Olin - Q2 2023
July 28, 2023
Transcript
Operator (participant)
Please note, this event is being recorded. I now turn the conference over to Steve Keenan, Olin's Director of Investor Relations. Please go ahead, Steve.
Steve Keenan (Director of Investor Relations)
Thank you, Keith. 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 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 in our website under 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 CEO, and Todd Slater, Olin CFO.
I'll now turn the call over to Scott Sutton to make some brief remarks, after which we'll be happy to take your questions.
Scott Sutton (CEO)
Thanks, Steve. Good morning, everybody. Global market conditions continue to be quite poor. Additionally, our performance in the Q2 was not up to expectations, partially due to the previously announced Freeport Vinyl Chloride Monomer plant operating issues, but also due to excessive Asian epoxy resin exports and our associated epoxy asset right-sizing activities. These factors will result in a lower trough expectation for 2023 adjusted EBITDA. The bright spot in the Q2 was our purchase of 2.5% of our outstanding shares, while simultaneously reducing net debt compared to the Q1. Since January 1st, 2022, we have purchased 21% of our outstanding shares. In the Q3, we expect epoxy resins and system sales volumes to slightly improve relative to the Q2. However, inventory reduction efforts will leave the business in negative EBITDA territory.
While Winchester's performance is expected to slightly improve in the Q3, mainly due to international and domestic military growth, our chlor-alkali and vinyls business is expected to be slightly down, mainly due to execution of our leadership model as we see bottoming of ECU values in some geographies, likely a positive sign for 2024. This is our time to be tested, I am confident that the Olin team is up to that test. It should be clear from slide number four that Olin believes running a value strategy with lots of built-in free options delivers more total cash for shareholders versus any alternative strategy. Looking forward, we are working on numerous initiatives to make sure both future peaks and troughs from that value strategy are higher than our previous results. Those initiatives are spelled out on slide number five.
Keith, that concludes my opening remarks, and we can now proceed to questions.
Operator (participant)
Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. This morning's first question comes from Hassan Ahmed with Alembic Capital.
Hassan Ahmed (Senior Equity Analyst)
Morning, Scott and Todd. You know, a question. Well, two-part question, one on the implied sort of trough earnings number, and the other one on sort of the peak number that you put up on your presentation. First on the trough number, I mean, if I take a look at your implied Q4 2023 guidance, it's around $300 million, right? I annualize that, that's obviously $1.2 billion. Obviously, you guys, you know, talked about the VCM Freeport, Texas, facility being sort of one of the cause agents, Epoxy being, you know, call it below trough, being another cause agent of this sort of perceived below trough guidance.
Is the delta between the $1.5 billion-$2 billion sort of trough range that you gave versus the annualized $300 million Q4 2023 guidance that you gave, primarily because of the VCM side of things and the Epoxy side of things?
Scott Sutton (CEO)
Yeah. Thanks, Hassan. Yeah, look, I mean, first of all, I, I would say that 2024 has a lot more positives than negatives. We're calling a trough at $1.4 billion, not $1.2 billion. Now, the, the difference between $1.4 billion and, you know, what we've called out is our, our previous trough there. Yeah, I mean, we've got a $100 million problem with VCM. You know, on top of that, it really is the mass of material that's come out of Asia in epoxy. You know, you heard me say that we're gonna run 1 quarter, probably here at negative, negative EBITDA territory. I mean, Hassan, I, I would also add that we have had to run our model a little bit deeper.
I mean, the, you know, demand declined so fast relative to supply, that if you look at rates, we're way below 50% in Epoxy, and we're not all that are above 50%, you know, across our CAPV portfolio right now. It's those things that make up the difference.
Hassan Ahmed (Senior Equity Analyst)
Understood. You know, sorry, it's, you know, the peak side of it, I also wanted to sort of touch base on. You guys sort of flagged over $3 billion in the next peak, right? If I take a look at what you guys, on a quarterly basis, were run rating in Q1 2022 and Q2 2022, it was over $850 million. Clearly, utilization rates weren't as tight as they potentially could be in the next peak, right? You hadn't sort of restructured the Epoxy business as you are right now, right? I mean, from the sounds of it, $3 billion in the next peak actually sounds pretty bare bone. Is that fair?
Scott Sutton (CEO)
I mean, yeah. I mean, Hassan, look, our, our outlook certainly says that the structure of chlor-alkali only gets better over, over time. It's true that we've done some restructuring in our, in our Epoxy business. I will say that in order for Epoxy to get back to the levels it was, that, that's probably a couple years out. You know, you're gonna see the, the next peak in chlor-alkali while Epoxy is, is still recovering, and that's why we put the next peak at somewhere just about $3 billion.
Hassan Ahmed (Senior Equity Analyst)
Understood. One last one, if I may. On Dow's earnings call, they basically talked about how their contract with you was renewed through 2035. You know, is there any sort of commentary you can give about... I know historically, sort of Olin's talked about not really making any money on that contract, but is there any commentary you guys can give us about that renewed contract?
Scott Sutton (CEO)
Yeah, I would just agree that we did reach an agreement, and I think that's gonna be good for everybody in the future.
Hassan Ahmed (Senior Equity Analyst)
Fair enough. Thank you so much.
Scott Sutton (CEO)
Sure.
Operator (participant)
Thank you. The next question comes from Steve Byrne with Bank of America.
Steve Byrne (Senior Chemicals Analyst)
Hi, thank you. Just continuing on to this, this peak EBITDA discussion, is it more driven by chlor-alkali? Is your view on Epoxy a little more measured than it used to be? With the former chlor-alkali and, are you, are you moving any further down the path of, of, partnering on some downstream polymer capacity, or is it a little too early for that?
Scott Sutton (CEO)
Well, I, I would say, I mean, the big driver of it is certainly chlor-alkali. There's no doubt Epoxy will improve, but the structure of the Epoxy industry, when you have a China, has probably added almost 20%, you know, to the world's supply capability in the last 18 months or so, it's gonna take a little more time to, to recover. I mean, I'd also call out our Winchester business as well. I mean, that business has great fundamentals, particularly in the growth of international and domestic ammunition. It's those things that'll get us there.
Steve Byrne (Senior Chemicals Analyst)
One follow-up for you, Scott, on Winchester is: what is going on competitively that's leading to a challenging, you know, domestic commercial market? Is it underlying demand, or is it, you know, increased imported product or competitive lack of discipline? What, what would you attribute it to?
Scott Sutton (CEO)
Yeah. Well, I, I would say, just a reminder, you know, even though it's challenging, it's certainly well above pre-COVID levels still. But what is driving the challenge is, is I would say across, you know, outdoor sports. Inventory is just generally increasing. That's not just a comment only on ammunition, but we're subject to that, and that's why it's a bit challenging.
Steve Byrne (Senior Chemicals Analyst)
There's destocking going on, is that the issue?
Scott Sutton (CEO)
Well, it's not necessarily, you know, destocking. I would say that, look, inventory in the channel has creeped up, and therefore, supply into the channel is slowing down, right? There may be some follow-on destocking that, that naturally would follow that, but that's the situation.
Steve Byrne (Senior Chemicals Analyst)
And some of that creep from Russian imports that you've talked about in the past?
Scott Sutton (CEO)
No, no. Russian imports have ended. If anything, imports into this country, in terms of ammunition, have gone down over the last 12 months, primarily to Russia importing 0 anymore.
Steve Byrne (Senior Chemicals Analyst)
Okay, thank you.
Scott Sutton (CEO)
Yep.
Operator (participant)
Thank you. The next question comes from Mike Sison with Wells Fargo.
Mike Sison (Managing Director)
Hey, guys. look, I, I wanted to understand the $300 million a little bit. In, in the Q3, what, what's the impact from, from the plant outages? Is it similar to the $80 million in, in, in the Q2? Then for the Q4, $300 million, Q4, $300 million, is there any impact from that extended into the fourth?
Scott Sutton (CEO)
Yeah. Let, let, let me clarify, Mike, the, the $80 million, first of all. Because in our earnings release, that is a year-over-year quarterly comparison, it includes the planned cost of the turnaround that we were gonna have. The guidance that we gave, or the early guidance we gave in the Q2 said, "Look, we have a $50 million impact," that was versus the expectation. I would say when you're looking at the Q3, it's very probable that that impact is the same. What you have versus our earlier expectation is a $100 million essentially spread evenly over the second and Q3.
Mike Sison (Managing Director)
Okay. Got it. The Q4 doesn't have an impact, that's just kind of the run rate for the, where the ECU and everything's at, right?
Scott Sutton (CEO)
Yeah. I mean, that, that, that's, that's pretty much right, right? We've called out $1.4 million. You kind of back into the numbers you're using for the, for the Q4. You know, there's some natural slowdown in, in some of the businesses, and there's still negative momentum in caustic.
Mike Sison (Managing Director)
Okay. Then just in terms of where your mid-cycle EBITDA could be, is it sort of the delta between the peak and this year, or is it a different number? How long do you think it takes to sort of get to sort of a mid-cycle number?
Scott Sutton (CEO)
Yeah. Well, I, I would just say, Mike, that we, we expect 2024 to be, to be better. You know, there's good signs to that, I think, even though they are slowly maturing signs, 2025 looks even better than that. It's in that range.
Mike Sison (Managing Director)
Thank you.
Scott Sutton (CEO)
Yeah.
Operator (participant)
Thank you. Next question comes from Kevin McCarthy, Vertical Research Partners.
Kevin McCarthy (Partner and Senior Equity Analyst)
Yes, good morning. Scott, with regard to caustic soda, how much was your average price down in 2Q versus 1Q? In chlorine, it seems like you had a quite divergent experience versus, you know, consulting marks, so to speak. I'm curious as to any color you can provide in, in caustic as to where your own experience is perhaps differing or similar to, you know, outsiders' views.
Scott Sutton (CEO)
Yeah. Yeah, I won't give a specific number on that. You know, our caustic was definitely down in Q2 versus Q1, and, you know, we're saying it's gonna go down in third. It's not that far off from what you see in the trade publications, perhaps a little bit favorable to that. Of course, you know, we had, just like you said, a different experience in merchant chlorine. You know, trade publications say flat to down. You know, we were able to lift merchant chlorine pricing in Q2 relative to Q1, and we'll lift merchant chlorine pricing in Q3 relative to Q2 as well.
Kevin McCarthy (Partner and Senior Equity Analyst)
Okay. Secondly, a financial question for you. If I look at your balance sheet, Olin's inventory levels in the Q2 were up 14% year-over-year in dollar terms. My question is, you know, how, how would you characterize your inventory in unit terms or, or tons? Are, are there product lines where you feel you have too much inventory and you need to draw it down, or product lines where it might even be relatively lean? How, how would you characterize that?
Todd Slater (CFO)
Hey, Kevin, this is Todd. Thanks for the question. Yes, you know, through the first half of the year, you have seen a $200 million working capital build from Olin. Ultimately, as you see in our cash flow forecast for the year, we think working capital will actually be favorable. You should expect to see working capital decline and turn into a source of cash in the back half of the year. Also, I think during Scott's prepared comments, he commented about the expectation of reducing epoxy inventory during the Q3.
Kevin McCarthy (Partner and Senior Equity Analyst)
Okay. Thank you.
Operator (participant)
Thank you. The next question comes from Michael Leithead with Barclays.
Mike Leithead (Director of Equity Research)
Great. Thanks. Good morning, guys.
Scott Sutton (CEO)
Morning.
Mike Leithead (Director of Equity Research)
Morning. First question on Epoxy. When you look at Asian exports and the prices they're selling for in the market, is your sense that producers there are below cash breakeven levels? If so, how, if at all, does that change your thinking about how Olin should approach, say, the epoxy value chain?
Scott Sutton (CEO)
Thanks for the question. I would just say yes. I mean, you got to remember in China that they've been, you know, operating with the favorability of negative chlorine values, right? Potentially negative hydrochloric acid values. Those key inputs, which is just one input, has gone into the Epoxy chain with somebody paying the producers of Epoxy to take it. That's totally different than, you know, any other geography, and it has, you know, nothing to do with covering any kind of level of fixed cost and certainly no return on capital. Yeah, I think that's a real issue. We're gonna consider, you know, what we're gonna do about proposing and duties in certain geographies as well, because this really can't go on.
Mike Leithead (Director of Equity Research)
Fair. Fair enough. Then second, just when you look at your chemicals volumes overall, with the exception of the VCM impact, do you think the Q2 is the low point in your volumes, or do you expect them to be stable or, or maybe lower in the back half?
Scott Sutton (CEO)
Yeah. I, I would say that for, for Olin, look, our, our volume challenge is effectively finishing.... here, right? We, we've taken it down enough to preserve values, run a leadership model, where we're prepared to capitalize on the run out. We've taken volumes down further enough to achieve that objective. Even in our Epoxy business in the Q3, we do expect systems and resin volumes to grow some.
Mike Leithead (Director of Equity Research)
Got it. Thank you.
Scott Sutton (CEO)
Sure.
Operator (participant)
Thank you. The next question comes from Jeffrey Zekauskas with J.P. Morgan.
Jeff Zekauskas (Managing Director and Senior Equity Research Analyst)
Thanks very much. You've always spoken of the negotiation of the Dow contract as a meaningful future benefit in 2025. Now, it seems that Dow is going to take less chlorine and caustic because of what they're doing in propylene oxide. Is it still a meaningful jump for Olin in 2025, or is that no longer the case?
Scott Sutton (CEO)
Yeah. I would say it's really a positive arrangement for Olin. Jeff, I mean, you're right that, you know, one PO unit, you know, Dow has announced that they're closing that, so that volume goes away. Other volumes at that same site remain, and the site in Louisiana becomes the site of focus for the bigger volumes.
Jeff Zekauskas (Managing Director and Senior Equity Research Analyst)
So we shouldn't expect some meaningful some meaningful EBITDA benefit to you in 2025 because of the renegotiation of the contract. Is that correct?
Scott Sutton (CEO)
No, I, I think it's positive, Jeff.
Jeff Zekauskas (Managing Director and Senior Equity Research Analyst)
Okay. In terms of your chlorine prices, are your... There's always a, there are always contract resets that Olin benefits from because pricing in the old days was so poor. Is the positive momentum in prices in chlorine a function of the repricing of very old contracts, or is it more, you know, an accurate picture of the current market today?
Scott Sutton (CEO)
Well, I think a large part of the continual improvement in our average merchant chlorine pricing has to do with, you know, contracts, maturing, maturing and being renegotiated. That's not the only part of it. You know, the part that's on spot, you know, we still continue to do well there. The bigger part is the new contractual arrangements where we exit these remaining legacy deals.
Jeff Zekauskas (Managing Director and Senior Equity Research Analyst)
Mm. Is there much more to go, or are you now pretty, pretty much caught up?
Scott Sutton (CEO)
Well, we have a little bit more to go.
Jeff Zekauskas (Managing Director and Senior Equity Research Analyst)
Okay, great. Thank you so much.
Scott Sutton (CEO)
Sure.
Operator (participant)
Thank you. The next question comes from Duffy Fischer with Goldman Sachs.
Duffy Fischer (Chemicals Equity Research Analyst)
Yes, good morning. Scott, I was hoping, can you just kinda summarize all the changes you've made to your Epoxy footprint, and what does that do, you know, to the upside coming out? I mean, how much capacity have we taken off? You know, when we get through this downturn, how much different is your footprint today?
Scott Sutton (CEO)
I mean, we've, we've made and are in the process of making quite a number of changes. You know, upstream, I'll say that, you know, we exited a cumene plant. We exited one of our BPA facilities. In the resin area, we reduced our capability both in Freeport, Texas, and in Stade. Then at a few downstream plants, we reduced our capability in solid epoxy resin, and then we shut down a facility in Korea. I mean, that has reduced our, our, you know, capability some. What I will say is that in Epoxy, you know, we had at least two of everything to begin with, and sometimes three or four of everything. So we've gotten rid of that overhang.
We're much more efficient now, and it's not gonna take a massive amount of volume to put us closer to a higher capacity utilization. We're still working to get those costs down.
Duffy Fischer (Chemicals Equity Research Analyst)
Fair enough. Then you often talk about managing one side or the other of the ECU. As you look out over the next year or so, which side do you think you're gonna have to work hardest on to manage?
Scott Sutton (CEO)
Well, we, we work both sides, of, of course, but I will say that, that, you know, right now, you see the, you know, rate of change of caustic pricing, and so we're just not participating in that market as much. In other words, we're setting our whole participation according to that dynamic. Doing that, of course, slows that rate of decline. On the other side of the ECU, it certainly enhances where it's already a little bit tighter. That's our positioning now. We'll stay in that positioning for a little while. I expect it to change. Maybe it'll change twice over the next year.
Duffy Fischer (Chemicals Equity Research Analyst)
Great. Thank you, guys.
Scott Sutton (CEO)
Yep.
Operator (participant)
Thank you. The next question comes from Arun Viswanathan with RBC Capital Markets.
Arun Viswanathan (Senior Equity Analyst)
... Hey, thanks for taking my question. I had a question about the PCI and your parlay volume. Your parlay volumes looks like they hit a high point in the Q2 as a percent of your sales, and yet you're still able to maintain the PCI in the 2, you know, high 250s. Is that really the swing wheel you have, the flywheel you have to maintain that PCI is the parlay volumes? When the market comes back and your utilization rates go higher and volume, you can service more of that volume from your own production, or how should we think about how the parlay volumes would, would evolve in order to keep the PCI constant and maybe as your, as your profitability improves?
Scott Sutton (CEO)
Well, I, I would maybe start with. Let me, let me redefine a little bit, you know, what these parlay volumes are. You know, when, when we're faced with weak market conditions, we may very well reduce our production as we have. It doesn't mean that we back out of the market according to that same production volume decrease. We go out into the market and buy volumes out of the market to satisfy that demand that we have. When I said earlier, we've been having to run the model deeper, this is evidence that we're having to run the market, I mean, run the model, you know, a lot deeper and go out and buy more volumes. Part of this volume, right, is, is working through our Blue Water Alliance joint venture, which is set up to go out and manage global liquidity as well.
All of those activities are just one contributing factor to keeping our Profit Contribution Index up over time.
Arun Viswanathan (Senior Equity Analyst)
Then if I could just ask a follow-up. On the potential peak EBITDA of $3 billion, maybe if you annualize that, it would be somewhere in the range of $700 or so for Q1 and Q4, and maybe, you know, $800-$900 for Q2, Q3. Could you potentially break down that by segment? You know, especially given some of the changes you've made on the footprint for Epoxy and CAPV, what are those potentially contributing per quarter now under the new structure? Thank you.
Scott Sutton (CEO)
Yeah. You know, I, I would say Epoxy is not gonna be the contributor that, you know, it was in recent history where we were running, you know, $700 million+ annual EBITDA. Included in that $3 billion is not Epoxy at that level. It's somewhere between today and that level. What is in there is, you know, a strong performance from chlor-alkali. As you know, the outlook on structure looks good. Demand outpaces supply. It's very likely that, in fact, caustic growth may outpace chlorine growth, you know, due to all the things that are going on with minerals and batteries and everything else, and that imbalance helps us in the future. In the chemical side, it's much more heavily weighted toward chlor-alkali, and Winchester is a contributor to that as well.
In fact, for the first time ever, as evidence that we're gonna move that way, for the first time ever in Q3, the consumer piece of the Winchester business is gonna be less than 50% of that business, and the military plus other is the larger part of it.
Arun Viswanathan (Senior Equity Analyst)
Just so I'm clear, you said there's a lot of drivers for 2024, 2025. Do you expect to maybe get closer to that peak by 2025, 2026, or what's the timing on that? Thanks.
Scott Sutton (CEO)
Well, I, I, you know, I don't have a, a, a specific time, but, you know, it, it's gonna take a couple of years.
Arun Viswanathan (Senior Equity Analyst)
Thanks.
Scott Sutton (CEO)
Yeah.
Operator (participant)
Thank you. The next question comes from Vincent Andrews with Morgan Stanley.
Vincent Andrews (Managing Director)
Yeah, thanks, guys. Just continuing on the, the sort of peak cycle definition. You know, just thinking back to the last peak, you know, obviously very unique period of time where you had lots of supply outages and supply chain issues and, and obviously very strong demand and, and significant stocking that's obviously reversing now. I, I, I assume, Scott, you're, you're looking for in the next peak cycle, sort of a more traditional peak cycle, where it's just tight utilization rates from, from supply and demand. You know, is that the case, or are you sort of also assuming there'll be some exotica, you know, on the operational side? Then where would your operating rates be in, in, in that scenario?
Would you actually be running full out, or would you still be managing the situation volumetrically in order to achieve that level of EBITDA?
Scott Sutton (CEO)
Yeah. Yeah, I mean, thanks for the, thanks for the question. Look, I, I, I would say that, okay, it, it's a bit more, you know, traditional there as, you know, global demand again, outpaces global supply. I would say a situation like we had, you know, coming out of COVID, that kind of volatility where demand is overstimulated for whatever the, the case, is certainly on top of, you know, what we're showing as, as our, our peak cycle right now. I, I don't think you'd expect that everything will be smooth, right? I mean, traditionally, these supply chains have faced, you know, all kind of challenges and volatility, but you really haven't seen that over the last eighteen months, at least not in a way that, you know, impacted supply-demand.
As demand climbs back, as some mass comes out of the trade flows that's being injected into the trade flows today by Asia, driven by China, as that changes, you'll start to see some of those problems with the supply chain likely exposed again.
Vincent Andrews (Managing Director)
Okay. If I could just ask on the, the reduction in the cash flow, obviously, commensurate with the reduction in EBITDA, but in terms of use of that, that cash flow, I assume nothing's changing. We should assume a similar pace of share repurchases in the back half?
Scott Sutton (CEO)
Yeah, good question. You know, we, you know, levered free cash flow as we look forward, we continue to see the first best use of levered free cash flow as it continue to repurchase shares. That's what you should see us continue to do.
Vincent Andrews (Managing Director)
Okay. Thanks very much, guys.
Scott Sutton (CEO)
Sure.
Operator (participant)
Thank you. The next question comes from Aleksey Yefremov, with KeyBanc Capital Markets.
Aleksey Yefremov (Managing Director and Equity Research Analyst)
Thanks, good morning, everyone. VCM outage, is it somewhat meaningful in terms of US caustic soda supply, I believe? Are you seeing any improvements in, in caustic supply and demand, you know, since the outage? As a follow-up to this question, is your goal for this outage to be over by the Q4? Should we assume that at this point?
Scott Sutton (CEO)
Yeah. Hey, Aleksey, I mean, this, this, this outage is really an impact to 2Q and 3Q. You know, we haven't factored in any outage issue in the Q4, nor do, do we anticipate that, okay? To, to some extent, this has impacted our upstream production. You know, this isn't the only way that we liberate vinyls intermediates, which in turn liberates caustic. I would say that's really not a driver on US caustic. What is the driver is going back to that, that mass of flows that's come out of Asia, that has impacted, you know, global, global trade flows and tends to back things up in the US Gulf Coast. That's been more the driver of how caustic pricing has changed.
Aleksey Yefremov (Managing Director and Equity Research Analyst)
Thanks, Scott. Coming back to your configuration, you know, with Dow, you know, as you mentioned, Dow will shut some PO capacity at Freeport that will free up some of your chlor-alkali capacity. Should we assume that that's not used in any way, or, or, or is it more likely that you'll, you'll look for, you know, some other derivative opportunities, either through joint ventures, other arrangements, or, or even organic investments downstream of chlor-alkali?
Scott Sutton (CEO)
Well, I would just say it opens up possibilities, right? Those are sort of some of the free options that, that we have going forward, and we haven't made a decision about that.
Aleksey Yefremov (Managing Director and Equity Research Analyst)
Got it. Thanks a lot.
Scott Sutton (CEO)
Sure.
Operator (participant)
Thank you. The next question comes from Matthew Blair with TPH.
Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)
Hey, good morning, Scott and Todd. Circling back to the Dow contract, Scott, you mentioned it was a, a positive resolution there. Should we think about this as being more significant on the free cash flow side for you than the EBITDA side, or can you give us any color on, on that?
Scott Sutton (CEO)
Well, I, I would say it, it, it's probably favorable for both parties on both sides, because there's some real win-win elements of this, and that not only helps, you know, how we're both running our day-to-day operations, but it also, you know, prevents inefficient investments on both parties' side, which drives free cash flow. I would just say it's, it's a positive for both parties on both those fronts.
Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)
Sounds good. Then do you have any more commentary on the Epoxy side, in terms of demand? Could you talk about how things are, are going in areas like electronics and wind and, and autos?
Scott Sutton (CEO)
I mean, look, the demand in all of those areas, well, at least in, you know, electronics, was certainly sluggish. Automotive coatings, at least in the US, has shown some recent recovery, and you've seen some of that in the coatings companies', you know, earnings announcement here. You know, there's a nice portfolio of wind projects, and that's one of the biggest outlets for, you know, our systems activities. You know, those projects go through stops and starts, and there's been some level of inventory adjustment in those supply chains. I would say all three of those areas, as we move into 2024, are positive.
Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)
Sounds good. Thank you.
Scott Sutton (CEO)
Yep.
Operator (participant)
Thank you. The next question comes from Frank Mitsch with Fermium Research.
Frank Mitsch (Managing Director and Senior Equity Analyst)
Hey, good morning. If I could just, point of clarification: the new terms, on the Dow, on the Dow contract, do they take place, when the old one was supposed to expire in October of 2025? Or is there a different effective date for the new terms?
Scott Sutton (CEO)
Yeah, I mean, you know, that's, that's roughly right. I mean, Frank, I won't comment on all the different dates and all the different improvements, but, you know, I guess you can average it there.
Frank Mitsch (Managing Director and Senior Equity Analyst)
All right. Awesome. Thank you. Yeah, I, I, I fully appreciate the difficulties in the Epoxy business, and obviously, you've been taking a number of steps to improve your own footprint. You, you've outlined some of them, and I know in the past, you, you've indicated that some of these actions should start to lead to $50 million annual EBITDA improvements starting in the Q4. Given the degradation in the broader markets, how should we think about, you know, sort of these actions that Olin is proactively taking will start impacting your income statement?
Scott Sutton (CEO)
Yeah. Yeah, I mean, principally, you'll see it more in 2024. It's actually being effective today and into the Q4, Frank, but we're having to, to clean up our inventory on the balance sheet a bit, and, you know, that, that, that is offsetting some of that underlying improvement that'll expose itself after a couple quarters here.
Frank Mitsch (Managing Director and Senior Equity Analyst)
Gotcha. Thank you so much.
Scott Sutton (CEO)
Sure.
Operator (participant)
Thank you. The next question comes from Josh Spector with UBS.
Josh Spector (Executive Director of Chemicals Equity Research)
Yeah, hi. Thanks for taking my question. I'm just curious on EDC, has your participation rate in that market changed at all? I mean, I think it was pretty minimal before. I guess, with the VCM outage, has that pushed more material into there or, or not? When do you think about when you would get more involved in that market in the future?
Scott Sutton (CEO)
Well, yeah, I mean, thanks for the question. I, I wouldn't say it's changed that much, but, I mean, look, our participation in, you know, the global EDC merchant market, you know, we've, we've traditionally been the biggest player there. You know, recently, because of low values, we had reduced that. I think through this period, when we're having, you know, challenges in our VCM operation, still, our participation hasn't changed all, all that much. I think the, the interesting thing about, you know, PVC is US inventories have declined, and you've seen the PVC players, you know, all nominate recent price increases. Eventually, the non-integrated PVC players, where our EDC ends up, are gonna get back in business. We've just got to make sure we get the right product values when that phenomena happens.
Josh Spector (Executive Director of Chemicals Equity Research)
Thanks. I appreciate that. I guess when you talk about some of the win-wins, potentially with Dow, should we be contemplating any increase in the amount of ethylene you can get from them? I guess, what's your desire for you to participate larger in whether EDC or, or VCM without a partner?
Scott Sutton (CEO)
Well, I, I, I would say, you know, our ethylene arrangements are, are kind of good forever. It's not forever. I forget how many years is left, but, you know, it was a, it was a long-term agreement for more than 20, 20 years, right? You know, we're set there. We do have the ability, when it, when it makes sense, to partner with a vinyls player, 'cause again, we, we, we have incremental capability there. We have, you know, the ECUs, the ethylene, the EDC capability, some level of VCM capability already. You know, we sit on a little gold mine there. The timing's just not right.
Josh Spector (Executive Director of Chemicals Equity Research)
Understood. Thanks, Scott.
Scott Sutton (CEO)
Yep.
Operator (participant)
Thank you. The next question comes from John Roberts with Credit Suisse.
John Roberts (Managing Director and U.S. Equity Research)
Just to confirm, nothing got renegotiated on the ethylene contract?
Scott Sutton (CEO)
we... That was a contract that we had in place some time ago, and it wasn't part of the discussion.
John Roberts (Managing Director and U.S. Equity Research)
Is any of the parlay activity in Epoxies, or is it all in Chlor-alkali Vinyls?
Scott Sutton (CEO)
Well, the majority of it is, is in chlor-alkali. We've been successful at running that parlay strategy in Epoxy until capacity utilization got so low, and so we've reduced that participation there. It just doesn't make sense to do it at the moment.
John Roberts (Managing Director and U.S. Equity Research)
Do you have any longer-term targets for both total parlay and the balance between Epoxy and Chlor-Alkali?
Scott Sutton (CEO)
Well, I wouldn't say there's a target for a balance between, you know, chlor-alkali and Epoxy. I would say that we're gonna do the right amount of parlays so that we can keep a leadership strategy in place and keep our product values up, even when our capacity utilization is low. When our capacity utilization is very low, like it is now, you're gonna see big percentages. When it goes up, you might see some smaller percentages. However, I will say that, you know, Blue Water is out there trading more caustic and more EDC across the oceans, and that trading activity will continue and grow no matter what our capacity utilization is.
John Roberts (Managing Director and U.S. Equity Research)
Thank you.
Scott Sutton (CEO)
Yep.
Operator (participant)
Thank you. This concludes our question and answer session. I now would like to turn the floor to Scott Sutton for any closing comments.
Scott Sutton (CEO)
Yeah. Well, I would just say thanks a lot to, to everybody for, for joining. I think, Keith, that closes the call.
Operator (participant)
Okay, thank you. As mentioned, the conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.