Earnings Call Transcript
OLIN Corp (OLN)
Earnings Call Transcript - OLN Q4 2022
Operator, Operator
Good morning, and welcome to the Olin Corporation's Fourth Quarter 2022 Earnings Conference Call. Please note this 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, Anthony. Good morning, everyone, and thank you for joining us again 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 fourth 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 CEO; Damian Gumpel, President, Epoxy; Patrick Schumacher, President, Chlor Alkali; Brett Flaugher, President, Winchester; and Todd Slater, Olin CFO. The leadership team will make some brief remarks, after which we'll be happy to take your questions. I'll now turn the call over to Scott Sutton.
Scott Sutton, CEO
Yes. Thanks, Steve, and good morning to everyone. In 2022, Olin generated $12 per share of levered free cash flow, repurchased more than 25 million shares and reduced our net debt by $200 million. It was a massive team effort after generating $9 per share of levered free cash flow in 2021. As we head into 2023, our markets are not healthy, yet our focus on levered free cash flow remains the same and we expect to generate approximately $7 per share of levered free cash flow in this recession year. From an EBITDA perspective, we worked in the $2.4 billion to the $2.5 billion range the last two years and we expect to generate at least two-thirds of that average in the trough that is 2023. For Olin, the key features of early 2023 include continuing to idle our complete global epoxy resin business due to suspended demand in the largest consuming regions of China and Europe, rectifying a transient fat supply channel in commercial ammunition via lower Olin participation rate, kicking off the operation of the Bluewater alliance with Mitsui to manage the world's liquidity in chlor alkali, and recognizing another solid pricing lift in our merchant chlorine business. While some of these features of the first quarter of 2023 are already impactful in a slightly negative way, it is still possible that we may have to take more drastic action in a subsequent quarter to recoil further and preserve product values for the rebound toward the latter part of the year. In 2023, expect us to hold our current net debt position, keep buying shares throughout the year, gain an investment-grade rating, complete our asset footprint adjustment decisions, and prepare for a quality growth story in 2024. We've also updated our 2022 ESG scorecard progress on Page 10 of the presentation. This is a growing theme for Olin, and we look forward to showing the results from our focus in this area. Now Damian, Patrick, and Brett will each make a few brief comments on both the situation and our initiatives across all three businesses and then Todd will follow with additional commentary on our 2022 accomplishments and 2023 outlook.
Damian Gumpel, President, Epoxy
Thank you, Scott, and good morning. On Slide 4, Epoxy Q4 results are partly a reflection of seasonal demand, but principally our disciplined approach to weathering the most challenging landscape in 14 years, which led us to deeply pull back resin production that would have otherwise harmed the landscape. While anticipating improvement in the back half of '23, we focus today on productivity, optimizing our asset base, enhancing our sustainability profile, and positioning for value-based growth. On this last point, we supercharged the business during Q4 of 2022, putting our differentiated systems product portfolio under seasoned leadership in new product commercialization. I look forward to sharing on future calls the role Olin Epoxy plays in addressing global energy, mobility, and infrastructure challenges in a sustainable way, and how that translates into shareholder value growth. I'll now turn it over to Patrick Schumacher for chlor alkali.
Patrick Schumacher, President, Chlor Alkali
Thanks, Damian. Even though 2022 was an all-time record year, the second half of 2022 brought significant challenges which we are likely to continue into the first half of 2023. Pricing in the vinyls chain remains weak and continues to necessitate lower Olin operating rates. On the positive side, our merchant chlorine pricing continues to improve. Chlorine pricing is expected to step up through 2023 as legacy contracts end. Bleach has been another success story and we expect both products to show substantial earnings growth again in 2023. Our Blue Water Alliance is now one of the world's largest traders of EDC and caustic and will be an important part of the Olin value creation for years to come. I'll now turn it over to Brett for an update on Winchester.
Brett Flaugher, President, Winchester
Thanks, Patrick. The Winchester team continued to maximize value throughout 2022. However, during the second half of the year, we started to experience a transition in our commercial ammunition business from refilling depleted inventories to filling inventories at the rate of our customer sales. In some cases, especially small caliber rifle, inventories became high. So we decided to manufacture and sell less to preserve value for both Olin and our customers. With nearly 15 million new participants entering the recreational shooting sports over the past few years, we believe demand for our leading Winchester ammunition products will remain stronger than historical levels. We continue to see opportunities within our military segment with demand increases from current and new international military customers as well as increased government funding to modernize the Army Lake City facility. As we manage through this commercial ammunition transition, our focus will be on growing and preserving value for the number one brand in the ammunition industry. I will turn it over to you, Todd.
Todd Slater, CFO
Thanks, Brett. Throughout the last two years, Olin has generated $3.1 billion of levered free cash flow. Our capital allocation was initially focused on the balance sheet, whereby we reduced outstanding debt by $1.3 billion over the two-year period. With our investment-grade balance sheet set, we primarily deployed our remaining levered free cash flow towards share repurchases totaling $1.6 billion over the last two years. In fact, during 2022, we reduced our outstanding shares by approximately 16% all from cash flow. In 2023, despite the challenging global economic conditions, we're forecasting to generate recessionary trough-level levered free cash flow of approximately $1 billion, which equates to about a 13% free cash flow yield. Our 2023 cash flow includes a couple of unusual items. Our cash tax rate is expected to be higher than normal due to deferred international tax payments of approximately $80 million that are forecast to be paid this year. Also, we are expecting a peak payment level under our long-term energy supply contracts of approximately $75 million. Finally, our investment-grade balance sheet and cash flow should enable Olin to continue to deploy a substantial portion of our 2023 levered free cash flow towards share repurchases. That concludes our prepared remarks. And we are now ready to take questions.
Operator, Operator
Our first question will come from Hassan Ahmed with Alembic Global.
Hassan Ahmed, Analyst
Got a question around the 2023 guidance you guys gave, obviously sort of in line with the trough range that you guys have been talking about, the $1.5 billion to $2 billion. So look, I mean I take a look at the Q4 adjusted EBITDA, $442 million. I annualized that, and I get to $1.77 billion, which is squarely sort of the midpoint of the trough and 2023 guidance that you guys have given. And you guys obviously achieved this sort of the Q4 EBITDA in the face of extreme adversity, right? I mean a massive destock, most of your end markets being as weak as they were, the epoxy business doing what it was doing. And on top of that, obviously, Q4 being a seasonally weak quarter. I guess the only tailwind you guys have had in the quarter and it seems on a go-forward basis is chlor alkali pricing, right? So as I sort of sit there and talk to investors, some of the cynics may turn around and say, hey, look, one of the things that has been contributing to EBITDA is chlor alkali pricing and it just can't go on rising forever. So it may crack. Again, I'm not in that camp, but what could you tell us to sort of give us a little more confidence that even with the macro looking the way it's looking, you're not really going to see any cracks in chlor alkali pricing?
Scott Sutton, CEO
Yes. Thanks, Hassan. I mean that's a good summary. I would also urge you to think about what's the cause and effect here, right? I mean Olin is absolutely the leader here and is setting the value equation. It's no doubt that pricing in chlor alkali, especially in some of the derivatives can go up from here and they can go down from here as well. But we have some very solid footing there. And I'll ask Patrick to add a little color on Olin's footing.
Patrick Schumacher, President, Chlor Alkali
Sure, Hassan. Thanks for the question. It's certainly possible, as Scott mentioned, that we may see lower prices, such as a decrease in caustic pricing from record levels. However, we anticipate running into weaker market conditions. We have accounted for an increase in chlorine prices this year compared to last year of at least $100 million, and vinyl prices have been quite weak for at least half of the year. There has been a recent increase in those prices, so we may see some upward movement. Therefore, we expect a combination of higher and lower prices in the coming year.
Hassan Ahmed, Analyst
Fair enough. Fair enough. And as a follow-up, just sort of trying to get a lay of the land with regards to inventory. I mean you guys, obviously, on the chlorovinyl side pointed towards certain end markets being sort of particularly weak, be it TiO2, be it the urethane side, be it the vinyl side. I mean as I'm sort of sitting there and looking at, call it, certain TiO2 producers, they're talking about volume declines as high as 30%, right? So I'm just trying to get a sense of if you could sort of give us a sense of where inventories are for you guys, for the industry? And if at all, there is a restock, how sort of impressive could that snapback in demand?
Patrick Schumacher, President, Chlor Alkali
Certainly. The chlorine business has experienced a year-over-year decline in volumes, but netbacks have significantly improved. The chlorine segment of the ECU has been the weaker aspect, which we've been discussing over the past three quarters. We are currently addressing the challenges in the chlorine segment and optimizing rates, which is helping to improve netbacks and compensating for the reduced volumes.
Operator, Operator
Our next question will come from Mike Sison with Wells Fargo.
Mike Sison, Analyst
I'm curious about your outlook for chlorine, especially in the second half of the year. A major paint company anticipates a weaker housing market in the second half. What are your thoughts on how this might impact that segment of the ECU?
Scott Sutton, CEO
Yes. Mike, it's Scott. Yes. I mean we see the same thing. I mean, the trend in U.S. housing isn't great. And it's not impossible that trends like that change which side of the ECU has the better fundamental conditions. And again, we'll set our market participation according to that bad weak side. But when you go all the way to merchant chlorine, just as Patrick said, Mike, I mean that's something that we've had contract resets. Patrick already mentioned $100 million a year. And looking beyond 2023, we would expect additional resets as well. So chlorine has a very nice runway.
Mike Sison, Analyst
Got it. And then I guess when you think about your operating rates for the rest of the year, do they sort of stay at these levels for most of the year? Or is there an assumption that they would improve a little bit as the year unfolds?
Scott Sutton, CEO
Well, look, I would say overall, I mean, we're certainly running lower operating rates. I mean, the highlights of those lows really are that if you went all the way down into our epoxy resin, you'd find that we're running below 50% capacity. And that situation is certainly going to continue because we're just not going to sell too much volume into an undervalued marketplace. In the fourth quarter, we had to adjust Winchester's rates quite a bit as well because the supply channel got a bit fat and that's trending the right way. And that's why we've said in the first quarter, that business will improve over the fourth quarter.
Operator, Operator
Our next question will come from Arun Viswanathan with RBC.
Arun Viswanathan, Analyst
So first off, regarding operating rates, it indicates that you can operate at 50% for one year. We've been at these low rates for a while now. How long does that year last? How much time do we have left in that? I also have a couple of questions about Blue Water and hydrogen.
Scott Sutton, CEO
Yes. Sure. Yes, I mean, that 50% rate was across effectively the whole company for a whole year. If we ran at the pricing levels established in the middle of last year, that would still deliver our recession case. So against that standard, there's still quite a bit of room left, Arun.
Arun Viswanathan, Analyst
Is there any way we can quantify the financial impact and benefit of Blue Water? I understand that you mentioned controlling a greater share of the industry supply or being in a position to manage it. How does that translate to EBITDA benefit, and when can we expect to see that?
Scott Sutton, CEO
Yes. Sure. I mean keep in mind, that's a consolidated joint venture for Olin. So Todd will make a couple of comments on the direct impact that you'll see.
Todd Slater, CFO
Yes. Thanks, Arun. It will be consolidated in our results will come up into the Chlor Alkali Products and Vinyls segment. In the first year, you should expect overall revenue to increase $500 million to $700 million. And as it is the first year, you should expect from that joint venture minimal EBITDA impact.
Arun Viswanathan, Analyst
Got it. And then similarly for hydrogen with the third unit starting up, is that in commercial operation? And similarly, when do you expect to get any EBITDA benefit from your sustainable activities there? And how should we think about how that contribution flows into Olin?
Scott Sutton, CEO
Yes. I mean, this is Scott. I mean, we only have one hydrogen arrangement into the fuel cell application operating today. The second one is our venture at San Gabriel, and that one is under design and under construction, and it will take us to the end of this year to get that started up. And the point we wanted to make that I think you saw in the slides is that we're starting discussions around a third venture as we try to get our hydrogen out into these new sectors. Even the first two are only about 5% of our hydrogen.
Operator, Operator
Our next question will come from Vincent Anderson with Stifel.
Vincent Anderson, Analyst
I just wanted to clarify your comments on Epoxy, just I had it clear. You said a global idling but naming just Europe and Asia markets is the reason. And I ask only because U.S. resin prices are still holding up fairly well. So is this really all epoxy resin assets are going down in the first quarter?
Scott Sutton, CEO
Well, I would say we've been running those at a lower level, but I'll let Damian give a little more color on where we are right now.
Damian Gumpel, President, Epoxy
Sure. Thanks, Scott. Vince, regarding Epoxy, we have noted that this is a globally challenging situation, the worst we've encountered in 14 years since the financial crisis. The majority of epoxy consumption occurs in China and Europe, which have been significantly affected. As a result, we have been adjusting our production and market participation for over a year now to preserve value, which has led us to successfully operate at lower rates across our portfolio. We will continue to do this for as long as necessary, and honestly, we can still reduce further. Our aim is to take this opportunity to refine our global epoxy portfolio and concentrate on the assets that are most valued by our customers. We have already made considerable progress, but there is still much more to accomplish in this challenging environment.
Vincent Anderson, Analyst
Okay. That's helpful. And then just kind of returning to Blue Water. So I always had kind of penciled Olin in as already the largest participant in the globally traded merchant markets for caustic and EDC. So is there any more detail you'd be willing to give around what that looks like now with Mitsui at the table?
Scott Sutton, CEO
Well, I would just say that we've expanded our capability there. Remember, the way that joint venture was formed was a merger of the two international businesses in caustic and EDC. So we've just enhanced our capability there further.
Vincent Anderson, Analyst
Okay. All right. That's fine. I can work with that. And then just one quick one. Todd, you said $500 million to $700 million of revenue, minimal EBITDA impact in your one specifically. This isn't some kind of big fixed cost asset that we're ramping up into. So what turns out to EBITDA positive?
Todd Slater, CFO
You should expect that this business as it continues to grow and it's more molecules under its umbrella, that revenue will continue to grow, and then we would expect that EBITDA performance would improve.
Operator, Operator
Our next question will come from Kevin McCarthy with Vertical Research Partners.
Kevin McCarthy, Analyst
Scott, natural gas prices have plummeted perhaps 65% or 70% over the last 6 months in the U.S. Would you talk about the impact that you would expect that to have on your chlor alkali and vinyls business or the overall company for that matter, taking into account any hedge positions that you may have?
Scott Sutton, CEO
Yes, sure. I mean, I would just say, look, I mean, the impact is a bit muted, right? We do hedge and we always have hedged. So we moderate that. We don't necessarily see the peaks. And because of that, we don't necessarily see the valleys either. So for us, it's really generally moderated.
Kevin McCarthy, Analyst
Okay. And then for the Winchester business, what sort of volume trends would you anticipate in 2023 for commercial versus military?
Scott Sutton, CEO
Yes. Well, I mean, Brett is going to add a good bit of color because we have actions there, particularly in the military business. We're going to start out slow in commercial as adjustments are taking place and military is off to a good start. Brett?
Brett Flaugher, President, Winchester
Scott is right that we will begin slowly from a commercial perspective. It is likely to show some improvement in the first quarter compared to the fourth quarter, but it will still be sluggish. On the military side, one advantage we have is that we gain clear visibility on demand from our U.S. military customer, which has been consistent with our past experiences. A significant development is that we are beginning to receive inquiries from some international military customers about needs they haven't expressed in a long time.
Operator, Operator
Our next question will come from Steve Byrne with Bank of America.
Steve Byrne, Analyst
Yes. Just wanted to drill into the hydrogen project at San Gabriel. I assume that you'll have to consume more natural gas just because that hydrogen presumably was previously being used for power production. And just curious whether you can alter the operations of your ECU units to increase hydrogen production, i.e., from changing the brine concentration running into the units.
Scott Sutton, CEO
Yes. Not all of that hydrogen is necessarily used for our energy production. We have several large contracts with gas companies and are working through those. We also vented a significant amount, so there is no use. In San Gabriel, we are primarily taking hydrogen into a new application, and there are no significant offsets in our system. This is CO2 offsets without a corresponding penalty, which is generally how these initial projects are structured.
Steve Byrne, Analyst
And maybe another question on Winchester, is it fair to assume that your EBITDA margins between military and commercial are significantly different, and you may have a volume shift more towards military, just given what's going on in the world, but it's not an EBITDA benefit. Is that fair?
Scott Sutton, CEO
Well, I think when you look at the overall position of the Winchester business, certainly, we gained something on the military side. There are some challenges on the commercial side right now. You may have noticed that we did improve overall pricing in that business in the fourth quarter relative to the third quarter. In fact, we expect to do the same thing in the first quarter.
Operator, Operator
Please give us a moment as we connect to the main speaker line.
Scott Sutton, CEO
Okay. Sorry, apologies to everybody. I mean, for some reason, our line keeps dropping. But I'll just repeat the answer to that last Winchester question on pricing. And we were able to lift overall pricing in the fourth quarter versus the third quarter, and we expect to do the same thing in the first quarter. Import ammunition pricing has always been low. But at the moment, we faced the additional challenge that the major domestic brands are actually pricing lower than the imports. But still, Winchester is the leader there, and our trend will continue.
Operator, Operator
Our next question will come from Josh Spector with UBS.
Josh Spector, Analyst
So just a follow-up on the chlorine pricing side of the equation. So when you talk about more pricing through this year, I mean how much of that has already been negotiated and it's going to flow through versus you need to renegotiate those contracts? And just as we look at your mix of portfolio today, how much of it still has room for renegotiation versus one to two years ago?
Scott Sutton, CEO
Yes. I mean, Patrick will give the right answer here. You gave the summary, right? We've implemented a $100 million run rate more in 2023 versus 2022. What's the rest of it?
Patrick Schumacher, President, Chlor Alkali
Yes. So that $100 million is locked in. So that's not a hope that's locked in already negotiated lift, and then there's going to be more to come this year. As Scott said, it is opening that will flow through in '24. Order of magnitude, probably I'm not going to peg it, but it's another substantial lift in '24 for new stuff to negotiate in '23.
Josh Spector, Analyst
And just on cash deployment, I mean, given the step-up in interest in some of your variable rates, has any of the calculations changed on buybacks versus debt paydown?
Todd Slater, CFO
Josh, thanks for the question. We expect our interest expense in 2023 to be between $150 million and $160 million. Approximately 30% of our debt is at a variable rate. We will continue to prioritize share repurchase for our free cash flow.
Operator, Operator
Our next question will come from Frank Mitsch with Fermium Research.
Frank Mitsch, Analyst
I wanted to follow-up on Winchester. Obviously, Russia came out of the market as a supplier mid-year. So I would have thought that the supply side wouldn't have been an issue, but you've obviously been making adjustments there. What has been the impact of Russia coming out of the market that you've seen so far? And obviously, the expectation is they'll be out of the market for a while as well. So wouldn't that bode well down the line?
Brett Flaugher, President, Winchester
Frank, this is Brett. You're correct. It should. What we're seeing right now is, I think, it's been since May of last year, that we saw any imports come into the country from Russia. However, we continue to see some inventory that's out in the marketplace across a couple of different calibers of ammunition. So we do anticipate that to sell through. It's taken a little bit longer than we expected, but we should benefit when that gets sold through.
Frank Mitsch, Analyst
Got it. Okay. I have a follow-up on chlor alkali. It was impressive that you maintained relatively flat profitability in the fourth quarter compared to the third quarter. There seems to be a disconnect in profitability between the upstream performing well and the downstream not doing as well. Could you walk us through the differences in profitability from the third quarter to the fourth quarter, focusing on the upstream and downstream? I would appreciate a breakdown of the Chlor Alkali segment in that context.
Scott Sutton, CEO
Yes. I mean this is Scott and Patrick may add to it. I mean we assume when you say upstream, you mean close to the ECU and downstream, you mean some of the derivative chains like coordinated organics and vinyls. Is that right?
Frank Mitsch, Analyst
Correct, correct.
Patrick Schumacher, President, Chlor Alkali
Okay. When you asked the question, I was thinking you were referring to Epoxy in the downstream context because we don't really use that language within our chlor alkali business. Could you please rephrase your question? Now that I understand the direction you're going.
Frank Mitsch, Analyst
I assume that there is an internal analysis of the profitability of caustic soda, EDC, coordinated organic, merchant chlorine, and so on. I understand you might be adjusting your operations, but can you discuss the stability and strength of these products? My impression is that ECU, chlorine, and caustic contribute significantly to profitability in the downstream, but I’m curious about your insights on this.
Patrick Schumacher, President, Chlor Alkali
Sure. Yes, as we've been talking about for, I think, three quarters now, that downstream chlorine chain, specifically through vinyls, EDC, and VCM has been weak. That weaker downstream in that vinyl chain has overall caused us to set our run rates or operating rates to the chlorine side of the ECU because of weakness downstream in those PVC chains. And we continue to do that today, and we're going to do that until things start to improve. Upstream within chlorine, we've talked about elemental chlorine, and that pricing goes one way and those prices remain very strong.
Operator, Operator
Our next question will come from Jeffrey Zekauskas with JP Morgan.
Jeffrey Zekauskas, Analyst
When examining public data for caustic prices, they were approximately $950 a short ton in November. It's somewhat unclear what the current prices are. Are they around $800? What has been the change in caustic prices from November until now? Additionally, can you explain the reasons behind this movement?
Scott Sutton, CEO
This is Scott, Jeff. Generally speaking, it's been relatively stable; however, there's a possibility that some product lines, like caustic, might fluctuate in the future. It's important to remember that we create value from the differences between the two sides of the ECU. So, when you observe any drift, it's probably due to value emerging from another area. We won't necessarily decline; it almost doesn't matter if it goes up or down. We are in a position to handle either scenario. In fact, I'd like to point out that we actually achieved a higher quarterly EBITDA in our chlor alkali business when caustic pricing was significantly lower than it is now.
Jeffrey Zekauskas, Analyst
And secondly, Scott, can you remind me when do the contracts with Dow expire? Is it the beginning of '25 or the end of '25 and is that a big event for the company?
Scott Sutton, CEO
Yes. Jeff, we really weren't going to comment on any specific customer or supplier arrangements.
Jeffrey Zekauskas, Analyst
Okay. Well, then I'll ask a different question. With Winchester, is the oversupply in ammunition because demand was weaker than expected or because the competition just simply ramped up their volumes?
Scott Sutton, CEO
Yes. Brett, do you want to jump in?
Brett Flaugher, President, Winchester
In the second half of the year, we observed some lower demand, though it remained significantly higher than our historical expectations. As I mentioned earlier, we were actually delivering more to our customers than they were able to sell as we worked to fill a pipeline. Once that pipeline reached capacity, we chose to scale back, lower our production rate, and avoid oversupplying the market. For insights on other companies, you'll need to check their statements regarding their business. From our perspective, making these market adjustments going forward was essential to maintain value.
Operator, Operator
Our next question will come from Mike Leithead with Barclays.
Mike Leithead, Analyst
First question, can you just talk through your full year EBITDA guidance framework? It looks like we can basically annualize 1Q levels to get to the midpoint. So is that roughly what you're assuming that first quarter conditions hold for the year? Just flesh out how you're thinking about that.
Scott Sutton, CEO
Yes. No, I mean I would say that we're expecting slightly lower performance in the early part of 2023. And that's the way we've called it out for our chemicals business, a little bit better in Winchester. Look, I think when you look at a 12-month basis, that's our target. I would say that we really reserve the right to take any actions that we need to, to make sure that we keep that whole 12-month trough as high as possible. And that may mean that we need to have one quarter that's not as good as the one that we just credited. I don't know when that quarter might come, but it certainly could be in the next 12 months.
Mike Leithead, Analyst
Got it. Makes sense. And then second for Todd, just two quick ones on cash flow. First, I think in the prepared remarks, it sounds like there's about $150 million of abnormal cash uses this year. Is that correct? And then second, on the $1 billion of free cash, I know it can be difficult to predict how or when some of these JV opportunities come through. But just how much of that $1 billion would you expect gets returned to shareholders this year?
Todd Slater, CFO
Thank you for the question, Mike. You're correct about the one-time items. There are approximately $80 million in cash taxes that are affecting the tax figures on that slide. A more normal figure would be around 25 percent. Additionally, this year there is a peak level of payments related to some power supply contracts. So you are accurate regarding the one-time expenses. For the joint ventures, the investments in 2023 are likely to be under $50 million. Therefore, considering that cash flow, we can effectively utilize it for share repurchases.
Operator, Operator
Our next question will come from Matthew Blair with TPH.
Matthew Blair, Analyst
Your EBITDA in Q4 was down by about $100 million. Do you have a breakout on just the moving parts here, like how much would you attribute to destocking, how much to seasonality, and I think you had some turnaround activity too. So was that material?
Scott Sutton, CEO
Well, I mean we've quit calling out a turnaround activity as we sort of leveled that across quarters. So it's really a nonissue for any variability of our earnings going forward. I mean, look, most of that decline, you called it out well. It was a big decline. Most of that decline is from our own actions to make sure that we get set up to have the right shoulder coming out of this recession and make sure that we have the highest 12-month trough result that we can going forward. The other things that you mentioned are really just drivers of that. Yes, there's some level of destocking. But yes, demand still doesn't look great. In fact, there's really suspended demand still in China and still in Europe.
Todd Slater, CFO
If you consider it, all three businesses experienced a significant decline in volumes year-over-year in the fourth quarter. I know in the press release...
Operator, Operator
One moments as we reconnect the speaker line.
Todd Slater, CFO
Matthew, sorry, we got cut off again. Maybe the fourth time will be the end of it. What I had said was if you look at all three businesses, volumes are down year-over-year in the fourth quarter, 29% chlor alkali, 36% epoxy, clearly, Winchester was down 5%. But offsetting that to a big extent as well was improved pricing across the board in all three businesses.
Matthew Blair, Analyst
Got it. And on caustic exports, so some spot prices in Asia for caustic have started to roll over. Is that filtering into your U.S. caustic export pricing yet and just how would you characterize demand and volumes for your U.S. caustic exports?
Scott Sutton, CEO
Yes. I mean, this is Scott. I mean, look, I mean, there's going to be impacts from that, of course. I mean, I would characterize demand generally not great. But it's not isolated demand on cost. What it is, is the relative demand strength between caustic and the chlorine side of the ECU. And I would say those imbalances keep in place and keep forming. So even though demand may come down, it's not necessarily an indicator that our direct results follow that.
Operator, Operator
Our next question will come from Angel Castillo with Morgan Stanley.
Angel Castillo, Analyst
I would like to understand the sensitivities for your key products that you used to share in your presentations. Considering how the market has changed, could you provide an update on your pricing strategy for chlorine and your hedging strategy for natural gas? Specifically, what are the key sensitivities for these commodities in terms of EBITDA per MMBtu or dollar per metric ton?
Todd Slater, CFO
Angel, thanks for the question. This is Todd. I think historically, we've talked in the $1 per MMBtu in North America was worth about plus or minus $50 million to our annual P&L. I think directionally, that still is a good metric for you to think about. But as Scott mentioned earlier about gas, you know we're a hedger, so those high-priced numbers you saw during 2022, those sort of got paired off; we didn't experience them. And maybe here in the very short run, because we're a hedger some of the dips in gas, you won't see that benefit running through immediately in our system.
Angel Castillo, Analyst
Got it. That's very helpful. What about caustic and chlorine and other kind of inputs?
Todd Slater, CFO
Yes, our model is really dependent on cost or cost variability. Therefore, I wouldn't expect any impact from gas, especially since we hedge.
Angel Castillo, Analyst
I'm sorry, I meant the pricing, for instance, like a $1 change in the price, cost vehicle.
Todd Slater, CFO
I appreciate the question, but I don’t think we will quantify how a specific change in commodity prices or public indexes might impact our bottom line. First, our business doesn’t entirely follow the index. Additionally, typically when prices are declining, we find value elsewhere.
Angel Castillo, Analyst
Understood. No worries. For the second question, I'd like to revisit some discussions regarding the macroeconomic environment and the demand trends you've observed. You mentioned in your slides that vinyl sales are expected to decline in the first quarter while epoxy sales should improve in the second half. I'm curious about your outlook for 2023. Are you seeing any signs in orders that reassure you about these anticipated rebounds? Is it mainly due to reduced destocking, or are there other factors that give you confidence? Additionally, as you consider the overall recovery, how much of it do you attribute to macroeconomic conditions versus your company's ability to make adjustments?
Scott Sutton, CEO
We'll start with epoxy, which is facing significant challenges right now, as we've discussed. Damian, could you provide some guidance on the latter half of the year?
Damian Gumpel, President, Epoxy
Sure, when we evaluate the factors for the second half, we are noticing improved demand. News reports indicate that China, the largest consumer of epoxy, is beginning to recover after nearly a year of stagnation. Additionally, we are observing other regions starting to increase their consumption of epoxies. Our growth platforms, along with macro trends in wind, infrastructure, electrification, and mobility, are also contributing to a positive demand profile with our valued customers. This reflects both the broader landscape and our active involvement in platforms that should enhance demand recovery in the latter half of the year.
Scott Sutton, CEO
And because we're running out of time, I'll just shortchange the vinyls answer. And there has been some light improvement in EDC pricing there. So thanks.
Operator, Operator
Our next question will come from Eric Petrie with Citi.
Eric Petrie, Analyst
What's embedded in your earnings outlook in terms of China and domestic consumption, and at the end of last year, we saw a ramp-up of exports in epoxy as well as caustic soda. So any comments on those export levels into 2023 and impact on earnings?
Scott Sutton, CEO
Yes. No, what's embedded is still that demand stays fairly muted, suspended for the better part of the first half of the year and then recovers. Specifically in epoxy by trade flows actually reversed out of China. But even when China recovers, still the amount of imports going into China is likely to be less than it was before because there have been some structural capacity adds there. And what this has taught us, knowing that we really didn't expect sort of the worst conditions in 15 years, is that we certainly have more trough minimization footprint work to do there. So we're working on that.
Operator, Operator
Our next question will come from Angel Castillo with Morgan Stanley.
Angel Castillo, Analyst
How are you thinking, Scott, about carbon sequestration versus buying renewable power? And does building out these hydrogen plants impact that decision tree? Can maximize the IRA credit.
Scott Sutton, CEO
Yes. Yes. I mean, look, I mean, there could be some IRA credits for us with regard to hydrogen. I mean we are the largest electrolysis grade hydrogen producer in the country today. So we'll see where that goes. As far as other activities to minimize our CO2 footprint, most of them are centered around our own efficiency and productivity programs. It's not impossible that we get some RECs in the future. Will we do more CO2 sequestration like we called out in our slides? I think those opportunities are more limited for us.
Operator, Operator
Our next question will come from John Roberts with Credit Suisse.
Unidentified Analyst, Analyst
This is Matt Sharansky filling in for John. Scott, given that Epoxy has been operating at reduced levels, have you implemented any structural changes in terms of operations or your customer base? When demand picks up again, will Epoxy be different from how it was before?
Scott Sutton, CEO
Yes. The answer is yes, but completely in process now. When I said we're going to do more trough minimization footprint work, that's something that we're analyzing right now. So when demand does return yes, that business is going to look a little different. It's going to be more focused on systems where we've had staying power even through these really sloppy recessionary conditions.
Unidentified Analyst, Analyst
Got it. That’s helpful. And Todd, in Winchester, can you describe what the impact to margins was from lower operating rates versus higher costs? The margins in the segment have just been a little bit volatile since Lake City contract started. So just trying to figure out what the normalized level would be?
Todd Slater, CFO
Yes. Thanks for the question. I think that what you saw in the fourth quarter because of the significant pullback in volume to address, I’ll say, the supply chain issues, you saw margins come in significantly compared to where they had been. Overall, we had a higher level of military sales in the fourth quarter compared to where had been over the last 12 months. So that also will slightly affect the margin, a little bit lower on average margin there.
Operator, Operator
Our next question will come from Roger Spitz with Bank of America.
Roger Spitz, Analyst
One is, can you comment on how much of your merchant or total chlorine was sold on below-market legacy contracts as of December 2022?
Scott Sutton, CEO
We won't give you a specific number, but I would say that that's turned into the minority share now. As Patrick said, we still have an uplift coming in 2024 that will essentially place almost 100% of our chlorine on a different standard, likely the Olin chlorine index.
Roger Spitz, Analyst
Got it. The second question is how can you specify how much, if any, of your ECU production is sold as cell liquor compared to finished product?
Scott Sutton, CEO
I'm not exactly sure what you mean by that. But we have some site partners where we may not fully take the product to an in-state that would be sold in merchant transportation equipment, and we won't quantify that.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Scott Sutton for closing remarks.
Scott Sutton, CEO
Yes. No, I would just say thanks to everybody for joining. Sorry we had so many technical difficulties this time, but looking forward to the next call. Thanks.
Operator, Operator
Thank you for attending today's presentation. You may now disconnect.