Olin - Q2 2024
July 26, 2024
Transcript
Operator (participant)
`Good morning, and welcome to KeyBanc Capital Markets Corporation's Q2 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Following today's brief opening comments, there will be an opportunity to ask questions.
To ask a question, you may press Star, then One on your touchtone phone. To withdraw your question, please press Star, then Two. Please note, this event is being recorded. I would now like to turn the conference over to Steve Keenan, KeyBanc Capital Markets Director of Investor Relations. Please go ahead, Steve.
Steve Keenan (Director of Investor Relations)
Thank you. Good morning, everyone, and thank you for joining us today. Before we begin, I'll remind you that this discussion, along with the associated slides and the question-and-answer session that follows, will include statements regarding estimates or expectations of future performance. Please note that these are forward-looking statements and that actual results could differ materially from those projected.
Some of the factors that could cause actual results to differ from our projections are described without limitations in the Risk Factors section of our most recent Form 10-K and in yesterday's Q2 earnings press release. A copy of today's transcripts 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 Ken Lane, Olin's CEO, and Todd Slater, Olin's CFO. We'll begin with our prepared remarks, and thereafter, we'll be happy to take your questions. I'll now turn the call over to Ken Lane. Ken?
Kenneth Lane (CEO)
Thank you, Steve, and good morning, everyone. I want to start by saying how grateful we are that despite a direct hit on our Freeport, Texas, facility by Hurricane Beryl, all our team members are safe. I'm very proud of how everyone responded. We saw the best come out with colleagues supporting one another, not only on-site during and following the storm, but with each other's homes as well.
Many team members experienced significant damage to their homes, and I want to personally thank all of those who stepped up to help during the recovery. While we did experience damage to some of our assets, Olin's preparations limited the impact of the storm and kept our team members and neighbors safe. Turning to our Q2 results, overall, the quarter unfolded as expected, with our chemical businesses improving modestly with seasonal demand gains and generally improved pricing.
Winchester also delivered on its Q2 objectives, as higher propellant costs were partially offset by improved pricing, continued strength in military, and a strong performance by White Flyer. Looking ahead to the second half, we now have greater clarity around the macroeconomic outlook, customer demand, and global supply. The industrial economic trough we find ourselves in looks to be longer-lived than typical.
We expect Hurricane Beryl to represent a setback for our chemicals businesses of approximately $100 million during the Q3. Based on our current outlook and including the effect of the hurricane, we have lowered our full-year 2024 Adjusted EBITDA outlook. Olin remains in great shape with our investment-grade balance sheet, strong liquidity, and leading market positions. We will continue to be disciplined with our capital allocation strategy as we were during the quarter.
Also, we remain focused on executing our value-first commercial strategy and continuing to anticipate a bright future as economic activity improves and Olin acts as a coiled spring to serve that recovering demand. Turning to slide 4, I'll highlight our efforts in the second half to maximize cash flow. Our teams will continue to focus on cash generation by reducing capital expenditures in spite of Hurricane Beryl requirements, maintaining cost discipline, and reducing working capital through the second half of 2024.
We've done a lot of restructuring around our chloralkali and epoxy assets and expect to continue to realize benefits in the second half. We will continue to stay focused on cost discipline and explore additional cost-saving opportunities. Now, let's turn to slide 5 for an update on our chloralkali and vinyls business.
During the Q2, we saw typical seasonal demand improvement, but little underlying recovery or growth volume. Olin has been extremely disciplined and continues to not sell into weak markets. The green shoots of demand anticipated as U.S. chlorine customers sought to restart assets during the second half proved overly optimistic. Global industrial activity continues to remain weak, with U.S. chlorine demand still running well below pre-COVID levels.
As previously mentioned, Hurricane Beryl made landfall in Freeport, Texas, on July eighth, with sustained winds measured at our site in excess of 120 miles per hour. Our remarkable Freeport team mobilized quickly to assess and repair damage. Today, fewer than three weeks after landfall, Olin has safely returned many plants to operation. Wind damage to ancillary equipment has prevented the remainder from resuming production.
Once this critical equipment is restored, those remaining assets, including our vinyl chloride monomer and phenol acetone plants, will be restarted. Additional global outages have tightened caustic supply and has resulted in upward pricing momentum. For a look at our epoxy business, let's turn to slide 6. Epoxy results continued to improve in the Q2 on lower costs and higher pricing… Q3 epoxy results will be challenged by both the impact of Hurricane Beryl and our planned Stade, Germany, epoxy resin turnaround.
Our U.S. epoxy antidumping case continues to progress on schedule, with an expectation for provisional duties to be set later this year. We are encouraged that the European Union recently launched a parallel investigation as we pull all available levers to level the global playing field and combat the government-subsidized dumping of foreign epoxy.
During the Q2, we've seen several U.S. and E.U. importers accelerate their epoxy import volumes. This raises the potential for retroactive duties to be applied, and we would expect our coalition of U.S. producers to request this additional remedy. Olin has been clear with regulators in both the U.S. and Europe that success on each front will be essential to keeping production of these critical materials in region.
Please turn to slide seven for a Winchester update. As expected, Winchester Q2 results were relatively flat versus the Q1. Commercial ammunition sales were sequentially lower, and rising propellant costs and reduced availability generated a headwind. Domestic and international military sales continued to show strength during the quarter. Winchester military revenues will continue to grow as global defense spending surges.
Our Lake City Next Generation Squad Weapon Ammunition Facility project is expected to generate at least $1 billion of government-funded revenue over the next 3-4 years. Winchester is a well-respected military partner with a strong brand and reputation within the industry, which provides a solid platform to grow our defense participation. We expect our military sales across all value chains, domestic, international, and projects, to significantly increase in the second half of 2024 versus the first half.
This trend of higher military revenue is expected to continue in the coming years. Also, we continue to see very strong performance by our new White Flyer business, exceeding all expectations and delivering on synergies. Now I'll turn it over to Todd for financial highlights before I wrap up our prepared comments.
Todd Slater (CFO)
Thanks, Ken. Times like these reinforce the importance of Olin's investment-grade balance sheet and our robust cash flow generation throughout the cycle. This strong financial foundation enables Olin to continue running our disciplined commercial model, while also currently deploying a substantial portion of our levered free cash flow towards share repurchase. We ended the Q2 with $182.1 million in cash and cash equivalents and approximately $1 billion in available liquidity.
Our net debt has increased by approximately $229 million from year-end, which is typical with our seasonal increases in working capital. The quarter ended with a net debt to Adjusted EBITDA ratio of 2.6 times. Our second-half cash flow projection will benefit from cash returned from liquidating the first-half seasonal working capital build.
We now expect working capital at year-end 2024 to be similar to year-end 2023. We've successfully deferred our international tax payments of approximately $80 million, now into 2025. We've reduced our annual capital spending plan by roughly $25 million to approximately $225 million for 2024, despite Hurricane Beryl requirements of approximately $10 million.
With all these initiatives, we expect net debt at year-end 2024 to be similar to year-end 2023. Excluding one-time payments under a long-term energy supply contract of approximately $50 million, our 2024 levered free cash flow yield currently would equate to approximately 8%. Now I turn it back to Ken for a few closing comments.
Kenneth Lane (CEO)
Thank you, Todd. As we fight through one of the longest troughs I've experienced in over 30 years, it is solely due to Team Olin's discipline and leadership that we've achieved the strongest trough-level ECU values ever recorded, and superior cash flow generation and share buybacks during the trough. Now, finally, I'm excited to announce that Olin will be hosting an Investor Day on Thursday, December twelfth, at the New York Stock Exchange and via webcast.
Todd and I will be joined by other members of the leadership team to provide an in-depth review of our businesses, strategy, and financial goals. We will share more details with you as we get closer to the day, but we hope many of you will be able to join us. Operator, we're now ready to take questions.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one 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 two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeff Zekauskas with J.P. Morgan. Please go ahead.
Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)
... Thanks very much. Why did you defer your international tax payment? And will your payment be larger or smaller next year than it would have been this year?
Kenneth Lane (CEO)
Good morning. Good morning, Jeff. This is Ken. I'm gonna hand it over to Todd and let him take that question.
Todd Slater (CFO)
Sure, Jeff. You know, this is the $80 million that we talked about even back in 2023.
Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)
Yep.
Todd Slater (CFO)
related to international tax payments that we had successfully deferred into 2024. You know, based on the pace of conclusion of those international tax work, we are able to defer it into 2025 without additional incremental cost to Olin, and it does relate to prior years. So it, you know, there is no incremental increase in cost other than that $80 million payment.
Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)
Okay. And in terms of your reassessment of demand for the second half, are there particular industry areas that were, you know, that have slowed relative to your expectations?
Kenneth Lane (CEO)
Hey, Jeff, I'll take that one. This is Ken.
Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)
Okay.
Kenneth Lane (CEO)
You know, back in the first half of the year, even in the Q1, there was a lot of expectation that we were gonna start to see the economy improve in the second half of the year. I think that was a consensus pretty much across industries. We were seeing some, you know, some inquiries coming in around volume in the second half for our businesses.
But as we got closer to that, they just didn't develop because the economy, frankly, is still, it's still struggling to really start to grow again. I wouldn't say that there's any significant difference in any one particular industry. There were a couple that we thought there would be some more improvement than what we've seen, maybe in the TiO2 space, maybe in polyurethanes.
Both of those have continued to be stable, but have not really shown any growth. So in Q2, you know, the volume uptick that we saw was more of a normal seasonal uplift. There was really no underlying growth that we saw in the market, which you would expect to see if you were gonna see growth in the second half of the year.
Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)
Okay, thank you very much.
Operator (participant)
Next question comes from Hassan Ahmed with Alembic Global. Please go ahead.
Hassan Ahmed (Senior Equity Analyst)
Morning, Ken and Todd. You know, just a question around... Obviously, you guys have sort of reset 2024 expectations and, you know, obviously given us commentary around, you know, the demand profile and demand not looking as great as you sort of thought it to be at the beginning of the year. But just more on the numerical side of things.
Yep. I mean, it seems that excluding the hurricane impact, you're guiding to $1.04 billion in 2024 EBITDA, around $940 million if you include the hurricane impact. So I'm just trying to get a better sense of, you know, what you guys think in terms of the trough earnings power of the company. Because, you know, it just seems that the bar has been lowered a few times.
You know, it was $1.5 billion-$2 billion earlier, then, you know, around $1.3 billion. So I'm, I'm just trying to get a better sense of internally, how you guys are thinking about the trough earnings power of the company.
Kenneth Lane (CEO)
I think the question, Hassan. You know, what I would say is we certainly are in the trough, and if you look at the last 12 months, that would, you know, I think, certainly represent a trough level of earnings. But what I will say is, I think the expectations are that even if you look at the epoxy business, you know, that is in a very unusual position relative to historic performance.
So, you know, that's not a typical trough level. It's really driven by the overinvestment that we've seen in China with the new capacity, and we know the impacts that that's having on both Europe and in the U.S. markets, which is why we've got the anti-dumping cases out there.
You know, so that's a bit of an unusual case, but I, I do think that the trough level of earnings is gonna be somewhere around this level. I don't, I don't expect that that it's going to continue at this level significantly longer.
As I said in my prepared comments, this is a very long trough that we've been in, and, you know, as soon as we start to see the green shoots, not just in the U.S. markets, but also in the China market, we really need to see China start to recover and, and get the demand and the economy going there. Europe is probably closer to seeing some improvement, but it's still very, very early, I would say, even in Europe.
Hassan Ahmed (Senior Equity Analyst)
Understood. Understood. And just, you know, as a follow-up to that whole sort of trough question, and maybe even late last year, you guys were talking about the Value Accelerator Initiative and how that could be a potential quarterly EBITDA tailwind of $25 million-$35 million, right? And, and, and I guess, you know, the notion was that you guys were incremental supply with incremental demand, and that'll kind of give you the sort of EBITDA uplift.
So is it fair to assume that as it stands right now, you know, I mean, Q1 to Q2, the results were a slight increment and you're, you know, excluding the hurricane impact, not really from Q2 to Q3. So is it fair to assume that you're really currently not seeing at all from that Value Accelerator Initiative? As and when demand returns, EBITDA we should think of in terms of as and when your operating rates normalize.
Kenneth Lane (CEO)
Yeah, Hassan, you were breaking up there. I think I got the gist of your question, so I'll take a shot at it, and if I don't answer it, then we can come back to it. You know, listen, we were successful with that value initiative that we had at the end of the year last year because we did stop the fall in the caustic price. And that has proven to be successful. In fact, we continue to see firmness in caustic pricing and even upward momentum at this point in time with the outages, not just that we're seeing in our system, but also others in Europe and in Asia. So, you know, so there is firmness and there is support for pricing going forward.
But we are not moving away from our strategy of only selling in the markets where we see value that is acceptable to us, the values that we wanna have in our system. So that strategy is going to continue, and focusing on value is what is going to continue to help us maintain a very high level of profit relative to historic troughs. You're gonna continue to see us generate very good cash flow at the trough level.
Hassan Ahmed (Senior Equity Analyst)
Very helpful. Thank you so much.
Kenneth Lane (CEO)
Thanks, Hassan.
Operator (participant)
The next question comes from Steve Byrne with Bank of America. Please go ahead.
Steve Byrne (Analyst)
Yes, thank you. Got a couple questions about Freeport. You mentioned VCM and phenol, but are the four chloralkali operations there in operation right now? Dow indicated they are still getting chlorine. I don't know, perhaps they get priority for your chlorine out of that plant. But in general, what is the most significant issues for the restart of that facility?
And maybe a longer-term question for you, for Freeport is: What are your plans going to be when Dow shutters their PO operation? Do you anticipate getting, you know, further downstream? Are you satisfied with the margins you're making on EDC relative to what your EDC customers are making off of that?
Kenneth Lane (CEO)
Good morning, Steve. Thanks for joining us. Yes, you're correct. The assets that you named are the ones that are still down. We have not restarted all of the chlorine capacity there yet. As you know, we've got a force majeure system-wide. We're continuing to work through that. But the good news is that there's not significant. Any damage really to the chloralkali assets is to equipment that support the VCM and the acetone and phenol assets.
So we're not able to operate everything yet, but we're working through getting those assets back online. And the priority is to do that safely and be able to, you know, communicate with our customers when that's going to happen.
You know, with regards to the future of the assets there at the Freeport site, you know, we're gonna work through the asset strategy, and that's a great question for us to be discussing at the Investor Day coming up later this year. But we're still working through the options and, of course, we're gonna find the highest value option for the assets there, and look forward to sharing that with you at the end of the year.
Steve Byrne (Analyst)
And then just a quick question on these, you know, these anti-dumping initiatives in the U.S. and Europe with respect to epoxy. Does that require some level of government support in order for those initiatives to get some traction? And what is it that you view as enabling those four countries to undercut you on price on epoxy? It would seem, you know, to be propylene and energy related, but what's your outlook for that?
Kenneth Lane (CEO)
Well, again, our outlook is that we favor, you know, fair and free trade. That's what we wanna have. And what we have seen is, over the last few years, there have been subsidized assets that are brought online that has created tremendous imbalances. And people are operating in a way that they are dumping materials into these markets and threatening local production.
So, you know, as I said in the prepared remarks, if we don't see some intervention with import duties to, you know, to give some protection to the domestic producers, they are very much at risk. And I think these are materials that we want to continue to produce, both in Europe and in the United States market.
So, you know, we'll see how this all plays out. We expect to see, we expect to see some, some announcements around that later this year. And, we hope that, we hope that it's favorable for the local producers.
Steve Byrne (Analyst)
Very good. Thank you.
Operator (participant)
The next question comes from Duffy Fischer with Goldman Sachs. Please go ahead.
Duffy Fischer (Analyst)
Yes, good morning. Could you just clarify, the Freeport startup or restart, I mean, are we talking weeks or months? Can you roughly give us an idea of the timeline there?
Kenneth Lane (CEO)
... Yeah, good morning, Duffy. Yeah, what we're looking at, just to kind of scale it for you, is weeks, and the $100 million that we put out there as the approximate impact really is assuming sometime around mid-August, we begin the startup process. You know, you don't flip a switch, and these assets are running on the first day, but at least we get the assets started up. Sometime around the middle of August is what we are assuming.
Duffy Fischer (Analyst)
Okay. And then, maybe one for Todd. On the buyback, at least with the numbers you gave, it looked like your average price was about $56 a share. But I think there were only like 11 or 12 days in the quarter that the stock was even at $56. Can you just walk us through? I mean, is it—how do you buy? Is it on a couple days that you take care of it in a quarter, or, you know, why were we so far off kinda from the average of the quarter?
Todd Slater (CFO)
Yeah. Thanks for the question, Duffy. We do operate under a 10b-5 plan, and over the quarter, generally, our purchases are at or below the weighted average purchase price over that, I'll say the roughly 90-day quarter period. Don't forget, included in that number is the 1% tax associated with per, you know, share repurchases. So that may be throwing you off a little bit, and rounding may be throwing you off a little bit.
Duffy Fischer (Analyst)
Okay, great. Thank you, guys.
Kenneth Lane (CEO)
Thank you.
Operator (participant)
The next question comes from Aleksey Yefremov with Olin. Please go ahead.
Aleksey Yefremov (Equity Research Analyst)
Thanks. Good morning, everyone. I just wanted to confirm that in your EBITDA outlook for the full year, did you assume that Beryl impact goes away completely in the Q4? And also, does the $100 million include any insurance recovery? And if not, do you expect any in the future?
Kenneth Lane (CEO)
Hi, good morning, Aleksey. Yeah, that is a Q3 event. We do expect that all to be in the Q3. At this point, we don't expect to have any insurance recovery just based on where we are in terms of the damage levels and the deductibles. But, that's all. That all should be in the Q3.
Aleksey Yefremov (Equity Research Analyst)
Okay, very helpful. And Ken, I mean, you've been in your seat for some time. You just shared sort of the new view on the demand, which is weaker. Any thoughts on sustainability of current operating rates and chloralkali for your system, sustainability of your pricing strategy and overall strategy of, you know, pricing for value and operating the way the company's been run for the last couple years? Just wanted you to share your thoughts on this.
Kenneth Lane (CEO)
Yeah, I'll tell you my thoughts. I mean, I believe very much that we are gonna be able to sustain what we have and the way that we operate. I think I commented on this at the last earnings call. Aleksey, I'm very impressed with the flexibility that our teams have shown in being able to adjust on the operating rates. Again, based on the model that we're running for value, they have learned how to do that very well.
And, you know, initially, I think it's the sort of thing that you have to go through that learning curve because it is a change in how we operate. But they have done very well at adjusting, and it's everybody, not just on the commercial side, but also in the manufacturing plants.
We've made some real progress in learning how to operate differently, and we're gonna continue to do that. We'll continue also to look for areas to optimize and reduce costs. That is not something that we are gonna lose sight of.
We are staying very focused on that, and you can imagine that as you do things like what we have done over the last couple of years, when you're rationalizing assets, you can still find ways to reduce costs as you optimize the asset base that's left. And we're gonna continue to be really, really focused on that as an organization.
Aleksey Yefremov (Equity Research Analyst)
Thanks, Ken.
Operator (participant)
The next question comes from David Begleiter with Deutsche Bank. Please go ahead.
David Begleiter (Analyst)
Thank you. Good morning. Ken, does the $100 million impact from Beryl include any benefit from the announced price increases for July?
Kenneth Lane (CEO)
The $100 million does not include any benefit from that. You know, we are expecting to see some improvement in pricing in the second half of the year, as we've said, you know, we believe that especially in the caustic market, there is firmness there with all of the outages that we've seen around the world. So that does include some, you know, the outlook does include some improvement in caustic pricing, but that $100 million is really just a cost and lost opportunity impact.
David Begleiter (Analyst)
Very good. And just again, back on Freeport, pre-hurricane, what were the operating rates of those four chlorine units you have?
Kenneth Lane (CEO)
Well, listen, as you know, like I said before, what our focus is, is running to meet the demand that we see in the market at the value that we like. So we don't focus on utilization rates as a metric in terms of our performance or how we think about running our business. We do focus on reliability, you know, we want to be able to run at the levels that we want to run at. So the utilization rate, we don't look at that as a metric around our operating performance. We focus on reliability.
David Begleiter (Analyst)
And to be clear, today, are any of those 4 units running today?
Kenneth Lane (CEO)
Yes, we do have some of the units online, but we have not restarted all of them yet.
David Begleiter (Analyst)
2 on, 2 off, is that fair?
Kenneth Lane (CEO)
No, we're, we're not gonna comment on any of the specifics around specific units.
David Begleiter (Analyst)
Okay, thank you.
Kenneth Lane (CEO)
Sure.
Operator (participant)
The next question comes from Patrick Cunningham with Citi. Please go ahead.
Patrick Cunningham (Analyst)
Hi, good morning, Ken and Todd. So there's some new capacity, you know, coming online in the back half of the year from one of your competitors. You know, how does, in your view, how does this impact the market and your ability to bring back volumes and raise operating rates?
Kenneth Lane (CEO)
Morning, Patrick. So I don't see that really impacting. That volume has already been contracted up earlier this year, even later in the year, last year, so it's already in the market. I don't see that being an issue. I know there's a lot of chatter about that in the market, but it's already in the market, frankly. So I'm not-- I'm not-- I don't see that as a headwind.
Patrick Cunningham (Analyst)
Understood. And you've obviously talked about, you know, improvement in commercial volumes, as well as, you know, the strength in military in the back half for Winchester. I'm trying to better understand where we are in the cycle here, you know, how you're thinking about cyclicality, given, you know, the full general discussion across the whole business in terms of cyclical earnings power.
Kenneth Lane (CEO)
Look, the Winchester business is a very strong business for us. You know, we've seen this year, of course, a big step up in our military revenue and the profitability around that, especially international military. The international military business this year is on track for being double what it is. I would not... You know, we don't think about Winchester, that business really having a cycle.
It is a much more stable cash generator for us and a much more significant one than it was even just a few years ago, now that we've got the Lake City contract. That has been a very strong business for us, working with the U.S. Army. So, you know, that business, it has some seasonality to it.
Typically, in the Q2, it's a little bit weaker. This year, it was down a little bit more than normal. I think you've seen that across the sporting goods retail space. I think a lot of that is related to the inflationary pressures on the consumer. So it's going to track the consumer.
Part of that business is gonna track more of the general economy and how inflation is going, while the military side of that, obviously, is gonna be tracking more with what's happening geopolitically. And the setup right now for that business for the long term is quite strong on the military side.
Patrick Cunningham (Analyst)
Great. Thank you so much.
Kenneth Lane (CEO)
Thank you.
Operator (participant)
The next question comes from Kevin McCarthy with Vertical Research. Please go ahead.
Kevin McCarthy (Analyst)
Yes, thank you, and good morning. Ken, there's, you know, a fair amount of discussion on the share repurchases, but I'm curious to hear your thoughts on potential for inorganic growth as you take a fresh look at Olin's portfolio here. The company's been, I would say, modestly active in recent years through White Flyer and the Blue Water Alliance with Mitsui, but nothing really bigger than a breadbox, so to speak. What are your views, you know, say, for the next two or three years on portfolio composition and potentially using the balance sheet to advance external growth?
Kenneth Lane (CEO)
Good morning. Thanks. Well, listen, we will continue. If we see opportunities like the one that we saw with White Flyer, which has been extremely attractive, you know, we've been able to leverage our channels to market and really make that business flourish.
I mean, it's been very impressive what the Winchester team has done with White Flyer. So if we see opportunities like that, the small scale bolt-ons that we think are gonna be highly accretive and ones that we can run better than current owners, we're gonna move on those. Anything beyond that, you know, we'll talk more about that at our Investor Day.
You know, you can imagine we're, we're thinking about where we wanna go in the future, and that's part of the conversation, but right now there's no change in what we're thinking about in terms of how we use the balance sheet. We are going to continue to stay focused on having a strong investment-grade balance sheet, and then continue with our capital allocation strategy as we have up to this point.
Kevin McCarthy (Analyst)
Okay. Then as a second question, if I may, on Winchester: How would you compare and contrast your margins in military versus commercial? And perhaps related to that, as the propellant raw material market seemingly remains quite tight, does that impact or how does that impact margins in military versus commercial, or is it a similar impact on both of those types of businesses? Maybe you can talk through some of the mix issues that are evolving in Winchester.
Kenneth Lane (CEO)
Sure. Yeah. I mean, listen, on the Winchester side, the military business is clearly a lower margin than the commercial business. There's no doubt. The domestic military is the lowest. International military is actually an attractive margin for us, but still not as good as commercial. For the U.S. military, that's one of the requirements around the Lake City asset. So that's, you know, that's the way that would work in terms of allocation of volume. But so far, we've been able to secure the volume that we need that both covers our military demand and the commercial demand. It is a very tight market, and those costs have gone up.
Some of that has been offset with some pricing, but, you know, frankly, not all of it, and we're gonna continue to see that headwind in the second half of the year. This is an area where I think in the market overall, when you look at propellants, it is an area that there's gotta be some strategic focus from even national security concerns, that there's gotta be some clear path forward on how we secure that capacity for the United States demand, and we don't wanna be importing that from regions that are not necessarily friendly to the U.S. So I think there's more to come on that.
I know, I know the government is looking at that, and we're eager to see where that goes because it will have a long-term impact on Winchester. But being a large player in that market, we've done a very good job securing the physical volume that we need. But, you know, the cost is still gonna be a headwind going forward.
Kevin McCarthy (Analyst)
Understood. Thank you.
Kenneth Lane (CEO)
Thank you.
Operator (participant)
The next question comes from Matthew Blair with TPH. Please go ahead.
Matthew Blair (Analyst)
Good morning. Thanks for taking my question. I'm glad everyone is safe after the hurricane. For that $100 million impact, is there a breakout between the CAPV and epoxy segments? And then I just wanna confirm, but it sounds like the $940 million full-year guide actually does include an assumption of better caustic pricing in Q4.
Kenneth Lane (CEO)
Yeah, thanks for your question, Matthew. You know, the split, if you think about the assets, that we've talked about, it's gonna be around 70-30, roughly. You know, don't make that too precise, but that's kind of the range that you can think about, 70 for chloralkali, 30 for epoxy. You know, I would use that as a rough estimate. You know, and when we think about the back half of the year, yeah, we see that there's pricing momentum. So in our outlook, we've included some improvement in the caustic market.
Matthew Blair (Analyst)
Sounds good. Then, you know, according to just various market indicators, EDC prices fell by a couple pennies in the Q2, but it looks like on slide 10, in your system, EDC prices moved up quarter-over-quarter. Could you talk about, you know, what you were able to do to capitalize in that market?
Kenneth Lane (CEO)
I think that's a reflection of our model, right? That's exactly what we try to do, is manage our portfolio for the value that we want to have, and we are very agile in doing that, and we're gonna continue to use that model. That's why I think I've said previously, it's. There's a lot of focus on indexes. Some of them are better than others, but our focus is on getting the highest value that we can for the volumes and the assets that we've got in our portfolio, and that's what you see reflected there.
Matthew Blair (Analyst)
Great. Thank you.
Kenneth Lane (CEO)
Thank you.
Operator (participant)
The next question comes from Arun Viswanathan with RBC. Please go ahead.
Arun Viswanathan (Analyst)
Great, thanks for taking my questions. Yeah, glad to hear things are safe there at Freeport. So I guess just wanted to circle back to how you're thinking about profitable conditions and maybe an early look on 2025. So, assuming we do kind of settle in the mid-900s on EBITDA this year, obviously a good some of that is hurricane related.
And you noted a couple of times that you do feel like this is a trough. What kind of growth should we expect, I guess, moving forward? I mean, and what are some of the indicators that you're looking for to see that inflection point coming? Is it just kind of macro-reated interest rate environment and so on, or is there something else that we can kind of hone in on? Thanks.
Kenneth Lane (CEO)
Yeah, thanks for the question, Arun. So listen, I, I think there's a lot of uncertainty, not, not just in the United States, around everything that's happening currently and, and with the elections coming up, but even, even globally. So, you know, that uncertainty, I don't think we're gonna get any real clarity on where things are going until after the elections and maybe even into the beginning of next year.
So, you know, we're, we're taking more of a wait and see approach, but the things, the things that we're gonna watch are gonna be things like what's happening in the U.S. housing market. Are we seeing the Fed reduce interest rates, and are we seeing buyers coming back into the housing market where housing starts to take a meaningful step up?
You know, are we seeing that the Chinese economy has really begun to recover? Because that is still missing, and the Chinese local demand is going to have to grow significantly to begin to help the global economy come back. So we're gonna be watching those sorts of things very closely over the coming months, but it is way too early to start talking about what we see for a 2025 outlook.
Arun Viswanathan (Analyst)
Okay, well, maybe I can ask the question a little differently then. So, you know, if you do have a resumption in normal operations, you know, given some of the capacity that you've taken out, would that be a limitation on your earlier comments maybe a little while ago, that peak EBITDA is kind of in the $3 billion range?
You know, maybe is that now kind of $2.5 billion or, you know, well below that? And then, along those lines, do you see any kind of structural impairment to any of these markets? I know Epoxy has gone through, you know, pretty significant pullback, especially in China, and demand.
It's unlikely that China will return to their prior growth rates, so, you know, I don't know if they've taken enough action to rightsize their own epoxy market either. So it seems like that business does have some structural limitations that weren't there in the past. And then on chloralkali, again, you've shut down some capacity. So just wanted to understand if there's been any change in kind of the earnings power of the businesses.
Kenneth Lane (CEO)
Yeah. Well, listen, I, I said on, in the prepared comments as well, that, you know, we've, we've positioned ourselves very well with a set of assets that are going to be competitive in the long term. They're very well positioned on the cost curve. You know, we're, we're continuously looking at optimizing our asset portfolio, especially around, around chloralkali, but our focus is, is going to be on operating those assets.
As we see demand coming back, we will adjust our position in the market to be the ones that are capturing that growth. I mean, that's really the way we've positioned ourselves. So if you think about the capacity we took offline, it doesn't, it doesn't take away the optionality for us to be that, that coiled spring, as we've called it, to be able to respond when we see the growth coming back.
With respect to Epoxy, yes, structurally there are, you know, more challenges in that market, and that's why, again, we've been so vocal about the antidumping cases that we have filed. We think that it's very important that there is some support that comes into those markets. But ultimately, you know, there probably does need to be some restructuring in the China market.
There's probably gonna need to be some capacity that comes offline, because to your point, it's gonna be a very long time before they're able to grow into that capacity. And when you've seen these sorts of troughs in the past, that's what's happened.
You've seen capacity come off in conjunction with growth in the market, and both of those things will typically correct themselves over time, but it's going to be years, if not months, before we see that happen.
Arun Viswanathan (Analyst)
Great. Thanks for that. Just one quick last one. So, if you do generate, you know, that level of EBITDA, you know, you will be kind of maybe north of $400 or $500 million of free cash flow. So is stock buyback still the preferred deployment of that cash, or are there some other options you're considering?
Kenneth Lane (CEO)
Yeah, we are not, we are not changing anything on our capital allocation strategy, and we'll continue to be a buyer of our shares with the excess cash that we've got. You know, we still view our shares very much as being discounted to the value that they should be, and, and we'll continue to be a steady buyer going forward.
Arun Viswanathan (Analyst)
Thanks.
Kenneth Lane (CEO)
Thanks, Arun.
Operator (participant)
And the next question comes from Mike Sisson with Wells Fargo. Please go ahead.
Michael Sison (Managing Director and Senior Analyst)
Hey, good morning, guys. Ken, you might wanna save, you know, some ammo for the analyst day, but how do you think about mid-cycle EBITDA here? You know, you know, any thoughts there, and, and maybe to some degree, if you can't get the specifics, you know, when you do get volume growth back, how do we sort of model that into better EBITDA and, and so maybe a, you know, a contribution margin to think about as we get closer to mid-cycle dynamics?
Kenneth Lane (CEO)
Sure. Thanks, Mike. And yeah, you're right. You know, that's some of the work that we're going through right now is working through where we think those things land, especially looking at our asset strategies and how that's gonna shape up and, you know, where we're going with Winchester, those sorts of things.
So, you know, when I think about where we are and how we're gonna go forward, the biggest thing that we see is as that coil starts to unspring and demand starts to come back, that's the biggest lever that we see in terms of our portfolio today. You know, yes, there's gonna be some steady improvements with Epoxy over time. We've already done some things around self-help in terms of restructuring and cost reductions.
We continue to realize the benefits of that. That's, that is coming through in line with what we had expected. As I said earlier, we'll look for additional, cost savings and, and put that as a priority as well. But, but really, as you start to see demand come back and that, that leverage around the volume that we have in chloralkali, that's where the real upside is to get you back to kind of that, that mid-cycle level of earnings the quickest.
The question is always gonna be: Well, when does that happen? And frankly, we don't know. We're, we're gonna be prepared, though, when it does happen, and we'll be the ones that are gonna benefit from that, from that recovery.
Michael Sison (Managing Director and Senior Analyst)
Great. And as a follow-up, when you think about getting to that mid-cycle, you know, right now, in Slide 10, you know, caustic is stronger side, chlorine, weaker side.... So in mid-cycle, is chlorine the stronger side where you really could, you know, lever up profitability? And maybe talk about, you know, how that needs—if that's sort of what creates that higher EBITDA, is which side needs to be stronger, et cetera?
Kenneth Lane (CEO)
Yeah. That's a great question, Mike. And as you can imagine, it's all about the timeframe. And, you know, I know you're referring to the chart that's in the appendix that we had issued. It's a much shorter term discussion than that. So you can't look at a cycle and say, you know, across a cycle, one side needs to be the stronger versus the other. The model that we run, we adjust that very frequently.
But it's, you know, it's gonna be within the month, we may change between what we see as the weak or the strong side. You know, so that's the way that we think about that. It's not a long-term play. It's a very short-term operational commercial decision-making that we need overall. And frankly, that's gonna be driven by the demand that we see on each side, but it's gonna be demand improving on both the chlorine and the caustic side that's gonna help accelerate that.
Michael Sison (Managing Director and Senior Analyst)
Got it. Thank you.
Operator (participant)
The next question comes from Michael Leithead with Barclays. Please go ahead.
Michael Leithead (Analyst)
Great. Thanks. Good morning, guys. I wanted to follow up to a previous question, just how you're thinking about capital deployment in the current earnings backdrop. Should we expect any share repurchases in the second half of this year? Are you comfortable where your leverage ratio is now intended to end this year? Just how you're thinking about everything here in the second half.
Kenneth Lane (CEO)
Yeah, I mean, I'll comment on that, then I'll ask Todd to add to that. But, yeah, we will continue to be a buyer again with the excess cash flow that we've got. But Todd, you wanna add to that?
Todd Slater (CFO)
Yeah. No, sure. You know, we've, we've taken several actions here, you know, to really improve our second half cash flow, and then our prepared remarks are, I articulated. Previously, we had talked about working capital being a use for the year. We now think that will be at least neutral. We have deferred the $80 million of international tax payments, reduced capital spending.
So all those actions enable us to keep, we would expect, debt flat from where we were at the end of 2023 to the end of 2024. So that does enable us to utilize our levered free cash flow towards share repurchase, and that will allow us to continue to repurchase shares in the back half of the year.
Michael Leithead (Analyst)
Great, that's super helpful. And then just briefly, I wanted to clarify on the Q3 outlook. It sounds like you would have expected chemicals to be flat before the Beryl impact, and Winchester should improve sequentially. So is it fair to summarize that Q3 should be down something on a consolidated basis, like $80 million-$90 million EBITDA sequentially?
Todd Slater (CFO)
Mike, when your comments on chemicals and Winchester are correct, based on our outlook. In the Q2, corporate and other, unfortunately, had a significant benefit associated with a reduction in the stock-based compensation, much lower stock price. So we would not necessarily expect that to continue into the Q3. So your numbers might be, you know, maybe haven't taken that part into account.
Michael Leithead (Analyst)
Fair enough. Thank you.
Operator (participant)
The next question comes from Josh Spector with UBS. Please go ahead.
Joshua Spector (Equity Research Analyst)
Yeah, hi, good morning. So, Ken, in some of your earlier comments, you talked about demand for chlorine and caustic as well, below 2019 levels. I guess when we look at some of the consultant data, it's kind of forecasting about 10% below. How would you characterize what you're seeing in the merchant market? Is it meaningfully different than that at this point in time?
Kenneth Lane (CEO)
Good morning, Josh. No, it's not. I mean, it's in that range. So, you know, it's what I had commented before, until we really see the economy generally, globally coming back, because, you know, a lot of even domestic demand was supporting exports. And until we see the global economy, really... And we say the economy, it's really the industrial economy where we're focused, that's where we're gonna start to see that recovery. But remember, in that time, we've also taken offline a lot of capacity. So that makes - that really tightens that spring that we keep talking about.
Joshua Spector (Equity Research Analyst)
Yeah, thanks. I guess, I mean, to that point, I mean, if I kind of go off of consultant forecasts, there's not really a strong snapback forecast in 2025, 2026, maybe a couple % a year. Obviously, your circuit is a lot lower, and I assume there's still some slack in other players, and you talked earlier about some additional capacity. I guess, how do you see Olin performing relative to that? Is that something where you can really bring back volumes at a much greater rate than the market without having an impact on pricing, or how do you navigate that scenario?
Kenneth Lane (CEO)
Yeah. Well, listen, that's what you do in commodities, right? I mean, we're focused on having the most competitive assets that we can have. I'm not gonna comment on what other, what others are doing, but, you know, obviously, it would be a very challenging time to make any kind of an economic case around a large investment in these commodities. So I would be surprised. Certainly not something that we're gonna be doing.
We've-- we believe that you've got to consider different scenarios when you're thinking about these things, because when you're in the trough, it always looks worse, and you never think it's gonna get better. And we're not naive enough to fall into that trap. We know things are gonna get better at some point.
Trying to predict when it's going to get better, that gets to be a little bit dicey. So we're gonna be thinking about scenarios going forward. We're gonna be prepared when that demand comes back with a competitive asset base to be able to supply that demand and capture that demand as it grows and comes back into the market. That is our focus. But you know, there's a lot of negative outlooks that are out there, and all I'll say is, you know, think about this in scenarios, because if you get too focused on one scenario, you're gonna be wrong.
Joshua Spector (Equity Research Analyst)
Fair enough. Thanks, Ken.
Operator (participant)
The next question comes from Frank Mitsch with Fermium Research. Please go ahead.
Frank Mitsch (Analyst)
Thank you. Good morning. I wanna come back to the pricing question. It was nice to see that the PCI picked up 15% sequentially into the Q2. I was curious, you know, looking at your system, what was the biggest driver of that? And how do you think about the outlook on the PCI?
Kenneth Lane (CEO)
Yeah, thanks for the question, Frank. I mean, listen, like I said before, there's gonna continue to be pricing momentum in the second half of the year. As we've said, you know, the demand is firm out there. We've seen some seasonal improvement, but supply has tightened up a little bit. So, you know, our expectation is that going forward, we'll continue to be able to manage our portfolio and the mix that we have there to, you know, maximize the value for Olin. That's our goal. But, you know, it's very hard to predict where some of the demand is going at this point in time.
You know, you recall at the Q1 earnings call, we were expecting to see more significant demand recovery than what we are seeing in the second half of the year. But we'll still look in terms of the portfolio that we have around maximizing the value and the mix of that portfolio.
Frank Mitsch (Analyst)
Thank you. I understood. And, you know, coming back to the, to the comments on indices and so forth, so, obviously you guys do not work off of, of indices, so it's more difficult for us to kind of figure out what's going on within the internal, Olin system. So I was just curious, I mean, you know, in terms of what was... What might, I mean, 15% sequential is, is a, is a pretty impressive, hefty lift.
So I was just curious, you know, was it chlorine? Was it EDC? Was it HCL? Was it, you know, aromatics? You know, any, any sort of guidance or epoxies, what have you, any, any sort of guidance there would be helpful. Just, just so we understand from the outside, what's really clicking in terms of Olin's pricing mechanisms?
Kenneth Lane (CEO)
Yeah, no, I get that, Frank, and listen, it's probably... The easiest way to put that again is it will be mix of that portfolio, because we are constantly looking at, you know, what are the values of each of the products and where are we gonna place the molecules that we have.
So it's, it would be very difficult for me to give you some kind of a modeling basis that would be consistent quarter to quarter, because it is a very dynamic model that we're gonna run, and we'll continue to do that to be as agile as we can to maximize that value. So it's, it's not something that I can point to that you would be able to then, you know, build into your models consistently and have it be correct.
Frank Mitsch (Analyst)
Fair, fair enough. Fair enough. I did make note that bleach pricing was lower in the Q2, and I would have thought, you know, from a demand standpoint, you know, it ticks up 2Q versus 1Q. What are the dynamics going on in the bleach markets?
Kenneth Lane (CEO)
Yeah, listen, what happened with bleach? There's definitely a mix element with that. And during the quarter, the bleach market was very interesting because the quarter started off cold and rainy, and demand was fairly low, and then it really got very hot and dry in the second half of the quarter. So there was a mix effect in the quarter. And, you know, again, very odd in terms of just the weather pattern during the Q2.
Frank Mitsch (Analyst)
Okay, gotcha. Thanks so much.
Kenneth Lane (CEO)
Sure.
Operator (participant)
The final question comes from Vincent Andrews with Morgan Stanley. Please go ahead.
Vincent Andrews (Analyst)
... Bringing me in, just two quick ones for me. The reduction in CapEx this year, what is it that you're not doing? And will that... Should we put that spend into next year? And then secondly, was there an SG&A or incentive comp reduction that was done with the reduction in guidance that we should think about coming back next year in a more normal year?
Kenneth Lane (CEO)
Hi, Vince. Thanks for the question. So listen, the things that will not be done in terms of CapEx, some of that will come back next year, but that doesn't mean that we're gonna see an increase next year. You know, we'll continue to look for ways to defer other things, but we're gonna prioritize operating our assets safely and maintaining those in good condition. So we're not deferring things that put any of the assets at risk. These are things that are easily deferred and don't do that. Now, in terms of the SG&A, I don't know, Todd, do you wanna add anything on that?
Todd Slater (CFO)
Yeah, you know, and so thanks for the question. Yeah, the big driver right now in SG&A is really, you know, lower stock-based compensation. And that's what really has driven the year-over-year decrease, not only in the quarter, but, you know, so far, year to date.
Vincent Andrews (Analyst)
Thanks, guys.
Kenneth Lane (CEO)
Thanks, Vince. Okay. Well, thank you, Dave, for hosting the call. I wanna just say thank you, everybody, that joined today. We appreciate your interest in Olin and look forward to hopefully seeing all of you on December twelfth at the New York Stock Exchange, and see you in person. Thank you all very much, and have a safe weekend.
Operator (participant)
Thank you for attending today's presentation. You may now disconnect.