Earnings Call Transcript - OLN Q1 2024

Operator, Operator

Good morning, everyone, and welcome to Olin Corporation's First Quarter 2024 Earnings Conference Call. Please also note, today's event is being recorded. At this time, I'd like to turn the floor 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, 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 yesterday's first 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 Ken Lane, Olin's CEO; and Todd Slater, Olin's CFO. We'll begin with our prepared remarks and thereafter, we'll be happy to take your questions. I'll now turn the call over to Ken Lane. Ken?

Kenneth Lane, CEO

Thank you, Steve, and good morning, everyone. Let me start by saying I'm delighted to be part of team Olin. Olin has a long enriched history with leading positions across this portfolio, and I'm looking forward to leading the company as we define the next phase of value creation for our shareholders and employees. Today, Olin is in great shape with an investment-grade balance sheet and a strong team. This company has incredible potential, and I look forward, together with our 7,000 Olin team members, to start building upon this foundation and writing the next chapter in Olin's success story. I do want to thank Scott Sutton for his leadership of the company, which resulted in a step change of record results. Scott has been very gracious with his time and support during our transition. I'm a firm believer in our operating model, and I am absolutely committed to continuing Olin's value-focused commercial approach. The entire Olin team embraces the winning model, and that support runs deep from senior leadership to frontline manufacturing. Now I want to talk about my near-term priorities. First and foremost is always operating safely, keeping our people and our communities safe while running our assets efficiently and reliably. It is not a coincidence that the safest operators are the most reliable. And we are focused on being a leader with respect to our safety performance. Next, Olin is a coiled spring. And as our market demand recovers and customers seek to pull more volume, we'll be ready to capture that significant value opportunity. I'll provide whatever support is needed to defend the gains we have achieved and continue our value generation as the industry leader that we are. Also, it's clear to me that investors appreciate Olin's consistently strong cash flow and share buybacks across the cycle. Delivering on our commitments is an imperative. We will continue our disciplined capital allocation strategy and will be a steady buyer of our shares, focused on delivering above-average shareholder returns. Finally, I'm committed to providing Olin stakeholders with strategic transparency and a long-term roadmap for growth that we will share during a Capital Markets Day around year-end. More will be communicated on that in the near future. Now let's take a quick look at our chlor alkali business and turn to Slide 5. Olin took decisive actions during the fourth quarter to curb price erosion across our system. Early in the first quarter, our value accelerator initiatives continue to tighten Olin supply, successfully advancing the inflection point and effectively stopping the value drop. During the first quarter, we saw improved chlorine volume being pulled by Olin customers at our value level across several key end uses, including agriculture, urethanes, titanium dioxide, and water treatment. As we look beyond the first quarter, we are seeing some seasonal demand increases for chlorine and caustic soda. In the United States, planned and unplanned outages and low supplier inventories have kept caustic availability tighter than expected. Trade publications confirm that domestic caustic is climbing up from a cycle bottom. Now let's turn to our Epoxy business on Slide 6. During the first quarter, our Epoxy business continued to realize the benefits of our 2023 restructuring actions. Our streamlined asset base will support the growth of our higher-margin Epoxy systems demand while also reducing Olin's downside commodity exposure across the cycle. Our recently announced U.S. antidumping initiative seeks to level the playing field. The first quarter marks the beginning of the recovery for Epoxy and the start of a gradual climb out of a very deep trough. As that building momentum continues into the second quarter, we will realize continued benefits from our restructuring and stronger focus on higher-margin formulated systems. Please turn to Slide 7 for a Winchester recap. First quarter commercial ammunition demand was good, and our military segment continues to be strong, delivering sequential adjusted EBITDA growth for the fourth quarter. We are concerned that propellant shortages could limit commercial ammunition supply this year, and we're actively working on mitigations. Our integration of the White Flyer business has exceeded expectations and is a great addition to our Winchester business, the leading brand in the industry and a strong cash flow generator for Olin. During the second quarter, Olin expects to break ground on the Army's Next Generation Squad Weapon ammunition plant. This will be the world's most transformational small-caliber ammunition plant ever built. This project will be designed, built, and operated by Winchester, but funded and owned by the U.S. Army. Before I pass it to Todd to review our financials, I'll sum up by saying this. Olin's future is bright, but we must remain disciplined and dedicated to extending our leadership position. Olin has led through the trough, seeding volume to maintain value. As demand recovers, we are well positioned to profitably capture the market recovery. We have reset the cycle, and we will continue to lead with discipline to ensure that this new normal remains durable. The Olin assets and operating model provide an extraordinary foundation to build upon. I've had the opportunity over the last month to visit many of our sites and meet with many of our team members. Olin is well-run, well-funded. And with a highly engaged and committed team, we will continue to generate differential shareholder value. I'll now pass it over to Todd for a few financial highlights.

Todd Slater, CFO

Thanks, Ken. Olin was in great financial shape, headed into this manufacturing recessionary environment we've been experiencing over the last 1.5 years. Our rock-solid financial foundation is a key pillar of Olin's winning model. We remain committed to maintaining our investment-grade balance sheet and achieving additional investment-grade credit ratings. On March 31, 2024, we ended the first quarter with $150.9 million of cash and cash equivalents and approximately $1.2 billion of available liquidity. As we expected, our net debt increased by approximately $115 million from year-end, primarily due to the typical seasonal increase in working capital. Our quarter-end net debt to adjusted EBITDA ratio was 2.3x, which we expect to return to the 2x range by later this year. Our 2024 cash flow projection anticipates a couple of unusual cash usage items, totaling approximately $130 million. Our 2024 cash tax rate is forecast to be higher than normal due to deferred international tax payments of approximately $80 million that are forecast to be paid later this year. Also, we are expecting the final payments under long-term energy supply contracts of approximately $50 million. Excluding these one-time items, our 2024 levered free cash flow yield currently would equate to approximately 10%. Finally, our investment-grade balance sheet and cash flow should enable Olin to continue to deploy a substantial portion of our 2024 levered free cash flow towards share repurchases.

Operator, Operator

We are now ready to take questions.

Hassan Ahmed, Analyst

Congratulations on your new role. My question is regarding the initial guidance for 2024 that you've provided. You're indicating an EBITDA exceeding $1.3 billion. If we use the Q1 reported EBITDA as a starting point, that translates to an annualized $242 million, while you're projecting EBITDA for 2024 to be over $1.3 billion. What will help us reach that $1.3 billion, meaning the additional $340 million? I assume you are referencing the value accelerator initiative, which you previously mentioned could contribute about $100 million a quarter. Is that the main factor?

Kenneth Lane, CEO

Thank you for the congratulations. Listen, what we have seen in the first quarter is we were successful in stopping the drop, at least in the Chlor Alkali Product and Vinyls group. So that's a win for us. What we see happening now though is seasonal demand is coming back. So we are seeing good momentum. The other thing that I'll say is when you think about the full year, what we've said previously is we're going to see better performance in the Epoxy business as well as Winchester. So let's not forget that. So as we see both of those businesses continue to improve year-over-year, chlor alkali is going to continue to improve as we go into the second half of the year. We are seeing some positive signs for demand in the back half of the year with some requests for volume. So I think with the higher results that we expect from Epoxy and Winchester and the momentum that we see from chlor alkali, we should see that flat to slightly higher results for 2024. That's how we get there.

Hassan Ahmed, Analyst

Understood. Understood. And as a follow-up, you touched on the improvement sequentially within the Epoxy business. How should we think about the split between, call it, further organic improvement over there? And maybe you could touch a bit on some of these sort of trade cases that you guys as well as the industry has brought about on the antidumping side of things.

Kenneth Lane, CEO

Yes. So we are seeing the impact from the restructuring last year. The team did a great job last year rightsizing the footprint. We've got the asset footprint that we think is going to support the strategy around growing the higher-margin business today. But we are seeing an influx over the last year or so of products that are being dumped into the United States. First, I'll say, we're all for fair trade, free trade, but we're going to fight against unfair trade, and that's what you see here. So we had the first hearings in Washington, D.C. this week. It's early in that process, but we're going to continue to push that case. And we believe that there is a risk within the United States. Having only two producers of Epoxy resin is a risk for the future. We've got a very critical material here that we're producing, and it is under threat by unfair trade.

Operator, Operator

Our next question comes from Aleksey Yefremov from KeyBanc Capital.

Aleksey Yefremov, Analyst

Ken, congratulations as well. I was just hoping to get some details, any specific details really, on how are you getting to $1.3 billion EBITDA this year. And in particular, are you assuming price increases in caustic soda, chlorine, EDC, any other major commodities in the chlor vinyls business? And how do they compare to current CMA forecast? Is current CMA forecast sufficient? Or do you need to get something more than that?

Kenneth Lane, CEO

Well, thank you, Aleksey. Going back to what I had said to Hassan, let's not forget about the improvements that we're going to see in Winchester and Epoxy year-over-year. Both of those businesses are going to improve. We're seeing very strong demand with Winchester. We are making good progress with our price initiatives there as well, even to offset some of the cost headwinds that we see. But overall, the demand with Winchester is going to be up significantly versus last year. So I'll give you just one example, international military, we're looking at being twice what it was last year. So there is good momentum in these businesses. When you think about chlor alkali, I'm not sure that I would put a lot of faith or confidence in CMA personally. We look at our system. And the value that we're looking for and the demand that we want to supply at that value level, and we're seeing good demand. I don't want to say any more than that in terms of what the indices are printing, but we're seeing some differential pricing there and demand coming back at the value levels that we want.

Aleksey Yefremov, Analyst

Thank you, Ken. And on just annual cadence of quarters, I mean, clearly talking about better second quarter. Do you think that step-up between Q1 and Q2 then sustained at about the same rate in the second half? Or is it improvement more second-half weighted? Anything you can say about sort of relatively Q2 versus second half?

Kenneth Lane, CEO

Yes. So we're going to continue to see that step up. We saw a step-up from Q4 to Q1. And Q2, you're going to see a similar, maybe slightly better step-up from Q1 to Q2. And as I said earlier, we're going to start to see in the back half of the year some demand come in, just based on some of the requests that we're getting. So that's baked into that view. If you think about last year, last year, the first half was relatively strong and the second half was relatively weak. I'm definitely not saying the second half is going to look like the first half of this year. But we're going to start coming out of this. And that's our expectation, is that we'll start to see some of that recovery in the second half of this year. And the early indications are that we're seeing that demand start to come back.

Operator, Operator

Our next question comes from Patrick Cunningham from Citi.

Patrick Cunningham, Analyst

Congratulations, and welcome, Ken. Ken, I just wanted to get a sense on capital allocation priorities versus that fourth pillar, writing the next chapter of Olin's success story. Olin has done a great job listing the value of the ECU. How do you see yourself positioning Olin for sort of the next stage of sustainable growth?

Kenneth Lane, CEO

Thank you, Patrick. As I mentioned earlier, we will provide more details on this at the end of the year, and we will announce specifics soon. I believe we have a strong foundation with our commercial strategy, which I expect will remain unchanged even as we adopt a new approach. This strategy is integral to our company and how we operate our core businesses, and we will maintain that focus. However, our executive team will take a step back to explore future opportunities. We are reviewing the same data as everyone else, and we see the share price stagnating, which we find unacceptable. Our goal is to enhance shareholder returns, and we will work in the coming weeks and months to craft a strategy that can lead to significant advancements in the future. Olin has a rich history and a range of established businesses, demonstrating our capacity to manage various operations. Today, we believe we have created a sustainable model, and we will seek to build on this. Our focus will be on initiatives that align closely with our core operations. That's all for now, but please stay tuned.

Operator, Operator

And our next question comes from Jeff Zekauskas from JPMorgan.

Jeffrey Zekauskas, Analyst

Were your utilization rates in the first quarter much different than they were in the fourth quarter? My memory is maybe you're close to 50% in chlor alkali, is that right? And where do you expect them to be in the second quarter?

Kenneth Lane, CEO

Jeff, I hope you're doing well. Listen, we were a little bit above that. We were not at 50%, we were a little bit above that. And Q1 looked very similar to Q4. We were continuing in Q1 with the activation. We're going to see a slight step-up in Q2 versus the utilization rates that we saw in Q1. But again, we're going to operate our system to match the demand that we see. We're not going to be pushing volume into the market. And like I said earlier, we are seeing some volume step up in the normal seasonal uptick that you would see in the second quarter, we are starting to see that. And that's what we'll adjust our operating rates to meet that.

Jeffrey Zekauskas, Analyst

Can you make a general comment on the rate of growth you're seeing or expect to see in chlorine versus caustic soda?

Kenneth Lane, CEO

Well, I think we're seeing a moderately better seasonal improvement in chlorine, which you would normally expect. We're getting into the water treatment season, and bleach is coming back. So at this point in time, it's a little bit stronger in chlorine. But it's modest. It's not anything that's going to change how we're operating our model today.

Operator, Operator

And our next question comes from Steve Byrne from BOA.

Steve Byrne, Analyst

Yes. Maybe a downstream strategy question for you, Ken. Another year from now, the contract with Dow will come to a close. Are you more interested in shifting that capacity to other chlorine customers? What is your interest in moving downstream into vinyls?

Kenneth Lane, CEO

Steve, listen, it's early for me to give you any comments. Of course, we've got ideas and things that we're going to look at, but like I said earlier, we're going to take our time to look at where we think we can deliver the highest value. And that's not something that I'm prepared to give you an answer on specifically today. I know that we've talked about that in the past, and so it will certainly be one of the options that we looked at or that we will look at, but it's not anything right now that I'm willing to give you a view on.

Steve Byrne, Analyst

And on the propellant availability issue, was this driven by an outage? And what are your options to offset that shortage problem?

Kenneth Lane, CEO

Yes, this situation is primarily driven by a significant increase in demand. As we mentioned earlier, commercial demand remains strong, but military demand has risen considerably. The supply chain for that propellant has very few sources, and the demand extends beyond just small ammunition, which is our focus, to include artillery and other components vital to the defense industry. We are leveraging our scale to secure additional volumes, but it's still early in the process. We are actively working on this issue, but I must acknowledge that there could be potential risks in the upcoming months due to material availability.

Operator, Operator

Our next question comes from David Begleiter from Deutsche Bank.

David Begleiter, Analyst

Congratulations on your new role, Ken. Regarding our customers, what feedback have you received from your conversations with them? Have there been any confirmations from their side? Also, how do you plan to enhance that moving forward?

Kenneth Lane, CEO

Well, thank you, Dave. Yes, listen, I have talked to some customers, and I know that I'm not new to the industry. I know that there has been some things in the past that have created some tension in this industry over the last couple of years. But I'll be honest with you, there are things that needed to happen in order to adjust the value of the products that we have. And the reality is that going forward, we're going to be focusing on being able to continue to run our model and have good relationships with our customers. Even if we can't agree, we're going to continue to find ways to work together. So I'm absolutely committed to that and so is the executive team.

David Begleiter, Analyst

Very good. And just on Winchester, I know this is a tough question to answer, but is Olin the best owner of the Winchester business?

Kenneth Lane, CEO

Well, Dave, I'll tell you, I am a very big fan of the Winchester business. I think that this is a brand that is undervalued today as part of our company. That's my view. So we're going to be taking a look at that as we go forward to find a way to get higher value for having that business as part of Olin. And that will be a portfolio is always something that you're going to look at, going forward. But we are very happy with the Winchester business and believe that it's something that we can find a path to get a higher value for that, and we're committed to doing that.

Operator, Operator

Our next question comes from Duffy Fischer from Goldman Sachs.

Patrick Fischer, Analyst

I was wondering if you could just give a little bit more clarity on the Q2 walk. So I think, Ken, you made a comment that you think the delta will be roughly similar to maybe a little bit better than the move from Q4 to Q1, that was $32 million. So just to put a number, like $285 million, is that about the right way to think about the over/under on where we're shooting for Q2?

Kenneth Lane, CEO

Yes. Duffy, the walk indicates that the price momentum we observed in Q1 will carry into Q2 for our upstream business. We expect to see a seasonal increase in demand there too. For Epoxy, we anticipate improvements in our product mix and a rise in volume, alongside positive effects from our restructuring efforts in Q2. This momentum is expected to continue. As for Winchester, we have previously noted that we expect it to remain relatively flat. Overall, we anticipate a combination of pricing and a better mix in Q2 compared to Q1. To quantify, it should be similar to or slightly better than the step-up from Q4 to Q1, which was around $32 million. That summarizes our expectations.

Patrick Fischer, Analyst

Okay. And then just to clarify, if your $1.3 billion ends up being right this year, you guys do not need to pay down any more structural debt to keep your investment-grade rating. And so therefore, all that excess cash goes to share buybacks. Did I hear that right?

Kenneth Lane, CEO

Well, that's going to continue to be our priority, yes. I don't know, Todd, if you want to add anything to that?

Todd Slater, CFO

Yes. We have an investment-grade balance sheet today. We have one of the three rating agencies that rate us investment grade, where our results are and expected to be for the year. Our debt level, as where we ended last year, is consistent with our expectation for the end of this year. So we don't need to have any structural debt repayment.

Operator, Operator

Our next question comes from Josh Spector from UBS.

Joshua Spector, Analyst

Congratulations, Ken. I wanted to revisit the guidance. If we're projecting under $300 million for the second quarter, it seems you'll need to achieve over $400 million in a later quarter this year to meet that range. I understand from your earlier response that you anticipate pricing to increase throughout the year, alongside rising demand. Considering the $100 million increase from the second quarter to the fourth quarter, how would you balance that between your assumptions on pricing and volumes?

Kenneth Lane, CEO

Well, first, you're correct with your math, and I'm not giving you a specific number around Q2. So I want to be careful with that. I would put it more of a range that would say, again, it could be slightly better than the step-up from Q4. And a lot of that is going to depend on the volume recovery that we see coming. The mix between volume and price is probably a little bit more volume coming back in chlor alkali, but we've got the momentum from pricing that we saw at the end of Q1. So that combined with continued pricing step-ups in chlor alkali is going to be the biggest driver there. The bigger driver for Epoxy is going to be mix. It's going to be the improved margin with the portfolio that we're going to see in Q2.

Joshua Spector, Analyst

If I could just ask, I mean, there's been some comments on the news about the St. Gabriel ramp-up and maybe some choppiness there. Does that have any headwind in 2Q that you call out or in 1Q at all?

Kenneth Lane, CEO

No. We've got a system that's operating relatively low utilization rates. And so we're able to flex our system to be able to make up for any shortfalls that at whatever site may have an upset, we can adjust for that in our system. So I don't expect there to be anything to impact our Q2 results there.

Operator, Operator

Our next question comes from Arun Viswanathan from RBC Capital Markets.

Arun Viswanathan, Analyst

I wanted to ask a couple of questions. First, congratulations Ken, it's good to hear from you again. Regarding the parlay index, it seems to have decreased this quarter. Was this primarily the result of your own marketing efforts, or was it possibly an inflection point in volumes? How do you characterize the activity around parlays?

Kenneth Lane, CEO

Thank you, Arun. This aligns with what we've previously discussed, indicating that the market for caustic is tighter than many realize. Our inventory levels are quite low, and we believe the same is true for the industry overall. Therefore, we're observing some adjustments in parlay volumes. It's important to note that these volumes may fluctuate due to broader factors beyond just our portfolio adjustments. However, we do perceive the caustic market as being tighter, which is reflected in the parlay volume.

Arun Viswanathan, Analyst

Great. Given the expectation that you will be exiting the second half with an EBITDA of over $1.3 billion, will that be in the range of $700 million to $800 million? Is that a reasonable starting point for the first half of next year? Would that indicate that volumes are nearing a more normal level? My concern is whether achieving that would require significant improvement in Epoxy, or can it be reached primarily through enhancements in chlor alkali?

Kenneth Lane, CEO

Yes, thanks, Arun. I would say that starting to talk about what may happen in the distant future given the current uncertainty in the world is not wise. We have many developments expected before the fourth quarter, and we need to observe how things unfold and how the global economy evolves. However, in the short term, we are noticing improvement in demand. Beyond that, it's really too early to predict what the first half of next year might look like.

Arun Viswanathan, Analyst

Okay. And then one quick one, if I could. Just on the shareholder returns, what's kind of a comfortable floor of buybacks that we should assume for this year, maybe in the $500 million to $600 million range or actually frame that?

Kenneth Lane, CEO

We have previously mentioned that we will consistently buy back our shares. I won't provide a specific prediction on the amount we will purchase at this time. Todd, do you have anything to add?

Todd Slater, CFO

You saw the level of purchases we did in the first quarter, roughly $105 million. And given our levered free cash flow forecast, we're a steady buyer, you can make your own assumptions. But that's really our primary use of levered free cash flow other than the regular dividend that we pay. That's where you would expect that to be used, Arun.

Operator, Operator

Our next question comes from Mike Sison from Wells Fargo.

Michael Sison, Analyst

Nice start to the year, Ken, welcome onboard. Just curious, and I know it might be a little bit early to comment, but if you think about what Olin's mid-cycle EBITDA potential and maybe peak EBITDA potential, do you have any thoughts of maybe where or how you can sort of get there and what levels those EBITDA or earnings could get to?

Kenneth Lane, CEO

Thank you, Mike. I will say that Olin has been very successful in resetting the cycle, which is great to see. Currently, the trough is above the previous peak, and we believe that is sustainable. I don't have a specific view to share regarding a mid-cycle level for Olin at this time. Perhaps we will address that during our Investor Day later this year, but I don’t have anything further to add on this matter right now.

Michael Sison, Analyst

Understood. Yes, I'm looking forward to that Analyst Day in Cleveland, just kidding. But as a follow-up regarding the setup for the second quarter and the second half of the year, it seems that the increase in the second quarter compared to the first quarter is better than the increase from the first to the fourth quarter, yet it appears you won't exceed $300 million. I realize you won't provide specific guidance, but my question is what operating rate you need to reach in the second half to achieve a significantly higher EBITDA level to reach approximately $1.3 billion for the full year.

Kenneth Lane, CEO

Well, again, I know we want to focus on operating rates, but there's more than just the operating rates for chlor alkali that we need to think about. There will be some increase in the operating rate, obviously, as we see the demand come back. But don't forget about the important role that our Winchester business is going to play. We're going to see that improve through the year. We're going to see Epoxy continue to improve through the year. So it's more than just focusing on that operating rate. We will adjust the operating rate to match the demand that we see. And obviously, if the demand is coming back with our inventories being low, operating rates will step up. But that's only one part of that equation to get to the higher level in the back half of the year.

Operator, Operator

Our next question comes from Matthew Blair from TPH.

Matthew Blair, Analyst

Congrats, Ken. There's been a lot of commentary on just the positive demand trends that you're seeing. Could you provide any more color on which end markets are relatively stronger and which end markets are relatively weaker, just thinking about areas like pulp and paper, alumina and then, I guess, more on the construction side?

Kenneth Lane, CEO

Yes. Well, like we've said in the prepared remarks, we are seeing improving demand in agriculture, titanium dioxide, polyurethanes, which go into a lot of different end markets. I would say, in general, the area that we're not seeing the improvement yet is around construction. That's a very big driver for our businesses. So things like electronics and even wind energy, we're going to start to see some improvement there. But a big market for us is construction, and we're not seeing improvement in that market yet. And I'll just comment, related to that is China and what we see happening in China. There have been some very small improvements that we see in China, but we're not seeing anything structural improved there yet. And for us to really see a global improvement in some of our commodity flows, we need to see China start to grow more. So that's still something we're watching very closely, is what's happening in that market.

Matthew Blair, Analyst

Okay. Are the weak numbers in construction contributing to the lower spot EDC prices in Q2 compared to Q1, or are there other factors involved?

Kenneth Lane, CEO

I'm sorry, you said spot what prices?

Matthew Blair, Analyst

Spot EDC.

Kenneth Lane, CEO

EDC, okay. I'm sorry, I didn't follow what you were saying. Yes. So I think what we saw in the first quarter, there was some volume getting pushed into the market just because of operating offsets. We actually saw some improvement in our portfolio and pricing there. But I think that is going to normalize as the assets that are producing get back to a normal level of operations and not trying to adjust for an upswing that's not necessarily as strong as what was thought previously.

Operator, Operator

Our next question comes from Kevin McCarthy from Vertical Research Partners.

Kevin McCarthy, Analyst

Thank you. And Ken, welcome. Good to hear your voice as well. My question relates to energy. Obviously, natural gas prices have been very favorable lately south of $2 per MMBtu. Can you talk about Olin's hedge positioning? To what degree have you locked in these low prices? Or might the exposure be more freely floating as we think about how ECU values or margins may trend, moving forward?

Kenneth Lane, CEO

Thank you, Kevin. We've discussed this previously. Our hedging strategy involves a high percentage of hedging in the current quarter, which will gradually decrease over the next three quarters. In the first quarter, we were highly hedged regarding our portfolio percentage, and we are maintaining that in the second quarter. Therefore, we may not see as much benefit from the lower energy prices in the market as you might expect. We will experience some of it, but our hedging strategy aims to protect us from the peaks and shocks that can occur. Todd, would you like to add anything?

Todd Slater, CFO

Yes, Kevin, as you saw from Q4 to Q1, chlor alkali we had favorable cost, and you should expect that to continue into Q2. Part of that includes power. So even though we are a hedger, the lower power prices and natural gas costs will flow through our system, albeit not necessarily on a spot basis, but will flow into our system favorable from a cost perspective.

Kevin McCarthy, Analyst

Okay. That's very helpful. And then, Todd, I wanted to clarify some of the commentary around levered free cash flow. I think you were at $545 million last quarter. Sounds like, if I did my math correctly, maybe you're tracking a little bit less than that, maybe closer to $500, and I heard you call out tax timing and long-term energy agreement. I guess my questions would be, what exactly changed over the last 2 or 3 months? And has there been any change in what I would call the normal drivers of free cash flow, such as working capital and CapEx and so forth?

Todd Slater, CFO

Kevin, from a levered free cash flow perspective, I think really, our assumptions were virtually unchanged. We did have a slight change in the assumption page, where we said we thought the total amount that we are going to spend on the Gulf Coast power contract payments to be $50 million. Now that the person is doing that, and we have to pay, too. We have a relatively final number now for 2024. So we think that's going to be $50 million. We had estimated that $25 million to $50 million before. So we'll come in at the high end. Other than that, I don't think there was any substantive changes to our outlook on levered free cash flow.

Operator, Operator

Our next question comes from Vincent Andrews from Morgan Stanley.

Vincent Andrews, Analyst

And congrats to you, Ken, very well deserved. If I could just ask you two things. One, could you give a little bit more color on the orders that you're already getting for the back half of the year? Are they coming from any specific end markets? And what's driving that so far in advance? And then secondly, if I could ask you just about St. Gabriel and just sort of operating issues. In general, is there any tension between wanting to be a reliable operator in having plants down for extended periods of time in terms of the risks of them coming back online easily and without any incremental maintenance costs?

Kenneth Lane, CEO

Vincent, thank you. So listen, the orders that we're seeing in the second half are actually pretty broad in terms of the end markets that we see. We're even seeing some customers who have had assets now that are looking to restart. So it's not just one place that we're seeing that. It's pretty broad, which gives us some pretty good confidence in terms of that demand uptick that we're talking about. I get your question around the reliability topics in St. Gabriel. We will do what we need to do to operate safely first. And we want to have the assets available when we need them. And that means that when they need to run, they will run. And that's what you've seen happen with St. Gabriel. We took it down. We have restarted that asset, and we're going to continue to focus on operating safely and doing what we have to do to do that, but make sure that when we need that asset to operate, it will operate. And one of the things that I've seen just traveling around to the sites, and I've visited many of our chlor alkali sites in the U.S., is the strong commitment to that. I was really impressed with the condition of the assets, visiting the site. So very happy with that, and I'll continue to support our manufacturing team to be ready and be able to operate the assets at the demand level we need and the value that we need.

Operator, Operator

Our next question comes from Frank Mitsch from Fermium Research.

Frank Mitsch, Analyst

Yes, let me echo my congrats, Ken, nice to reconnect. One of the interesting things is chlorine prices in the first quarter, according to the consultants, ticked down a little bit, but it was up in your system. So I understand that some of that may be due to contract resets. Can you talk about the interplay between contract resets and maybe other pricing for chlorine that led chlorine prices to be up in the Olin system?

Kenneth Lane, CEO

Yes. Thanks, Frank. I appreciate the question, good to reconnect. Listen, I will tell you that I don't put a lot of faith in those indices. I just don't. I look at what we have in our system. And you know how we operate, we operate to meet the demand at the value that we want, and that's basically the model that we have. We're not going to give away our products. We're going to make sure that we get the right value for the products that we produce, and we'll continue to focus on matching the demand at the weak side of the ECU. And that's the result, is what you see in the numbers for us. We're going to be the ones that are focusing on value, and that's not going to change.

Frank Mitsch, Analyst

Terrific. The estimates you've heard from CMA and ISIS are promising. Additionally, regarding chlorine end use, you mentioned that B and C aren’t seeing significant recovery. Do you foresee any recovery in the construction markets in the second half of the year as part of the $1.3 billion forecast for 2024? The reason I ask is that, with interest rates not expected to be lowered soon, there are concerns about the construction sector. Can you discuss what might be reflected in your full-year guidance from these markets?

Kenneth Lane, CEO

We are not expecting any significant recovery in the construction sector. The current housing starts suggest there isn't enough momentum in housing to justify any optimism. Instead, we're seeing a broad-based demand driven by consumers in various areas which show signs of potential, but construction isn't one of them at this time.

Operator, Operator

Our next question comes from Roger Spitz from Bank of America.

Roger Spitz, Analyst

When you said earlier, the free cash flow yield of 10%, are you saying that operating cash flow less CapEx and before dividends would be circa $130 million for 2024? Do I understand that correctly?

Kenneth Lane, CEO

Todd, do you want to take that?

Todd Slater, CFO

Yes, Roger, I mentioned that our levered free cash flow yield is consistent with the metric we have been using. We anticipate it will likely be in the 10% range for the year, possibly a bit higher given the current price.

Operator, Operator

And ladies and gentlemen, in showing no further questions, this will conclude our question-and-answer session. I'd like to turn the conference call back over to Ken Lane for closing comments.

Kenneth Lane, CEO

Well, thank you very much, Jamie, and thank you all for participating in the call today. I wish you all a safe and relaxing weekend.

Operator, Operator

Ladies and gentlemen, thank you for attending today's presentation. You may now disconnect your lines.