Olin Corporation

Good morning and welcome to Olin Corporation's third 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. Following today's brief opening comments, there will be an opportunity to ask a question. 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.

Thank you, Grant. Good morning, everyone, and thank you for joining us today. Before we begin, let me remind you that this discussion, along with the associated slides and the question and answer session that follows, will include statements regarding estimates or expectations of future performance. Please note that these are forward-looking statements and that the actual results could differ materially from those projected. Some of the factors that could cause actual results to differ from our projections are described without limitations in the risk factors section of our most recent Form 10-K, the third quarter 2020 Form 10-Q, and in yesterday's third quarter earnings press release. A copy of today's transcript and slides will be available on our website in the investors section under past events. The earnings press release and other financial data and information are available under press releases. With me this morning are Scott Sutton, Olin's President and Chief Executive Officer, Pat Dawson, Executive Vice President and President of Foxian International, Jim Varlick, Executive Vice President and Chief Operating Officer, and Todd Slater, Vice President and Chief Financial Officer. We will begin with brief remarks, and thereafter we will be happy to take your questions. I'll now turn the call over to Scott Sutton.

Yeah, thanks, Steve, and hello to everybody. You know, I've been Olin's CEO for a couple months now, and I can tell you that I'm just plain lucky to be here in this great company and working with this passionate team. In fact, I'd ask you to watch carefully what this team is going to do with this company, as it will surely be exciting. My role is to lock arms with this team and win our way back to a much higher equity value. Let me start my comments with slide number three in the presentation and an update on market and business fundamentals. Look, I would say the summary is that global industry fundamentals are still intact, though currently pressured by COVID-19. In our chemicals business, the supply-demand balance is expected to push back toward demand as only limited, meaningful supply additions are foreseen on the horizon. In fact, 80%-ish effective industry utilization rates with a sophisticated player is a really good place to be as long as that player is focused on driving value. So we are that player. We're going to be that leader. For example, competing in a way that represents the value we bring to the market, as we will discuss further today. In our Winchester business, demand in the U.S. far outstrips supply because of long-term positive demand attributes. Sporting participation, new firearms owners, and self-defense readiness is way up. Military programs have multi-year growth needs under long-term commitments. I mean, we are the absolute small-caliber ammunition leader. In fact, you know, I'd say that under John Fisher's leadership, Olin has built undisputable number one global leadership positions in every single business, core alkali, epoxy, and Winchester. And when you break down the businesses into specific sources of value, the list of number ones expands to numerous product and geographic positions. John and the team did that. I mean, the necessary spending to complete that building process of approximately $1.4 billion for IT, ethylene payments, and transition cost is done. It's finished. So, what is next for Olin? We are leaping from building to leading in terms of value. So building to leading. So I'm moving to slide number four now. The next step in that evolution takes off today. Our value is not determined by industry trade indices or other items like asset utilizations and changes in input costs. Those may well be influencers. but they will not be main drivers of Olin's value. We are more eager to talk about and implement our own Olin initiatives to create main drivers. I mean look, we're committed to showing outcomes from those initiatives too. That means financial outcomes as well. So we are accelerating the implementation of an Olin unique winning model. All of our initiatives will involve principally around two foundational elements. Number one is exercising and getting value from our undisputable leadership positions as Olin is critical in this world. And number two is driving and prioritizing productivity from a large, motivated, and engaged employee base. Some new things that you should look for from our winning model, particularly from the number one foundational element of exercise in our leadership, include that we will start talking about how Olin can increase the value of the ECUs itself, and we will measure that through an Olin ECU Profit Contribution Index. This type of ECU metric is the best indicator of our success. I mean, it's really the number one indicator of our success. And that's what Olin does, increases returns on ECUs, and we are the clear global leader. Merchant-costed soda is only one element of our business. Maybe up to 25% by sales, thinking prospectively. In fact, and really as a side note, caustic is certainly not a singular driver. There are no independent caustic dynamics. If the caustic market quality is exceptionally poor, we might back down caustic and change our trading and inventory mix, resulting in slowing chlorine chain sales in order to maximize the Olin ECU value as we proactively manage our landscape. We will be sharing that ECU Profit Contribution Index with you quarterly. In fact, take a look at slide number five now. And it will represent the unit contribution value of chlorine and caustic soda through our complete and broad derivative chain, even including epoxy, and of course, including merchant sales of chlorine and caustic too. Our index will be used to set an ever-rising floor on the unit ECU profit we will accept. It is the number one marker of us resetting business value and exercising our leadership, and it covers about 75% of this company's total business. You know, a companion discussion is that unfortunately, Some industry trade indices have come to be thought of as leading indicators of our business. We plan to make them a trailing indicator only as we control our own destiny. We will do this by shifting more of our business to be based on a freely negotiated basis and negotiating directly with customers for our value. We just don't feel the industry trade indices represent the full value we will transact at. Our view of a timely example of this is the miss of the North American chlorine pricing by an index here over the last month. You know, obviously this unwinding of some industry trade indices gives us more ability to positively control the O and ECU profit contribution index. You know, as a point of reference, In Q3, we sold some rail car chlorine at the highest price since 2003. And we lifted some spot EDC pricing by more than 10 times the Q2 low price. In early Q4, we just asked for and received the largest Winchester commercial ammunition price increase in many years. And this comes on the heels of two other successful commercial price increases this year. So what's the expected outcome from our new unique winning model? Well, this is on slide number six. You know, of course, we're thinking in terms of multiples of our current equity value. But in terms of 2021, you should expect us to target an EBITDA margin roughly in the mid-teens. Composed of the following elements. One is an expected $100 million of improvement from confirmed items. So that is our Lake City Army Ammunition contract in operation and a new VCM deal. Another expected $100 million of improvement over 2020 from not repeating the second quarter COVID shutdown. Additionally, we expect up to $100 million of net, and that is net, productivity savings as our gross actions more than offset inflation pressures. And the big one is up to $200 million expected from our acceleration of leadership activities, as I just previously described. So, our levered free cash flow, and so that's after all of our capital spending, It's expected to be quite positive, somewhere between $2 and $3 a share. You know, I'd say at today's stock price, it's a huge return. So we need for every business to deliver in 2021, and every business is positioned to do so. So with that introduction, you know, I look forward to your questions on these next steps and how we will be controlling our own destiny. and how we will significantly lift our equity value. That completes the opening comments.