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Olin Corporation (OLN) Q3 2021 Earnings Call Transcript | The Motley Fool

Olin Corporation (NYSE:OLN)
Q3 2021 Earnings Call
Oct 22, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Olin Corporation’s Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Following today’s brief opening comments, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Steve Keenan, Olin’s Director of Investor Relations. Please go ahead, Steve.

Steve KeenanDirector of Investor Relations

Thank you, Tom. Good morning everyone and thank you for joining us today. Before we begin, let me remind you that this discussion along with the associated slides and the question-and-answer session that follows will include statements regarding estimates or expectations of future performance. Please note that these are forward-looking statements and that actual results could differ materially from those projected. Some of the factors that could cause actual results to differ from our projections are described without limitations in the Risk Factors section of our most recent Form 10-K and in the third quarter earnings press release.

A copy of today’s transcript and slides will be available on our website in the Investors section under Past Events. Our earnings press release and other financial data and information are available under Press Releases.

With me this morning are Scott Sutton, Olin’s CEO; Pat Dawson, President, Epoxy; Damian Gumpel, President, Chlor Alkali Products and Vinyls; Brett Flaugher, President, Winchester; Jim Varilek, Olin’s COO; and Todd Slater, Olin’s CFO.

Scott will begin with some brief remarks, after which we will be happy to take your questions.

I’ll now turn the call over to Scott Sutton.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah. Thanks, Steve, and hello to everybody. I’m pleased to report the Olin team has once again proved to be the most unique and agile in the industry in meeting the clear expectation of our shareholders. Again, I just have to say that the solid performance by the complete team sets me up to be able to focus on the items that drive our future which are enhancing our contrarian value model, turning our ratchet on undervalued products, call in to grow accretive capital allocation, building out our interlinked matrix of activation knobs, growing shooting sports participation and lifting all Olin people.

This is a company that is focused on continuing to grow adjusted EBITDA and coupling that with balanced capital management to deliver more than $10 of earnings per share in the near future. So I’ll make some brief commentary on a few slides and get to the Q&A quickly. 2021 is expected to be a solid result for Olin for the reasons shown on Slide number 3. While the longer term fundamental of demand that grows faster than supply is starting to be exposed here in 2021, our leading actions to get a higher value for our scarce resources is proving to be successful.

Current highlights of that success are that we continue to exit business that was based on non-negotiated pricing allowing our product chain mix with the intended impact from purposeful settings of our interlinked matrix of activation nodes start accelerating the value capture of epichlorohydrin and drive expansion in shooting sports participation with our Shoot United movement. While there maybe some end-of-year holiday slowdowns, which are really supply driven, not demand driven, and some seasonality that result in a sequentially flattish fourth quarter results, we still expect 2022 to exceed 2021. The reason thematic for better results in 2022 is shown on Slide number 4. The minor reason in our thematic is that the previously mentioned demand growth versus supply growth dynamic just gets better and better across all our businesses. More people are enjoying shooting sports, demanding clean wind energy and expanding their homes to have us.

The major reason in our thematic is that all of Olin’s activities are designed around a foundational cultural principal of only selling into value. We know who we are. In October, we took the decision to close some more undervalued assets and simultaneously used other existing global asset and product liquidity to grow Olin’s value. As our own ECU assets are getting rightsized, we are a global buyer of ECUs to satisfy our higher value products demand. Even though we have grown our earnings for five consecutive quarters and delivered a levered free cash flow that is approaching 20%, we still must show that our performance will continue to improve, but maybe more importantly, we must demonstrate our ability to manage uncertainty and volatility.

Slide number 5 has an illustration. Olin has three substantial businesses, each with a meaningful contribution to segment earnings. For reasons that we previously discussed, the Winchester, which is shown in red on the slide, Consumer and Defense business offer solid and sustainable growth. For reasons we will discuss in just a moment, the Epoxy, which is shown in green on the slide, Engineered Materials, offer differentiated growth as we expand margins in that business. The Chlor Alkali products and Vinyls industrial essentials are largest organic and inorganic growth opportunity.

We expect the Chlor Alkali segment results to be slightly volatile across a brief transitional window when we have a model profile shift between the relative strengths on the two sides of the ECU. We think of the net company volatility as ripples on a deep ocean, not waves on a shallow lagoon. We should control our destiny here.

Continuing with the theme of good fundamentals on Slide number 6, our perceived old world chemistry has new world application and value. I won’t read all of these mega trend multipliers, as I’m sure they’re familiar to you, but instead jump to Slide number 7 and hit on the differentiated growth profile of Epoxy. Epoxy sets itself apart from other engineered materials by offering nearly non substitutable performance. Almost every end use category is growing faster than global GDP. Consider the outlook for more and larger wind turbines for clean energy, consider the outlook for electrical laminates for the New Mobility trends and broad electrification trends, consider the outlook for infrastructure expansion and replacement and so on.

Even though we recognize the value of this business in Epoxy resin sales and in Epoxy systems sales, the value driver is really epichlorohydrin and we will be expounding on our globally leading epichlorohydrin position in future earnings calls. We expect it won’t be long before our Epoxy business delivers greater than $1 billion of EBITDA and carries the same enterprise value that all of Olin carries today, more representative of a highly engineered materials company.

Finally, I will close on Slide number 8. We are going to start talking more about EPS in conjunction with EBITDA and segment earnings. We are advancing in our evolution and expect our activities in debt reduction, refinancing, share repurchases and M&A to be big contributors of forward value and that value shows in EPS. No doubt that a majority of our forward discussion will center on leadership, our linchpin products, great supply demand fundamentals, parlaying and lifting Olin people, however, new ways to create shareholder returns are evolving for Olin and help us earn above $10 of earnings per share.

So that concludes my opening comments and Tom, we’re now ready to take questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Hassan Ahmed with Alembic Global. Please go ahead.

Hassan AhmedAlembic Global — Analyst

Good morning, Scott.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Hi Hassan.

Hassan AhmedAlembic Global — Analyst

Scott, wanted to touch on some of these natural gas price escalations that we’ve seen, not just in the US but globally as well. So on the US side to say if you could sort of talk through how you guys have dealt and what was a pretty tricky quarter and continues to be a tricky 4Q in terms of the hikes we’ve seen in natural gas prices, and if you could also talk about what you guys are seeing in terms of the cost curve impact with natural gas price escalation in Europe and the power curtailments we are seeing in China as well?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, I mean. Sure. For us, we have a couple strategies to manage the local issue, I mean, one is we have a pretty strong hedging program, where we have some amount of it hedged out into the future, which helps protect us. The rest of it is absolutely 100% covered in product pricing and every day we get more ability to recover that on an instantaneous basis as we get out of some of these contracts that keep us in handcuffs. I think the more important one is maybe your second one, I mean rising global energy cost is actually a plus for Olin. And that’s because trade flows get more expensive and trade movements get more volatile and that’s just fits right into our model of lifting the value of these Olin scarce resources.

Hassan AhmedAlembic Global — Analyst

Very helpful. And as a follow-up, Scott, obviously, now you’re guiding to net debt to EBITDA being around one time by the end of the year and it’s very helpful, we’re talking about $10-plus in EPS. And you touched on sort of share buybacks and M&A and the like as being meaningful contributors. As we look at 2022 with the balance sheet now as clean as it is, how should we be thinking about capital allocation, particularly if you could dig a bit deeper into the thought process with regards to sort of meaningful share buybacks as well as M&A?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, I mean, sure. Look, I’ll cover one element and then Todd will cover most of it but a good bit of that is going to go toward our grow brands and I suspect maybe there’ll be some other questions through the call and we’re happy to talk about how we go out and grow the company. So that’s certainly a part of it. Todd, do you want to cover those?

Todd A. SlaterPresident and Chief Financial Officer

Yes, you’re right, the side as we delever the balance sheet, that does provide a lot of financial flexibility to accomplish the structuring and parlaying that we’ve been talking about, Scott just referenced. Going forward, we would expect to target in that 40% range of our levered free cash flow as shareholder rewards. That includes the dividends and opportunistic share buyback as we go forward.

Hassan AhmedAlembic Global — Analyst

Very helpful. Thank you so much, guys.

Operator

The next question comes from Mike Sison with Wells Fargo. Please go ahead.

Mike SisonWells Fargo — Analyst

Hey, good morning guys, nice another great quarter. Scott, I mean, I’m just curious, it sort of feels like given how well your results have come in in this year, you’re sort of in the ninth inning of your transformation and — but you sort of talked about a lot of things that can continue to improve. So just curious where you think you are, you have only been here a year, it’s been a good year. Just what else do you think could be done to continue to improve the company?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah. Hi, Mike, and thanks. Yeah, I mean, I would say the team here at Olin has a long runway in front of it. I mean, all we’ve done so far is put a bit of a disruptive model in place which is highly complementary to the fact that for the foreseeable future that demand growth actually grows faster than supply growth. There is a lot more to come beyond that. I would say, if you think about business by business a little bit, here, we are in Winchester about to embark on a Shoot United program to go out and grow the number of people doing sports shooting immensely and Brad will get an opportunity to talk about that hopefully later in the call. In Epoxy, some of the systems and some of the high-growth areas like Mobility that we provide are starting to take off. Maybe more importantly, we’ve set ourselves to the point where we are a buyer of ECUs out there and there is global product and asset liquidity available and we’re just getting started on that program of accessing that to go out and grow our business, and then of course, we’ll complement that with inorganic acquisitions. So that’s sort of how the runway shapes out.

Mike SisonWells Fargo — Analyst

Got it. And then as a follow-up, the first half year, a little bit above $500 million in EBITDA, second half year in the $700 million range. When you think about the volatility or maybe just the kind of the delta between the quarters, is that $500 million to $700 million sort of the — a range that you can keep your EBITDA within, and is that sort of the potential for next year as we think about doing better?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Well, I think the reason, Mike, that you made, you see those differences is because we’re just getting good at practicing our model and every day we continue to get more knobs that are under our control, reference some of the remarks we made about getting some of our materials more open and freely negotiated as opposed to being tied to trade indices. So the reason that that early volatility has been there and it’s kind of been a one-way up volatility there is just because we’re getting better and expanding our model. I think when you look out in the future, of course, we’re saying, the 2022 will be better than 2021 and there may be some time periods where we have to shift which side of the ECU sets our market participation because today the weak side is still caustic.

Mike SisonWells Fargo — Analyst

Got it. Thank you.

Operator

The next question comes from Alex Yefremov with KeyBanc. Please go ahead.

Alex YefremovKeyBanc — Analyst

Thank you. Good morning, everyone. Scott, you mentioned at the renegotiations in the slides, can you provide any details what percent of your merchant business is up for renegotiation, could also maybe size up the merchant EPI business as a percent of revenue or percent of your capacity?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah. So I think I heard your question, I mean, at least on the chlorine side, we continue to make progress, getting that opened up and we expect at least by 2023 that that’s essentially opened up. But we’ll have to see how discussions go over the next quarter four’s. We haven’t really shared just how big our EPI business is in relation to the rest of it, because it’s not that important, the size of the EPI business. What is important is that it is the linchpin that is such value across our whole Epoxy chain and Olin is focused every day on lifting the value of that scarce resource. Pat, would you have anything else to add about epichlorohydrin?

Pat D. DawsonExecutive Vice President and President of Epoxy & International

Yeah, I think the other thing to keep in mind about EPI is we have a lot of flexibility between the merchant market and our captive production we have — we have multiple knobs on that, that we can activate to bring more value to that whole Epoxy value chain.

Alex YefremovKeyBanc — Analyst

Okay, understood. Thank you for that. Could you discuss parlaying activity for EDC as well. What is involved here, and how would you describe this opportunity?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, I mean, Damian will make some comments on parlaying of EDC. Just on the broader topic, I would just say, we’re continuing to be successful developing that program. And if you think about many of our products, chlorine, caustic, bleach, EDC, epoxy and epichlorohydrin, in the third quarter, we had success at parlaying activities around all those. Damian, do you want to talk about EDC?

Damian GumpelVice President of Olin and President of Chlor Alkali Products & Vinyls

Sure. Thanks, Scott. From an EDC standpoint, at Olin, we have a large presence in Merchant EDC, of course, we can touch — reach customers all over the world with our physicians in the US Gulf and we have expanded our parlaying network there as well because we have customer demand now in Europe, Africa, obviously, India, Southeast Asia, Northeast Asia, Latin America, and our ability to complement our own supply with supply then happens to be available at certain opportunistic times in the world, so it’s allowed us to get to bring that product closer to the customer and realize some some value there from the ability to help them turn that material into their PVC end-use product that’s serving the other growing markets. So our ability to get closer to customers with our parlaying network of that is — that translates into into value for Olin that we realize going forward.

Alex YefremovKeyBanc — Analyst

Thanks a lot.

Operator

The next question comes from Kevin McCarthy with Vertical Research Partners. Please go ahead.

Kevin McCarthyVertical Research Partners — Analyst

Good morning. Scott, you’ve talked about in Epoxy segment margin goal of 30% in the past and this morning I think you threw out $1 billion as an EBITDA goal for the segment. What do you need to do in that business to get there from here? What are the two or three sources of incremental improvement, recognizing that the business has already come a long way? What additional runway do you see in ’22 and beyond for upside in Epoxy?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, I mean we just need to keep the activities going that we’ve already started, but Pat can expand on those a little bit.

Pat D. DawsonExecutive Vice President and President of Epoxy & International

Yeah. Kevin, Epoxy, I would say is really — it’s epoxies at the right time, at the right place, and what I mean by that is if you look at the mega trends and you look at the demand for Epoxy in these different segments, right place, right time, right. So you look at composites and lightweighting, Epoxy enables that. You look at wind — wind systems, decarbonization, right place, right time. Electrical laminates, E-Mobility, adhesives that are used in E batteries, Epoxy, right place, right time. So I think what you’re seeing is, we’ve got the infrastructure in place, we’ve got the commercial organization in place and really we can go across the whole globe around these applications extracting value, where we see value can best be extracted. But Kevin, I think we’re in a great position to be able to complement what we have already been doing and to keep building value around a lot of these mega trends at play right in the wheelhouse of how Epoxy brings value to the market.

Kevin McCarthyVertical Research Partners — Analyst

Okay. So it sounds like less strategic and more just riding the sources of demand improvement that you outlined Pat.

Pat D. DawsonExecutive Vice President and President of Epoxy & International

Well, I’d say strategically make no mistake that epichlorohydrin and the scarcity of epichlorohydrin in the multiple knobs we have there is much more strategic going forward than it has been in the past and I would say that we even have opportunities in aromatics of what we do in phenol, acetone and cumene to bring this contrarian model into place, so that could be very strategic to our future as well.

Kevin McCarthyVertical Research Partners — Analyst

Understood. And then secondly, if I may. Scott, I just wanted to ask about Slide 8. This is something you’ve talked about in the past, breaking the cycle pattern. Just was wondering if you could put a finer point on it. I appreciate the analogy used, the waves on lagoon, ripples on an ocean and so forth, but even specialty chemical company sometimes suffer a down year, if you were to look out over the medium term, three years to five years, what would it take to cause a down year in your mind for Olin, is it shift from weaker side to stronger side of the ECU or an economic recession or something else that would precipitate a cyclical change for the company?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, I mean even just going back to your first question where you had kind of said, are you just riding the wave? I mean, I would make no mistake about it. I mean, we’re heavily focused on value over volume and if there is any way if it’s a wave that Olin is creating. So you’re exactly right on number on Slide number 8 there. We’re trying to represent that this is no longer a cyclic business. There was a cyclic business because Olin made it a cyclic business and we completely changed how we are doing business now. This is structural work that is going on and not only that, there are structural dynamics that have changed in the marketplace. We have a reasonable view out five years, right. And every single place we look, demand growth exceeds supply growth.

So could there be down quarters? That is not impossible. But I do want to reiterate that you know if we have to ship which side of the ECU is setting our market participation, that’s a relatively short term, I doubt that you may or may not see, that is not a year-long type of shift. We’ve taken the business from being a little bit slower to being very nimble to go out and make sure that we do what we need to do to make sure that we get significant value from Olin’s scarce resources.

Kevin McCarthyVertical Research Partners — Analyst

Thanks so much. That’s helpful.

Operator

The next question comes from Frank Mitsch with Fermium Research. Please go ahead.

Frank MitschFermium Research — Analyst

Thank you and congratulations on another solid quarter. You made an announcement yesterday about shoveling some capacity in Alabama. Could you talk about the decisions behind that where you think this leaves the Chlor Alkali market in a supply and demand balance?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah. Thank you, Frank. And we won’t comment on the market. The decision was strictly driven by the fact that we’re still undervalued there and we’re just not going to sell into low value markets. I mean, I can tell you where it leaves Olin’s supply demand balance and that is in a place where we’re positioned to go out and why you see use at the right time to support growth in our downstream derivatives and will likely be a smaller participant in the merchant market going forward particularly in those places where we’re going to be compelled to continue to supply through next year on trade indices that actually don’t reflect the market value of the products.

Frank MitschFermium Research — Analyst

Okay, got you, got you. And as I look at Slide 12, the ECU profitability in contribution index, that is an investment banker’s dream. I mean, it’s just an absolute hockeystick. Where do you see that going into 4Q and in 2022?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Well, every day, we’re focused on lifting value and that is one measurement that has everybody in the company together. So we’re focused on continuing to move it up. Again. I want to reiterate that there maybe a quarter or two where we have to draw flat spot in it to make sure we’re positioned right to continue to lift Olin’s value. But yeah, we’ll continue to move it up, I mean, Damian, in your businesses, what do you think about fourth quarter here?

Damian GumpelVice President of Olin and President of Chlor Alkali Products & Vinyls

Yeah sure, I mean, we certainly can see a continuation of the trend where the chlorine side remains relatively stronger and a portion that Scott mentioned as contracts that’s gone away, we highlighted on our first slide that we shifted more contracts away from index to really negotiate it. There is a step-up in value there that we’re achieving as well. So we continue to see that momentum play through as chlorine remains strong. The rest of the chlorine portfolio in my division is a complement past point on the Epoxy side, continues to — we continue to achieve value, and of course, yet, the positive side has had a group, there are certainly some increasing areas of high [Indecipherable] and we spoke about the energy issues that are disrupting those trade flows and so we’re seeing positive growth as well. But net-net, the ECU continues to move up, is reflected in the PCI. We expect that to continue, but chlorine certainly continues to drive those — a stronger side of the model.

Frank MitschFermium Research — Analyst

Terrific. Perfect. Thank you so much.

Operator

The next question comes from Jeff Zekauskas with JPMorgan. Please go ahead.

Jeff ZekauskasJPMorgan — Analyst

Thanks very much. I was looking at your cost of goods sold which I think was $1.68 billion and in the second quarter, it was $1.71 billion. Why did cost of goods sold go down sequentially? I would have thought your raw materials would have been higher. Did you simply ship lower volume, is that the effect, or can you explain that?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah. Hey, Jeff. Yeah, sure. I mean, look, it’s at least in one of our businesses. We had some amount of lower volumes, if you remember, and at the end of the third quarter, hurricanes, other logistics issues and so forth slowed down volumes a bit there, so that’s probably the main driver. Todd, can you talk about that?

Todd A. SlaterPresident and Chief Financial Officer

Yeah, no, I think that’s absolutely the case. I mean, we commented in the deck, you can see Chlor Alkali products and Vinyls line was down sequentially. Really that was a result of hurricanes. So that’s why you saw lower cost of goods sold.

Jeff ZekauskasJPMorgan — Analyst

Great. And then in your — just in your third slide, he said he shifted another 10% of merchant chlorine to freely negotiated and now less than one-third of volume remains under index. So if all of that — the remaining volume that was under index is now you know at some market contract, what’s the annual economic effect of that?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Jeff, I would just say without trying to itemize product-by-product that the impact of getting more of our merchant chlorine out from index is important, the more important part is that it leaves our whole portfolio of chlorine derivatives. Now if we were to get the remaining third out from under index, it would have a fair economic impact to Olin. But I’ll just say we don’t expect to hold on to that complete one third of volume that remains under index because some of those customer segments aren’t going to be receiving chlorine from Olin because we’re stuck with having to supply for one more year at some value, that isn’t representative of the market. So we will lose some of that volume.

Jeff ZekauskasJPMorgan — Analyst

Okay, thank you very much.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Sure.

Operator

The next question comes from Josh Silverstein with Wolfe Research. Please go ahead.

Josh SilversteinWolfe Research — Analyst

Thanks, good morning guys. Just wanted to go back for the capital allocation discussion from before. Obviously, this year was a big year for debt reduction. Can you just talk about maybe the capacity for buybacks next year, what you’re thinking about for a minimum amount of cash on hand versus debt reduction. And then what would be left over for potential M&A versus buybacks?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah. I mean, Todd will expand on this a little bit. I mean, what I would say to set the stage for his explanation is that right now buying back stock represents an immediate return of about 20%, so you can expect this to be a significant part of our forward program. Todd, that’s for you.

Todd A. SlaterPresident and Chief Financial Officer

That’s right, really if you think about 2021, our first priority has really been to pay down debt and we’re targeting $1.1 billion of debt reduction this year, so far, about $850 million through the first three quarters, we’ve taken a lot of high cost debt out of our system now and we will plan to reduce debt further here in the fourth quarter. So that would get us down to about one times range. Ultimately, we’re probably targeting gross debt in the $2.5 billion range. To answer part of your question, Josh, where we’re really targeting gross debt is in that 2.5 range. And as we said earlier, we’re going to focus on our financial flexibility to enable us to do restructuring activities, which would include M&A as well as parlaying and we are targeting 40% — right in that 40% range of our levered free cash flow toward shareholder rewards including the dividend and buybacks.

Josh SilversteinWolfe Research — Analyst

That’s helpful and then just on the $2.5 billion EBITDA level, I mean this was previously suggested it can be done in a few years from now, is that the new forward to think of. And where do you think, given the portfolio and an asset base right now, what could that new number be to be upside?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Well, I mean, we will keep working to move EBITDA. I mean, this year, we will get pretty close to that, pretty obvious, I think next year, we’ve absolutely said that we will lift EBIDTA over this year. We are evolving to also setting targets based around EPS and so we have a fairly short-term goal of $10 a share and we’ll look at where we go from there.

Josh SilversteinWolfe Research — Analyst

All right. Thanks guys.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Thanks.

Operator

The next question comes from John Roberts with UBS. Please go ahead.

John RobertsUBS — Analyst

Thank you. It seems like the Dow contract is still one of the largest opportunities going forward. Does that contract all open up at once or does it open up in phases over time, and if it’s the latter, could you talk about how far out the longest part of that contract goes?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

I won’t give too many specifics on range mix with a particular supplier customer, but what I will say because it’s in the public domain already and it is a material item is that our major ECU supply that we’re doing at cost ends in 2025, and so there’ll be options and each and every option will be cash accretive to Olin.

John RobertsUBS — Analyst

Okay and then Hassan earlier [Technical Issue] specifically at the production and to get a lot of the Chinese caustic [Technical Issue] making of any export [Technical Issue].

Scott M. SuttonPresident, Chief Executive Officer and Chairman

I’m sorry, I missed the question, it just went quiet. I don’t know it’s on your end or our end. Anybody, still there? Hey Tom, can you hear us?

Operator

Yes, I can hear you. Would you like to go to the next question?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, for some reason, we just lost it.

Operator

Yeah, it sounds like his phone’s line disconnected. All right. The next question comes from Arun Viswanathan with RBC. Please go ahead.

Arun ViswanathanRBC Capital Markets — Analyst

Thanks for taking my question. Congrats on the continued strong results here. So just wanted to ask on your comments that ’22 will be better than ’21. Your Slide 13 has positive price momentum in across all of your businesses pretty much, so assuming that continues, just given your comments that you continue to focus on value, do you expect each of the segments to show higher EBITDA or how should we think about that comment in the context of the segments? Thanks.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, no, I think that’s fair. Each and every segment should show better results in 2022 relative to 2021.

Arun ViswanathanRBC Capital Markets — Analyst

Great, thanks. And then, just another question on the cost curve, you obviously moved up the values here on the ECU, how much of your capacity would you say it’s still kind of not up to your standards on value. And is there anything that you could do to change that, I mean, is there any debottlenecking. I know you have the $100 million in productivity, but anything that you would focus on to think about changing that situation? And again, how much of your capacity would you say is still maybe could be ready for shutdown? Thanks.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, I mean, when you think about — you think about it from a capacity standpoint, I would just start out in 2025 clearly 30% of our capacity gets the zero return today. So that’s certainly a big chunk. If you take that out, we still have some work to do, it’s not necessarily a cost issue though. I mean I think our manufacturing and supply chains have done just a great job driving productivity and flexibility in our assets. It’s more still a market value issue and while a lot of our derivatives are starting to get to the point of reinvestment economics, if you look at what we sell into the merchant market, so take the ECU elemental chlorine and caustic, they go into the merchant market, there is still some work to do there to lift those up to a point that we did somewhere close to reinvestment economics.

Arun ViswanathanRBC Capital Markets — Analyst

Thanks.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Sure.

Operator

The next question comes from Eric Petrie with Citi. Please go ahead.

Eric PetrieCiti — Analyst

Thank you and good morning Scott.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Hi Eric.

Eric PetrieCiti — Analyst

You disclosed roughly 850,000 tons of ECU capacity as a share. Just a question on strategy, do you expect to parlay and close one amount or how do you see that going forward?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, I think I’ll let maybe Damian answer this question.

Damian GumpelVice President of Olin and President of Chlor Alkali Products & Vinyls

Sure, I mean, [Indecipherable] we still see that it’s about following that volume that’s out there and the liquidity that’s out in the market, we believe there is still pools of that available globally that we can — that we can leverage of course that these tradables do become disrupted. You know, it has cost impact to other areas, we’re going to capitalize on that with our cost position. But we also see — as we look at these mega trends and the demand that is clearly growing across that fully use our ECUs and derivatives, partly ECUs are going to play a bigger and bigger role in our ability to break those ECUs into our system, allow us to be more flexible with how we derivatize our chlorine across areas like Epoxy, across [Indecipherable] space, across our intermediate organic — even back to the elemental chlorine. So we have opportunities here to flex our own merchant chlorine and derivatize that and pull other ECUs into the system as well, all for the purpose of lifting and enhancing the value of ECUs into the customers that we serve.

Eric PetrieCiti — Analyst

Helpful. And then, on the one-third of volume in chlorine that remains under index, how much of that is related to TiO2 in the market and how does that step change that during the next year?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Well, I mean, I would just say, part of it is, goes into TiO2 and that’s some part of the market. We’re not going to be serving out in 2023. And so part of the volumes that no doubt are related to this shutdown that we just announced in McIntosh Alabama.

Eric PetrieCiti — Analyst

Thank you.

Operator

The next question comes from Steve Byrne with Bank of America Merrill Lynch. Please go ahead.

Steve ByrneBank of America Merrill Lynch — Analyst

Yes, thank you. You have the slide that illustrates the relative value between chlorine and caustic and I appreciate the concept, but your business is so complex. It’s clear that that chlorine value is not a data point on here. But likely a very wide range. EPI, for example, perhaps a year ago, might have been at the bottom end of that range in value to you of chlorine. Is it fair to say that it is now among the highest value end markets for chlorine for you. The reason I ask is, is it getting to the point where you think there is risk of capacity expansions of EPI in the market either competitors or customers back integrated?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah. Thanks. I mean, look, yeah, a lot of chlorine and chlorine derivatives have moved up. I would say we have a long way to move EPI because it’s certainly not at the high end of that range today. Could it move up to a point where it supports reinvestment economics? It’s certainly not impossible. Do we expect to see expansions out in the future, whether it’s at EPI or even on the ECU side of the business? Yes, we expect to see some things get announced because otherwise the world’s not going to have enough of those scarce products. Once those expansions are announced, I keep in mind that there is still likely a four-year gap where demand continues to grow faster than the supply. So the only way that changes, if there is — if there are just multiple announcements of multiple expansions that continue over the next 10 years.

Steve ByrneBank of America Merrill Lynch — Analyst

And then when we look at pricing on some of these chlorine derivatives like PVC versus EDC, both of them have ripped but you’ve got about maybe at $0.60 a pound difference between them. Is that fair to you that downstream PVC garnered not much of a margin versus EDC or is that compelling to you to want to move in that direction?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Well, I mean we are, of course, the largest part supplier of EDC and so that’s a material that we’ve moved up in value, I think sort of the recent movements of PVC, it’s not going back maybe across six-month to nine-month window. If we’re not looked like there were some risk of it coming down, where by the way, we had a number of activations around EDC to make sure that at least Olin’s portfolio do not go down. Then you saw PVC move back up. I would just say that I think we have some room there. Clearly, the fundamentals for PVC look good longer term and there is a margin lift that PVC gets over the EDC and I think we’re positioned to take advantage of that.

Steve ByrneBank of America Merrill Lynch — Analyst

Thank you.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Sure.

Operator

The next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.

Matthew BlairTudor Pickering Holt — Analyst

Hey, good morning. Congrats on the great results, I wanted to circle back to the capital allocation. So based on your 2022 EBITDA guidance, it seems like you should be able to generate at least $1.6 billion of free cash flow next year and you mentioned 40% to shareholders. That will be about $600 million. That remaining $1 billion, so we think of that as dry powder for M&A either like transformational M&A or bolt-on M&A because it seems like a pretty significant amount?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, I mean, you looked — the numbers certainly are that far off. So, I mean you’re exactly right, I mean we’ll have options for that, part of it is in acquisitions. Part of it is also to support our parlaying activities where we go out and use global product and asset liquidity because we will have some needs for various logistics capabilities as we do that. That’s really low capital, it’s very light touch in terms of capital, but I just wanted to complete the picture.

Matthew BlairTudor Pickering Holt — Analyst

Sounds good. And then previously, I think it’s hard to either sell or spin Winchester just due to either like valuation or taxes or maybe a mix of both, in today’s environment, it seems like ESG is just a bigger part of the picture. So, has anything changed and I guess could you just provide an update of how you see Winchester fit in the portfolio over the long term?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, well, I mean this is a great business for us, it still has a lot of legs, and I’m going to ask Brett to speak here in just a moment about our Shoot United movement, but if you were to bright the business now just a little bit and you’ve got 55 million to 60 million people do export trading now and it is the fastest growing new sport really in the country now, so, and now we’ve got this program that we’re about to roll out to go out and increase the pie, Brett, do you want to talk about Shoot United?

Brett A. FlaugherVice President and President of Winchester

Yeah, just to add a little bit to what Scott said, the 60 million people that participate now really participate for the main reason to stay with family [Indecipherable]. You know the addressable market is over 200 million people of all demographics and ages. What Shoot United is sophisticated communication strategy to introduce all those fun facts and great things about the recreational shooting sports to those 200 plus million people.

Matthew BlairTudor Pickering Holt — Analyst

Okay, thank you.

Operator

Your next question comes from Roger Spitz with Bank of America. Please go ahead.

Roger SpitzBank of America — Analyst

Thanks very much. Following yesterday’s announcement, how much diaphragm capacity do you have left in short chain ECUs?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, yeah, I mean, we probably won’t quote an exact number, but what I will say is almost half of our capacity used to be diaphragm-based. And with that announcement, we have totally tightened out about 885,000 something like that ECU times. So we took out a good chunk of it, but we still have a lot.

Roger SpitzBank of America — Analyst

Okay. And can you comment on chlorine value and volumes into bleach, is it starting to fall versus other derivatives as we move out of the pandemic or is people still reaching all services they can touch?

Damian GumpelVice President of Olin and President of Chlor Alkali Products & Vinyls

This is Damian. Let me take that question and thanks for it. Clearly, we have seen bleach values go up and in concert with the smart moving across the ECU. Bleach is also a scarce product, the largest merchant bleach producer we clearly have seen the dynamics play out, chlorine and ECU values have moved up in bleach, but clearly much more room. As you know bleach is used into disinfectant and wastewater treatment areas, you know, continues to grow and be more value to need it, and so we’re still poised with a long runway in front of us to capture value for this specialty product design properties into great markets.

Roger SpitzBank of America — Analyst

Thank you very much.

Operator

[Operator Instructions] The next question comes from Mike Leithead with Barclays. Please go ahead.

Mike LeitheadBarclays — Analyst

Great. Thanks, good morning guys. I guess just first on the — you touched on inorganic or acquisition opportunities. Can you maybe just flesh out what you’re looking for there. Just help us with either in terms of size. Are you looking for geographic or new product expansion, just give us a sense of kind of what you’re going after there?

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Yeah, sure. I mean if I had to sum it up, I would say we’re looking for assets that really complement our model. So I mean, that opens up a lot of possibilities. You could imagine that we’re able to acquire ECU capability, although that may not be necessarily North American focus, there is a lot of opportunity for us to expand into other geographies. Another complement to our model would be derivatives, just like we have a coordinated derivative chain and we have an epoxy chain and we go part of the way down Vinyls, there is other chains that certainly feed off [Indecipherable] metal, chlorine and those would be great complements to our model, whereby we get a lot more knobs to turn across our Matrix and get value back to ton one that we have today. The other thing I would say it’s also not impossible that we discover that some of those things that have a direct complement to our model that actually our commercial attitude might apply to other businesses as well that we might acquire. So we’re thinking about all of those possibilities.

Mike LeitheadBarclays — Analyst

That’s great and then maybe just for a follow-on digging into the Epoxy strategy a bit, if I look at Slide 7, there’s a lot of talk or discussion around engineered solutions. Is it fair to say that you’re trying to kind of ultimately sell less of the [Indecipherable] commodity, liquid Epoxy and try to push it more downstream, it’s kind of [Indecipherable] Epoxy dispersions things like that, if you could just flesh out kind of where the strategy for Epoxy, that’d be great.

Pat D. DawsonExecutive Vice President and President of Epoxy & International

Yeah, Mike, this is Pat. And when you look at the Epoxy value chain, we make money across that whole chain very interlinked as to how we make our money there. So with our epichlorohydrin like I say, we have multiple knobs on how we monetize that EPI. whether it’s selling into the merchant market. if we get value there or we back out of the merchant market and we take that EPI and convert it more to liquid epoxy resin to monetize it or we can take that liquid epoxy resin and further convert it to a solid epoxy resin or other converted resins or we can take that liquid epoxy resin and systematize it into things like wind systems or formulated products or blend. So, Mike, we need that strategically, we need that whole chain to be able to have the maximum value over volume choices. That’s really what we’ve been doing and we will continue to do in future.

Mike LeitheadBarclays — Analyst

Great, thanks.

Operator

As there are no further questions, this concludes our question-and-answer session. I would now like to hand the conference back over to Scott Sutton for any closing remarks.

Scott M. SuttonPresident, Chief Executive Officer and Chairman

No, I would just say, thanks a lot everybody for joining today. Appreciate it.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Steve KeenanDirector of Investor Relations

Scott M. SuttonPresident, Chief Executive Officer and Chairman

Todd A. SlaterPresident and Chief Financial Officer

Pat D. DawsonExecutive Vice President and President of Epoxy & International

Damian GumpelVice President of Olin and President of Chlor Alkali Products & Vinyls

Brett A. FlaugherVice President and President of Winchester

Hassan AhmedAlembic Global — Analyst

Mike SisonWells Fargo — Analyst

Alex YefremovKeyBanc — Analyst

Kevin McCarthyVertical Research Partners — Analyst

Frank MitschFermium Research — Analyst

Jeff ZekauskasJPMorgan — Analyst

Josh SilversteinWolfe Research — Analyst

John RobertsUBS — Analyst

Arun ViswanathanRBC Capital Markets — Analyst

Eric PetrieCiti — Analyst

Steve ByrneBank of America Merrill Lynch — Analyst

Matthew BlairTudor Pickering Holt — Analyst

Roger SpitzBank of America — Analyst

Mike LeitheadBarclays — Analyst

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