Olin Corporation

Good morning and welcome to the Olin Corporation second quarter 2020 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. After today's presentation, there will be an opportunity to ask questions. 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.

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 limitation In the risk factors section of our most recent Form 10-K, the second quarter 2020 Form 10-Q, and in yesterday's second 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. The earnings press release and other financial data and information are available under press releases. With me this morning is John Fisher, Olin's Chairman, President, and Chief Executive Officer. Pat Dawson, Executive Vice President and President of OxyInd International, Jim Varlick, Executive Vice President and Chief Operating Officer, and Todd Slater, Vice President and Chief Financial Officer. We will begin with brief prepared remarks, and thereafter we will be happy to take your questions. I will now turn the call over to John Fisher. John?

Thank you, Steve, and good morning, everyone. I hope you and your families are keeping safe and healthy during these challenging times. Olin shared our second quarter results last night. We'll keep our remarks this morning to a minimum in favor of addressing your specific questions. I'll start on slide three. COVID-19 related demand losses were first seen in our chemical portfolio in March. The demand impact continued through early June before showing signs of recovery. was compounded by two large planned maintenance turnarounds that took place early in the quarter. These included a one-in-every-three-year vinyl chloride monomer turnaround and a one-in-every-five-year free-port epichlorohydrin turnaround. As a result, April and May were Olin's weakest volume months in the chloralkylide products and vinyls business. Overall, Olin's chemical business sales increased each month during the quarter from the April low point. Thank you for joining us. We plan to continue to temporarily idle plants to minimize operating costs. Third quarter 2020 will benefit from improved volumes, lower maintenance turnaround costs and higher product prices compared to the second quarter. We are forecasting third quarter 2020 adjusted EBITDA that is more than double second quarter 2020 levels. Let's now turn to slide four. The most significantly impacted end uses for our products include automotive, aerospace, construction, and oil and gas. Chlorine demand from urethane and isocyanates customers represented our largest volume decline during the second quarter, and that demand outlook still remains challenged. Chlorine sold into titanium dioxide, which held strong through the first quarter, began to weaken during April and is now below historic trend. We have seen Olin's dichloride pricing improve during the third quarter. Our second quarter epoxy resin volumes decreased by approximately 30%, both sequentially and year-over-year, across both Europe and North America, impacted by weak customer demand from automotive, industrial coatings, and oil and gas. We are now one month into the third quarter and have seen an increase in vinyls and isocyanate demand and a slower paced recovery in resins and urethanes. On the caustic side, inorganic end uses are recovering The current environment across our chemical businesses is still marked by uncertainty and volatility. Future demand visibility on both sides of the ECU remains uncertain. Our customer order patterns have been and remain erratic and heavily influenced by their customers and supply chain inventories. As a result, are equally likely that Olin's year-end 2020 caustic soda price will be higher than or lower than our July 2020 pricing. Now let's talk about Winchester, which is on slide six. For the fourth consecutive quarter, the Winchester business experienced year-over-year segment earnings growth. In the second quarter of 2020, Winchester experienced a 17% increase in sales compared to the same quarter last year, resulting in a 61% year over year increase in adjusted EBITDA. These year over year increases were due to higher commercial ammunition sales volume and improved pricing. The second quarter of 2020 represented the strongest quarter in commercial demand since 2016 and we expect this elevated level of commercial ammunition demand to continue at least through the balance of the year. Winchester has significantly reduced inventory levels responding to this surge. The lower level of inventory in the business will limit our ability to meaningfully increase our commercial ammunition sales volume during the third quarter. Following the April 1st price increase, Winchester announced an additional 2020 commercial ammunition price increase effective August 1st. Moving to slide seven, I'll provide an update on Winchester's Lake City project. Winchester will assume operational control of the U.S. Army's Lake City Army Ammunition Manufacturing Facility on October 1st. This multiyear contract is expected to increase Winchester's annual revenue by $450 to $550 million and increase annual adjusted EBITDA for Winchester by $40 to $50 million. Based on the transition work performed to date, Thank you. Thank you. and expected $35 million reduction in annual operating costs from the permanent shutdown of a chloralkali plant with capacity of 230,000 tons and the associated vanillidene dichloride production facility, both in Freeport, Texas. These closures are expected to be completed around year end and will enable OLA to optimize its Freeport, Texas chloralkali operations and cost structure. The winding down of the multi-year information technology projects integrate the acquired Dow Chlorine Products businesses, which is forecast to reduce spending by approximately $110 million annually, split between capital and expense. This wind down begins in the fourth quarter of this year. These after-tax cash flow enhancements of approximately $200 million per year are generally independent of industry conditions. The EBITDA benefit is approximately $140 million annually. Now I would like to turn the call over to Todd Slater, owner and CFO.

Thanks, John. During the second quarter, we completed several refinancing actions that enhanced our liquidity as highlighted on slide 9. These actions included the following. We reactivated our $250 million accounts receivable securitization program. of which 240.7 million was drawn at June 30th. In May, we amended our $1.3 billion senior secure credit facility. It now includes a senior delay draw term loan facility of $500 million and a senior revolving credit facility of $800 million. Both facilities are undrawn. The new bank structure provides additional financial flexibility. Also in May, We issued $500 million of 9.5% senior notes due in 2025. These refinancing actions provide the company with the financial flexibility to navigate the current economic conditions and should support the company over the next several years. Olin expects to refinance a portion of the high-cost bonds, which were assumed during the 2015 Dow acquisition. During the fourth quarter of 2020, When they first become callable. By refinancing a portion of the high-cost bonds, we expect to reduce annual interest expense by approximately $30 million. We ended the quarter with cash and cash equivalents of $238 million. We continue to focus on other liquidity enhancements such as our 2020 target to reduce working capital by $150 million. Year to date, we reduced working capital by $31 million, which represented approximately $130 million of incremental cash flow from March 2020 levels. We are forecasting capital spending to be $250 to $275 million in 2020, which is approximately $135 million lower than the prior year levels. The timing of capital spending was front half loaded. and we expect lower capital spending in the second half of the year. We also expect that capital spending will be lower in 2021 than 2020. Finally, on Thursday, July 30th, Olin's Board of Directors declared a dividend of 20 cents on each share of Olin Common Stock. This dividend is payable on September 10th, 2020 to shareholders of record as of the close of business on August 10th, 2020. This is the 375th consecutive quarterly dividend to be paid by the company. Operator, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star and 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star and 2. Our first question today will come from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Yes, good morning. I think you mentioned in the prepared remarks that you were idling some core alkali plants. Can you expand on that in terms of locations and what you think the operating rates are likely to be? And then I guess on a related note, I think you announced in late 2019 your intention to Shutter some capacity in Texas. Is that still on track for late 2020 or has that timeline changed?

This is John Kevin. I'll answer the second question first. The Texas capacity shutdown is on pace to be done by the end of 2020. And that was also done in context with another downstream plan. I would rather not address I can tell you we've had one plant where we've been running it between two and three weeks a month and taking seven to ten days off every month since March. I can tell you there's a plant that's down now that in order to save costs we took a turnaround that was typically done with contractors and tried to be done in two weeks and we're spreading it out over five to six weeks using just internal people and doing it only on first shift to avoid overtime costs So those are the kind of things we are doing. And I would say that we have had probably of the seven different sites that have chloralkalite plants, we've had some kind of shutdown at at least five of them over the last four months.

I see. That's helpful. And then I had a second question on the epoxy business. Benzene and propylene, I suppose, have been quite volatile in recent months. So If you take into account the inventory flow-through effects of those important raw materials, how do you think your margins might trend moving forward into the third quarter versus the second quarter?

Hi, Kevin. This is Pat. You're right. They have been very volatile. We saw the big fall-off here in the second quarter, and I would say that that's benefiting us Thank you so much.

and our next question will come from Steve Fern with Bank of America. Please go ahead.

Yes, thank you. I wanted to ask a little bit about that VCM contract. Why is there now this $25 million range in there and what will be the mechanism for VCM pricing in that contract? The reason for there's a range in there is when you look at the

Demand uncertainty that we're facing today, there's the prospect of just facing lower demand as we move into 2021 than we originally would have forecast because demand in that space had been a lot solider. And the contract, I'm not going to give you any specifics, but it does have some movements around different raw material inputs.

And just also wanted to follow up on your outlook for caustic pricing. You highlighted that you thought it'd be higher in the third quarter. I don't know if that was just like sequentially an improvement in the average price from second quarter to third. Because you also mentioned by year end, you know, could be roughly the same as the price in July. So what is your thinking on the cadence of pricing in the second half?

Our comment on the third quarters was simply the price in Olin's system. That was all we were referencing. And then our outlook for the end of the year where we said equally likely, I think, just goes to the volatility around supply and demand, or demand on both sides of the ECU, especially when you give consideration to the fact that PVC and chlorine demand typically weakens pretty significantly when we move from late third quarter into fourth quarter just on a seasonal basis.

Thank you. And if I could just squeeze one more in there. Have you looked at the production of hydrogen out of your chlorophyll electrolyzers and whether there's an alternative use for that hydrogen other than as a combustion fuel in your cogens?

What we use is a significant amount of it to make hydrochloric acid, which we then sell. So, and we do have other contracts with third parties who take the hydrogen for other than combustion purposes.

Okay. Very good. Thank you.

And our next question will come from Frank Mitch with Permian Research. Please go ahead.

Good morning, folks. And John, I assume this is your last conference call. So certainly wanted to offer my congratulations and best wishes on your pending retirement.

Thank you, Frank.

And if I could follow up on the on the caustic soda pricing, because it is a little bit of a surprise that you're anticipating that, you know, prices are moving higher. Obviously, your system includes certain contract terms and so forth. So I can understand why the third quarter caustic prices may be higher in your system. But if you look at the industry overall, I mean, there is a thought that PDC demand and chlorine demand is doing a bit better than perhaps caustic demand. As you think about the industry itself, wouldn't you have thought that maybe from the high July levels, we might start to tend off or trend off or that's not necessarily...

I think, Frank, that there are a lot of views and a lot of uncertainty around demand on both sides of the molecule. And, you know, we have seen PVC operating rates improve, but they're still 10 to 15 percent below where they were a year ago. So they're not what I would term wildly robust. and if we do get a seasonal slowdown in that, you could see a situation where Caustic, if demand doesn't seasonally slow down, which it typically doesn't, Tosca could go tight again. We're just not convinced that some of the things that you read that say Caustic is going to roll over in the second half, that that's true.

Gotcha. Gotcha. Understood. You did mention that volumes in July were better than June. What does your crystal ball say in terms of when we might be at year-over-year parity in terms of volumes for Roland? I'm not sure I could answer that question. I personally don't think that's going to happen in 2020.

Okay.

All right. All right, fair enough. Thanks so much, and again, congrats.

Thank you.

And our next question will come from Hassan Ahmed with Alembic Global. Please go ahead.

Morning, guys. You know, you guys talked about in your prepared remarks, you know, a couple of turnarounds in the quarter. I'm just trying to get a sense of what sort of negative EBITDA impact in the quarter those turnarounds may have had. Hassan, this is Todd. I know we have a slide back on 22 in the deck that talks about specifically the maintenance costs.

It was a little bit of a headwind from Q2 versus Q1, but the most significant penalty to us is really the volume impact, especially our chlorophyllite operations in April and the first part of May.

Fair enough, fair enough. And now moving to the raw material side of things, you know, obviously, you know, there's been some choppiness on the natural gas pricing side of things, the ethylene pricing side of things. As you guys have provided your Q3 guidance of, you know, more than doubling EBITDA, I'm just trying to get a sense of what sort of raw material pricing environment you are baking into that guidance. Hassan, this is Todd again. We, as you know, we are heavily hedged at least a quarter out. So I think we have a high degree of confidence in our costs associated with ethane for ethylene and natural gas.

And I think, you know, from Q2 to Q3, I think it's a small good guy.

Very helpful. Thanks so much, guys.

And our next question will come from Mike Sesson with Wells Fargo. Please go ahead.

Hey, good morning, guys, and congrats to you as well, John. Can you give us a little bit of color where your operating rates were for the chloralkali footprint in June and heading into July? And what do you think you need to sustain to sort of get that outlook for the third quarter in terms of EBITDA versus the second quarter?

As you know, the industry operating rates in the second quarter were around 71%. I mean, they were higher in June than April. It would be our expectation that you're not going to see, and that 71% is down 14% year-over-year. Again, we are expecting continued year-over-year softness in operating rates, but not a significant improvement in operating rates from late Q2 to Q3. And I would add to that, the scale of the turnarounds that we discussed made our operating rates in the second quarter lower than those of the industry. And we've got a built-in larger step-up as we move to Q3.

And I would say that based on what we saw in July, July's operating rates are sufficient for us to achieve what we've set about the third quarter.

Understood. And then any changes to your long-term view for the industry? You've had slides in the past out to, you know, several years mid-part of this decade in terms of operating rate or capacity expansions being mostly debottlenecking. Any sort of – do you think – We're still on that same path in terms of the long-term potential for the industry?

I think we're still on that long-term path, and I think the likelihood of any near-term capacity expansions within the industry globally has probably gone way down given what we've experienced in the last three or four months and what the uncertainty of the near-to-intermediate-term outlook is.

Great. Thank you.

and the next question will come from John Roberts with EBS.

Please go ahead. Thank you and good luck John and you move to the executive chairman role and I'm sure Scott is listening in so welcome. On slide four for chlorine demand in the third quarter you have a green bar for inorganics. I think you said TiO2 was softening into the third quarter so is TiO2 a minority of that inorganic box or is at large and the weakening in TiO2 is just very modest.

I'll answer the first part of that. What we said was TiO2 weakened significantly in the second quarter and is improving, which would heal the green box. And Jim, maybe you want to just talk about that category.

Yeah, it's a broad-made category. There's a lot of different elements to it. And, you know, I read some other releases this morning where bromine actually was a good guy, was strong and so forth. So, We see that as increasing. Again, it's coming off of what was a slow first and second quarter and improving. Automobiles are back up, so by definition, there's an improvement there. And then, as I mentioned, bromine, and John just talked, the TiO2. So it's a broad category that's improving.

And then also on slide four, all of the boxes improved from 2Q to 3Q except for pulp and paper for caustic soda. By flat, is it still at an elevated level versus pre-COVID, or has it come down from the initial surge of boxes and tissue and towel demand that we had earlier this year?

Yeah, in the second quarter, you had the big surge, especially on the tissue side of things. And so that is waning to a certain extent. So it's just a pullback in some of the markets that were really in surge conditions. and so forth. And also, the fine papers and so forth were expected. With return to work, you would expect those to be coming up. And actually, that's being stretched out a little bit more with fewer people coming back into offices and so forth. So not a dramatic drop-off. It's just a settling back of where we were in the second quarter, which was very much to the upside.

Thank you. and the next question will come from Eric Petrie with Citi.

Please go ahead.

Hey, good morning, John. Good morning. Could you talk a little bit about how the cost curve for ECU has changed with lower gasoline prices year over year as well as gas prices and how does that impact, you know, your export economics and, you know, do you see that holding still into 2021?

As it relates to the ECU, obviously ethylene doesn't really affect that. I would say where we are on the cost curve is the biggest variable on the cost curve right now is just operating rate and obviously how you spread your fixed costs. I think natural gas for us is in a very similar place to where it was last year on average. I think what matters in terms of EDC, and I'll let Jim elaborate on this, is it so much what the absolute price of EDC is based on that thing, but how that relates to the price of PDC globally?

Jim, maybe you want to... Yeah, just specifically on EDC, it's a very dynamic marketplace, as I think everybody has seen. The dynamics that are taking place right now in EDC are that after the complete pullback at 80%, and many more.

dynamics are playing to the increase in EEC pricing that's taking place from the low levels in the second quarter. And then to help us think about your volume recovery sequentially, can you give us where Olin's underweight versus overweight ECE molecule compared to the industry?

I would say if you look at the industry, we're underweight on the vinyl side, and we're probably overweight on the urethane slash isocyanate side.

Great. Thank you.

And the next question will come from Alex Yefermov with KeyBank. Please go ahead.

Thank you. Good morning, everyone, and congrats, Sean, as well. Just to follow up on the EDC price, Would you expect that price to be higher in the third quarter versus second quarter in terms of your realizations?

Yes, higher in the third quarter.

Thank you. And then on the balance sheet, do you have full access to your entire revolver capacity currently, and what are the covenants that are related to this revolver?

This is Todd. We do have full access to the revolver and the delayed draw term loan. The covenants now, because we in May went to a secured structure, the covenant is only based on secured debt. And at the end of June, we had $153 million of secured debt. And the covenant now is three and a half times basically adjusted EBITDA. Okay. so well within any of those kind of metrics. So we'll see. As we said, a significant improvement in financial flexibility associated with our new bank agreement.

Thank you, Pat.

And the next question will come from Matthew Blair with Tudor Pickering Holt. Please go ahead.

Hey, good morning, everyone. I had a question on Winchester margins. You know, it looks like revenue is back to and many more.

Thank you very much.

Sounds good. And then could you talk about your bleach activities? Did you have elevated demand in Q2? And if so, it looks like bleach pricing was flat quarter over quarter. Why didn't prices move up there?

I would say demanding bleach in the second quarter was a record for a second quarter, remembering that a lot of it is seasonal. I don't know what you're looking at to say that pricing was down or flat. I can't comment on that, other than it's just... Okay, and some of that just goes to the mix.

Okay, thank you.

And our next question will come from Mike Leadhead with Barclays.

Great, thanks, good morning, and John, Mike, congrats as well. I wanted to first return to the topic of the heavy turnarounds in the quarter and its impact on results that you talked about. If I go to slide 22 in your deck where I looked at maintenance turnarounds, if I just add up chlorophyll and epoxy, QQ actually looks lower year over year and quarter over quarter. So are there other costs in there that I don't see on the slide or can you just help triangulate that for me?

The component that is missing, and I mentioned earlier, really relates to the lost volume, especially in chlorophyllite because of the turnaround this year, the BCM turnaround, and the epoxy epi turnaround affected our chlorophyllite operating rates significantly in April and the first part of May.

Thank you for your time. I guess how does the board view the dividend in light of this? Because I presume the dividend in some ways impairs your borrowing costs and your stock is probably not getting full credit for that dividend today.

I would say if you look at Olin over a long period of time, we recognize and the board recognizes that it's a cyclical company and there are points in time where the dividend is a very key component of shareholding I don't have any sense that it is creating an issue as it relates to our borrowing capacity or anything like that. Got it. Thank you.

and our next question will come from Arun Viswanathan with RBC Capital.

Please go ahead.

All right. Thanks. Good morning and congrats on your retirement pending as well, John. Appreciate working with you over the last several years. So, yeah, I guess, you know, first off, you know, if you can just talk about your term, caustic soda, you know, looks like we saw the first decline here in July. Do you expect that to continue, the declines? Or maybe we just see one month of declines would be unusual. Usually we keep going. So maybe just off your perspective as to the trajectory here and if pricing remains stable from here.

I think the point we were trying to make was that The visibility that we have, and I think that the industry has, over demand on both sides of the molecule is very limited. And it is entirely possible to create a scenario where caustic does go down. We said we gave that a 50% probability. But we also think there's a probability that caustic, by the end of the year, could be higher than it was in July. Keeping in mind that there is typically a very meaningful step down in operating rates In the industry, driven by PVC, in the fourth quarter. I mean, you typically see a five to seven point drop in operating rates. Caustic demand is not that seasonal, and we typically see price increases in caustic for caustic announced late in the third quarter, into the fourth quarter, recognizing that seasonality. We were not making a forecast. could end up on either side of this.

Okay. And I appreciate the detail added on slide eight. You know, it looks like you're now expecting a $140 million uplift in EBITDA in 21 versus 20. What's your confidence level on that? I guess it sounds mostly company-specific, not necessarily related to price or supply and demand, I guess. Is that correct? and could you maybe offer some thoughts on sensitivity to price and volume in that $140 million?

Thanks. What I would say is that $140 million we say is relatively independent of market conditions so we feel very good about that flowing through the income statement. I think there's an entirely different question about where are base values and base pricing going to be and I would because of uncertainty around demand right now. But I would just say all other things being equal, and that's a lot of things to be equal, we would expect 2021's adjusted EBITDA to be $140 million higher than it will be in 2020.

Okay, great. Thanks. Congrats again.

Thank you.

Then the next question will come from Travis Edwards with Goldman Sachs.

Please go ahead. Hi, good morning. I just wanted to ask a follow-up question on the balance sheet. I can appreciate there's a lot of uncertainty. I can also appreciate the recent deal that you completed to improve the, you know, the covenant structure and long-term viability of the business. But I'm just wondering, you know, what your team is thinking as far as, you know, the potential or willingness to come to market again, either to preserve liquidity, take out more of those blue cube notes, and then as, you know, if so, if there is willingness, Can you just remind us again what your capacity looks like to issue debt at the security level, just between that security leverage ratio you mentioned and your CNTA limitations?

Well, let me address the first part of that is that the term loan that we have in place is there to be used to call the Dow bonds. And as Todd said in his remarks, we intend to do that. And we do have essentially a billion-two of callable bonds. Starting October 15th. So that $500 million could be used or more. You can answer the secured borrowing question.

I don't think we would comment at this point about whether to your specific question about whether we would consider additional debt or incremental borrowings beyond what John mentioned to refinance the remainder of that $1.2 billion. Clearly Your leverage ratio, if you borrow the $500 million, is much closer to one-to-one on a secured basis when that would occur, and our limitation is three and a half.

Thanks, I can appreciate that. There was some granularity there, so thank you for walking through. I guess maybe as a follow-up, just as we're looking through the slides, I think the message has been a little bit as far as the interest cost savings. I think it's down to $30 million now from the $50 to $70, and then I think later in the slide deck you talk about $12 million of call premiums. So just wondering, between those two numbers, can we extrapolate sort of what the implied portion of those, the $1.2 billion of notes that's coming out, is that a safe way to sort of triangulate the amount that you're taking out, or are there more considerations that we need to take into account?

After the restructuring of our debt, we reduced the amount of the delayed draw term loan from $1.2 billion to $500 million. We originally had expectations in a different environment that we could use the delayed draw term loan to take out all of the callable bonds. Now we are saying we're essentially going to call $500 million. That's what Todd said in his remarks. And all of that is what's now reflected in the slides. And I know we had something different reflected last year, early this year.

Got it. Thanks. I know things have changed. So, appreciate the just clarifying on your end and best of luck to you, Geron and team. Thanks.

And our next question will come from Roger Spitz with Bank of America. Please go ahead. Thank you. Good morning.

This is in context to compare this recent event with the 2008-09 recession in chloraldehyde. Do you now export more EDC than you or shall I say Dow Chemicals did back in 08-09?

This is Jim. To be honest with you, I wasn't in the business in 08-09. So I can't make a comment about, you know, whether we're exporting more or less with that period of time. I don't have that information for you.

Okay. In that VCM contract, you were suggesting that the range in EBITDA benefit, it's now a different range because the customer might take lower volumes. If that were to occur, would you make that up by exporting VCM if you have that capability or perhaps more EDC to consume that chlorine capacity production?

Yeah, we have flexibility in our assets, so the EDC capability that we have would provide an outlet for that should we fall short on the VCUM contract.

Thank you very much.

And there are no further questions. This concludes the question and answer session. I'd like to turn the conference back over to John Fisher for any closing remarks.

Yes, I thank everybody for joining us today, and I look forward to talking to you again in about 90 days, so thank you very much.

And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.