Earnings Call Transcript - OLN Q3 2025

Operator, Operator

Good morning, and welcome to Olin Corporation's Third Quarter 2025 Earnings Conference Call. Please note today's 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 Keenan, Director of Investor Relations

Thank you, operator. Good morning, everyone. We appreciate you joining us today to review Olin's third quarter 2025 results. Please keep in mind that today's discussion, together with the associated slides as well as the question-and-answer session that follows, will include statements regarding estimates or expectations of future performance. Please note these are forward-looking statements and that Olin's actual results could differ materially from those projected. Some of the factors that could cause actual results to differ from our projections are described without limitations in the Risk Factors section of our most recent Form 10-K and in yesterday's third quarter earnings press release. A copy of today's transcript and slides will be available on our website in the Investors section under Past Events. Our earnings press release and related financial data and information are available under Press Releases. With me this morning are Ken Lane, Olin's President and CEO; and Todd Slater, Olin's CFO. We'll start with some prepared remarks, then we'll look forward to taking your questions. In order to give everyone an opportunity, we will limit participants to one question with no follow-ups. I'll now turn the call over to Olin's President and CEO, Ken Lane.

Ken Lane, President and CEO

Thank you, Steve, and thanks to everyone for joining us today. Let's start with Slide 3 and our third quarter highlights. During the third quarter, we delivered robust results, reflecting strong performance in our Chlor Alkali products and Vinyls business, partially offset by ongoing weakness in our Epoxy and Winchester commercial ammunition businesses. We remain disciplined in our value-first commercial approach and operated our assets safely, reliably and efficiently. Team Olin is more committed than ever to executing our value-first commercial strategy, maximizing cash generation and delivering on our capital allocation priorities while preserving our strong leverage to a demand recovery. During the third quarter, we continued to generate positive operating cash flow and with a focused effort by Team Olin achieved a significant milestone by securing our eligibility for Section 45V clean hydrogen production tax credits, which Todd will discuss shortly. Now let's turn to Slide 4 and review our Chlor Alkali Products and Vinyls results. Third quarter ECU values remained stable as did global caustic soda demand. The main end markets for caustic soda have held up well. Some weakness in pulp and paper has been largely offset by good demand in other markets such as alumina and water treatment. As expected, caustic soda remains the stronger side of the ECU. Adding to the good results for CAPV was improved operating performance and lower costs. We are beginning to realize the benefits of our optimized core strategy. During the quarter, we announced the dissolution of our Blue Water Alliance joint venture with Mitsui at year-end. Mitsui has been a long-term partner for Olin, and that will continue to be the case. However, we believe the complexity of a joint venture is not needed for us to strategically manage our participation in the EDC market. Aligned with our value-first commercial strategy, we will reduce our spot EDC exposure and focus on longer-term structural relationships offering higher returns across the cycle. Looking forward to the fourth quarter, we expect seasonally lower demand and our Chlor Alkali team is focused on preserving ECU values. In support of that, we are taking aggressive steps to adjust our operating rates, which will also help us deliver on our target to reduce working capital. Now let's turn to Slide 5 for a look at our Epoxy results. Global Epoxy resin demand remains weak, and we continue to face significant headwinds in both Europe and the U.S. regions, facing subsidized imported resin from Asian producers. U.S. demand has been more resilient than Europe. And with the removal of Epoxy resins from Annex II tariff exemptions, we are seeing traction with U.S. price increases. In spite of these market dynamics, Olin's third quarter formulated solutions volume improved sequentially. Fourth quarter planned maintenance presents a $14 million sequential headwind to Epoxy earnings. As we execute this turnaround safely and efficiently, the Epoxy team will focus on cash management as they reduce year-end inventories. Olin's new Stade, Germany supply agreement will provide improved economics for our European production, similar to the benefits from our integrated operations at Freeport. Starting in January 2026, the new agreement is expected to provide an annual adjusted EBITDA benefit of approximately $40 million. With rationalization of capacity in Europe, we are seeing opportunities to grow our participation and we'll do so at a value that is attractive. Next, we move to Slide 6 for an update on our Winchester business. As we discussed last quarter, our commercial ammunition business has been hit by a perfect storm, rising costs, elevated channel inventories, lower out-the-door retail sales and falling market prices. We estimate that high retail inventories have decreased Winchester commercial sales by approximately 5% to 10% so far this year. In the face of weak consumer sales, retail inventories have been slow to correct. As a result of this market environment, commercial margins have dropped dramatically, with half being attributable to lower volume, while the other half is a combination of lower pricing and higher costs. We are seeing some positive pricing trends developing for the fourth quarter. Given the recent run-up in metals and manufacturing costs, commercial margins will not be restored until demand recovers and inventory levels have been rightsized. In contrast to weak commercial demand, Winchester's military business continues to show strength. Domestic military and international military demand continues to grow as NATO countries expand their defense budgets. Our Next Generation Squad Weapon ammunition facility project at Lake City is well underway, and we are on course to complete construction in late 2027. In parallel, we are developing and delivering components and equipment to support the Army's accelerated fielding plan. Recognizing that the commercial market is not improving as quickly as we had hoped, we are adjusting our operating model to make-to-order versus make to inventory. As a result, we will see a reduction in Winchester working capital that will be sustained until we see demand improve. As part of this change, we will extend our typical holiday plant shutdowns to further reduce supply and reduce inventory. This will shift Winchester closer to a just-in-time manufacturing model. I'll now turn the call over to Todd Slater for a look at our financial highlights.

Todd Slater, CFO

Thanks, Ken. Let's review our sequential quarterly adjusted EBITDA bridge. Third quarter 2025 adjusted EBITDA included a $32 million pretax benefit, primarily related to the clean hydrogen production tax credit under Section 45V as part of the Inflation Reduction Act of 2022. Excluding the Section 45V tax credit, our third quarter adjusted EBITDA was $190 million, which was an 8% sequential improvement. Chlor Alkali Products and Vinyls results improved, driven by lower operating costs and higher ethylene dichloride volumes while preserving ECU values as we navigate through this prolonged trough. Our Epoxy business continued to grow its formulated solutions volume as persistent headwinds from subsidized Asian imports impacted both the United States and European markets. As expected, Epoxy's third quarter results included higher operating costs from unabsorbed fixed manufacturing expenses incurred from planned inventory reductions. Winchester's third quarter segment results reflected the continued weakness of commercial ammunition volumes and margins, which more than offset improved military project earnings. The typical third quarter seasonal growth in commercial demand was muted. Now turning back to the 45V tax credit. We recognize this benefit as a result of our team's dedicated efforts over the last three years. During the third quarter, we received notification from the Department of Energy regarding our provisional carbon dioxide emissions rate, marking a significant milestone for tax credit recognition. The Section 45V tax credit pertains to qualified clean hydrogen produced and either sold or used at certain of our Chlor Alkali plants. Looking forward, we expect an annual benefit in adjusted EBITDA of $15 million to $20 million for the years 2026 through 2028 with lower amounts through 2032. Next, let's move to Slide 8 for a review of our liquidity. During the third quarter, we fell short of our cash flow and working capital targets, resulting in an increase in net debt for the period. This was primarily due to unforeseen payment delays from the U.S. government related to Lake City military business. These payments were subsequently received in October. For 2025, we continue to expect working capital to be a source of at least $100 million of cash, excluding the timing of tax payments. Consistent with what we previously discussed, by year-end 2025, we expect net debt to be flat with year-end 2024. Finally, we remain committed to our disciplined capital allocation approach and our priorities are clear. First and foremost, we retain our investment-grade balance sheet. Second, we fund sustaining capital spending to maintain the safe and reliable operation of our assets. And third, we are committed to maintaining our quarterly dividend. And then fourth, any available free cash flow is returned to shareholders through either highly accretive growth opportunities or share buybacks. Our teams continue to focus on cash generation, maintaining cost discipline and supporting our Beyond250 cost savings initiative. Our strong financial foundation enables Olin to continue executing our value-first commercial approach while adhering to our capital allocation priorities and prudent capital structure with a strong balance sheet and cash flow. Ken, I'll now hand the call back to you.

Ken Lane, President and CEO

Thanks, Todd. Let's finish up with Slide 9 and our outlook for the fourth quarter. In our CAPV business, through actions we're taking, we expect to see stable ECU values in the face of seasonally weaker demand. Our Epoxy business remains challenged, but will begin to see improvement as we enter the new year and benefits accrue from our new Stade supply agreement, some pricing improvements in the U.S. market and volume gains in Europe following capacity rationalizations. In Winchester, we have a very strong legacy and an industry-leading brand that has supported the U.S. and allied militaries for more than 150 years. We will see resilience in this business and are taking actions to accelerate that in the fourth quarter by adjusting our operating model, driving price increases and finding new opportunities in our international military business. The current trough has been a test of our commercial model and our commitment to operating discipline. We've stayed the course and developed ways to further help ourselves through improvements in our cost structure that are beginning to show benefits. We will provide a more detailed progress report during our fourth quarter earnings call in early 2026. But as we shared during our Investor Day, our Beyond250 initiative is built upon 3 pillars. First, the structural rightsizing and cleanup of our production assets. Recent rationalizations have left behind inefficiencies or remnant costs. This will be implemented in close coordination with our planned outages in the coming years. Second, we must streamline our operations and maintenance practices to work more efficiently and reduce our dependency on contractors. Third, we will redouble our efforts to be the industry leader in operating efficiencies. These Beyond250 pillars are embedded in every employee's incentive so that we create a culture of ownership and performance-driven accountability that is aligned to our values, including being the safest and most reliable operator in the industry. Finally, during the fourth quarter, we will realize a $40 million EBITDA penalty to reduce inventories and support our value-first commercial strategy. Including this, we expect our fourth quarter 2025 adjusted EBITDA to be in the range of $110 million to $130 million. Operator, we are now ready to take questions.

Operator, Operator

And today's first question comes from Hassan Ahmed with Alembic Global.

Hassan Ahmed, Analyst

I know it's early to think about 2026, but if I look at your guidance for 2025, excluding the inventory penalty, we're looking at around $734 million to $754 million in EBITDA. I'm trying to understand how much additional growth we might see in 2026 through self-help initiatives and other controllable factors. You have the Dow contract secured, there's no turnaround in the Epoxy business, and you're also implementing cost-cutting measures.

Ken Lane, President and CEO

Hassan, this is Ken. I'll start, and then maybe Todd can add. As we approach the fourth quarter, we've discussed the necessary steps we need to take since the market environment hasn't improved in any of our businesses. The focus on Beyond250 and the cost reductions we expect to achieve there is a priority for the entire organization to ensure we can deliver on that. We've mentioned a run rate of $70 million to $90 million transitioning from this year into next year. This includes the Dow agreement at Stade, which has already taken effect on October 1 and will be reflected in the P&L in the first quarter. We anticipate some upside to that $70 million to $90 million figure in 2026. We plan to provide more details during the fourth quarter earnings call at the start of next year, so stay tuned for that. Ultimately, we need to concentrate on doing everything we can to support ourselves. Todd, do you want to add anything?

Todd Slater, CFO

Hassan, as we look into 2027, you mentioned turnarounds. I'll remind everyone on the call that we do have our 1 in every 3-year major turnaround on our VCM, Vinyl Chloride Monomer unit that will happen generally in the first half of next year. So that's probably a headwind relative to what we've seen this year.

Operator, Operator

Thank you. Our next question today comes from Josh Spector at UBS.

Joshua Spector, Analyst

I apologize if I missed this earlier, but I also wanted to ask on the 45V credit. I mean, the $32 million in the quarter, how much of that is catch-up for earlier in the year? And really, the question is, what's the ongoing benefit we should be modeling in for Olin into next year or further out?

Todd Slater, CFO

Josh, it's Todd. Thanks for the question. Yes, it is ultimately a catch-up. The $32 million, we were finally able to realize that because of getting our final CO2 emissions information from the Department of Energy. We've been working on this candidly for the last 3 years. As we go forward, we would look at 2026 through 2028. We think you'll see adjusted EBITDA benefit in the $15 million to $20 million range each of those years.

Operator, Operator

And our next question today comes from Matt DeYoe with Bank of America.

Salvator Tiano, Analyst

This is Salvator Tiano filling in for Matt. Can you discuss the working capital situation in Q3? There seems to have been a significant increase in some working capital areas. What caused this? Additionally, can we assume that Q3 operating rates, particularly in Chlor Alkali, were better than your initial expectations? What does this imply for your Q4 operating rates compared to how you've been operating in recent years?

Ken Lane, President and CEO

Let's discuss the inventory reduction in more detail. We're expecting a $40 million penalty in EBITDA for the fourth quarter, which will help us free up around $150 million in cash. This cash benefit has accumulated over the entire year, as we've experienced increases in working capital across all businesses. Early in the year, we anticipated stronger demand, especially for Winchester, but the inventories have not decreased as quickly as we hoped, necessitating some decisive actions to reduce them. In Chemicals, the inventory situation involves timing issues with turnarounds and the need to build up inventory in the third quarter for these turnarounds in the fourth quarter. You'll see that inventory come down in the fourth quarter. Additionally, we're committed to maintaining discipline in our value-first commercial strategy. Todd, do you have anything you’d like to add regarding this?

Todd Slater, CFO

The only comment I would remind everyone, and thanks for the question, Sal, was that we did have a penalty on working capital at the end of September related to delayed payments from the U.S. government for our Lake City military business. Ultimately, those have been received here in October. But that was candidly the biggest driver by far on why working capital moved up in the third quarter compared to the second.

Operator, Operator

Thank you. And our next question today comes from Frank Mitsch with Fermium Research.

Frank Mitsch, Analyst

I'd like to flesh out this $40 million negative impact due to inventories in the fourth quarter. It looks like it's a combination of Chlor Alkali and Winchester. So wondering if you could size it to. Is this more of an Olin issue? Or do you feel like the industry overall is holding much too much inventory, so we should expect lower operating rates from the industry overall? And how confident are you that the $40 million is the right number? And then as we start 1Q '26, you can go back to operating as you normally would?

Ken Lane, President and CEO

Thank you for the question. To clarify the EBITDA penalty we are facing, much of the working capital build is related to Winchester. This situation is quite different from the chemicals value chains, where there seems to be an issue with inventory levels. Regarding Winchester, we have been discussing high inventories in the retail chain since last year. Although those inventory levels decreased at the start of the year, they have since plateaued at a high level. Additionally, a surge of imports before the ammunition tariffs has contributed to this problem. Winchester is somewhat unique in this regard, as there is still a significant amount of inventory in the chain that needs to be addressed. We intend to avoid using our balance sheet to support that inventory if it's already present elsewhere in the chain, as we need to be disciplined to protect our financial health. As for chemicals, visibility is challenging. Currently, I am not worried about excessive inventory in the chemicals value chains. However, there is always a risk as we approach the fourth quarter since it tends to be the weakest quarter. Even if inventories are low, there’s a chance that companies might quickly deplete them. Therefore, we want to remain prepared for any scenario, aiming to minimize our inventory levels. At the same time, we will reduce operating rates to maintain discipline in moving volume at our preferred value. Our strategy remains unchanged.

Operator, Operator

Thank you. And our next question today comes from Aleksey Yefremov with KeyBanc.

Aleksey Yefremov, Analyst

You mentioned the opportunity to sign EDC supply agreements. Do you have anything in place today? Or is your entire EDC volume on a spot basis? And also, are there any agreements that are fairly close to getting over the finish line soon in this area?

Ken Lane, President and CEO

We are actively working on establishing more structural term agreements for EDC. Currently, one of the largest differences compared to last year is the EDC price in the market. Fortunately, we are the cost leader in producing EDC, which allows us to manage these market conditions better than others. Over time, it makes more sense for us to secure more contracted positions than we currently have. Although we do have some contracted business, much of it operates through our joint venture with BWA, which we plan to dissolve by the end of the year. Mitsui has been a valuable partner, but the complexities of the joint venture were not worth the benefits compared to the potential of controlling this market channel exclusively. This was the primary reason for our decision to end the joint venture, allowing us to pursue these structural deals. We will continue to work with Mitsui but are looking for larger opportunities to increase volume, and we expect to have more updates on this soon. While we are altering our portfolio, we will still maintain some exposure to the spot market, although it will decrease compared to past levels.

Operator, Operator

Thank you. And our next question today comes from John Roberts of Mizuho.

John Ezekiel Roberts, Analyst

Could you provide an update on the propellants contract bidding process? Also, could you give us an update on your metal hedging and what your expectations are for that?

Ken Lane, President and CEO

Yes, I'll give you a quick update there. Like anything with the government, it's a slow process. And with the government being shut down, it's basically not a running process right now. It's a little bit frustrating when you're dealing with the government here, especially when they're not paying you sometimes. But we're going to continue to look at that as an opportunity. All it is, is a working capital investment for us. It doesn't require any real capital to speak of. They've issued a preliminary RFP. They've received comments from industry and now they're going back and they're revising that. So there'll be another draft RFP that's coming out in the not-too-distant future. Let's see what happens with the government shutdown. And then there'll be another iteration. So I don't expect there's going to be anything decided regarding this until late next year at the earliest, which means there probably won't be any transition to a new operator, assuming that's the choice that they make until sometime in 2027. And I can't predict when that's going to be. But it certainly is an opportunity that we're still very interested in. As I said in my prepared comments, Winchester has been a strong supporter of the U.S. and NATO allied militaries over many years. We believe that with our chemical-based core businesses, along with the advantages that we have with our Winchester brand, we're the best person to be able to operate that. But we're going to do it for a value that makes sense for Olin and Olin shareholders. Now, I'll let Todd talk about the metals hedging.

Todd Slater, CFO

Thanks, Ken. As everyone on the call knows, we are a hedger, and we anticipate that metal costs will be a challenge in 2026 compared to 2025. We maintain a rolling four-quarter hedging program. This morning, I checked the price of copper, which was around $510. As you know, those prices gradually influence our system. Copper prices have been rising. Therefore, as we consider raw material costs, we recognize that they will continue to be a challenge, just as they have been.

Operator, Operator

Thank you. And our next question today comes from Patrick Cunningham at Citi.

Patrick Cunningham, Analyst

Maybe just on Epoxy. Obviously, still continues to be challenged by some price competitive Asian imports. Maybe you're getting a little protection here that gives you a platform for price. But how should we think about earnings levels into next year? You have some nice savings actions at Stade. You have maybe some incremental volume opportunities with competitors leaving the space in Europe. So I'm just how are you thinking about the framework for next year on Epoxy?

Ken Lane, President and CEO

Patrick, thank you for your question. I hate to get too far out over my skis here, but I'm probably more optimistic on Epoxy than I have been in the last 1.5 years. But that's not because the market is improving. It's really because of the actions that we've taken as Olin over the last few years to be able to rightsize our cost base, rightsize our capacities. We do have a very good integrated business that has allowed us to survive when others can't. And so that's what happens in the trough. You start to see people that are not as competitive close capacity until demand begins to recover, and we're positioned very well as that happens. But in the meantime, with all the cost reductions that we're going to realize, both in Europe and frankly, in the U.S., along with a little bit of a tailwind around tariffs, I do expect that going into next year, we're going to see a pretty significant improvement from a very low level for Epoxy. But I think that's a business where, yes, I'm going to be very eager to see that improvement next year, which should be quite positive versus this year. And as a percentage, will probably be better than any other business we've got.

Operator, Operator

Thank you. And our next question today comes from David Begleiter with Deutsche Bank.

David Begleiter, Analyst

Ken, on Slide 14, your ECU profit index was down in Q3 versus Q2, but your Chlor Alkali EBITDA was actually up in Q3 versus Q2 even after the onetime benefit. So why was that?

Ken Lane, President and CEO

Glad to hear you. So listen, that index obviously has got a lot of moving parts to it. A big issue with that is mix, and we've seen that in other quarters. And what I'll tell you is it's all just related to mix in the portfolio. So you've seen it sort of going up and down quarter-to-quarter, but it is not something that I expect to see any further deterioration. Like I said, we expect ECU values to continue to be stable into Q4. Nothing that I see is changing that. But depending on which customers are operating plants or taking volume, that number is going to move around. But it is not something right now that is indicating any trend one way or the other. Stability is the way that I would be thinking about that.

Operator, Operator

Thank you. And our next question today comes from Pete Osterland with Truist Securities.

Peter Osterland, Analyst

Within Winchester, could you talk a bit more about your plans to shift production towards the international defense markets? Is this intended to be a permanent change in strategy just given the stronger growth opportunities that you're seeing within defense? And where do you see the revenue mix between commercial and defense going for this business over the medium term?

Ken Lane, President and CEO

Thank you for the question, Pete. This aligns with what we discussed at our Investor Day regarding the growth of our defense business. We've observed positive trends in this market, particularly as NATO countries are set to increase their defense spending in the coming years, which presents us with opportunities to participate. Currently, we are experiencing significant short-term demand, with a growing backlog for international military orders. We are actively collaborating with our partners to secure this demand for the upcoming year, indicating robust growth in the short term. Furthermore, we are also considering how to engage in this market strategically over the long term, exploring options like partnerships and long-term supply agreements. We view this as a strategic opportunity. Earlier this year, we mentioned that military would comprise a larger portion of our revenue, largely due to the project we have underway at Lake City, which is contributing project revenue and skewing Winchester's sales towards military. This segment has lower margins since we earn a project-based fee for our execution. However, I believe it will take some time before we see a return in commercial demand, as consumer spending on discretionary items like ammunition remains challenged. Nonetheless, the growth in international military will strengthen our military portfolio more than we anticipated a year ago, and the good news is that international military margins are appealing, which we find very encouraging.

Todd Slater, CFO

As you think about revenue, you're probably sitting today 62% military and the remainder, commercial. That is higher than it has been over the last several years. Candidly, I would expect that to tick up a little bit as we move forward with the shift toward more military sales, both internationally as well as projects.

Operator, Operator

Thank you. And our next question today comes from Mike Sison with Wells Fargo.

Michael Sison, Analyst

When you think about what needs to happen for a recovery in chemicals, are you seeing anything that might give you some confidence that there could be a recovery in '26? And then I know you don't talk about operating rates anymore, but how much volume is in the system that could recover? And maybe help us understand the earnings power of that volume now versus the past?

Ken Lane, President and CEO

We will continue to adjust our operating rates to align with the demand we observe and manage our working capital in the chemical sector accordingly. We do not plan to maintain inventory in this environment except for specific needs like turnaround. Our operating rates are intentionally lower compared to others in the industry, which is not surprising given our operating model. We will maintain this approach. To see a recovery, we should first focus on North America, specifically the housing market, as it is a significant driver for chemicals, especially in relation to chlorine. A real recovery in housing is uncertain; I hope it happens next year, but currently, there are no clear signs of a substantial turnaround. In North America, this is what will influence the market. If we look beyond the U.S. to Europe and Asia, we also need those markets to start growing, but so far, there hasn't been much indication of consumption rising, particularly in China, which is the largest market capable of absorbing the new capacity it has added. China has become a major exporter of PVC, which increases its exports of products like caustic soda. All of this supply needs to find demand to ensure it is absorbed. Additionally, we need to see growth in the global economy to help absorb the excess supply coming from China. While we have discussed anti-involution policies, which are promising theories, they have not yet effectively targeted the chemical sector as we had hoped. This situation might change next year, but at this moment, we require increased demand in Asia and some rationalization to occur.

Operator, Operator

Thank you. And our next question today comes from Kevin McCarthy of Vertical Research Partners.

Kevin McCarthy, Analyst

Ken, I was wondering if you could provide an update on your thoughts about the U.S. caustic soda market. On Slide 9, it appears as though you're baking in some price improvement for caustic in the fourth quarter. Maybe you could speak to how much of that is seasonal uplift as chlorine operating rates or demand presumably comes down seasonally versus any cyclical or structural uplift that you may see unfolding in caustic?

Ken Lane, President and CEO

Kevin, thank you for the question. Yes, so we are expecting to see higher values for caustic in the fourth quarter. As I said in the prepared remarks, the caustic market is relatively stable. So we have seen some softening around pulp and paper, but we continue to see a robust market around alumina. And if you look at the aluminum market, prices for aluminum still are holding up quite well, which indicates healthy demand, and that's a very positive thing for caustic. So the demand side, I would say stability is the key word. On the supply side, yes, you're going to see less supply in the fourth quarter. Some of that is going to be related to some of the actions that we're taking with our portfolio. Some of it is also related to other industry outages that normally happen in the fourth quarter. That's going to be the case here as well. So between lower demand for chlorine derivatives, which is naturally going to pull down operating rates and the normal sort of seasonal turnarounds that occur in the fourth quarter, that's going to restrict supply, and that should give support for caustic values in the fourth quarter.

Operator, Operator

Thank you. And our next question today comes from Jeff Zekauskas with JPMorgan.

Jeffrey Zekauskas, Analyst

You talked about a large turnaround in VCM. I think this year, your forecasted turnaround costs are $125 million. Is maybe something like $175 million next year, up $50 million a reasonable first draft?

Ken Lane, President and CEO

So listen, turnarounds this year was pretty heavy. We are going to be updating our modeling data for 2026 at our fourth quarter earnings call here coming up at the beginning of the year. But that is a very large turnaround for us. It happens every 3 years, like Todd had mentioned. But there are other puts and takes as well. We're currently finalizing our schedule for turnarounds in 2026. So I don't have a final number to give you today. Some of that is still moving around. And once we do, like I said, we will get you a new outlook for 2026 at the beginning of the year.

Operator, Operator

And our next question today comes from Vincent Andrews at Morgan Stanley.

Vincent Andrews, Analyst

Wondering if you could just talk a little bit, Todd, I know you went through your capital allocation priorities. But if we look at trailing 12-month leverage at the end of the year based on the fourth quarter EBITDA guidance, it pushes you close to 4. So does that change anything in terms of what you're going to be able to do? Are you going to continue to repurchase stock? Or are you going to hold off a little bit and see how 2026 develops? How should we be thinking about that in terms of your desire to maintain your investment-grade credit rating?

Todd Slater, CFO

Thank you for the question. We expect to have significant cash flow in the fourth quarter and to reduce our debt back to where we started the year, resulting in net debt remaining flat year-over-year. We have noticeably limited our share repurchases this year compared to previous years, purchasing about $10 million in the last couple of quarters. While I wouldn't be surprised if we continue at a modest pace, we are prioritizing the cash flow generated in the fourth quarter toward debt reduction from our current position.

Operator, Operator

Thank you. And our next question today comes from Arun Viswanathan with RBC.

Arun Viswanathan, Analyst

You are currently around a $700 million annualized EBITDA run rate. Given the relatively stable Chlor Alkali index numbers, what do you think it will take to reach around $1 billion? Would it be approximately $50 million from Epoxy and Winchester uplift, and perhaps about $200 million in Chlor Alkali? If you could help clarify how to bridge that gap, it would be appreciated.

Ken Lane, President and CEO

Thank you for the question. If you look at our year-to-date performance, the biggest change compared to last year is with Winchester. Chlor Alkali has been performing well, which is a positive for our company as it drives our operations. I believe that over time, we will see improvements in ECU values from their current low levels, and our operating leverage is significant in the overall portfolio. We expect a recovery in Winchester eventually, but we need to navigate through current cost challenges and see an uptick in consumer spending on discretionary items first. I'm uncertain if that will happen in the near term. However, the good news is that our Winchester team is focused on adapting their operating model to the new market conditions. A year ago, we did not foresee being in this position; we anticipated a demand recovery by 2025, but that has not materialized, and we have experienced a downturn instead. We will adjust our strategy, and I do expect to see some recovery. Regarding Epoxy, I am more optimistic about it than any other business at the moment, even though the demand landscape remains challenging. With the industry's capacity rationalization, high glycerin costs in Asia providing pricing support, and our ongoing self-improvement efforts, I believe we will see positive momentum for the Epoxy business heading into next year. This is how I foresee the improvements as we move toward 2026, and while I think things will start to improve, the pace of change will largely depend on the global economic conditions.

Operator, Operator

Thank you. And our next question today comes from Matthew Blair at TPH.

Matthew Blair, Analyst

Given the slower production outlook for Winchester, how is the AMMO acquisition progressing? Do you still anticipate achieving the previous guidance of approximately $5 million EBITDA in the latter half of the year from AMMO? Is that still a realistic expectation?

Ken Lane, President and CEO

Thank you for the question. We remain very positive. When we consider the business case around the acquisition and what we've previously discussed, the synergies from our ability to build shell cases at that facility have proven to be as effective, if not slightly better, than we anticipated. We are very confident in delivering the synergies we've mentioned, not just for this year, but also reaching that $40 million milestone in three years. The asset is in excellent condition, and the employees have been fantastic as they integrate into Winchester. They seem excited to be part of the Winchester brand, making this a very favorable acquisition for us. Overall, we feel really good about it.

Operator, Operator

Thank you. And our next question today comes from Roger Spitz at Bank of America.

Roger Spitz, Analyst

Todd, how do you expect to reflect the clean hydrogen benefit in EBITDA? Will you include approximately 25% each quarter, or will we see a larger figure presented annually in the EBITDA?

Todd Slater, CFO

Yes, thank you for the question, Roger. You should begin to see the 45V tax credit incorporated into our regular earnings as a reduction to the cost of goods sold each quarter now that we have received the key emissions information from the Department of Energy. It won't be highlighted as it is currently. This year was primarily about catching up since we finally obtained the emissions data. As you consider next year and the following three years, with a benefit of $15 million to $20 million, this will flow through as a reduction to the cost of goods sold on a quarterly basis.

Operator, Operator

As there are no further questions, this concludes our question-and-answer session. I'd now like to turn the conference back over to Ken Lane for closing comments.

Ken Lane, President and CEO

Thank you, Rocco. And listen, thank you, everyone, for joining us this morning. We appreciate your interest in Olin, and we look forward to speaking with you at the beginning of the year next year. We wish you all a very safe and prosperous week. Thank you.

Operator, Operator

Thank you. And we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.