Q4 2022 Olin Corp Earnings Call

Speaker 2: Good morning and welcome to the Olin Corporation's fourth quarter 2022 earnings conference call.

Speaker 3: All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero.

Speaker 4: Following today's brief opening comments, there will be an opportunity to ask questions.

Speaker 5: To ask a question, you may press star then one on your touch-tone 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 Director of Investor Relations. Please go ahead, Steve. More national megauatches on 9 councillors.

Speaker 6: Thank you Anthony. Good morning everyone and thank you for joining us again today.

Speaker 7: Before we begin, let me remind you that this discussion, along with the associated slides and the question and answer session that follows...

Speaker 8: We'll include statements regarding estimates for expectations of future performance.

Speaker 9: Please note that these are forward-looking statements and that actual results could differ materially from those projected.

Speaker 10: Some of the factors that could cause actual results different from our projections are described without limitations.

Speaker 11: in the risk factor section of our most recent Form 10-K and in yesterday's fourth quarter earnings press release.

Speaker 12: A copy of today's transcripts and slides will be available in our website in the investors section under past events.

Speaker 13: Our earnings press release and other financial data and information are available under press releases.

Speaker 14: With me this morning are Scott Sutton, home CEO .

Speaker 15: Damien Gunkel, President, APACSI.

Speaker 16: Patrick Schumacher, President Chloralkyli.

Speaker 17: Brett Floyer, President Winchester, and Todd Slater, O & CFO .

Speaker 18: The leadership team 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.

Speaker 19: Thanks Steve, and good morning to everyone.

Speaker 20: In 2022, Olin generated $12 per share of levered-free cash flow, repurchased more than 25 million shares and reduced our net debt by $200 million.

Speaker 21: It was a massive team effort after generating $9 per share of Levered Free Cash Flow in 2021.

Speaker 22: As we head into 2023, our markets are not healthy, yet our focus on levered-free cash flow remains the same, and we expect to generate approximately $7 per share of levered-free cash flow in this recession year.

Speaker 23: From an IBITDA perspective, we worked in the $2.4 billion to the $2.5 billion range the last two years, and we expect to generate at least two-thirds of that average in the trough that is 2023.

Speaker 24: For Olin, the key features of early 2023 include continuing to idle our complete global epoxy resin business due to suspended demand in the largest consuming regions of China and Europe , rectifying a transient fat supply channel in commercial ammunition via a low-cost machine.

Speaker 25: main speaker line. Thank you.

Speaker 26: I.

Speaker 27: F F the comation.

Speaker 28: Okay.

Speaker 29: All right, thank you. Look, sorry, I understand that we dropped. I won't repeat the first part of my comments, but I'll start where I think we dropped off.

Speaker 30: So, you know, for Olin, the key features of early 2023 include continuing to idle our complete global epoxy resin business due to suspended demand in the largest consuming regions of China and Europe , rectifying a transient fat supply channel in commercialWS.

Speaker 31: in our merchant chlorine business.

Speaker 32: While some of these features of the first quarter of 2023 are already impactful in a slightly negative way, it is still possible that we may have to take more drastic action in a subsequent quarter to recoil further and preserve product values for the rebound toward the latter part of the year.

In 2023, expect us to hold our current net debt position.

Keep buying shares throughout the year.

Gain in Investment Rate Rating.

complete our asset footprint adjustment decisions, and prepare for a quality growth story in 2024.

We've also updated our 2022 ESG Scorecard progress on page 10 of the presentation. This is a growing theme for Olin, and we look forward to showing the results from our focus in this area.

Now, Damian, Patrick, and Brett will each make a few brief comments on both the situation and our initiatives across all three businesses, and then Todd will follow with additional commentary on our 2022 accomplishments and 2023 outlook. Thank you, Scott.

And good morning. On slide 4, epoxy Q4 results are partly a reflection of seasonal demand, but principally our disciplined approach to one of the most challenging landscapes in 14 years.

which led us to deeply pull back resin production that would have otherwise harmed the landscape.

While anticipating improvement in the back half of 23, we focus today on productivity, optimizing our asset base.

enhancing our sustainability profile, and positioning for value-based growth.

On this last point, we supercharged the business during Q4 of 2022, putting our differentiated systems product portfolio under seasoned leadership in new product commercialization.

I look forward to sharing on future calls the role olden epoxy plays in addressing global energy, mobility, and infrastructure challenges in a sustainable way and how that translates into shareholder value growth.

And I'll turn it over to Patrick Schumacher for chlorophyllite.

for chlorophyllite. Thanks, Damion. Thanks, Damion.

Even though 2022 was an all-time record year, the second half of 2022 brought significant challenges, which we are likely to continue into the first half of 2023.

Pricing in the vinyls chain remains weak and continues to necessitate lower Olin operating rates.

On the positive side, our merchant chlorine ratchet continues to turn only one way.

Chlorine pricing is expected to step up through 2023 as legacy contracts end.

Bleach has been another success story and we expect both products to show substantial earnings growth again in 2023.

Our Blue Water Alliance is now one of the world's largest traders of EDC and caustics and will be an important part of the Olin value equation for years to come.

I'll now turn it over to Brad for an update on Winchester.

Thanks Patrick. The Winchester team continued to maximize value throughout 2022. However, during the second half of the year, we started to experience a transition in our commercial ammunition business.

from refilling depleted emmitories to filling emmitories to the rate of our customer sales.

And in some cases, especially small caliber rifle, inventories became high.

So we decided to manufacture and sell less to preserve value for both Olin and our customers. With nearly 15 million new participants entering the recreational shooting sports over the past few years, we believe demand for our leading Winchester ammunition products is the key.

will remain stronger than historical levels. We continue to see opportunities within our military segment with demand increases from current and new international military customers.

as well as increase government funding to modernize the Army Lake City facility.

As we manage through this commercial ammunition transition, our focus will be on growing and preserving value for the number one brand in the ammunition industry.

I will turn it over to you, Todd.

Thanks, Brett.

Throughout the last two years, Olin has generated $3.1 billion of leverage-free cash flow.

Our capital allocation was initially focused on the balance sheet, whereby we reduced outstanding debt by 1.3 billion dollars over the two-year period.

with our investment grade balance sheet set.

We primarily deployed our remaining leverage-free cash flow toward share repurchases totaling $1.6 billion over the last two years. In fact, during 2022, we reduced our outstanding shares by approximately 16%, all from cash flow.

In 2023, despite the challenging global economic conditions, we're forecasting to generate recessionary trough level levered free cash flow of approximately a billion dollars, which equates to about a 13% free cash flow yield.

Our 2023 cash flow includes a couple of unusual items.

Our cash tax rate is expected to be higher than normal due to deferred international tax payments of approximately $80 million that are forecast to be paid this year.

Also, we are expecting a peak payment level under our long-term energy supply contracts of approximately $75 million.

Finally, our investment-grade balance sheet and cash flow should enable Olin to continue to deploy a substantial portion of our 2023 levered-free cash flow toward share repurchases.

That concludes our prepared remarks.

And Anthony, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then one in your touch tone phone.

If using the speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then 2. At this time, we will pause momentarily to send our question.

Our first question will come from Hasan Ahmed with Alembic Global. You may now go ahead. Yes, we do.

Good morning, Scott. Scott, a question around the 2023 guidance you guys gave, obviously in line with the trough range that you guys have been talking about, the 1.5 to 2 billion. So look, I take a look at the Q4 adjusted EBITDA, 442 million.

I annualized that and I get to 1.77 billion which is

squarely sort of the midpoint of the TROP and 2023 guidance that you guys have given. And you guys obviously achieved this Q4 EBITDA in the face of extreme adversity, right? I mean a massive destalk.

most of your end markets being as weak as they were, the epoxy business doing what it was doing. And on top of that, obviously Q4 being a seasonally weak quarter. I guess the only tailwind you guys have had in the quarter, and it seems on a go forward basis.

is chloralkali pricing. So as I sort of sit there and talk to investors, some of the cynics may turn around and say, hey look, one of the things that has been propping up EBITDA is chloralkali pricing and it just can't go on.

rising forever, so it may crack. Again, I'm not in that camp, but what could you tell us to sort of give us a little more confidence that even with the macro looking the way it's looking, you're not really going to see any cracks in chloral cyclide rice.

Yeah, thanks Hassan, I mean that's a good summary. I mean I would also urge you to think about what's the cause and effect here, right? Nolan is absolutely the leader here and is setting the value equation.

It's no doubt that pricing in chloralkali, especially in some of the derivatives, can go up from here and they can go down from here as well. But we have some very solid footing there and I'll ask Patrick to add a little color on it.

We've baked in or locked in a lift in chlorine prices for this year over last year of at least $100 million.

And vinyl's prices have been very, very weak for at least half the year. So, you know, there's been, you know, recent uptick in prices there. So maybe those prices start to tick up. So, you know, we expect a mixture this coming year of maybe some higher prices and maybe some lower prices.

there is a restock, how sort of impressive would that snap back in demand be? Yes, sure. You know, 30%, you know, I'll take your word for that. You know, if you look at our chlorine business year over year, you know, volumes are definitely down.

But netbacks are definitely way up. Chlorine, the chlorine side of the ECU has been the weak side of the ECU as we've been talking to you guys for the last, well this would be the third quarter, so we're running to that weaker side and we're managing rates to that weaker chlorine side of the ECU.

Our next question will come from Mike Sisson with Wells Fargo. You may now go ahead.

Hey guys, just curious on your outlook for chlorine. I think this is the second half of the year there's been a couple, one big paint company who sees the second half weaker in housing. So just your thoughts on how that would affect.

you know that part of the the East

Yeah, hey Mike, it's Scott. Yeah, I mean we see the same thing. I mean the trend in U.S. housing isn't great. And it's not impossible that trends like that change which side of the ECU has the better fundamental condition.

And again, we'll set our market participation according to that week's site. But when you go all the way to merchant chlorine, just as Patrick said, Mike, I mean, that's something that, you know, we've had contract resets. Patrick already mentioned $100 million a year.

Even looking beyond 2023, we would expect additional resets as well. So, Poring has a very nice runway.

Got it. And then this...

I guess when you think about your operating rights for the rest of the year, the...

Do they sort of stay at these levels for most of the year? Or is there an assumption that they would improve a little bit?

as the year unfolds.

Pardon me a moment as I reconnect the main speaker line.

Okay, I've reconnected the main speaker line. The microphone line is open as well.

Yeah, hey guys, I just I guess the question was, you know, where are your operating rates now and do you think?

they will, based on your guidance, stay similar through the rest of the year given the outlook for demand.

Well, look, I would say overall, I mean, we're, you know, certainly running lower operating rates. I mean, the highlights of those lows really are that, you know, if you went all the way down into our epoxy resin, you know, you'd find that we're running below 50%.

capacity and that situation is certainly going to continue because we're just not going to sell too much volume into an undervalued marketplace. In the fourth quarter we had to adjust Winchester's rates quite a bit as well because the supply channel got a bit fat. That's trending the right way.

Our next question will come from Arun Viswanathan with RBC.

You may now go ahead.

Great, thanks for taking my questions. First off, on that note of operating rates, it says you can run at 50% for one year. I think we've been at these low rates now for a little while. How long does that year last? I mean, how much time do we have left in that?

And then I had a couple of questions on Blue Water and Hydrogen as well. Thanks. Yeah, sure. Hey Arun. Yeah, I mean that 50% rate was across effectively the whole company.

for a whole year. You know, if we ran at the pricing levels established in the middle of last year, that would still deliver our recession case. So against that standard, there's still quite a bit of room left.

Okay, and on Blue Water, is there any way we can quantify the impact, financial impact and benefit to you? I know that you noted that you'll control a greater amount of the industry supply or at least be in a position to manage it.

How does that translate to EBITDA benefit and when do you start seeing that?

Yeah, sure. I mean, keep in mind that's a consolidated, you know, joint venture for Olin. So, you know, Todd will make a couple comments on the direct impact that you'll see.

Thanks, Arun. It will be consolidated and our results will come up into the chloroply products and vinyl segment. In the first year, you should expect overall revenue to increase $500 to $700 million. As it is the first year, you should expect from that.

joint venture, you know, minimal EPA impact.

Similarly, for hydrogen, which is the third unit starting up, is that in commercial operation and similarly when do you expect to get any EBITDA benefit?

from your sustainable activities there and how should we think about how that contribution flows into Owen.

Yeah, I mean, this is Scott. I mean, we only have one hydrogen arrangement into the fuel cell application operating today. The second one is our venture at St. Gabriel, and that one is...

you know, under design and under construction, and it'll take us to the end of this year to get that started up. And what the point we wanted to make that I think you saw in the slides is that we're starting discussions around a third venture.

you know, as we try to get our hydrogen out into these new sectors. Even the first two are only about 5% of our hydrogen.

Thanks.

Bye

Our next question will come from Vincent Anderson with Stifel.

This question will come from Vincent Anderson with Steve-O. You may now go ahead. You may now go ahead.

Yeah, thanks and good morning everyone.

I just wanted to clarify your comments on epoxy just so I had it clear. You said a global idling, but naming just Europe and Asia markets is the reason, and I ask only because US resin prices are still holding up fairly well. Is this really all epoxy resin assets are going down in the first quarter?

Well, I would say we've been running those at a lower level, but I'll let Dami and give a little more color on where we are right now.

Sure, thanks Scott. Yeah, good morning Vincent. Yeah, so on epoxy, what we've said is that, you know, this is a globally challenged situation, the worst that we've seen in 14 years since the financial crisis. You know, most of epoxy consumption does take place in China and in Europe .

And so that's where we've seen the greatest impact to the landscape. Now as a result, we've been, you know, for over a year now, we've been adjusting our production and our market participation in order to preserve value. That's led us to continue to, you know, successfully challenge ourselves to operate it.

lower rates across our portfolio. We're going to continue to do that as long as it takes and frankly we can still go further and for us it's a question of taking this opportunity to right size our global epoxy portfolio.

to focus on the assets that our customers value the most. And we've done a lot of that already, but we still have a lot more that we are going to do here under this challenging environment.

Okay, that's helpful, thanks. And then just kind of returning to Blue Ocean, so I always had kind of penciled Olin in as already the largest participant in the globally traded merchant markets for caustic and EDC. So is there any more questions?

details you'd be willing to give around what that looks like now with Mitsui at the table? Well, I would just say that we've expanded our capability there. I remember the way that joint venture was formed was...

a merger of the two international businesses in Caustic and EDC. So we've just enhanced our capability there further.

Okay, and then, you know, as I think about the other market share expansion benefit is pretty self-explanatory, but if I think about your partner not being a producer the way you are, you know, can you talk about how that might change your approach to the international market so that you're not caught in a position where you'd otherwise be looking, you know, having to run your assets even lighter than you would want to.

Does that involve a more significant investment in storage capacity, dedicating balance sheet capital to inventory builds in the right situation?

talk through that. Well I would just say that look it's not a market share you know game there if you think about what's going on you're merging two existing businesses and then the merged business is essentially going out and expanding its trading capability.

So, while the joint venture will be managing more molecules in the future than it does today, those molecules are already produced and sold today. It's just that they end up under a different umbrella in the future.

Okay, all right, that's fine. I can work with that. And then just one quick one. Todd, you said $500 to $700 million of revenue, minimal EBITDA impact in year one specifically. This isn't some kind of big fixed cost asset that we're ramping up into. So what turns out to EBITDA positive?

You should expect that this business, as it continues to grow and there's more molecules under its umbrella, that revenue will continue to grow and then we would expect that EPD-A performance would improve.

Okay. All right. Well, best of luck on the rest of the year. Thanks. Bye.

Okay. All right. Well, best of luck on the rest of the year. Thanks. Thanks.

Our next question will come from Kevin McCarthy with Vertical Research Partners.

You may now go ahead.

Yes, good morning. Scott, natural gas prices have plummeted perhaps 65 or 70 percent over the last six months in the U.S. Would you talk about the impact that you would expect that to have on your chloralkali and vinyls business or the overall company for that matter?

taking into account any hedge positions that you may have.

Yeah, sure. I mean, I would just say, look, I mean, the impact is a bit muted, right? We do hedge and we always have hedged, so, you know, we moderate that. We don't necessarily see the peaks and because of that we don't necessarily see the valleys either.

So for us, it's really generally moderated.

So for us, it's really generally moderated. OK.

And then for the Winchester business, what sort of volume trends would you anticipate in 2023 for commercial versus military?

Well, I mean, Brett's going to add a good bit of color because we have a lot of actions there, you know, particularly in the military business. You know, we're going to start out slow in commercial as adjustments, you know, are taking place and, you know, military's off to a good start. Brett? Sure.

Scott's correct that we'll start off slow from a commercial standpoint. It probably will look a little bit better in the fourth quarter versus the fourth quarter, but still slow. From a military standpoint, the one benefit that we have from the military is we get a long runway.

visibility on demand from the military, from our US military customer. And we have that visibility and it's very consistent from what we've experienced in the past. The big change is that we are starting to see some of our international military customers.

acquire about some needs that they haven't had in a long time.

about some needs that they haven't had in a long time. Thank you guys.

all Thouknest thing to do

Our next question will come from Steve Byrne with Bank of America. You may now go ahead. You may now go ahead.

Yes, just wanted to drill into the hydrogen project at St. Gabriel. I assume that you'll have to consume more natural gas just because that hydrogen presumably was white palms in the air and

was previously being used for power production.

Just curious whether you can alter the operations of your ECU units to

increase hydrogen production, i.e. from changing the brine concentration running into the units.

Yeah, yeah, hi. I mean, look, not all of that hydrogen is necessarily used for our own energy production.

We have a lot of large off-take arrangements with the gas companies, and we're working our way out of those. We also just vented a lot as well, so absolutely no use. What's happening in St. Gabriel...

for the most part is we're taking hydrogen into a new application and there's no real meaningful offset anywhere in our system.

So this is, you know, CO2 offsets.

without a corresponding penalty. That's generally the way these first projects are set up.

And maybe another question on Winchester. Is it fair to assume that

You know, your EBITDA margins between military and commercial are significantly different, and you may have a volume shift more towards military, just given what's going on in the world. But it's... So, lots of liberation around, yeah.

It's not an EBITDA benefit, is that fair?

Well, I think when you look at the overall position of the Winchester business, certainly we gained something on the military side. There are some challenges on the commercial side right now. You know, you may have noticed that we did improve overall pricing in that business in the fourth quarter. It's been a fair

relative to the third quarter. And in fact, we expect to do the same thing in the first quarter. And, you know... Please give me a moment as I reconnect the mainspin going.

The.

You know, apologies to everybody. I mean, for some reason, you know, our line keeps dropping. But I'll just repeat the answer to that last Winchester, you know, question on pricing.

You know, we were able to lift overall pricing in the fourth quarter versus the third quarter, and we expect to do the same thing in the first quarter. You know, import ammunition pricing has always been low, but at the moment we face the additional challenge that the major domestic brands are actually pricing.

Our next question will come from Josh Spector with UBS. Excuse me now, go ahead.

Yeah, hi, thanks. So just to follow up on the chlorine pricing side of the equation, so when you talk about more pricing through this year, I mean how much of that has already been negotiated and it's going to flow through versus you need to renegotiate those contracts? And just as we look at your mix of portfolio today, how much of it still has room for renegotiation versus one, two years ago?

Yeah, I mean, I mean, you know Patrick will give the give the right answer here. He gave the summary right we implemented a hundred million dollar run rate more in 2023 versus 2022. What's the rest of it? Yeah, so that that hundred million is locked in so that's that's not

you know, a hope that that's locked in already negotiated lift. And then there's going to be more to come this year, as Scott said, in his opening that will flow through in 24. You know, order of magnitude, probably, you know, I'm not going to peg it, but it's another substantial lift in 24 for new stuff to negotiate in 23.

Thanks. Just on cash deployment, given the step-ups in interest and some of your variable rates, has any of the calculus changed on buybacks versus at pay down?

Josh, thanks for the question. We would expect interest expense in 2023 to be between $150 and $160 million. We do have 30% of our debt is variable rates.

we will continue for our free cash flow to prioritize share repurchase.

Got it. Thanks guys.

Our next question will come from Frank Mitch with FirmU Research. You may now go ahead.

Hey, good morning. I wanted to follow up on Winchester. Obviously, Russia came out of the market as a supplier mid-year. So I would have thought that the supply side wouldn't have been an issue, but you've obviously been making adjustments there. What has been the impact of Russia coming out of the market that you've seen so far?

last year that we saw any imports come into the country from Russia.

However, we continue to see some inventory that's out in the marketplace across a couple different calibers of ammunition. So we do anticipate that to sell through. It's taken a little bit longer than we expected, but we should benefit when that gets all the way sold through.

Gotcha, gotcha. Okay, and then if I follow up on Cloracle, I obviously was impressed that you kept the fourth quarter relatively flat profitability-wise and the third quarter. There seems to be a bit of a disconnect in terms of profitability between the upstream doing pretty well and the downstream not doing so well. So I was wondering if you could kind of walk through.

the third quarter to the fourth quarter in terms of upstream versus downstream profitability and what your near-term outlook is. If you could parse the chloralkali segment in that fashion.

the third quarter to the fourth quarter in terms of upstream versus downstream profitability and what your near-term outlook is, if you could parse the chloralkali segment in that fashion.

Yeah, I mean this is Scott and Patrick may add to it. I mean we assume when you say upstream you mean close to the ECU and downstream you mean some of the derivative chains like chlorinate, organics and vinyls. Is that right?

Correct, correct. Okay, John . Okay. So, when you asked the question, I was thinking you were talking about epoxy as the downstream because we don't really use that terminology within our chloralkali business. So, can you just reframe your question? I'll have the... Now that I kind of know what direction you're heading.

I assume that there's someone else that's of the profitability of caustic soda and the profitability of EDC and the profitability of chlorinated organic, profitability of merchant chlorine and so on that you're doing internally. Although I do understand that you're probably moving molecules up and down.

So can you speak to the strength? My assumption is that the ECU, car in encaustic, was the more stable and the bigger part of the profitability than the downstream. But I'm just curious as to how you would car snatch. Sure. Yes, as we've been talking about for I think three quarters now.

you know, that downstream, you know, pouring chain, specifically through vinyls, you know, EDC and VCM has been weak, you know, that weaker, you know, downstream in that vinyls chain and that has overall, you know, set the contest.

to set our run rates or operating rates to the chlorine side of the ECU because of weakness downstream in that PVC chain. And we continue to do that today and we're going to do that until things start to improve.

upstream within chlorine. We've talked about elemental chlorine and that ratchet goes one way and those prices remain very strong.

Terrific, thank you.

Our next question will come from Jeffrey Zecosks with JP Morgan. You may now go ahead. You may now go ahead and close the poll.

Thanks very much.

When you look at public data for caustic prices,

Maybe caustic prices were $9.50 a short time in November .

It's a little hard to see where they are today. Are they at 800? Or what's been the move in caustic prices from?

say November to today, and can you account for the reasons for the movement?

Yeah, I mean this is Scott, Jeff. I mean, you know, in general it's been, you know, fairly flat.

But, you know, it's not impossible that you see some product lines like Caustic drift off in the future.

But again, remember we make value out of imbalances between the two sides of the ECU. So when you see that drifting, it's likely because of value coming somewhere else. Will it go down? I don't know. It almost doesn't matter whether it goes up.

or down, right? We have a position to take in either case. In fact, I would sort of remind everybody that we actually delivered a higher level of quarterly IBITDA in our chloralcolab business when cost of pricing was much lower than it is today.

And secondly, Scott, can you remind me, when do the contracts with Dow expire?

Is it the beginning of 25 or the end of 25? And is that a big event for the company?

You know Jeff, we really weren't going to comment on any specific customer or supplier arrangements.

Okay, well then, then I'll ask a different question. With Winchester, is the oversupply in ammunition because demand was weaker than expected or because the competition just simply ramped up their volumes?

Yeah, right, you want to jump in? You know, we did see in the second half of the year some lower demand, but yet much higher than what our historical outlook, our preview has been.

As I mentioned in my opening comments, we were actually shipping more to our customers than they were selling as we were filling up a pipeline.

When that pipeline got full, we decided to pull back, reduce our run rates, and not oversupply the market. As far as others, you know, we've been able to pull back, reduce our run rates, and not oversupply the market.

You'd have to take a look at what they're saying about their business. But as far as we're concerned, making those adjustments in the market going forward were necessary to preserve value.

Okay, great. Thank you so much. Thanks.

Our next question will come from Mike Lighthead with Barclay. You may now go ahead.w

Great, thanks. Good morning guys. First question, can you just talk through your full year EBITDA guidance framework? It looks like we can basically annualize 1Q levels to get to the midpoint. So is that roughly what you're assuming, that first quarter conditions hold for the year? Just flesh out how you're thinking about that. Yep.

No, I mean, I would say that we're expecting, you know, slightly lower performance in the early part of 2023. And that's the way we called it out for our chemicals business, a little bit better in Winchester. Look, I think when you look at...

you know, a 12-month basis, you know, that's our target. I would say that we, you know, really reserve the right to take any actions that we need to to make sure that we keep that whole 12-month trough as high as possible.

And, you know, that may mean that we need to have one quarter that's not as good as the one that we just printed. I don't know when that quarter might come, but it certainly could be in the next 12 months.

Got it. Makes sense. And then second for Todd, just two quick ones on cash flow. First, I think in the prepared remarks, it sounds like there's about 150 million or so of abnormal cash uses this year. Is that correct? And then second on the billion of free cash, I know it can be difficult to predict how or when some of these JV opportunities come.

through, but just how much of that 1 billion would you expect gets returned to shareholders this year?

Thanks for the question Mike. You're right on the one time items. There's basically $80 million of cash taxes that are inflating our tax number on that slide. So more normalized is in that 25-ish percent range.

And then there is a peak level of payments for some power supply contracts this year. So you are right on the one timers.

When we think of those joint ventures, the investments during 2023 probably are less than $50 million.

And so therefore when you think about that cash flow, you know, it can really be deployed for share repurchases.

Great, thank you.

Thank you.

Our next question will come from Matthew Blair with TPH. You may now go ahead.

Hey, good morning. Your EBITDA in Q4 was down by about 100 million. Do you have a breakout on just the moving parts here? How much would you attribute to de-stocking? How much to seasonality? I think you have some turnaround activity too. Is that material? Yes.

Well, yeah, hi, I mean, you know, we quit calling out, you know, turnaround activity as we sort of leveled that across quarters. So it's really a non-issue in any variability of our earnings, you know, going forward.

I mean, look, you know, most of that decline, you know, you called it out well, it was a big decline. Most of that decline is, you know, from our own actions to make sure that, you know, we get set up to have the right, you know, shoulder coming out of this recession and make sure that we

have the highest 12-month trough result that we can going forward. The other things that you mentioned are really just drivers of that. Yes, there's some level of destocking, but yes, demand still doesn't look great. In fact, there's really suspended demand still in China and still in Europe .

Matt, if you think about it, all three, if you think about it, all three businesses, year over year in the fourth quarter, volumes were down significantly. I know on the press release, and we talked about it in the press release, and we talked about it in the press release.

Please leave a moment as I reconnect the speaker line. Thank you.

This.

Matthew, sorry we got cut off again. Maybe the fourth time will be the end of it. What I have said was if you look at all three businesses, volumes are down year over year in the fourth quarter. 29% in chlorophyllite, 36% in epoxy, and clearly Winchester was the only one that had a

was down. But offsetting that to a big extent as well was improved pricing across the board and all three businesses.

Got it. And on caustic exports, so some spot prices in Asia for caustic have started to roll over. Is that filtering into your US caustic export pricing yet? And just how would you characterize demand in volumes for your US caustic exports?

Yeah, I mean this is Scott. I mean look, there's going to be impacts from that of course. I mean I would characterize demand generally not great. But it's not...

isolated demand on caustic. What it is, is the relative demand strength between caustic and the chlorine side of the ECU.

And I would say those imbalances keep in place and keep forming. So even though demand may come down, it's not necessarily an indicator that our direct results follow that.

Thanks for the commentary.

Our next question will come from Angel Castillo with Morgan Stanley .

Thanks for taking my question. Just wanted to get a level set. You used to give sensitivities for your key products in your slides. As we think about how the world has evolved, both your chlorine ratchet pricing strategy as well as just your edging strategy around natural gas, could you just update us on what you could do for a particular company?

As we think about those key commodities, whether it's chloro-encaustic or inputs like natural gas, what are the key sensitivities for that from an E with a kind of MMBTU or dial-up metric basis? What are the key sensitivities for that?

Angel, thanks for the question. This is Todd. I think historically we've talked in the one dollar per MMBTU in North America was worth about plus or minus 50 million dollars through our annual P&L.

I think directionally that still is a good metric for you to think about. But as Scott mentioned earlier about gas, you know we're a hedger so those high-priced numbers you saw during 2022 those sort of got paired off and we didn't experience them.

And maybe here in the very short run because we're a hedger, some of the dips in gas, you won't see that benefit running through immediately in our system.

Got it, that's very helpful. What about caustic and chlorine?

Yeah, I mean, those, you know…

Our model really isn't dependent on cost or cost variability at all. So I wouldn't model any impact from gas, especially with the fact that we hedge.

I'm sorry, I meant the pricing for instance like a dollar change in the price of a car. Yeah, yeah, no, I appreciate the question but I don't think we're going to go through and probably exactly quantify, you know, what difference, you know, a certain change in price of a commodity.

And just going back to some of the discussions around the macro and some of the demand picture of what you've been seeing, you noted I think in the slides vinyl troughing here in the first quarter and epoxy improving in the second half. I was curious, one, as we think about the 2023 outlook, how much of this is the demand data?

Are you seeing anything in orders that gives you confidence in those rebounds? Is it more just de-stocking or baiting? How do you get comfortable with those factors? And then as you think about just overall recovery and some of that, how much of it is it macro versus your ability to pull levers and parlay?

Well look, I mean we'll start with epoxy. I mean, of course it's very challenging right now as we've tried to lay out. But, Damion, do you want to give a little guidance on the back half? Sure. I mean, when we look at some of the factors in the back half, we're seeing...

You know there's some you know improve the man think you all you know you see the news You know China as I said being the largest you know consuming region of epoxy You know looking like it's emerging from it. You know almost year-long slumber We have but we also see you know other areas are starting to pull you know epoxy

as well if we highlighted our growth platforms and our macro trends around wind, infrastructure, electrification, mobility. Those are all that we're already starting to see some of that demand profile improve with our valued customers. So it's a combination of what we see in the landscape, but more purposely our participation is a way to expandec adequate option to have more Eyes are po id Sara I!) Can we To C Him Sab gigantic

there. So thanks.

Thank you.

Our next question will come from Eric Petry with Citi. You may now go ahead. You may now go ahead and close the poll.

Hi, good morning Scott and Todd. Morning.

What's embedded in your earnings outlook in terms of China and domestic consumption? And you know, at the end of last year, we saw a ramp up of exports in epoxy as well as caustic soda. So any comments on those export levels into 2023 and impact on earnings?

Yeah, now what's embedded is still that demand stays, you know, fairly muted, suspended for the better part of the first half of the year, and then recovers. You know, specifically in epoxy, right, trade flows actually reversed out of China, but even when China recovers.

still the amount of imports going into China is likely to be less than it was before because there have been some structural capacity adds there. And you know what this has taught us, knowing that we really didn't expect sort of the worst conditions in 15 years, but what it has taught us...

here is that we certainly have more trough minimization footprint work to do there. So we're working on that.

Secondly, on decarbonization, how are you thinking about carbon sequestration versus buying renewable power? And does building out these hydrogen plants impact that decision tree?

to maximize the IRA credit? Yeah, I mean, look, there could be some IRA credits for us with regard to hydrogen. I mean, we are the largest electrolysis-grade hydrogen producer in the country today. So we'll see where that goes.

As far as other activities to minimize our CO2 footprint, you know, most of them are centered around our own efficiency and productivity programs. It's not impossible that, you know, we get some wrecks in the future.

Will we do more CO2 sequestration like we called out in our slide? I think those opportunities are more limited for us.

Thank you. Sure. Our next question will come from John Roberts with Credit Suisse. You may now go ahead.

Good morning, this is Matt Skoronsky on for John . Scott, while epoxy has been down or operating at lower rates, have you made any structural changes such as operational or with your customer base so that when demand finally returns, epoxy will look different than it has previously? Yeah, the answer is yes, but completely in progress.

on systems where we've had staying power, you know, even through these really sloppy recessionary conditions.

Got it, that's helpful. And Todd, in Winchester, can you describe what the impact of margins was from lower operating rates versus higher costs? The margins in the segment have just been a little bit volatile since the Lake City contract started. So just trying to figure out what a normalized level would be. Thanks for the question.

I think that what you saw in the fourth quarter, because of the significant pullback in volume to address, I'll say the supply chain, the fact that supply chain and SCAP would have said, you saw margins come in significantly compared to where they had been. Overall, we had a higher level of...

military sales in the fourth quarter compared to where we had been over the last 12 months. So that also will slightly affect the margin, a little bit lower average margin there.

Thanks.

Our next question will come from Roger Spitz with Bank of America. You may now go ahead. Thank you. Good morning. One is can you comment on how much of your merchant or total chlorine was sold on the below market legacy contracts as of December 2022?

We won't give you a specific number, but I would say that's turned into the minority share now. As Patrick said, we still have an uplift coming in 2024 that will essentially place almost 100% of our chlorine on a different standard.

likely the Olin Chlorine Index. Got it. The second one was, this may seem a little odd, but can you say how much, if any, of your ECU production you sell as sell liquor, meaning versus finished product?

I'm not exactly sure what you mean by that, but we have some site partners where we may not fully take the product to an end state that would be sold in merchant transportation equipment. And we want to make sure that we're not taking the product to an end state that would

for closing remarks. Yeah, no, I would just say thanks to everybody for joining. Sorry we had so many technical difficulties this time, but looking forward to the next call.

I would just say thanks to everybody for joining. Sorry we had so many technical difficulties this time, but looking forward to the next call. Thanks.

Thank you for attending today's presentation. You may now disconnect.