Good morning, and welcome to Olin Corporation's Q2 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Following today's brief opening comments, there will be an opportunity to ask questions.
To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Steve Keenan, Olin's Director of Investor Relations. Please go ahead, Steve.
Thank you, Chad. Good morning, everyone, and thank you for joining us today. Before we begin, let me remind you that this discussion, along with the associated slides and the question- and- answer session that follows, will include statements regarding estimates or expectations 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 Q2 earnings press release. A copy of today's transcript and slides will be available on our website in the Investors section under Past Events. Our earnings press release and other financial data and information are available under Press Releases.
With me this morning are Scott Sutton, Olin's CEO; Pat Dawson, President, Epoxy; Damian Gumpel, President, Chlor Alkali Products and Vinyls; Brett Flaugher, President, Winchester; James Varilek, Olin's COO; and Todd Slater, Olin's CFO. Scott will begin with some brief remarks, after which we will be happy to take your questions. I'll now turn the call over to Scott Sutton.
Thanks, Steve, and hi, everybody. Look, the most important data to know today is that our Olin employees are accelerating our success. We're going to use this earnings call to forecast just a bit further down the runway as well and keep up with our team's momentum. As previously forecasted, the Q2 Adjusted EBITDA did exceed the Q1 Adjusted EBITDA by $119 million, or 27%, excluding the one-time benefit from Winter Storm Uri in the Q1.
We also forecast that the Q3 Adjusted EBITDA will exceed the Q2 as well, and we expect our full-year Adjusted EBITDA result to be at least $2.1 billion. Opening up with slide number three in the presentation. 2022 is a positive stepping stone for Olin, principally because we will grow the number of knobs in our hands via expansion of our interlinked matrix of activation nodes.
The various combinations of activations across the interlinked matrix are what lifts Olin's value. Generally, the first-order effect of a singular activation is unseen. However, the second or third-order effect of multiple activations is what lifts the whole Olin tide. Fundamental to that rising value tide are our three linchpin elemental chlorine, epichlorohydrin, and ammunition primers. Our pricing in those products is a ratchet. Our pricing only turns one way and does not reverse.
If necessary, we will sell zero volume into the freely negotiated market to preserve our ratchet principle and the value of our broad downstream chains based on those linchpin products. Across all our businesses, supply chains are closer to empty than full, and in 2022, we expect demand growth to outpace supply growth. Continuing to slide number four.
In 2022, we should gain traction in our next phase of parlaying and potentially surface some acquisition opportunities to complement our differentiated model, and in doing so, use the funds from the Olin cash flow machine to deliver more value to our shareholders. On slide number five, that parlaying activity is new in 2021, but we do have some accomplishments to catch up on and report beginning here in the Q2, which reached an annual run rate of about 500,000 tons of molecules made on somebody else's assets, but now running through our matrix.
We will share a tracking mechanism to report on our progress in this important area as we move into 2022 and beyond. In my opening comment, I said we would forecast just a bit further down the runway. On slide number six, we are calling out a few discrete upsides beyond 2022. I will just note that we have a lot elemental chlorine, a linchpin product, moving into the titanium dioxide space.
We won't be supplying large parts of that industry in 2023 as we move that chlorine volume into higher margin end uses or completely take it out of our system. In 2024, we expect Winchester's participation in the Next Generation Squad Weapon program to become significant. We have Brett Flaugher, our Winchester President, with us today if you have some questions about that or about our expectations to continue growing the recreational shooting pie as well.
Finally, in 2025, the 10-year cost-based sales contract term representing 30% of our ECUs is completed as well, and all options are accretive for Olin. Some options substantially reduce our carbon footprint as well as we evolve our ESG scorecard targets. Pulling back to today a bit, please see slide number seven and number eight. As our mastery of the ECU conundrum solution continues to improve, we matched our market participation to the weaker side of the ECU, caustic, and pricing on both sides of the ECU improved versus the Q1.
The first time that pricing on both sides of the ECU moved in the same direction since we have articulated this contrarian model. Not surprisingly, the Olin ECU Profit Contribution Index lifted again. Moving to slide nine. I hope you noted that Winchester's Q2 Adjusted EBITDA improved to $115 million. In addition to our future participation in the Army's Next Generation Squad Weapon, we are embarking on a plan to reach some of the 175 million adults and part of the 45 million youths who don't participate in target shooting today by using the Winchester brand to grow the overall pie.
Before opening the call up to Q&A, let me call out a few key elements at play in the Q3 on slide number 10. First of all, fundamentals are good. We started off the Q3 with our model positioned to participate less in the weaker side of the ECU, caustic. As we move through the rest of the Q3, we will adjust our configuration depending on which side of the ECU is weaker relative to the other side.
We relish that opportunity to add another proof point to our model and demonstrate that we deserve a higher valuation. Epoxy continues its upward Adjusted EBITDA margin march as it is now at 22%, and Winchester improves its value equation, even though we expect commodities costs to be sequentially higher in the Q3. That concludes my opening comments, and operator, we are now ready to take questions.
Thank you. We will now begin the question- and- answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today will be from Michael Sison with Wells Fargo. Please go ahead.
Hey, good morning. Nice quarter. Scott, just curious, when you think about the ECU PCI improvement in Q2 to 192 versus the 1476, how much of that do you think was sort of the strategy versus kind of industry pricing just going up?
Well, I think our strategy is to move Olin's pricing up as we run our model. Those things are just intimately connected, Mike. We're taking very specific actions and trying to telegraph those actions in advance so that the world understands that this is a purposeful activity.
Got it. Then you had mentioned the opening remarks in acquisitions. Anything in particular you think would make sense for Olin as you look at those opportunities down the road?
Mike, we still have some work to do in this area, clearly, as we move toward that phase IV of structuring. What I would say about potential acquisitions, we'll be looking for something that essentially adds another layer or box around our matrix. When we were able to improve the value of that acquisition is significant enough to impact our performance all the way back to the fundamental ECU. That'll sort of be our main criteria to go after acquisitions.
Great. Thank you.
Thanks, Mike.
The next question will come from Hassan Ahmed with Alembic. Please go ahead.
Morning, Scott.
Hi, Hassan.
Scott, question on chlor-alkali products. Sequential sort of margins over there, sequential EBITDA over there, Q1 to Q2. Adjusting or scraping away the Uri sort of favorable impact, if I took a look at the margins, the margins were relatively flat quarter-on-quarter. EBITDA was up, call it, around $17 million. This is despite you guys calling out higher ECU contribution sequentially.
If I took a look at the slides and heard your comments properly, you talked about sort of lower volumes. The question really is, despite these favorable pricing trends, margins were relatively flat. EBITDA was up slightly. I'm just trying to understand the sort of negative volume impact properly. How much of that was you guys actually sort of taking out volumes from the system versus, I keep hearing about supply chain disruption impacts, logistical sort of issues, and the like in the quarter. If you could just parse those out as they relate to the volumes.
Yeah. Thanks a lot. The way we would answer that question is basically is that, look, we're running our model, which is focused on value over volume. What you saw happen in the Q2 is, of course, our pricing went up, our ECU PCI improved. The reason that you sort of see the margin issue there in CAPV is we did have some fixed cost issues that won't repeat themselves in the Q3. We've addressed that item. Absolute profit up, margins kind of flat, understood to be because of the fixed cost, and that doesn't continue, Hassan.
Understood. As a follow-up on the raw material side of things, obviously we've seen higher natural gas prices, as it relates to the Epoxy segment. We've seen sort of higher benzene and propylene prices. As you have given your guidance for the second half of the year, how are you guys thinking about sort of raws? How are you managing those sort of higher prices? As you've given your guidance, if raws do come down, could that be the source of a tailwind above and beyond what you guys have guided to?
Yeah. Some of those things you mentioned really impact our Epoxy segment quite a lot. I'll ask Pat to answer it.
Yeah, Hassan. I think first of all, raw material costs, the hydrocarbon costs have really never had a big impact on the Epoxy business. We deal with those pretty easily through our value chain. I'm really not concerned about what happens with hydrocarbons, given our ability to pass those costs along and to manage those costs within our system. Of course, we do have options to make versus buy in our key raw materials around things like BPA, phenol, and even epichlorohydrin.
Very helpful. Thanks, guys.
Yeah.
The next question will come from Jeff Zekauskas with JP Morgan. Please go ahead.
Thanks very much. How do you see changes in global Epoxy supply and demand now that prices have elevated? Do you think that it will invite new competitors in, or some of your competitors may expand capacity, or you think it'll take quite a long time?
Yeah. Thanks, Jeff. I'll just start it out. Pat will give a little bit of color on maybe some specific areas of demand. Generally, Jeff, demand is superb and improving across multiple segments that Epoxy goes into. Pat, do you want to give a little color?
Yeah, Jeff. I think if you look at some of the major markets, we have a variety of markets that we sell into. The biggest markets being around industrial and performance coatings. Also, electronics is very important to us, automotive, and of course, between automotive and electronics, they get intertwined with electrical vehicles and a lot more printed circuit boards being put into electric vehicles.
That plays to our strength with what we do in electrical laminates in Asia. Appliances, very strong. Oil and gas, we're seeing oil and gas improving. There's more demand coming in oil and gas for our fusion-bonded epoxy resins. Then, I don't know, Jeff, if you caught this or not, but the marine coatings have been very, pretty much, pardon the pun, dead in the water for the last, I'd say five years.
In shipbuilding, container ships or orders for new container ships in the first five months of this year were nearly double the orders for all of both 2019 and 2020. This is demand for Epoxy that is yet to be realized but will come in 2022 and 2023.
I guess for my follow-up, there have been so many outages in the United States because of weather in chlorine and caustic, which has tightened supply demand balances. If we don't have outages to come and the industry gets back up to normal rates of production, do you think the supply-demand balance in chlorine will change in 2022?
Yeah, Jeff, this is Scott. I guess two points. Number one, we're running our model, and so we control supply-demand characteristics of our business. That's point one. Even if you fast-forward to 2022, ECU demand growth outstrips ECU supply growth. Same exact thing in Epoxy and epichlorohydrin, right? Demand growth far outstrips supply growth. If you take that to our small-caliber ammunition business, Winchester, you see exactly the same phenomena as well.
Okay, thanks so much.
Sure.
The next question is from John Roberts with UBS. Please go ahead.
Thank you. What's the range of your chlorine realized prices? Is it fair to say that, including the TiO2 and the Dow contract, about half your volume in chlorine is locked into these lower price contracts?
Thanks for the question. I'll ask Damian just to comment a little bit. At a high level, we have a really broad range with a lot of opportunity. Damian, you want to give some color?
Sure thing. John, good morning. We've talked about in the past that aside from the 30% of these ECUs that are on this long-term cost-based arrangement, the remainder of our merchant chlorine, we've said that we've moved a significant portion off of indices and put them within our own destiny.
We still have a ways to go, but even within this quarter, we achieved moving another significant chunk of this volume off of these rear view mirror arbitrary indices and stepped up the value of that chlorine into its true reflection of its market value in our system. We still have a way to go, but this Q2, through everything we've done in running our model, we've achieved yet another milestone step for us on our way to put more of our ECUs back into our own, chart our own destiny with them as we prepare for 2022 and beyond.
Okay. I guess I don't understand the primer market that well in the Winchester business. How big is primers as a percent of Winchester or however you want to characterize it, and what's going on with pricing on primers? That's something we don't observe in the market.
Yeah. Go ahead, Brett.
Sure. There's really two manufacturers of primers in the U.S. right now. Winchester is the largest. One of the things that we've taken a strong look at is our past practices and the complicated nature of building primers and the high startup costs of getting into the primer business. We're exploring strategies that will help us get full value out of our primer manufacturing capabilities.
Thank you. The next question will be from Frank Mitsch with Fermium Research. Please go ahead.
Hey, good morning and congrats. As I look at your Epoxy results in the Q2 and the guidance for a higher Q3 in that business, we're starting to talk about an $800 million EBITDA run rate. Is that the sort of neighborhood that we should start thinking about for the Epoxy business?
Yeah. Hey, thanks a lot, Frank. This is Scott. What I will say is we're just not up to our target yet, and so we have some work to do in that business, right? We put a target out there of 30%, which maybe at the end of the day gets exceeded, but we still have some work to do, so gets you to a range.
Okay, got you. If I think about the ratchet principle that almost implies a continued upward PCI. You're getting close to that 200 level on the ECU PCI that we've talked about in the past as necessary for a $2.5 billion EBITDA. Is something like that nearer term than perhaps we thought before? What are your current thoughts about getting to that midterm target?
Frank, that's what we're working toward. What I will say is the ECU PCI has moved up. We're going to continue to work on moving it up. Most of the growth of that has been from the derivative businesses we have. If you think about the lynchpin products that I talked about, the two that go into that ECU PCI elemental chlorine and epichlorohydrin.
I'll just say right now that neither one of them sell in the merchant market anywhere close to reinvestment economics. We have some room to move there. We've also got some period of time to work our way out of certain handcuffs that we have today. As Damian said, we're making some progress on that.
Terrific. Thanks so much, Scott.
Sure.
The next question comes from Aleksey Yefremov with KeyBanc. Please go ahead.
Hey, this is Paul Solon drawinf for Aleksey. Is it possible that you may look at extending the 10-year supply agreements of 30% of your ECUs earlier than 2025? Just to follow up, could you discuss the size of the Squad Weapon opportunity? Thanks so much.
Yeah. Thanks a lot, Paul. Look, I would just say for those 30% of our ECUs, that ends in 2025, and any option is accretive for us. What I'll do, I'll ask Brett to answer the second part of that.
Sure. Thanks for the question, Aleksey Yefremov. Since we've taken over Lake City, we've been highly involved in the Next Generation Squad Weapon program. It's hard to define the scale of it right now, but it's large. It's more than just making ammunition at Lake City. We have to support the U.S. Army in building out a whole new infrastructure. We're active in that today. We do believe by about 2024 that that will ramp up extensively and really go throughout the whole contract period for us at Lake City. It's a big program for the U.S. Army, and we're highly involved in that right now.
Thank you. The next question will be from Kevin McCarthy of Vertical Research. Please go ahead.
Good morning. Scott, I appreciate you're a lot more focused on value versus volume. Nevertheless, the volume side has been quite volatile lately, really across the industry. If I think about the Q3 versus the Q2, what kind of volume uplift might we see in Chlor Alkali Products and Vinyls, and what kind of benefit would you anticipate relative to superior fixed cost absorption, for example? Maybe you could just talk through some of the force majeure declarations and operating rate changes that are running through your business right now.
Yeah. Thanks a lot, Kevin. You're right, of course, we're focused on value over volume. I don't think in the Q3 that our volumes would be lower than they are in the Q2. What I will add on to that is the fact that we're getting traction in our phase III of parlaying, so essentially applying our model to molecules that aren't necessarily made on our assets, but flow through our business and run through our matrix.
There's likely to be some additional growth in that. What we're trying to do, Kevin, is really matching up. We're going to drive for value, yet we have a thematic to be able to still grow the company without having to build new assets. That's where we are.
Okay. Thank you for that. Secondly, with regard to Winchester, it looks like your sales were up, I guess 110% in the Q2 on a year-over-year basis. Can you help us with how much of that uplift would've been attributable to price versus volume? On the pricing side, are there additional price benefits that you would anticipate in the Q3, sequentially versus the Q2? Thanks.
Yeah. On the Winchester revenue being up, it's a mix of both, right? It's price across our complete business, including the new business at Lake City. It's also that volume that comes from Lake City and being able to utilize that sum. If you look at our pricing chart in the back of the presentation, you'll see that we have announced another price increase in Winchester for the Q3 on some products. That'll be partially effective through the Q3. Kevin-
Perfect. Thanks a lot.
-it's about 50/50 of the change.
Thank you, Scott.
The next question is from Josh Silverstein with Wolfe Research. Please go ahead.
Yeah. Thanks. Good morning, guys. We're just looking at the EBITDA guide for next year to be at least up year-over-year. Can you talk about the different business units, what you're expecting there? I imagine Epoxy is probably moving higher with the margins. Anything that you can break down by the different business units would be helpful.
Yeah. I appreciate the question, but we didn't give a breakout by business of what's expected there. The reality is, I can indirectly answer your question by saying that in each business, fundamentals get better. In each business, we have a specific set of actions that are likely to add value as well.
Just to give examples of it, you've heard the team speak to some of those, right? We release ourself from more contractual restrictions in CAPV. We work the upstream linchpin product more in Epoxy, and we're going after more recreational shooters in our Winchester business by growing the pie, not taking share as well. You might have a view that it's broad based.
Got you. That's helpful for that. Just as far as free cash flow deployment for next year, you guys are due with $1 billion of debt reduction this year. Is there more balance sheet cleanup for next year? Or can you start to think about stepping up the return of capital profile, using cash for M&A? How are you guys thinking about that $1 billion potentially for next year?
Yeah. No, we have a number of options we're thinking about. Todd, do you want to give a little bit on that now?
Yeah. No problem. If you think about it. Where we sit in 2021 today, we're generating $1.3 billion of free leverage, free cash flow. That's a cash flow yield of around 18% based on our current stock price. Clearly, we're going to use about $1 billion of that to reduce debt. By reducing debt today, that really frees the balance sheet up to provide flexibility going forward to accomplish those structuring activities, including M&A and parlaying activities as we are. Parlaying activities are obviously much more capital light.
Yep. Is there any necessary, I guess, balance sheet cleanup for next year, or can you really just redeploy all that $1 billion for those other activities?
Yeah, I'll jump in, Todd. This is Scott. Part of it will go toward structuring activities, assuming we're successful at finding some targets that complement our model there. We'll be exploring some other options as well. There's not a lot more debt that we necessarily intend to take down, but we will be exploring other ways to get value for shareholders. Look, at the end of the day, if this phenomena of multiple compression keeps happening in our stock price, our equity becomes the best return for us. It sits at an 18% return right now.
Got it. Yep. That's what I was trying to get at. All right. Thanks, guys.
Our next question is from Arun Viswanathan with RBC. Please go ahead.
Great. Thanks for taking my question. Congrats on the results. Yeah, I guess first question, just real simply, could you just reiterate or describe the impact of natural gas on your business? There has been some inflation there recently. Is there any hedging that we should be aware of, or what's the impact there?
Hey, Arun. Thanks a lot. We do hedge. I mean, Todd, do you want to give a little more info?
Yeah, sure. Arun, in the near term, we are very heavily hedged. As you've heard from us before, about a quarter out, we're fairly heavily hedged. We have a high degree of cost certainty in sort of a rolling four-quarter basis. Your comment about natural gas, natural gas clearly has gone up lately. You really won't see, unless that is sustained, you will see that in our results over the next year as our hedges start to roll off. Back in the deck, we said the dollar change in gas is worth $50 million of cost.
Great. This is a follow-up. I guess what I'm hearing from you is the primer market is a little bit of a bottleneck within Winchester that potentially could be a value creation mechanism for you guys. Is that the right way to think about it? If you could maybe, how would you characterize the bottleneck in Chlor-alkali Vinyls and Epoxy? What are the linchpins there?
Yeah. Sure. Our primer business is certainly a linchpin for us, and like Brett said, there's limited suppliers of that. We haven't fully exercised that yet, but as our business grows, certainly we're going to use that to support our business. In the chemicals business, epichlorohydrin is the key upstream material for liquid epoxy resin.
There's only one producer of that in all of the Americas, and we're also the leading producer in Europe as well. By driving value of that key upstream intermediate, we can drive value across our whole downstream portfolio in Epoxy, and so you get a large value boost. The same sort of thing applies to elemental chlorine.
If there's one key to this company that lifts more value than anything else, it is that continuing value lift elemental chlorine, and using elemental chlorine according to the best return to the ECU across our broad downstream derivative portfolio. Not just in our CAPV business, but also in our Epoxy business as well.
Great. Thanks. If I could just ask one more quick one. Have you had any impact from the container shortages globally? Is that something that's a pressure point now, or do you see that not as an issue for you? Thanks.
Yeah, sure. From a supply chain, there's been some impact that we've been able to deal with. The neatest impact is the future impact in Pat's business of Epoxy, where new ships are being built, many new containers to be utilized on these ships. All those things are coated inside and out with epoxy, so it's actually a forward positive impact.
The next question will be from Eric Petrie with Citi. Please go ahead.
Hey, good morning, Scott.
Hey, Eric.
I wanted to ask about your comment on chlorine supply in the TiO2 industry. What are the pros and cons, are these producers that are securing other supply or just resistant to paying higher price for chlorine?
Well, no, I would say that whole industry gets chlorine from Olin that is far undervalued, and we have commercial arrangements today that keep that chlorine far undervalued relative to any other opportunity that we have for that chlorine, including, in many cases, just not selling it at all.
There's a value uplift opportunity there. I guess what we're saying is we're just not going to be in the business of that supply in a big way in 2023. If we have to continue supplying according to the terms that we have today, it essentially means that we're going to match that supply up to a future decision around the capability to supply. That's what we're doing.
Helpful. As a follow-up, I think seasonality in 2018, 2019, Q3 and the Q4 resulted in EBITDA lower by $100 million. What are you seeing this year based on your order books and inventory supply?
Well, like we say, Q3 is expected to be better than Q2. You might compute from our guidance of at least $2.1 billion in the full year that it's possible that we face a few challenges there in the Q4 that have to do with some seasonality. I'll say, supply chains are empty. We've still got a lot of work to do there to see the final story.
Thank you.
Sure.
The next question is from Angel Castillo with Morgan Stanley. Please go ahead.
Thank you for taking my question, and congrats on the quarter. I just wanted to, I guess, expand a little bit more on the net productivity. Your slide showed $100 million for 2021. I believe the range was previously $50 million-$100 million. You continue to do very well here and a lot of initiatives underway. Curious, one, could you expand on the comments of the additional underutilized capacity under review, and then just how should we think about net productivity for the remainder of the year and going into 2022?
Yeah. Sure. I'll turn that question to Jim.
Yeah. Thanks for the question. You're absolutely right. We have been successful with our program. We've got a very broad-based program. We've got over 1,200 different active projects across every geography, every division, every function. We've got the whole company involved in productivity, so that's a positive. We did remove the bottom end of the range as we made progress against the program.
We have a $100 million target out there right now. As far as capacity, you can see on the slide that a lot of the projects and a lot of the productivity projects are related to capacity. Looking at scrutinizing capacity for high investment, high cost, underutilized. We're not going away from that. Even though we've made some progress up to this point, we're going to continue to evaluate all of our assets for the value they're delivering, the investment that they require, and we'll make decisions as we go forward.
That's very helpful. Thank you. Just wanted to follow up a little bit more on, I guess, that last question around the Q4. Is the right way to read that there's conservatism kind of embedded in that Q4, just given the visibility into the market heading into, I guess, the next few months? Is there anything else, I guess, to consider there as we look at the overall guidance?
I guess the way I'm looking at the guidance, it implies a continued step up of EBITDA from the $559 million this quarter. Just looking at it from that perspective, it would seem to suggest that 2021 could be $2.2 billion or higher if you're going to continue the steady improvement, which puts 2022 even higher. Just, I guess a little bit more color would be helpful around how to conceptualize that.
Yeah, thanks. Look, our guidance is at least $2.1 billion for the year. I wouldn't say it's conservatism when we think about the Q4, but we are heading into a Q4 where market dynamics and market fundamentals are different than maybe many years in the past. In fact, they're likely better than many years in the past. That sort of normal seasonality or downturn that you get, we're working hard to mitigate that.
The only reason you may sense some conservatism is we just don't want there to be a mistake if we run into a little gully on the way up the mountain to adjust our model in a time of a little bit of seasonality that the external world sees that as us heading down a trough, which absolutely isn't the case, as we've said about 2022.
That's very helpful. Thank you.
Sure.
The next question comes from Matthew Blair with Tudor, Pickering, Holt & Co. Please go ahead.
Hey, good morning. Thanks for taking my question. Scott, Asia caustic soda prices have been improving in July. They're currently about $60 a ton above the Q2 average. Do you have any more color here? Does this provide support for U.S. caustic price increases?
Yeah, sure. Thanks for the question. In general, of course, we don't overly focus on one product. We're always focused on improving the whole ECU. Let me see if Damian can give us a little bit of color about what's going on there. Damian?
Sure thing. Matthew, on caustic soda in the Q2, we did see demand starting to pick up as it tracks general economy pick up, particularly in North America. We did see some activity pick up in Europe as well. Generally speaking, while supply-demand fundamentals of caustic soda did improve, and we have seen prices starting to reflect that.
Clearly, that supply-demand situation in caustic is still relatively weaker than the supply-demand configuration we see in chlorine. Albeit sequentially, caustic fundamentals on their own are showing improvement, and even through Q3, as seen by some recent price increase announcements. Caustic soda still remains the weaker side of the ECU, and we continue to run our model against that weaker side.
Got it. On slide six, where you mentioned that you're completing the 10-year contract term for 30% of your ECU. That 30% applies to your volumes, right? Can you give us a general idea of what kind of EBITDA you're getting off that 30%? Would it be less than 15% of your EBITDA?
Yeah. I would just answer that by saying that's essentially cash value destructive today.
Okay. Maybe even lower. Okay, great. Thank you.
The next question is from Mike Leithead with Barclays. Please go ahead.
Great. Thanks. Good morning, guys. First question, I think on your longer term outlook in 2025, you mentioned some options, including redirecting the contracted ECUs to significantly lowering your carbon footprint. I was hoping you could flesh out a bit more what you meant by that comment.
Yeah. I guess what I said is that's a lot of volume. You just heard me say it's cash value destructive. It ends in 2025. If we're not producing that volume, certainly our carbon footprint goes down, and it also turns out being accretive to us from a financial standpoint as well. It's like a win-win.
Got it. Okay. That makes sense. Second question, I think diluted share count's up about 4% year-to-date. Where should we expect that number to finish the year? Relatedly, you've highlighted M&A opportunities, but you've also made pretty clear in your slides you think your shares are more than 50% undervalued. Once debt paydown is complete, how should we think about accelerating buybacks versus M&A?
Yeah. Well, Todd will make a comment on that first part of the question. Maybe I'll comment on the second part.
Yeah. Our outstanding shares have increased this year, a little over two million shares. As you can see through the cash flow statement, we've had some option exercises this year. That's generated about $50 million of cash flow for Olin this year. When you look at our absolute level of share count, we are still well below where the share count was post the shares that were issued back in 2015 for the Dow acquisition.
Yeah. On the second point, clearly any acquisition we do, it's going to be more than, of course, going out and buying EBITDA. There's got to be quite a lot of synergy value. The direct synergies would be just the smaller part of that. The larger synergies would come from the fact that we expand this interlinked matrix where we're able to execute multiple activations on any given day and get a response somewhere else in the matrix that maybe no one expected that is able to lift Olin's value.
We have to be able to get significant uplift. What that'll compete with right now, of course, is our levered free cash flow return per share, which again, is 18% or 20%, whatever it is today. That's a hurdle right now to put the money in growth acquisitions.
Got it. Thanks, guys.
Sure.
The next question is from Steve Byrne with Bank of America. Please go ahead.
Yes. Thank you. Scott, you mentioned pricing on both sides of the ECU has improved. My question for you is, how has mix shift driven that? You have these numerous buckets that you move the chlorine atoms into, and how has that changed to drive up that value? More importantly, how much more could it change? You mentioned the merchant sales on TiO2 is just one piece, are you able to move significantly more in various buckets than you have so far?
Yeah. Thanks a lot for the question. The answer to both of those is sort of the same. How much has it contributed? How much can it contribute in the future? The answer is a lot to both. This is our model. We're moving things around every day and letting the weaker side of the ECU guide our market participation and then looking at our complete derivative chains about which one is delivering the most value on any given day. We only expect to be able to expand our capability to do that in the future, not only through our activities today, but through our parlaying activities and through our structuring activities as well.
Then maybe a similar question on the Epoxy business. Have you shifted volumes either more downstream or more upstream? How does that shift get reflected in your PCI algorithm? You're moving some portion of the chlorine side of the ECU into that business, and that business is generating more profit. Is that reflected in your PCI?
Yeah. I mean, Pat, do you want to give a little color?
Yeah, Steve. I think first of all, we've got a lot of flexibility in this prioritization of value over volume within the Epoxy value chain, right? We have a lot of flexibility. Obviously, we got a lot of flexibility on our pricing as demonstrated here over the last three months, six months or a year. We have a lot of flexibility to do that.
I think on mix, yeah, we look across that whole portfolio of Epoxy from upstream epichlorohydrin, and even converting that phenol into BPA, we've got options there that we're discovering. Then we have a lot of optionality of where we place that epichlorohydrin molecule, and we monetize it in the form of liquid epoxy resin, converted resin.
We systematize that LER into things like laminates, wind energy. A lot of flexibility. The last part of that mix flexibility is around merchant versus captive. That's kind of the way we think of it, and it's a pretty dynamic grid of where we can extract the best value across that whole chain.
Do your decisions get reflected in that PCI?
Yes.
Thank you.
The next question is from Travis Edwards with Goldman Sachs. Please go ahead.
Hey, good morning. Thanks for the time. I wanted to follow up on Josh's question earlier around capital allocation. If you're at 1.5x leverage this year and EBITDA is in the same ballpark next year or better, presumably leverage improves further. I'm curious, when you talk about freeing up the balance sheet to engage in M&A opportunities or shareholder remuneration, is there a sort of range of leverage you plan to manage to as you consider these opportunities, specifically when commodity conditions may not be as favorable?
Todd, do you want to comment?
Yeah. Travis, we think about the absolute level of debt, and you heard the comments earlier. With the actions we're doing in 2021, that really gets us in the range of where we're looking for maybe a little bit more next year. We're down to the absolute level of debt, not necessarily a leverage target.
Got it. That's helpful. Then, separate question, but I guess somewhat related is, a potential path to an investment-grade rating has been occasionally brought up in our conversations around Olin. Regardless of your desire or the probability of that happening, I'm curious, are there even specific quantifiable benefits to business fundamentals? Again, separate from the general more favorable issuance costs, but are there specific benefits to actual business fundamentals, renegotiating terms, et cetera, if you have an IG rating?
We generally, and we've said this before, is we target to operate our business with investment-grade metrics, and I think we're well on that pathway as we continue to repay debt this year. It's our view that the business fundamentals within Olin and how we want to operate, operating with investment-grade metrics is critical for us as we move forward.
Got it. Thanks for the time.
The next question is from Roger Spitz with Bank of America. Please go ahead.
Thank you. two. The first is, can you articulate your latest view on your desire to achieve IG ratings from the agencies rather than just operating with IG metrics?
Todd, do you want to continue on that?
Yeah. Roger, this is Todd. We want to operate with investment-grade metrics. We have never stated publicly that is a goal of the company to become investment grade. We want to operate with investment-grade metrics, and we think that what we're doing with the balance sheet to de-lever gives us the flexibility as we move forward.
Thank you. My second one is, you're clearly changing the chlorine cost to go your pricing paradigm in a very significant way. What has changed for you to be successful? Clearly it's your will and drive, but is there any other change in the industry dynamic that is allowing you to turn this paradigm on its head in an extraordinarily positive way? Thank you.
No, I wouldn't say it's industry dynamic. I would just say that Olin is controlling its own destiny and changing its own outcome. In other words, we're the leader elemental chlorine. we have a contrarian model that we are focused on every day to go get the value. We have a list of clear actions, and we've elemental chlorine as the number one driver of this company's overall value evolution, and it is a ratchet and a linchpin because of that, and that's how we treat it. When you focus on it that much, you're going to liberate a lot of value.
Got it. Thank you very much for your time.
Sure.
Ladies and gentlemen, as there are no further questions, this concludes our question- and- answer session. I would like to turn the conference back over to Scott Sutton for closing comments.
Yeah. Okay. Yeah. Thanks a lot. I guess what I would say in closing is that Olin is really focused on two main activities right now. The first one is lifting up all our Olin teammates who are doing just a great job. The second one is that we're continuing to print wins and demonstrate success so that we can in turn demonstrate that we deserve a higher valuation. With that, thanks a lot for joining us today.
Thank you, sir. Thank you for attending today's presentation. You may now disconnect your lines.
All right. Thank you.