Earnings Call: Q4 2019

Feb 5, 2020

Good morning, and welcome to the Olin Corporation Fourth Quarter and Full Year 2019 Earnings Conference Call. All participants will be After today's Please note that this event is being recorded. I would now like to turn the conference over to Logan on, of course, the Olin's Director of Investor Relations. Please go ahead, Ms. Good morning, everyone, and thank you for joining us today. Before we begin, let me statements regarding estimates of future performance. Please note that these are forward looking statements that actual results could material could differ materially from those projected. Section of our most recent Form 10 K and in yesterday's 4th 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. The earnings press release and other financial data and information are available under Press Releases. With me this morning are John Fisher, Olin's Chairman, President and Chief Executive Officer Pat Dawson, Executive President and President, Approxine International Jim Barlick, Executive Vice President And Chief Operating Officer and Todd Slater, Vice President And Chief Financial sir. We will begin with our prepared remarks, and thereafter, we will be happy to take your questions. I will now turn the call over to John Fisher. Sean. Thank you, Logan, and good morning, everyone. I will begin today by reviewing Olin's full year 2019 results. Then I will provide an overview of each of our business and conclude with some comments on our near term and long term outlook for Olin and the markets in which we participate. With that, let's turn to Slide 3. During the fourth quarter of 2019, Olin reported adjusted EBITDA of approximately $173,000,000, 2019 adjusted EBITDA of 941 the challenging macroeconomic environment that developed during the year and worsened during the fourth quarter. In particular, the chlor alkali products and vinyls business experienced a broad based weakness in demand from Urethane, agricultural, refrigerant, alumina, and pulp and paper customers. The epoxy business also faced weaker demand from automotive, electrical laminate and industrial coatings customers. As you can see from the chart, the lower product the $1,000,000 from 2018 levels and the deterioration in our Epoxy business was approximately $260,000,000. There were a number factors that help partially offset these price declines. Lower raw material costs of approximately $130,000,000 in our chlor alkali products and vinyl primarily related to lower electricity and ethylene costs. We realized lower raw material costs in the epoxy business of approximately $215,000,000 primarily benzene and propylene. Olin accelerated its ongoing activities to lower our cost structure into improve our efficiency. Operating and administrative costs in 2019 were approximately $90,000,000 lower than 2018 levels. As a point of reference, since late 2018, Olin's total employee and contractor headcount was reduced by approximately 6 in 2020. Now we'd like to take a more detailed look at the quarterly results for each of our business segments starting with chlor alkali and Vinyls segment was $142,500,000, As previously discussed, this decline was driven chiefly by them declined approximately 24% when compared to the fourth quarter of 2018. At the same time, year over year ethylenedichloride experienced power lower pricing of approximately 23% and hydrochloric acid pricing declined approximately 40%. Partially offsetting this year over year pricing pressure was the improved cost performance as well as the lower raw material cost just discussed. Now let's take a closer look at caustic soda pricing, which is on Slide 5. During the fourth quarter and into January 2020, caustic soda prices continued to have remained relatively steady primarily due to strength in the vinyl sector, which increased the supply demand in balance that has existed for much of the past 15 months. The caustic soda price decline has been particularly pronounced in export market, where pricing indices were down more than 18. Expert caustic soda pricing has declined to levels last seen in 2010. Domestic pricing while lower was more resilient due to support from a relatively stronger domestic demand environment and the overall cost to service market. A portion of fourth quarter January declines in the price indices will be experienced in our system as we progress through the early months of 2020. Let's now talk about Appoxi segment, which is shown on Slide 6. APOCI's of $36,200,000 in the fourth quarter of 2019, which represented an 18% decline from the level achieved in the prior year period. The year over year decrease primarily reflects lower resin pricing due to lower demand in our key markets, a trend that has challenged the business for the last 15 months. Partially offsetting these market conditions during the period were lower raw material costs, primarily benzene and propylene and lower operating costs, driven by our ongoing productivity efforts. That said, the year. The Epoxy segment generated $154,000,000 in adjusted EBITDA for the full year 2019. While not the year over year improvement that was originally anticipated, it was strong performance in the face of a challenging market landscape. We and we continue to believe that the strength of the epoxy business is chlorine integration and potential and in the potential epoxy resin prices, which is shown on Slide 8. During the fourth quarter, liquid epoxy resin pricing continued to decline in all regions. Average global epoxy resin pricing declined 20% over the course of 2019. Ongoing demand weakness from global automotive, global electrical laminate, and industrial coatings customers has led to global price erosion. We also believe deceleration in multiple geographic regions has led to cautious buying behavior and inventory management by customers during the period. Now let's turn to our Winchester segment on Slide 8. The Winchester business continued on a positive trend, posting its second consecutive quarterly year over year increase. 4th quarter 2019 adjusted EBITDA was $12,500,000, which represents a 33 operating costs. Lower year over year pricing partially offset these improvements. 2019 also marked the 1st year over year increase in annual adjusted EBITDA since 2016, which was the last year of surge buying in the industry. This of ongoing cost reduction efforts in As you all know, Olin is primarily a commodity chemical producer with limited ability to influence price in large global commodity markets. Given the uncertainty surrounding pricing for our chlor alkali and epoxy products, and the significant and We will continue chemical products and other key metrics, which are included the chemical pricing. January 2020 pricing for caustic soda ethylene dichloride and other chlorine derivatives as well as epoxy resins are below 2019 full year averages. If these levels of prices are maintained throughout 2020, the impact of pricing on 2020 results compared to 2019 would be in the $250,000,000 range. During January, we have seen demand across our chemicals portfolio consistent with 4th quarter levels. We expect lower raw materials in both our chlor alkali products and vinyls and epoxy segments to be in 2020 compared to 2019. The lower costs are related to electricity ethylene, benzene and propylene. We will continue to focus loss and expect them to decline in 2020 compared to 2019. We are also anticipating an increased contribution from our Winchester segment primarily driven by the uplift from the Lake City U. S. Army ammunition contract beginning in fourth quarter of this year. As we have previously discussed, our Winchester business secured a multi contract with U. S. Army to operate the Lake City Army ammunition plant in Independence, Missouri. Upon completion of the 1 year transition period, we expect this tier contract will drive a significant increase in annual profitability for Winchester starting in fourth quarter of this We estimate increased annual revenue of between $450,000,000 $550,000,000 and corresponding increased in annual adjusted EBITDA of $40,000,000 to $50,000,000. I would like to underscore the long term out now like to underscore the long term outlook for this is where currently experiencing. We continue to believe that market fundamentals will be supported and bolster by long be demand and announcements of additions to meet this projected demand growth. And as a reminder in December, Olin announced chlor alkali products capacity reductions. The U. S. Will continue to enjoy a sustained energy and feedstock advantage over the rest of the world Current industry economics do not support world scale chlor alkali capital investments and ultimately over the long term, supply and demand balances will tighten resulting in upward pricing momentum for Olin's caustic soda chlorine and chlorine derivative products. Similarly, the epoxy business, we see global demand growth and minimal capacity additions. Before I turn the call over to Todd, I'd like to emphasize that Olin remains on very solid financial the normal quarterly dividend and before the one time investments that Todd will discuss. And this assumes a full year negative impact of no change in the current product pricing and no positive cost offsets. With that, I'll turn it over to Tom. Thanks, John, and good morning, everyone. Let's turn to our full year 2019 cash flow detail, which is on Slide 11. We generated approximately $252,000,000 of free cash flow in EBITDA of $941,000,000, which is in the far left of the waterfall chart. We deduct $36,000,000 in cash tax payments which are almost all attributable to earnings in foreign jurisdictions. Column 3 reflects our capital spending of $386,000,000, which includes annual maintenance capital spending, and the investment associated with our multi year information technology integration project of approximately 56,000,000 As we've previously discussed in 2017, we began a multiyear project to implement new enterprise resource planning, manufacturing and engineering systems across the chemical businesses. The project includes the required information technology infrastructure. Now turning to the 4th column, one time items include information technology integration costs, cash restructuring costs of approximately $100,000,000. This includes approximately $49,000,000 of IT and integration project costs that I just spoke about and approximately $28,000,000 of duplicate IT costs being incurred during the transition. These costs were partially offset consolidate affiliate during the first quarter. The next column represents our cash interest expense for 2019. As of December 31, we had approximately 5% of our debt at variable interest risk. In the next column, We had an $11,000,000 decrease in working capital in 2019, primarily as a result of lower accounts receivable attributed to lower level of sales in the fourth quarter of 2014 which was offset by a reduction in the sale of receivables under our factoring program. In the far right column, we had $252,000,000 of free cash flow. Now I'd like to move to Olin's investment requirements in 2020, which we'll review on Slide 12. In order that are outlined on this slide. The final ethylene tranche payment of approximately $493,000,000 at year end This will provide ethylene at producer based economics needed to supply the new VCM contract, which will commence at the beginning of 2021. A total of approximately $110,000,000 for the capital project costs and duplicate IT costs being incurred during the transition of our multi year information technology integration project. This project is winding down by theendof2019approximately30 5% of Olin's chemical users were successfully converted to the new systems. During 2020, most of the remaining chemical users will be converted which were assumed during the 2015 Dow acquisition and will become callable in the fourth quarter of 2020. With a call required for catalysts for improved cash generation beginning in late 2020 and fully in 2021 and beyond. Regardless of the market environment, the cash flow benefits are highlighted on slide 13. In 2021, we expect incremental annual cash generation of approximately $250,000,000 from the initiatives that I just discussed. The refinancing of the high cost bonds are expected to reduce interest expense by $50,000,000 to $70,000,000 annually, winding down of the multi year information technology project will save approximately $110,000,000 between capital and expense. The vinyl chloride monomer contract, which is transitioning from total manufacturing arrangement that's been place since the acquisition to a direct customer sale agreement beginning on January 1 2021. The VCM facility is on our chlor alkali products and vinyls results. The full year effect of the new Lake City U. S. Army Ammunition contract And finally, one initiative announced in December and was and operating costs from the permanent shutdown of a chlor alkali plant with a capacity of 230,000 tons and Olin's vanilla Dean chloride production facility in Freeport, Texas. These closures are expected to be completed before the end of 2020 These closures will allow Olin to optimize its chlor alkali operations and cost structure in Freeport, Texas. $35,000,000, not $75,000,000. These cash flow enhancements of approximately $250,000,000 provide significant incremental cash to Olin independent of industry conditions. Now I'd like to conclude with Olin's priorities for free cash flow, which is on Slide 14. During 2020, our priorities for free cash flow will be returning capital to our shareholders through our on Friday, January 24th, Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on March 10, 2020 to shareholders of record at the close of business on February 10 2020. This is the 3 73rd consecutive quarterly dividend to be paid by the company. Operator, And our first question will come from Neil Kumar of Morgan Stanley. Please go ahead. Hi, good morning. I know that you provided, I know you mentioned that, January costs and ADC prices are approximately 15% below the average 2019 price. Just give us a sense of what type of EBITDA headwind that could translate to assuming prices remain at January levels? We made comment and just made a comment in the remarks, it said if all prices that we discussed, which was caustic BDC, HCL and then epoxy resins remain at current levels throughout the year. The negative impact would be approximately $250,000,000. Thank you. And then you talked about some cost containment productivity initiatives in 2019. To offset the cost of pricing weakness. Can you just give us a sense of some examples of this and what initiatives you have in place for 2020? Addition to the planned closure as you reduced your costs by $35,000,000? Well, we talked about pretty significantly lower raw material costs, both in the chlor alkali sector from electricity and ethylene and in the epoxy sector from benzene and propylene. And we also talk about a 6 benefit just from that because that was not in place all year in 2019. And we expect to reduce that headcount additional 4% in 2020. We also expect, again, to benefit from lower raw material costs, both on the electric and ethylene side as well as benzene and propylene. And our next question will come from Kevin McCarthy of Vertical Research Partners. Please go ahead. Yes, good morning. On Slide 12, you show an expected payment of $493,000,000 to procure more ethylene. My recollection is that, you had an option to do so. And so my question is, If we fast forward to December and it turns out that ethylene prices are quite low for whatever reason, you have the ability to defer that payment? Would that be feasible or impractical? I think that is totally impractical. It allows us access the cost base ethylene for 20 years. It matches up with the new vinyls contract. We've all already negotiated. So I would say that and as Todd mentioned in his remarks, vinyls is 1 of the 2 months that plant is 1 of the 2 most important plants in our system. And we're not going to do anything to jeopardize that. So that's in our mind not practical. Clarification. Second, I wanted to ask about working capital. Todd, if we look at the balance sheet, accounts receivable, for example, declined $16,000,000 year over year or about 2% Looks like payables were up. Can you speak to those line items in the context of the relatively large price declines that you quantified in the prepared remarks. Why did we not see more of a change there? Kevin, a good question. In receivables, we do factor our receivables. So some are sold. So year end to year end directionally, you're looking at about $70,000,000 and less receivable sold. So when you factor that in, to the equation, receivables was actually down fairly consistent with the sales change. And accounts payable and you see inventory is down as well. Those are much more in line. I see. Thank you for that clarification. And our next question will come from Don Harson of Susquehanna Financial. Please go ahead. Thank you. John, it seems you're kind of in a situation where chlorine demand is stronger than caustic demand. So with early restocking in PVC domestically boosting chlorine demand, how do you see industry operating rates in OLED operating rates in chlor alkali for the 1st and second quarters on a year over year basis? What I'd like to do is answer that historically. We believe from the time we made the Dow acquisition through the end of 20 18, Olin's operating rates were actually slightly better than the industry. In 2019, we believe that reversed. We have a significantly larger exposure to the urethanes chain, both MDI and propylene oxide producers. And then we do change. So I believe in 2019, our operating rate was probably a little bit lower than the industry. And I would suggest that based on what we've seen so far in January that will continue early in 2020. Okay. And then just switching to epoxy. So given the level of demand and where raws are, is the 4th quarter EBITDA roughly $36,000,000, is that kind of a good run rate for each quarter as we go through 2020 or do you see any potential upside? Well, the run rate is heavily influenced by turnaround schedules. I would suggest based on the turnaround schedule, we forecast that you're going to see a weaker level in Q2. And then seasonally, we typically see Q3 be stronger. And I would say if you looked at the pattern we saw in 2019, that's a good pattern. And final question, just on Winchester, you've talked in the past about a lot of channel inventory and customer inventory. Where do you think we are in that right now? Think where the point where industry small caliber shipments can actually equal final ultimate demand? I think we saw that developing as we move through 2019. I think the one wildcard that the industry faced is the withdrawal of Walmart from certain industry categories specifically pistol ammunition and modern sporting rifle ammunition, which they essentially exited the business by December 1st sold out their entire inventory. So I actually think we saw some purchasing at the end of the year in excess of what we would normally see. And we're going to see inventory replenishment, but it's not at Walmart. So the what I'll say is the view is a little muddled at the moment. And our next question will come from Frank Mits of Fermium Research. Please go ahead. Yes, good morning folks. Listen, regarding the chlor alkali shutdown announced in December, so hoping you might talk a little bit more about the thought process. Behind that. I guess I'm assuming that's that was on the higher end of your cost curve. Do you anticipate other shutdowns either by yourselves or by the competition? Well, Frank, we announced that as part in concert with the shutdown of a chlorine derivative, which we've seen just declining demand to the point where it doesn't make sense to run the plant. And that just gave us the opportunity to shut down the chlor alkali plant that feeds it or on the site, it actually creates less demand. I'm not sure I want to comment on what other people are going to do. We're going to manage our system to optimize our costs. And if we get in a place where plant makes no from an economic perspective, we will take action. Got you. Got you. And, just curious, I mean, I know it's very early days with respect to the coronavirus, but it seems to be a topic that comes up everywhere. And you're just my gut would suggest that Olin might be a beneficiary in terms of disinfectants, etcetera. Are you seeing any change in purchasing patterns with respect to the coronavirus? Yes, Frank, this is Pat. Listen, first of all, I think it's important to remember that our exposure is Olin is very very small. China represents less than 5% of our overall revenues. We do have do have an epoxy plant over in China that serves mainly our downstream markets and this facility is currently as it normally is this time of the year and we'll start back up next week. So really at the moment, back to your question, we haven't really seen any direct impact to our businesses. But we're monitoring that and watching it very closely to see if it could benefit us on the chlorine side as this evolves? Yes, no, I would have anticipated that you would have seen bleach sales and chlorine sales move up. But at this point, it's too early it's too early to make that call? Yes. All right. Thank you so much. Our next question will come from Mike Sison of Wells Fargo. Hey, guys. Good morning. When you talked about the $250,000,000 negative for pricing in 2020, if prices remain at 4th quarter levels, Is that more front end loaded? Does it primarily hit you in the first and second quarter? Any thoughts on how that flush us through? Let me clarify something. That's based on that $2.50 is based on the pricing we saw in January, not 4th quarter. And obviously, if you're looking at year over year comparisons, the gap narrows as we move through the year. Okay, great. And just I know it's tough to forecast and predict, but what do you think needs to happen to to get some momentum in caustic prices as the year unfolds? Mike, this is Jim. What we really need is we need that the industrial production side of things to grow. We, we'd love to see a pickup in the automotive market. Also the some of the aluminum markets like Arrow space, aircrafts, commercial aircrafts and so forth. And if we saw those pick up, that would obviously start to rebalance things between 4 with chlorine and caustic side. Great. Thank you. Our next question will come from Jim Sheehan of SunTrust. Please go ahead. A question on your earnings power. If we look back at 2014, your pro form a EBITDA was $1,000,000,000. Since then, the caustic soda index prices are up a bit and chlorine and EDC prices are down, but natural gas prices have dropped from around $4 to $2.50. That should have given you a net EBITDA tailwind. And then when you consider cost synergies, of $250,000,000 in revenue synergies on top of that, you should have been able to generate about $1,300,000,000 or $1,400,000,000 of EBITDA in 2019. Based on your sensitivities. But you did $941,000,000 in 2019. That's about $60,000,000 below the level of pro form a 5 years ago. How do you explain not being able to grow EBITDA over 2014 pro form a? I would say, I think you've thrown a lot of things at us there. And I would prefer to write down what you said and get back to you on that point, because we're not going to pound through the pro form a and all the differences that I'm not saying you're wrong. I'm not sure exactly about veracity of everything you said. Okay. Fair enough. Now like your EBITDA is declining in 2020 at the current price levels, which means your net debt to EBITDA ratio might be rising if pricing continues to erode, are you in any danger of tripping debt covenants this year? Jim, as you know, in December, we agreed at our bank agreements, that expands our leverage ratio for the next two and a half years, to which should enable us to ensure a level of compliance. And So we would expect that we will be fully in compliant, including the investments outflows in 2020. With our bank, with our bank agreements. And don't forget about the $250,000,000 of incremental cash flow that starts in late 20 and is full bore in 2021. And our next question will come from Matthew Blair of Tudor, Pickering and Holt. Please go ahead. Good morning. Thank you. John, you mentioned that the pricing environment was clearly pretty tough in Q4. Could you just provide some commentary on just overall volumes and, just overall demand trends as you progress throughout the quarter? Would you say that December was either stronger or weaker from a volume standpoint, compared to October? Well, in October, we had some turnarounds, so that's not a valid comparison. I would say that what we saw in December in the fourth quarter generally was quite a bit weaker than what we saw in the 3rd quarter. And that was across the spectrum of chemical products. Got it. And then, any thoughts on EDC's supply demand, it looks like several new EDC plants in South Korea and China this year could raise global capacity by over 3 percent. What do you project for demand? And is there a concern that EDC might weaken as you progress through the year? I don't know. I'm not going to forecast what it's going to do. What I would say is we've actually seen EDC in January February. And as we look at March, 10 tick up in terms of in and tick up a little bit in terms of pricing. Sounds good. Thanks. Our next question will come from Eric Petri of Citi. Please go ahead. Good morning. So U. S. Export prices for caustic soda declined to $200 to $2.50 per ton. Can you just talk about the arbitrage windows that are still existing for you and talk on how you're seeing transport costs develop? Obviously, the best arbitrage role in is to stay out of the straight export market. And I would say when you look at those prices, those are prices that all sold out. Our best situation is to continue to sport, if you will, into Latin America, where we continue to build out a distribution system and where we get prices significantly higher than what you see epoxy price initiatives. Have you done the same? And then broadly, could you change your strategy to go more downstream to support that near term earnings target of $250,000,000 EBITDA? Yes, Eric, just a couple of comments. First of all, We had increases out there in January. We had very modest success with that. We do have increases out there for February as well. And your last point, we do continue to build our downstream businesses around formulated products around wind and a few other areas. So that is a part of our strategic thrust well. But I want to emphasize, we are at our core chlor alkali producer, which means we are going to stay the upstream of the epoxy chain. That's where our strength is and that's what we're trying to leverage. Our next question will come from Mike Lihid of Barclays. Please go ahead. Thanks guys. Good morning. Good morning. Thank you. Just two quick ones on the input side of the equation. First, on your chlor alkali EBITDA sensitivity Abel. I noticed you added a little asterisk where you mentioned there might be some impact to the sensitivity because of your hedging activities for inputs. So guess, can you just give us a sense of the level of impulse benefit you expect to realize in 2020 since my guess is it's probably less than what the sensitivity would imply given where natural gas prices are today? This is Todd. If you as you as everyone on the call knows, we're a hedger We do hedge gas and ethane for ethylene needs on our rolling 4 core 4th quarter basis. If you look today at where our hedge position is for natural gas and ethylene ethane for 2020 as well as a current futures number for 2020. You're probably looking at good news year over year 'twenty versus 'nineteen in the $40 plus 1,000,000 range. Got it. Okay. That's helpful. And then to tie in with that, you mentioned earlier kind of the rough $50,000,000 headwind number on pricing. If we run rate January numbers, is that net of this benefit from cost reduction or is that just purely run rating gross pricing? That is run rating gross pricing. Okay, perfect. Thank you. And our next question will come from Stephen Byrne of Bank of America Please go ahead. Hi, you made some comments about the supply and demand imbalance on the chlor alkali chain that's leading to the lower pricing in caustic, but you had pricing on the chlorine derivatives are not very favorable either. Is it your view that chlor alkali in the industry is too fragmented for for there to be any idling of capacity to tighten this market up and drive pricing up? No, I don't believe that at all. I think if you looked at the industry operating rates, they're in the mid-80s. So we're just we're suffering from 2 things. We're suffering from lack of overall demand and then the imbalance between chlorine and caustic at less than optimal levels. Well, maybe an extension of this then on the epoxy side, you commented about some of the end markets being weak, and yet your volumes went up. Is that logical to push more volume in a declining price environment or do you have the ability to tighten that by cutting back on production rates? Yes. The thing I would point out is that in 2018, we had 2 very significant 60 day turnarounds, 1 at our plant in Europe, 1 at our plant in the United States. So the 2019 volume increase would been expected under all circumstances. And then I have one question on, your SG and A expense. It looks like you trimmed it in 2019 versus 2018 and perhaps that is a reflection of that headcount reduction that you mentioned earlier. But if you go back to a few years post the acquisition from Dow, the SG and A expense was lower. What has been driving that up to more than offset the cost synergies from that acquisition? Todd. One of the big items that runs through SG And A that has gone up from, I'll say, 2016, early 2017 levels the cost associated with this IT integration project. And that number was about $77,000,000 in, 2019. So that's the big driver from what your reference several years ago, but today, SG and A was down in 2019 versus 2018 in spite of $40,000,000 of higher IT integration costs. Year over year. It was legal, consulting, incentive, stock based compensation. I mean, it was lower costs generally across the board. And again, we keep emphasizing that project is scheduled to conclude at the end of 2020 and we talked about $100,000,000 of less spending in 2021 split between capital and expense. The expense piece of that is part of the G And A. Okay. Thank you. And our next question will come from Hassan Ahmed of Alembic Global. Please go ahead. Morning guys. You guys were kind enough to share with us that if we were to mark to market pricing at January levels, it would be around a $250,000,000 EBITDA hit. Now obviously we've seen crude oil prices and crude linked sort of raw material prices come down a fair bit. We've seen similar sort of dynamic mix happen on the nat gas side of things. So what would that number EBITDA sort of benefit wise look like if you were to mark to market raws where they are currently in January, obviously taking into account the hedging activities and the like to mention. What we said in the remarks qualitatively, we expected raw material costs in both chlor alkali and epoxy to be down. Todd just gave a number associated with natural gas and ethane of $40,000,000 to $50,000,000. And I can tell you on the epoxy side, a similar number to that and there are some other benefits coming from that. Understood, understood. Very helpful. Now moving on, in Q3, during the conference call, you guys talked about sort of continued destocking in caustic. I mean, with pricing sort of sliding more, I would imagine that sort of destocking continued through Q4 as well. So where do you see sort of industry inventory levels right now? This is Jim. I think you're correct from a customer standpoint within a declining price environment, it's natural for them to run inventories down and that started. As early as the third quarter and moved through the end of the year. So we believe that customer inventories have moved down I can't really speak to producer inventories. All I can say is that Olin's inventories are lower at the end of the year than they were in the third quarter. Super. Thanks so much guys. And our next question will come from Jeff Zekauskas of JP Morgan. Please go ahead. Thanks very much. You're shutting down a chlor alkali plant in a VDC plant You talked about the chlor alkali plant being 230,000 tons. Maybe the VDC plant buys some caustic soda and maybe you're not running at a high rate if the plant you're going to shut down. So What's the net capacity closure really for the industry and the shutting down of those units? And do you plan to shut them down in the first half? With the second half? The capacity around chlorine and caustic soda is as we stated 230,000 tons. We plan to shut these down in the second half of the year. We have contracts on the VDC side to run out, and that's then we'll be shutting them down. Okay. And when you totaled up your I think it's $105,000,000 in transition costs and additional working capital for Lake City in 2020. Would there be more in 2021 in terms of building working capital or would we be done? Assuming that the business level at Lake City from the Army remains at a constant level, we would be done. Okay, great. All right. Thank you very much. And our next question will come from Arun Vishwanathan of RBC Capital Markets. Please go ahead. Great. Thanks. Good morning. You guys delineated the price impact around $250,000,000, but just curious on the volume side last year when you provided guidance in Q2 and Q3, you thought volumes would provide an over $100,000,000 uplift in the second half I guess did that materialize? And if not, is that something that we could look forward to, when markets recover? That did not materialize. We said that the economic climate for us weakened throughout the year and that weakness accelerated inside urethanes, we would hope very much that there's a potential uptick in 2020 on a volume. Perspective. Great. So just going with that, I guess, in the past, you've provided a different walk to mid cycle EBITDA in the $13,000,000,000 to $15,000,000,000 range of annual EBITDA. Is that, I guess, deal within the room of possibility, and what would it really take? It seems like there's been not a large amount of capacity additions in chlor alkali. You guys are potentially shutting down a facility or are I guess, are you surprised at all that pricing has been so difficult in many of the products? Especially since if supply is tight right now and you're still not able to achieve some pricing. I know that demand obviously been weak, but is there anything other than weak demand that's realizing or resulting in this weak price capture? Thanks. From our perspective, we believe it is weak demand that is driving the prices down. You asked what would take to get back up into the $1,100,000,000. We talked about we experienced $450,000,000 of negative price on caustic soda plus the epoxy resin chain in 2019 versus 20 18. And if I add that back to the EBITDA 2019, we actually exceeded 20 eighteen's EBITDA. All the things being made, obviously they're not, but. Right. And then just lastly, just going back to the restructure question, I guess, why wouldn't there be any further transactions when I look at operating rates, I guess, in the mid-80s, and then the potential for relatively attractive North American production base, it would seem that that some players may want to end or maybe from an international standpoint or whatever it is in the caustic and you put more consolidation. Do you expect more consolidation in this space? And would you be in a position to drive that? Thanks. I think it is from our perspective, highly unlikely that Olin given its current market share in North America could participate in the consolidation. Thanks. And our next question will come from John Roberts of UBS. Please go ahead. Thank you. Back to Frank's original question on China, would you hazard a guess as to how much of the cost of capacity in epoxy capacity in China is operating at below normal rates right now? This is Jim. That's a pretty tough, tough call to make. I would say that there's a they did extend the Chinese Chinese New Year. They extended that and they do have plant their plants down. I can't give you a number on that. But I would just say that there's, there's obviously more shut down than there traditionally is, even though you're in the winter time periods. That's about as good as I can do, John. Okay. And then just an accounting question here, Todd, on the $75,000,000 for the VCM contract change, I assume that's primarily the expected margin on the ethylene that you're going to get. What's the revenue change associated with going to consolidating the VCM sales? And how much depreciation do we put against that $75,000,000? Can we just take the $493,000,000 and straight line it over 20 years? I'll start with the back and work my way forward. Yes, the $493,000,000 divided by $20,000,000 will be the amortization. That's right. We've not given a guide on revenue, but the revenue effect will be higher than the 70 $5,000,000. That is clearly a net number. As there are no further questions, this concludes our question and answer session. I would like to turn the conference back over to John Fisher for closing remarks. Please go ahead. I'd like to thank you all for participating in our call today, and we look forward to talking to you at the end of the first quarter. Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.