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Edited Transcript of OLN earnings conference call or presentation 1-Aug-19 2:00pm GMT

Q2 2019 Olin Corp Earnings Call

CLAYTON Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Olin Corp earnings conference call or presentation Thursday, August 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James A. Varilek

Olin Corporation - Executive VP & COO

* John E. Fischer

Olin Corporation - Chairman, President & CEO

* John L. McIntosh

Olin Corporation - EVP of Synergies & Systems

* Logan L. Bonacorsi

Olin Corporation - Director of IR

* Pat D. Dawson

Olin Corporation - Executive VP and President of Epoxy & International

* Todd A. Slater

Olin Corporation - VP & CFO

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Conference Call Participants

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* Aleksey V. Yefremov

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Donald David Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Eric B Petrie

Citigroup Inc, Research Division - Senior Associate

* Frank Joseph Mitsch

Fermium Research, LLC - Senior MD

* Hassan Ijaz Ahmed

Alembic Global Advisors - Partner & Head of Research

* James Michael Sheehan

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Matthew Robert Lovseth Blair

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research

* Michael James Leithead

Barclays Bank PLC, Research Division - Research Analyst

* Michael Joseph Sison

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Neel Kumar

Morgan Stanley, Research Division - Equity Analyst

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Good day, and welcome to the Olin Corporation Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ms. Logan Bonacorsi, Olin's Director of Investor Relations. Ms. Bonacorsi, the floor is yours, ma'am.

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Logan L. Bonacorsi, Olin Corporation - Director of IR [2]

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Good morning, everyone, and thank you for joining us today. Before we begin, let me remind you that this presentation, along with the associated slides 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 results to differ from our projections are described without limitations in the risk factor section of our most recent Form 10-K and in yesterday's second quarter earnings press release. A copy of today's transcript and slides will be available on our website in the Investors section under past events. The earnings press release and other financial data and information are available under press releases.

With me this morning are John Fischer, Olin's Chairman, President and Chief Executive Officer; Pat Dawson, Executive Vice President and President of Epoxy and International; Jim Varilek, Executive Vice President and Chief Operating Officer; John McIntosh, Executive Vice President, Synergies & Systems; and Todd Slater, Vice President and Chief Financial Officer. We will begin with our prepared remarks and thereafter, we'll be happy to take your question.

I'll now turn the call over to John Fischer. John?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [3]

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Thank you, Logan, and good morning, everyone. Today, we'll begin my remarks by discussing the key points from the quarter just ended, followed by the outlook for the second half of 2019, a detailed review of each of Olin's business segments and conclude with our view on market dynamics for chlor alkali and Epoxy.

With that, let's turn to Slide 3. During the second quarter and consistent with our early July update, Olin reported adjusted EBITDA of $204.6 million. Second quarter results were challenged by several factors across our business segments. Specifically, we experienced lower-than-anticipated demand for merchant chlorine and certain chlorine derivatives, predominantly from titanium dioxide and refrigeration customers and agricultural customers impacted by flooding.

We were challenged by several onetime events in the Epoxy segment, which negatively impacted results by approximately $10 million. These included customer issues resulting from the Intercontinental Terminals Company storage fire in the Houston, Texas area and reduced production in Europe resulting from an unplanned outage at the utility supplier.

We incurred, as expected, approximately $40 million of sequentially higher planned maintenance turnaround costs in our chemical businesses, and we recorded a $20 million environmental expense from remedial activities related to a legacy Olin manufacturing site.

Now moving to our third quarter 2019 outlook, which is on Slide 4. We expect our third quarter adjusted EBITDA to be higher than that achieved in the second quarter of 2019. First, we expect improved operating rates and seasonally stronger sales volume in each of our 3 segments. Second, we expect approximately $40 million of lower maintenance turnaround costs compared to the second quarter. Third, the absence of the onetime events that challenged Olin in the second quarter should benefit third quarter adjusted EBITDA. Finally, while the second quarter declines in caustic soda indices will continue to affect the price in Olin system during the third quarter, the anticipated improvement in caustic soda pricing should provide positive momentum moving forward.

Now looking at the second half of 2019 outlook, which is on Page 5. As we guided to in early July, we expect full year adjusted EBITDA to be in the range of $1.075 billion and $1.175 billion. At the midpoint, this guidance implies second half of 2019 adjusted EBITDA of approximately $650 million.

The key assumptions behind this forecast are: higher volume levels in chlor alkali and Epoxy, increased operating rates in the chemicals business, lower turnaround costs, stronger contribution from the Winchester segment and improved cost performance. Although pricing is expected to improve, we are assuming that approximately $15 million of the adjusted EBITDA improvement in the second half, compared to the first half, will come from higher prices.

Now we'd like to take a more detailed look at each of the business segments starting with Chlor Alkali Products and Vinyls on Slide 6. Second quarter 2019 adjusted EBITDA for the Chlor Alkali Products and Vinyls segment was $189.5 million, representing a 35% year-over-year decline and reflecting the significant impact of lower caustic soda pricing.

In fact, caustic soda pricing in Olin system was approximately 25% or approximately $100 million lower when compared to the second quarter of 2018. In addition, lower overall volumes, which were down approximately 4% year-over-year, negatively impacted the second quarter segment results.

Offsetting some of the year-over-year pressure from caustic soda prices and lower overall volume levels was a larger contribution from Olin's ethylene dichloride business. Ethylene dichloride pricing improved approximately 40% over second quarter 2018 levels.

Now let's discuss caustic soda pricing, which is on Slide 7. Domestic caustic soda pricing declined at a slower rate in the second quarter 2019 with the third-party indices moving down an additional $20 from first quarter 2019 levels. This price reduction, coupled with the first quarter decline still being recognized in our system, led to a 3% sequential decline in Olin system. An upward turn in caustic soda price has occurred later than we had anticipated, but we are now seeing positive developments. During the second quarter, the caustic soda demand locations that plagued the market for more than 1 year was largely resolved.

In addition, global restraints on the supply side, particularly in Latin America, have emerged resulting in the need for additional caustic soda exports from the United States. The tightening supply and demand dynamics taking place today should lead the caustic soda price improvement as we progress through the back half of the year.

In fact, we're already seeing indications of upward pricing momentum. For example, U.S. spot export pricing reversed its downward trend in the second quarter with indices of increasing approximately $40 per ton over the first quarter. Resilient domestic pricing is increased approximately $200 per ton since the end of the first quarter and most recently, the domestic caustic price indices broke its streak of low -- declines in July by increasing $5 per ton.

Now let's move to the performance of our Epoxy segment, which is on Slide 8. During the second quarter of 2019, Olin's Epoxy business generated adjusted EBITDA of $29.7 million. This level of adjusted EBITDA coupled with our first quarter 2019 results represents this Olin's strongest first half performance from this segment since owning and operating this business.

Looking ahead to the third quarter of 2019, we expect Epoxy segment results to increase when compared to the second quarter of 2019. Specifically, $20 million of lower plan turnaround costs, resumption of normal customer operations at the ITC terminal storage facility and the resolution of the unplanned utility outage at the Stade, Germany plant will supplement the expected seasonal uplift in volumes.

Moreover, we continue to believe we will see improved year-over-year performance from the Epoxy segment in 2019. Looking now at Global Epoxy resin prices, which are shown on the chart on Slide 9. During the second quarter, liquid Epoxy resin pricing in all regions declined from the pricing levels experienced during the prior year quarter. Sequentially, pricing in Asia and Europe moved lower due to weaker-than-expected demand, while U.S. liquid Epoxy resin pricing appears to have stabilized. However, ongoing supply disruptions in China have tightened epichlorohydrin supply. In fact, epichlorohydrin prices in China increased approximately 30% over the past 2 months. This has resulted in upward pricing momentum for liquid Epoxy resins in China. We believe this development could tighten global markets resulting in an increase in global liquid Epoxy resins pricing in the second half of 2019.

Now turning to our Winchester segment, which is summarized on Slide 10. Winchester experienced a 9% decline in adjusted EBITDA for the second quarter of 2019 compared to the second quarter last year. This decline was the result of lower commercial volumes and lower product pricing. Favorable commodity and operating cost partially offset the impact of the lower volumes and pricing. We're forecasting sequential improvement in adjusted EBITDA during the third quarter as the business enters its seasonally strongest quarter of the year. We expect to see an improvement in commercial sales and volumes across all product categories and in military and law enforcement sales volumes.

This should lead to a stronger overall performance during the year, second half. We continue to expect Winchester's results for the full year of 2019 to be comparable to the full year levels achieved in 2018.

Now turning to our long-term view of the market. In mid-July, Olin completed a $750 million bond offering and new $2 billion bank credit facility. Todd will discuss this transaction in more detail in a minute, but overall, we were able to establish a low-risk pathway to refinance the high-cost bonds assuming -- assumed during the 2015 Dow merger when the bonds become callable in late 2020, while also increasing our overall financial flexibility.

Despite the recent weakness in caustic soda pricing and lackluster demand for certain of our products, our positive long-term view of the chlor alkali and Epoxy markets is unchanged. This positive outlook reflects the following: in the chlor alkali sector, demand growth is occurring on both sides of the EU; to date, there have been minimal global capacity additions and announcements of additions to meet this growing demand. Current industry economics do not support world scale for chlor alkali capital investment. As a result over time, supply and demand balances will continue to tighten creating upward pricing momentum for Olin's caustic soda, chlorine and chlorine derivative products. Similarly, in the Epoxy business, we see steady global demand growth and minimal announced capacity additions.

Now I'd like to turn the call over to Todd Slater, Olin's CFO. Todd?

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Todd A. Slater, Olin Corporation - VP & CFO [4]

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Thanks, John. Before turning to our 2019 cash flow outlook, I'd like to discuss the recent capital market transactions in more detail on Slide 12. In mid-July, we completed an opportunistic bond offering, which extended our debt maturity profile and enhanced our current liquidity position. We issued $750 million of 10 years senior unsecured notes at an interest rate of 5.625%. We immediately used the proceeds from the offering to prepay the Term Loan A facility and the outstanding borrowings under the accounts receivable securitization facility.

As a result, we have effectively no prepayable debt outstanding. Concurrently, we put in place a new $2 billion bank credit facility, consisting of an $800 million revolving credit facility and a $1.2 billion delayed draw term loan. We expect to use the proceeds from the delayed draw term loan to pay the existing high-cost bonds that were assumed in the acquisition of Dow chlorine products businesses when the bonds become callable in late 2020.

By addressing this future need now when the credit markets are favorable, we have positioned Olin to enhance our balance sheet and cash flow significantly at attractive terms within the next 15 months. We estimate that the 2020 refinancings will reduce annual interest expense by $50 million to $70 million.

Now let's turn to our 2019 cash flow forecast, which is on Slide 13. Assuming the midpoint of our full year adjusted EBITDA guidance, we expect to generate approximately $310 million of cash flow in 2019. Starting with the midpoint of our adjusted EBITDA forecast, which is in the far left of the waterfall chart. We deduct $60 million in estimated cash tax payments. We're forecasting our cash tax rate will be in the 25% range for the year.

Column 3 reflects the midpoint of our current forecast for capital spending of $375 million, which includes annual maintenance capital spending of between $225 million and $275 million and the investment associated with our multiyear information technology integration project of approximately $80 million.

As we have previously discussed in 2017, we began a multiyear project to implement new enterprise resource planning, manufacturing and engineering systems across the heritage Olin and the acquired Dow chlorine products businesses. The project includes the required information technology infrastructure.

Now turning to the fourth column. We expect a $100 million increase in working capital in 2019, as we will use cash from our refinancing to discontinue the sale of receivables under our factoring arrangement. In the next column, onetime items include information technology integration costs and cash restructuring costs of approximately $80 million. This includes approximately $40 million for the IT integration project that I just spoke about and approximately $25 million of duplicate IT costs that are being incurred during the transition. These costs were partially offset by $20 million of pretax proceeds from the sale of an investment in a nonconsolidated affiliate during the first quarter.

The next column represents an estimate of cash interest expense. On June 30, we had approximately 30% of our debt at variable interest rates. However, following the refinancing that was just completed, that percentage has dropped to 20% of our debt at variable rates. We're forecasting the 2019 interest rates will be slightly higher than those we experienced in 2018.

In the far right column, we are forecasting $310 million of cash flow. Given the recent capital market transactions and the debt repayment progress to date, our top priority for free cash flow is to return to our shareholders through dividends and share repurchases and build our cash position in advance of the ethylene payment, which will be no more than $493 million and that is due in late 2020.

Finally, on Thursday, July 25, Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on September 10, 2019, to shareholders of record at the close of business on August 9, 2019. This is the 371st consecutive quarterly dividend to be paid by the company.

Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Don Carson of Susquehanna.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [2]

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John, in your prerelease, you talked about some weakness in chlorine volumes as well, obviously ags continue to weak, but what are you seeing in some of these other markets like refrigerants and TiO2? Any uptick? And maybe just talk about EDC demand and price outlook for the second half.

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John E. Fischer, Olin Corporation - Chairman, President & CEO [3]

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Okay. In terms of -- if you look at our chlorine demand historically, it is always been the strongest in Q3. And I would say as it relates to both TiO2 and refrigerants, which we saw fairly weak in the first half, we have seen some seasonal uptick in both of those. I'll let Jim just comment on EDC.

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James A. Varilek, Olin Corporation - Executive VP & COO [4]

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This is Jim. From EDC standpoint, I think the demand is actually been pretty solid throughout the first half, and we expect that to continue into the second half. What we're seeing in the marketplace actually is, there is a broadened demand for EDC. A long time ago. 18 months, 2 years ago, it used to be predominantly Asia. But in the last 1.5 year, we've seen demand increase in Southern Europe. We've seen in also increase in Middle East, North Africa as well and then, of course, most recently in Latin America. So demand is solid and we remain constructive on EDC.

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Donald David Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [5]

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And then as a follow-up. On Slide 20, you show significant leverage to lower nat gas and ethane cost and price of those been coming down, what benefit did you see from that? If any in the first half given your hedging position? And how do you see that contributing to earnings growth in the second half?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [6]

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I would say, generally, we are a hedger as it relates to gas, predominantly. And that some of the benefit was tempered, but it will just be delayed in our system. And we have been benefiting, and you see that in terms of the profitability of our EDC from the lower ethane prices, although a lot of that has occurred just fairly recently.

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Operator [7]

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Next, we have Kevin McCarthy of Vertical Research.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [8]

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Just a follow-up on EDC. I was wondering if you could comment on the level of EDC prices that is baked into your financial guidance for 2019. We've noticed some weakness over the last 2 months-or-so and just would like to understand, kind of, what you're assuming in terms of the sequential pattern there?

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James A. Varilek, Olin Corporation - Executive VP & COO [9]

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Yes. From an EDC standpoint, there has been some movement that we've seen in Asia, and I think that's because of low ethylene pricing that's taking place. So you probably are hearing and seeing some of the spot volumes that are moving to Asia that have reduced some numbers. What I would say is that, as I mentioned earlier on the threats we're seeing in the marketplace, Olin doesn't have to participate. Specifically in Asia, we have a broad-based participation and a significant amount of our volume for the third quarter and into the fourth quarter has already been preplaced at contractual pricing. So we're going to be somewhat -- we'll see somewhat muted effect relative to that spread.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [10]

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And then as a second question, I think, you indicated in your press release that your average realized pricing for caustic soda declined 3% in 2Q versus 1Q. Just wondering if it's possible to provide a similar number for the chlorine side of the molecule, including derivatives, what was your average price experience there?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [11]

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I will tell you that on the chlorine side itself, chlorine is actually up year-over-year. So the derivatives get very messy because mix gets into the play, but I think you can look at the big derivatives which are -- with the bleach that just takes chlorine and moves it through and chlorinated organics and chlorine moves through. So those would have a positive trend. I would say the other derivative is HCL which is much more market-driven and that has tended to be lower year-over-year at this point. But still, if you look at HCL from our perspective, it's still a value-add compared to selling merchant chlorine.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [12]

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Just to clarify, John, were prices stable on a sequential basis versus 1Q?

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Todd A. Slater, Olin Corporation - VP & CFO [13]

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Kevin, this is Todd. If you go back to Slide 19, you will see, virtually, all prices were similar. Q1 versus Q2, except for caustic and HCL.

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Operator [14]

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Next, we have Eric Petrie of Citi.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [15]

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You noted that in your second half over first half guidance that pricing could contribute roughly $15 million. Of that, how much is caustic soda represents, chlorine derivatives or any pricing uptick that you think you will realize in Epoxy?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [16]

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We have not broken that out. I would just say as with most of our portfolio, caustic is roughly half of our volume. So it's probably represents half of the price.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [17]

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Okay. Helpful. And then by region, could you talk about your customer caustic soda inventories, at least in Europe, it seems that stocks remains elevated year-over-year on a historical basis. So with prices seemingly trussing and bottoming out at this level, I wonder if you could talk about potential restocking in second half.

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John E. Fischer, Olin Corporation - Chairman, President & CEO [18]

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I guess, I would say, from the standpoint of inventories, we don't pay that much attention to Europe other than I could tell you that for the year 2019, exports from Europe to North America are down. I would also tell you that exports out of China are also down. So we think that we're going to continue to see -- we're going to see benefiting -- continue to see benefit over time from a tightening market.

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Operator [19]

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Next, we have Michael Leithead of Barclays.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [20]

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Following on the last question, so if I sort of build a half-over-half EBITDA bridge, pricing is going to give us $50 million, turnarounds are going to give us another $25 million, and I think in your preannouncement, you called out $20 million in Epoxy items. So if my math is right, that leaves us around $115 million GAAP that we need in terms of hitting the guidance. I'm assuming that's mostly volume that's going to get us there?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [21]

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That's correct.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [22]

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Okay. And since you bought the Dow business 4 years ago, what has historically been the seasonal volume split between the first half and the second half?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [23]

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If you just look at EBITDA between first half and second half for the 3-year average of '16, '17 and '18, we've averaged about 45% of our EBITDA in the first half, 55% in the second half, but it's been as low as 41% to 42%. So, I would say, what we're forecasting is not way out of line with what we've seen historically.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [24]

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But I guess, just one last one. You've seen a massive caustic upcycle over the past 3 or 4 years, so the second half has just benefited from higher price over the past 3 years versus that first half this year. So I'm assuming pricing skews some of the EBITDA benefit. So I guess, that's why I was asking the volume side, what has that split been?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [25]

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Well, let me give you -- I'll give you 3 statistics because the biggest -- the 3 biggest things that benefit for us in terms of first half versus second half. The first is bleach, which is seasonal. And it's not the biggest of the businesses, but historically that has been up somewhere in the 15% to 20% range, first half to second half, and that's not cyclical. And in fact, as hot as it was in July, that's actually positive in terms of the comparison. The second has been our vinyls business, and that over the prior 3 years has averaged about a 5% to 7% improvement, first half versus second half. And then we have some large pipeline customers, who are predominantly related to the polyurethanes path and that has historically been up about 15% in the second half versus the first half. And a lot of that just has to do with the timing and turnarounds, but we typically take our turnaround when our customers do. So there is 3 big pieces.

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Operator [26]

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Next, we have Jim Sheehan of SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [27]

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Can you address your chlor alkali vinyls to demand declines in the quarter? You said down 4%. It seems to be well below GDP or industrial production rates. Is this an impact of trade and tariffs or something else?

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James A. Varilek, Olin Corporation - Executive VP & COO [28]

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Jim, this is Jim. No, it's not a result of the trade tariffs or anything. We mentioned some of the weakness on the chlorine side of things, chlorinated organics, refrigerants and the agricultural market that impacts us and obviously that -- when you have that demand on the chlorine side, you lose both sides of the ECUs. That's primarily what we're talking about in terms of the volume declines.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [29]

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Okay. And in Epoxy, you talked about tight epichlorohydrin conditions supply/demand may be resulting in upward pricing momentum for Epoxy and liquid Epoxy resin pricing. Do you think that tightness is enough to offset some of the demand weakness we're seeing in electronics and from automotive end markets?

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Pat D. Dawson, Olin Corporation - Executive VP and President of Epoxy & International [30]

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Yes. Jim, this is Pat. We will see. Because the real issue there with epi prices going up 30% in the last 2 months, so that puts pressure -- margin pressure on the nonintegrated Epoxy resin producers in China. And so we've seen that price of LER in China go up to levels where we were in late '17 and early '18. And what that does is you get the price of LER in China higher than the price of LER out of China. So producers in Asia where we see a lot of the competitive activity coming into Europe and North America, they'll send that LER into China because they can make better returns and that takes product off the market in Europe and North America. Hence, you can get a tightening from that kind of arbitrage dynamic. So that's really what we see could happen here in the second half of the year.

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Operator [31]

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The next question we'll have will come from Matthew Blair of Tudor, Pickering and Holt.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [32]

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I just want to clarify on the use of cash proceeds. I think previously, you were talking about paying down $250 million to $300 million of debt. Is that still intact? Or is the general idea to build cash in advance of this third ethylene tranche payment?

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Todd A. Slater, Olin Corporation - VP & CFO [33]

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Matthew, this is Todd. That debt repayment was in effect lowering debt in advance of the ethylene payment that was going to be due at the end of 2020. So we are going to build cash over the next 1.5 years to be in a position to pay that.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [34]

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Okay. Sounds good. And then it looks like Epoxy contracts in the U.S. settled down a little bit in July. I'm just wondering, are you expecting margin compression in Epoxy in the third quarter? Or do you think you will make that up with cheaper raws?

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Pat D. Dawson, Olin Corporation - Executive VP and President of Epoxy & International [35]

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This is Pat again. I think we had price increases out there in May, and we got modest improvement traction on that pricing that you saw in the chart there from the ICIS index in that May, June time frame. No question with the lackluster demand in Asia and in Europe. We're seeing pressure on the margins, but we're also not seeing the -- any major increases in raw material costs. So we think margin should be pretty stable here as we go into the second half of the year in North America.

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Operator [36]

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Next, we have Hassan Ahmed of Alembic Global.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [37]

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You guys talked about a recovery in caustic pricing in the back half of the year, now there is some industry consultants out there talking about the restart of a caustic facility in the back half of the year in the U.S. Not a huge capacity, but a restart all the same. So as you guys think about your sort of forecast looking for higher caustic prices in the back half, are you factoring in that capacity coming on stream?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [38]

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I guess, what I would say that it is a small facility, that's a restart in the whole scheme of things in terms of the capacity that's 13 million tonnes plus in North America. It's very small. So I would say that we're very constructive on what we're seeing. The demand on caustic is strong in the domestic market and obviously would pick up in the export market that we're seeing. We're constructive on it. And that plant restart we wouldn't expect to have any impact on the overall supply/demand outlook.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [39]

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Understood. And since you brought up the export demand side of it, I would love to hear what you guys are seeing, specifically on the Brazilian side, it seems Alunorte is sort of ramping up production, Braskem facility continues to be offline, the very least through the end of the year. So what are you guys seeing on the sort of Brazilian export demand side?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [40]

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We continue to see relatively strong demand in Brazil aided by some supply outages down there. We talked in the prepared remarks that we have seen the price of caustic in Brazil, the domestic price go up about $200 a ton over the last quarter. And I'll make one other comment about our caustic soda pricing. Our caustic soda pricing outside of North America went up approximately $50 a ton from the end of the first quarter to the end of the second quarter. So the export market is improving.

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Operator [41]

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Next, we have Steve Byrne of Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [42]

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Are your higher-margin chlorine derivative products running at capacity? Or could you shift more chlorine molecules into those end markets and away from, say, spot EDC?

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James A. Varilek, Olin Corporation - Executive VP & COO [43]

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This is Jim. We do have the ability to move some product around. Our assets are running hard, and I think we talked in our Investor Day about adding additional capacity down the road to support the derivative demand in bleach and HCL and so forth. And we are in fact, doing that. So I would say the assets downstream are running well, running hard and we do have -- we do still have the capability to optimize across different product portfolios based on operational things and seasonal demands.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [44]

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And this environmental remediation charge that you have, what site is this associated with? What's the source of the contamination? And how significant could this be longer-term?

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John L. McIntosh, Olin Corporation - EVP of Synergies & Systems [45]

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We're not going to respond specifically about the site. This is just part of the ongoing remediation activity at the site. This is not indicative of a trend or harbinger of things to come. This is just a normal course of events as we work cooperatively with the agencies to remediate sites that were targets -- or orphan sites for us years ago.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [46]

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Can you just comment on what the contamination is?

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Todd A. Slater, Olin Corporation - VP & CFO [47]

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Steve, this is Todd. If you look over the last 15 years, environment is also a long-term item for Olin. Our average expense has been just under $20 million a year and it ranges anywhere from $38 million in a year to $8 million. So this $20 million item happens is not unusual, it happens periodically over a 15-year period. And the other day, I think, we have over 77 sites that Olin is dealing within the -- its environmental portfolio. And remember this is a [heritage Olin] site as we didn't take any legacy Dow environmental liabilities.

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Operator [48]

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Your next question we have will come from Frank Mitsch of Fermium Research.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [49]

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Congrats on the bond offering. I wanted to follow-up on caustic pricing. I believe you indicated that indices had a down $20 a ton on the second quarter versus the first quarter. I thought you mentioned industry was in July also down $5. As we look at -- if we think about where the industry index will end the third quarter, what are your expectations in terms of it being higher than where it ended in June? Is that how we should be thinking about it that we should be getting more than that $5 down on the index by the end of this quarter?

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James A. Varilek, Olin Corporation - Executive VP & COO [50]

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Frank, this is Jim. Just for clarity, the July index was actually moved up $5 [IHS]. There is a number of different indexes and they range anywhere from up $5 to up $30 on the indexes. So we do expect that we've reached inflection point here and with demand continuing to be strong here as we go through the summertime that we would expect continued movement -- upward movement on the prices. I think from an expectation standpoint, if you think about third quarter, caustic pricing being at or slightly better than the second quarter would be a good assumption.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [51]

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That makes a lot more sense, which is why I asked the question because I obviously had misheard it. So my apologies there. On the ITC incident, negatively impacting Epoxy by $10, is that demand gone forever? Or is that merely delayed and you will be making that up as we progress through the year?

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Pat D. Dawson, Olin Corporation - Executive VP and President of Epoxy & International [52]

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Frank, this is Pat. No, no. That demand is not gone forever. It was a temporary situation and so we -- we're seeing that come back strong here as we go into the second half of the year, and actually we started to see it come back in the month of June.

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Operator [53]

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The next question we have will come from Jeff Zekauskas of JPMorgan.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [54]

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Your maintenance expenses have come down nicely from 2017, maybe from about $220 million then to about $136 million in '19. I was wondering, are these elevated? Or is the $136 million that you think you're going to pay this year, is this still an elevated level of maintenance? Or is this now a more of normal level of maintenance? What's the trajectory of maintenance spending as a base case over the next several years?

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Todd A. Slater, Olin Corporation - VP & CFO [55]

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Jeff, there is a couple of things that drive the level of maintenance spending. One, there is a large outage that occurs every 3 years in the VCM plant, which is obviously the biggest and most complicated plant we have, and that will drive it up in the year that, that occurs. That last occurred in 2017. So we will see that again in 2020. We also had once every 6-year maintenance at both of the Epoxy plants, part of that occurred late in 2017, part of that occurred in 2018. So both that, again, drove '17 up above what I would call the normal line. I would say '19 is probably a little bit below the normal line. But as we go into 2020, I would tell you we would expect that to be elevated because of VCM.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [56]

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And then if you could just briefly summarize why caustic soda prices for the first half of 2019 probably were lower than you expected? And why the -- and why do you think that stabilization and growth in caustic, which is about to come, is probably coming at a slower rate? What were the primary levers in your mind behind that toughness in the caustic market? And why have they altered?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [57]

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I think there was one discrete event, which was the whole issue of Alunorte which was -- has been discussed for about a year. And I think ultimately the restart of half of that plant, which consumes 15,000 tons of caustic a month was delayed much longer than we might have anticipated a year ago. The other thing, I think, if you look at some industry data and some consumption data, I think caustic soda demand in North America was just a little bit weaker in the first half of the year than we would have expected. Now there is probably impossible to specify where that came from, but that's why. We started to believe, we turned the corners, we said in our remarks around the demand disruption from Alunorte. On top of that, we've seen a supply disruption in Latin America around Braskem. And we've seen in our system of improving demand as we started to move into the summer months, which are typically the strongest months from a manufacturing perspective.

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Operator [58]

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And next, we have Mike Sison of KeyBanc.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [59]

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Just a question on the July realization of $5 and -- for caustic. I think you guys and some others announced $60. What -- can you maybe talk about what -- why the realization was so low? Was it more supply? Was it more demand in terms of pricing realization?

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James A. Varilek, Olin Corporation - Executive VP & COO [60]

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Mike, this is Jim. The price realization, it's always hard to turn things when you're going from a market that has been moving down to up. A lot of the individual negotiations take place and you should think about this also as a range in terms of pricing. Some of the different indexes there, like I said, from $5 to $30 range on that. And so that would indicate kind of a spread of what type of price realization took place in the -- across the industry. And some of that will continue to be pushed into the latter parts of the third quarter.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [61]

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Got it. And then in terms of demand, where do you need that demand to improve, just on a geographic basis? I mean, is it more the U.S. that needs to improve to see the improvement in demand? Or do you need some demand overseas as well?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [62]

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This is John. I would say to you that caustic for us is a global market. So we really need it to -- we're indifferent where demand improves.

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Operator [63]

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Next, we have Neel Kumar of Morgan Stanley.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [64]

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One of the trade sources mentioned that recent U.S. export offers have come in at about $20 per metric ton lower versus July. I was just wondering if that's indifferent from what you're seeing in the market. And what are the drivers of the lower offers? And then, is there anticipated price improvements in the second half of the year? Does it come from higher domestic or export pricing?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [65]

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Well, I'll go back to the answer I gave to a question a few minutes ago, which is, in our system, caustic sold out of North America went up approximately $50 a ton between the end of the first quarter and the end of the second quarter. So -- and we do not expect that to go down as we move forward. So it's our expectation that for us and our system, export pricing or non-North American pricing will be improved in the second half versus the first half. And I think that's consistent with what you see in the index, which is up $40 a ton. I can't comment on what one shipment that might be at a slightly different price might mean. From our perspective, this is what we're getting under our contracts. As we've said in the past, we sell virtually nothing in the spot market. So we're at least constructive on the direction.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [66]

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That's helpful. And we've seen some commentary about producer inventories in caustic being a bit elevated over the last couple of months. Have those levels begun to get drawn down with higher export demand? Or how would you characterize inventories for that industry currently?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [67]

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I would say, I can't talk about the industry. I can tell you that our inventories are at normal to slightly below normal levels right now.

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Operator [68]

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And the next question we have will come from John Roberts of UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [69]

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I may have misheard at the beginning, but I think you talked about some Chinese supply disruptions in Epoxy, is that the glycerin-based Chinese industry? Or was that chemical-based epi where there were disruption? Or were these some of older explosion that happened a while ago just still rippling through the system?

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Pat D. Dawson, Olin Corporation - Executive VP and President of Epoxy & International [70]

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John, this is Pat. This is was chlorohydrin-based, epichlorohydrin. It was not glycerin, to epi-based. And it was really -- this is out in the press, primarily around highly having some environmental issues and [domestic] capacity that has really gone down.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [71]

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Is there a fair amount of excess glycerin-based production that can still come back to market here to kind of fill in if the pricing continues up?

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Pat D. Dawson, Olin Corporation - Executive VP and President of Epoxy & International [72]

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I would say the honest answer right now is hard to tell. There is a lot of the different sizes of that glycerin to epi out there in terms of scale. There is a lot of different costs involved in those small assets. Most -- there is very little epichlorohydrin that comes out of China, John, as you know. So I think most of this is around chlorohydrin-based and that is, of course, most of the capacity in China is chlorohydrin-based.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [73]

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And then follow-up on Winchester. Are we kind of completed all the destock at both end consumers in the supply chain now and until the next kind of disruption comes along, this is a new normal and we'll have normal seasonal patterns off of the current level of results at Winchester?

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Todd A. Slater, Olin Corporation - VP & CFO [74]

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John, this is Todd. I think we've seen that the distributors and retailers, I think, inventories were in line. It's still unknowable what the consumer has in their safety stock. So it's not clear that they are buying what they are technically consuming today. So but what we've seen in the first half of the year, Winchester is sort of even though commercial sales have been down and pricing has been down with commodity cost and improved military volumes, year-over-year results are very similar.

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Operator [75]

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Next, we have Arun Viswanathan of RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [76]

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Just a question, going back to the bridge. So you highlighted kind of comparable Winchester earnings so that's minimal H2 improvement, lower turnaround of $25, prices only $15 and then you said that leaves $100 or so for volumes. Could you break that out as well? I mean, that seems like a quite a big jump to me. Was that just weakness in H1 that was more pronounced and you see all that coming back? And what gives you that confidence, especially given the demand weakness that you saw in the first half?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [77]

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We just -- we provided some information specific to products a few minutes ago, where we talked about bleach, which, I think, everybody knows is a seasonal business. And if you look at the weather pattern in United States early part of the year, especially, April and May was a lot cooler and a lot wetter. July was a lot harder than normal and that continued in August. That represents a big uptick. Historically, we've seen 15% uptick first half to second half. I talked about the vinyls business, which has a seasonal component to it in terms of how we run, how our customers run and that has historically had a 5% to 7% uptick second half to first half. The Epoxy business has always been seasonally strongest in the first -- in the second half versus the first half. It really goes to a lot of the businesses in Europe, a lot of it is construction-related and that is predominantly a summer activity, June, July, August, September. So we're confident in that. And I also talked about what -- our large pipeline accounts, who primarily are in the urethanes business and we have typically seen somewhere in the 15% improvement year -- first half to second half in them. So all we're really looking for here is the normal demand pattern over the first half to second half. And a lot of that gives you -- and that plays into the fact that second half turnaround costs are going to be lower because some of this is driven by turnaround that occur in the first half, and the first half turnarounds reflect lower demand in the first half versus the second half. So we're as confident as we could be about the pattern that we're seeing. This is not that unusual.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [78]

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And then just so we can put that into context, I have those numbers as far as bleach up 15% to 20%, 5%, 7% in vinyls, pipeline up 15%. Given those typical movements, I guess, in the past has that typically resulted in a $100 million improvement second half versus first half? Or is that because of changes in your system that you could realize that larger level of improvement?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [79]

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I would say, that typically creates a significant change from first half to second half. We said earlier that over the last 3 years that we've owned the Dow businesses, we've seen about 45% of our EBITDA be generated in the first half, 55% in the second half and pricing can skew that all over the place. We're looking at this and the number we're giving you is based on or obviously based on assumptions on price, and there is not a lot of price skewing that this time.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [80]

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And then just to understand the lower end of the guidance then. So assuming the midpoint you get that $100 million-or-so in volume. So the lower end, is it mainly just the volume doesn't come through? Or what are the other factors that go into the lower end of guidance?

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Todd A. Slater, Olin Corporation - VP & CFO [81]

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Well, I would say, the 2 big variables around the guidance are, we realize the $15 million in price and the rest is the volume.

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Operator [82]

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Next, we have an Aleksey Yefremov of Nomura.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [83]

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Apologies another question on first half versus second half. If I take the $650 million you expect at the midpoint in the second half and divided by 2, that's about $325 million per quarter. Should I think about the seasonality as 3Q is going to be higher than that average and 4Q below that?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [84]

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No. I think with the product mix that we have today, and some of the changes in the customer, I would say, Q3 and Q4 should look similar to each other.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [85]

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So about $325 million per quarter is roughly. All right. And then the $20 million environmental charge, should that benefit the corporate line in the third quarter compared to the second quarter because of absence of it?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [86]

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All other things being equal. Yes.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [87]

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Last quick one, if I may. Could you quantify the negative impact of ITC fire in the first half? And how much it will benefit in the second?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [88]

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All we've said is that it was $10 million in the second quarter.

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Operator [89]

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There are no further questions. This concludes our question-and-answer session. I would now like to turn the conference call back over to Mr. John Fischer for any closing remarks. Sir?

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John E. Fischer, Olin Corporation - Chairman, President & CEO [90]

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I'd like to thank you all for joining us today, and we look forward to speaking with you about our third quarter.

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Operator [91]

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And we thank you, sir, and to the rest of the management team for your time also. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you. Take care, and have a great day, everyone.