask on Winchester. You meant you had mentioned previously the vet channel be proven to be a bit Oh oversold and you didn't participate in loading volumes in Q3, but I assume your slides you do have a price increase for Q4. So how should we think about I mean, what does.
The rationale for raising prices and should we actually as a child well easily smoking.
Think about potential competitive pricing pressures and kind of your refresh it'll be done administration with rush and supplies them, where things stand at the moment and what's the impact on the supply demand balance in North America.
Yeah, Yeah sure I would just go back to the first point, you made and maybe I would restate it differently right I mean, the the channel hasn't become overstocked are overfilled.
Just that the channel was starved for a very long time and the channel has returned closer to normal inventory levels, it's still not there yet and that happens principally in the third quarter.
And we just didn't really participate as much as others and you know trying to get the channel you know stock back to a more normalized level by the way.
Normalized demand and ammunition now is much higher than it was two years ago. So we will have some selective price increases there and Winchester on certain products. So it's not necessarily across the board, but you know those have been Ben.
Munich hated and it's it's an undervalued items that you know have a high demand. So you know that logic still fits and it's the same logic, that's really applied to Winchester over the last couple of years, where we've had six or seven broad price increases before.
The fundamentals are still excellent in that business.
Consumer demand much higher than it was two years ago military and law enforcement demand you know higher than it was.
A year or a year ago, and then there's been changes in the import situation, where you know Russia used to be the largest standpoint or if that's still clearing out through the channel, but no more imports are happening of Russia in ammunition.
Okay, perfect and I also wanted to touch base, a little bit on green hydrogen there was this JV with plug power from syngas.
And if I understand correctly that if you can confirm first thing that I think the hydrogen is going to produce there and sell to plug power will not require incremental investment and can you also talk a little bit how do you see this.
This business has an even.
And even longer term as part of our own portfolio.
Yep.
And so this this is our second arrangement with plug plug power. This joint venture and signing Gabriel will use hydrogen you know that's already being produced today and you know may be used in a less efficient way.
So what that does is you know minimize the base investment to get the molecule, but joint venture you know still has to you know build and operate liquefaction facilities to be able to distribute the hydrogen to our fuel.
Sale uses so there's still some investment it's a pretty minor investment.
Next steps are very interesting all those two existing arrangements, we have or maybe you know four or 5% of the hydrogen that we already produce today. So there's an opportunity to replicate yes, or even modify it at many different sites.
Yeah.
Great. Thank you very much.
Sure.
The next question is from Joshua Spector with UBS. Please go ahead.
Hi, its Chris Perrella on for Josh.
The I was curious as to what you've done to hedge out natural gas costs into the fourth quarter and out to next year and at what level.
Okay.
Yeah, Chris This is Todd.
We are as you know and active hedger for natural gas is that directionally about 70% of our fuel source for power.
We are in a corner out we are very heavily hedged and generally have a rolling four quarter program. So you can imagine that you know we have a a portion of our 2023 already covered with active hedges.
Alright, and then to your earlier comments about flexing down the Chlor alkali rate.
Protect value and cash flow on the shoulder seasons.
The expectation for that too.
Sort of hold the Chlor alkali route.
Your operating rates steady into the first quarter, assuming E D C and a pox he stays where they are now.
Well look I you know without getting you know to two specific Chris I would just say that you know, there's there's gonna be shifts and changes in our production rate relative to the liquidity that we buy out of the market place.
And you know we've we've already said that we've limited our participation in the vinyls chain and it's certainly not impossible that we choose to limit that participation. Even further as we enter 2023.
Alright, thank you.
Right.
The next question is from Matthew Blair with T. P. H. Please go ahead.
Hey, good morning, I had a question on the epoxy feedstocks, it looked like propylene and benzene or coming down quite a bit in Q4 would that be a feedstock benefit through a proxy in Q4 or do you have to.
So we really think about this as you know potentially flowing through into 2023.
Matthew This is Todd as we think about you know, especially in North America.
The costs have come down from the third quarter, and therefore that does lower our our cost but once you start around the globe on an international basis, those lower cost really you'll see that benefit in our policy in the first quarter.
Thanks, I'll leave it there.
The next question is from Angel Castillo with Morgan Stanley . Please go ahead.
Thanks for taking my question. This is Melissa on for Jon I guess, you've mentioned that your throttling back production to maintain.
Are you seeing your peers remain as disciplined here.
Yeah, Hi, this is Scott here I really wouldn't have that much to say about the peers. What I will say is that you know olin is only participating where there's reasonable value in them.
Market place. So you know, we're having we have to make pretty significant changes sometimes in our operating rate to to do that so I'll speak on old ones behalf there.
Got it thanks, and then we've talked about share repurchases, but I'm wondering what the overall appetite is for M&A and kind of the pipeline there.
Yeah, Yeah, I mean, it's it's not out of question out of the question that you know some M&A is possible what I will say is that certainly in the near term.
That most of that is low capital type activities and as we consider you know M&A candidates and targets and potentially even have discussions a lot of that turns into you know nearer term.
Joint venture or alliance opportunities. So you know we've announced a couple of joint ventures, we announced at least one alliance. We've completed other multiple unannounced alliance is and so I expect those kind of.
Arrangements to continue to materialize over the next year and you know it's unlikely that we moved to complete any kind of you know large acquisition is right. Now you know, we've got a pretty shareholder friendly.
Friendly policy, taking almost all of our Levered free cash flow and directing it towards you know direct returns in the form of share repurchases and then maintaining our dividend.
The next question comes from John Roberts with Credit Suisse. Please go ahead.
Good morning, it's maths Garosci on for John .
Slide six you indicate your ability to repurchase shares through an economic downturn.
Given some speculation or are nearing recession in your potential cash flow generation during that time, and considering supply demand projections and the time it takes to add capacity where do your bottleneck.
Is there a point, where you would look to allocate capital towards stroke.
Yep Yep, Matt, Yeah, you're not going to see Oh and expand its base production capability. In fact, you know over the last two years, we've taken out more than a million tons.
E C U E.
Production pay capability. So we're not going to we don't have any need to direct capital towards that kind of base growth projects. However, you know as a levered free cash flow does grow from sort of that trough level of 1.1.
Dollars in a year theres going to be opportunities to acquire you know existing assets do joint ventures with existing assets do additional alliances as well and so that could be some pull on that.
That capital, but all of that has to compete you know with the value of repurchasing shares and really none of it is competitive with the value of repurchasing shares in today's world.
That's helpful. Thank you.
And my follow up is just on the epoxy market have you seen any change in behavior. Since the end of September either in terms of buying dynamics are selling dynamics.
I would say the same principle trend.
You know stay stays in place.
With the China.
Demand shortfall.
But yet still running and expanding assets there we've seen traditional trade flows temporarily reverse.
So a lot of that material is ending up.
You know either in the U S or Europe or a lot of material that used to be produced in other countries in Asia and used to for import into China is coming to the U S and Europe and that really hasn't.
Change I would say that you know the good news is there's been some moderation of the rate of change there and so you know there's some stability there and we've settled with you know a group of advanced customers that.
Val U the Olin solution and also value the fact.
That are a part C resin carries a C O two footprint, that's probably you know 70% below the C O two footprint of all that material, but it's making its way out of China.
So there's some moderation there.
Thank you.
Sure.
The next question.
Comes from Kevin Mccarthy with vertical research partners. Please go ahead.
Yes. Good morning, I just had a few follow ups, Scott, we're hearing or reading more about low water levels on the Mississippi River.
Our our restrictions on barge movement, having any meaningful impact on either olin or the industry that we should be thinking about or is that really just immaterial.
Yeah, you know Kevin I mean, it's it's it's not image immaterial. So there is you know some impact it's causing logistics change you know to have to be re arranged a bit for OLED, perhaps it's a little less.
Impactful.
I think the thing to worry about actually is this rail strike I mean, if that rail strike really occurred I would just say that it's equivalent to the mother of all Hurricanes that you know we've ever ever experience that disruption on top of you know this nagging.
You know barge issue going up the river system.
It would be a real concern to all one and perhaps beyond.
Interesting.
Secondly, Scott I think a few quarters ago, you had a you know publicly.
Discuss potential or at least the exploration of a PVC resin partnership are those efforts active or or dormant or extinct how would you describe.
You know your discussions at this stage.
Well I would just say that there are multiple active discussions around that I would also say that that you know for the moment with the contemporary you know decline in P. D C attractiveness.
You know something may not materialize, you know for a little while they're interesting enough through all that there's there's more interested parties.
We haven't found the right setup that delivers what we expect out of that and we expect more than D. C M or P. V. C. You know, we we expect an expansion of our ECS business through that.
And then last one if I may for Todd I think your press release indicated a tax benefit of 36 million and.
Related to the release of deferred tax liabilities can you just elaborate on on what transpired there.
Yeah sure Kevin Thanks for the question. It did it did in the third quarter, we did realize just under it.
Book benefit of just under $37 million related to a legal entity liquidation, it's a noncash tax benefit resulting.
Resulting from us liquidating and acquisition entity created over 10 years ago, and it was really no longer necessary. So from a book perspective, we're able to remove that liability and recognized the income.
I see thank you very much.
The next question.
It's Eric Petrie with Citi. Please go ahead.
Hey, good morning, it's gotten Todd good.
I'm wondering in your near a bottom up build that you've provided 400 million from merchant chlorine pricing.
Upgrade versus 'twenty 'twenty did that include or exclude the reset of chlorine and the T. I O two next year.
Yeah.
Yeah. So so Eric I mean, it is inclusive of all of those items and I think the good news here is that it's probably the total number is probably a little low compared to the actual risk.
Salt after we turn the calendar over here in 2020 three from 2022.
Okay, and then Scott I was wondering if you could comment on your participation currently in caustic soda exports and how does that compare to the industry or are you seeing better opportunity parlaying volume.
Yeah, well, you know what without giving any specific numbers of course.
We we always participate in the export market you know we've also built up.
Our parts of server of liquidity and you know the export world.
If you think about our blue water Alliance joint venture that we've announced with Mitsui.
The idea there is to become the largest manager of liquidity in the world that means that we're you know we'll target being one day the largest trader.
Oh, you know chlor alkali molecules.
In the World. So I would just say, it's a heavy point of focus for US and you know we use it effectively to run our model.
Thank you.
Yep.
As there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Scott Sutton for closing comments.
Well I would just say thanks to everyone for joining the call and we'll wrap it up with that.
Thank you for attending today's presentation you may now disconnect.
Yeah.