Q3 2022 Earnings Conference Call
October 27, 2022, 09:00 ET
Steve Keenan - Director, IR
Scott Sutton - President, CEO & Chairman
Todd Slater - SVP & CFO
Conference Call Participants
Kevin McCarthy - Vertical Research Partners
Hassan Ahmed - Alembic Global Advisors
Aleksey Yefremov - KeyBanc Capital Markets
Michael Sison - Wells Fargo Securities
Frank Mitsch - Fermium Research
Arun Viswanathan - RBC Capital Markets
Matthew Blair - Tudor, Pickering, Holt
Alyssa Steinberg - Morgan Stanley
Eric Petrie - Citigroup
Good morning, and welcome to Olin Corporation's Third Quarter 2020 Earnings Conference Call. Good morning, and welcome to Olin Corporation's Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. 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, Jay. 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 third 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. 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; and Todd Slater, Olin's CFO. Scott will make 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 good morning to everyone. The Olin team is all about delivering on opportunities. We have 2 major opportunities before us. I'll start with opportunity, number one. We are experiencing recessionary conditions, and the opportunity is to show Olin will perform remarkably different than history may indicate. Over the next 4 quarters, we forecast delivering more than $1.1 billion of levered free cash flow.
This is remarkably different. Don't worry that we had to pull back from the EDC market, while prices cratered, creating a major PBC value morass and don't worry that we had to optimize our epoxy participation to support our advanced partners while Asia liquidity temporarily lowered others. These necessary activities are respectful of our core theme to focus on value, set our market participation based on the weak side of the ECU and by liquidity where necessary to lift the value of the ECU, which we did in the third quarter.
Similarly, Winchester did not participate in large replenishments to the channel load but instead lifted the outlook of the storied brand by preserving value. The whole Olin team is poised to march our way through all these challenges and come out recession tested on the other side.
We are the leader, and we demonstrate it every day. Opportunity #2 is to multiply the value of our recession levered free cash flow. We have reduced our share count by 14% over the last 12 months and by 10% over the last 6 months.
We continue to deploy our levered free cash flow towards share repurchases and have a runway of $1.9 billion left on our share repurchase authorization. A possible outcome is that our share count is reduced to $100 million in a couple of years. Our post-recession normalized levered free cash flow is expected to be more than $1.5 billion by band. The possible outcome being $15-plus per share of levered free cash flow. We have an excellent high-value capital allocation plan before us. and we'll drive it every day.
Supporting these 2 opportunities is an investment-grade balance sheet, which we are committing to maintain. And more importantly, the best team in the business OLED employees united in a leadership value quest. I really can't thank them enough. So with that, we'll take your questions now.
[Operator Instructions]. The first question today comes from Kevin McCarthy with Vertical Research Partners.
Scott, you put forth updated guidance for the fourth quarter, but also affirmed your EBITDA guidance range for a recession case scenario. As you see these markets develop and unfold here, what do you think are the biggest sources of variability either on the upside or the downside as we move through the cycle?
Well, you're right. Kevin, we have reaffirmed our recession case guidance, which we see happening over the next year already entering it now. There's going to be lots of ups and downs across the product portfolio. As you know, we run a contrarian model where we let our market participation be based on a weak market or the weak side of the ECU.
So you've seen EDC, for example, go from really high pricing to really low pricing and those kind of things are going to happen. But because we focus on the ECU likely to be more balanced in totality. What there could be some alarm about, Kevin, is that we may have to take a couple of quarters down in order to support the shoulder quarters be able to deliver more than $1 billion of levered free cash flow across the whole year. I mean, no market segment really has good fundamentals right now. So there's going to be some volatility
And then I know you're throttling back on volumes in an effort to support the market. That effort appears to be succeeding. But Nevertheless, can you talk about what your operating rates were in the quarter in chlor alkali and epoxy and how you see that utilization progressing here October?
Yes. Well, maybe instead of all of those operation rates, I'll at least share with you what we're doing in epoxy if you were to think about the equivalent operating rates, all of our resin production facilities, we're running below 50% there in order to preserve value. And remember, our recession case said that we could move the whole company down to that level. And so I would just say we have plenty of room left across the rest of the company to make our recession prediction come true.
The next question comes from Hassan Ahmed with Alembic Global.
I just wanted to revisit the Q4 guidance, particularly in light of recessionary conditions and the like. I mean, look, I understand Q4 tends to be seasonally weak. You guys have consistently talked about certain sort of markets, be it EDC, be epoxy conditions over there being even below trough conditions.
But if I were to annualize the lower end of your Q4 guidance, I still come up with, call it, $1.75 billion in EBITDA, which obviously is kind of the midpoint of the $1.5 billion to $2 billion of the guidance range for a trough that you guys have given. So with the conditions evolving the way they are, I mean I just wanted to sort of get your take on how comfortable you guys continue to be with that trough EBITDA guidance range.
Yes. I mean, look, I mean, it's still our guidance range. And in fact, it's been our guidance range now for the last 3 quarters as we've really been preparing this window to show that Olin delivers a different level of free cash flow than we did before. I will say, of course, I understand annualized in the fourth quarter, and you're right, get exactly to that conclusion, even though the fourth quarter has traditionally weak factors on top of all the extraordinary factors that are going on in the world right now. I will just again sort of caution that we may experience 1 or 2 quarters that are lower than that in order to set the value equation right for the rest of the year, though.
I mean we're not going to hesitate to take the proper actions in advance to make sure that value doesn't decline. We're not having to do that yet, but it could certainly happen as the recession plays out.
So Scott, sort of following up on that, one of the pushbacks that I get is around sort of chlor alkali pricing, right? Obviously, pricing has been sort of firm to up both for caustic and chlorine. But one of the fairs or investor concerns tends to be that, look, U.S. housing, weakening, PVC market, very weak. If we go into a recession, obviously, industrial production will affect cost take as well. So in that sort of an environment, I mean how comfortable are you that pricing for chlorine and caustic at the very least will not go down?...