Olin Corporation (NYSE:OLN) Q1 2024 Earnings Call Transcript

Olin Corporation (NYSE:OLN) Q1 2024 Earnings Call Transcript April 26, 2024

Olin Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone and welcome to Olin Corporation’s First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please also note today’s event is being recorded. At this time, I’d like to turn the floor over to Steve Keenan, Olin’s Director of Investor Relations. Please go ahead, Steve.

Steve Keenan: Thank you, operator. 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 in 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 Ken Lane, Olin’s CEO; and Todd Slater, Olin’s CFO. We’ll begin with our prepared remarks and thereafter, we’ll be happy to take your questions. I’ll now turn the call over to Ken Lane. Ken?

Ken Lane: Thank you, Steve and good morning everyone. Let me start by saying I am delighted to be part of Team Olin. Olin has a long and rich history with leading positions across this portfolio and I am looking forward to leading the company as we define the next phase of value creation for our shareholders and employees. Today, Olin is in great shape with an investment-grade balance sheet and a strong team. This company has incredible potential and I look forward together with our 7,000 Olin team members to start building upon this foundation and writing the next chapter in Olin’s success story. I do want to thank Scott Sutton for his leadership of the company, which resulted in a step change of record results. Scott has been very gracious with his time and support during our transition.

I am a firm believer in our operating model and I am absolutely committed to continuing Olin’s value-focused commercial approach. The entire Olin team embraces the winning model and that support runs deep from senior leadership to frontline manufacturing. Now, I want to talk about my near-term priorities. First and foremost is always operating safely. Keeping our people and our communities safe, while running our assets efficiently and reliably. It is not a coincidence that the safest operators are the most reliable. We are focused on being a leader with respect to our safety performance. Next, Olin is a coiled spring. And as our market demand recovers and customers seek to pull more volume, we will be ready to capture that significant value opportunity.

I’ll provide whatever support is needed to defend the gains we have achieved and continue our value generation as the industry leader that we are. Also, it’s clear to me that investors appreciate Olin’s consistently strong cash flow and share buybacks across the cycle. Delivering on our commitments is an imperative. We will continue our disciplined capital allocation strategy and will be a steady buyer of our shares, focused on delivering above average shareholder returns. Finally, I am committed to providing Olin stakeholders with strategic transparency and a long-term roadmap for growth, that we will share during a Capital Markets Day around year end. More will be communicated on that in the near future. Now, let’s take a quick look at our chlor alkali business and turn to Slide 5.

Olin took decisive actions during the fourth quarter to curb price erosion across our system. Early in the first quarter, our value accelerator initiatives continue to tighten Olin supply, successfully advancing the inflection point and effectively stopping the value drop. During the first quarter, we saw improved chlorine volume being pulled by Olin customers at our value level across several key end uses, including agriculture, urethanes, titanium dioxide and water treatment. As we look beyond the first quarter, we are seeing some seasonal demand increases for chlorine and caustic soda. In the United States, planned and unplanned outages and low supplier inventories have kept caustic availability tighter than expected. Trade publications confirm that domestic caustic is climbing up from a cycle bottom.

Now, let’s turn to our Epoxy business on Slide 6. During the first quarter, our Epoxy business continued to realize the benefits of our 2023 restructuring actions. Our streamlined asset base will support the growth of our higher margin epoxy systems demand while also reducing Olin’s downside commodity exposure across the cycle. Our recently announced U.S. anti-dumping initiative seeks to level the playing field. The first quarter marks the beginning of the recovery for epoxy and the start of a gradual climb out of a very deep trough. As that building momentum continues into the second quarter, we will realize continued benefits from our restructuring and stronger focus on higher margin formulated systems. Please turn to Slide 7 for a Winchester recap.

First quarter commercial ammunition demand was good and our military segment continues to be strong, delivering sequential adjusted EBITDA growth for the fourth quarter. We are concerned that propellant shortages could limit commercial ammunition supply this year and we are actively working on mitigations. Our integration of the wildfire business has exceeded expectation and is a great addition to our Winchester business, the leading brand in the industry and a strong cash flow generator for Olin. During the second quarter, Olin expects to break ground on the Army’s next-generation squad weapon ammunition plant. This will be the world’s most transformational small caliber ammunition plant ever built. This project will be designed, built and operated by Winchester, but funded and owned by the U.S. Army.

Before I pass it to Todd to review our financials, I’ll sum up by saying this, Olin’s future is bright, but we must remain disciplined and dedicated to extending our leadership position. Olin has led through the trough, seeding volume to maintain value. As demand recovers, we are well positioned to profitably capture the market recovery. We have reset the cycle and we will continue to lead with discipline to ensure that this new normal remains durable. The Olin assets and operating model provide an extraordinary foundation to build upon. I have had the opportunity over the last month to visit many of our sites and meet with many of our team members. Olin is well run, well funded and with a highly engaged and committed team, we will continue to generate differential shareholder value.

I’ll now pass it over to Todd for a few financial highlights.

Todd Slater: Thanks, Ken. Olin was in great financial shape headed into this manufacturing recessionary environment we have been experiencing over the last 1.5 years. Our rock solid financial foundation is a key pillar of Olin’s winning model. We remain committed to maintaining our investment grade balance sheet and achieving additional investment-grade credit ratings. On March 31, 2024, we ended the first quarter with $150.9 million of cash and cash equivalents and approximately $1.2 billion of available liquidity. As we expected, our net debt increased by approximately $115 million from year end, primarily due to the typical seasonal increase in working capital. Our quarter end net debt to adjusted EBITDA ratio was 2.3x, which we expect to return to the 2x range by later this year.

Our 2024 cash flow projection anticipates a couple of unusual cash usage items totaling approximately $130 million. Our 2024 cash tax rate is forecast to be higher than normal due to deferred international tax payments of approximately $80 million that are forecast to be paid later this year. Also, we are expecting the final payments under long-term energy supply contracts of approximately $50 million. Excluding these one-time items, our 2024 levered free cash flow yield currently would equate to approximately 10%. Finally, our investment grade balance sheet and cash flow should enable Olin to continue to deploy a substantial portion of our 2024 levered free cash flow towards share repurchases. Operator, we are now ready to take questions.

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Q&A Session

Operator: [Operator Instructions] And our first question today comes from Hassan Ahmed from Alembic Global. Please go ahead with your question.

Hassan Ahmed: Good morning, Ken and first of all, congratulations on the new role. My question is, first and foremost, on the 2024 initial guidance that you have provided. You are obviously guiding to north of $1.3 billion in EBITDA. I mean, if we were to sort of take Q1 reported EBITDA as call it a starting point, the $242 million annualized at $970 million, right? And you are guiding to 2024 EBITDA north of $1.3 billion. So what gets us – what bridges us to that $1.3 billion that incremental, call it, $340 million or so? I mean my guess is not to get your views that you guys had historically talked about the value accelerator initiative being maybe $100 million quarterly penalty. Is it primarily that?

Ken Lane: Hi, Hassan. Thank you for the – congratulations. Listen, what we have seen in the first quarter is we were successful in stopping the drop at least in the chlor alkali and product line-hauls group. So that’s a win for us. What we see happening now though is seasonal demand is coming back. So, we are seeing good momentum. The other thing that I’ll say is when you think about the full year, what we’ve said previously is we are going to see better performance in the epoxy business as well as Winchester. So, let’s not forget that. So as we see both of those businesses continue to improve year-over-year, chlor alkali is going to continue to improve as we go into the second half of the year. We are seeing some, some positive signs for demand in the back half of the year with some requests for volume.

So I think with the higher results that we expect from Epoxy and Winchester and the momentum that we see from chlor alkali, we should see that flat to slightly higher results for 2024. That’s how we get there.

Hassan Ahmed: Understood. Understood. And as a follow-up, you touched on the improvement sequentially within the Epoxy business. How should we think about the split between, call it, further organic improvement ove0r there? And maybe you could touch a bit on some of these sort of trade cases that you guys as well as the industry has brought about on the anti-dumping side of things?

Ken Lane: Yes. So we are seeing the impact from the restructuring last year. The team did a great job last year rightsizing the footprint. We have got the asset footprint that we think is going to support the strategy around growing the higher margin business today. But we are seeing an influx over the last year or so of products that is being dumped into the United States. First, I’ll say, we’re all for fair trade, free trade, but we are going to fight against unfair trade, and that’s what you see here. So we had the first hearings in Washington, D.C. this week. It’s early in that process, but we are going to continue to push that case. And we believe that there is a risk within the United States having only two producers of epoxy resin is a risk for the future. We have got a very critical material here that we are producing and it is under threat by unfair trade.

Hassan Ahmed: Very helpful, Ken. Thank you so much.

Ken Lane: Thank you, Hassan.

Operator: Our next question comes from Aleksey Yefremov from KeyBanc Capital. Please go ahead with your question.

Aleksey Yefremov: Thanks. Good morning, all and Ken, congratulations as well. I was just hoping to get some details, any specific details really on how are you getting to $1.3 billion EBITDA this year? And in particular, are you assuming price increases in caustic soda, chlorine, EDC, any other major commodities, chlorovinyls business? And how do they compare to current CMA forecast? Is current CMA forecast sufficient or do you need to get something more than that?

Ken Lane: Well, thank you, Aleksey. Going back to what I had said to Hassan, let’s not forget about the improvements that we’re going to see in Winchester and Epoxy year-over-year. Both of those businesses are going to improve. We are seeing very strong demand with Winchester. We are making good progress with our price initiatives there as well even to offset some of the cost headwinds that we see. But overall, the demand with Winchester is going to be up significantly versus last year. So I’ll give you – just one example, international military, we are looking at being twice what it was last year. So there is good momentum in these businesses. When you think about chlor alkali, I’m not sure that I would put a lot of faith or confidence in CMA personally.

We look at our system and the value that we’re looking for and the demand that we want to supply at that value level, and we are seeing good demand. I don’t want to say any more than that in terms of what the indices are printing, but we are seeing some differential pricing there and demand coming back at the value levels that we want.

Aleksey Yefremov: Thank you, Ken. And on just annual cadence of quarters, I mean, clearly talking about better second quarter. Do you think that step up between Q1 and Q2 then sustained at about the same rate in the second half or is it improvement more second half weighted? Anything you can say about sort of relatively Q2 versus second half?

Ken Lane: Yes. So we’re going to continue to see that step up. We saw a step up from Q4 to Q1 and Q2, you’re going to see a similar, maybe slightly better step up from Q1 to Q2. And as I said earlier, we’re going to start to see in the back half of the year, some demand come in, just based on some of the requests that we’re getting, so that’s baked into that view. If you think about last year, last year, the first half was relatively strong and the second half was relatively weak. I’m definitely not saying the second half is going to look like the first half of this year. But we’re going to start coming out of this. And that’s our expectation is that we’ll start to see some of that recovery in the second half of this year. and the early indications are that we’re seeing that demand start to come back.

Aleksey Yefremov: Thanks, Ken.

Ken Lane: Sure. Thank you.

Operator: Our next question comes from Patrick Cunningham from Citi. Please go ahead with your question.

Patrick Cunningham: Hi, good morning. Congratulations, and welcome, Ken. Ken, I just wanted to get a sense on capital allocation priorities versus that fourth pillar, writing the next chapter of Olin’s success story. Olin has done a great job listing the value of the EPU. How do you see yourself positioning Olin for sort of the next stage of sustainable growth?

Ken Lane: Well, thank you, Patrick. Like I said in the prepared comments, we’re going to communicate more on that at the back end of the year, and we’ll be announcing the specifics around that shortly. But the way that I think about it is we’ve got – we have a core capability with our commercial strategy, and I don’t see that changing even with a new strategy, I think that is a core part of our company now and it’s how we run our core businesses. We’ll continue with that. But we’re going to, as an executive team step back and look at where can we go next? We’re looking at the same data that you are, and we see the share price plateauing where it’s at, and we’re not satisfied with that. We want to continue to drive differential shareholder returns, and we’re going to work in the coming weeks and months to define a compelling strategy that we think is going to help make the next step change in the future.

Olin is a company that has a tremendous history and a lot of legacy businesses and they’ve proven that they can run many different businesses. But you look at where we are today and where we have arrived today – what we have built now is something that we believe is sustainable. And we’re going to look for things that we can build around this model, this operating model that we have. We’re not going to be looking at doing things that are very far from our core. That’s all I’m going to say at this time, but I’ll just say stay tuned.

Patrick Cunningham: Great. Thank you.

Operator: And our next question comes from Jeffrey Zekauskas from JPMorgan. Please go ahead with your question.

Jeffrey Zekauskas: Thanks very much. Were your utilization rates in the first quarter much different than they were in the fourth quarter? My memory is maybe you’re close to 50% in chlor-alkali. Is that right? And where do you expect them to be in the second quarter?

Damian Gumpel: Hi, Jeff, I hope you’re doing well. Listen, we were a little bit above that. We were not at 50%. We were a little bit above that. And Q1 looked very similar to Q4. We were continuing in Q1 with the activation. We’re going to see a slight step up in Q2 versus the utilization rates that we saw in Q1. But again, we’re going to operate our system to match the demand that we see. We’re not going to be pushing volume into the market. And like I said earlier, we are seeing some volume step up in the normal seasonal uptick that you would see in the second quarter, we are starting to see that, and that’s what we’ll adjust our operating rates to meet that.

Jeffrey Zekauskas: Can you make a general comment on the rate of growth you’re seeing or expect to see in chlorine versus caustic soda?

Damian Gumpel: Well, I think we’re seeing a moderately better seasonal improvement in chlorine, which you would normally expect, right? We’re getting into the water treating season and bleach is coming back. So at this point in time, it’s a little bit stronger in chlorine. But it’s modest. It’s not anything that’s going to change how we’re operating our model today.

Jeffrey Zekauskas: Okay. Great. Thank you very much.

Ken Lane: Thanks, Jeff.

Operator: And our next question comes from Steve Byrne from BofA. Please go ahead with your question.

Steve Byrne: Yes, thank you. Maybe a downstream strategy question for you, Ken, another year from now, the contract with Dow will come to a close. Are you more interested in shifting that capacity to other chlorine customers. What is your interest in moving downstream into vials?

Ken Lane: Hi, Steve. Listen, it’s early for me to give you any comments. Of course, we’ve got ideas and things that we’re going to look at, but like I said earlier, we’re going to take our time to look at where we think we can deliver the highest value. And that’s not something that I’m prepared to give you an answer on specifically today. I know that we’ve talked about that in the past, and – and so it will certainly be one of the options that we looked at or that we will look at, but it’s not anything right now that I’m willing to give you a view on.

Steve Byrne: And on the propellant availability issue, was this driven by an outage? And what are your options to offset that shortage problem?

Damian Gumpel: Yes. That is really a function of significantly higher demand, as you can imagine, like we have said earlier in the prepared remarks, commercial demand continues to be good. But military demand is significantly higher. And when you think about the supply chain for that propelled, there are very limited sources of that supply, let’s put it that way. And there being – the demand for that propellant is not just for small ammunition, which is what we’re in. It’s also for artillery and other components that are supporting the defense industry. So we are positioning ourselves with the scale that we have in terms of the buy to be able to secure some additional volumes. But it’s still early. We’re working that very hard, but I can’t sit here and tell you that there would not be some potential risk in the coming months based on that availability of material.

Steve Byrne: Very good. Thank you.

Operator: Our next question comes from David Begleiter from Deutsche Bank. Please go ahead with your question.

David Begleiter: Thank you. Good morning. Ken congratulations as well on the new role. Ken, first, on customers, as you’ve gone around and talk with them, what has been the feedback? And what’s been the – any source of confirmation on their part and how you hope to improve that going forward?

Ken Lane: Well, thank you, Dave. Yes, listen, I have talked to some customers, and I know that I’m not new to the industry. I know that there has been some things in the past that have created some tension in this industry over the last couple of years. But I’ll be honest with you, there are things that needed to happen in order to adjust the value of the products that we have. And the reality is, is that going forward, we’re going to be focusing on being able to continue to run our model and have good relationships with our customers, even if we can’t agree, we’re going to continue to find ways to work together. So I’m absolutely committed to that and so is the executive team.

David Begleiter: Very good. And just on Winchester, I know this is a tough question to answer, but is Olin the best owner of the Winchester business?

Ken Lane: Well, Dave, I’ll tell you, I am a very big fan of the Winchester business. I think that this is a brand that is that is undervalued today as part of our company. That’s my view. So we’re going to be taking a look at that as we go forward to find a way to get higher value for having that business as part of Olin. And that will be a portfolio is always something that you’re going to look at going forward. But we are very happy with the Winchester business and believe that it’s something that we can find a path to get a higher value for that, and we’re committed to doing that.

David Begleiter: Thank you.

Operator: Our next question comes from Duffy Fischer from Goldman Sachs. Please go ahead with your question.

Duffy Fischer: Yes, good morning. I was wondering if you could just give a little bit more clarity on the Q2 walk. So I think, Ken, you made a comment that you think the delta will be roughly similar to maybe a little bit better than the move from Q4 to Q1, that was $32 million. So just to put a number, like $285 million, is that about the right way to think about the over under on where we’re shooting for Q2.

Ken Lane: Yes. So Duffy, look, the walk is really – we are going to continue to see that the price momentum that we saw coming out of Q1, that’s going to continue into Q2 for chlor alkali and those businesses, we will see seasonal demand uptick there as well. For Epoxy, we’re looking at seeing improvement in terms of our mix and some volume improvement, but we will see an improvement in mix. We are also going to see continued positive impact from the restructuring in Q2. We’re going to see that momentum continue. And then with Winchester, like we have said previously in the remarks, we’re expecting that to be relatively flat. So it’s a combination of pricing, better mix in the second quarter versus the first quarter, but to range it, yes, it’s going to be about the same as a step-up from Q4 to Q1, maybe a little bit better than that. That’s the way I put it.

Duffy Fischer: Okay, thanks. And then just to clarify, if your 1.3 ends up being right this year, you guys do not need to pay down any more structural debt to keep your investment grade rating. And so therefore, all that excess cash go to share buybacks. Did I hear that right?

Ken Lane: Well, that’s going to continue to be our priority, yes. I don’t know, Todd, if you want to add anything to that?