Earnings Call Transcript
OLIN Corp (OLN)
Earnings Call Transcript - OLN Q3 2023
Operator, Operator
Good morning and welcome to Olin Corporation's Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Steve Keenan, Olin's Director of Investor Relations. Please go ahead, Steve.
Steve Keenan, Director of Investor Relations
Thank you, Jason. Good morning everyone and thank you for joining us today. Before we begin, let me remind you 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 third quarter earnings press release. A copy of today's transcription slides will be available on our website in the Investors section under Past Events. Our earnings press release and other financial data and information are available under Press Releases. With me this morning are Scott Sutton, Olin's CEO; and Todd Slater, Olin's CFO. I'll now turn the call over to Scott Sutton to make some brief remarks, after which, we will be happy to take your questions.
Scott Sutton, CEO
Thanks, Steve and good morning to all. In the third quarter, the Olin team delivered what we promised, which was $315 million of adjusted EBITDA, no sequential reduction in chlorine pricing, and prioritization on share repurchases. Additionally, we complemented those confirmed deliveries with the acquisition of the White Flyer Clay Targets Business at forecasted returns substantially better than share repurchase returns. Looking forward, Olin's strategy continues to be championed by our teammates and our Board of Directors. As such, in the fourth quarter, and potentially beyond the fourth quarter, we are taking a dramatic, but necessary step to change the direction of declining ECU values. It is a challenging market and we've already actioned this initiative to force a rebound of our ECU values, which involves idling significant chunks of our assets and slashing our participation in weak markets. This value accelerator initiative results in a $100 million incremental penalty to adjusted EBITDA in the fourth quarter relative to our previous expectations, but delivers an anticipated improvement in 2024 adjusted EBITDA relative to 2023. We are confident of that improvement. Even though we operate in an environment where bad news creates a negative recency bias, please never forget that in chlor alkali, we believe future demand growth exceeds future supply growth, and that growth may also be unbalanced across the ECU, all favorable for Olin. We are confident in that favorable outlook. So, Jason, that concludes my opening remarks and we can now proceed to questions.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Our first question comes from Aleksey Yefremov from KeyBanc Capital Markets. Please go ahead.
Aleksey Yefremov, Analyst
Thank you. Scott, I believe this is the first earnings call since the news came out. Can you address some of the concerns that are out there about Olin's strategy, whether what the Board and you decided reflects how successful or not the strategy is? And any other questions from to it?
Scott Sutton, CEO
Okay. Hi, Alex, I think I understood the question. But look, I mean there's absolutely change in the momentum that Olin has going forward. We absolutely all are pulling the same way in terms of our model, our strategy, how we lift people and our shareholder value allocation scheme as well. So there's absolutely no dispute in any of that. And we're running a process there.
Aleksey Yefremov, Analyst
Thanks, Scott. And then turning to your fourth quarter. Chlor Vinyls segment earned about $280 million EBITDA in 3Q, and you're estimating about $100 million EBITDA impact from your idling actions in the fourth quarter. Just seems like a very large number relative to what the segment earns in total. So could you maybe talk about how you came up with $100 million and whether you view that number as something we could simply add back and assume that the real run rate is something like $300 million maybe in Q1 of next year or Q2?
Scott Sutton, CEO
Well, what I would say is, yes, it's certainly a big number, but this is a very big activation as well. And we've said probably through the previous six quarterly earnings calls that there could very well be an order where we have to take a significant action to make sure that our cash delivery over any longer period, say, four to six quarters is maximized. And that's what this is intended to do, right? It consists of significant actions. We are idling major assets not participating in a lot of weak markets and additionally going out there and parlaying a bit and managing some of that liquidity to a more favorable place for Olin. So, yes, it's significant.
Aleksey Yefremov, Analyst
Thanks, Scott.
Scott Sutton, CEO
Thanks.
Operator, Operator
The next question comes from Kevin McCarthy from Vertical Research Partners. Please go ahead.
Kevin McCarthy, Analyst
Good morning. Scott, having shut down St. Gabriel and I think, at least a large unit at Freeport, what are you looking for or what should we look for as outsiders to gauge whether or not you may restart those assets? And do you have a preliminary idea of how long the outage might take?
Scott Sutton, CEO
Yes. I mean, hi, Kevin, look, I mean this is a fourth quarter activation, but it doesn't mean that it absolutely finishes in the fourth quarter. If we need to continue to get the desired result that we need to deliver the most shareholder value, then we're going to continue it, right? I think it's going to be challenging for the outside world to see when we might change or reduce this value acceleration initiative. But we have many internal signs that we can see and we know when it's effective because we watch excess liquidity out there in the world. We watch if the strong side of the ECU is being chased by others at the detriment of both sides of the ECU. We watch very carefully how much material is entering trade flows out of China. And there's already less material entering trade flows. We watch that increasing price that you see in caustic and the attempts to increase price in Europe and China. And those things are happening, but may be fluctuating. Already, there are some requests for merchant chlorine volume that we can't supply. Already, there are some requests for EDC volumes that we can't supply. Already HCL price is increasing, and there are requests for volumes that we can't supply. So those are the kind of things that we'll watch. Harder for the outside world to see that. Those indications will be more apparent in the first quarter, and they'll appear in our results more than likely in the second quarter.
Kevin McCarthy, Analyst
That's very helpful. And then secondly, Scott, I'd welcome your view on the epoxy market heading into the fourth quarter. Part of the reason I ask is one of your competitors has reportedly implemented some sales control related to a Shell force majeure declaration on phenol and acetone, as I understand it. Are you seeing any encouraging signs that epoxy may begin to firm up at this juncture?
Scott Sutton, CEO
Yes. Well, I'll just say that we have already announced price increases in both North America and Europe, and we did that over the last week or so. Additionally, the other good sign that we see there is that the contribution from our systems business exceeds the contribution from our resins business. And really, that's the first time that has happened. I'll just caution you a little bit. It's still really sloppy in those markets, no doubt about it. And we still have some inventory to clean up. And those impacts are still going to haunt us a little bit in the fourth quarter and even into the first quarter as well.
Kevin McCarthy, Analyst
Thanks very much.
Scott Sutton, CEO
Sure.
Operator, Operator
The next question comes from Jeff Zekauskas from JPMorgan. Please go ahead.
Jeff Zekauskas, Analyst
Thanks, very much. Can you talk about the state of domestic chlorine demand? At what rate did it grow, say, in 2022? At what rate is it growing today and why?
Scott Sutton, CEO
Yes, hey Jeff. It's not good. This is why we're implementing the value acceleration initiative because the chlorine segment of the ECU has become weaker. Those markets are extremely weak, and we won't be participating in them since it's a downward chase, which isn't our strategy. You can see this reflected in our third-quarter results, as our merchant chlorine price didn't decrease as some trade publications suggested. So while it's not good, it's not getting worse. We're timing this activation to align with a potential future improvement, which we anticipate will happen in about three quarters. The goal of this activation is to accelerate that improvement in ECU values.
Jeff Zekauskas, Analyst
Okay. And of the $100 million penalty in the fourth quarter, is it best to understand that penalty as all volume, or is there a certain component of a certain amount of money which has to do with the actual shutdown of the assets?
Scott Sutton, CEO
No, it's not connected to the asset shutdown. It is primarily due to not participating in weak markets. Those volumes are out of our system for that quarter.
Jeff Zekauskas, Analyst
Okay. Great. Thank you.
Operator, Operator
The next question comes from Josh Spector from UBS. Please go ahead.
Josh Spector, Analyst
Yeah. Hi. Thanks. Just curious, as you take down your volumes more as you guys have been hedged on gas cost for most of this year, does this extend the roll-through of some of that higher cost? I guess, is that more of a volume-related hedge or time-related? And just any early thoughts on how that impacts 2024? Thanks.
Todd Slater, CFO
Yes. Thanks for the question, Josh. This is Todd. We are hedged for the fourth quarter. We do expect to see sequential improvement in our cost structure just like we saw that in the third quarter sequentially from the second quarter because of our hedge positions.
Josh Spector, Analyst
Okay. Thanks. And just as your volumes have pulled back, I mean, obviously, you're deselecting from a lot of different markets. How do you think about what you're selling into your Epoxy business? I guess, are you taking volumes down there in tandem, or are you parlaying that kind of purchase to other regions?
Scott Sutton, CEO
Well, I would say our volumes in the Epoxy business are already quite low. I'll say, the good news there is that sequentially in third quarter relative to the second quarter, our volumes actually increased in that business. But look, our volumes are so low in Epoxy. That's not where the major adjustment is. The new adjustments are in merchant chlorine, EDC and caustic.
Josh Spector, Analyst
Got it. Thanks.
Scott Sutton, CEO
Sure.
Operator, Operator
The next question comes from Hassan Ahmed from Alembic Global. Please go ahead.
Hassan Ahmed, Analyst
Good morning, Scott, and Todd. Scott, I wanted to dig a bit deeper into your comfort level around the implications of the value accelerator initiative. I mean, you guys have been very specific in saying that you feel there's going to be a positive inflection in the second quarter of 2024. I mean, I'm just trying to understand. I mean, clearly, it's an uncertain world. Industrial production seems to be all over the place. So obviously, that has an impact on caustic demand. And obviously, there's housing weakness here, out in China and the like. I mean, of course, you guys are controlling supply. But I'm just trying to understand what gives you that level of comfort that you will indeed, with this uncertain sort of macro environment, see that Q2 positive inflection.
Scott Sutton, CEO
Yes. Well, you know, Hassan, things aren't necessarily getting worse, right? Asia has been slow for a while and has stayed there. Europe has been slow for a while and has stayed there, right? I mean new homes in the US, yes, there is some slowdown, but that still continues. Granted, we all know that new mortgage applications and sales of existing homes are really low, maybe the lowest in many years. But the reason that we have a lot of confidence in this is, number one, we've been running this model for three years. And we've been through other mini cycles running that model over the course of those three years, and we've always been able to be successful at turning the value equation around when we need to turn it around. Number two, we have a really seasoned and broad Olin team who's completely united on this. And I'd just ask you to remember, we are the absolute leader in these businesses, right? So when you pair those two things together, there's a lot of momentum to get this done. And then I'll refer back to maybe it was the first question as well. There's already some signs that this has a good chance to succeed, right? When request for EDC and merchant chlorine come in that maybe can't be fulfilled via another path, at least that's an indicator. But look, it's really early, right? We just implemented this or started this at the very first of the fourth quarter, right? So we still have a lot of the quarter to go, clearly. And if necessary, we have time in the first quarter as well. So I don't want to mislead you. We've got a long way to go, but there's a lot of positive momentum to get this done.
Hassan Ahmed, Analyst
Understood. Understood. And as a follow-up, again, not to sort of keep harping on this, but in your prepared remarks, you guys talked about how 2024 from an earnings perspective will be better than 2023. Now our exit run rate coming out of Q4 based off of your guidance is $200 million in quarterly EBITDA. You annualize that, and that's $800 million. And you earlier obviously talked about how in terms of the facilities that you guys are shutting down, it's TBD, where that you'll restart them imminently or not, right? So I'm just trying to understand in terms of that guidance that you gave of 2024 earnings being better than 2023, keeping in mind the exit run rate in Q4. I mean, can you just help me sort of understand the quantification behind that?
Scott Sutton, CEO
Yes. Absolutely. And I'll just start with the two smaller businesses, right? So Epoxy is ending the year, adjusting its inventory, setting a bottom in, announcing price increases, and we have our two major initiatives that are going to help us much more in 2024 relative to 2023. We're going to have a full year of benefits from the restructuring work that we've done. Our systems business has a lot of momentum. And like I said before, this recent quarter was the first one where the contribution profit in systems exceeded the contribution profit in resin. So those things are working. We're going to work to end this unfair trade that exists coming out of Asia as well. So that's why Epoxy will step up. When you get to Winchester, there's tremendous momentum in the military piece of that business. And again, this most recent quarter, for the first time ever, military ammunition sales exceeded commercial sales. And we have a very long runway on military improvements, selling international ammunition, NATO-base-type countries and then also the next-generation squad weapon program, which is a lift over the next 10 years. We've said we'll double that business in two years, and we are well on our way to doing that. On top of that, the focus on and momentum in target shooting looks favorable. We just made the White Flyer acquisition, and while not a major one from a revenue standpoint, it's highly profitable and we merge that up with our sports shooting ammunition. And then finally, you get to our chlor alkali powerhouse business. I mean, we have this value accelerator initiative that we're running that is going to be favorable for next year. And again, the fundamentals underlying that business are good. Every product, demand growth bigger than supply growth.
Hassan Ahmed, Analyst
Perfect. Thank you so much, Todd.
Todd Slater, CFO
Yes.
Operator, Operator
The next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead.
Arun Viswanathan, Analyst
Great. Thanks for taking my question. Yes, thanks for all your comments. I think, it is quite helpful. So I just wanted to zero in on a couple of those comments on slide 4. You note that you're taking some decisive action here. And I think that you've laid it out as maybe a $100 million impact. And then you've also commented on a better 2024. So when I think about the numbers and how those will evolve, it sounds like Q1 should be seasonally better than Q4 and also maybe less of that $100 million impact. And then Q2, you see the real inflection point from the actions you've taken. And so maybe that's in the $350 million to $400 million range. And then you see maybe a little bit more improvement as well in Q3 and then seasonally softer in Q4. Is that right? And maybe you can just relate that to the PCI, which, I guess, dropped to 11 in Q3. So maybe you go down into the mid-100s or high-100s in Q4 of 2023, but then you really see that rebound into the maybe $250 million level or above in Q2. Is that how you're thinking about how the value accelerator initiative kind of plays out? Thanks.
Scott Sutton, CEO
I would just say that later quarters in 2024 may be stronger than the earlier ones. However, keep in mind that in Q1, we might still be implementing this initiative for part of the time. To make 2024 better than 2023, we need some quarters in the middle to later part of the year to be significantly better than our current position. So, you will observe an improvement in those areas.
Arun Viswanathan, Analyst
And then just on capital allocation as a quick follow-up. You are doing the $600 million or so leverage free cash flow this year. So next year, I assume that that should be higher as well. Will that also be put mainly towards share repurchases or other activities we can expect?
Scott Sutton, CEO
Yeah. Todd, do you want to answer that?
Todd Slater, CFO
Yes. Thanks, Scott. Clearly, we will continue to target share repurchases. But as you saw this year, we're willing to deploy some of that cash towards the White Flyer acquisition. But only any type of acquisition will have to demonstrate the ability to be much better than buying shares. And today, it's an easy decision. We're targeting buying 10% of our outstanding shares this year.
Arun Viswanathan, Analyst
Thanks.
Operator, Operator
The next question comes from Mike Sison from Wells Fargo. Please go ahead.
Mike Sison, Analyst
Hi, guys good morning. So you're running your operating rates below 50% or so for Chlor Alkali. Where do you think the industry or the other major players will run in the fourth quarter? And just curious, if you ran at that level, would your impact be more than the $100 million that you're going to take for lowering your operating rates?
Scott Sutton, CEO
Hey, Mike, I don't know what anybody else is doing. But I can say that, yeah, I mean, our whole system is running around that 50% number. And you may recall that we had predicted a certain trough level, and we said that trough level, assume that we could get our whole system down to 50% rates if we needed to. The reality is we can run lower than that if we had to, to have a bigger activation. But would come at a bigger penalty than that $100 million if we were doing that. We think this is the right place to go down to. It leaves us with one low number in the fourth quarter of roughly $200 million EBITDA, which, by the way, at that level, we still have positive levered free cash flow. So yes, look, we have some room. I don't think we need to use it, but we have some room.
Mike Sison, Analyst
Okay. And then, I guess it sounds like in Q1, you may have to run at this level in order for you to have EBITDA above 2023 for 2024, where would your operator need to improve to over time? 2Q, 3Q, 4Q? And can you remind us in your prior $1.5 billion to $2 billion EBITDA recession case, what your Chlor Alkali operating rates would need to be to get back there?
Scott Sutton, CEO
Yeah, yeah. Well, I would just say we may or may not need to do this in Q1, just to be clear, right? But if we did need to do this in Q1, in the later parts of the year, we need to bring rates up. We can't run the whole year at 50% rates, right? And that's not our plan to do that. In our previous recession case or trough case guidance, right, which if you go back four quarters ago, it was $1.5 billion of EBITDA as the low point. That number assumed roughly 50% rates at that same pricing level. So, I hope I answered your question on that.
Mike Sison, Analyst
Thank you.
Scott Sutton, CEO
Sure.
Operator, Operator
The next question comes from Matthew Blair from TPH. Please go ahead.
Matthew Blair, Analyst
Hey good morning. Thanks for taking my questions. Is it fair to think that the shutdowns at Freeport and St. Gabriel are going to take about 1 million tons of capacity out of the US market that's around 14 million tons? And if those numbers are correct, is that enough to materially tighten up the market, or would you count on other producers also shutting in some capacity too?
Scott Sutton, CEO
Well, I mean, this is an Olin activation, right? I can't comment on anybody else and it doesn't count on anybody else taking any kind of action that is similar to that. And I also won't comment on exactly what the capacity reduction is. I will just say it's significant, and it's significant enough to take our whole system, which we operate the largest system in the US and the world by a long shot, all the way down to a utilization of 50% or below. So, it's a big number.
Matthew Blair, Analyst
Sounds good. And then, Scott, I think you mentioned that chlorine has now flipped to the weak side of the ECU. Is that just a seasonal dynamic? Or is that something structural? And what are the factors driving that?
Scott Sutton, CEO
Yes. No, it's not a seasonal dynamic, right? I mean there are some small seasonal things at play just like there's not as much demand going into water treatment as you head into the winter season relative to heading into the summer season. But no, it's just the fact that businesses that are supported by merchant chlorine, the supply/demand situation around those relative to the supply-demand situation around the caustic world are worse off. It's a relative issue.
Matthew Blair, Analyst
Got it. Thank you.
Operator, Operator
The next question comes from Steve Byrne from Bank of America. Please go ahead.
Steve Byrne, Analyst
So, just following on your answer there, Scott, chlorine demand being worse off, do you have a view as to how much of the lower demand that you're seeing now for chlorine and chlorine derivatives versus two years ago is due to just left end-market demand versus destocking? Do you have the ability to split that? And potentially, is there a third bucket that's driving this, and that is end markets that are shifting to different products, just product substitution that's not a chlorinated product? Do you have a view on those three buckets?
Scott Sutton, CEO
Yes. Sure. Thanks for the question. Yes, I mean product substitution is pretty much zero, I would say. There is no structural issue here. So, then you get back to the other buckets, right? Taking inventory out of the channel, that's a non-issue today. I mean that was done some time ago and from month-to-month, that varies. That's a non-issue. This is all a temporary or transient issue around very weak demand. And that's what it is.
Steve Byrne, Analyst
Can you comment on how much of the lower demand in the epoxy segment is related to low inventory levels in the channel? Is that an additional potential opportunity for you in 2024?
Scott Sutton, CEO
Yes. No, epoxy is totally different than that. Epoxy, there's a structural issue, right? Over the last 18 to 24 months, China added about 20% to the world's productive capability for epoxy. At the same time, their demand, along with Europe's, together, they constitute 75% of the world's demand, has really diminished. So you have both aspects going on in epoxy. And that's why we've had to make some structural changes to our epoxy business to be able to combat that for the long-term, and we're doing some things in the short-term as well. Epoxy is going to have a much longer road to recovery, but it's going to be a steady, methodical recovery.
Steve Byrne, Analyst
Thank you.
Scott Sutton, CEO
Sure.
Operator, Operator
The next question comes from Vincent Andrews from Morgan Stanley. Please go ahead.
Vincent Andrews, Analyst
Thank you and good morning, everyone. As I've been reflecting on this recent initiative and listening to the questions on the call this morning, I've come to the conclusion that for this initiative to be truly successful, you will need to see a shift in demand sometime in the middle of next year. I would like to hear more about your expectations regarding that shift and its potential sources. I'm asking this because we are about halfway through earnings season, and from what I’ve observed, most companies are not indicating a shift in demand for next year; it rather seems like there has been a rebase in demand compared to the past couple of years. It appears we might have returned to 2019 levels or even lower, but it doesn't sound like a significant increase is on the horizon. I would appreciate any insights you can provide on this, and I am open to being incorrect.
Scott Sutton, CEO
Yes, I understand. This doesn't signify a major shift in demand. Clearly, we aren't expecting conditions to remain as poor as they have been over the past couple of quarters for the next six. However, it's important to recognize that this is a co-production landscape. Over the last year, many companies have pursued the strong side of the ECU, resulting in diminished value in that area. It was challenging for a time, but the values on the weaker side were substantially impacted as we increased supply into struggling markets. The economics of pursuing the strong side no longer apply. The inclination to chase that strong side has faded, independent of current demand. This shift is occurring alongside our value accelerator initiative, and together they will enhance our values. If demand does improve, it will provide additional benefits.
Vincent Andrews, Analyst
Okay. And if I could just ask on the CEO succession. Could you talk a little bit about the candidate you're looking for? And presumably, you want someone that can run the existing playbook. But what other attributes might that person bring to the role that might be new or additive for Olin?
Scott Sutton, CEO
Yes. I think that candidate is going to be somebody who can take Olin to the next level. In other words, their focus is going to be to take what the team has done here and build on it. So they'll endorse the value model, do a lot better with it, and they'll be very clever at capital allocation. So that's what we're looking for.
Vincent Andrews, Analyst
And if I can just add, clever on capital allocation means what beyond just doing share repurchases?
Scott Sutton, CEO
Well, it means finding opportunities that deliver even more value to shareholders than just share repurchases. Those may come through alliances. It may come through ventures. It's possible it could come through acquisitions just like the White Flyer acquisition that we did. It's all those things.
Vincent Andrews, Analyst
Okay. Thanks for all the details. I really appreciate it.
Scott Sutton, CEO
Yep. You bet.
Operator, Operator
The next question comes from Frank Mitsch from Fermium Research Company. Please go ahead.
Frank Mitsch, Analyst
Thank you very much, and congratulations on your successful time at Olin. I look forward to your next opportunity. I wanted to revisit some comments you made earlier in the call regarding the products your customers are requesting, such as chlorine, EDC, and HCl. You mentioned that you are unable to supply these products due to shutting down that capacity. Are the prices your customers are willing to pay unattractive? Is that what is causing the gap between your inability to fulfill these customer requests?
Scott Sutton, CEO
Well, it's not an inability to supply, right? We are running an initiative where we have cut back operations significantly and are not participating in those markets. So if we're not participating in a market, we're not participating. But the choice is to not participate.
Frank Mitsch, Analyst
Understood. And so the logical follow-on is that because the prices that they're willing to pay right now are not attractive for Olin and when you reflect that back to the customers, what sort of response are you getting? Or is it simply a matter of waiting out a few weeks, a month or a quarter, and then they'll come back and offer the prices that you do find attractive?
Scott Sutton, CEO
Look, I can't speak for every customer. But what I can say is we're not participating. So our response is we're not participating.
Frank Mitsch, Analyst
Okay, okay. Thank you. And among the third quarter highlights was your ability to hold chlorine price flat despite the broader indices going lower. What's your outlook on Olin's chlorine price?
Scott Sutton, CEO
Yeah. Sure. I think in this fourth quarter period, right, because we shuttered some assets and we're not participating, it's very possible that our mix generates a lower chlorine price in the fourth quarter relative to the third quarter. But that's strictly a mix issue. Because going back to the prior line of questioning, we're choosing not to participate. And where we may have to choose not to participate maybe at higher pricing because it's more spot business than some committed contract business. So, I think you'll see a mix issue appear in the fourth quarter. But in the first quarter, I'm quite sure that chlorine price will increase again.
Frank Mitsch, Analyst
Very helpful. Thank you.
Operator, Operator
The next question comes from Roger Spitz from Bank of America. Please go ahead.
Roger Spitz, Analyst
Thank you very much. You may have been asked this differently before, but typically, when chlorine price demand decreases, we usually see a lagging indicator where demand tightens as prices rise when chlor alkali plants are reduced. Why hasn't that occurred this time?
Scott Sutton, CEO
Can you repeat that? I'm sorry, I just don't understand the question.
Roger Spitz, Analyst
Sure. During the Great Recession in 2007-2008, the demand for housing fell sharply. This led to a reduction in chlor alkali production due to low chlorine demand. Since caustic demand tends to lag behind chlorine demand by a couple of quarters, chlorine supply became very tight as producers scaled back their operations, resulting in very high prices for caustic soda in the U.S. Typically, caustic behaves countercyclically while chlorine behaves post-cyclically, meaning there are initial periods of stability followed by downturns. Currently, we are seeing a significant decline in caustic soda prices. However, chlorine appears to be weakening, and it raises the question of why caustic demand has not tightened given this decrease in chlorine demand and the flexibility in caustic pricing.
Scott Sutton, CEO
Okay. Got it. Yeah. Thanks for clarifying that. Look, we just started this value accelerator initiative, right? You're not going to see instantaneous results in the trade publications, which is what most people look at in a public format. It takes some time to generate that impact, but that impact could happen. The other thing to remember is that it depends on a big way what the PVC producers do as well. And at least PVC hasn't come off yet near as much as things like the polyurethanes segment, like the ag chemicals segment. Even some things like titanium dioxide and bromine are likely a little bit weaker than PVC. So there's some work to do to get that impact to happen.
Roger Spitz, Analyst
Got it. Thank you. My second question is, just to be clear, I understand how you operate your chlor alkali, you're currently running at or slightly below 50%. Can you clarify whether this means you have shut down entire trains or plants and are operating what you have at a very high or near full capacity? Or are you running trains within plants at significantly lower than full capacity?
Scott Sutton, CEO
Well, it's all of the above, right? But this time, because it's so significant, right, we've shut down complete sites and we've shut down complete units at larger sites.
Roger Spitz, Analyst
Got it. Thank you very much for your time.
Scott Sutton, CEO
Okay, sure.
Operator, Operator
The next question is a follow-up from Jeff Zekauskas from JPMorgan. Please go ahead.
Jeff Zekauskas, Analyst
Thanks very much. You talk about the shutdown of capacity as an initiative to, I think, attempt to tighten up the markets. But you also have a sort of a new trough EBITDA on an annual basis, which looks to me like it's maybe $1.3 billion, something like that. Does that new trough imply that your initiative will be successful or unsuccessful? Where does that trough estimation stand relative to the initiative that you're trying to execute?
Scott Sutton, CEO
Yes, I think you're correct that we're going to do approximately $1.3 billion this year. This figure accounts for a couple of quarters where conditions have been quite challenging, and we've had to invest significantly in a major initiative. So, you're right that $1.3 billion represents a trough. Notably, this trough is still higher than the peak of any previous cycle prior to implementing this model, just for your information.
Jeff Zekauskas, Analyst
Yes. For my follow-up, I believe the costs associated with the VCM plant not operating in the third quarter were around $50 million. In the fourth quarter, we're expecting a decrease from approximately $300 million to $200 million. However, with the VCM plant operational, wouldn't that provide about a $50 million benefit? Therefore, what is causing the additional margin pressure in the fourth quarter? Specifically, why is the fourth quarter EBITDA projected to be more like $200 million instead of $250 million?
Scott Sutton, CEO
Yes. Yes, I mean, you got it, Jeff. You're right. I mean we had an extra penalty during the third quarter of that $50 million that we don't have in the fourth quarter, right? But there's quite a number of other things at play across the business. And for example, because a big chunk of our caustic business is still priced on public trade indices, those public trade indices have dropped in fourth quarter relative to third quarter. So you've got that impact going on, on top of everything that we're doing, as one example.
Jeff Zekauskas, Analyst
Okay. Great. Thank you so much.
Scott Sutton, CEO
Sure.
Operator, Operator
The next question is a follow-up from Aleksey Yefremov from KeyBanc Capital Markets.
Aleksey Yefremov, Analyst
Scott, I appreciate that you don't want to comment on actions with your competitors. But I guess your strategy kind of depends on them not filling the supply deficit or supply balance that you're trying to create as your strategy. Why wouldn't your competitors just fill the room that you're creating for them?
Todd Slater, CFO
I can’t comment on what competitors might do. Our strategy is not dependent on their actions. When we pull back, those volumes may be temporarily filled in. However, as they are filled in, the tightening of supply and demand benefits us.
Aleksey Yefremov, Analyst
Okay. Thanks, Todd.
Todd Slater, CFO
Okay.
Operator, Operator
As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Scott Sutton for closing comments.
Scott Sutton, CEO
Yes. No, I'd just say thanks a lot, Jason. Thanks to everyone for joining us today. We appreciate the questions. Thanks.
Operator, Operator
Thank you for attending today's presentation. You may now disconnect.