Earnings Call: Q3 2019

Nov 1, 2019

Good morning, and welcome to the Olin Corporation Third Quarter 2019 Earnings Conference Call. All participants After today's presentation, there will be an opportunity Please note this event is being recorded. I would now like to turn the conference over to Logan Bonacorsi, 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 remind you that this presentation, along with the associated slides in the question and answer session following our prepared remarks, will include statements regarding estimates of future performance. Please note that these are 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 3rd 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 Vice President and President, Epoxy And International Jim Varlick, Executive Vice President and Chief Operating Officer and Todd Slater, Vice President and Chief Financial Officer. We will begin with our prepared Thank you, Logan, and good morning, everyone. Today, I will begin my remarks by discussing the key points from the third quarter, followed by our updated outlook chlor alkaline epoxy and conclude with the Winchester segment. With that, let's turn to Slide 3. During the third quarter of 20 team own reported adjusted EBITDA of approximately $293,000,000. While this represents a year over year decline, Results for the quarter improved 43 percent sequentially despite a challenging economic backdrop. 3rd quarter results benefited from lower planned maintenance turnaround costs, strong operating performance, the resolution of the one time events that affected the epoxy business during the second quarter as well as seasonally higher volumes across our business segments. However, several challenges during the period work to offset these positives. Beginning in the middle of third quarter, we saw a significant slowdown in demand from a broad spectrum of chemical customers. We experienced lower than expected demand from Urethane, agricultural, refrigerant, alumina, pulp and paper, automotive, electrical laminate and industrial coatings customers. In addition to lower volumes, lower customer demand negatively affected prices for several products. We experienced lower pricing for caustic soda, ethylene dichloride, hydrochloric acid, chlorinated organics and epoxy resins. Moving now to 19 adjusted EBITDA to be between $930,000,000 $980,000,000. This compares to full year 2018 18 adjusted EBITDA of $1,265,000,000. The year over year decline in adjusted EBITDA can be primarily attributed to 3 factors. And approximately $325,000,000 impact from lower caustic soda pricing lower epoxy resin pricing, partially offset by lower maintenance turnaround costs. Looking ahead, We expect As a result, we anticipate our fourth quarter adjusted EBITDA to decline when compared to the third quarter of 2019. The 4th quarter may represent the lowest earnings quarter of the year. The key assumptions behind this forecast are lower caustic soda ethylene dichloride, hydrochloric acid, chlorinated organics and epoxy resin pricing, lower volume levels in the chlor alkali and epoxy, lower operating rates in the chemical business due to seasonally weaker demand coupled with seasonal inventory destocking and 4th quarter turnarounds. Now, we'd like to take a more detailed look at each of our business segments, starting with chlor alkali products and vinyls, which is on Slide 5. The chlor alkali products in vinyls business experienced lower demand from a broad spectrum of customers, including urethane, agricultural, refrigerant, alumina, and pulp and paste customers. As an example, a major chlorine customer did not buy any chlorine over a 4 week period beginning in September. The slower demand negatively impacted both volumes and pricing. 3rd quarter 2019 adjusted EBITDA for the chlor alkali products in Vinyls segment was $234,900,000, representing a 29% system has declined more than 20 percent or approximately $90,000,000 when compared to the third quarter of 2018. Coronated organics and hydrochloric acid pricing also declined year over year. Volume levels for caustic soda chlorine, chlorinated organics and hydrochloric acid all declined year over year. Offsetting some of this year over year pricing and volume pressure were lower raw material and operating costs. Looking at the fourth quarter of 2019 and given the current demand environment, We expect results for the chlor alkali products and vinyls segment to be lower sequentially and to likely represent the lowest earnings quarter of 2019. Now let's take a closer look at caustic soda pricing, which is on Slide 6. Caustic soda pricing in Olin system declined in the third quarter. The price decline was particularly pronounced in the export market where caustic soda pricing indices were down $55 per tonne in the third quarter, and $25 per ton additionally in October. Domestic pricing port from a relatively stronger U. S. Economy and the cost to serve that market. Looking ahead, we expect the current weak and caustic soda demand to continue in the fourth quarter and potentially into 2020. Let us now move to the performance of our APACI segment which is on Slide 7. During the third quarter of 2019, Olin's epoxy business generated adjusted EBITDA of $51,100,000, a 9% decline from the level achieved in the third quarter of 2018. While these results fell short of our expectation, the 1st 3 quarters of 2019 represent Olin's strongest 9 month period for this segment since the acquisition of Dow chlorine products businesses in 2015. The gradually improving trend in epoxy results highlight the strength of the businesses chlorine integration and the potential longer term earnings power. Looking ahead to the fourth quarter of 2019, we expect epoxy segment results to be lower than the fourth quarter 2018 results. Sequentially, we anticipate seasonally lower volume levels stable raw material costs and unfavorable pricing trends to affect quarterly results. We now believe 2019 proxy segment adjusted EBITDA will be lower than last year's levels due to lower margins, partially offset by lower maintenance turnaround costs. Looking now at to move lower in all regions. The average global epoxy resin pricing has declined approximately 15% during the 1st 9 months of 2019. The price declines have primarily been driven by demand weakness from global automotive, electrical laminate, and industrial coating cuts customers. Our bright spot in the epoxy business has been sales in the wind energy sector, which are forecast to increase approximately 15 percent in 2019 compared to 2018. Before moving to the Winchester segment, I would like to emphasize the long term outlook for our chemicals businesses, which is on Slide 9. Demand for Olin's key products such as caustic soda, chlorine, Coronator organics, ethylene dichloride, and epoxy resins have been weaker in 2019 than 2018. Production levels for Lumina and pulp and paper, 2 key end use markets for caustic soda have declined. Demand for epoxy resin in Europe Olin's largest epoxy market has been flat, and hydrochloric acid demand in North America has declined due to weaker demand from oil and gas producers. In spite of these near term dynamics, we continue to believe market fundamentals for chlor alkali, vinyl and epoxy products will be supported by favorable long term supply and demand fundamentals. We continue to believe that there will be demand growth for the chlor alkali sector on both sides of the ECU. Both chlorine and chlorine derivatives, as well capacity additions and announcements of additions saying energy and feedstock advantage over the rest of the world. Current industry economics do not support world scale chlor alkali investments. 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, in the Epoxy business, we see global demand growth and minimal capacity additions. Now, let's move and talk about our Winchester segment, which is on Slide 10. Winchester experienced its first quarterly year over year increase since 2016, ending the third quarter of 2019 with adjusted EBITDA of $19,100,000. 26% improvement was a result of higher commercial, military and law enforcement volumes and favorable commodity and operating costs. Lower year over year product pricing partially offset with the business's normal seasonality. We continue to expect Winchester's results for the full year 2019 to be comparable to or slightly better than the full year levels achieved in 2018. Now turning to the Lake City contract in Slide 11. Late in the third quarter, it was announced that Olin's Winchester segment secured the contract to operate the government owned Lake City U. S. Army ammunition facility, in Independence, Missouri. This award is transformational for the Winchester business. After a 1 year transition period, Winchester will assume operational control of the facility on October 1, 2020. The contract has an initial term of 7 years and we expect this multiyear contract will drive a significant increase in annual profitability for the segment starting in late 2020. We estimate increased at EBITDA of $40,000,000 to $50,000,000. The full year effect of the Lake City contract will begin in 2021, I would like to highlight several other near term enhancements that will improve cash flows as we transition to 2021. And these are shown on Slide 12. In 2021, we expect incremental cash generation of approximately $225,000,000 from items within Owens control or that are contractually committed. The refinancing of the high cost bonds, which were issued as part of the Dow acquisition in 2015, will become callable in late 2020 and are expected to reduce interest expense by $50,000,000 to $70,000,000 annually. The winding down of the multi year information technology project to integrate the acquired Dow chlorine products businesses will save approximately 100 $100,000,000 of capital and expense spending. The vinyl chloride monomer contract is transitioning from the toll manufacturing arrangement that has been in place since the acquisition to a direct customer sale agreement beginning on January 1, 2021. And finally $225,000,000 provides significant incremental cash flows to Olin independent of industry conditions. And with that, I'd like to turn the call over to Todd Slater, Olin's CFO. Todd? Thanks, John, and good morning, everyone. The accelerated share repurchase program that was announced on August 5th was completed in early October. 5,700,000 shares of Olin's common stock were repurchased for $100,000,000. Also during the third quarter, Olin completed a $750,000,000 bond offering We are able to we were able to establish a low risk pathway to refinance high class bonds assumed during the 2015 Dow acquisition and when they become callable in late 2020, while increasing our financial flexibility. Now let's turn to our updated 2019 cash flow forecast, which is on Slide 13. Assuming the midpoint of our full year adjusted EBITDA guidance, we expect to generate approximately $230,000,000 of free cash flow in 2019. From the midpoint of our adjusted EBITDA forecast, which is on the far left of the waterfall chart, We deduct $30,000,000 in estimated cash tax payments. Earnings in foreign jurisdictions. Column 3 reflects the midpoint of our current forecast for capital spending of $375,000,000, which includes annual maintenance capital spending of between $225,000,000 $275,000,000 and the investment associated with our multi year information technology integration project of approximately $70,000,000. As we've previously discussed, in 2017, we began a multiyear project to implement new enterprise resource planning, manufacturing and engineering systems across the heritage Olin and the acquired Dow chlorine products businesses. The project also includes the required information technology infrastructure. Now, turning to the 4th column, we are expecting a $25,000,000 increase in working capital in 2019 as we use cash from the refinancing to reduce the sale of receivables information technology integration costs, and cash restructuring costs of approximately $90,000,000. This includes approximately $50,000,000 for the IT integration project that I just spoke about and approximately $25,000,000 of duplicate IT cost being incurred during the transition. These costs from the sale of an dollars. As of September 30, we had approximately 5% of our debt at variable interest rates. In the far right column, we are forecasting $250,000,000, $230,000,000 of free cash flow. Now I'd like to move on to Olin's priorities for free cash flow, which are on Slide 14. Since the acquisition in 2015, Olin has utilized its cash flow repaying approximately $500,000,000 of debt, repurchasing $190,000,000 of Olin Common stock or 6 percent of shares outstanding and continuing our consistent quarterly dividend. Looking ahead, our 2020 priorities for free cash flow will be expanding our cash position on the balance sheet in advance of the approximately $490,000,000 ethylene payment at the end of 2020. As a reminder, this investment will provide Olin additional cost based ethylene for 20 years and support the VCM contract. After 2020, we expect to use our free cash flow to reduce debt levels, reward shareholders, and invest in our pipeline of low cost organic growth projects. These growth opportunities exist in smaller increments across the chlorine envelope and our production platform and can be implemented as market conditions warrant. Finally, on Wednesday, October 23rd, Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on December 10, 2019, to shareholders of record at the close of business on November 12, 2019. This is the 3 72nd consecutive quarterly dividend to be paid by the company. Operator, are now ready to take First question comes from Don Carson of Susquehanna. Don, please proceed. Yes, thank you. John, a question on the chlor alkali cycle. This cycle seems a little different in that normally industrial demand is more sustainable than vinyls demand, especially in residential construction. We seem to have the opposite this time around. Is that why you think that we're going to have lower caustic pricing in 2020 versus 2019? And then I have a follow-up on Winchester. What I would say is what I think is we think is different about the chlor alkali cycle, as we sit at this moment, is there's been a significant increase in the amount of chlorine exported as derivatives over the past 12 years. If you look today between 35% 40% of the chlorine that's produced in North America is actually exported. So when we look at a slowdown in industrial production in the United States, it has typically been accompanied by a slowdown in housing and construction in the U. S. But what we really, for the cycle, to take full effect, we really need there to be a global slowdown in in construction so that the chlorine demand actually goes down in North America. So we would see a lower level of exports. I think if you looked at caustic demand in North America, it would significantly exceed chlorine demand right now. Just in North America. And then my follow-up on Winchester, we've seen a significant change in industry distribution patterns are about to see where the largest retailer Walmart is going to restricted sales of certain types of ammunition. What impact do you think this has on overall demand, if any? And could that actually be positive for you given that presumably the smaller distributors who make, who will take over from Walmart, don't get the same terms as a Walmart does. I would say at the moment, it's probably too soon to tell because Walmart is still in the market. Their targeted exit on the products they're exiting is December 1st. And I imagine that they're not helping the market right now because they're trying to move all that product. Longer in the immediate aftermath, I would not be surprised if there's some short run disruptions on the retail supply side just because Walmart has such a large presence and nobody else comes close. I think your, your comment on pricing probably has some validity but we'll need to see how that plays Our next question comes from Kevin McCarthy of Vertical Research Partners. Kevin, please proceed. Yes, good morning. Would you comment on where you think demand for chlor alkali is tracking in 2019. And based on your prior experience, with previous downturns, would you expect the trajectory to look like demand wise as we move through 2020? Kevin, this is Jim. I would say on a year over year basis, we have seen some weaker operating rates and so forth would indicate that we have had a lower caustic output So I think that's been exacerbated here in the third quarter. We've seen that, we've seen that decline. And we've seen it in specific pocket like pulp and paper and alumina that are actually driving that. Having said that, I think, there's some inventory corrections and so forth that are taking place in those markets. And as we look into 2020, we need to see some kind of a, what I would call an industrial production rebound, to see increasing demand We need to get the, as was mentioned earlier, we need to get the industrial production side of things which drives caustic demand moving to the upside in excess of pouring demand, which will help bring balance back to the market. And then I had a follow-up question, if I may, on Winchester on Slide 11, I think you referenced $25,000,000 of transition costs. Can you talk a little bit about what those are and also whether you need to reinvest capital, to serve this contract and, whether or not there are any other meaningful contracts that might roll off or roll on over the next year or so? The $25,000,000 is the expense that Olin will occur to take over what is effectively a $500,000,000 business in a different location. We have to provide the entire management team, which is somewhere between in period living there. There are certain investments that we need to make in terms of getting what I'll call the management systems up to speed that There are 2000 employees at Lake City that become our employees. We have to put them on our benefit programs, etcetera, etcetera. So that's what the $25,000,000 is about. In terms of investments by Olin, the only real investment we are obligated to make is in work capital. And I would tell you, I think that's in the $60,000,000 to $80,000,000 range, which will occur late next year. That's helpful. Our next question comes from Jim Sheehan of SunTrust. Would you expect caustic soda customers to be in need of restocking inventories sometime in early 2020? Yes, we would expect that, I mean, they've been in destock mode for quite some time. So we would expect that at some point here, that restocking has to, has to occur. Right now, with prices moving down with, we say, industrial production in general demand, it kind of a malaise They've been destocking and we'll probably continue to do that until they see something to the positive side that will cause them or give them a trigger to restock. But It's got to happen at some point in time. Thank you. And what is your expectation for turnaround costs in 2020 relative to 2019? We haven't given a number, Jim, but I would tell you qualitatively, they will be higher. The we've talked about the large turnarounds There's one in the BCM plant that occurs every 3 years. It will occur in the second quarter of next year. And that will, all other things being equal, make turnaround costs higher next year than the share. Our next question comes from Frank Mitsch from Yum Research. Thank you and congrats on the Lake City contract. John, interesting factoid on the chlorine customer not buying anything for 4 weeks starting in September. I was wondering what industry or one end market that was. And do we have to go back to like the 'eight, 'nine timeframe for the last time you saw that occur? That is the longest outage from that type of customer we've seen since 2000 the end of 2008. So yes, you do have to go back that far. I'd rather not say where they came from, but I would just take the opportunity to say, we were moving along through the month of August last this past August with relatively high demand across spectrum of what we're doing, and it's like we hit a wall in September. And that's what we're really experiencing now. Things dropped off dramatically and they stayed down as up till today anyway. Okay. That's helpful. And Yes, in discussing not just customer inventories, but I'm more curious on the caustic soda side in terms of producer inventory levels we had heard that they were somewhat elevated. Can you talk about how that trended? How do you believe that trended through the third quarter and where producer inventory levels are, on caustic here today? I would say, I don't feel qualified to comment on the competitors or the other participants in the market. I would tell you that as we sit today, our caustic inventory is equal to or slightly below our normal levels. And was it above it during the third quarter and you've been able to work that down? Is that the way that we should think about that? No, we've had a series of we was our we built in a little bit of inventory in the third quarter because we a series of turnarounds that are going on early in fourth quarter, those turnarounds have had the effect of bringing inventory levels below normal. Our next question comes from Neil Kumar of Morgan Stanley. Thanks. I was wondering if you can give any preliminary expectations on how to think about 2020 EBITDA. I mean, just given the softness for seeing demand didn't get scared to think about it as annualized 4th quarter EBITDA expectations plus perhaps a quarter from the new Winchester contract? What I would say is we intend to give 4th full year 2020 when we report our 4th quarter earnings. I would just go back to the comment I made to Frank about how strong the slowdown was. And I would say based on that, and the ability of this industry to move very rapidly one way or the other, it would be prudent to really give 2020 guidance at this moment. And then I just was wondering if you can talk about what you're seeing in terms of the EEC market going forward. It seems that prices started to strengthen a bit in October. So just curious to what you're seeing in that market? Danielle, this is Jim. EDC, I think at the last call, what we said was that we expected EDC demand to continue, fairly solid in the third quarter. We didn't see that. Prices did come down, as we expected. And we mentioned that we, were going to be buffered from a good bit of that movement, and we in fact did see that. So, that's the 3rd quarter heading into fourth quarter, there is there has been still some pressure on ADC prices to the downward side. But you're correct in your observation here in the last few weeks, we've actually seen some movement, to the upside on EDC. And as I've spoken before, we oftentimes see EDC demand pick up as people start to restock in the fourth quarter. So we'll have to see where the rest of the quarter takes us in terms of pricing, but we would expect to see some increased volume, in the latter part of the quarter. Our next question comes from Mike Leithead of Barclays. Thanks. Good morning, guys. If we were to just flatline pricing for your key products right now, what would the year over year EBITDA headwind be next year versus this year? I don't think we want to, I don't know what flatlining means because if it'll move you want to flatline at this moment, I would say if that's If we just took 3rd quarter levels and just random straight. I don't have that calculation. I would prefer to answer that with more information. Fair enough. And then on cash flow, I think Slide 12 is helpful to think about 2021. But if we were to just bridge from 2019 to 2020 for free cash, we'll pick whatever level of earnings next year, but just agnostic of that. How should we think about the changing cash calls next year versus what we have this year in 2019? Well, we've talked about a couple of things that are what I would call one time cash flow. Todd talked in his remarks about the ethylene We also talked about the bond call. There's a premium to be paid on that. And we talked about the need, there was an earlier question to fund working capital Winchester. That said, I would expect given the environment we're in that you will see lower capital spending for us next year. And if the business stays where it is, we should the Lake City thing be a positive Our next question comes from Eric Petrie of Citi. Hi, good morning. Good morning. Good morning. It seems the alumina industry is oversupplied with or announcements to review capacity. Has this impacted you at all? And have you seen with the slowdown in industrial production customers for caustic switch more to spot versus contract? As I mentioned before, Eric, this is Jim. As I mentioned before, we have seen weakness in the market. And I think the best, the aluminum market, and I think the best indicator of that actually is the price and the price declines that have taken place in that market would come off all the way down into the LMEs are way down into levels that they haven't seen in several years. So, that would indicate the weak demand. As far as individual capacities in Illumina and so forth, I think you'd have to speak to them about what's the right size and whether capacity needs to come off. We have seen weaker demand coming out of the, out of the alumina, alumina sector, but To your comment about spot or whatever, spot caustic pricing and so forth, and spot versus contract. I would say we haven't seen a significant change in the action of, in that industry. Helpful. And secondly, how much of your epoxy volumes are indexed to raw materials? Index to raw materials? Yes, Jeff, this is, sorry, Eric, this fat, but, the indexing is very little. Quite frankly, most of the indexing where we index to raw materials is in our upstream, things like benzene and propylene. So been seen, we can pretty much immediately offset any changes there in our upstream. Very little indexing, done in the midstream and downstream parts of our portfolio. Our next question comes from Jeff Zekauskas of JPMorgan. Geoff, please proceed. Thanks very much. What South American demand for caustic been like for you. In the third quarter. Latin America had been a very strong growth area over the past couple of years. Again, I would focus on the pulp and paper and aluminum markets, which drives Latin American growth and specifically Brazilian growth. And those have been, have been softer. And so we, we've seen the same things Latin America as we've seen elsewhere in the world, respective to those 2 sectors. In thinking through the last few conference calls, I think when we began 2019, there was a general optimism around caustic prices. And obviously, caustic prices have been weak When you think through the change from a more optimistic approach to a less optimistic one, do you think that the major factors were really in Paper And Illumina? Or do you think that the factors were wider than that? Leading to the weakness in caustic prices? I think they're much wider than just those two sectors. I really think that when you look at the whether you want to call it an economic malaise, the impact of trade wars, uncertainty around Brexit and so forth. I think that's weighing across a variety of different industries. And it backs up into what we're seeing. Clearly, pulp and paper and alumina, alumina, have seen declines And we have a tendency to highlight those because they're larger end use segments. But at the end of the day, I think it's broader decline. And I think that's also why, we saw the significant drop off in the middle of the third quarter There was an awful lot of negative economic data and so forth and forecast that came out during that period. And I think that affected the mindset of many of our numbers. Our next question comes from Hassan Amara of Alembic Global. Hassan, please proceed. Again and again, in your prepared remarks, I keep hearing that there's no incremental see on the horizon. But over the last couple of weeks, certain reports have popped up that an overseas player may invest as much as $3,000,000,000 in the U. S, towards a fairly integrated Bureau facility. So how are you, I mean, have you heard similar things and how should we be thinking about that? On. This is Jim. I think the way to think about capacity, and the future capacity, I think, what we've consistently said is that we believe over the long term that demand for caustic products will outstrip, the capacity that's being added. I don't think anybody believes that there won't be some incremental capacity or even longer term, there may be some larger capacity that will be added at some point in time. What we've said is that demand will outstrip capacity additions and that right now, reinvestment economics are not did not exist on a large world scale integrated facility. So, I think, you know, suppliers in various, whether they PVC producers or integrated players continuously evaluate when and if the most opportune time might be to invest. So I think that's an ongoing process. But we firmly believe that this imbalance between growth and capacity will continue for some period. And there was public there was something published about, an overseas producer adding capacity in North America but that was capacity associated with PDC, some chlor alkali with a targeted date of installation of 2025 to 2020 6. And it was a relatively small amount when you look at an 80,000,000 ton market that if it grows, would have that was, you know, half less than half of 1% of the GDP mark or the caustic market. Understood. Very helpful. And just sticking to the supply side, during sort of the course of Q3 earnings, some of the company's reporting have talked about, increased, environmental sort of inspections and the like in China. Are you hearing similar things with the in floor of vinyls, are you hearing of any curtailments in China based off of these sort of inspections and the like? Hassan, this is Pat. Certainly, you've seen a lot of volatility over the past year in China. Around these environmental issues in epoxy and specifically in epichlorohydrin. So this volatility continues persists around these supply disruptions, and that's led to epi prices going up 40% year over year. It's important to keep in mind that very little Epi leaves China because it's just not cost effective. And only time it comes out of heavy prices go up, outside of China. So what this 40% year over year increase has done in China on EPI, it's now caused LAR prices in China over the past 30 to 45 days to go up significantly and, actually, prices for LAR in China are now about $500 a ton higher than outside of China. And so if this arbitrage persists and there will be increased LAR imports into China from producers, probably primarily Northeast Asia, but, but many parts of the world So I think this could bode well for LAR pricing around the world. And of course, Hassan, we saw some of the same movie before in late 2017 2018, which led to LAR prices, not just going up in China, but in other parts of the world as well. So stay tuned. The environmental issues continue to persist, and it definitely continues to impact both chlor alkali and epoxy capacity. Our next question comes from Mike Sison of Wells Fargo. Mike, please proceed. Hey, good morning. When I think about Slide 6 and you go back to the last downturn in 2015, 2016 for industrial demand. Contract, North American contract prices were similar to spot and now spots a lot lower and contracts is a little bit higher. So do you think contract will sort of follow suit, but spot, or does the spot come up? How does that dynamic kind of, unfold over the next couple of quarters, do you think? Mike, this is Jim. I think that as long as, in spite of spot and export prices remain below the contract, their contract prices, there will be some some pull down on those prices just because, that's the trade off that companies make. Having said that, however, we still believe in the fundamentals of this marketplace. And, we're still getting a lot of requests from a contract standpoint where customers continue to be focused on security of supply and so forth. So we believe that the we're not going to see a dive off here in terms of the contracts. But, because of that security of supply and, So we think that it's going to continue to maintain this spread. And in fact, the first thing that we'll move when we have when we go to the upside is the export and the spot pricing and it can move fairly dramatically as obviously you see on this chart. Right. And then just, could you maybe just give us where you think operating rates are for North American spot export market is now and maybe where it was over the last year. So just to give us a perspective of and where we're sort of at. Well, from an operating rate standpoint, I think the most recent operating rate was 84%. Which was a significant decline from 92% in the previous month. And I think what you see over the course of the year is that we're about 1 to 2 percentage points lower this year than last year in terms of operating rate. The September drop off, there were a very significant amount of turnarounds that affected that operating rate. So 1% to 2% lower than last year is what we're seeing from an operating rate standpoint. Our next question comes from Matthew Blair of Peter Pickering Holt. Matthew, please proceed. Hey, good morning, everyone. On the last call, I think you talked about expectations for pretty strong volumes in the back half of twenty nineteen. And I just wanted to clarify, is that still occurring and it's just the pricing has come off or are you also seeing this weak demand environment pressure your volumes as well? The demand environment that we based our second half outlook on when we had a conference call in August has not materialized. As I said, to answer an earlier question, sometime in September, we saw a pretty significant slowdown in demand pretty much across the chemicals portfolio. So what is impacting us today is a combination of weaker demand and weaker pricing, some of which the pricing follows the demand, obviously. Makes sense. And then slide 20 shows chlorine prices holding steady. But some of the derivatives like HCL and chlorinated organics are seeing price declines. I was just hoping you could provide some commentary on this dynamic? And when this happens, are you able to adjust your production slate to, I guess, minimize some of the downside? What I would say on the on the on each of those, there's a discrete market around selling chlorine as a merchant product, selling chlorinator organics, which is a global product and selling HCL, which is North American product, and we do we do toggle back and forth across the entire portfolio, which includes EDC, which includes epoxy resins, according to where pricing is and where demand is for all three. And that's kind of how we manage it. If you look at just a simple trade off in HCL for the last probably year or so, has had pricing higher than the merchant chlorine market, we would favor making HCL versus merchant chlorine. Merchant chlorine has held relatively steady. That's positive. And there might be a moment now where we would favor that over some chlorinated organics products. Our next question comes from Steve Byrne with Bank of America. Steve? Please proceed. Yes, thank you. Several of your large petrochemical peers do not provide specific earnings guidance just reflecting the uncertainty in commodity pricing. And just would like to hear your view on your level of commitment to continuing this the level of detail you provide? That's something we evaluated on an annual basis. And it varies. It has evolved over time when we were a smaller company with prior to the Dow acquisition, we had a different view there, and we're doing something different now than we did then. And it just continues to evolve. Okay, fair enough. Thank you, John. I did want to ask you about your view of your competitors in epoxy resins. Do you have an estimate of what fraction of your epoxy resin competitors are back integrated into benzene and propylene And how much of those raw materials do you have long term supply agreements for? Yes. So Steve, this is Pat. I mean, first of all, no one, none of the epoxy, competitors are back integrated into the hydrocarbons in the benzene or propylene. So that's pretty clear. Quite frankly, very few of our competitors, actually I only I think we're the only one that's fully back integrated in chlor alkaline. We use both chlorine and caustic and net liberator of caustic soda when we're making our epichlorohydrin. So, we have the best integrated position than anyone out there And, people like Huntsman have moved really downstream and are no longer really in the upstream or quite frankly, the midstream. So I hope that answers your question. Our next question comes from Arun Viswanathan of RBC Capital. Arun, please proceed. Great, thanks. Good morning, guys. Yeah, I just wanted to ask back on the caustic price kind of evolution and outlook. So, I think going into Q4, the thought was that operating rates would come down on the chlorine side and that would support potentially some pricing on caustic. I guess what you're communicating is that did happen, but the demand in caustic has been materially weaker than you expected. And so we are in a little bit of a state of oversupply in caustic. My question is, Assuming that the pricing doesn't necessarily go up in Q4, usually when we enter Q1 and Q2, we see a tick back up in operating rates and potentially that would further, prevent pricing progress. So Is that kind of your base case for, the progression over the next quarter or 2 that, pricing will remain muted? And if so, is demand improvement in caustic the main driver of of what's going to drive a slightly better caustic pricing environment? I would come back to just to start, the basic issue for a chlor alkali producer is not necessarily the absolute demand for chlorine or caustic demand for one relative to the other. So to answer your question, we would have to make or establish the premise of what happens to chlorine demand. We are seeing, as I gave the example of a large chlorine customer, not buying any chlorine for 4 weeks earlier this quarter, we are seeing chlorine demand slowdown. Also, we talked about that as it related to coordinator organics and some other things. I don't know that we see clearly enough right now to know what's going to happen. I think I don't think chlorine demand is that much greater than caustic demand. It doesn't feel that way to us. And if we had a couple of percentage point decline in operating rate, more than what we see in the fourth quarter carrying over into the first quarter, you could see caustic prices move up somewhat. I think we're sort of on the what I'll call the edge of balance and imbalance. And then, just as a follow-up, so if you look at your your 3 businesses, you've laid out the incremental improvement that could happen in Winchester relatively clearly. So we can understand that. I guess chlor alkali, as you just pointed out, it's going to depend on chlorine caustic demand. And assuming those are maybe driven by construction and industrial production? And then, I guess, what about epoxy? I guess, if you think about the driver from year, you'd mentioned kind of a $250,000,000 level of normalized EBITDA in the past. Is there a to that still that you can lay out in 2020 or 2021? Yes, I think this is Pat again. Clearly, we're very confident that there's a path to $250,000,000 to $300,000,000 in epoxy. And the real drivers to that you know, is around the demand side, 1st of all, and historically demand in epoxy has grown around 3%. Mean, this year, we see growth flat at best. Europe, the 2nd largest epoxy market in the world has been flat since the middle of 'eighteen. So no question we need to see that demand, come back. And this whole industrial funk that we have seen hitting us has really impacted the demand for epoxy. Certainly centered around what's happened in automotive, electronics, and industrial coatings. So we need to see demand come back, but as we outlined at the February investors, discussion, you've got operating rates today in epi and liquid epoxy resins in the mid to high 80s. And so if we just get some demand coming back, we think we're in a good position, in our cost position, and we think we're in a good position to, to grow and expand these margins through volume increases here over the next several years. Okay, great. And then just lastly, I just wanted to come back to the idea of no new capacity. Again, it does appear that are several players who are looking at, building some extra coral vinyls capacity here. There has been some installations of a lot of ethylene here. And so Just wondering, at one point, would you expect new capacity announcements what is it going to take? Is it going to take a much better caustic pricing environment, some improved environment on the chlorine side and ethylene. And so I guess implicit in your assumption that there's not going to be much capacity build, would that also imply that pricing for these products is going to stay relatively muted? Thanks. I think the biggest two factors that you have to look at is what's the price of PVC and what's the price of caustic. And right now neither of them are anywhere close to what it would take to justify a significant investment in the entire cora vinyls chain at least through PVC and depending on who it is, maybe through ethylene. So I think, and I, you know, we showed a slide back in February that showed where a long way from where reinvestment economics are for those. Today. Our next question comes from John Roberts of UBS. Thank you. Back on Lake City, a lot's been going on with AT case since its orbital deal, and then it's Northrop Grumman deal, Did it become noncore for them, just trying to get a sense of how competitive the bidding was or what it was that allowed Olin to win this back after so many years? John, to the best of my knowledge, ATK was not a bidder for the contract. I believe Other bidders were general dynamics in Northrop Grumman. And I think that orbital business is actually today sitting in Northrop Grumman. Right. That's what I meant. It went the operator went to Orbital then in Northrop Grumet, but they did bid to keep it then. They did to keep it, yes. Okay. And then do you think IMO 2020 could in increase export caustic and EDC freight costs here and maybe result in a little bit lower netbacks as we get into next year? This is Jim. I wouldn't expect it to have a major impact. There may be some demand, but we it's probably going to be small enough that we we may have a hard time finding it, but we'll take anything to the positive, but I don't think it's going to be a big impact. No, I was asking whether your freight costs would go up, and therefore, maybe the net backs be a little bit lower. I don't think that's going to drive freight costs. Our next question comes from Travis Edwards of Goldman Sachs. Travis, please proceed. Hey, good morning. Two quick questions of clarification from me. 1st, on free cash flow next year, you provided a little bit of detail on some of the elements impacting that But as you think about the upcoming ethylene payment to Dow, if you're generating cash, maybe buying back shares opportunistically, Are you planning to address that payment just using cash on the balance sheet or are you thinking you'll have to pull down a bit on that revolver? I would say at this point, we haven't given any guidance on what we intend to do there. Got it. Thank you. Second question is on the Lake City contract. You touched on this a bit on the prepared remarks, but again, just a question of clarification. There any sort of sensitivity to that $40,000,000 to $50,000,000 of incremental EBITDA? Is there any possible changes to the contract itself, whether that be in the volume or pricing side between now and when you take over? Well, the majority of that business is the government's business and they have a pretty good idea because we had our winning proposal, the prices that we bid were based on a set of volumes that they're sort of obligated to buy So I think that's a positive. There's an ability to use that facility commercially. Which I would tell you has a high degree of probability because we've been in that commercial market for 150 years. So I feel that there's a relatively small deviation around those numbers. Got it. Scratch me a minute. Thanks for that. And we would have a lot of warning for there to be a change. Got it, appreciate it. Thank you. There are no further questions. This concludes our question and answer session. I would now like to turn the conference back over to John Fisher for any closing remarks. Yes. Thank you all for joining us today, and we look forward to talking to you again when we review our fourth quarter 2019 results. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.