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spk16: Participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Following today's brief opening comments, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Steve Keenan, Olin's Director of Investor Relations. Please go ahead, Steve.
spk14: Thank you, Sarah. 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 actual results could differ materially from those projected. Some of the factors that could cause actual results to differ from our projections are described without limitations in the risk factors section of our most recent Form 10-K and in yesterday's first quarter earnings press release. A copy of today's transcript and slides will be available on our website in the investors section under past events. Our earnings press release and other financial data and information are available under press releases. With me this morning are Scott Sutton, Olin's CEO, Pat Dawson, President, Epoxy and International, Damian Gumpel, President, Chloralkali Products and Vinyls, Jim Varlick, Olin's COO, and Todd Slater, Olin's CFO. Scott will begin with some brief remarks and thereafter we will be happy to take your questions. I'll now turn the call over to Scott Sattin.
spk21: Yeah, thanks, Steve, and hello to everyone. Look, I'm super proud of the Olin team for their passion, results, and for their optimism for our future. Because of their optimism and success, I have the opportunity to pull forward our value creation formula story. First of all, Olin is on track to deliver more than $1.8 billion of adjusted EBITDA this year. One proof point to that track is that second quarter adjusted EBITDA is expected to exceed first quarter adjusted EBITDA, excluding URI one-time impacts, even though we have significant turnarounds in the second quarter. The third quarter adjusted EBITDA should also exceed the second quarter. So, it is time to start projecting toward a higher adjusted EBITDA of $2.5 billion and above in future years, the emphasis really being on the above. For clarity, 2022 is expected to be a positive stepping stone toward that direction. Some key activities to bridge that gap to $2.5 billion are shown on slide number four But maybe slide number five tells a more comprehensive story to that 2.5 billion and above. Olin is quickly moving through four phases of evolution. We have already discussed the first two with you on prior earnings calls, and we are currently in phase two, the leading phase, as we enhance our unique model of optimizing value first across the whole ECU. Think of leading as solving the ECU co-production conundrum by setting our participation to the weak side of the ECU, anticipating potential value inflection points, and then activating to achieve a desired response. Shortly, we'll be looking to take our innovative model and apply it across multiple millions of tons of similar molecules and parlay the model into a much larger business. All kinds of commercial strategies will be employed in this phase three of parlaying, including bartering, sophisticated trading, and differentiated alliances to better serve customers. Simultaneously, Olin will be preparing for phase four, structuring, as we look to take proceeds from our cash flow machine and invest them in a smart way to expand our beneficial footprint. Please don't miss our internal equity price target in the lower corner of that slide. Okay, let me pull back to today a bit and fill in some key activities and results. You know, slide number six shows that in the first quarter, we matched our market participation to the weak side of the ECU. In other words, we sold less caustic, which not only allowed us to hold up caustic value relative to the fourth quarter, but more importantly, allowed us to significantly expand value throughout our chlorine and chlorine derivatives chain. I think the lift And the ECU PCI shown on slide number seven clearly shows the positive results. That value impact was also significantly expanded by the innovative actions taken by our epoxy team, as shown on slide number eight. Owen is the world's leader in epoxy, and our wins continue to stack up as we place our offering with key customers and into key applications. Look, I would also like to highlight the updates made to our Olin ESG scorecard in the appendix slides. We are generally delivering to many of the commitments made in our sustainability report, but we still have a lot of work to get fully on track here. Again, this demonstrates the team's comprehensive passion for Olin's broader contribution. Before opening this call up to Q&A, let me wrap it all up into contemporary value on slide number nine. Our team's shared success in leading and running toward parlaying is forecasted to generate roughly $1.1 billion of levered free cash flow this year, which at the current stock price represents a yield of roughly 16%. you know, really attractive considering we're just in the early stages of our push for shareholder value delivery. Okay, I mean, that concludes my opening comments, and operator, we're now ready to take questions.
spk16: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. And at this time, we will pause momentarily to assemble our roster. Our first question comes from Hassan Ahmed with Alembic Global. Please go ahead.
spk01: Morning, Scott. Hi, Hassan. You know, great numbers, very good guidance, but particularly, you know, I liked the sort of accelerated debt pay down side of things. Now, you know, as sort of you guys mentioned that you should be sort of approaching less than two times net debt to adjusted EBITDA by year end, and you also sort of called out the phase four side of the evolution at Olin. Just wanted to sort of dig a bit deeper into what exactly Phase 4 may look like. You know, in terms of deployment of capital, you know, how should we be thinking about M&A? Would it be upstream or downstream? And how should we be thinking about share buybacks?
spk21: Yeah. Yeah. Thanks a lot, Hassan. I mean, yeah, you're right. I mean, toward the end of this year, we end up somewhere at a, you know, debt-to-ebit ratio between 1 and 2, actually. That's why we're introducing this phase four publicly now is that we're pulling those activities forward. I do think M&A can be a part of that. On the other hand, there are some investments that we can make in this phase three of parlaying too as we get into differentiated alliances and actually invest in things like working capital to be able to expand presence of our model. So, you know, we have all those things. We are absolutely focused right now on right-sizing our balance sheet and really right-conditioning our balance sheet. But, Hassan, there will be a lot more to come on Phase 4. We just haven't fully introduced it yet, and that will be the subject of some future calls.
spk01: Understood. Understood. And as a follow-up, you know, again, one of the things that you talked about was the ending the cycle pattern, as you guys called it. So, you know, we understand what you're doing. And obviously, you know, going out, selling into the stronger markets, sort of avoiding certain weekend markets and the like. I just wanted to get a sense of what you're seeing on the competitor side of things. You know, I understand it's an oligopoly, but, you know, is the market continuing to be disciplined? You know, how should we be thinking about that? Because obviously, one of the risks that arises is that you guys may be doing everything right. But you know, there could be some market share games, there could be some price cutting games. I mean, could you just give us a better sense of beyond all in what you guys are seeing in terms of the landscape?
spk21: You know, Hassan, of course it'd be hard for me to comment on competitiveness and so forth. It's easy for me to comment on what Olin is doing as we've really worked ourselves through solving this ECU conundrum where, you know, our market participation is really set by the weak side. And so in doing that, we just don't cross downward inflection points we only cross upward inflection points on our value curve. And so what that takes you to, Ahsan, if you think about it, I know there's lots of publications out there and you see the quotes that somehow our capacity utilization is around 80%. But when you're talking about having to run a co-production scenario, basically serving two or more different needs with one production rate, that 80% has the effect of a 90%. And in fact, you're not going to see us be able to run above 90% because these are challenged assets to run as well. So I just submit that our actions are leading 80% to be be closer to 100%. So maybe not a direct answer to your question, but I will say our discussions have evolved more toward value with customers than anything else.
spk01: Very helpful, Scott. Thanks so much.
spk16: Our next question comes from Alex Yefremov with KeyBank. Please go ahead.
spk19: Thank you, and good morning, everyone. Scott, you were talking about epoxy margins moving towards 30% in the medium to long term. If margins are this high, I assume part of this equation is the price. How do you think competitors and industry in general would respond to this? What level of free investment economics are we in this position? And do you just see more capacity announced?
spk21: Yeah, hi, Alex. Thanks for the question. I'll turn it over to Pat here in just a moment. And, you know, we probably won't go into the competitor action there, but I would just start Pat's comments for him by saying that we actually have a long way to go to get to that 30% adjusted dividend, but it's totally within our scope and range.
spk17: So, Pat. Yeah, Alex, I would say why not 30%? Because I think if you look at the performance properties of epoxy and the fact that there's really not any clear substitutes for epoxy in terms of its performance and the value that it brings to customers, it should be able to command these kind of returns. I think also you look at our leadership position and the space that we occupy, vis-a-vis competitors, that's more of an upstream, midstream space and the way we can monetize our epichlorohydrin in the form of liquid epoxy resin. I think those leadership positions are very strong. I think also we have a number of opportunities to parlay that you see on slide 8, that upstream position into opportunities that quite frankly are already in motion. Whether we have the option to Toll produced, the option to make versus buy, the option to produce more if we can get the value for that. I think we have a lot of optionality there. So that's the way we look at it, and we're really working to accelerate those parlaying activities as we move early into the game here towards that 30%.
spk19: Thank you, Pat. And just as a follow-up, Scott, you mentioned you expect third quarter EBITDA to continue improving sequentially. You know, we had a lot of disruptions in the Gulf Coast, as you well know. How do you expect PCI, ECU PCI, to behave in the back half? Do you think it will start, you know, coming down at some point in the third or fourth quarter from Q2 level?
spk21: Well, I mean, I would say our improved EBITDA performance is going to be a reflection of an improved ECU PCI as well. But what I would say, you know, there are going to be points in our future that perhaps we exist through a quarter where we have to make some adjustments in how we're set up as we're running our model, and that can lead to changes potential declines in the ECU PCI, but they're gonna be short-lived because what they do is position us for the next phase of growth that we have in that ECU PCI and in our EBITDA.
spk15: Thank you. Our next question comes from Mike Sisson with Wells Fargo.
spk16: Please go ahead.
spk12: Hey, guys. Really nice start to the year. I guess, Scott, when you think about 2022 and the sustainability of the earnings that you're seeing here in 21, and I know it's a little bit early to get specific guidance, but it does sound like there is potential that 22 EBITDA could continue to go up from 21. Can you maybe walk through some of the things that you will do under your control to do that and and what needs to happen to keep that progress.
spk21: Yeah. Hi, Mike. Thanks. We have given fairly narrow guidance for 2021, considering where we sit right now. That's that 1.8 to 2.1 billion. you know, what I said was, look, 2022 is going to be a positive stepping stone going above that. So we haven't given specifics on that. But some of the items that will help us, right, we've listed out on that slide four. But I would add to that, Mike, and I would just say that When you think about supply-demand fundamentals looking out a year from now, especially around the ECU, they only improve. And at the same time, we continue to improve and enhance our unique model. And I think when you put those two things together, they underpin all of those activities that we listed out on slide number four.
spk12: Understood. And then just a quick follow-up. I think you mentioned that the ECU PCI will get to about 200 in 2Q. Is there any way to help us understand how much of the improvement from whatever, let's say the 100 in the third and fourth quarter, is kind of your new business model and how much was the tightness in supply and demand?
spk21: Yeah, sure. Just for clarification, Mike, because that index really represents the variable margin 75% of our company movements in that ECU PCI make a very big difference in our profitability. And so what we've said is we've got to move that index up close to 200 to get in the range of $2.5 billion of EBITDA. So while I wish it would happen in the second quarter, it's not going to get to that level.
spk02: So that's kind of where that item sits.
spk12: Great, thank you.
spk02: Yep, sure.
spk16: Our next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead.
spk05: Yes, good morning. You know, Scott, as I listened to the commentary and having read the slides, It seems to me that when we hear about alliances, tolling agreements, bartering, et cetera, that you're going to be looking for what I would call capital light solutions to growth as opposed to building, let's say, new greenfield or brownfield capacity. Is that correct or am I overreading into the signals here?
spk21: Yeah, thanks a lot, Kevin. I mean, no, I mean, that's correct. I mean, we do have a next path to growth that is capital life. And in fact, we are already engaging in those activities, right? You heard when Pat had answered an earlier question that we're doing things like tolling some of our scarce upstream materials into liquid epoxy resin, for example, so that we can service our customer base. And there's just a lot of opportunities to do that across our complete portfolio. So those are the things that we can pull forward the fastest to support growth. There's other things we can do beyond that. I don't really see greenfield expansion as part of our future. There could be limited brownfield expansion, depending on the alliance opportunity that we might have. But yeah, it's a low capital, near-term growth strategy that will complement with that phase four structure.
spk05: OK, that's very helpful. And then secondly, I'd be interested to hear your updated thoughts on international trade. Normally, when prices rise in a parabolic fashion, what would happen is we'd see imports to exploit a physical arbitrage opportunity. In today's market, we've got all kinds of chaos and friction in global supply chains. Are you more insulated from trade threats today? And if so, what do you think that means for Olin's profitability?
spk21: Well, I'll start this, and then I'll ask Damian to add a little bit to it. But, you know, our winning model is a very active model. And so we participate in, you know, global trade at the right moment with the right people. with the right product. So we're an active participant in that instead of just being subject to, you know, reactions that may develop from that. But Damian can probably do a better job with that than I did.
spk03: Kevin, good morning. Just a dovetail on the comment. I would tell you that the way our model is really set up right now is, you know, regardless of the stimulus that is put on us, whether it's the changes in trade flow, demand, you know, flow, end-use flow, We just adjust to it and not have to mitigate from it. And so, you know, as we saw, you know, just to give you a brief list of examples, you know, we saw, you know, globally on the vinyl side, a lot of, you know, strong demand, you know, a lot of people running, you know, for that stronger side, and we're running towards our weakest side of caustic. You know, it didn't mean that, you know, we pulled back our participation of caustic, but we looked globally at, where there were pools of available material. And we have done some things in purchasing products from regions that we, in our prior models, our prior paradigms, we haven't done before. And so by doing that, we were able to effect the participation strategy on our ECUs that we wanted to do, but we still met some desired customer growth and reactions to be able to serve them as their demands ramped up. And we did that in a very fluid and efficient way. So that's just one brief example of kind of the way we adjust to really any curveball or fastball that comes our way. OK.
spk05: Thanks so much.
spk16: Our next question comes from Frank Mitch with Fermium Research. Please go ahead.
spk13: Thanks so much, and nice results. I just wanted to drill down a little bit more onto the chloracly side of things. On slide five, you mentioned that the model fits across millions of additional pounds, and yet you took the decision to shutter 50% of the McIntosh diaphragm capacity. Can you talk through the decision behind doing that?
spk21: Yeah, sure. I mean, this is Scott. I'll start. I mean, hi, Frank. And, yeah, by the way, just for clarification, our model fits across millions of additional tons of material, not just millions of additional pounds of material. We're selling roughly 14 million tons a year, so it's maybe not that far-fetched to think that we can grow at that kind of level. When you think about the capacity announcements that we've had in terms of shutting down, they were underutilized assets, right? And the reason that they've been underutilized assets has been because of the way we run our model, right? We said we're not going to participate in poor quality markets. So therefore, as one example, not participating in a poor quality caustic market is means we don't have need for that asset anymore, so we're going to right-size our balance sheet to be much more nimble in the future, and that's what it's about. It's not an indicator that demand is weak or weakening. In fact, it's just the opposite.
spk13: Understood. And listen, I mean, obviously the Winchester EBITDA really jumped off the page, and much of that is Lake City is humming along. I mean, when you originally bought that, the indication was that that should add about $50 million of EBITDA per year, but it looks like it's adding that per quarter. Can you talk through what you're seeing with your Lake City business, and have we repealed seasonality in ammunition? Because, you know, obviously an incredibly strong 1Q result.
spk21: Yeah, thanks. I mean, I would say actually, you know, Lake City is doing as we intended and as we said, maybe just a little bit more. You've got to remember that we integrated it very fast, right? And not only has it become part of our military business, but also part of our commercial business. So the performance improvement that you're seeing is across the whole business after we made the acquisition and the team did some fantastic work to really go out and optimize our whole supply chain and our whole approach to the market there. Demand stays strong and it's really a result of the fact that the sport of target shooting is growing quite a lot, and it continues to do that. And you see us, or you will see us, start to use the Winchester brand to grow that sport of target shooting. And we're doing things like, you know, we just had supported the Winchester Sporting Plays Ladies Cup. Ladies participation in target shooting is one of the fastest-growing areas, and we're going to be a big player in that.
spk13: Got you. Thanks so much.
spk02: Sure.
spk16: Our next question comes from Jeff with JP Morgan. Please go ahead.
spk06: Thanks very much. In the light of your EBITDA ambitions, is the pattern of your capital expenditures over the next several years different? That is, is it higher than $200 million a year? And you spoke of buying various assets to fill in, I don't know, tactical or strategic gaps. How much might that cost, roughly?
spk21: Well, yeah. Hi, Jeff. I mean, I would say, in general, for the next few years, we're in that $200 million a year range for capital. But what I would also compliment that statement with is the fact that some good opportunities are gonna come out of our activities as we move into phase three of PAR lane and potentially phase four structuring. I know you get the phase four structuring piece of it if we did do some targeted M&A. But even in phase three, we may have the opportunity to invest in a different way And therefore, we might use some of our levered free cash flow to do some of that. But in general, it's going to be $200 million a year at that level for the next few years. Maybe Jim, who's next to me, wants to comment on why we can stay at that kind of level in the base business.
spk08: Yeah, we're looking very hard at our asset base on a continual basis. A lot of it is about productivity and what we need to run and what we don't need to run. And you've seen the progress that we've made on productivity, some of the asset closures and so forth. That actually reduces the amount of capital that we have to spend, maintenance dollars, fixed costs, and so forth. And also the fact that we're now running to the weak side of the ECU, so we look at things a little bit differently today. than we used to in the past. So at $200 million, we feel like we've made heavy investments in the early part of the building phase, and now we're reaping the benefits of those investments, and so our capital requirements are going to be in that $200 million range for the next few years.
spk06: Okay, and then for my follow-up, how much were your caustic soda volumes up or down sequentially in year over year in the quarter?
spk21: Well, I'll pass this to Damian. Again, I'll just preface it a little bit with the movement of volumes relative to a prior time period in one product are almost inconsequential to our results, right? It's how we use all of those activations to deliver the best value across the whole ECU and all of our derivatives that utilize parts of the ECU. Damian can give you something that's probably a little more specific.
spk03: I'll probably end up saying, just adding just another layer to the onion that Scott just peeled in that it really doesn't matter, you know, the answer is they were lower than they were to any relevant period, but that's a result of our models.
spk06: Right. How much lower?
spk03: Lower. We weren't going to specify. It was purposely lower. We pulled out of, you know, of low, you know, pools of low-value liquidity wherever they are in the world. So, you know, we pulled out of, you know, in the past we've said we were a certain level of participation on the export market. And if the export markets are weaker, And you see where the pricing has been in the globally traded market. That's clearly an area that one can pull back from. And there were others as well. So lower, lower by decision, lower purposely. And it's an area that we still look at managing. We're going to always take a fresh look at what is the relative strength of one side of the ECU towards the other. You know, the ETU is not a zero-sum teeter-totter. We completely break away from that paradigm, and we just play, you know, we're just going to keep playing to the lower side, and the lower side is still caustic soda relative to everything else on the chlorine side.
spk06: Lower by 10%? Is it as much as that?
spk21: Yeah. Hey, Jeff, I mean, what I would tell you is that it actually takes, you know, a lot less volume movement than, you know, you might be anticipating. to keep from moving across a pricing inflection point. And I'll just sort of refer you back to slide six. Yep.
spk06: Okay. Thank you.
spk16: Our next question comes from Aaron Viswanathan with RBC Capital Markets. Please go ahead.
spk09: Great. Thanks for taking my question. Congratulations on the great results here. So first off, I guess I just wanted to understand what you're seeing in the market right now. It looks like you are seeing some uplift in caustic soda pricing as well. What do you expect for caustic soda pricing over the next, say, two quarters or through the rest of this year?
spk03: Damian, do you want to grab that one? Sure. I mean, the short answer right now is, well, if you look at a high level, the The historical trends in association is that, you know, caustic trends with economy, economies are opening up, and so forth. But, again, to us, it's a simple equation that goes right back to the ECU. And, you know, caustic still remains the weaker side of the ECU, regardless of any upward trend that can be seen with the aforementioned economic recovery. and we still look to manage our participation based on which side is relatively weaker than the other.
spk09: Okay, great, thanks. And then could you also elaborate on some of your plans moving forward? Would you potentially consider opportunities to move more downstream into, say, PVC, or could you also comment on your participation in EDC?
spk21: Yeah, sure. This is Scott. I mean, look, we're certainly not looking to move downstream. There's so much opportunity in where we participate today that you're likely to see us do things that complement our existing business. Yes, we already go into EDC and actually are the world's largest merchant marketer of EDC as well.
spk09: And then if I could just ask you to comment on overall supply and demand trends. Do you think demand has structurally improved in this market? And do you feel a bit more optimistic about the next several years on demand? Or is it still relatively going to follow industrial production for ECU? Thanks.
spk21: Yeah, I would just say it's starting to get better, right? It's not super great today, but, you know, every month, every quarter seems to generally get a little bit better, and that's been our outlook anyway is that, you know, demand continues to improve, and certainly relative to supply, that gap continues to widen.
spk00: Thanks. Yep.
spk16: Our next question comes from Matthew Blair with TPH. Please go ahead.
spk18: Hey, good morning. Congrats on the great results. So it's been reported that one of your competitors will be restarting some chloralkali capacity after shuttering it for about a year. Obviously a different approach than what you've been taking. But Scott, I was hoping that you could just kind of, you know, address that and how do you think about this is a potential risk to the industry that capacity growth might be a little bit more than expected?
spk21: Well, hi, Matthew, and thanks. Yeah, I mean, of course I won't comment on, you know, specific competitors and their actions. But what I would say is that factored into our plans, right, is a view that, yes, there will be some supply added over time. It's just that all of that announced supply is likely to be a lot smaller than the growth in demand. And when you marry that up with the fact that there's still a lot of poor quality markets out there, and certainly there's a lot of value left to lift in the ECU, which informs us about how we're going to run Olin and what assets we're going to have in our future portfolio, then I only see the overall outlook as positive. So the simple answer is, look, we certainly expect there to be some supply expansions out there.
spk18: Sounds good. And then I was hoping you could share any more details on just other chlorine derivatives that were especially strong in the quarter, you know, other than EDC, which has some pretty transparent pricing. You know, on our sources, it looks like HDL pricing was up more than 100% quarter over quarter. But could you just offer, you know, any more commentary on what you're seeing on that chlorine envelope?
spk21: Yeah, well, I mean, that chlorine envelope is, you know, most of our company, so I'm going to let, you know, Damian probably make a comment or two on something, and then, you know, Pat might want to add on to his epoxy comments being a key chlorine derivative for us.
spk03: Yeah, Matthew, I'll refer you to a couple of slides. I'll refer you to, you know, slide 17, you know, the appendix showing our heat map, and then, you know, refer you to A slide also at the back, slide 21. And both of those, when you put those together, you see, you know, pretty widespread interest in Olin's chlorine and chlorine derivative for, you know, a very broad spectrum of end uses. You see a continued momentum, you know, and requests from customers for, you know, Olin's ability to supply. I'll go back to Hassan's comments or questions at the beginning he asked about, you know, Are we seeing things, question around maybe market share? I will just tell you that our customer forecasts are still for volumes throughout the rest of the year that are higher than our forecasted ability to supply them. So that should give you an indication as to the robustness of the cloning side, which of course, and it's going to my earlier comments, is still relatively stronger than the caustic side. But across GCO, ATL, bleach, merchant chlorine, it's all those green lights in the heat map. And I'll pass it over here to Pat. Yeah, Dominic.
spk17: Matthew, I'd say from an epoxy standpoint, we do sell some of our upstream products into wastewater treatment and municipalities for water treatment. We've seen that really continue to improve on demand. And from an epoxy resin standpoint, you look at civil engineering, construction, automotive, even though there's been a semi-chip shortage, we've seen improvement coming back there. Appliances, electronics, we're starting to see maybe a little bit of life again in oil and gas, which uses fusion-bonded epoxy for pipelines and pipelines. areas like that. A lot of machinery is coated with epoxy. I think it's back to what Scott said. We've seen good month-over-month improvements, but we think we're still very much in the early innings of this demand recovery. We think there's more coming based on some of these end-use markets I just mentioned.
spk18: Great. Thank you.
spk16: Our next question comes from Alec Petri with Citi. Please go ahead.
spk07: Hi, good morning, Scott. Hi. Just looking at your core alkalized sales exposure by region, over the last couple of years, it's gone from 65% U.S.-based to 75%. Is that part of the strategy, do the higher netbacks, or how do you see that, you know, over time going forward?
spk21: Well, look, I mean, we... There's lots of opportunities to flex that, Eric. It's just that certainly the activities that we've had globally have enhanced our business in North America. Look, it's a high-level statement, but I think in the future you'll see us do more business even outside of North America as we really expand and parlay our models.
spk07: Okay. And then maybe a question for Pat. How much epoxy goes into higher value versus the low margin end markets? Where do you want to get that down to? And then is there a difference in profitability between regions currently?
spk17: Yeah, Eric. You know, I think, you know, if you look on slide eight, we talk about where we're increasing our supply and, you know, the high margin performance coatings. I mentioned civil engineering earlier. you know, formulated type systems, and certainly that value over volume orientation that we have is putting more into those types of areas and applications. And, you know, there's places where you have, you know, low margins in industrial coatings, you know, wind energy, you know, it's been an area that's been growing, but, you know, we've pulled back from some of the low ends of that business. And then some of our upstream feedstocks were definitely doing less business there because the value's not there. I think geographically speaking, one of our leadership advantages that we have is we have a lot of flexibility as to how we flex product between the regions. And that's a pretty dynamic process that we use all the time around our activation. So I wouldn't say any one geography's, you know, I don't pay attention to that, you know, so much strategically as I do where the opportunities come up to create more value and to juice up our return to the ECU. Okay.
spk07: And then lastly, Scott, maybe to help us track the progress of the value-first equation and moving away from indexes and higher activation, how much of your 14 million tons that you sell have undergone this change, this strategic change?
spk21: Well, I would just say if you think about that sort of roughly 14 million tons, I mean, we're left with a very minority part that is still attached to an index directly. And, you know, we've still got some hurdles to get off indexes or at least some of the indexes. And we'll still have some that will continue into next year, particularly in some areas like, you know, merchant chlorine, where it's, you know, really completely non-functional. But after that, we're completely away from many of the indexes.
spk07: Thank you.
spk16: Our next question comes from Mike Leashead with Barclays. Please go ahead.
spk07: Great. Thanks. Good morning, guys. I just got a question on the long-term EBITDA outlook. I think last quarter on the call you talked about $1.5 billion being a target level maybe two years out or so. And obviously the hurricane and market tightness is helping you get there this year. But it seemed like $1.5 was roughly where you thought the earnings power of this business could get to over time. And now three months later, you're telling us it's maybe a billion dollars higher than that. So I'm just trying to better understand maybe what's changed over that time, whether it's better confidence in the pricing power, the commercial success you're having. Just why has the long-term earnings power of the business moved so much higher over the past three months?
spk21: Yeah, hi, and thanks. Yeah, I would just say, look, the fundamental – factor of good early performance is that the whole company and the whole team is being really successful at running our model. And there's lots of momentum there and there's lots of runway left there. Fundamentally, that's what's going on. I would say that, look, we've talked about other numbers, of course, 1.5, 2, 2.5 billion. I mean, These are all just points along an upward curve. There's no cap on this business. I'm sort of unwilling to say that we get to a cap or we see any kind of near-term limitations. And so, you know, there's just a long runway here. One day we'll be talking about different numbers as well, but I thought it would be sort of too scary to put up three today.
spk07: Got it. No, that makes sense. And then maybe just a follow-up question on capital spending tangential to Jeff's earlier question, but I think you're guiding CapEx the next few years to $200 million. and your DNA runs around 600 million, which is a much lower ratio than most companies. So can you just talk about how you're able to sustainably achieve that, or would we expect DNA to start to move lower towards that CapEx number over time?
spk21: Yeah. Well, I'll tell you what. I mean, you know, Todd's going to explain why we have such a discrepancy there. Go ahead, Todd.
spk20: One thing to remember, Mike, is a big portion of our depreciation and amortization is amortization. And included in that amortization are those upfront ethylene payments for 20 years of cost-based ethylene. So, you know, amortization is, you know, well over $100-plus million a year on those agreements. And so, you know, when you look at DNA, that's part of the difference when you may compare us to other people is those large ethylene investments we made all the way back starting in 2015 and were completed in the summer of last year.
spk07: Great. Thank you, guys.
spk15: Our next question comes from John Roberts with UBS.
spk16: Please go ahead.
spk04: Thank you. Did you sell any electricity or ethylene during the quarter instead of using it internally?
spk21: Well, yeah. Hi, John. We did have a gain, right? We called it out as a one-time gain. And that gain is essentially associated with the fact that we buy energy in advance. And I think you're very aware of our gas hedging program. So during the hurricane, because we were ordered to shut down, we had no way to utilize what we had already bought. So we just sold it back.
spk04: So you didn't make electricity out of it. You just sold the gas back?
spk21: That's part of it, yeah. We're not itemizing everything that goes into that $99 million gain because there's a lot of puts and takes there. But, yes, that is part of it.
spk04: Okay. And then has the pricing dynamics in the ammo industry changed since we now have a duopoly after the breakup of Remington?
spk21: Well, look, I mean, you know, the Remington event happened some time ago. There's quite a lot of producers of ammunition out there. You know, we happen to be the largest and demand continues to grow. And that has been the fundamental change in the pricing dynamic is that this has just become such a large, wholesome family sport where 55 million of us are out there you know, doing sport target shooting, and that's the biggest change.
spk04: How much was price up year over year in Winchester?
spk21: Yeah, we didn't give a percent on that, but, you know, volume has a lot to do with our growth year over year, primarily because of Lake City, and then pricing is at least as much as that volume growth.
spk04: Thank you. Sure.
spk16: Our next question comes from Steve Verne with Bank of America. Please go ahead.
spk11: Yes, thank you. With respect to this 30% EBITDA target in epoxy and the shift more downstream and less of the upstream commodity sales, do you have the commercial relationships in those downstream resumes and or the production capacity to move more of the feedstock material into those downstream products, or will this require some acquisitions?
spk17: Yeah, Steve, this is Pat. First of all, let me just, of course, correct you here a little bit. Really, our sweet spot is in the up and the midstream part of the epoxy value chains. We don't go nearly as far down in that chain as to say the questions that you were asking. We certainly have all the right channels to market in place today to monetize and to really exert our leadership in it up and midstream. So I would just say just a little correction in how we view that value chain and where our strengths are.
spk11: So you can get to 30% EBITDA margins by selling epi and cumine and BPA and so forth and not move downstream?
spk17: No, Steve. That's, again, part of the equation is the strength in the upstream. But that midstream, we have many channels as to how we monetize the epichlorohydrin and the bisphenol A. So that's where we have a lot of channels, a lot of optionality. a lot of optionality to parlay. So that's pretty broad reaching as you move down into that midstream.
spk11: And I'm just curious about the margin on EPI. If you look about your broad platform of chlorine-containing derivatives, where would you put EPI in the ranking of all of those chlorine-containing products? I mean, if you look at the margin difference between your two segments, I'm just curious where that epi would fall in the rankings.
spk17: Yeah, I don't think we're going to get into the rankings of epi versus derivatives of where we put that epi. Epi, make no mistake, is a strategic pillar to our upstream, and it's a strategic pillar as to how we parlay down through the midstream into those various end-use markets where we're prioritizing our value over volume. I think the other thing to keep in mind, Steve, is when we had our investors' presentation back in February of 2019, One of the headlines on my slides read that, you know, EFI and LER supply-demand projected to be tight by 2021. And so we're just entering this phase of what we've been saying for the last two years, what we saw coming in this, you know, sweet spot of ours around this up in the midstream and parlaying these things that we talked about on slide eight. So, you know, I think those kind of fundamentals bode well for us. for our ability to get to this 30% EBITDA in epoxy.
spk11: And then Scott, just one quick one on your sustainability slide. Kudos to you for putting out your scope one and scope two emissions. We understand you also have an emissions reduction target for 2030. Just curious as to whether you have a strategy to get that 10% reduction, whether you're already well on your way or do you anticipate some CAPEX intensive projects to achieve that goal?
spk21: Yeah, hey, thanks a lot for recognizing that, and you're right. I mean, we did have that target by 2030, and, you know, we're way ahead of that target right now. In fact, that was referenced from our baseline year of 2018, We have already achieved an 8.4% reduction in the carbon emissions intensity. In other words, how much is associated with every ton that we sell. So we're well on our way to exceeding that target. Okay, great. Hey, operator, why don't we take one more question? We're about to run out of time.
spk16: Thank you. Our next question comes from Angel Castillo with Morgan Stanley. Please go ahead.
spk10: All right. Thanks for taking my question. So just one last one on price within the chlorocolyte. Just thoughts as to how much of it was actually driven by all of the outages that we've seen globally, whether it's both in chlorocolyte and hypoxia versus your own kind of self-help initiatives and pricing initiatives. And yes, if you could just break that down, that would be helpful.
spk21: Yeah, I mean, most of it is our self-help initiatives. There may have been some acceleration, but this really goes hand-in-hand with, you know, our actions and our contract strategy. Damian, why don't you fill in? Sure thing, Angel.
spk03: So I would tell you that, you know, regardless of the outside market condition, our self-help just takes a different form. So, you know, as we look at it kind of, you know, going forward with self-help, as we continue to deploy this model, it's going to be less and less dependent on outside factors. Those just kind of drive, again, how we want to manage our ECU participation, play to the weaker side. And as we pivot and kind of think going forward here, all that just means is that we'll just want to keep, as we talked before, controlling our own destiny. That just means more flexibility for us. We may certainly engage in a different approach on contracts with, you know, more selectivity on the number of contracts we choose to enter. We certainly want to partner with winners, but within that, there'll be a lot more selectivity and optionality for us in terms of how many contracts we enter into, their duration, their volumes, definitely more dynamic pricing because that will now play into the next level of sophistication with this model that we have really good traction on.
spk10: That's very helpful, thank you. And then on the epoxy margins, you noted that you expect them to improve sequentially in the second quarter. I was just curious, does that contemplate the, I guess, the meaningful pickup in venting prices and or, you know, as you think about where raw materials are moving, how should we think about that within your guidance?
spk17: Yeah, Angel, listen, you know, we feel very confident in the fact that we've, you know, had good pricing momentum and You know, we've seen that pricing momentum continue here in April. There's publicly announced increases out there for May that are also getting good traction. So we feel very good about the sequential improvement in our margins and the sequential improvement in improved returns to the ECU.
spk10: Very helpful. Thank you.
spk16: This concludes our question and answer session. I would like to turn the conference back over to Scott Sutton for any closing comments.
spk21: Yeah, thanks a lot. I mean, I guess in closing, you know, I'd just like to repeat what I said in the fourth quarter earnings call. I mean, Olin's going to continue to win our way to a different valuation, which means, you know, we've got to continue to lift Olin people high. So thanks a lot for joining us today.
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