Olin Corporation (OLN) Earnings Call Transcript & Summary

Good morning, and welcome to Olin Corporation's Second Quarter 2026 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, operator. Good morning, everyone. We appreciate you joining us today to review Olin's second quarter 2026 results. Please keep in mind that today's discussion together with the associated slides as well as 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 Olin's 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 related financial data and information are available under press releases. With me this morning are Ken Lane, Olin's President and CEO; and Todd Slater, Olin's CFO. We'll start with some prepared remarks, and we'll look forward to taking your questions. Let me now turn the call over to Olin's President and CEO, Ken Lane.

Thank you, Steve, and thanks to everyone for joining us today. We appreciate your interest in all and in taking the time to join us on such a busy morning. Let's begin with some highlights from the second quarter on Slide 3. On June 16, we were very pleased to announce our planned merger with Huntsman. -- bringing together 2 highly complementary businesses to create a world-scale vertically integrated North American-focused chemical leader with more than $12 billion in sales. Second quarter also saw the conflict involving Iran disrupt chemical supply chains and increased prices. Markets rebalanced as the quarter progressed, although significant uncertainty remains. Caustic soda and EDC export pricing was a second quarter bright spot, reflecting the supply chain disruptions at the beginning of the quarter. This was partially offset by an unplanned VCM shutdown at our Freeport, Texas facility. Epoxy also achieved higher pricing across all products during the second quarter as hydrocarbon feedstock costs rose and availability tightened. Epoxy demand remained weak in Europe, but the U.S. saw moderate seasonal demand improvement in the quarter. Winchester's commercial ammunition recovery continues as year-over-year demand improves and our pricing initiatives to offset rising metals costs start to gain traction. Domestic and international military sales continue to show strength. Against the backdrop of weak demand and volatile global events, Olin's self-help efforts remain top of mind. Our value-first commercial approach continues to preserve ECU values, while our Beyond 250 initiative is delivering structural cost reductions. Now let's turn to Slide 4 for an update on our recently announced merger with Huntsman, which creates a $12 billion vertically integrated cost advantage North American chemicals leader. Since announcing the transaction, we made significant progress in a short period of time. We filed our definitive proxy on July 13, and Olin shareholders have already begun casting their votes as we approach the August 25 Special Shareholder Meeting. Todd and I have spent recent weeks on the road with the Huntsman management team, meeting with both Olin and Huntsman shareholders, listening to feedback and discussing our value creation thesis -- the response has been very supportive and reinforces our excitement about the deal. In the third quarter, we'll begin pre-closing integration planning led by Todd. This is a very important first step toward realizing the $400 million of synergies quickly following the close, which we continue to expect in the first half of 2027. Now let's turn to Slide 5 for a closer look at our Chlor Alkali products and Vinyls second quarter performance. Early in the quarter, the Iran conflict drove supply chain interruptions and dramatically higher feedstock and energy costs resulting in higher prices for many products. As supply chains rebalanced during the quarter, export pricing for both EDC and caustic soda trended lower, but remained above pre-conflict levels. These export price trends will offset stronger domestic caustic pricing in the third quarter. We expect product availability to tighten in the fourth quarter driven by persistently higher feedstock and energy costs as well as several planned industry shutdowns. As discussed on our Q1 earnings call, we had an unplanned outage in early May at our Freeport, Texas VCM plant. While the outage was disappointing, it was an isolated equipment issue that we've addressed. We were able to restart the plant by mid-May, but BCM will be running at reduced operating rates through the third quarter, while we complete final repairs. This outage resulted in a $40 million penalty to second quarter adjusted EBITDA, and we'll have an estimated $20 million impact on the third quarter. Second quarter merchant chlorine sales improved seasonally, supported by stronger water treatment, refrigerant and other derivative demand. During the third quarter, Several planned chlorine customer shutdowns will reduce volumes, but chlorine pricing remained stable. Finally, we continue to make very good progress on our Beyond 250 structural cost savings initiatives, and we're on track to deliver on our commitments. Turning to Slide 6. Let's review our Epoxy results. During the second quarter, our Epoxy business posted its best results in more than 3 years. As the Iran conflict unfolded, our epoxy team implemented price increases to offset rising raw material and transportation costs. Security of supply became paramount to customers, supporting Olin's strategy to grow our epoxy participation in both the U.S. and Europe. During the second quarter, U.S. epoxy resin demand experienced moderate seasonal improvements while European demand remained flat. Our epoxy cost initiatives continue to pay off between our new Stade, Germany supply agreements and our Guaruja Brazil plant closure -- we've reduced epoxy structural costs by more than $50 million per year. These actions, in combination with our commercial strategy for increased participation have returned this business to positive earnings. Now let's take a look at Winchester on Slide #7. Monthly out-the-door commercial ammunition sales have improved year-over-year as consumer demand strengthens. Winchester continues to increase prices to offset rising raw material costs, particularly copper and brass. Both of these have resulted in year-over-year improvement to adjusted EBITDA. Winchester is continuing its disciplined approach to working capital and inventory management as we see our commercial backlog growth. The third quarter is typically our strongest for commercial ammunition demand due to the fall hunting season and we expect that to drive sequential earnings improvement. Domestic and international military ammunition and project sales continue to be strong. I'll now turn the call over to Todd for a look at our financial highlights.

Thanks, Ken. I'll now walk through our cash flow, liquidity position and overall financial foundation. Our top priority remains generating strong cash flow, preserving liquidity and maintaining flexibility through the cycle. We ended the quarter with $1.2 billion of available liquidity, including the undrawn capacity under our revolving credit facility. Our debt profile remains well structured with no bond maturities before 2029. During the first half of 2026, working capital increased by $183 million, reflecting our normal seasonal build, which we expect to liquidate in the second half of the year. The increase also included $93 million of payments against previously accrued reserves related to the resolution of the legacy Shintech litigation matters. We expect to pay the remaining $100 million during the second half of 2026. As a result of these litigation-related cash payments, we expect to end the year with year-over-year increase in outstanding debt and a leverage ratio of approximately 4.5x. As we further strengthen our financial resilience, any excess cash flow will be used to reduce our outstanding debt. Our capital allocation priorities also remain consistent and disciplined. First, we continue to target 2026 capital spending of approximately $200 million with investments focused on the safe, reliable and efficient operation of our assets. Second, we expect to continue our long history of uninterrupted quarterly dividend payments. Third, excluding approximately $195 million of cash payments to resolve legacy litigation matters I just discussed. We expect working capital to be essentially flat for the full year 2026. And finally, we continue to expect 2026 to be a cash-free tax year plus or minus approximately $20 million. Within Beyond 250, we are expanding our focus on people and process improvements and remain on track to deliver more than $100 million of incremental structural cost savings in 2026. In addition, based on the progress we're seeing across the organization, we are increasingly confident we will exceed our $250 million target by 2028. In summary, our teams remain focused on cash generation, cost discipline and execution of Beyond $250 million. Our strong financial foundation enables Olin to continue executing our value-first commercial approach, while maintaining disciplined capital allocation a prudent capital structure and resilient cash flows. With that, Ken, I'll turn the call back to you.

Thank you, Todd. I'll finish up with Slide 9 and our outlook for the third quarter. We expect stronger domestic caustic soda pricing. Export volumes for both caustic soda and EDC should improve but will largely be offset by lower export pricing. In Epoxy, stable volumes and an improved mix are expected to benefit third quarter results. However, this will be more than offset by higher European FIFO costs. Winchester third quarter results are expected to improve, driven by higher commercial volumes and pricing, partially offset by higher metals costs. We'll continue to remain focused on working capital discipline. Against the backdrop of continued global uncertainty, we expect Chemicals adjusted EBITDA to be relatively flat in the third quarter. We do expect a modest earnings improvement at Winchester although corporate costs are expected to be a sequential headwind. Overall, adjusted EBITDA should again be in the range of $160 million to $200 million. Stepping back, we remain confident in the long-term outlook for our business. Chlor Alkali continues to benefit from an attractive supply-demand outlook relative to other commodity chemical value chains, supported by recent industry capacity closures and limited new capacity additions globally. As the industry leader in chlor-alkali, we are very well positioned to benefit from these favorable dynamics. Our Epoxy business has returned to profitability and continues to improve. At Winchester, self-help actions taken in late 2025, disciplined cost and working capital management and a recovering commercial ammunition market continue to support improved performance. Across Olin, we're making good progress on our priorities, delivering record safety performance in 2026. Dreamlining work processes, creating new reliability road maps and adding resources to support execution. Leveraging digital tools and AI across our plants to quickly identify inefficiencies, reduce costs and improve asset reliability. Finally, we're reinforcing accountability by aligning our short-term incentive program with site level safety, reliability and cost performance targets, further strengthening our performance-driven culture. Operator, we're now ready to begin Q&A.

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Frank Mitch with Fermium Research.

It's Aziza on for Frank. My first question was around the Iran Roland where would you say this has been the biggest impact within Olin? And if the war were to drag on for a few more months, what are the implications for the company?

Good to hear your voice. Well, listen, the biggest impact, really, we felt in the second quarter, that's when we saw prices and concern around supply disruptions really ramp up early in the quarter. But as we said in the prepared comments, we saw that abate as we went through the quarter. Going forward, as markets have rebalanced, what we do expect is just globally costs have risen for folks, especially producing outside of the U.S. That is going to put maybe a higher floor under prices as we go forward. We recognize that there is some softness in some of the export pricing for EDC and caustic today. A lot of that is just digesting the volume that was produced when everybody saw that peak in pricing, all of a sudden, even the producers that were not making any money, some that were even cash negative before prices ran up, saw an opportunity to be able to produce and move some product that's going to be digested here in the third quarter. And then as I said, I think things will start to tighten up more in the fourth quarter. There's a lot of capacity that's going to be down. Demand continues to be stable. We're not seeing any erosion in demand. So I think we saw the run-up in Q2. We're going to see things kind of normalize in Q3 at a higher cost level, and that should benefit us in the fourth quarter.

The next question will come from Hassan Ahmed with Alembic Global.

Wanted to sort of revisit the same question a little differently, trying to get a clearer view on near-term supply-demand dynamics for chlorovinyls. First of all, I would love to hear your views about the return of capacity across the Middle East as and when the conflict does end. And then above and beyond that, obviously, we've seen reescalation in the price of natural gas in Europe. So would love to hear your views around rationalization out there. And then on the demand side of it across a variety of chemical gains, it seems that particularly in Asia, we saw a fair amount of inventory destocking -- so could we potentially over the next couple of quarters, expect on the demand side of things, a restocking cycle as well?

Hassan. Well, that's a lot of questions you put in there. I tried to take some notes, and I will try to get to all of them. So listen, again, in terms of short-term supply-demand implications, we saw a run-up in Q2. So looking backwards, we did see a run-up in chlor-alkali and PVC operating rates in Q2. Yes, you did see a lot of the Asian ethylene-based producers cut back. Carbide ramped up, even Europe ramped up and had a spike in operating rates in Q2. but we have seen those reverse. So like I said, there's a bit of a -- we had this lump in Q2 of production. Now people have cut back on operating rates, and that's going to start to filter through into the market. as we go through the third and the fourth quarter. I'm not as much worried about what's happening in terms of the return of capacity in the Middle East. That is much less of a concern for me. I think -- the reality of it is, it is hard to put this genie back in the bottle, and I'm not sure exactly when things are going to settle down there. So that's less of a concern. I think the thing that we're going to watch is going to continue to be around what's happening in -- primarily in China and what are they doing with their assets. We have seen operating rates in China already reduced in the third quarter. And again, it takes a little bit of time for that to filter through into the supply-demand balances, but it will. And that, combined with some outages that we see particularly coming up here in North America should be constructive for supply/demand as we finish out the year. Going back to Europe. Europe, again, we did see a run up in operating rates there. But you saw that come back as prices began to normalize and the fear of not being able to get product sort of waned, I would say. And your final point there around destocking is 1 that's going to be really important to watch, because I do think the buying pattern that we have seen from customers is initially, yes, they were trying to buy to be ahead of any disruptions. But now I think what you see is the behavior is they're going to consume their inventory because they're hoping that prices or costs will come down in the future. So yes, that is certainly a situation that could change here that all of a sudden, people do need to restock and demand -- the apparent demand may improve. But I just want to reiterate, underlying housing, underlying automotive demand is still it's stable, but it is not recovering yet. So all of these dynamics are very volatile. They're hard to predict. And frankly, that's why we gave a pretty wide range for the third quarter outlook that we did.

The next question will come from Gabe Hedged with Wells Fargo.

Ken, Todd I wanted to ask about kind of the 4.5x leverage target at the end of the year. And you've kind of given us some building blocks, Todd, I think, about the normal -- when I look at the model, $200 million, give or take, on working capital release and a $100 million payment -- so I'm kind of getting net debt maybe at $2,750 by the end of the year, which would kind of imply a full year EBITDA of $610 million. And then I'm trying to kind of juxtapose that, I guess, with some comments that you're making, Ken, about improved dynamics in the fourth quarter for the chlor alkali business?

Thanks for joining. I'll start and then I'll let Todd add to it. First, I just want to emphasize that as we have been saying over the course of the second quarter. And as we talked about our merger with Huntsman even for Olin deleveraging is going to be a priority. And that is something that we'll be very focused on -- the teams here are extremely focused on cash generation and reducing working capital and managing that very carefully. I think you've got to realize that there is a lot of volatility in the world around things that are going on with the geopolitical environment that we're in. And that is not going to change anytime soon as I just mentioned. So we saw the run-up in Q2, which was very beneficial for us. You saw that in our results. We're going to see a little bit of give back here in the third quarter as prices, especially in the export markets, reflects some of the pullback in terms of the costs and the results of customers, again, maybe trying to buy ahead a little bit of a lot of uncertainty. I think people are getting more comfortable living in an uncertain world for what that's worth. But what won't change is that there is going to be outages that are occurring. And if you think back to the end of last year, we were already in an environment where industry rationalization of capacity relatively good demand. Yes, it's not growing right now, but it is stable. So in the face of all of that, we were seeing things begin to improve already. And I think that's what I'm saying is you're going to get back to a more stable environment that reflects what we saw kind of late Q1 and even in the latter part of Q2, but that spike that we saw in Q2 is going to be an anomaly here as things try to find a more balanced way forward in a very uncertain world. But Todd, I'll let you talk to the...

Gabe, thanks for the question. We obviously do not provide annual EBITDA outlook, but we do expect net debt to increase year-over-year from year-end '25 to year-end '26. As I said, driven by the roughly $195 million of legacy litigation payments that we're going to be obligated to make during 2026. So we would expect to end the year in that 4.5x range on leverage. I just want to remind everyone on the call about cash flow. When you think about our trailing 12-month adjusted EBITDA here in the end of June is roughly $570 million. And when you look at that number, Olin generated roughly $100 million of levered free cash flow in the last trailing 4 quarters even at those levels of adjusted EBITDA. That cash flow has really been utilized to repay legacy litigation matters. But and that when I talk about levered free cash flow, that's after paying the dividend, that's funding all of our capital spending, paying all our interest, all our capital allocation priorities. So Olin does generate cash flow at very low levels of earnings, which is, I think, a distinction among many of our commodity chemical peers.

The next question will come from Josh Spector with UBS.

It's Chris Parel on for Josh. Ken, for the AV business, with the VCM fix in place, do you expect to get that $20 million back in the fourth quarter? And then for epoxy, -- do you -- how large is that FIFO headwind in the third quarter? And is pricing elevated enough to offset increasing raw materials? Or do you need another round to kind of keep things where they are.

Yes. So listen, as we get the VCM asset back to full capacity at the end of the quarter here, we do expect to see recovery of that in the fourth quarter. All that is going well at this point. So Todd, do you want to take the second part of that question?

Yes. Sure. No problem. Epoxy has announced price increases here in the third quarter commensurate with increased hydrocarbon and raw material costs that they've seen most recently by the most recent escalation of the conflict in the Middle East. And we would expect it net to be a headwind on FIFO between Q2 and Q3. But we clearly expect Epoxy to continue to generate positive EBITDA for the third quarter.

The next question will come from Matthew DeYoe with Bank of America.

This is akin Seton for Matthew D. You guys mentioned that U.S. epoxy resin demand experienced seasonal improvement. -- what was the main driver? And do you expect it to continue into Q3? And then in Europe, what needs to happen for demand to improve is just more construction and industrial demand?