Olin's Q3 2025 Earnings Call: Contradictions Emerge on Caustic Soda, EDC Pricing, and Epoxy Recovery

Guidance:

• Fourth quarter 2025 adjusted EBITDA expected to be $110–$130M, including a $40M EBITDA penalty to reduce inventories.
• CAPV: expect stable ECU values into Q4 with seasonally lower demand; aggressive operating-rate reductions to preserve values and reduce working capital.
• Epoxy: improvement anticipated in 2026 driven by Stade supply agreement, U.S. pricing traction, and European capacity rationalization.
• Winchester: shift to make-to-order, extended plant shutdowns, and focus on international/military demand to reduce inventory and working capital.
• Section 45V clean-hydrogen credit to provide ~ $15–$20M adjusted EBITDA annually in 2026–2028.
• Expect working capital to be a source of >= $100M in 2025; net debt targeted to be flat vs. year-end 2024; maintain quarterly dividend.

Business Commentary:

• Core Alkaline Products and Vinyls Performance:
• Olin's core alkaline products and vinyls segment reported stable ECU values and maintained global caustic soda demand, with the main end markets holding up.

• The strength in this segment was attributed to improved operating performance and reduced costs, with caustic soda remaining the stronger side of the ECU.

• Epoxy Challenges and Strategic Moves:

• The epoxy segment faced weak global demand and persistent headwinds from subsidized Asian imports in both the U.S. and European markets.

• Olin is addressing these challenges by aligning with a new supply agreement in Stade, Germany, due to take effect in January 2026, and by reducing year-end inventories to improve cash management.

• Winchester Business Adjustments:

• Winchester's commercial ammunition volumes and margins were impacted by a decline in consumer sales and elevated retail inventories, leading to a drop in market prices.

• The company is taking actions to adjust its operating model and shift production towards international military markets to mitigate these challenges.

• Working Capital and Inventory Management:

• Olin reported a significant increase in working capital, primarily in Winchester, due to high inventory levels in the retail channel and delayed U.S. government payments.
• The company plans to address this by reducing inventory levels and adjusting operating rates to align with demand, taking a $40 million EBITDA penalty in the fourth quarter.

Sentiment Analysis:

Overall Tone: Neutral

• Management described "robust results" in core businesses while acknowledging ongoing weakness in epoxy and Winchester commercial ammo; provided a conservative Q4 adjusted EBITDA range of $110–$130M and emphasized cost actions, Section 45V tax-credit benefits ($15–$20M annually 2026–2028), and inventory reductions as primary moves to stabilize cash flow.

Q&A:

• Question from Hassan Ahmed (Alembic Global): If excluding the inventory penalty and given contracts and cost cuts, how much incremental EBITDA could we see in 2026?
  Response: Management expects a $70–$90M run-rate improvement into 2026 (including the Stade/Dow agreement) with potential upside and will provide more detail on the Q4 call.

• Question from Josh Spector (UBS): The $32M Section 45V credit this quarter — how much was catch-up and what ongoing benefit should we model?
  Response: The $32M was a catch-up; expect an adjusted EBITDA benefit of roughly $15–$20M per year in 2026–2028.

• Question from Salvador Tiano (Bank of America, filling for Matt DeOrry): Can you explain the working capital increase in Q3 and implications for Q4 operating rates?
  Response: Q3 working-capital rose due to delayed government payments and inventory builds for turnarounds; the $40M Q4 EBITDA penalty will free about $150M cash and management will reduce operating rates and inventories into Q4.

• Question from Frank Mitsch (Fermium Research): Is the $40M inventory hit mostly Olin-specific or industry-wide and how confident are you in that number?
  Response: Much of the hit is Winchester-specific due to elevated retail-channel inventory; chemicals inventories are not broadly excessive; management will not use its balance sheet to carry channel inventory and will right-size production to the $40M plan.

• Question from Aleksey Yefremov (KeyBanc): Do you have supply agreements in place or is volume mostly spot today?
  Response: Olin is shifting toward more term/structural contracts, unwinding the Blue Water JV to pursue direct agreements with Mitsui as a counterparty; spot exposure will be reduced but not eliminated.

• Question from John Roberts (Mizuho): Update on Radnor Propellants bidding and metals hedging expectations?
  Response: Radnor RFP process is slow (government shutdown); decisions unlikely until late 2026 with transitions possible in 2027; metals are hedged on a rolling four-quarter basis and metal costs are expected to be a headwind into 2026.

• Question from Patrick Cunningham (Citi): How should we think about epoxy earnings into next year given actions taken?
  Response: Management is cautiously optimistic: expects significant improvement in epoxy in 2026 driven by cost reductions, the Stade agreement, tariff-related pricing support, and European capacity rationalization.

• Question from David Begleiter (Deutsche Bank): ECU profit index down Q3 vs Q2 but core alkaline EBITDA up — why?
  Response: The variance is driven by mix effects in the portfolio; management expects ECU values to be stable into Q4 and does not see a deteriorating trend.

• Question from Pete Osterland (Truist Securities): Plans to shift Winchester production toward international defense and medium-term revenue mix?
  Response: The shift is intentional; international/military backlog is growing, revenue mix is roughly 62% military today and is expected to tick higher as management secures more defense orders.

• Question from Mike Sison (Wells Fargo): What needs to happen for a chemicals recovery in 2026?
  Response: Recovery needs demand drivers—primarily U.S. housing and global consumption (notably China); management will continue to adjust operating rates and await broader demand improvement before a sustained recovery.

• Question from Kevin McCarthy (Vertical Research): Are Q4 caustic soda price improvements seasonal or structural?
  Response: Q4 support is expected from seasonal supply restrictions and steady alumina demand; management views Q4 caustic values as stable supported by lower fourth-quarter supply.

• Question from Jeff Zekauskas (JPMorgan): Can you quantify 2026 VCM turnaround costs?
  Response: Turnaround scheduling and costs for 2026 are still being finalized; management will update 2026 modeling with specifics on the Q4 earnings call.

• Question from Vincent Andrews (Morgan Stanley): With leverage near 4x on run-rate EBITDA, will buybacks be curtailed?
  Response: Priority is to reduce debt and keep net debt flat vs. year-end 2024; share repurchases have been curtailed to a modest pace and debt reduction will be prioritized while maintaining the dividend.

• Question from Arun Viswanathan (RBC): What bridge gets you from ~ $700M to ~$1B EBITDA?
  Response: Management expects upside from core alkaline (as ECU recovers), significant epoxy improvement, and eventual Winchester recovery—timing depends on market demand and global economic recovery.

• Question from Matthew Boyer (PPH): Status of AMMO acquisition synergies and the ~$5M EBITDA in H2?
  Response: Management remains confident in the acquisition and its synergies, expects strong integration results and the multi-year $40M synergies target; the asset and workforce integration are proceeding well.

• Question from Roger Smith (Bank of America): How will the clean-hydrogen (45V) benefit show up in EBITDA reporting?
  Response: Now that DOE emissions data is received, the 45V tax credit will be reflected quarterly as a reduction to cost of goods sold (i.e., included in normal earnings) rather than a separate callout.

Contradiction Point 1

Caustic Soda Market Stability

It involves differing perspectives on the stability and demand outlook for caustic soda, which directly impacts revenue and profitability expectations.

Can you provide an update on the U.S. caustic soda market and price expectations? - Kevin McCarthy(Vertical Research Partners)

2025Q3: We expect higher caustic values in Q4 due to factors like alumina demand and seasonal declines in derivative demand. Supply reduction will support these values. - Ken Lane(CEO)

Ken, how is the caustic soda price increase announced in June progressing? - David L. Begleiter(Deutsche Bank AG)

2025Q2: We continue to see strength in our system around caustic in terms of supply and stable demand. The tightness in the market is driven more by supply rather than demand. Current noise in the system is due to tariff threats impacting exports to Latin America. However, once we get past the uncertainty, we still expect stability in caustic. - Ken Lane(CEO)

Contradiction Point 2

EDC Pricing and Market Stability

It involves differing views on the stability and projected pricing of Ethylene Dichloride (EDC), which impacts Olin's revenue and profitability.

What is the expected annual benefit of the $32 million tax credit in Q3? - Josh Spector(UBS)

2025Q3: We expect EDC pricing to be stable through Q4, with improved operating rates in the fourth quarter due to completion of planned maintenance events. - Ken Lane(CEO)

Has EDC pricing dropped significantly from Q1 to Q2? Is there potential support? - Patrick Cunningham(Citi)

2025Q2: Prices dipped lower than expected in the second quarter due to softness in the oil price. We're now back at a floor, where cheaper Asian producers can compete. However, we see stability in oil prices, indicating a floor. We expect EDC pricing to stabilize at the current levels in the third quarter. - Ken Lane(CEO)

Contradiction Point 3

Epoxy Market Conditions and Recovery Expectations

It involves differing perspectives on the state of the epoxy market and the anticipated timeline for its recovery, which could impact investor expectations and strategic planning.

How should we model epoxy earnings for next year? - Patrick Cunningham (Citi)

2025Q3: I am optimistic about epoxy in 2026 due to cost reductions, capacity rationalization, and tariff benefits. The market remains challenging, but we are positioned well with our integrated business. - Ken Lane(CEO)

What actions are needed to return Epoxy to profitability by 2025? - Frank Mitsch (Fermium Research)

2025Q1: I would not call it a lost year, but I do think that you're going to see Epoxy continue to struggle in 2025. We've got some tailwinds related to some of the antidumping duties... I think by the time we get to the end of the year to the beginning of next year, we will start to see a positive result coming out of Epoxy. - Ken Lane(CEO)

Contradiction Point 4

Winchester's Price Recovery and Market Outlook

It reflects differing expectations regarding Winchester's pricing strategy and market recovery, which directly impacts revenue projections.

Explain the increase in working capital during Q3 and its impact on operating rates? - Salvador Tiano(Bank of America)

2025Q3: We expect improvement in the third quarter as we push for pricing recovery. - Ken Lane(CEO)

Could Winchester worsen in the second half, and are costs increasing? - Aleksey Yefremov(KeyBanc)

2025Q2: We're experiencing a perfect storm in Winchester due to destocking, higher costs, and weak consumer spending. We expect improvement in the third quarter as we push for pricing recovery. - Ken Lane(CEO)

Contradiction Point 5

EBITDA Growth and Cost Management

It involves differing expectations regarding the potential for EBITDA growth and cost-cutting efforts, which are critical for understanding the company's financial performance and strategy.

What is the potential for EBITDA growth in 2026 via self-help and cost-cutting measures? - Hassan Ahmed(Alembic Global)

2025Q3: Through efforts like the Beyond 250 initiative and a new supply agreement with Dow, we expect a $70 to $90 million run rate improvement by year-end 2026. - Ken Lane(CEO)

What is your volume outlook for chlorovinyls in Q1? Have you lost any Chlor Alkali business in Q1, and is the volume decline temporary and tactical with a rebound expected in 2025? - Aleksey Yefremov(KeyBanc Capital Markets)

2024Q4: We will continue to step down in Q1 as we go through, the ethylene and others turnarounds. And then we'll start to build it back up in stages as we get through the year, as we see opportunity. - Ken Lane(CEO)