Earnings Call: Q1 2018

May 2, 2018

Good day, and welcome to the Olin Corporation First Quarter 2018 Earnings Conference Call. All participants will be in After today's presentation, there will be Please note this event is being recorded. I would now like to turn the conference over to Larry Cromides, Director of Investor Relations. Please go ahead. Thank you, Nicole. Good morning, everyone. 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 of the factors that could cause actual results to differ from our projections are described without limitations in the risk Factors section of our most recent Form 10 K and in yesterday's press release. A copy of today's transcript and slides will be available on our website in the Investors section under calendar of Events. Releases. With me this morning are John Fisher, Olin's Chairman, President and Chief Executive Officer Pat Dahl Executive Vice President and President, Epoxy And International John McIntosh, Executive Vice President, Synergies And Systems, Jim Varalek, Executive Vice President And President, Clorox Life Products And Vinyls And Services and Todd Slater, Vice President And Chief Financial Officer Now, I would like to turn the call over to John Fisher. John? Thank you, Larry. Good morning, and thank you for joining us today. During this morning's call, I will begin by highlighting 4 key takeaways from Olin's first quarter, then I will describe our improving outlook for 2018 followed by a more detailed successfully completed approximately $92,000,000 of planned maintenance turnaround costs. The chlor alkali planned maintenance turnarounds at Freeport, Texas and Plaquemines, Louisiana that began in the first quarter were completed on schedule in April. In addition, the planned maintenance turnaround at McIntosh Alabama that began a couple of weeks ago was also completed by theendofApril. The Freeport Texas epoxy plant maintenance turnaround began in February was also completed in April. This 2 month epoxy turnaround was last performed 6 years ago. Included in the slides in the appendix of this presentation are the details of our actual and forecasted maintenance turnaround costs by quarter and by business segment. Overall, we continue to forecast that full year turnaround costs will be approximately $30,000,000 lower than full year 2017 costs. Also during the first quarter of 2018, we continued to experience a positive pricing environment for the majority of our chemical portfolio. Our first quarter 2018 caustic soda pricing improved approximately 40% year over year and approximately 10% Austic soda export price indices fully recovered from the January decline that we discussed in early February. The April domestic contract price indices increased an additional $35 per ton, while spot export prices decreased $40 per ton at the low end, but increased $10 at the high end of the range. These index pricing changes will be reflected in our pricing on a 30 to 90 day lag During the first quarter, export volumes accounted for soda price increases, we realized 1st quarter price increases in chlorine and most chlorine derivative products. While chlorine indices did not increased during the first quarter, the April chlorine price indices increased $15 per ton, which will be realized in our pricing, primarily on a 1 quarter lag. Hydrochloric acid prices have more than doubled from this time last year and increased approximately 25% in the 1st quarter sequentially on strong demand. Ethylene dichloride pricing was lower than the first quarter of 2017 but improved sequentially and exceeded our expectations for prove both year over year and sequentially. Public liquid epoxy resin price indices increased 21% from $1.32 to $1.60 per pound in North America and 27 percent to €2800 per metric ton in Europe during the quarter. Trade publications also reported that April liquid epoxy resin prices have been improved at additional $0.09 per pound in North America and per metric ton in Europe. Demand remains strong for epoxy products. In the Winchester business, we experienced lower commercial demand and a less favorable product mix than we had anticipated, a difficult pricing environment and higher commodity material costs. Given these factors, which 18 segment earnings will improve over full year 2017 results. Finally, during April, Olin's Board of Directors proved a share repurchase program for up to $500,000,000 of common stock. Because of the Dow chlorine products acquisition and the rules governing a reverse Mars trust transaction, Olin was effectively prohibited from repurchasing stock through October of 2017. As some of you may recall, Olin had an active share repurchase program from 2011 to 2014. While debt reduction remains our top priority for free cash flow generation we expect to begin to opportunistically repurchase shares the goal of offsetting dilution. 18, which is on Slide 4. We continue to remain encouraged by the supply and demand dynamics for both the chlor alkali products and vinyls business and the epoxy the earnings to improve significantly in 2018 compared to 2017. As I mentioned earlier, we no longer believe Winchester results will improve during 2018. We are reiterating our full year 2018 forecast for adjusted EBITDA of $1,250,000,000 with upside opportunities and downside risks of approximately 5%. With the favorable pricing forecast, we believe alkali products and vinyls on Slide 5. First quarter 2018 chlor alkali products and vinyls adjusted e of $244,200,000 improved compared to 6 soda chlorine and other chlorine derivatives and lower ethylene costs. These items were partially upset offset by planned maintenance turnarounds. The chlor alkali products in vinyls business is forecast to significantly improve the second quarter of 2018 from the second quarter of 2017, driven by higher caustic soda chlorine and chlorine derivative pricing and lower ethylene costs. 2nd quarter planned maintenance turnaround costs are also expected to be significantly lower year over year. Olin continues to maintain its positive long term view of caustic soda pricing. This is summarized on Slide 6. In 2018, In 2017, caustic soda exports from the United States increased approximately 14% over record 20 16 volumes. Exports in 2017 to Australia increased approximately 38% from 2016 levels. And exports in 2017 to Brazil have continued to increase with improved alumina and pulp and paper demand. At the same so to imports into Europe continued to trend up. The combination of the closure of the mercury based chlor alkali plants in Europe and no material chlor alkali capacity additions expected in segment, which is on Slide 7. First quarter 2018 epoxy adjusted EBITDA of $4,600,000 was impacted by approximately $45,000,000 of planned maintenance turnaround costs at our largest epoxy production facility in Freeport, Texas. As I said earlier, team due to this planned maintenance turnaround. As we look ahead into the second quarter of 2018, we project epoxy product pricing to be higher both sequentially and higher than the second quarter of 2017. We also project that raw material costs, primarily benzene and propylene will be higher in the second quarter of 2018 as compared to the second quarter of 2017. This, combined with lower maintenance turnaround costs, is expected to result in a significant sequential improvement in adjusted EBIT saw in the second quarter compared to the first quarter. We continue to expect the epoxy business to improve meaningfully in 2018 over 2017. Overall demand and product as For the United States, Europe and Asia. As you can see, pricing in all three regions has improved since the beginning of 2016. Current supply and demand fundamentals have resulted in tight market conditions. Forecasted demand growth for our products is between 3 5% annually depending on the geographic location and the application. Mentioned earlier, we have already seen significant improvement in pricing, which began in 2017. A portion of these price increases have been necessary to recover higher raw material costs primarily benzene and propylene. The additional epoxy slide is located in the appendix of today's slide deck. This slide summarizes benzene and propylene pricing in the United States and Europe for the past 28 months. Now let's move on to the Winchester business, which summarized on Slide 9. In Winchester's current business mix, commercial ammunition sales account for approximately 2 thirds of Winchester revenue. Military, law enforcement, and industrial sales account from the remaining 1 third. The lower level of commercial ammunition demand has a result in pressure on commercial ammunition selling prices in spite of higher commodity costs and other material costs. In the first quarter of 2018 on a year over year basis, commodity and other material costs increased $7,000,000. Over the last 12 months, commodity and other material costs have increased approximately $18,000,000. Through higher commodity metal prices through selling price increases have not been successful. In addition to the higher commodity cost headwinds, our product mix in the first quarter of this year was less favorable than the last the first quarter of 2017. In spite of the weakness in Winchester, we are pleased with the progress trends across our chemical businesses have improved. We continue to believe that we are in a multi year upcycle in caustic soda as evidenced by the positive pricing momentum. We have also witnessed positive volume and price trends in both chlorine and other chlorine derivative products. In addition, positive volume and pricing in to EBITDA of $1,500,000,000 we described a couple of years ago as achievable in the next 1 to 2 years. I'd like to turn the call over to Todd Slater. Todd? Thanks, John. Let's turn to our 2018 cash flow forecast, which is on slide end. We expect to generate $450,000,000 expectation is that by the end of 2018, the combination of debt reduction and EBITDA growth will reduce the net debt EBITDA leverage ratio to the 2.5 times range. During the first quarter, we prepaid approximately $60,000,000 of debt, Starting with the midpoint of our full year adjusted EBITDA forecast of $1,250,000,000 on the far left of the waterfall charge We deduct $50,000,000 of estimated tax payments, which primarily reflect income tax payments made to foreign jurisdictions in 2018. We are forecasting our cash tax not been a U. S. Federal taxpayer because of the utilization of net operating loss carry forwards, primarily arising out of cost associated with the acquisition in 2015. Because of tax credit carry forwards, we are not expected to be a U. S. Federal taxpayer in 2018. While we are continuing to analyze of 2017, the cash tax benefit to Olin for the changes in the tax law is minimal in 2018 due to tax credit carryforwards. We do expect the new tax law provide cash tax benefit to Olin beginning in 2019. The new tax law is currently estimated to reduce our cash tax rate for 2019 and beyond to the 15% to 20% range. This translates into an estimated annual reduction in cash taxes of approximately $75,000,000. Column 3 reflects the midpoint of our current four cast of capital spending of $400,000,000, which includes annual maintenance capital spending of between 225 and $275,000,000 and the investment associated with our information technology project of approximately 100 implement a new enterprise resource planning, manufacturing and engineering systems across the heritage Olin, and the acquired structure. The objective of the project is to effectiveness, efficiency and control over our global chemical operations. The project is anticipated to be completed during 2020. When completed, we expect the IT project to provide annual cost savings of approximately $50,000,000 Total capital spending for this multi year IT project cash to be $100,000,000. We are forecasting as I previously mentioned and approximately $50,000,000 of expenses associated with this project. The IT project expenses been included as an add back to our adjusted EBITDA. The add back of these incremental expenses will continue through the completion of the IT project. Now turning to the 4th column, we are expecting working capital to be a use of cash in 20.18 of approximately $50,000,000, The estimated increase in working capital is primarily due to higher selling prices and inventory costs associated with hydrocarbons in 2018. In the next column, one time items of approximately $60,000,000 include integration, cash restructuring costs, and the $8,000,000 of the expense approximately 20% of our debt at variable interest rates after the debt refinancing we completed in January, and we are 2018 interest rates will be higher than those we experienced in 2017. In the far right column, we are forecasting 3 $15,000,000 of free cash flow after paying our normal quarterly dividends totaling approximately $134,000,000 for the year. While debt reduction remains our top priority for free cash flow generation, we will begin an opportunistic share repurchase program with a goal of offsetting dilution. Finally, On Thursday, April 26, Olin's Board of Directors declared a dividend of The dividend is payable on June 11, 2018 to shareholders of record at the close of business on May 10, 2018. This is the 366 consecutive quarterly dividend to be paid by the company. Thank you. Our first question comes from Frank Mitsch of Wells Fargo Securities. Please go ahead. This is Jacob Hughes on for Frank. I just wanted to get your thoughts. There's been several disruptions over the past couple of months from Rosal. And now in Northeast, which looks like it's coming offline for up to 6 months. Could you talk about your outlook for caustic and any impact that has to your full year EBITDA guidance? I'll address both of those. The alkynorth think both of those, generally speaking, Alunorte has happened, Rusal hasn't happened yet, have had the effect of causing trade flows to be adjusted more than anything else. I think in the Alunero take case, we're talking about a very small quantity of caustic in an 80,000,000 ton market. And I would characterize, we expect that the Rousseau event if it occurs is going to have less impact because of the delay than it would have had otherwise because it just occurred quickly. But again, the total volume there isn't big enough to offset an 80,000,000 ton market. And it will adjust some trade flows I think Rusal will there will be more supply from Europe and then Europe will import more. And I think at the end of the day, it'll all watch out. So I don't really we don't really believe either of those are going to materially affect caustic pricing going forward. Okay. And then on your current leverage profile, can you walk through your thinking on the buyback versus more opportunistic that pay down and your timeframe to you envision executing the program? We believe that based on our outlook, We have, keeping in mind that debt reduction still remains our top priority. We believe that having a vehicle to opportunistically repurchase shares to offset dilution is important for the shareholders. And that was our thinking. Okay. Thank you. Our next question comes from Arun Viswanathan of RBC Capital Markets. Please go ahead. First off, I guess just wanted to understand the potential dynamics in your statement about, more upside opportunities. How should we think about the $35 inked on caustic and the 15 or so inked on chlorine? To your profitability for 'eighteen and 'nineteen, are you experiencing significant inflation that would offset those amounts or Should we just use the typical kind of $10 equals $30,000,000 annual adjusted EBITDA uplift? Thanks. I think you should use the typical $10 is $30,000,000 of uplift keeping in mind that on the caustic side, it's anywhere from 30 to 90 days. In terms of implementation on the chlorine side is typically 90 days. Oh, okay. And, I guess, you know, as a follow-up, are there any of your contracts that are significantly behind the index And we're set a different way. We've seen a couple of $100,000,000 go into the index over the last couple of years. So if we take 50% of that, maybe there's a 150 implied increase on your margins, have you seen that kind of improvement in your ECU per ton margin or is there something else that is holding that back? This is Jim Barlick. From a contractual standpoint, we continue to make improvements on there. You should assume that we now have improved the percentage of realization in the index movement. It's now in the 50% to 70% range And so we continue to improve contracts. So we're seeing an acceleration of the impact on price versus a year ago. Arun, I would also just caution you when you look at Q1, we talked about at one point during the quarter, 40% of our chlor alkali, capacity was offline due to planned maintenance. So from a volume perspective, this is going Q1 will be the weakest quarter. As will, as we've said earlier, the entire quarter will be the weakest of the year. This will be the weakest for chlor alk line. Great. And just lastly on that point then, given that there were some outages in Q1, And, you guys are ramping back up here in Q2. And, you know, typically, current operating rates will go up anyway. Do you expect, prices to kind of moderate as we go through the year? And if not, what will be the drivers for continued support of higher pricing? Arun, this is Jim again. I would say that the fundamentals of the market haven't changed. That we still see very good industrial production. We still see GDPs that are booking good. We still see, and anticipate, as John said, record ports out of the U. S. Gulf Coast. So, what you're seeing through the first quarter and you see in the 1st month of 2nd quarter is the momentum stemming from those fundamentals. So we are we continue to see that And we would expect that to continue for the next actually for the next several years with those trends being positive. Our next question comes from Don Carson of Susquehanna. Good morning. This is Emily Wagner on for Don. I guess following up on the guidance aspect, I only show an upside bias to guidance when cost stick chlorine and EDC and epoxy price trends have been so much better than the initial guidance given in 4th quarter? Emily, we would agree with what you said about the pricing trends. There is downside as we mentioned in Winchester. And we're always cautious about raw material costs, especially in the epoxy business with benzene and propylene, which have been very volatile, as you know, over the last 24 to 30 months as well as So at this moment, I would say we feel more comfortable saying we believe there is more upside than downside rather than just ten raising our guidance. Understand. Okay. And then on epoxy, I know in the price chart you showed the $0.09 increase in the U. S. Did you realize that already? And how should we think about pricing lags in the epoxy space? Yes, Emily, this is Tad And I think the short answer to that is yes, we are seeing that increase and we continue to get good momentum on that increase as we go into Yefremov of Nomura. Please go ahead. Good morning, everyone. Thank you. Just a follow-up on epoxy. How should we think about your sensitivity to these changes in benchmark prices, maybe similar to the way you describe caustic? Is it 75% of the benchmark 50%? Alex, we have not given you specific guidance associated with that. But what we have now started to provide is the changes in those, the key the key to remember though is that over the last year, benzene and propylene have continued to increase. As a matter of fact, our costs for the first quarter compared to the first quarter of last year, we're up over $20,000,000 in benzene and propylene costs. So a lot of our pricing improvement as we said earlier has really been to offset increased raw material costs. And maybe just follow-up on that again. In the second quarter, as you look at your increases in prices, are those larger than increases in raw materials? Are your cash margins increasing in Q2 compared to Q1? Based on the current prices for benzene and propylene, we would expand margins in the second quarter. Thank you. And a follow-up on ADC, there were recently there was recently a spike in ADC prices in China. To just give you hope that your forecast for lower ADC prices in the second quarter is maybe conservative or do you not see it as sustainable? This is Jim. Obviously, we are pleased to see the movement in EDC prices. And it's the EDC is it's kind of a it's a global market. And a lot of those the spike actually had to do with some other issues in terms of Latin America, Brazil and so forth that helped push the prices up. We are moving into a strong season in terms of replenishment and so forth, 1st quarter, 2nd quarter So, we're anticipating momentum in the 2nd quarter. The 3rd and 4th quarter, as John said, It's always a challenging time in EDC as you go to off season in monsoon. And that's why we're us about EDC for the remainder of the year. I think the IHS projection has 2018 EDC prices to be slightly lower on an annual basis than 2017. Our next question comes Hi, good morning. You mentioned in your prepared remarks that $1,500,000,000 of adjusted EBITDA is more of a near term target the next 1, 2 years rather than a mid cycle target. Is your new estimate of mid cycle EBITDA now higher than $1,500,000,000? In the mid cycle target, we're just commenting on achieving, we believe $1,500,000,000 is achievable in the next 1 to 2 years. Neil, this is Todd. I think there has been some confusion at times by, investors or other folks. When we talk about mid cycle, we are not remotely talking about peak, you're talking about sort of the middle of the cycle, where there's still plenty of room to run above that. And I think maybe it's a nomenclature item, from how we're speaking versus how some other people may interpret that. So yeah, I think we're the number of $1,500,000,005 is by no means an end. It's just an item that we will continue to improve from. Great. That's very helpful. And then a question on how you're thinking about your current portfolio. Competitor viewers in epoxy has put up some assets for sale. Is that something that you would consider? And also has there been any change in how you're thinking about Winchester? In light of recent industry headwinds and changes in the competitive landscape? We're aware of assets that are for sale in the epoxy business. And I would say As a general comment, we would always be interested. I think as a practical matter, the assets that are for sale are not to be available represents a value question. And is there a methodology for Olin to separate the Winchester business from the Olin portfolio and create value? We are always faced with the fact that we've owned the business since 1892. It has an extremely low tax basis essentially equal to its working capital. So any straight sale for cash would have to have a pretty generous multiple on it. And if you look at similar properties to kind of tax free spin. And I would say, again, if you looked at comparables today, you would spin it off. It would trade worse than it's trading in Olin today. So we're aware of the issue. We kind of we've been focused on it. I've been looking at it for 15 years And it really just becomes a value question. That said, even with its weaker results, it's a significant cash generator for Olin. And I would say it is a business we understand. It is a business that we can continue to work hard at improving. Okay, great. And then I guess just one last follow-up on the buyback. When you say that you're going to be opportunistic to offset dilution, are you speaking about the the 2018 long term incentive plan, shares issued from that? And then could you also see yourself being more aggressive with buybacks at levels? Shares are undervalued at? We were not addressing specifically the 2018 plan that those shares actually has been issued yet. We were just addressing the normal dilution that occurs from existing compensation plans, whether they'd be for management, employees or directors. And I think we would just say we would look at this the opportunities opportunistically. Okay, all right. Thank you. Our next question comes from Jeff Zekauskas of JPMorgan. Please go ahead. Thanks very much. In your slide, you present a favorable supply demand balance for caustic soda over a longer period of time, and you talk about positive pricing, in epoxies, what you do is you simply have a price chart Do you have a view of the supply demand balance in epoxies over the next 2 or 3 years or a view as to whether supply demand balances will tighten or loosen or are you agnostic and you don't have a view? Yes. Jeff, this is Pat. Listen, first of all, you got to remember that the market contract for epoxy resin in 2016 versus 2015 and that was fairly sluggish into 2017. We've just started to see positive growth again in this 3% to 5% range that we talked about in our remarks. And I think that's very Also, I think from a supply demand standpoint, the fundamentals are improving. No question about it. While the overcapacity that was built in this industry was built in China, as most of you know. And so that capacity has been working itself off. There's also been some environmental regulations that I think has constrained some of that capacity. Although we don't have clear vision of that, it definitely has been impacting supply demand fundamentals that are much more favorable here. And we see those supply demand fundamentals continuing to be favorable and that we don't see anyone who's gone out and announced any new meaningful capacity here. Going forward. So that's our view of it right now. Just for my follow-up Were 2017 2018 years of unusually high turnaround activity in your opinion? For Olin, yes, there was, we have 2 large integrated epoxy plants, 1 in Europe, 1 in the United States. In the 3rd 4th quarters of 2017, the European operations underwent there once every 6 year turnaround. And then in the first quarter or into the second quarter of this year, the U. S. That's underwent that. So we would expect if you look forward 1 year, Jeff, that 2019 will be a much lower turnaround year in terms of dollars spent and volumes of production lost for the epoxy business. Okay. Thank you very much. Our next question comes from Steve Byrne of Bank of America. Please go ahead. Yes, thank you. What is the outlook for the Shintech contract that you have via your tolling agreement with Dow? Could this change post the startup of their new ethylene cracker? We would not expect this is Jim. We wouldn't expect anything to change. We have a long term relationship with Shintech and we expect to have that well into the next decade. Okay. Thank you. And what would you say is structurally driving the weakness in ethylene dichloride? Is there a shrinking merchant market that leads of that weakness or is it ethylene related? How do you look at that? Well, as you if you look at the slide, you see that EDC is very volatile. It moves up and down as a number of factors. Supply demand obviously drives it Right now, it's I would say that the weakness has been driven by the success that's been achieved on the cost side of things where you have incremental players that have the ability to move EDC or pouring into EDC, in order to liberate the caustic has been a factor. Having said that, only a certain amount of that incremental EDC that's going to be able to come online. And so we do expect that over the period of the next few years that we do anticipate improving fundamentals on EDC. And just lastly, any capacity expansion or efficiency improvements with this latest round of turnarounds? One always expects to get operating improvements when you spend this kind of money to do a turnaround that's done once every 6 years. I mean, what coming out of the turnaround that we had in Europe on the epoxy, we had to best production we've had in many years, we expect to see the same thing in Freeport. Our next question comes from Jim Sheehan of SunTrust. Please go ahead. Could you discuss the various puts and takes that you see for the 2nd quarter EBITDA bridge? Well, I think the biggest single bridge point is that we're going to have significantly less turnaround costs and significantly lower loss volumes from production in both chlor alkali and epoxy. The other big bridge going is the positive pricing trend moving forward. We as we said in both discussions about chlor alkali and epoxy, we expect pricing to be better second quarter versus first quarter. And what are your current views on the epoxy business for 2019? Yes, I think. Yes, this is This is Pat. I think, again, back to the fundamentals, I think the fundamentals bode well from a demand standpoint, with what we're seeing, especially with oil and gas improving in North America. Europe continued to consume 3%, 4% more epoxy resin over the past few years. We really don't see that changing with a lot of the structure building in that on some of the demand in the epoxy market from that standpoint. It's really hard to tell at this point in time. But basically the fundamentals should continue to improve. Yes. The other thing we answered in a prior question was maintenance outage costs in epoxy in 2019 should be significantly lower than they were in 2018. And related to that, how much lower will your total planned maintenance costs be in 2019? Can you give some more color on that? I would tell you qualitatively, we expect them to be lower. We have not at this juncture given out anything specific on that or any other element of 2019 other than the broad comment that we think $1,500,000,000 is achievable in the next 1 to 2 years. Our next question comes from Hi guys and Todd and Larry looking forward to seeing you on May 21st. Thanks Thanks for the new epoxy slide in the appendix with the propylene and benzene costs. Would you be able to add an ethylene slide as well, or does your price from Dow vary too much from the IHS benchmark community disclose that? I would say that the price from Dow makes slides somewhat unnecessary and competitively very sensitive. John, this is Todd. You should think of, we now have virtually ethylene at producer economics. So really, you're thinking about changes in ethane. Because the changes in spot ethylene or those type of things are no longer meaningful after the end of September of 2017. We've basically went to cost based ethylene. Okay. And then secondly on Winchester, you've got one competitor in bankrupt and you get a second competitor that just announced separating its gun business from its ammo operations. Do we have to wait for a post bankruptcy and for, the separation at the other competitor kind of happen until normalized competitive behavior comes back to the marketplace. I'm not sure we're the right people to answer that question John. I think the Remington bankruptcy appears to be proceeding very quickly. So I would hope that gets resolved very shortly. I think if you look at what Vista is trying to do, I would hope in the comments they made around ammo, I would hope their behavior, gets normal quick. I mean, they sort of said that. Our next question comes from Kevin McCarthy of Vertical Research Partners. Yes, good morning. As you look across the businesses where you compete, do you anticipate the need to expand capacity in any of those markets over the next couple of years trying to get a feel for whether organic reinvestment, will be any sort of meaningful call on cash as we think about your capital deployment priorities and the new repurchase plan? I think, Kevin, in the near term, which I would call 1 to 2 years, we will have a greater focus on investing for reliability and investing to optimize the output or the use of our chlorine to ensure the highest operating rates that we can generate. Okay. And then a second question, if I may, just to come back to epoxies. I appreciate the additional slides. Why in your judgment of prices increased or inflected over the past several months. Is it related to operating rates? And if so, what is your assessment of global operating rate for base liquid resin how do you expect that to trend? And can you also comment on your typical geographic mix within the epoxy business? It's a few different questions. Apologies, but just would like to understand better the outlook there. As it relates to the geography, I think if you look at the 10 Q, which will be filed later today, still actually be segment information by geography. And what you'll see is that the larger portion of our sales actually are in Europe in the epoxy business, North American 2nd and then others being 3rd, which is either Asia or South America. I'll let Pat talk about the inflection points. Yes, Kevin. I think the graph we included you'll see the big inflection in Asia, liquid epoxy resin. And, you know, that's where all the overcapacity was really built, in that 2006 through 2012 type timeframe. So, one factor I've already mentioned before that I think caused that inflection point was around what happened in China and we don't have full transparency there on the environmental regulations that have definitely constricted restraint, epichlorohydrin capacity and liquid epoxy resin capacity. And so think China was China was a big inflection point. Of course, when you see the price way it shot up, from September of 2017 until beginning of this year, it did create an arbitrage where people moved more liquid epoxy resin into China, which was 3 major events. And I think the ongoing fundamentals is if you look outside of China, supply demand fundamentals are very good there on liquid epoxy resins and there hasn't been any meaningful capacity built because the reinvestment economics weren't there. So I think you're seeing a fairly typical commodity cycle of supply working its way off combined with some environmental issues in China and that has really propelled the liquid resin prices. And lastly, if I may, just coming back to the $1,500,000,000 EBITDA level that you've put forth, over the near to medium term, let's say, what sort of level of profitability and epoxy might we expect to be embedded in that sort of level? Can you provide some sort of notion of what you view as a mid cycle or normal level of profit ability here, coming off of 5 or 6 red quarters? If you went back to the, February 2016 investor meeting, where we talked about what our long term goal was, which was one $5,000,000,000. We had a chart that showed epoxy on the upswing over a period of years. I think if you actually tried to maple out the chart, it suggested that a posse would be something in the $250,000,000 a year of EBITDA range. And that still valid. Our next question comes from Eric Petrie of Please go ahead. Hi, good morning. Good morning. Could you give us an update on Asia or China demand specifically for caustic soda following the 2+26 on the winter production curtailments. And I think it's been a little softer demand recovery as prices kind of slipped below the $600 per ton mark. All right. Sure. This is Jim. What you saw in China is, prior to the curtailment the winter curtailments and so forth that took place, you actually saw a run up in prices and the prices went well into the 600 range and peaked at that point in time. And so what you've seen since then is really just a, kind of a return or a calibration back to the norm. So there has been some movement in pricing downward, but we don't see it that is a long term trend. It's a peak prior to the curtailment and then following up with the curtailment, you saw some settling out of the prices. Nonetheless, we don't see the dynamics in China changing. We're still seeing exports of caustic soda out of China continuing to decline. And they've been on a 4 to 5 year decline. So I wouldn't read too much into it other than just some normal movement around what is actually a very high number. Okay. And then what's typically a healthy level of gap between China prices and U. S. Gulf Coast at the $7.95 mark in April? I guess that I don't know that there's a healthy gap. There's gaps that occur. That are just the normal movements of the market. And those dynamics will drive that I don't know that there's a what would you consider a healthy gap? There's a it's a global market and product moves to wherever the highest prices are. So I don't have have a good answer for you on a GAAP number. Okay. Lastly, has the mix of your trade flows changed in either EDC or caustic soda based on the proposed China tariffs? No, not at all. Our next question comes from Matthew Blair of Tudor Pickering And Holt. Please go ahead. Hey, good morning. Wanted to come back to epoxy here. A few comments on strong demand. And in terms of geographies, I think you mentioned that China looks pretty good. What about specific end markets? Can you call out any particular areas where you're seeing a significant improvement? Matthew, this is Pat again. Poxy, the biggest markets, of course, are your performance coating market. So if you follow the PPGs, the Sherwin Williams, the So you get a pretty good idea about their demand. There's no question with both in Europe and North America, there's been a little bit of a slow start to the season with the wet cold weather. But those performance coatings are by far biggest part of the epoxy market. You get into electronic electrical laminates, which we participate in over in China. So that's a major market that continues to be very good for us and grows more than GDP. You get into the wind energy market and the windmill blades and adhesives. There's also a major market and then of course, automotive. So across most of those markets, as I said earlier, the demand, it's between 3% 5% and much better than where it was in 2016 versus 2015 in the first half of twenty seventeen. Sounds good. And then, there's a couple of comments on just overcapacity in the industry. After you get down with the turnarounds, what kind of utilization rates are you running both your, your Europe and U. S. Asset that? We have not provided operating rate information for any of our assets. So we're not prepared to do that. Okay. Thank you. Our next question comes from Dmitry Silverstein of Longbow Research. Please go ahead. Hey, actually Casey in for Dimitri. When you look to the 1.5 $1,000,000,000 of EBITDA potential. You mentioned a Winchester improvement. Just wondering where you think that could come from, whether pickup in demand, raws or maybe some pricing? I don't think we actually mentioned Winchester Improvement as a major thing. On a list of 6 or 7 things. Fundamentally, what we think is ultimately going to happen and it was an earlier question about the competition. Is that you're going to get balance between the commodity costs and the pricing environment. And that will be the biggest single thing in the short run and our ability to continue to improve our operations. Okay. And just one more on chlor alkali side. You mentioned that there's not likely to be any capacity additions. I think you said over the next 3 years, is there any or fulfillment concerns that you have on that business, just with all the production rationalizations? Well, I think that goes to the conversation we had about a multiyear upcycle on caustic soda. If you get a global economy that grows at 2%, that suggests 2% caustic soda growth, annually and no new capacity being added over time. And I would remind you that to add capacity, you actually have to have increasing chlorine demand. That suggests that the market's going to remain tight or potentially get tighter and prices are going to continue to move positively. Excellent. Thanks guys. Our next question comes from Carl Blunden of Goldman Sachs. Please go ahead. Hey guys, just a quick question on the pricing dynamic and epoxy prices out quite nicely, but a lot of the different input costs where the coatings plays are up to TiO2 is up year over year oil looking to move up. Does that affect demand going forward or epoxy prices still low enough that it's not really a driver there? I don't think those other factors are really a driver, right? I do think it adds to the overall momentum. You have a basket of raw materials that goes into the major coating houses going up right now but there's really no adjacent impact here from any of those other raw materials on epoxy. Okay. And then just a quick one on the balance sheet here. You've made progress. You're progressing with the agencies on the ratings front. What's the what are the gating factors to to moving further up in terms of ratings and edging up towards IG. And then just for the overall debt target, should we think the total loan coming out over time, or do you feel like the amount of debt you have now is appropriate and deleveraging will be somewhat from debt reduction, but primarily from EBITDA growth. How should we think about that? I think you should think about it is that metrics will continue to improve and it will they will continue to reflect both improvement in EBITDA and repayment of debt we've commented in the past that when we target our debt to EBITDA ratio, we do it based on where we are in the cycle. We're obviously in and hopefully we'll continue to be in a good part of the cycle. And we need to get based on the his historic volatility in cyclicality, we need to get that ratio down well to something in the 1.5 to 2 range. We believe to give us the cushion when and if the cycle turns that we stay in a good place. We have always said that we our objective is to run the company with investment grade credit metrics, whether we get investment grade ratings or not is another element that is not has not been a per se. That's helpful. Thanks guys. This concludes our question and answer set session. I would like to turn the conference back over to John Fisher for any closing remarks. Thank you for joining us today and we look forward to speaking to you about our second quarter results. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.