Q2 2019 Earnings Call
Hello, and welcome to the Olin Corporation second quarter 2019 earnings Conference call.
All participants will be in a listen only mode.
Should you need assistance, please signal corporate specialist, but testing will start key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question that you might pursue star then one on their touchtone phone to withdraw your question. Please press Star then too.
Please note this event is being recorded.
Oh, no. That's total comps covered some as Logan, but of course see all ones director of Investor Relations Ms. One of course, the floor is yours ma'am.
Good morning, everyone and thank you for joining us today before we begin let me remind you that this presentation along with the associated slides and the question and answer session. Following our prepared remarks will include statements regarding estimates 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 results to differ from our projections are described without limitations and the rest after section of our most recent Form 10-K .
And in yesterday's second quarter earnings press release.
A copy of today's transcript on slides will be available on our website in the investor section under past event.
The earnings press release, and other financial data and information are available under press releases.
With me. This morning are John Fischer, Olin's, Chairman, President and Chief Executive Officer, Pat Dawson Executive Vice President and President of Hoxsey in International.
Jim Barlett Executive Vice President and Chief Operating Officer, John Mcintosh, Executive Vice President synergies and system, and Todd Slater, Vice President and Chief Financial Officer.
We'll begin with our prepared remarks, and thereafter, we'll be happy to take your questions I will now turn the call over to John Fischer John .
Thank you Logan and good morning, everyone. Today I will begin my remarks by discussing the key points from the quarter. Just ended followed by the outlook for the second half of 2019, a detailed review of each of bones business segments and conclude with our view on market dynamics for Chlor alkali and a proxy with that let's turn to slide three.
During the second quarter and consistent with our early July update own reported adjusted EBITDA of $204.6 million.
Second quarter results were challenged by several factors across our business segments, specifically, we experienced lower than anticipated demand for merchant chlorine and certain chlorine derivatives predominantly from titanium dioxide and refrigeration customers and agricultural customers impacted by flooding.
We were challenged by several one time events in the epoxy segment, which negatively impacted results by approximately $10 million. These included customer issues, resulting from the Intercontinental terminals company storage fire in the Houston, Texas area and reduced production in Europe , resulting from an unplanned outage at a utility supplier.
We incurred as expected approximately $40 million of sequentially higher planned maintenance turnaround costs in our chemical businesses.
And we recorded a 20 million dollar environmental expense for remedial activities related to a legacy Olin manufacturing site.
Now moving to our third quarter 2019 outlook, which is on slide four.
We expect our third quarter adjusted EBITDA to be higher than that achieved in the second quarter of 2019.
First we expect improved operating rates and seasonally stronger sales volume in each of our three segments.
Second we expect approximately $40 million of lower maintenance turnaround costs compared to the second quarter third the absence of the onetime events that challenge stolen in the second quarter should benefit third quarter adjusted EBITDA finally, while the second quarter declines in caustic soda indices will continue to affect the price in olin's system. During the third quarter the anticipated improvement in caustic soda pricing should provide positive momentum moving forward.
Now looking at the second half of 2019 outlook, which is on page five as we guided to in early July we expect full year adjusted EBITDA to be in the range of $1.075 billion and $1.175 billion at the midpoint. This guidance implies second half 2019, adjusted EBITDA of approximately $650 million. The key assumptions behind this forecast are higher volume levels in chlor alkali and the proxy increased operating rates in the chemicals business lower turnaround costs stronger contribution from the Winchester segment and improved cost performance.
Although pricing is expected to improve we are assuming that approximately $15 million of the adjusted EBITDA improvement in the second half compared to the first half will come from higher prices.
Now, we'd like to take a more detailed look at each of the business segments, starting with Chlor alkali products and vinyls on slide six.
Second quarter 2019, adjusted EBITDA for the Chlor alkali products and Vinyls segment was $189.5 million, representing a 35% year over year decline and reflecting the significant impact of lower caustic soda pricing.
In fact, caustic soda pricing in olin's system was approximately 25% or approximately $100 million lower when compared to the second quarter of 2018. In addition, lower overall volumes, which were down approximately 4% year over year negatively impacted the second quarter segment results.
Offsetting some of the year over year pressure from caustic soda prices and lower overall volume levels was larger contribution from olin's ethylene dichloride business ethylene dichloride pricing improved approximately 40% over second quarter 2018 levels.
Now lets discuss caustic soda pricing, which is on slide seven.
Domestic caustic soda pricing declined at a slower rate in the second quarter of 2019 with the third party indices moving down an additional $20 from first quarter 2019 levels.
This price reduction coupled with the first quarter decline still being recognized in our system led to a 3% sequential decline in olin's system.
An upward turn in caustic soda price has occurred later than we had anticipated, but we're now seeing positive developments during the second quarter. The caustic soda demand locations that plagued the market for more than a year were largely resolved.
In addition, global restraints on the supply side, particularly in Latin America have emerged resulting in the need for additional caustic soda exports from the United States.
The tightening supply and demand dynamics, taking place today should lead the caustic soda price improvement as we progress through the back half of the year. In fact, we are already seeing indications of upward pricing momentum for example.
Use spot export pricing reverse its downward trend in the second quarter with indices of increasing approximately $40 per ton over the first quarter.
Brazilian domestic pricing has increased approximately $200 per time since the end of the first quarter.
And most recently the domestic caustic price indices broken streak of law declines in July by increasing $5 per ton.
Now, let us move to the performance of our Hoxsey segment, which is on slide eight.
During the second quarter of 2019 owns a proxy business generated adjusted EBITDA of $29.7 million. This level of adjusted EBITDA, coupled with our first quarter 2019 results represent the polling strongest first half performance from this segment since owning and operating this business.
Looking ahead to the third quarter of 2019, we expect the proxy segment results to increase when compared to the second quarter of 2019, specifically $20 million of lower planned turnaround costs. The resumption of normal customer operations at the ITC terminal storage facility and the resolution of the unplanned or utility outages that started Germany plant will supplement the expected seasonal uplift in volumes wherever we continue to believe we will see improved year over year performance from of the proxy segment in 2019.
Looking now at global Apociii resin prices, which are shown on the chart on slide nine.
During the second quarter liquid apociii resin pricing in all regions declined from the pricing levels experienced during the prior year quarter sequentially pricing in Asia, and Europe move lower due to weaker than expected demand, while us liquid a proxy resin pricing appears to have stabilized.
However, ongoing supply disruptions in China have tightened epichlorohydrin supply in fact epichlorohydrin prices in China increased approximately 30% over the past two months. This resulted in upward pricing momentum for liquid of hoxsey resins in China. We believe this development could tighten global markets, resulting in an increase in global liquid apoc see resin pricing in the second half of 2019.
Now turning to our Winchester segment, which is summarized on slide 10.
Winchester experienced a 9% decline in adjusted EBITDA for the second quarter of 2019 compared to the second quarter last year.
This decline was the result of lower commercial volumes and lower product pricing.
Favorable commodity and operating costs, partially offset the impact of the lower volumes and pricing.
We are forecasting sequential improvement in adjusted EBITDA during the third quarter as the business enters its seasonally strongest quarter of the year.
We expect to see an improvement in commercial sales and volumes across all product categories and the military and law.
Horsemen sales volumes.
This should lead to a stronger overall performance during the year second half.
We continue to expect Winchesters results for the full year of 2019 to be comparable to the full year levels achieved in 2018.
Now turning to our long term view of the market.
In mid July Olin completed a $750 million bond offering and new $2 billion Bank credit facility Todd will discuss this transaction in more detail in a minute, but overall, we were able to establish a low risk pathway to refinance the high cost bonds, assuming assumed during the 2015 Dow merger when the bonds become callable in late 2020, while also increasing our overall financial flexibility.
Despite the recent weakness in caustic soda pricing and lackluster demand for certain of our products. Our positive long term view of the Chlor alkali and apoc see markets is unchanged. This positive outlook reflects the following.
And the core alkali sector demand growth is occurring on both sides of the easy to use.
To date, there have been minimal global capacity additions and announcements of additions to meet this growing demand.
Current industry economics, do not support world scale, Chlor alkali capital investments.
As a result overtime supply and demand balances will continue to tighten creating upward pricing momentum for olin's caustic soda chlorine and chlorine derivative products. Similarly, any a proxy business, we see steady global demand growth and minimal announced capacity additions.
Now I would like to turn the call over to Todd Slater Olin CFO .
Todd.
Thanks, John .
Before turning to our 2019 cash flow outlook I'd like to discuss the recent capital market transactions in more detail on slide 12.
In mid July we completed an opportunistic bond offering which extended our debt maturity profile and enhanced our current liquidity position.
We issued $750 million of 10 year senior unsecured notes at an interest rate of 5.58%.
We immediately used the proceeds from the offering to prepay the term loan a facility and the outstanding borrowings under the accounts receivable securitization facility.
As a result, we have effectively no pre payable debt outstanding.
Concurrently.
We put in place a new $2 billion bank credit facility, consisting of an $800 million revolving credit facility and a 1.2 billion delayed draw term loan we expect to use the proceeds from the delayed draw term loan to pay the existing high cost bonds that were assumed in the acquisition of Dow chlorine products businesses when the bonds become callable in late 2020.
By addressing this future need now when the credit markets are favorable we have positioned olin to enhance our balance sheet and cash flow significantly at attractive terms within the next 15 months, we estimate that the 2020 refinancing will reduce annual interest expense by $50 million to $70 million.
Now, let's turn to our 2019 cash flow forecast, which is on slide 13.
Assuming the midpoint of our full year adjusted EBITDA guidance, we expect to generate approximately $310 million of cash flow in 2019.
Starting with the midpoint of our adjusted EBITDA forecast, which is in the far left of the waterfall chart, we deduct $60 million and estimated cash tax payments, we are forecasting our cash tax rate will be in the 25%.
Range for the year.
Column three reflects the midpoint of our current forecast for capital spending of $375 million, which includes annual maintenance capital spending of between 225 and $275 million and the investment associated with our multi year information technology integration project of approximately $80 million.
As we have previously discussed in 2017, we began a multi year project to implement new enterprise resource planning manufacturing and engineering systems across the heritage Olin and the acquired Dow chlorine products businesses. The project includes the required information technology infrastructure.
Now turning to the fourth column, we expect a 100 million dollar increase in working capital in 2019, as we will use cash from our refinancing to discontinue the sale of receivables under our factoring arrangement.
And the next column onetime items include information technology integration cost and cash restructuring costs of approximately $80 million.
This includes approximately $40 million for the integration project that I, just spoke about and approximately $25 million of duplicative costs that are being incurred during the transition.
These costs were partially offset by $20 million a pre tax proceeds from the sale of an investment at a nonconsolidated affiliates during the first quarter.
The next column represents an estimate of cash interest expense on June Thirtyth, we had approximately 30% of our data at variable interest rate.
However, following the refinancing that was just completed that percentage has dropped to 20% of our debt at variable rates.
We are forecasting the 2019 interest rates will be slightly higher than those we experienced in 2018.
In the far right column, we are forecasting $310 million of cash flow.
Given the recent capital market market transactions and the debt repayment progress to date, our top priority for free cash flow is to return to our shareholders through dividends and share repurchases and build our cash position in advance of the ethylene payment, which will be no more than $493 million and that is due in late 2020.
Finally on Thursday July 25th Olin's Board of directors declared a dividend of 20 cents on each share of Olin common stock.
The dividend is payable on September 10th 2019 to shareholders of record at the close of business on August nine 2019.
This is a 370 onest consecutive quarterly dividend to be paid by the company.
Operator, we're now ready to take questions.
Yes, Sir.
We will now begin the question and answer session.
To ask a question you May press Star then one on the Touchtone phone if using a speakerphone. Please pick up the handset before personally keys.
So thats a question that has been I'd just like to join a question. Please press Star then too.
Again, the Star then one to ask a question at this time, we will just pause momentarily to assemble roster.
Our first question will come from Don Carson of Susquehanna. Please go ahead.
Thank you.
John in your press release, you talked about some weakness in chlorine volumes as well obviously, it's continued weak but what are you seeing in some of these other markets like refrigerants in tier two any any uptick and maybe just talk about it.
See demand and price outlook for the second half.
Okay.
I'll, let Jim just comment on LTC.
Yes, John this is Jim.
From AIDC standpoint, I think the demand has actually been pretty solid.
Throughout the throughout the first half and we expect that to continue into the second half.
In a long time ago 18 months two years ago, it used to be predominantly Asia, but in the last year and a half weve seen demand increases and southern Europe , we've seen it also.
Increase in Middle East North Africa, as well and then of course, most recently in Latin America. So demand is solid we remain constructive on DTC.
And then as a follow up on Slide 20, you show significant leverage to lower Nat gas and ethane costs.
Price of those have been coming down what benefit did you see from that if any in the first half fuel hedging position and how do you see them contributing to earnings growth in the second half.
I would say generally we we are a hedger as it relates to gas predominantly and that.
Some of the benefit was tempered, but it'll just be delayed in our system and we have been benefiting and you see that in terms of the profitability of our LTC.
From the lower ethane prices, although a lot of that has occurred just very fairly recently.
Thank you.
Next we have Kevin Mccarthy of vertical research.
Yes. Good morning, just to follow up on the Dcs wondering if you could comment on the level of EDI see prices that is baked into your financial guidance for 2019, we've noticed some weakness over the last two months or so and just.
We would like to understand kind of what you're assuming in terms of the sequential pattern there.
You probably are hearing and seeing.
Some of the spot volumes that are moving to Asia.
Better it at reduced.
Numbers.
What I would say is that.
As I mentioned earlier on the breadth.
Olin doesn't have to participate specifically in Asia, we have a broad base participation and a significant amount of our volume.
For the third quarter in the fourth quarter has already been pre placed at contractual pricing. So.
We're going to be somewhat.
We'll see somewhat muted muted effect relative to that spread.
Okay, and then as a second question I think you indicated in your press release that your average realized pricing for caustic soda declined 3% in Twoq versus one Q just wondering if it's possible to provide a similar number for the chlorine side of the molecule.
Including derivatives, what was your average price experience there.
I would tell you that on the chlorine side itself chlorine is actually up year over year.
So.
The derivatives get very messy because mix gets into the play gets into play, but I think you can look at the big derivatives, which are which would be bleach that just takes chlorine and moves it through and chlorinated organics and Corey moves through so those would have had a positive trend I would say the other derivative as hcl, which is much more market driven and that has tended to be lower year over year at this point, but still if you look at Hcl is from.
From our perspective, it's still a value add compared to selling merchant chlorine.
Just to clarify Jim were prices stable on a sequential basis versus one Q.
Kevin This is Todd if you go back to slide 19.
You will see virtually all prices were similar Q1 versus Q2, except for caustic and Hcl.
Thank you very much.
Next we have Eric Petri.
Of Citi.
Hi, good morning.
Morning, Mark.
You noted that in your second half over first half guidance that pricing would contribute roughly $15 million of that how much does caustic soda represent purposes.
Chlorine derivatives or any pricing uptick that you think you will.
Relies on the proxy.
We have not broken that out I would just say as with most of our portfolio caustic is roughly half our vos volume. So it probably represents half the price.
Okay helpful.
And then.
By region could you talk about your customer caustic soda inventories at least in Europe . It seems that stocks remain elevated year over year on a on a historical basis, so with prices seemingly troughing and bottoming out at these levels I Wonder if you could talk about potential restocking in second half.
I guess I would say from the standpoint of inventories, we we don't pay that much attention to Europe other than I could tell you that for the year 2019 exports from Europe to North America are down.
I would also tell you that exports out of China are also down. So we think that we're going to continue to see we're going to see benefit and continue to see benefit over time from a tightening market.
Thank you.
Next we have Michael light head of Barclays.
Hey, Fellows good morning.
Following on the last question, so if I sort of build a half over half EBITDA bridge pricing is going to give US 15 million turnarounds are going to give us another 25, and I think in your pre announcement, you called out $20 million in Apociii items.
So if my math is right that leaves us around 115 million.
Gap that we need in terms of hitting the guidance I'm, assuming is that mostly volume that's going to.
Get us there.
That's correct.
Okay and since you bought the Dell business four years ago, what has historically been the seasonal volume split between the first half and the second half.
If you just look at EBITDA between first half and second half for the three year average of 16 17 and 18.
We've averaged about 45% of our EBITDA in the first half 55% in the second half.
But its been as low as 41% to 42%, so but I would say what we're forecasting is not way out of line with what we've seen historically.
But I guess, just one last one you've seen a massive caustic upcycle over the past three or four years. So the second half has just benefiting from higher price over the past three years versus that first half this year, so I'm assuming.
Pricing skew some of the EBITDA benefit so I guess, that's why I was asking on the volume side, what has that slipped them.
Well, let me give you I'll give you three statistics because the biggest the the three biggest things that benefit.
For us in terms of first half versus second half. The first is bleach, which is seasonal and its not the biggest of the businesses, but historically that has been.
Been up somewhere in the 15% to 20% range first half to second half and Thats not cyclical and in fact as hot as it was in July that's actually positive in terms of the comparison. The second has been our vinyls business and that over the prior three years has averaged about 5% to 7% improvement first half versus second half and then we have some large.
Pipeline customers, who are primary permanently.
Related to the Polyurethanes.
Pat and that has historically been up about 15% in the second half versus the first half and a lot of that just has to do with the timing of turnarounds, but we typically take our turnaround when our customers do.
Three big pieces.
That's super helpful. Thank you.
And next we have Jim Sheehan of Suntrust.
Good morning, Thanks for taking my question.
Can you address your Chlor alkali vinyls the man declines.
GDP or industrial production rates is this an impact of trade and tariff or something else.
John This is Jim.
No. It's not a result of the trade tariffs or anything we mentioned some of the weakness on the on the chlorine side of things the chlorinated organics refrigerant and.
And the agricultural market that impacts us and obviously that when when you have that demand.
On the borrowing side uses both sides VCA. So thats, primarily what we're talking about in terms of the volume declines.
Okay, and then in epoxy.
Conditions supply demand, maybe resulting an upward pricing momentum for a pasi at liquid proxy resin pricing.
Do you think that tightness is isn't enough to offset some of the demand weakness, we're seeing in electronics and from automotive end markets.
Yes, Jim This is Pat we will see because the real issue there with.
Perhaps the resin producers in China.
And so we've seen that price of LCR in China.
You know go up.
You know to levels, where we were in late 17 in early 18, and what that does is you've got the price of LCR in China higher than the price of LCR out of China. So producers in Asia, where we see a lot of the competitive.
Activity coming into Europe , and North America, they'll send that LCR into China, because they can make better returns and that takes product off the market in Europe , and North America hand, you can get a tightening from that kind of arbitrage dynamic. So thats really what we seek that happened here in the second half of the year.
Thank you.
Hey, good morning, everyone I just wanted to clarify on the use of cash proceeds.
I think previously you were talking about paying down 250 to 300 million of debt is that still intact or is the general idea to to build cash in advance of this third ethylene tranche payment.
Matthew This is Todd.
That debt repayment was it was in effect lowering that in advance of the ethylene payment that was going to be due at the end of 2020, and so we are going to build cash over the next.
Year, and a half to be in a position to pay that.
Okay sounds good and then it looks like a proxy contracts and the U.S. settled down a little bit in July .
I was just wondering are you expecting margin compression in a proxy in the third quarter or do you think you'll make that up with a cheaper raws.
That you saw in the chart there from the from the Isis Index.
In in that May June timeframe, no question with the lackluster demand in Asia and in Europe .
We're seeing pressure on the margins, but we're also not seeing the any major increases in raw material costs. So we think margins should be pretty stable.
Here as we go into the second half of the year in North America.
Sounds good thanks.
Next we have Hassan Ahmed of Alembic Global.
Now there are some industry consultants out there.
Talking about the restart all see caustic facility in the back half of the into U.S. not a huge capacity, but you know.
A a restart all the same so as you guys think about Youre sort of four calls looking for higher caustic prices in the back half are you factoring in that capacity coming on stream.
I guess, what I would say that.
It's it is a small facility that that's a restart.
In this whole scheme of things in terms of the capacity, that's 13 million plus.
In North America is very small so I would say that we're very constructive on what were seeing the demand on caustic is strong in the domestic market and obviously with the pickup in the export market that we're seeing we're constructive on it and that that plant restart we wouldn't expect to have any impact on the overall supply demand.
Outlook.
Understood understood and since you brought up the export demand side. If it you know would love to hear what you guys are seeing that specifically on the Brazilian side. You know it seems out of Nortech is sort of you know ramping up production and Nebraska facility continues to be all flying you know at the very least through the end of the yeah.
So so what what are you guys seeing on the sort of Brazilian export demand side.
We continue to see relatively strong demand in Brazil.
Aided by some supply outages down there we talked in the prepared remarks that we have seen the price of caustic in Brazil. The domestic price go up about $200 a ton over the last quarter.
And I'll make one other comment about our caustic soda pricing, our caustic soda pricing outside of North America went up approximately $50 a ton from the end of the first quarter to the end of the second quarter. So the export market is improving.
Very helpful. Thanks, so much guys.
Next we have Steve Byrne of Bank of America.
Yes. Thank you.
Are you or your higher margin chlorine derivative products running at capacity or could you just more chlorine molecules into the into those end markets and away from spot EDI C.
This is Jim.
We do have the ability to move some product around our assets are are running hard and.
I think we talked at our Investor day about adding additional capacity down the road to support the derivative demand in bleach and Hcl and so forth and we are in fact doing that so.
I would say the assets a downstream or are are running well running hard and we do have you know we do still have some capability to optimize across different product portfolios based on operational and.
And seasonal demands.
And this environmental remediation charge that you have what what what sorry is this associated with what's the source of the contamination and how significant could this be longer term.
Specifically about site.
This is just part of the ongoing remediation activity at the site.
This is Scott.
It could even have a trend or.
Harbinger of things to come this is just a normal course of events as we.
Work cooperatively with the agencies to remediate sites that were targets or orphan sites for us from years ago.
Can you just comment on what what the comp contamination is.
Steve This is Todd if you look over the last 15 years of environmental so long term item for Roland.
UK our average expense has been just under $20 million a year and it ranges anywhere from $38 million in a year to date. So this 20 million dollar item happens is not unusual it happens periodically over a 15 year period.
Yes, yes, and the other day I think that we have over 77 sites.
That olin is dealing with and the environmental its environmental portfolio.
And remember these this is a heritage Olin site as we didn't take any legacy Dow environmental liabilities.
Okay. Thank you.
The next question, we have will come from Frank Mitsch affirming them research.
Hey, good morning, and congrats on the bond offering I wanted to follow up on on caustic pricing.
I believe you indicated that indices.
I had it down $20 per ton second quarter versus the first quarter and I thought you mentioned at industry. You was in July also down $5.
As we look at it if we think about where the Indicee index will end the third quarter.
What are your expectations in terms of it being.
Higher than where it ended June is that how we should be thinking about it that we should be getting more than that $5 down and in the index by by the end of this quarter.
Hi, Frank this is Jim.
Just for clarity the July index was actually move up.
Five if you use I hate to ask but there's a number of different indexes and they range anywhere from five to upper 30.
On the on the indexes. So we do expect that that we've reached an inflection point here and with with demand continuing to be strong as we go through the summer time that we would expect.
Continued continued movement upward movement on the prices.
I think.
From an expectation standpoint, do you think about third quarter caustic pricing being at or slightly better than second quarter would be a good assumption.
That makes a lot more sense.
You know at the end, which is why I asked the question because I, obviously I Miss heard that so so my apologies there on the on the ITC incident.
Negatively impacting a posses by $10 is that.
Is that demand.
Gone forever or is that.
Merely delayed and you will be making that up as we progress through the year.
Frank This is Pat no no that demand has not gone forever.
It was a temporary situation and.
So we were seeing that.
Come back strong here.
As we go into the second half of the year and actually we started it started to see it come back in the month of June .
Terrific. Thanks, so much.
The next question, we have will come from Jeff Zekauskas of JP Morgan.
Thanks very much.
Your your maintenance expenses have come down nicely from 2017, maybe from about 220 million that to about.
136 and 19.
I was wondering are these elevated corridors. The ones 36 that you think you're going to pay this year is this still an elevated level of maintenance or is this now a more normal level of maintenance.
What's the trajectory of maintenance spending as a base case over the next several years.
Jeff There's a couple of things that drive the level of maintenance spending one there's a large outage that occurs every three years and the VCM plan.
Which is obviously the biggest most complicated plant, we have and that will drive it up.
In the year that that occurs that last occurred in 2017. So we will see that again in 2020. We also had once every six year maintenance at both of the epoxy plants part of that occurred late in 2017 part of that occurred in 2018. So both that again drove 17 up above what I would call the normal life.
I would say 19 is probably a little bit below the normal line, but as we go into 2020 I would tell you we would expect that to be elevated because of the bcf.
Okay, and then if you could just briefly summarize why.
[noise] caustic soda prices for the first half of 2019, probably were lower than you expected.
And why the.
And why do you think that the stabilization.
Gross in caustic, which which is about to come is probably coming at a slower rate what would the primary leavers.
Behind.
The toughness in the caustic market and why if they altered.
I think theres there was one discrete event, which was the whole issue of value Nortel, which was has been discussed here for about a year and I think ultimately.
The restart of half of that plant, which consumes 15000 tons of caustic a month.
What was delayed much longer than we might have anticipated a year ago. The other thing I think if you look at some industry data and some consumption data I think caustic soda demand in North America was just a little bit weaker in the first half of the year than we would have expected now there's there's a.
Probably impossible to specific specify where that came from but thats why weve turned we sort of believe we've turned the corner as we said in our remarks around the.
Demand disruption from our ignored say on top of that Weve seen a supply disruption in Latin America around Braskem.
So and we've seen in our system.
Improving demand as we've started to move into the summer months, which are typically the strongest months from a manufacturing perspective.
Okay, Alright, thank you very much.
And next well, Mike Sison of Keybanc.
Hey, guys.
Just a question on the July realization of the $5 and and for caustic I think you guys and several others announced 60 Watt can you maybe talk about what.
Why the realization was so low is it more supply was it more demand.
In terms of the pricing realization.
Mike This is Jim yes, the price realization, it's always hard to.
Turn things when you're going from a market that has been moving down to.
A lot of individual.
Negotiations take place and and you should think about this also is a range.
In terms of the pricing if you some of the different indexes theres from like I said from five to 30.
On a range on that and so that.
I would indicate kind of a spread of what type of price realization took place in the across the industry.
And.
And some of that will continue to be pushed into the latter parts of the third quarter.
Got it and then in terms of demand.
Where do you need to that demand to improve just as.
On a geographic basis, I mean is it more the last that needs to improve to sort of see that improvement in demand or do you need some demand overseas as well.
Hi, This is John I would say to you that caustic for us is a global market.
So we really need it to where it is different where demand improves.
Got it thank you.
Next we have Neel Kumar of Morgan Stanley .
Hi, good morning.
Hi, Good morning trade sources mentioned that leasing you guys have put all first half coming in at about $20 per metric ton lower versus July .
I was just wondering if that's different than what you're seeing in the market.
And what are the drivers of the lower offers.
And then is there anticipated price improvements in the second half of the year, it's like it's come from higher domestic or export pricing.
Well I'll go back to the answer I gave to a question few minutes ago, which is in our system caustic sold out of North America went up to approximately $50 a ton between the end of the first quarter and the end of the second quarter. So and we don't we do not expect that to go down as as we move forward. So its our expectation that for us in our system export pricing or non north American pricing will be improved in the second half versus the first half and I think thats consistent with what you see in the index.
Which is up $40 a ton.
I can't comment on what one.
Shipment that might be at a slightly different price might mean.
From our perspective. This is what we are getting under our contracts. We as we've said in the past we sell virtually nothing in the spot market.
So were at least constructive on the direction.
Thanks, that's helpful.
And we've seen some commentary about producer inventories in caustic being a bit elevated over the last couple of months.
At those levels began to get drawn down and with the higher export demand or how would you characterize inventories for the industry currently.
I would say I can't talk about the industry I can tell you that our inventories are at normal to slightly below normal levels right now.
Okay. Thank you.
The next question, we have will come from John Roberts.
Yes.
Thank you I may have miss heard at the beginning but I think you talked about some Chinese supply disruptions in the proxy is that the glittering.
Based Chinese industry or was that chemical based at the where we're disruption or were these some of the older explosions that happened a while ago, just still rippling through the system.
Hi, Hi, John This is Pat this was clar hydrogen based.
Epichlorohydrin, a it was not blistering to EFI based.
And it was really.
This is out in the press you know primarily around highly.
You know, having some environmental issues and.
And that's the capacity that has really gone down.
Is there a fair amount of excess quick turn based production that can still come back to the market here to kind of.
Fill in if the pricing continues up.
I'd say, it's I'd say the honest answer right now it's hard to tell.
Theres lot of different sizes of that glass or into EFI out there in terms of scale. There is a lot of different costs involved in those small assets.
Most of you know theres very little epichlorohydrin that ever comes out of China, John as you know.
So I think most of this is around cloud or hybrid based and that is of course most of the capacity in China is clearly a hydrant based.
Okay, and then a follow up on Winchester. It's are we kind of completed all the destock at both and consumers in the supply chain now and until the next kind of disruption comes along this is a new normal and we'll have normal seasonal patterns offer at the current level of results in Winchester.
Hey, John This is this is Todd I think what you we've seen at the distributors and retailers I think inventories are in line.
It's still unknowable, what the consumer has their safety stock.
So we aren't it's not clear that they are buying what theyre technically consuming today.
So, but what we've seen in the first half of the year Winchesters sort of you know, even though commercial sales have been down in pricing has been down with commodity costs and improved military volumes year over year results or you know are very similar.
Okay.
Next we have a rune viswanathan of RBC capital markets.
Great. Thanks, Good morning, guys.
Just a question on going back to the the bridge so you highlighted.
Kind of comparable Winchester earnings.
That's a minimal H H H to improvement.
Lower turn around a 25 price is only 15.
And then you said that leaves 100 or so for volumes.
Could you break that out as well I mean that seems like quite a big jump to me.
It was that.
Just.
Weakness in H., one that that was more pronounced than you see all that coming back and what gives you that confidence, especially given the demand weakness that you saw in the first half.
We just we provided some information specific to products a few minutes ago, where we talked about bleach, which I think everybody knows is a seasonal business and if you look at the weather pattern in the United States. The early part of the year, especially the April may was a lot cooler and a lot wetter July was a lot hotter than normal and that has continued in August that represents a big uptick historically, we've seen 15% uptick first half to second half I talked about the vinyls business, which has a seasonal component to it in terms of how we run how our customers Ron and that has historically had a 5% to 7% uptick second half to first half.
The epoxy business has always been seasonally strongest in the first half in the second half versus the first half drily goes to a lot of a lot of the businesses in Europe a lot of it is construction related and that that is predominantly a summer activity June July August September . So we were confident in that and I also talked about one of our large pipeline accounts, who primarily or in the urethanes business and we have typically seen somewhere in the 15%.
Improvement year first half to second half in Nam. So all we're really looking for here is the normal demand pattern over the first half to second half.
And you know a lot of that gives you and that plays into the fact that second half turn around costs are going to be lower because some of this is driven by turnarounds that occur in the first half.
And the first half turnarounds reflect lower demand in the first half versus the second half.
So I'd say were as confident as we could be about the long the pattern that we're seeing this is not that unusual.
And then just so we can put that in context.
Yeah, I have those numbers as far as bleach up 15% to 20% five to seven in vinyls pipeline up 15%.
You know given those typical movements I guess in the past has that typically resulted in a in a $100 million improvement.
Second half versus first half or is that.
Because of changes in your system that you can realize that that larger levels of improvement.
I would say that typically creates a significant change from first half to second half, we said earlier that.
Over the last three years that we've owned the Dow businesses, we've seen about 45% of our EBITDA will be generated in the first half 55% in the second half pricing can skew that all over the place.
We're looking at this.
And the number we're giving you is based on our obviously based on our assumptions on price and there is not a lot of price skewing that this time.
And then just to understand the lower end of the guidance then so I'm assuming the midpoint.
You get that 100 million or so in volume.
So the lower end is it mainly just at the the volume doesn't come through or what are the other factors that go into the lower end of guidance.
Well I would say the two big variables around the guidance are doing you realize the $15 million in price and the rest is the volume.
Okay. Thanks.
Next with Aleksey Yefremov of Nomura.
Thank you.
Good morning.
Apologies another question on first half versus second half if I take the 650, you expect at the mid point in the second half and divide it by two that's about 325 million per quarter.
Should I think about the seasonality as threeq, who is going to be higher than that average for Q below that.
No I think with the product mix that we have today and some of the changes in the customer I would say Q3, and Q4 should look similar to each other.
So about 325 per quarter is roughly.
All right. Thanks, and then the 20 million environmental charge or should that benefit or the corporate line in the third quarter compared to the second quarter because of absence of it.
All other things being equal yes.
And last quick one I find me could you quantify the negative impact of ITC you fire in the first half and how how much it would benefit the second.
All we've said is that it was $10 million in the second quarter.
Great. Thank you.
Well as there are no further questions. This concludes our question and answer session.
I would now like to turn the conference call back over to Mr., John Fischer for any closing remarks, Sir.
I'd like to thank you all for joining us today, and we look forward to speaking with you about our third quarter.
Right and we thank you Sir and to the rest of the management team for your time also again the conference call is now concluded at this time you may disconnect. Your lines. Thank you take care and have a great day everyone.
[noise].
[noise].