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Olin Corp
Earnings Call Analysis
Q2-2024 Analysis
Olin Corp
Olin Corporation faced a significant challenge this quarter as Hurricane Beryl directly impacted their Freeport, Texas facility. Despite severe weather with winds exceeding 120 miles per hour, swift preparations and response limited the damage to assets and ensured the safety of all team members. However, the hurricane is expected to represent a $100 million setback for Olin's Chemicals business in the third quarter.
Olin's second quarter unfolded largely as expected. The Chemical businesses saw modest improvements due to seasonal demand gains and improved pricing. Winchester, Olin's ammunition business, also met its objectives despite higher propellant costs, benefiting from strengthened military demand and a strong performance by its White Flyer business.
Considering the costs associated with Hurricane Beryl and a prolonged industrial economic trough, Olin has lowered its full-year 2024 adjusted EBITDA outlook. Despite the revision, the company remains confident due to its investment-grade balance sheet and strong liquidity, positioning it well to handle economic adversities and capitalize on future demand recoveries.
Olin plans to focus on cash generation for the second half of 2024. Their strategy includes reducing capital expenditures, maintaining cost discipline, and cutting working capital. Notably, the company has deferred $80 million in international tax payments and reduced annual capital spending to approximately $225 million, despite the additional $10 million needed for Hurricane Beryl repairs.
In Chlor Alkali & Vinyls, Olin experienced typical seasonal demand but little underlying recovery. Despite damage, many plants at Freeport resumed production within weeks. In the Epoxy segment, lower costs and higher pricing improved results, but ongoing challenges await in Q3 due to the hurricane and planned maintenance at the Stade, Germany plant. The Winchester business remained steady, supported by military sales and a successful integration of the White Flyer acquisition.
Olin anticipates a mix of challenges and opportunities in the coming months. There's an expectation for improved pricing in the caustic market driven by global supply constraints. Additionally, Olin aims to maximize shareholder value through disciplined commercial strategies and ongoing share repurchases.
Despite facing one of the longest economic troughs in over 30 years, Olin’s disciplined commercial model and strong cash flow generation have ensured robust performance. Notably, the Winchester military revenue is projected to grow significantly, driven by global defense spending and new contracts, further strengthening Olin's position.
CEO Ken Lane concluded the call by announcing an Investor Day on December 12 at the New York Stock Exchange. This event will offer an in-depth review of Olin’s businesses, strategy, and financial goals, underscoring the company’s commitment to transparency and shareholder engagement.
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Good morning, and welcome to Olin Corporation's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Following today's brief opening comments, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Steve Keenan, Olin's Director of Investor Relations. Please go ahead, Steve.
Thank you. Good morning, everyone, and thank you for joining us today. Before we begin, I'll 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 second quarter earnings press release.
A copy of today's transcript and slides will be available on our website in the Investors section under past events. 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?
Thank you, Steve, and good morning, everyone. I want to start by saying how grateful we are that despite a direct hit on our Freeport, Texas facility by Hurricane Beryl, all our team members are safe. I'm very proud of how everyone responded. We saw the best come out with colleagues supporting one another, not only onsite during and following the storm, but with each other's homes as well.
Many team members experienced significant damage to their homes, and I want to personally thank all of those who stepped up to help during the recovery. While we did experience damage to some of our assets, Olin's preparations limited the impact of the storm and kept our team members and neighbors safe.
Turning to our second quarter results. Overall, the quarter unfolded as expected, with our Chemical businesses improving modestly with seasonal demand gains and generally improved pricing. Winchester also delivered on its second quarter objectives, as higher propellent costs were partially offset by improved pricing, continued strength in military and a strong performance by White Flyer.
Looking ahead to the second half, we now have greater clarity around the macroeconomic outlook, customer demand and global supply. The industrial economic trough we find ourselves in looks to be longer lived than typical. We expect Hurricane Beryl to represent a setback for our Chemicals businesses of approximately $100 million during the third quarter. Based on our current outlook and including the effect of the Hurricane, we have lowered our full year 2024 adjusted EBITDA outlook.
Olin remains in great shape with our investment-grade balance sheet, strong liquidity and leading market positions. We will continue to be disciplined with our capital allocation strategy as we were during the quarter. Also, we remain focused on executing our value-first commercial strategy and continuing to anticipate a bright future as economic activity improves, and Olin acts as a coiled spring to serve that recovering demand.
Turning to Slide 4, I'll highlight our efforts to the second half to maximize cash flow. Our teams will continue to focus on cash generation by reducing capital expenditures in spite of Hurricane Beryl requirements, maintaining cost discipline and reducing working capital through the second half of 2024. We've done a lot of restructuring around our Chlor alkali and Epoxy assets and expect to continue to realize benefits in the second half. We will continue to stay focused on cost discipline and explore additional cost-saving opportunities.
Now let's turn to Slide 5 for an update on our Chlor Alkali & Vinyls business. During the second quarter, we saw typical seasonal demand improvement, but little underlying recovery or growth volume. Olin has been extremely disciplined and continues to not sell it to weak markets. The green shoots of demand anticipated as U.S. chlorine customers sought to restart assets during the second half proved overly optimistic. Global industrial activity continues to remain weak, with U.S. chlorine demand still running well below pre-COVID levels.
As previously mentioned, Hurricane Beryl made landfall at Freeport, Texas on July 8, with sustained wins measured at our site in excess of 120 miles per hour. Our remarkable Freeport team mobilized quickly to assess and repair damage. Today, fewer than 3 weeks after landfall, Olin has safely returned many plants to operation. Wind damage to ancillary equipment has prevented the remainder from resuming production. Once this critical equipment is restored, those remaining assets, including our vinyl chloride monomer and phenol/acetone plants will be restarted. Additional global outages have tightened caustic supply and has resulted in upward pricing momentum.
We'll look at our Epoxy business. Let's turn to Slide 6. Epoxy results continue to improve in the second quarter on lower cost and higher pricing. Third quarter Epoxy results will be challenged by both the impact of Hurricane Beryl and our plant at Stade, Germany Epoxy resin turnaround. Our U.S. Epoxy antidumping case continues to progress on schedule, with an expectation for provisional duties to be set later this year. We are encouraged that the European Union recently launched a parallel investigation as we pull all available levers to level the global playing field and combat the government subsidized dumping of Solid Epoxy.
During the second quarter, we've seen several U.S. and EU importers accelerate their Epoxy import volumes. This raises the potential for retroactive duties to be applied, and we would expect our coalition of U.S. producers to request this initial remedy. Olin has been clear with regulators in both the U.S. and Europe that success on each front will be essential to keeping production of these critical materials in region.
Please turn to Slide 7 for a Winchester update. As expected, Winchester's second quarter results were relatively flat versus the first quarter. Commercial ammunition sales were sequentially lower, and rising propelling costs and reduced availability generated a headwind.
Domestic and international military sales continued to show strength during the quarter. Winchester military revenues will continue to grow as global defense spending surges. Our Lake City Next-Generation Squad Weapon Ammunition Facility project is expected to generate at least $1 billion of government-funded revenue over the next 3 to 4 years. Winchester is a well-respected military partner with a strong brand and reputation within the industry, which provides a solid platform to grow our defense participation.
We expect our military sales across all value chains, domestic, international and projects to significantly increase in the second half of 2024 versus the first half. This trend of higher military revenue is expected to continue in the coming years. Also, we continue to see very strong performance by our new White Flyer business, exceeding all expectations and delivering on synergies.
And now I'll turn it over to Todd for financial highlights before I wrap up our prepared comments.
Thanks, Ken. Times like these reinforce the importance of Olin's investment-grade balance sheet and our robust cash flow generation throughout the cycle. This strong financial foundation enables Olin to continue running our disciplined commercial model while also currently deploying a substantial portion of our levered free cash flow towards share repurchase. We ended the second quarter with $182.1 million in cash and cash equivalents and approximately $1 billion in available liquidity. Our net debt has increased by approximately $229 million from year-end, which is typical with our seasonal increases in working capital. The quarter ended with a net debt to adjusted EBITDA ratio of 2.6x.
Our second half cash flow projection will benefit from cash returned from liquidating the first half seasonal working capital build. We now expect working capital at year-end 2024 to be similar to year-end 2023. We've successfully deferred our international tax payments of approximately $80 million now into 2025. We've reduced our annual capital spending plan by roughly $25 million to approximately $225 million for 2024 despite Hurricane Beryl requirements of approximately $10 million.
With all these initiatives, we expect net debt at year-end 2024 to be similar to year-end 2023. Excluding onetime payments under a long-term energy supply contract of approximately $50 million, our 2024 levered free cash flow yield currently would equate to approximately 8%.
Now I'll turn it back to Ken for a few closing comments.
Thank you, Todd. As we fight through one of the longest troughs I've experienced in over 30 years, it is solely due to team Olin's discipline and leadership that we've achieved the strongest trough-level ECU values ever recorded and superior cash flow generation and share buybacks during the trough.
Now finally, I'm excited to announce that Olin will be hosting an Investor Day on Thursday, December 12 at the New York Stock Exchange and via webcast. Todd and I will be joined by other members of the leadership team to provide an in-depth review of our businesses, strategy and financial goals. We will share more details with you as we get closer to the day, but we hope many of you will be able to join us.
Operator, we're now ready to take questions.
[Operator Instructions] The first question comes from Jeff Zekauskas with JPMorgan.
Why did you defer your international tax payment? And will your payment be larger or smaller next year than it would have been this year?
Jeff, this is Ken. I'm going to hand it over to Todd and let him take that question.
Sure, Jeff. This is the $80 million that we talked about even back in 2023 related to international tax payments that we had successfully deferred into '24. Based on the pace of conclusion of those international -- of the international tax work, we are able to defer it into 2025 without additional incremental cost to Olin. And it does relate to prior years. So there is no incremental increase in cost other than that $80 million payment.
Okay. And in terms of your reassessment of demand for the second half, are there particular industry areas that were -- that have slowed relative to your expectations?
Jeff, I'll take that one. This is Ken. So back in the first half of the year, even in the first quarter, there was a lot of expectation that we were going to start to see the economy improve in the second half of the year. I think that was the consensus pretty much across industries. And we were seeing some inquiries coming in around volume in the second half for our businesses. But as we got closer to that, they just didn't develop because the economy, frankly, is still struggling to really start to grow again.
I wouldn't say that there's any significant difference in any one particular industry. There were a couple that we thought there would be some more improvement than what we've seen maybe in the TiO2 space, maybe in polyurethanes. Both of those have, have continued to be stable but have not really shown any growth. So in Q2, the volume uptick that we saw was more of a normal seasonal uplift. There was really no underlying growth that we saw in the market, which you would expect to see if you were going to see growth in the second half of the year.
Next question comes from Hassan Ahmed with Alembic Global.
Just a question around -- obviously, you guys have sort of reset 2024 expectations and obviously given us commentary around the demand profile and demand not looking as great as you sort of thought to be at the beginning of the year. But just more on the numerical side of things. I mean, it seems that excluding the Hurricane impact, you're guiding to $1.04 billion in 2024 EBITDA, around $940 million if you include the Hurricane impact. So I'm just trying to get a better sense of what you guys think in terms of the trough earnings power of the company? Because it just seems that the bar has been lowered a few times. It was $1.5 billion to $2 billion earlier, then around $1.3 billion.
So I'm just trying to get a better sense of internally how you guys are thinking about the trough earnings power of the company.
Thanks for the question, Hassan. What I would say is we certainly are in the trough. And if you look at the last 12 months, that would, I think, certainly represent a trough level of earnings. And what I will say is, I think the expectations are that, even if you look at the Epoxy business, that is in a very unusual position relative to historic performance. So that's not a typical trough level. It's really driven by the over investment that we've seen in China with the new capacity, and we know the impact that that's having on both Europe and in the U.S. markets, which is why we've got the antidumping cases out there.
So that's a bit of an unusual case. But I do think that the trough level of earnings is going to be somewhere around this level, I don't expect that it's going to continue at this level significantly longer. As I said in my prepared comments, this is a very long trough that we've been in. And as soon as we start to see the green shoots, not just in the U.S. markets, but also in the China market, we really need to see China start to recover and get the demand in the economy going there. Europe is probably closer to seeing some improvement, but it's still very, very early, I would say, even in Europe.
Understood. Understood. And just as a follow-up to that whole sort of trough question [Technical Difficulty] and maybe even late last year, you guys were talking about the value accelerator initiative and how that could be a potential quarterly EBITDA tailwind of $25 million to $35 million, right? And I guess the notion was that you guys were [Technical Difficulty] incremental supply with incremental demand and that will kind of give you the sort of EBITDA uplift.
So is it fair to assume that as it stands right now, I mean, in Q1 to Q2, the results were a slight increment in your -- excluding the Hurricane impact, not really [Technical Difficulty] Q2 to Q3. So is it fair to assume that you're really currently not seems [Technical Difficulty] at all from that value accelerator initiative? And as and when demand returns [Technical Difficulty] EBITDA we should think of in terms of as and when your operating rates normalize.
Yes. Hassan, you were breaking up there. I think, I got the gist of your question. I'll take a shot at it. And if I don't answer it, then we can come back to it.
Listen, we were successful with that value initiative that we had at the end of the year last year, because we did stop the fall in the cost of price. And that has proven to be successful. In fact, we continue to see firmness in caustic pricing and even upward momentum at this point in time with the outages, not just that we're seeing in our system, but also others in Europe and in Asia.
So -- so there is firmness and there is support for pricing going forward. But we are not moving away from our strategy of only selling in the markets where we see value that is acceptable to us, the values that we want to have in our system. So that strategy is going to continue. And focusing on value is what is going to continue to help us maintain a very high level of profit relative to historic trough. You're going to continue to see us generate very good cash flow at the trough level.
And the next question comes from Steve Byrne with Bank of America.
I've got a couple of questions about Freeport. You mentioned VCM and phenol, but are the four chlor-alkali operations there in operation right now? Dow indicated they are still getting chlorine, I don't know, perhaps they get priority for your chlorine out of that plant. But in general, what is the most significant issues for the restart of that facility?
And maybe a longer-term question for you for Freeport is, what are your plans going to be when Dow shutters their PO operation? Do you anticipate getting further downstream? Are you satisfied with the margins you're making on EDC relative to what your EDC customers are making off of that?
Thanks for joining us. We -- yes, you're correct. The asset that you named are the ones that are still down. We have not restarted all of the chlorine capacity there yet. As you know, we've got a force majeure system-wide. We're continuing to work through that. But the good news is that there's that -- there's not any damage really to chlor-alkali assets as to equipment that support the VCM and the acetone and phenol assets. So we're not able to operate everything yet, but we're working through getting those assets back online and the priority is to do that safely and be able to communicate with our customers when that's going to happen.
With regards to the future of the assets there at the Freeport site, we're going to work through the asset strategy. And that's a great question for us to be discussing at the Investor Day coming up later this year. But we're still working through the options. And of course, we're going to find the highest value option for the assets there and look forward to sharing that with you at the end of the year.
And then just a quick question on these antidumping initiatives in the U.S. and Europe with respect to Epoxy. Does that require some level of government support in order for those initiatives to get some traction? And what is it that you -- that you view as enabling those four countries to undercut you on price on Epoxy? It would seem to be propylene- and energy-related, but what's your outlook for that?
Well, again, our outlook is that we favor fair and free trade. That's what we want to have. And what we have seen is over the last few years, there have been subsidized assets that are rolled online. That has created tremendous imbalances, and people are operating in a way that they are dumping material into these markets and threatening local production. So as I said in the prepared remarks, if we don't see some intervention with import duties to get some protection to the domestic producers, they are very much at risk. And -- and I think these are materials that we want to continue to produce both in Europe and in the United States market. So we'll see how this all plays out. We expect to see -- we expect to see some announcements around that later this year, and we hope that it's favorable for the local producers.
And the next question comes from Duffy Fischer with Goldman Sachs.
Could you just clarify the Freeport startup or restart? I mean, are we talking weeks or months? Can you roughly give us an idea of the time line there?
Yes, what we're looking at, just to kind of scale it for you, is weeks. And the $100 million that we put out there is the approximate impact really is assuming sometime around mid-August, we began the start-up process. You don't flip a switch and these assets are running on the first day, but at least we get the assets started up sometime around the middle of August is what we are assuming.
Okay. And then maybe one for Todd. On the buyback, at least with the numbers you gave, it looked like your average price was about $56 a share. But I think there are only like 11 or 12 days in the quarter that the stock was even at $56. Can you just walk us through, I mean, is it -- how do you buy? Is it on a couple of days that you take care of it in the quarter? Or why were we so far off kind of from the average of the quarter?
Thanks for the question, Duffy. We do operate under a 10b5 plan. And over the quarter, generally, our purchases are at or below the weighted average purchase price. Over that, I'll say, the roughly 90-day quarter period. Don't forget included in that number is the 1% tax associated with pre-owned share repurchases. So that may be throwing you off a little bit and rounding may be throwing you off a little bit.
The next question comes from Aleksey Yefremov with Olin. (sic) [ KeyBanc ]
I just wanted to confirm that in your EBITDA outlook, the full year, did you assume that Beryl impact goes away completely in the fourth quarter? And also does, if the $100 million include any insurance recovery? And if not, do you expect any in the future?
Yes, that is a Q3 event. We do expect that all to be in the third quarter. At this point, we don't expect to have any insurance recovery just based on where we are in terms of the damage levels and the deductibles, but that's all -- that all should be in the third quarter.
Okay. Very helpful. And Ken, I mean, you've been in your seat for some time. You just shared sort of the near view on the demand, which is weaker. Any thoughts on sustainability of current operating rates in chlor-alkali for your system?
Sustainability of your pricing strategy and overall strategy of pricing for value and operating the way the company has been run for the last couple of years? Just want you to share your thoughts on this.
Yes. I'll tell you my thoughts. I mean, I believe very much that we are going to be able to sustain what we have and the way that we operate. I think I commented on this at the last earnings call, Aleksey, I'm very impressed with the flexibility that our teams have shown and being able to adjust on the operating rates, again, based on the model that we're running for value. They have learned how to do that very well. And initially, I think it's the sort of thing that you have to go through that learning curve because it is a change in how we operate. But they have done very well at adjusting. And it's everybody, not just on the commercial side but also in the manufacturing plants. We've made some real progress in learning how to operate differently.
And we're going to continue to do that. We'll continue also to look for areas to optimize and reduce costs. That is not something that we are going to lose sight of. We are staying very focused on that. And you can imagine as you do things like what we have done over the last couple of years, when you're rationalizing assets, you can still find ways to reduce costs as you optimize the asset base that's left, and we're going to continue to be really, really focused on that as an organization.
The next question comes from David Begleiter with Deutsche Bank.
Ken, does the $100 million impact from Beryl include any benefit from the announced price increases for July?
The $100 million does not include any benefit from that. We are expecting to see some improvement in pricing in the second half of the year. As we said that we believe that especially in the caustic market, there is firmness there with all of the outages that we've seen around the world. So that does include some -- the outlook does include some improvement in caustic pricing, but that $100 million is really just the cost and lost opportunity impact.
Very good. And just again back on Freeport, pre-hurricane, what were the operating rates of those four chlorine units you have?
Listen, as you know, like I said before, what our focus is running to meet the demand that we see in the market and the value that we like. So we don't focus on utilization rates as a metric in terms of our performance or how we take them out running our business. We do focus on reliability. We want to be able to run at the levels that we want to run at, but we're very -- we're very flexible in how we do that. And so the utilization rate, we don't look at that as a metric around our operating performance. We focus on reliability.
And to be clear, today, are any of those four units running today?
Yes, we do have some of the units online, but we have not restarted all of them yet.
So two on, two off. Is that fair?
No, we're not going to comment on any of the specifics around specific units.
And the next question comes from Patrick Cunningham with Citi.
So there's some new capacity coming online in the back half of the year from one of your competitors. How does -- in your view, how does this impact the market and your ability to bring back volumes and raise operating rates?
I don't see that really impacting -- that volume has already been contracted up earlier this year, even later in the year last year. So it's already in the market. I don't see that being an issue. I know there's a lot of chatter about that in the market, but it's -- it's already in the market, frankly. So I'm not -- I don't see that as a headwind.
Understood. And you've obviously talked about improvement in commercial volumes as well as you have strengthened military in the back half for Winchester. I'm trying to better understand where we are in the cycle here, how you're thinking about cyclicality given the full general discussion across the whole business in terms of cyclical earnings power?
The Winchester business is a very strong business for us. We've seen -- this year, of course, a big step up in our military revenue and the profitability around that, especially international military, the international military business this year is on track to being double what it is. I would not -- we don't think about Winchester, that business really having a cycle. It is a much more stable cash generator for us and then in a much more significant one than it was even just a few years ago now that we've got the Lake City contract, that has been a very strong business for us, working with the U.S. Army.
So that business, it has some seasonality to it, typically in the second quarter. It's a little bit weaker this year. It was down a little bit more than normal. I think you've seen that across the sporting goods retail space. I think a lot of that is related to the inflationary pressures on the consumer. So it's going to track -- the consumer part of that business is going to track more of the general economy and how inflation is going, while the military side of that, obviously, is going to be tracking more with what's happening geopolitically. And the setup right now for that business for the long term is quite strong on the military side.
And the next question comes from Kevin McCarthy with Vertical Research.
Yes. Thank you, and good morning. Ken, there's a fair amount of discussion on the share repurchases, but I'm curious to hear your thoughts on potential for inorganic growth as you take a fresh look at Olin's portfolio here. The company has been, I would say, modestly active in recent years through White Flyer and the Blue Water Alliance with Mitsui, but nothing really bigger than a bread box, so to speak.
What are your views, say, for the next 2 or 3 years on portfolio composition and potentially using the balance sheet to advance external growth?
Well, listen, we will continue -- if we see opportunities like the one that we saw with White Flyer, which has been extremely attractive, we've been able to leverage our channels to market and really make that business flourish. It's been very impressive, what the Winchester team has done with White Flyer. So if we see opportunities like that, the small-scale bolt-ons and we think they're going to be highly accretive and ones that we can run better than current owners, we're going to move on those.
Anything beyond that, we'll talk more about that at our Investor Day. You can imagine we're thinking about where we want to go in the future, and that's part of the conversation. But right now, there's no change in what we're thinking about in terms of how we use the balance sheet. We are going to continue to stay focused on having a strong investment-grade balance sheet and then continue with our capital allocation strategy as we have up to this point.
Okay. And then as a second question, if I may, on Winchester. How would you compare and contrast your margins in military versus commercial? And perhaps related to that, as the propellant market, market seemingly remains quite tight, does that impact -- or how does that impact margins in military versus commercial? Or is it a similar impact on both of those types of businesses? Maybe you can talk through some of the mix issues that are evolving in Winchester.
Sure. Yes. I mean, listen, on the Winchester side, the military business is clearly a lower margin than the commercial business, there's no doubt. The domestic military is the lowest. International military is actually an attractive margin for us, but still not as good as commercial. So that's kind of the mix that we see across the portfolio. In terms of propellant, clearly, we're going to prioritize propellant for the U.S. military. That's one of the requirements around the Lake City assets. So that's the way that would work in terms of allocation of volume.
But we've been -- so far, we've been able to secure the volume that we need that both covers our military demand and the commercial demand. It is a very tight market, and those costs have gone up. Some of that has been offset with some pricing, but frankly, not all of it. And we're going to continue to see that headwind in the second half of the year. This is an area where I think in the market overall, when you look at propellants, it is an area that -- there's got to be some strategic focus from even national security concerns that there's got to be some clear path forward on how we secure that capacity for the United States' demand. And we don't want to be aborting that from regions that are not necessarily friendly to the U.S.
So I think there's more to come on that. I know the government is looking at that. And we're eager to see where that goes because it will have a long-term impact on Winchester. But being a large player in that market, we've done a very good job securing the physical volume that we need, but the cost is still going to be a headwind going forward.
And the next question comes from Matthew Blair with TPH.
I'm glad everyone is safe after the hurricane. For that $100 million impact, is there a breakout between the CAPV and Epoxy segments? And then I just want to confirm, but it sounds like the $940 million full year guide actually does include an assumption of better caustic pricing in Q4?
Yes. Thanks for your question, Matthew. The split, if you think about the assets that we've talked about, it's going to be around 70-30 roughly. Don't make that too precise. But that's kind of the range that you can think about, 70% for chlor alkali, 30% for epoxy. I would use that as a rough estimate. And when we think about the back half of the year, yes, we see that there's pricing momentum. So in our outlook, we've included some improvement in the caustic market.
Sounds good. And then according to just various market indicators, EDC prices fell by a couple of pennies in the second quarter. But it looks like on Slide 10, in your system, EDC prices moved up quarter-over-quarter. Could you talk about what you're able to do to capitalize on that market?
I think that's a reflection of our model, right? That's exactly what we try to do is manage our portfolio for the value that we want to have, and we are very agile in doing that. And we're going to continue to use that model. That's why I think I've said previously is, there's, just to say, a lot of focus on indexes, some of them are better than others, but our focus is on getting the highest value that we can for the volumes and the assets that we've got in our portfolio, and that's what you see reflected there.
The next question comes from Arun Viswanathan with RBC.
Yes, glad to hear things are safe there at Freeport. So I guess I just wanted to circle back to how you're thinking about profitable conditions and maybe an early look on '25. So assuming we do kind of settle in the mid-900s on EBITDA this year, obviously, a good sum of that is hurricane-related. And you noted a couple of times that you do feel like this is a trough. What kind of growth should we expect, I guess, moving forward? I mean -- and what are some of the indicators that you're looking for one to see that inflection point coming? Is it just kind of macro-related interest rate environment and so on? Or is there something else that we can kind of hone in on?
Yes. Thanks for the question, Arun. So listen, I think there's a lot of uncertainty, not just in the United States, around everything that's happening currently and with the elections coming up, but even globally. So that uncertainty, I don't think we're going to get any real clarity on where things are going until after the elections and maybe even into the beginning of next year. So we're taking more of a wait-and-see approach, but the things that we're going to watch are going to be things like what's happening in the U.S. housing market.
Are we seeing the Fed reduce interest rates and are we seeing buyers coming back into the housing market where housing starts take a meaningful step up? Are we seeing that the Chinese economy has really begun to recover? Because that is still missing. And the Chinese local demand is going to have to grow significantly to begin to help the global economy come back. So we're going to be watching those sorts of things very closely over the coming months. But it is way too early to start talking about what we see for a 2025 outlook.
Okay. And well, maybe I can ask the question a little differently then. So if you do have a resumption in normal operations, given some of the capacity that you've taken out, is that -- would that be a limitation on your earlier comments maybe a little while ago that peak EBITDA is kind of in the $3 billion range? Maybe -- is that now kind of $2.5 billion or well below that?
And then along those lines, do you see any kind of structural impairment to any of these markets? I know Epoxy has gone through pretty significant pullback, especially in China in demand. It's unlikely that China will return to their prior growth rates. So I don't know if they've taken enough action to rightsize their own Epoxy market either. So it seems like that business does have some structural limitations that weren't there in the past.
And then on chlor alkali, again, you shut down some capacity. So I just wanted to understand if there's been any change in kind of the earnings power of the businesses.
Listen, I said in the prepared comments as well that we've positioned ourselves very well with a set of assets that are going to be competitive in the long term. They're very well positioned on the cost curve. We're continuously looking at optimizing our asset portfolio, especially around chlor alkali. But our focus is going to be on operating those assets. As we see demand coming back, we will adjust our position in the market to be the ones that are capturing that growth. I mean, that's really the way we've positioned ourselves. So if you think about the capacity we took offline, it doesn't take away the optionality for us to be that coiled spring as we've called it, to be able to respond when we see the growth coming back.
With respect to Epoxy, yes, structurally, there are more challenges in that market. And that's why, again, we've been so vocal about the antidumping cases that we have filed. We think that it's very important that there is some support that comes into those markets. But ultimately, there probably does need to be some restructuring in the China market. There's probably going to need to be some capacity that comes offline, because to your point, it's going to be a very long time before they're able to grow into that capacity. And when you've seen these sorts of troughs in the past, that's what's happened. You've seen capacity come off. In conjunction with growth in the market and both of those things will typically correct themselves over time, but it's going to be years, it's not months before we see that happen.
Great. And just one quick last one. So if you do generate that level of EBITDA, you will be kind of maybe north of $400 million or $500 million of free cash flow. So is stock buyback still the preferred deployment of that cash? Or are there some other options you're considering?
We are not changing anything on our capital allocation strategy, and we'll continue to be a buyer of our shares with the excess cash that we've got. We still view our shares very much as being discounted to the value that they should be and will continue to be a steady buyer going forward.
And the next question comes from Mike Sison with Wells Fargo.
Ken, you might want to save some ammo for the Analyst Day, but how do you think about mid-cycle EBITDA here? You've -- any thoughts there? And maybe to some degree, if you can't get the specifics, when you do get volume growth back, how do we sort of model that into better EBITDA and sort of maybe contribution margin to think about as we get closer to mid-cycle dynamics?
Sure. Thanks, Mike. And yes, you're right that some of the work that we're going through right now is working through where we think those things land, especially looking at our asset strategies and how that's going to shape up and where we're going with Winchester and those sorts of things. So when I think about -- when I think about where we are and how we're going to go forward, the biggest thing that we see is as that coil starts to unspring the demand starts to come back, that's the biggest lever that we see in terms of our portfolio today.
Yes, there's going to be some steady improvements with Epoxy over time. We've already done some things around self-help in terms of restructuring and cost reductions. We continue to realize the benefits of that. That's -- that is coming through in line with what we had expected. As I said earlier, we'll look for additional cost savings and put that as a priority as well.
But really, as you start to see demand come back and that leverage around the volume that we have in chlor alkali, that's where the real upside is to get you back to kind of that mid-cycle level of earnings the quickest. The question is always going to be, well, when does that happen? And frankly, we don't know. We're going to be prepare though when it does happen and we'll be the ones that are going to benefit from that recovery.
Great. And as a follow-up, when you think about getting to that mid-cycle. Right now, in Slide 10, caustic is stronger side, chlorine is weaker side. So in mid-cycle, is chlorine the stronger side where you really could lever up profitability? And maybe talk about how that meets -- if that's sort of what creates that higher EBITDA is, which side needs to be stronger, et cetera?
Yes. That's a great question, Mike. And as you can imagine, it's all about the time frame. And I know you're referring to the chart that's in the appendix that we had issued. It's a much shorter-term discussion than that. So you can't look at a cycle and say, across the cycle, one side needs to be the stronger versus the other. The model that we run, we adjust that very frequently. It's going to be within the month, we may change between what we see as the weaker, the strong side.
So that's -- that's the way that we think about that. It's not a long-term play. It's a very short-term operational commercial decision-making that we need overall. And frankly, that's going to be driven by the demand that we see on each side, but it's going to be demand improving on both the chlorine and the caustic side that's going to help accelerate that.
The next question comes from Mike Leithead with Barclays.
Great. I wanted to follow up to a previous question, just how you're thinking about capital deployment in the current earnings backdrop, should we expect any share repurchases in the second half of this year? Are you comfortable where your leverage ratio is now intended to end this year? Just how you're thinking about everything here in the second half?
Yes. I mean I'll comment on that, and then I'll ask Todd to add to that. But we will continue to be a buyer again with the excess cash flow that we've got. But Todd, do you want to add to that?
Sure. We've taken several actions here to really improve our second half cash flow. And then in our prepared remarks, I articulated previously, we had talked about working capital being a use for the year. We now think that will be at least neutral. We have deferred the $80 million of international tax payments, reduced capital spending. So all those actions enable us to keep -- we would expect debt flat from where we were at the end of '23 to the end of '24. So that does enable us to utilize our levered free cash flow towards share repurchase. And that will allow us to continue to repurchase shares in the back half of the year.
Great. That's super helpful. And then just briefly, I wanted to clarify on the third quarter outlook. It sounds like you would have expected chemicals to be flat before the Beryl impact and Winchester should improve sequentially. So is it fair to summarize that third quarter should be down something on a consolidated basis, like $80 million to $90 million EBITDA sequentially?
Mike, when you -- your comments on chemicals of Winchester are correct based on our outlook. In the second quarter, corporate and other unfortunately had a significant benefit associated with the reduction in the stock-based compensation, much lower stock price. So we would not necessarily expect that to continue into the third quarter. So your numbers might be -- may be haven't taken that part into account.
And the next question comes from Josh Spector with UBS.
So Ken, in some of your earlier comments, you talked about demand for chlorine and caustic as well below 2019 levels. I guess, when we look at some of the consultant data, it's kind of forecasting about 10% below. How would you characterize what you're seeing in the merchant market? Is it meaningfully different than that at this point in time?
No, it's not. I mean, it's in that range. So we -- it's what I had commented before. Until we really see the economy generally globally coming back -- because a lot of even domestic demand was supporting exports. And until we see the global economy really -- and we say the economy is really industrial economy where we're focused. That's where we're going to start to see that recovery. But remember, in that time, we've also taken offline a lot of capacity. So that makes -- that really tightens that spring that we keep talking about.
Yes. And I guess, I mean, to that point, I mean, if I kind of go off of consultant forecast, there's not really a strong snapback forecasted in '25, '26, maybe a couple of percent a year. Obviously, your circuit is a lot lower. And I assume there's still some slack in other players, and we talked earlier about some additional capacity. I guess, how do you see Olin performing relative to that? Is that something where you can really bring back volumes at a much greater rate than the market without having an impact on pricing? Or how do you navigate that scenario?
Yes. Well, listen, that's what you do in commodities, right? I mean we're focused on having the most competitive assets that we can have. I'm not going to comment on what others are doing. But obviously, it's -- it would be a very challenging time to make any kind of an economic case around a large investment in these commodities. So I would be surprised, certainly not something that we're going to be doing.
We believe that you've got to consider different scenarios when you're thinking about these things because when you're in the trough, it always looks worse and you never think it's going to get better. And since we're not naive enough to fall into that trap, we know things are going to get better at some point. Trying to predict when it's going to get better, that gets to be a little bit dicey. So we're going to be thinking about scenarios going forward.
We're going to be prepared when that demand comes back with a competitive asset base to be able to supply that demand and capture that demand as it grows and comes back into the market. That is our focus. But there's a lot of negative outlooks that are out there. And all I'll say is think about distant scenarios, because if you get too focused on one scenario, you're going to be wrong.
And the next question comes from Frank Mitsch with Fermium Research.
I want to come back to the pricing question. It was nice to see that the PCI picked up 15% sequentially into the second quarter. So I was curious, looking at your system, what was the biggest driver of that? And how do you think about the outlook on the PCI?
Yes. Thank you for the question, Frank. I mean, listen, like I said before, there's going to continue to be pricing momentum in the second half of the year. As we've said, the demand is firm out there. We've seen some seasonal improvement, but supply has tightened up a little bit. So we're -- our expectation is that going forward, we'll continue to be able to manage our portfolio and the mix that we have there to maximize the value for Olin, that's our goal. But it's very hard to predict where some of the demand is going at this point in time.
If you recall at the first quarter earnings call, we were expecting to see more significant demand recovery than what we are seeing in the second half of the year. But we'll still look in terms of the portfolio that we have around maximizing the value and the mix of that portfolio.
I understood. And coming back to the comments on indices and so forth. So obviously, you guys do not work off of of indices. So it's more difficult for us to kind of figure out what's going on within the internal Olin system. So I was just curious, I mean, in terms of what was -- what might -- I mean, 15% sequential is a pretty impressive hefty lift. So I was just curious, was it chlorine, was it EDC, was it HCL, was it aromatics? Any sort of guidance -- or Epoxies, what have you? Any sort of guidance there would be helpful. Just so we understand from the outside, what's really clicking in terms of Olin's pricing mechanisms.
Yes. No, I get that, Frank. And listen, it's probably -- the easiest way to put that again is it will be a mix of that portfolio, because we are constantly looking at what are the values of each of the products and where are we going to place the molecules that we have. So it's -- it would be very difficult for me to give you some kind of a modeling basis that would be consistent quarter-to-quarter, because it is a very dynamic model that we're going to run, and we'll continue to do that to be as agile as we can to maximize that value. So it's not something that I can point to that you would be able to then build into your models consistently and have it be correct.
Fair enough, fair enough. I did make note that bleach was -- that bleach pricing was lower in the second quarter. And I would have thought from a demand standpoint, it picks up 2Q versus 1Q. What are the dynamics going on in the bleach markets?
Yes. Listen, what happened with bleach, there's definitely a mix element with that. And during the quarter, the bleach market was very interesting because the quarter started off cold and rainy. And the [indiscernible] was fairly low. And then it really got very hot and dry in the second half of the quarter. So there was a mix effect in the quarter. And again, very odd in terms of just the weather pattern during the second quarter.
The final question comes from Vincent Andrews with Morgan Stanley.
Just two quick ones for me. The reduction in CapEx this year, what is it that you're not doing? And will that -- should we put that spend into next year? And then secondly, was there an SG&A or incentive comp reduction that was done with the reduction in guidance that we should think about coming back next year in a more normal year?
Vince, thanks for the question. So listen, the things that will not be done in terms of CapEx, some of that will come back next year, but that doesn't mean that we're going to see an increase next year. We'll continue to look for ways to defer other things.
But we're going to prioritize operating our assets safely and maintaining those in good conditions. So we're not deferring things that put any of the assets at risk. These are things that are easily deferred and -- and don't do that. Now in terms of the SG&A, I don't know, Todd, do you want to add anything on that?
Yes, Vincent, thanks for the question. Yes, the big driver right now in SG&A is really lower stock-based compensation. And that's what really has driven the year-over-year decrease, not only in the quarter, but so far, year-to-date.
Okay. Well, thank you, Dave, for hosting the call. I want to just say thank you, everybody who joined today. We appreciate your interest in Olin and look forward to hopefully seeing all of you on December 12 at the New York Stock Exchange and see you in person. Thank you all very much, and have a safe weekend.
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