Earnings Call: Q3 2018

Oct 30, 2018

Good morning, and welcome to the Olin Corporation Third Quarter 2018 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Larry Kremittis, Olin's Director of Director of Investor Relations. Please go ahead. Thank you, operator. Good morning, everyone, and thank you for joining us on our third quarter earnings call. Before we begin this morning, I want to remind everyone that this presentation along with the associated slides and the question and answer session following our prepared remarks will include statements regarding estimates of future performance. Please note that these are forward looking statements and that actual results could differ materially from those projected. Some factors that could cause actual results to differ from our 10 K and in yesterday's 3rd quarter earnings press release. A copy of today's transcript and slides will be available on our Web site in the Investors section under calendar of 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, a Hoxy And International John McIntosh, Executive Vice President, Synergies And Systems Jim Varilek, Executive Vice President and President chlor alkali Products And Vinals And Services and Todd Slater, Vice President And Chief Financial Officer. Now, I'd like turn the call over to John Fisher. I will begin by highlighting the key takeaways If we now dollars. This is the highest quarterly Dow chlorine products assets in late 2015. As we progress through the balance of the year, there are several short term market wins that I will discuss in more detail in a moment, in addition to the normal seasonal demand slowdown. These will likely dampen our earnings performance in the fourth quarter. As a result, we now expect full year 2018 adjusted EBITDA to be in the $1,260,000,000 range with upside op in the 4. For the third quarter of 2018, chlor alkali products and vinyls reported adjusted EBITDA of $333,000,000, an improvement of more higher pricing for caustic soda, chlorine, ethylene dichloride and other chlorine derivatives. For example, ethylene dichloride prices Olin system have more than doubled so far this year. During the third quarter, we experienced higher ethylene costs as a result of higher ethane prices in addition to per gallon during the third quarter, a 60% increase. We are forecasting that ethane prices will average in the mid-forty cents per gallon range in the fourth quarter. We expect ethane prices to a $0.01 change in the price of a gallon of ethane impacts our EBITDA by approximately $3,200,000 on a full year basis. In addition, freight costs increased approximately 15% in the third quarter of 2018 compared to the third quarter last year, reflecting both higher truck and railroad freight rates. Now turning to caustic soda pricing on Slide 5. Over the past year or so caustic soda pricing has been influenced by series of one time curtailment. The first two were supply disruptions that created favorable price momentum. The Alunorte curtailment represents a demand this option. This demand disruption combined with seasonally strong PVC operating rates has been putting pressure on caustic soda pricing in the export market. Which will impact caustic soda export have recently seen caustic soda prices in both China and Europe increased from their recent lows. If Olin's caustic soda price, remains at the current $100,000,000 compared to 2018 levels. As we look forward into 2019, there are opportunities that can provide offsets to the earlier challenge that caustic soda pricing presents. If pricing in our chlorine derivative portfolio including merchant chlorine, bleach, hydrochloric acid, ethylene dichloride and chlorinator organics remains at current fourth quarter 2018 level, 2019 adjusted EBITDA would improve by $60,000,000 to $75,000,000 compared to 2018 levels. We expect chlorine ethylene dichlorine and chlorine derivatives pricing to improve further in 2019. In addition, maintenance turnaround costs, especially in the epoxy business, are forecast to be approximately $30,000,000 to $40,000,000 lower in 2019 compared to 2018. Finally, while we expect our ethylene costs to be higher in 2019 compared to 2018, due to higher ethane pricing, we anticipate higher ethylene dichloride pricing in 2019 to more than compensate for these higher ethylene 3rd quarter 2018 epoxy adjusted EBITDA of $56,000,000 was approximately $33,000,000 higher than the 3rd quarter 2017 results. The significant earnings improvement was driven by higher loss, primarily benzene and propylene. Sequentially, the $6,000,000 adjusted EBITDA improvement from the 2nd quarter was driven by lower The 3rd quarter is typically the strongest seasonal quarter for the epoxy resin demand. Therefore, we are forecasting 4th quarter epoxy resin sales and adjusted EBITDA to be sequentially lower than 3rd quarter results. We are encouraged by the results in the epoxy business this year and the overall supply end demand dynamics present in the market. With the successful completion of our maintenance turnarounds earlier this year in North America, and late last year in Europe, we expect improved volumes and improved results into 2019. On Slide 7, we have a chart that plays liquid epoxy resin pricing in the United States, Europe and Asia. Resin pricing has improved in each region since the beginning of 2016. A portion of these increases have been necessary to recover the higher raw material costs experienced, primarily benzene and propylene. Supply and demand fundamentals have resulted in tighter market conditions for liquid epoxy resin adding to the price momentum. Appoxy resin pricing dynamics have been different by region. In Asia, resin prices have increased dramatically in the latter part of 2017 into early 2018 and moderated during the First And Second Quarters of 2018. In North America, in Europe, price increases in prices increased late in the fourth quarter 2017, and through the beginning of second quarter of 2018 and then declined slightly. During the third quarter of 2018, resin prices were stable globally, excuse me, increased global pricing for Vistenol and epichlorohydrin have continued to support the current epoxy resin pricing levels. Moving on to our Winchester business, on Slide 8. Third quarter 2018 Winchester adjusted EBITDA was $15,200,000, a de $6,800,000 other material costs of $4,000,000, lower commercial volumes and pricing of $5,000,000, partially offset by lower operating costs of $3,000,000. During the 1st 9 months of 2018, commodity and other material costs have increased approximately $18,000,000 as compared to the 1st 9 months of 2017. We now expect overall 2018 commercial demand to decline by approximately 20%, which follows a 17% decline in commercial demand in 2017. While we have rates. The fourth quarter has historically been the weakest ammunition demand quarter. And as a result, we expect that there will be a normal sequential decline in 4th quarter results as compared to the 3rd quarter. Turning to Slide 9, I will discuss our view of the market. Allwin continues to be bullish about the long term prospects for its chemical businesses. This bullishness reflects continuation of and the required vinyls or other derivatives required to utilize the chlorine as well as the cost of new capacity for the upstream products of the lleochloride, phenol, Visthenol A and epichlorohydrin required to produce additional liquid epoxy resin. More specifically on these points, over the next 5 years, we expect global caustic soda demand to grow by approximately 3% annually, led by growth in the alumina industry of 5%. We also expect global chlorine demand to grow at approximately 2.5%, the largest growth area At this justify the additional investment required to fill this gap. We also do not believe this additional demand can be filled by and be sustained at approximately 10 percentage points higher than the long term global average. These factors lead us to continue to believe the chlor alkali and the caustic soda business is in the midst of a structural change that will result in improved profitability over time. To demand growth. Now turning to Slide 10. In the past, we have referred to a mid cycle adjusted EBITDA forecast of $1,500,000,000. This forecast was developed based on our view of the business when the Dow chlorine products transaction closed in October of 2015. Today, we believe $1,500,000,000 of adjusted EBITDA is a point on a long prices to EBITDA by approximately $25,000,000. The 3rd quarter performance plus those adjustments demonstrate our ability to achieve the one point 5,000,000,000 of adjusted EBITDA. Finally, it is our intention to host an Investors Day in New York in early February to provide a detailed analysis of our industry views. John. We'll turn to our 2018 cash flow forecast, which is on Slide 11. We expect to generate approximately $550,000,000 of free cash remains debt reduction. And with the combination of debt reduction and EBITDA growth over the last 12 months, as of September 30, Our net debt to adjusted EBITDA leverage ratio has We expect the leverage ratio to the two points to the 2 times range. Starting with the midpoint of our full year adjusted EBITDA forecast, of 1.26 tax payments, which primarily reflect income tax payments made to foreign jurisdictions in 2018. We are forecasting that our cash Olin has not been a U. S. Federal taxpayer because of the utilization of net operating loss carry forwards, primarily arising out of costs associated with the acquisition in 2015. Because of this, we do not expect be a U. S. Federal taxpayer in 2018. While we are continuing to analyze the full impact of the Tax Cuts and Jobs Act of 2017, which was signed into law in December 22, 2017. The cash tax benefit to Olin of the changes in the tax law is minimal in 2018 due to the tax credit carryforwards. We do expect to reduce our cash column 3 reflects the midpoint of our current forecast for capital spending of $400,000,000. Which includes annual maintenance capital spending of between $225,000,000 $275,000,000 and the investment associated with our multi year information technology project of approximately $100,000,000. As we have previously discussed in 2017, we began a multiyear project to implement a new enterprise resource planning, manufacturing, and engineering systems across the heritage Olin and the acquired Dow chlorine products businesses. The project includes the required information technology infrastructure. Now turning to the 4th column, we are expecting working capital to be a use of cash in 2018 of approximately $50,000,000. The estimated increase in working capital is primarily due to higher selling We currently expect revenue in 2018 In the dollars. The one time items include an $88,500,000 insurance recovery net of legal costs incurred for various environmental remediation sites. Integration and cash restructuring costs and the first quarter's $8,000,000 business interruption insurance recovery and the approximately $50,000,000 for the expense portion of the multi year IT project that I just spoke about. During the third quarter, we settled certain disputes with respect to an coverage for costs at various environmental remediation sites totaling $120,000,000. Which was reduced by an estimated liabilities of $10,000,000 associated with claims by subsequent owners of certain of these recognized a pretax gain of $110,000,000. Olin incurred legal fees of $21,500,000 in 2018 to affect this insurance recovery. As a result, adjusted EBITDA excludes the $88,500,000 of environmental insurance recoveries. The cash associated with this recovery was received in the fourth quarter. The next column represents an estimate of interest expense. We currently have approximately 15% of our debt at variable interest rates. After the debt refinancing we completed in January. And we are forecasting 2018 interest rates to be higher than those we experienced 2017. Now turning to capital allocation. During 1st 9 months of the year, we prepaid approximately $250,000,000 in debt. In addition, we have returned $117,000,000 to shareholders in the form of dividends and share Given our confidence in the outlook for the chemicals businesses and our positive outlook for cash generation and the environmental insurance recovery received, we expect to be more balanced quarter. Finally, on Thursday, October 24th, Olin's Board of Directors declared a dividend of $0.20 on each share old and common stock. The dividend is payable on December 10, 2018 to shareholders of record at the close of business on November 9th to 2018. This is the 368 consecutive quarterly dividend to be paid by the company. Operator, we are now ready And our first question comes from Don Carr of Susquehanna. Please go ahead. Good morning. This is Emily Wagner on for Don. Just going over the guidance update, we calculate that $45,000,000 EBITDA decline from that caustic lower caustic prices translates to roughly about $30 per short ton. For lower prices in the second half. So knowing that the index declined about $25 in 3Q, could you give us some more color on the change export pricing? And what do you expect to happen to the index in the fourth quarter? Emily, this is Jim. The index, the domestic index, as you mentioned, has moved down, in the third quarter. And, currently is forecast for another $15 a tonne in the fourth quarter. As far as export pricing goes, it's a dynamic marketplace right now. And we are seeing some of the reductions that are, that are, that are taking place bottoming out and we're expecting to see some level, I'll say leveling out right now. And we would expect with a few of it demand changes taking place, early part of next year, we would expect that to start to reverse. Thank you. And then for a follow-up, if you take those 3 items reducing guidance, it seems to imply a 5th 15, sorry, 12,000,000 dollars, $15,000,000 for the full year. What is the offset from that? It seems like there's about $45,000,000 that's better offsetting those things. Is that just better APAC or can you break that down a little bit? We talked about the year over year improvement and the that we've been or the year improvement we've seen on the chlorine side, the chlorine derivatives, etcetera. And that is the biggest driver of that. Our next question comes ahead. You talked about ethane impacts and you might see those continuing in 2019. I think in prices have collapsed back into the low 30s, do you think your 2019 outlook might be more conservative Are you banking on volatility in ethane next year? Yes, I think the, the thing about ethane right now is it is very volatile. And so We do expect that from the spikes that we've seen here in the September, October timeframe, we do expect it to settle back albeit, we do expect that to be at a higher level than we experienced in the first half of twenty eighteen. Thanks. And on the Alunorte situation, when would you expect that facility to return to operating rates above 50%? It's a good question. That's one we've been asking for a while. The situation is that one of the barriers has been recently removed last week, from the equivalent of the Brazilian EPA remove their embargo on the site. And so now it's strictly in the hands of the federal court. To remove that embargo. And now that elections are over, we're hopeful that that will be resolved I can't give you any kind of data it's really in their hands, but the technical hurdles have been removed. Our next question comes from Frank Mitsch of Fermium Research. Please go ahead. Yes, hi. Good morning, gentlemen. And not following up on Alunorte, Jim, but what about the Russo sanction What are you hearing there? What is your expectation there and what impact that might have on caustic export pricing? Yes, I don't, you know, Russel, we had earlier in the year, and it caused a bit of excitement for a couple of months. But I would not expect anything more from Russell on the sanctions. Trade flows adjust relatively quickly, so I'm not expecting any impact. All right. Terrific. And Todd, you made the comment that you anticipate being more balanced in capital allocation in 4 you. Can you can you elaborate on what that means and what might be the implications, in terms of, in terms of money, stock share buyback, etcetera? Yes, Frank, as we said, we repaid approximately, so far in 2018, 250 $1,000,000 of debt and we returned $117,000,000 to the shareholders as in dividends share repurchases. What I would say is we expect a higher percentage of our free cash flow in the 4th quarter to be returned to shareholders. All right. Terrific. So the flywheel obviously you share buyback. All right. I appreciate it. Thanks so much. Our next question comes from Neil Kumar of Morgan Stanley. Please go ahead. On the $100,000,000 headwind in 2019 EBITDA, it's expected cost of prices stay at 4Q levels. Does that incorporate any decline in the October cost of price, which IHS you're projecting? And also, does that consider any improvement in your system pricing kind of resetting some of your legacy contracts at the end of the year? No, it is simply a point in time measurement of the prices we had in our system at the end of the that we have in our system as of last week. So if we get a favorable reset from our contract pricing, that's a positive. And if the indices move up, that's a positive. If they move down, that's a negative. Also, we see some reports of Northeast Asian export prices coming down recently due to a disruption of trade book India from the new Bureau industrial standard. Can you give us your thoughts on how you think the issue will play out and if it will be resolved in the near term? Hi, Neil. This is Jim. Yeah, the India situation, it's based it's a reset on registration that needs to take place to import product into India. What it really means is that for a period of time, there'll be some kind of activity that'll be taking place, again, as caustic is the trade flows are adjusted. I don't expect it to be a long term thing. It's a technical government registration that will pass because frankly, India will need to continue to import caustic. Our next question comes from Kevin McCarthy of Vertical Research Partners. Please go ahead. Good morning. It's Matt on for Kevin. So I have a question as it relates to the ethylene component of your guidance. I mean, what is the ethane feedstock cost kind of baked into that number? And shouldn't at least most of this being recovered by better EDC prices? I mean, it seems like particularly, throughout the year, the guidance has been fairly conservative on EDC price and we kind of continue to push to the upside on that. So I'm a little confused as to why there's a negative discrepancy of that size coming in 4Q? I think what's embedded in our guidance is we said, this is Todd, the mid $0.40 a gallon range, And just let's go back a second to what's in our guidance. We had said we're going to make $1,000,000,000 $1,260,000,000. And that compares to what we had said before plus or minus 2%. We said $1,300,000,000. Plus or minus 5 plus or minus 4%. We gave a bridge of $25,000,000 associated with ethane, of Acoustic and $15,000,000 associated with Winchester. So if you add that off of the $12,000,000,000 of the $1,260,000,000, that put you right at the top end of our prior yes, there were offsets, as John mentioned, for chlorine, all the chlorine derivatives as well as EDC. Okay. And then as it relates to Winchester, copper prices starting to move lower year over year basis, lead prices moving down. Do you expect to receive any kind of raw material relief or benefits on that end? Or do you just think that most of it will get competed away on price? And so we have any better volume return to the market? Thanks. My gut tells me that the answer to that is the latter. I think when you see a 35% decline in commercial volumes. I think it would normally get competed away. I think what you will stop costs. So it's probably tricky to put a number on this, but do you have any idea about inventories on the commercial side and on the consumer end and how elevated they might be versus historics and how much we have to work through here? I would be lying if I said I had any idea. I mean, other than if you look at, you can go back and look at ammunition purchases in North America from the period, the ovarian 2018 through the end of 2016 and look at them compared to an historic level. And they were 30% to 40% higher almost 7 years. Our next question comes from Jeff Zekauskas of JPMorgan. Please go ahead. In your near term adjusted EBITDA potential, you say your potential is about $1,500,000,000. In over a shorter period of time, the value of Olin has really come down. I think because people have economic fears, And you have all kinds of both cyclical businesses, countercyclical businesses, in a normal recession, what might your EBITDA potential be? Well, Jeff, the first thing I would say is typically if you think back through what happens in a chlor alkali cycle as we enter a recession, You see a significant drop off in demand for chlorine before you see a significant drop off in demand for caustic. So at the front end of any recession and we saw this in space in 2008 early 2009, you get a near term run up in caustic. That's right. And then you get a rollover. So we don't we're not in the business of forecasting recessions. But I think in a recession, the first step for Olin would be the results would be more positive on the caustic side than they are today. And we're obviously very highly levered to caustic. Okay. Weird, can you talk about some of the dynamics behind positive chlorine pricing and how sustainable you think they are? I think, Jeff, what's happened over the long span of time and I can go back 25 or 30 years is the merchant market for chlorine has shrunk dramatically primarily because of the vinyls producers in North America have over the last 20 years backward integrated and become their own chlorine supplier. So the merchant market itself has shrunk quite around the delivery of chlorine by rail. So merchant the merchant market itself has shrunk as has the supply. And I think in an environment where chlorine and chlorine derivatives are growing at 1 to 2% a year, we're actually shrinking the available supply because some of that growth is in the vinyls chain and it's being handled by the vinyls guys We're actually shrinking the amount of chlorine available for the merchant market, and that is putting pressure upward on chlorine itself. Okay, great. Thank you so much. Our next question comes from Mike Lee of Barclays. Please go ahead. Good morning guys. Just to piggyback a bit on Jeff's question on the $1,500,000,000 EBITDA number. Just to be clear here, is that no longer considered a mid cycle target? And if so, what would be a fair new mid cycle number? I think the way I would answer that is, yes, it is no longer considered a mid cycle target. It is a point on a long term improvement curve And what we would say to you is we think the structural changes that occurred have occurred in the chlor alkali and chlorine derivatives business and in the epoxy business are such that we're really not going to see cycles like we've seen in the past. We will see supply and demand changes and price changes around broader economic levels of activity. We're not going to whipsaw up and down like we have in the past. Therefore, I would I don't want call a mid cycle, because I don't think we're really looking at a cycle here. Okay. And then in your 2019 comments, you talked about if we flatlined today's caustic soda price, but can you maybe just expand a bit upon how you're seeing caustic soda dynamics here so far in the fourth quarter and how you guys expected the trend heading into 'nineteen? Yes. Mike, this is Jim. Yes, as far as the caustic soda demand, What we're seeing is that on the export market in particular, we've been the beneficiaries in the past of a number of supply events, as John mentioned in his comments, that have spiked the market quite honestly. And you can go back to whether they be mercury shutdowns, whether they be outages of any individual plants, freeze, hurricane, those things spike the market. And now since that time, we've had a demand event or that has, limited the demand, and that's specifically the Alunorte. What you're seeing is you're seeing a readjustment of the trade flows out of the Gulf Coast that have impacted the export market. And interestingly enough, in September, for example, the exact amount of exports, spot export was done was 25,000 tons, which is about the exact amount you would expect from Alunorte on an ongoing basis. So you've got that readjustment taking place. And we believe that when that comes back, that demand event is over, then we'll start to see a more balanced approach in the upward positive movement that we've seen in the past on the caustic side of things. It up. And we're seeing the same thing on the downside, which is why you're seeing a minor move in the indexes over the past period of time. So that's really what's taking place right now. The dynamics are there. We do expect the seasonal slowdown on chlorine and operating rates. And that should also help the market pull out. Got it. Thanks guys. Our next question comes from Alekki Yefremov of Nomura Instinet. Please go ahead. Hi, thank you. Good morning, everyone. Just going back to your guidance, you mentioned lower expected caustic soda pricing of $45,000,000. Is this really should we think about this as a sequential decline in the fourth quarter Is that really the euro realized price decline in Q4 versus Q3? No, that was designed to describe the difference between our second, the guidance we provided at the end of the second quarter, which was $1,300,000,000 and the guidance we provided at the end of the third quarter for the full year. So that is the full year impact that we've realized from lower caustic pricing than we would have expected when we gave you guidance on August 1. All right. So it's really representative of the second half of the year, so to say, change in your price expectations? Yes. And that is true also of the comment on ethane and true of the comment on Winchester. In your caustic soda export contracts, will you do you expect to renegotiate any of those contracts as far as the customer commitments, the level of pricing relative to the benchmark, etcetera? Have you concluded any of those negotiations itself? Those And we're really talking about 2019, sorry. Yes. Understood. Contracts, we're in a constant state of renegotiation, and we have contracts that come up, all the time. A significant amount of the volume that is contracted. Over the last 2 years, given the tightness in supply and caustic, we have, industry has moved towards increased amount of caustic that is contracted. So, the answer is yes, we'll continue to contract that. And there's always price discussions in those contracts. Our next question comes from John Roberts of UBS. Please go ahead. Thanks. I think China exports caustic soda to the West Coast of the U. S. Has there been any change in the dynamics of that particular part of the market? No. Other than, there were in the early part of the mid summer and late summer. There were some pricing impacts that are well known. But the dynamics and the movements haven't dramatically changed. Okay. So you think it'll be stable here as we go through the end of the year. I think it won't change that much, over time. China's continued to export less. And if there's demand pickup in China, you may see less movement to the West Coast. Okay. And then you indicated there really hasn't been any demand in demand destruction in Winchester. Could you just give us an update on some of the metrics that you look at to give yourself comfort with that? We have as well, 1st, the National Shooting Sports Foundation looks consumption around shooting ranges, etcetera. And that's our primary data source. So there's an actual activity of going out and finding out what activity levels are at different shooting ranges, which is where the predominance of the ammunition is consumed. Our next question comes from Eric Petrie of Citi. Please go ahead. Hi, good morning. What are your expectations for alumina capacity closures in China during this winter? And do you expect to see a similar ramp up in prices as we did last year into November? I don't have really good visibility into what the Chinese are going to do for this particular season. Over the last couple of years, we've seen shutdowns or curtailments that have taken place that have impacted the supply side obviously increased the pricing. And then we've also seen the demand side be an impact by curtailments as well. So I don't have a real good ability into what to expect this year. Okay. Contract prices for caustic soda have increased to premium compared to export. Is that just purely a function of lower exports to Alunorte? Or do you expect greater pressure on contract prices as export as continued decline? As I mentioned before, I think the export prices have probably bottomed out. And there's going to be pulls in either direction. If export pricing is above, is above U. S. Pricing, then you're going to see an upward if it's down, you're going to see a downward pull. The volatility on that export market has been significant. And when it moves to the upside, it'll, once it crosses over the equivalent value, then you'll start to see upward pressure But yes, it does create some amount of pressure in either direction. Great. Thank you. Our next question comes from Matthew Blair of Tudor Pickering Holt. Please go ahead. Hey, good morning. I think you mentioned a normal seasonal demand slowdown in your opening remarks. When I look at the chlorine Institute data, it really doesn't show that much of a reduction in average Q4 operates compared to average Q3 operate. So I was hoping you could maybe just quantify What kind of impact seasonality should have in Q4, whether in terms of volumes or perhaps EBITDA? Matthew, this is Todd. I guess if you look historically, we would say chlor alkali industry operating rates it declined between 3% 8% between the 3rd quarter 4th quarter. So that's we would expect a similar you're seeing on the chlorine and chlorine derivatives side, maybe today versus 6 months ago, I think housing and construction is perhaps perhaps 1 quarter of chlorine demand. Are you seeing any softness there? This is Jim. Actually, the chlorine side of the equation is, has been very interesting over the last year, year and a half. In that, in typical times, when you see caustic pricing move as aggressively as it has, you oftentimes see the opposite side of the ECU be under pressure. What we've seen over the last year to 2 years is actually both sides of the ECU moving up. The chlorine, the merchant chlorine, the chlorine derivative whether it be HCL or whether it be EDC, you're seeing upward movement on on that side of the equation. So we're seeing both sides of the ECU move, which speaks to the structural change that we believe has taken place in the industry. So we do expect that to continue, over the course of the next several years. Our next question comes from Steven Byrne of Bank of America Merrill Lynch. Please go ahead. Hi, your longer term demand growth forecast for caustic is more robust than the chlorine derivatives. And my question for you is, how does the industry balance that differential given the production is equal molar? The normal way that, that gets balanced is by pricing. And that that leads us to a bullish outlook on caustic soda pricing long term. But does the end market make the adjustment in switching to some other alternative raw materials given will be more production of caustic than chlorine that will be more demand for caustic than chlorine. I think on the margin, there's an ability to convert from caustic soda to soda ash. But I that is not that it would not be sufficient to plug a 10,000,000 ton shortfall. And have you seen any increase in that switching over to soda ash and this year? No, that's not a decision you make every day. It's an expensive process change. And historically, when you look at people that did it, they're more often than regret that they did it because the time they spend the money and get it done, you see a reversal in caustic prices that makes it not just viable. So we are not concerned about that. And are there any new technologies in development that would potentially increase demand for chlorine derivatives. Nothing that jumps out at this point, no. Our next question comes from Arun Viswanza of RBC Capital. Please go ahead. I'm just wondering if you still see a trajectory towards $1,500,000,000 as mid cycle EBITDA over the next couple of years. And if so, how would that kind of break out in the different businesses? You still see in light of the Winchester pullback and some of this caustic kind of moderation recently? I think we said a little bit earlier. We no longer look at $1,500,000,000 as mid cycle. We look at it as a point on a longer months. And obviously, if you looked at our Q3 and adjusted for the ethane penalty and the caustic penalty and added that back into EBITDA, you can clearly see a path on a quarterly basis to getting there. Our view is that we're going to see continued growth in demand across the chlor alkali portfolio, both on the chlorine side and the caustic side as Jim talked about, And we also expect the same dynamics to play out in the epoxy chain. We've seen improved liquid epoxy resin pricing very consistently since 2016. And we also are starting to see tightness in the precursors of epoxy which are levochloride, epichlorohydrinphenol and bifinal A, all of which as those get tighter, they're going to force liquid epoxy resin prices up longer term. We just view it as a point in a longer term improvement trend. And that improvement trend will come from the chemical businesses. Thanks. And then on the cash flow, obviously you're generating a lot of cash for the next couple of years. Your leverage, I think, will be in a relatively manageable level 2 times or so. How do you, I guess, prioritize buybacks and other investments, given where your leverage would be and your generous cash flow? I think Arun, this is Todd. I think consistently with what we have said on the call, as we look in the fourth quarter, we expect a higher percentage of free cash flow to be returned to shareholders. And as we de lever, we would expect to continue to have a higher percentage of free cash flow going forward to shareholders. Our next question comes from Carl Blunden Goldman Sachs. Please go ahead. Hi, good morning guys. I think we started touching on, epoxy resin pricing. In the last question. I just wanted to get more detail on what your thoughts are on the margin outlook for that business and for 2019, clearly feedstocks you mentioned octetinow pushing and supporting epoxy prices, but how did the puts and takes, all balance out for your business? Yes, Carl, this is Pat. Listen, we've seen a pretty dramatic run up the indices market indices and epoxy here over the last 12 months. I mean, since the beginning of 2016, liquid epoxy resins up almost 56%. If you just look quarter on quarter at the market indices, liquid epoxy resins up 41%, Epi's up 49%. Vistinola A, up 40% on a year over year third quarter basis. So we see we saw a big change in epichlorohydrin here, a out this time last year. And we see the supply demand fundamentals continuing to be very favorable outside of China. It would appear that in China, what we've seen is, is any epi that comes which there's very little epics that comes out of China has been coming out at $600 to $800 ton higher than the chlorohydrin epi because a lot of that epi in China is based on glycerin epi. So I think that is a potentially a structural change that we have not seen in the past. So I see fundamentals on Epi continuing to stay high. You know, Fanal, as John mentioned, there's been a lot of pressure on Fanal with some decreases in capacity out in the industry that's tightened that market. The polycarbonate market has been strong and robust that has driven BPA prices up and there hasn't been any capacity of any significance built on EPI or BPA in recent times nor have we seen any additional significant capacity built for liquid epoxy resin. So I think the fundamentals around supplydemand and some of the changing dynamics things going on in China bodes well for good stability at the prices that you're seeing right now. And Olin's epoxy resin prices have been very stable here in Q3. So the puts and takes I think it also calls for ongoing demand, Europe, one of the cautious optimism out there is that Europe had been growing at 3% or 4%. It looks like more like 1% or 2%. On the flip side of it, the U. S. Market has been stronger this year than past years, mainly driven by oil and gas. So overall, I would say that the input costs, the supply demand fundamentals, the fact that there hasn't been any capacity additions made either on the input costs or the precursors or in the resin market would bode well for stable margins. And I think you could see a run up in price again here like we saw earlier in the year if you have a few unplanned events. A lot of detail. I appreciate it. Just a quick one on the balance sheet. Is it too early or would you intend to at some point give a debt reduction goal for 2019 or are we at a place where when you look at the equity is just too many things to consider to give that kind of guidance? I think, Carl, this is Todd. And early, when we provide our 4th quarter results and our early February. I think we'll be able to give a better sense as to what our expectations are for 2019 on that Okay, great. Thanks a lot. Appreciate it. Our next question comes from Roger Spitz of Bank of America. Please go ahead. Thanks very much. And I apologize if I missed this explanation, but, how much of the ethane price spike did we see in Q3 2018 Was it, some of it or all of it, or will some of it show up in Q4 twenty eighteen? And should we think about the impact of Dow's ethylene capacity for you having a half month or a 1 month delay before it goes through your income statement? So it covered both Q3 and Q4. And the answer to your second question is no. We essentially pay an average market price for the month. Bradane. Bradane. Oh, okay. So you're going to see it if it happens that month going to show up in your income statement in that month? That's correct. Perfect. And then on the epoxy side, could you comment with your Q3, if your epoxy spreads were up flat or down year over year. I mean, your the prices were up You also mentioned that the benzene propylene costs were up. I'm assuming the margin expanded, but I just want to the spread expanded? I just wanted to hear what you have to say. Yes. Listen, Roger, I think, not commenting specifically here on the spread. I mean, what we saw in Q3 versus Q2 is that propylene was up 17% in North America and propylene was up 5% Europe. So there's no question that the hydrocarbon headwinds curtailed our margin expansion in 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. Yes. Thank you to everyone for joining us today. And we look forward to speaking to you again at the end of our fourth quarter. Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.