Olin Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to Olin Corporation's First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's brief opening comments, there will be an opportunity to ask questions. 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.

Operator

Please go ahead, Steve.

Speaker 1

Thank you, Jason. 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 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 With me this morning are Scott Sutton, Olin's CEO and Tom Slater, Olin's CFO.

Speaker 1

I'll now turn the call over to Scott Sutton to make some brief remarks, after which we will be happy to take your questions.

Speaker 2

All right. Thank you, Steve, and good morning, everybody. The Olin team is deeply engaged in doing what we said we would do, which is to establish a new 12 month trough EBITDA level that is significantly higher than previous peaks and additionally supports a higher equity valuation. We are halfway through that demonstration after back to back quarters where our EBITDA delivery was $442,000,000 In the Q4 and $434,000,000 in the Q1, market conditions are quite

Speaker 3

poor

Speaker 2

And the forward outlook of those conditions is for more of the same. But Olin is busy adjusting our market Participation across the ECU to support product values, fixing our prior shortfall of not recession proofing the Oxy business while simultaneously growing epoxy systems and correcting commercial ammunition channel loads And landing new military business in Winchester. Referring to Slide number 5 in our earnings presentation, The initial evolution of Olin to a higher level value state is also about halfway along. Leadership behavior in all three of our businesses through this recessionary environment will lead to more value growth opportunities That in turn deliver more firepower for share repurchases. We are currently on a run rate to repurchase 10% of the company's outstanding equity this year after repurchasing 16% in 2022.

Speaker 2

So Vincent, that concludes my opening remarks. Now let's go ahead and get to questions.

Operator

We will now begin the question and answer session. Our first question comes from Kevin McCarthy from Vertical Research Partners.

Speaker 4

Yes, good morning. Scott, you've taken a number of actions toward restructuring your epoxy business. Can you talk Through what you've done already and what lies ahead, I think there was a reference in your curios to some additional restructuring actions. I wasn't clear as to whether that was in addition to what you communicated several weeks ago or just additional implementations against that existing communication?

Speaker 2

Yes, sure. Thanks a lot and good Morning. So we have taken some recent actions to really recession improve the epoxy business. And so In March, we announced that the Ternus and cumene plant and our solid epoxy resins facilities in Korea and Brazil You know, R2B closed and you see that we took a restructuring charge of almost $60,000,000 in the first quarter To do that, we had additionally also closed one BPA facility in our Stata, Germany plant. And there's more to come.

Speaker 2

We're going to have additional asset decisions And then we're going to also change the way that we go to market in the epoxy business as well. So that's going to happen through the course of this year.

Speaker 4

Okay. Thank you for that. And then secondly, perhaps for Todd, can you speak to the inventory levels On your balance sheet, optically, it looks like they're up 20% year over year. How much of that is underlying escalation Of inventory versus other factors, I'm not sure if your Bluewater joint venture establishment affects any of those numbers?

Speaker 2

Kevin, thanks for the question on inventory. We normally build inventory And working capital during the 1st part of the year and liquidate that late in the 3rd Q4, The inventory levels are higher than that normal seasonal activity this year because of a major turnaround that's planned We've built some inventory in advance of that turnaround. You should expect those levels to decline as the year unfolds with Step down, you'll see in June.

Speaker 4

I see. Thank you very much. I'll pass it along.

Operator

The next question comes from Steve Byrne from Bank of America. Please go ahead.

Speaker 5

Yes. Thank you.

Speaker 6

You've switched back and forth between, which is the weaker side, caustic or chlorine and now you're making another change there. And I'm just curious whether when you've operated in the Pass with caustic as the weaker side, has that given you maybe more collective pricing power For the ECU because you have so many end markets you can go into with chlorine.

Speaker 2

Yes. Hi, Steve. And

Speaker 1

so that is the

Speaker 2

nature of our leadership model, Right. We set our market participation according to the weaker side of the ECU and we don't chase A strong market in this co production world because when you do that, you depress the strong market and you kill the weak market. So we have switched and we've operated where caustic was the weaker side Just like it is today, when we did operate in that manner, that's when we also set the 4 quarter peak earnings of the company at $2,800,000,000 So it certainly presents opportunities. But what I'll say is, you have to take into account Many factors and when you have sort of a global recession going on, It doesn't necessarily mean that at this moment in time, we can repeat those levels of earnings, but it certainly We'll support higher merchant chlorine pricing and higher pricing and value in other chlorine derivatives as well.

Speaker 6

And you made a comment in your slides about potential other inorganic opportunities. And I just wanted to drill into that a little bit. I mean, your downstream businesses are essentially tied back to chlorine and there Numerous chemical pathways that have a very essential chlorine component in it like Whether it's polyurethane or polycarbonate or so forth, can you highlight any other opportunities that you're looking at downstream?

Speaker 2

Well, I would just say that as we look at inorganic opportunities, I mean, the best ones that create the biggest value For Olin are ones where we add to our ECU value model. So that could be more ECU capability Or it could also be derivatives that use chlorine. I mean, those opportunities are Likely improving, but clearly, I mean, they're going to have to compete with the return that we get on share repurchase and that's sort of a measuring stick for that.

Speaker 6

Very good. Thank you.

Speaker 2

Sure.

Operator

The next question comes from Hassan Ahmed from Alembic Global. Please go ahead.

Speaker 7

Good morning, Scott and Todd. First question just around Q1 and the guidance that you guys gave. I mean, you guys always talked about how There could be 1 quarter or 2 quarters where you could sort of trend at annualized Below guided to sort of trough EBITDA, right, as you sort of rejig or readjust to the stronger side of the ECU. So what we saw in Q1 and the guidance that you have given for Q2, is it fair to assume that These two quarters are those two quarters and things kind of trend higher thereon after?

Speaker 2

Yes. Hi, Hassane. Look, I mean, it's certainly not impossible, right, that we make a significant adjustment in $7,000,000 But what I will say is we're halfway through and we've essentially delivered the same EBITDA number in those first 2 quarters and we've given guidance for the next quarter that is slightly below that. So Hopefully, we can get through this without having to make such a deep correction in any one quarter.

Speaker 7

Understood, understood. And also wanted to revisit the question around inorganic opportunities. From the sound of fake, you guys obviously want to Stick to the sort of area that you're comfortable with, call it, integration into the ECU and the like. So from the sounds of it, you're looking at Downstream Products, but could you also chat a bit about sort of what geographies are of interest to you? I mean, because back in the day, you did talk about Maybe potentially being sort of replicating what you have in the U.

Speaker 7

S. Out in Europe. Does that still sort of hold true?

Speaker 2

Yes. Look, I think that's a real possibility. It's not Completely impossible to do some things that are right down the center of the fairway in North America. However, it's also possible that we can add a new fairway in Europe. So that's a consideration.

Speaker 7

Very helpful, Scott. Thank you so much. Sure.

Operator

Our next question comes from Jeff Zekauskas from JPMorgan.

Speaker 4

Thanks very much. Why is it that the contract caustic markets in the United States Are so much more stable than spot export caustic markets. And can you talk about Where caustic contract prices have been say over the past 6 months?

Speaker 2

Yes. Good morning, Jeff. Yes. And so the domestic caustic markets, Of course, our right where Olin plays and right where Olin leads And right where we implement our leadership model. So there's some impact from that.

Speaker 2

I think you have to remember how the world landscape moves around, right? You may start with a butterfly Effect coming out of China. So there's a volume and a price indication there. And over time, that may impact international trade. And then over time, that may impact The U.

Speaker 2

S. Gulf Coast, over time, the U. S. Gulf Coast impacts the barge market in the U. S.

Speaker 2

Then over time, the barge market may impact the rest of the domestic market. But over all that time, Olin is looking far ahead and looking for the rate of change of each of those things and Trying to take some kind of action that tends to support value. So by the time you get all the way to The domestic market, we've supported the value of our business. And over the last 6 months, of course, that has Stay more stable, which is the back part of your question.

Speaker 4

Okay. Maybe a question for Todd. What should the normal percentage of operating cash flow To EBITDA to adjusted EBITDA, B for Olin. Is it 70% or 80% or 60 or 85?

Speaker 2

I think, Jeff, this year in the recessionary trough period, that percentage is lower than Would be typical and expand the expectation for Olin of that levered free cash flow because of a couple of one time items That are occurring this year, that roughly $80,000,000 international tax payment that we'll have to make Later this year as well as a one time item that we need to pay related to Some power assets in the Gulf Coast on a contract. So when you factor those in, I think that percentage would go up Significantly compared to what it seems like this year. But overall, that number is in clearly in the upper quartile.

Speaker 4

How big is the power asset payment?

Speaker 2

Between $50,000,000 $100,000,000 this year.

Speaker 4

Okay. Thank you so much.

Operator

The next question comes from Vincent Anderson from Olin. Please go ahead.

Speaker 8

Yes, thanks. Good morning. So I wanted to follow-up on Kevin's question earlier, Scott. Have you settled on maybe a more permanent vision for what the optimal footprint looks like for the Epoxy business, particularly with regards to an

Speaker 2

Yes, I mean, thanks for the question. And look, I mean, as we go through this Restructuring, right, we're going to get to a footprint and a business presence That removes some element of the duplication that we have. We have 2 of every single kind of asset All across that vertically integrated chain, and we may or may not need all of those to have full capability. But what I will say, when we get through this, Epoxy is still going to be the absolute global Leader in that world and it's still going to be the absolute most vertically integrated business In that world as well, epoxy has certainly been a challenge. If you go a little bit backwards in time, Whenever Asia volumes became available, customers bought away and When those Asian volumes weren't available because of instability or demand in Asia, they came back To Olin for security of supply, more recently, we probably overpriced a bit for a bit Too long.

Speaker 2

So now we're just moving to a point where we're going to partner with epoxy customers for a bit Longer run and there's going to be a lot more cooperation in that forward world with Epoxy customers, especially As our business pivots more to value from systems, so you need to have a longer term profile mix with customers.

Speaker 8

Okay. That's extremely helpful. Thank you.

Speaker 2

Sure. And then a quick one, if

Speaker 8

you don't mind on something you mentioned in your slides Talking about the hydrochloric acid recycling opportunity. Do you have just a couple of Comments on what that market structure looks like. I'm assuming it's coming from areas of HCL utilization where the customer's Chlorine input is something other than HCL coming out the other end and then maybe just early thoughts on build versus buy.

Speaker 2

Yes. I mean, sure. I mean, look, this is actually a business segment That Olin doesn't really participate in today and we should be the leader. The reason that this business Segment exists is many applications and many customers are Merchant chlorine, and it's not just Olin's merchant chlorine, but any merchant chlorine that is used, A lot of that chlorine comes back out of the process, whether it's all or part of it because it's not Utilized in the final product. So it comes back out as HCL or hydrochloric acid And that material needs to be moved somewhere, like a major application for that is Downhole, cleaning of formations and so forth in oil and gas.

Speaker 2

But Today, Olin just doesn't really participate there and there's no reason that We shouldn't be the leader there. So we're entering that business. So now you have 3 interesting Nearly organic growth areas in our CABP business, One of them is trading or parlaying, which is partly our Bluewater Alliance joint venture. The other one is our hydrogen growth. And now you're going to have our growth in HCL where we should be the leader We just haven't developed that business yet.

Speaker 8

Excellent. Thank you.

Speaker 2

Sure.

Operator

The next question comes from Mark Sison from Wells Fargo. Please go ahead.

Speaker 3

Hey, guys. Just curious, so where do you think your operating rate what

Speaker 9

are you going to do

Speaker 3

with your operating rates for 2023? I guess, Given you're still in a recessionary trough level sort of outlook, does it stay at 1st quarter levels for the rest of the year?

Speaker 2

Yes. Hey, Mike. Look, I mean, what I would say, there's a lot more of the same coming For us to grind through, right. We will change those operating rates to anything that's to support value for Olin. But you're right, I mean, they're low.

Speaker 2

I think we put in our materials that Our epoxy resin operating rate is around 40% or so. And there, the second Quarter landscape is certainly not better than the Q1 landscape. If you were to think about operating rates in our chlor alkali and vinyls Maybe we're running around 2 thirds or so. These are not likely to change that much, But within there, we'll have some units that run higher and some or many that run lower than that, Mike.

Speaker 10

Got it. Okay. And then as a quick follow-up,

Speaker 3

your ECU PCI calculation has held up Significantly better than the consultants. And I understand it's yours. So when you think about the level you're at now versus last year and where Your adjusted EBITDA was being down. Is it simply the year over year decline in EBITDA just Volume and then if you can hold these ECU PCI levels and volumes come back, are you sort of back To your prior EBITDA levels from

Speaker 2

Yes. I mean, that's a good question. And yes, I mean, the decline In EBITDA to these more trough levels in this recessionary time is certainly principally from volume. That ECU PCI, that's indicative of our value concept, right? We said we're going to be the value player and We're going to place value over volume and that leads to the best outcome in a trough.

Speaker 2

And when you come out of that trough, you come out of it with A lot of earnings power. So that has been set to a totally different level. Look, I do know this, it will move down some and it will move up some. But Clearly, we're going to be the value player and that's the biggest indicator of it. And you're right, it's different than Trade publications for sure.

Speaker 2

I mean, it's just like the chlorine index that is published in a trade indication actually It went down just a little bit here recently, yet our chlorine index moved up. Yet our chlorine price In the Q1 moved up over the Q4, and yet our chlorine price will move up in the Q2 versus the Q1 as well.

Speaker 11

Got it. Thank you.

Speaker 2

Sure.

Operator

The next question comes from Mike Leithead from Barclays. Please go ahead.

Speaker 12

Great. Thanks. Good morning, guys. First on epoxy, Scott, can you just maybe talk about where the Chinese export pressure currently stands today versus Maybe a quarter ago and just where you think that trends over say the next quarter or so?

Speaker 2

Yes. Sure. I mean, look, that export pressure, I'll say in the second quarter is probably even more than in the first There is record epoxy exports coming out of Asia. And those exports out of Asia being driven by the fact that China has added a lot of capacity. They've got their Supply apparatus running hard, yet their demand apparatus has not turned back on.

Speaker 2

So that sort of reversal in trade flows out of China has caused the rest of the volume in Asia To come towards Europe and North America. So that's the impact we're seeing, and we see extreme pressure continuing there.

Speaker 12

Great. Thank you. And then just real briefly, I want to follow-up on the inorganic opportunities. I think In your slides, you made a comment calling them potentially being more executable. So just curious if that's really just a comment about asking prices that Becoming more palatable and discussions picking up or just more about Olin's ability to execute Given where it is in its evolution or financial position?

Speaker 3

Yes. Well, I think,

Speaker 2

Olin is able to on most anything we would want to considering our financial position, right? That's really not But the reason that we use the words more executable is it's not impossible now To get deals done closer to Olin's current trading multiples, it doesn't mean it will be the same, But it certainly means that we'll get there really quickly with the batch of synergies that we would Expect to be available in any acquisition.

Speaker 12

Makes sense. Thank you.

Speaker 1

Sure.

Operator

Our next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead.

Speaker 10

Great. Thanks for taking my question. Just kind of question on the cadence of the year. It looks like the guidance now has been tightened up to $1.6 to $1.9 which would put you at $1.75 for the full year. It's very possible that you do $8.65 maybe in the first half and another $8.65 or more or slightly more in the second half.

Speaker 10

Is that the right way to think about it that the halves will be kind of equally split? And then if that is the case, When you look into next year, is it mainly volume that would drive you back up to the upper end of that $1,900,000,000 range, dollars 2,000,000,000 range and above. And what would put you at the upper end of the range this year itself? Thanks.

Speaker 2

Well, I wouldn't assume that first half and second half are sort of perfectly Balance, right. I mean, we will do whatever we need to do to put this 4 quarter trough in around that 1 point 7 $7,000,000,000 but clearly, we've said for the calendar year, we have a range of 1.6 To 1.9. The way you would end up at a 1.9 is that maybe there's a little better condition in the second half than what we're forecasting. The way you end up at the 1.6 Is that we keep having to make heavy adjustments and things actually get worse, particularly in Asia demand Versus where they are today. And that's why we've kept this range.

Speaker 2

When we sort of get out of this Slow demand, recessionary conditions, right, we'll have a number of earnings levers. Yes, One of them will be natural volume. It won't be volume from share gain, but it will be just natural volume coming back in on the Shoulders of a recovery. We'll also have our epoxy systems business Being more effective and it's already made a lot of great, great progress Some of the discussion we just went through entering the HCL business, that's something that we can do pretty rapidly. And maybe some of the best conditions actually exist in our Winchester Ammunition Business, the international military piece of that business is growing rapidly.

Speaker 2

In addition to that, so is the preparations for the next Generation squad weapon. In fact, if you were to think about our military ammunition business, we expect to double that In roughly 2 years from where we were about 6 months ago.

Operator

Thanks for that.

Speaker 10

And then certainly on the cash flow side. So it sounds like your levered free cash flow It's going to eclipse the $1,000,000,000 And should we assume that maybe that leaves about $800,000,000 for buybacks? And how are you thinking about that opportunity as you move forward? Will you continue to be prioritizing Share buybacks or are there other uses for the capital? Thanks.

Speaker 2

Yes. Thanks, Arun. Yes. I think our current forecast for levered free cash flow for 2023 It is $965,000,000 range. Obviously, that includes roughly 1 $150,000,000 of one timers that I mentioned earlier.

Speaker 2

As we look at that levered free cash flow, We would say the first and best use of that excess cash flow relates to share repurchase. And you should see us continue on that pathway.

Speaker 6

Thanks.

Operator

The next question comes from Josh Spector from UBS. Please go ahead.

Speaker 9

Yes. Thanks for taking my question. Just to follow-up on your market participation and kind of how you address the weaker side. I mean, your response over the last year, at least within the, CAS segment has been generally lower utilization rates. I guess, is there anything different now that that Shifted back to chlorine being strong, cost of being weaker that would require a different playbook for you to maintain that EBITDA over the next 6 months or so?

Speaker 2

Yes. Hey, Josh, thanks for the question. I mean, not really, right? Not in totality. We don't necessarily lower overall operating rates, right?

Speaker 2

I think the dilemma is that I mean, market conditions are really poor and we certainly expect more of the same. But that's one element that ends up setting our operating rates. What you have to remember about Olin, we make value When there's a level of imbalance between the two sides of the ECU, so you can actually have a declining overall global market, but yet there's some kind of imbalance between the two Totally different kinds of market outlets on the chlorine side of the ECU versus the caustic side of the And when we have that imbalance or can help create that imbalance, that's when we're able to hold value.

Speaker 9

Okay. I guess, maybe you could correct me if I'm wrong, but I would think, I mean, you have more options, I'd say, on The chlorine side of where you can do that and maybe go to a stronger market, I mean, conversely, I'd say maybe there's less options on the caustic side. I guess, where would I be wrong in that?

Speaker 2

Well, I mean, it's true that look, I mean, we have a lot of business on the chlorine side of the ECU And our forward integrated into vinyls, epoxy, chlorinated organics, a number of Inorganics there, so we have options. But also, the caustic market is it's not just one fungible Product either, right? If you kind of go back to the discussion we were just having about going from China export all the way through international trade, Gulf Coast, impact on other regions into Trade, Gulf Coast, impact on other regions into the barge market and the domestic market. So there's a lot of Service options there and there's also options to package up ECUs for customers that use a full A full ECU. And on top of that, we're able to use our Bluewater joint venture to make sure that there's All kinds of complex options on that 3 d chessboard to get the best value that we can.

Speaker 11

Okay, got it. Thanks, Scott.

Speaker 2

Sure.

Operator

The next question comes from Ask Eefremov from KeyBanc Capital Markets. Please go ahead.

Speaker 2

Thanks. Good morning, everyone. Scott, Inorganic opportunities, can you tell us how you're thinking about potential size of a deal here, bolt ons or something Larger, more transformational in

Speaker 1

nature? Yes. I mean, look, there's, of course,

Speaker 2

a number of options. I mean, what we need to do and would prefer to do is something that's right down the fairway that We can get a high level of synergies quickly and pay off Any kind of financing that we might do in order to do that acquisition And all of that has to add up to a picture that gives us much better return to our shareholders than doing Share repurchases. So we I think there's options there. Of course, we would prefer to do something Initially, that's measured down the fairway and a slam dunk. Very helpful.

Speaker 2

Thank you. Your annual guidance range, especially at the low end, are you assuming any meaningful decline in Caustic soda price and by meaningful, I mean, say $100 or more drop or price declines in any other Important commodity or is the range variability mostly due to volumes going up and down? Well, I would say caustic pricing is moving down globally. And that's why it's become the weaker side of the ECU and that's why we adjusted our participation to dampen The rate of that decline. So we've taken our outlook there into account In our forecast and that's included in that range of 1.6 to 1.9.

Speaker 2

Thanks a lot. Sure.

Operator

The next question comes from Matthew Blair from Tudor Pickering. Please go ahead.

Speaker 13

Hey, good morning. Thanks for taking my questions. Scott, I just wanted to follow-up on your comment a few questions ago When you talked about, you can make value when there's a level of imbalance between the two sides of the ECU, Should we assume or can we assume that that level of imbalance was actually pretty tight in Q1 Given the caustic flip to the weak side and I guess how is that trending in Q2 and what are your Patience, do you think that level of imbalance will widen as we progress throughout the rest of the year?

Speaker 2

Yes. I mean, thanks for Good question. I mean, I think as the global landscape changes, there's likely to be more imbalance As opposed to less imbalance, right? I mean, where the landscape is Weaker, at least for Olin's outlook is when there's balance between the two sides. At the first part of the quarter, it looked like PVC and vinyls were actually Going to get a little stronger, but that was a bit false and maybe that trend has moderated Some.

Speaker 2

And now you see the global demand for caustic sort of softening a bit. So things are changing. When things are changing, there's likely to be some imbalances and we have the ability To go out and manage some global liquidity, do some parlaying to Accelerate or decelerate the timing of where those imbalances happen. So I don't know that it will necessarily be a lot more, but as things Change, there'll be opportunities. It's been pretty stable, I would say, if you look back over the last 6 to 9 months, more stable than maybe it's been in a very long

Speaker 13

Okay. Sounds good. And then I had a question on Slide 9. You showed the parlay volumes at, what I think is a record 16%, which I thought that happened when Caustic prices in your system were moving down, but that same slide shows caustic prices moving up quarter over quarter in Q1. So could you help us just understand what's going on there?

Speaker 2

Yes, sure. I mean, In January, our Bluewater Alliance joint venture started operation. And remember, the point of that joint venture is to go out and do more trading, more parlaying, more management A global liquidity that is to the partners' benefit. So as a percent of our total volumes, Much more of it came from trading and parlaying, and that's why it jumped up to 16

Speaker 13

Okay. Thank you.

Speaker 2

Sure.

Operator

The next question comes from John Roberts from Credit Suisse. Please go ahead.

Speaker 5

Yes. Thank you. On Slide 9, the ECU PCI declined sequentially from 287 down to 262. But Almost all the chlorine caustic products went up sequentially. So epoxies was big enough and declined enough that it offset All the gains in the other products sequentially?

Speaker 2

Yes. I mean, John, epoxy was a big driver of that because Per ECU, there was less delivery So in epoxy, not only do you have price declines, but you have volume declines As well, so you get the impact of volume and price coming through there. Even within core alkali, A lot of it has to do with the mix of products as well. So for all those reasons, That's why it came down.

Speaker 5

But that's a variable contribution. Volume shouldn't play into there, right?

Speaker 2

No, it will. I mean, it could be because here's what it is. It's the total contribution profit that this Company delivers divided by the total number of ECUs that we sell. So the ratio of volumes between different products can impact that a lot.

Speaker 5

All right. And then are you surprised given the housing market weakness that caustic has actually flipped to the weak side here?

Speaker 2

Well, I think caustic is actually flipping to the weak side. I mean, Housing is certainly off, but you also have movements in the caustic demand market as well.

Speaker 5

Okay. Just historically more housing would have driven, which is strong week versus general industrial, I think.

Speaker 1

But John, maybe, Claire, maybe I

Speaker 2

misunderstood your question. You asked me if I was surprised that caustic hasn't Become weak?

Speaker 5

No, that it flipped to the weak side that's there. Usually with a weaker housing market here, We'd have a caustic as the strong side. Yes. Well Which is what we've had until recently.

Speaker 2

Yes. Well, look, I mean, you got to remember, caustic is also globally traded, right? And If PVC demand goes down even more, our actions To flip our approach to the market, along with maybe a shortfall in caustic supply, Could redirect that. That's not impossible. I mean to your point, traditionally, that's the way it would go.

Speaker 2

So we've taken actions to support our caustic pricing and then there could be market impacts that return to Traditional ways such that it may be another force that's lifting caustic price.

Speaker 6

Thank you.

Speaker 2

Sure.

Operator

The next question comes from Angel Castillo from Morgan Stanley. Please go ahead.

Speaker 11

Hi, good morning and thanks for taking my question. Scott, I just wanted to maybe dig a little bit deeper on the second quarter. I think the commentary is generally indicated just extremely weak markets. And I think last night, we also saw trade sources settle April for caustic Down more than expected and lower their estimates for 2Q and 3Q for both caustic and the ECU margins. So just curious, in the past you've given for Some of these quarters are range of what your expectation is of percentage EBITDA decline.

Speaker 11

Curious if you could share the same just Way of kind of clarifying what slightly lower than 1Q means and in essence giving a kind of A guardrail for what the downside or upside risk is versus your expectations?

Speaker 2

Yes. Angel, I mean, I would just say slightly lower means a little bit lower It is the reality. And we have taken into account the Current negative momentum in caustic pricing. And in fact, we've readjusted our market Positioning to dampen that some and likely strengthen the other side of the ECU. So we've just taken all that into account.

Speaker 2

I would just say, remember when we were in the 4th quarter, We said the Q1 might be slightly down too, if you need some guidance for the Q2.

Speaker 11

I guess, as I think about it for as we kind of move through the Q2, it sounds like you are kind of accounting for some of this weakness. Just Curious as these plants that have been under turnaround seems like there's a pretty large amount of maintenance activity in the current market. So it's surprising, I guess, that the positive market is so weak given the degree of turnaround. So just curious as those plants come back online, it Like you are kind of, I guess, enforcing your parlaying activity a little bit more. Curious, do you see enough flexibility to offset that?

Speaker 11

I Is this kind of returning to the market? And how do you kind of see the degree of downside risk, like slightly lower doesn't Clearly feel like there's like you feel like there's a lot of risk that as plants restart and given the current demand that I'm curious what gives you confidence in that?

Speaker 2

Well, I mean, we feel okay about Slightly lower. But I don't think anyone should be surprised that caustic pricing has started Coming down, right? I mean PVC was chased hard for a while. In China, caustic exports have been pretty extensive, much more Than normal and that certainly didn't help the caustic world. I think if there's one piece of good news, it's that those export prices of caustic out of China And sort of flat.

Speaker 2

And the reason that they're flattening now is that the China ECU Producers, Right. We're not getting value for chlorine. In fact, they were paying customers to take Corie, so that was to be able to chase things, but when they chased them, market pricing eventually came down on caustic And all of a sudden to be in an ECU business, you have to be willing to attach $100 bills to every shipment that's going out of And so even they're not willing to do that. So finally, you see that moderate and perhaps that means something different in the future.

Speaker 11

Got it. So maybe ask a different way. You raised the low end of your 2023 guidance from 1.5 to 1.6. And just given the backdrop that you've kind of described, what is kind of the step change that gives Confidence that you that we won't see something closer with a 1.5 rather than a 1.6 like what's kind of changed in this past quarter that gets you there?

Speaker 2

Well, I think what gives us confidence there is we just printed 1 quarter and we just gave a forecast for the

Operator

As there are no further questions, this concludes our question and answer session. I would like to turn the conference back over to Scott Sutton for closing comments.

Speaker 2

Yes. No, I would just say thanks a lot to everybody for joining the call. Thanks.

Operator

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

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Earnings Conference Call
Olin Q1 2023
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