Larry P. Kromidas - Olin Corp. John E. Fischer - Olin Corp. Todd A. Slater - Olin Corp. James A. Varilek - Olin Corp. Pat D. Dawson - Olin Corp..

Frank J. Mitsch - Wells Fargo Securities LLC Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc. Don Carson - Susquehanna Financial Group LLLP Arun Viswanathan - RBC Capital Markets LLC Aleksey Yefremov - Nomura Securities International, Inc. John Roberts - UBS Securities LLC Dmitry Silversteyn - Longbow Research LLC Kevin W.

McCarthy - Vertical Research Partners.

Good morning and welcome to the Olin Corporation's Third Quarter 2016 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Larry Kromidas, Director of Investor Relations. Please go ahead..

Thank you, Austin, and good morning, everyone. Before we begin, I want to remind everyone that this presentation along with the associated slides and the question-and-answer session following our prepared remarks will include statements regarding estimates of future performance.

Please note that these are forward-looking statements and that results could differ materially from those projected. Some of the factors that could cause actual results to differ are described, without limitations, in the Risk Factors section of our most recent 10-K and in our third quarter earnings press release.

Also, note that during today's call we will reference quarter-over-quarter comparisons, as the prior year results do not reflect the contribution of the chlorine products businesses that we acquired from Dow. Finally, a copy of today's transcript and slides will be available on our website in the Investors section under Calendar of Events.

The earnings press release and other financial data and information are available under Press Releases. Now, I'd like to turn the call over to John Fischer, Olin's President and Chief Executive Officer.

John?.

Good morning and thank you for joining us today.

In addition to Larry, with me this morning are Pat Dawson, Executive Vice President and President of Epoxy; John McIntosh, Executive Vice President, Chemicals and Ammunition; Jim Varilek, Executive Vice President and President, Chlor Alkali Products and Vinyls; and Todd Slater, Vice President and Chief Financial Officer.

I will begin with a discussion of our third quarter results, our fourth quarter and full year 2016 adjusted EBITDA forecast, and then provide some details on each of the businesses. Todd will then provide an update on our cash flow projections for the year before we open the call to questions.

On slide 3, we list some of the highlights for the third quarter and our fourth quarter and full year expectations.

Last night, we announced third quarter 2016 adjusted EBITDA of $221.9 million, which includes depreciation and amortization expense of $135.3 million, researching charges of $5.2 million and acquisition-related integration costs of $13.1 million.

While the third quarter saw a sequential improvement from all three segments, adjusted EBITDA was at the lower end of our range. Chlorine volumes were lower than expected and purchased ethylene, benzene and propylene prices were higher than expected.

These items were partially offset by better than expected caustic soda prices and lower corporate and other costs. We expect fourth quarter adjusted EBITDA to be in the range of $190 million to $220 million. Caustic soda pricing is expected to improve 7% to 10% compared to the third quarter.

This improvement reflects both higher domestic and export caustic soda pricing. The improvement in caustic soda pricing will be offset by seasonally weaker volumes for ammunition, merchant chlorine, vinyls, bleach, and refrigerant chemicals. We also expect higher natural gas, purchased ethylene and propylene cost compared to the third quarter.

While the combination of the current levels of both EDC price and market ethylene costs, we have elected to reduce fourth quarter EDC volumes. Now let us turn to slide 4 and review our full year 2016 forecast.

As a result of our third quarter actual results and our fourth quarter outlook, we are now forecasting full year 2016 adjusted EBITDA to be in the range of $810 million to $840 million.

This forecast compares to our original 2016 full year estimate of $915 million to $985 million and continues to reflect weaker chlorinated organics volumes from refrigerant, agricultural and packaging customers and lower EDC pricing.

In addition, despite the recent favorable trend in caustic soda pricing, the full year 2016 average caustic soda price is expected to be approximately $20 per ton lower than our original forecast. Now let us turn to the businesses, beginning with Chlor Alkali Products and Vinyls on slide 5.

Third quarter sales of $779.4 million improved 6% over sales in the second quarter. Improved caustic soda volumes and pricing and seasonally stronger bleach and chlorinated organics volumes were partially offset by sequentially weaker merchant chlorine volumes.

Chlorine demand from our urethanes customers were down approximately 20% sequentially in the third quarter. Now turning to caustic soda, since April, we have seen seven consecutive months of improvement in the domestic caustic soda price indices.

As a result, our domestic caustic soda price improved by approximately 5% in the third quarter compared to the second quarter and we are forecasting domestic caustic soda pricing to improve sequentially in the fourth quarter by approximately 7%. We have also seen improvement for seven consecutive months in the export caustic soda price indices.

Export caustic soda pricing improved by approximately 12% in the third quarter compared to the second quarter and we are forecasting a similar caustic soda export price increase in the fourth quarter. Chlor Alkali Products and Vinyls adjusted EBITDA increased $25.9 million in the third quarter to $160 million as compared to second quarter levels.

The sequential improvement in the business was attributable to higher caustic soda pricing and volumes and decreased expense for maintenance outages. Higher natural gas prices and purchased ethylene costs partially offset these improvements.

We expect fourth quarter Chlor Alkali Products and Vinyls adjusted EBITDA to be slightly lower than the third quarter. Seasonally lower volumes from merchant chlorine, vinyls, bleach and refrigerants chemicals as well as higher natural gas and purchased ethylene costs will offset improved caustic soda pricing.

Now turning to slide 6, I would like to reiterate our long-term view on caustic soda pricing. Olin believes there are several favorable trends emerging in the global caustic soda market, some of which are evident today.

First, Olin reduced capacity by 433,000 tons at the end of the first quarter and there have been no major chlor alkali increases announced in North America.

Outside of North America, the mandated elimination of European mercury-based chlor alkali production by the end of 2017 is expected to result in chlor alkali capacity reductions of between 1 million and 1.5 million tons. Some of these reductions have already taken place.

As a result, we have seen caustic soda imports into the United States from Europe decline in 2016 from historic levels and we expect Europe to ultimately become a net importer of caustic soda. Finally, we have also seen caustic soda exports from China decline each year since 2012, with these declines expected to continue.

Overall, Chinese exports have declined by approximately 30% since 2012. We believe this reflects the combination of reduced supply, driven by lower chlorine production and increased internal consumption. As a result, caustic soda export sales from North America have reached record levels during 2016.

Olin continues to believe that the chlor alkali industry is entering a favorable multiyear caustic soda pricing environment. Now let's move ahead to slide 7 and the performance of our Epoxy segment. For the third quarter, Epoxy sales were $470.1 million, a sequential increase of $20.1 million from second quarter levels.

Epoxy resin volumes improved approximately 10% from the second quarter. The Epoxy adjusted EBITDA increased 43% from the second quarter results to $32.9 million in the third quarter. This improvement reflects higher volumes and higher product pricing, partially offset by higher benzene and propylene costs.

Lower maintenance cost in the third quarter also contributed to the sequential increase in adjusted EBITDA. For the fourth quarter, we expect Epoxy segment earnings to be similar to the third quarter levels.

We're forecasting higher product pricing and lower expense for maintenance outages to be offset by seasonally weaker volumes and higher benzene and propylene cost. Consistent with our long-term forecast for the full year 2016, adjusted EBITDA in the Epoxy business is expected to increase approximately 40% from pro forma 2015 levels.

I would now like to turn to Winchester's performance, which is summarized on slide 8. Third quarter sales were $203.2 million, a 12% increase compared to the second quarter. Seasonally strong demand across all customer categories drove the sequential improvement in sales.

Adjusted EBITDA of $40.7 million was higher than both the second quarter 2016 and third quarter 2015 adjusted EBITDA levels. Third quarter Winchester segment earnings were the third best quarterly earnings in its history.

The improved adjusted EBITDA from the second quarter reflects higher volumes and lower commodity, other material and manufacturing costs. With the completion of the Centerfire relocation effort, we now expect cost savings of $40 million annually from this five-year project.

We are forecasting normal seasonally weaker volumes in the fourth quarter, but we expect that both fourth quarter 2016 and full year 2016 Winchester earnings will exceed the same periods in 2015, primarily as a result of expected incremental savings from the Oxford relocation, expected decreases in commodity and other material costs and expected improvements in volumes.

I would now like to take a minute to update everyone on our synergy efforts. Slide 9 summarizes the expected annual synergy capture for both cost and revenue based synergies and the capital and integration costs associated with attaining those synergies.

We continue to expect synergies to total $60 million in 2016 and to end the year at an annualized run rate of $80 million. In addition, there are significant costs in operational synergies to be realized over the next 18 months.

The company expects procurement and maintenance related costs and operational savings of $125 million to $150 million over the next four to six quarters, as well as an additional $20 million of savings from the optimization of administrative activities that were outsourced or covered by transition service agreements from the time of the transaction with Dow.

Now, turning to my final slide. We remain confident that our business is positioned to achieve mid-cycle adjusted EBITDA of $1.5 billion annually.

In spite of the full year 2006 (sic) [2016] (11:39) outlook that is well below our original expectations, there are number of factors in place that suggest meaningful improvements can be achieved next year and beyond.

If caustic soda prices remain constant at the current levels we have in our fourth quarter 2016 forecast, adjusted EBITDA will improve by approximately $100 million in 2017.

In addition, if current levels of EDC prices, which are still near historic lows, are maintained for 2017, and Olin acquires the second tranche of cost based ethylene by mid-year 2017 then approximately $50 million of year-over-year improvement should be realized.

In 2016, the Epoxy business demonstrated the level of improvement that can be achieved, as evidenced by the sequential improvement in the third quarter, and we are looking forward to further improvement next year. Finally, we continue to see significant synergy opportunities, the vast majority of which are still ahead of us.

Now, I would like to turn the call over to Todd Slater.

Todd?.

Thanks, John. Let's turn to our 2016 cash flow forecast, which is on slide 11. We expect to generate $351 million of free cash flow before dividend payments in 2016.

Starting with the midpoint of our full year adjusted EBITDA guidance of $825 million on the far left of the waterfall chart, we add back $25 million in taxes for an income tax refund we expect to receive in 2016.

This reflects the benefits from the utilization of net operating loss carryforwards created by acquisition costs incurred last year and income tax refunds from prior years, primarily resulting from the ability to utilize net operating loss carrybacks.

Based on our current forecast of net operating loss carryforwards in 2016, we expect a lower than normal cash tax rate in 2017, as we expect net operating loss carryforwards to provide a cash tax shield of approximately $40 million to $50 million after 2016. Column three shows the capital spending and investments we expect to make in 2016.

The $455 million includes the midpoint of our current forecast for capital spending of $280 million and the $175 million of investments we made during the year for additional low-cost electrical power for the next 20 years at our Freeport, Texas, and Plaquemine, Louisiana facilities.

We have lowered our full year forecast for capital spending by $20 million. As we discussed in the second quarter call, Olin entered into a program to accelerate the collection of receivables, which should create a permanent working capital reduction of $175 million in 2016.

This is a one-time increase in cash flow, as we intend to keep this program in place for the foreseeable future. In the next column, one-time items include integration and cash restructuring costs of approximately $80 million, which are partially offset by an insurance recovery and asset sales totaling $50 million.

The next column represents interest expense. We have approximately 60% variable rate debt in our debt profile. As a result, we are estimating the fourth quarter 2016 interest rate to be approximately 5%. For the full year 2016, approximately $205 million of debt will be repaid using available cash.

In the far right-hand column, we are forecasting $219 million of free cash flow after paying our normal quarterly dividends, totaling approximately $132 million for the year. Finally, on October 26, Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock.

The dividend is payable on December 9, 2016 to shareholders of record at the close of business on November 10, 2016. This is the 360th consecutive quarterly dividend to be paid by the company. Operator, we are now ready to take questions..

We will now begin the question-and-answer session. And our first question comes from Frank Mitsch with Wells Fargo Securities. Please, go ahead..

Hey. Good morning, gentlemen. John, I appreciate some of the more detail that you're providing, particularly with the lowering of the forecast.

And I'm trying to understand a little bit better the comment that lower caustic soda pricing is going to be a negative impact of $60 million from your original forecast, which I believe the original forecast was reiterated in May – early May.

And since that time, you mentioned during your prepared remarks something like seven months in a row of higher pricing. So I'm trying to reconcile what the expectation was, I guess, back in early May versus what you're actually realizing such that you're going to be $60 million lower due to lower caustic soda pricing..

Frank, if you remember we saw our caustic soda price indices drop in March and then April, and that when we had done our call in May, we were not aware of the April drop.

And then, we also had experienced in the second quarter an unfavorable mix, which we talked about, where a higher percentage of our caustic sales were export versus domestic, and just the weighted average of that took us below where we thought we would have been on a full year basis.

We actually had expected we would start of the year and be flat to moving up for the whole year. So we just had a dip at the end of the first quarter and into the second quarter. And if we look at our forecast that's about $20 a ton for the year lower than we would have expected at the start of the year..

Okay. That's helpful. And perhaps you could elaborate in terms of the higher raw material, natural gas costs, because, as you said, you've seen caustic prices move up.

How is the interplay in your system between the increase in electricity cost versus the increase in your caustic soda pricing? Are we seeing margins being enhanced, or is it merely enough to offset the increase in nat gas?.

On balance, we're seeing margins enhanced, Frank..

Okay. All right. And then lastly, John, just to make sure that we're looking at things in the same basis.

Looking at 2017, you indicated obviously if caustic stays where you think Q4 is – where your Q4 comes in, that's $100 million on a full year basis, which I guess there is some potential for that to increase, because if I'm not mistaken your Q4 average cost, based on where pricing indices are, probably ticks higher in Q1 just based on the lag in price realization.

So that's $100 million possibly higher, you have $50 million of synergies in 2017 higher and another $50 million that you indicated from the ethylene costs.

So, right now, all else being equal, you're looking at 2017 being $200 million higher than 2016?.

Well, the offset to that is if natural gas stays where it is today, that would be a negative to the $200 million, because natural gas today is higher than it has been on average for 2017. So that would be the one offset to that, Frank, but your math is right. And I would concur with your first comment about caustic.

The index price improvement that we saw published a couple days ago for October will predominantly have a positive effect on us in Q1..

All right. Terrific. Thank you..

Your next question is from Jason Freuchtel with SunTrust. Please go ahead..

Hey. Good morning..

Good morning, Jason..

Good morning..

The commentary was very helpful on the bridge of 2017.

But to better understand the revision to your guidance, I guess, that was provided in August, can you provide some clarity in terms of how much natural gas, ethylene, as well as the performance in Epoxy, EDC and chlor alkali pricing impacted your expectations for 3Q 2016?.

Yeah. The decline in the guidance was essentially equal parts ethylene, natural gas, and Epoxy..

Okay, great.

And then, I guess, as we look into 4Q 2016, should we assume the same kind of equal percentage of impact to 4Q 2016 from 3Q 2016?.

Actually, if you roll forward from Q3 2016 to Q4 2016, the two big impacts are the normal seasonal decline in Winchester, which if you look historically, Winchester's fourth quarter results usually decline about 30% from third quarter just due to the seasonal pattern of ammunition purchases. And that's what's baked into our estimate.

And we've got some slightly higher corporate cost in terms of the timing of things like litigation and environmental. And I think then we gave specific commentary around the business. We do expect higher gas prices in CAV, but better caustic prices and then seasonal weakness on some of the products..

Okay.

And then, I guess, just to add on to the bridge into 2017, are there any turnarounds that'll go away and what is your view of seasonality in each of the businesses from 4Q to 1Q?.

I think, year-over-year, we would expect in 2017 outages to be similar to slightly higher in 2017 versus 2016. Seasonally, if you – the chlor alkali business definitely get stronger as we move through Q1 and we would expect it to be stronger than Q4. And I would say the same thing about the Epoxy business.

And those comments are absent outages which – with the Gulf Coast assets tend to be concentrated in Q1 and Q2..

Okay.

And then, is the $50 million year-over-year improvement in EDC earnings that you commented for 2017 that's associated with the second tranche of the Dow ethylene contract? Is that $50 million benefit is the full expected benefit from the second tranche of the Dow ethylene contract?.

The $50 million improvement is made up of two pieces. What we said was if EDC prices stay the same throughout 2017 as they are in Q4, which is higher than they were earlier this year, that's part of it and the other part of it is the second tranche of the ethylene..

Okay.

And roughly, how much is the impact from the second tranche of the ethylene?.

We're not going to comment on that..

Okay, great. Thanks, guys..

And our next question comes from Don Carson with Susquehanna Financial. Please go ahead..

John, how hard were you running the EDC assets in the quarter? And of your ethylene requirements there, how much is internal versus how much is purchased externally and spotter contract?.

During Q3, we were running fairly hard and about 60% of the ethylene is cost-based and about 40% is market-based..

And on that 40% market-based, what's the spot contract split there?.

I'm not sure I understand the question. I think the best barometer of it is something like the IHS monthly price..

Okay, but you're not buying spot, it's all contract..

It's really a mix, Don..

Okay..

And then from a modeling perspective, I would assume it that as spot price..

Okay. And then fourth quarter, part of the revision, is it also greater than expected outages, or were these turnarounds in Charleston and St.

Gabriel already in your guidance?.

They were already in our guidance.

And then, just a clarification on the tranche two of the Dow ethylene contract. So that kicks in mid-year.

What would you estimate – if you have that for the full year, what would you estimate the earnings benefit to be?.

We're not going to comment on what that is, because that tells you what our cost is. And that's very competitively sensitive..

Okay. Thank you..

Our next question is from Arun Viswanathan with RBC Capital Markets. Please go ahead..

Thanks. Good morning. I was just wondering if you could help us understand the 2017 comments a little bit more.

So, first off, the $100 million caustic improvement, when you say that, if it includes the Q4 caustic improvements, what exactly are you including in the Q4 improvements? Is that what we saw in the October index? Are you assuming that that holds constant through most of 2017? Are you including any increases for November or December?.

The $100 million is based on the price, as we said, we assumed. That was based on the information we had through the end of September. I just said the index improvement that we saw in October would be an incremental benefit beginning in Q1.

If there are additional improvements in the index or additional price increase is announced in the fourth quarter or into 2017, those represent further upside to the $100 million..

Okay, great. And then, before you were tracking it around $240 million to $250 a quarter, but now it looks like your run rate's around $220 million, $210 million or so. So, maybe you could help us bridge that gap.

What do you think the biggest movements are there? Is it mainly nat gas and ethylene? And how much do you think the contract that you signed with Dow would bridge that gap?.

Well, the biggest impact we've had over the course of the year has been the increase in natural gas costs, which if you just look at some kind of index, it's gone from about $2 in Q1 to something around $3 in Q4. And today, round numbers, two-thirds of our electricity comes from gas versus it used to be 25% in the Olin system.

So that's the biggest single impact. The ethylene move really happened late in the second quarter and it moved up quite a bit in Q3. It's actually forecasted to back off a little bit. But that's an impact that really only hit us in the first half – in the second half of this year.

And if it carries over, it will only hit us in the first half of next year. So that's kind of a wash..

Okay. And then, so I guess what you're saying is that, if all else equal, the only major headwind that you see relative to getting to that $1 billion or so next year is the gas piece..

Very simplistically that's true..

Okay. And then....

There's a lot of assumptions in there around business activity, which is ultimately very important, but -.

Okay, great.

And then just on the Epoxy business, is that business kind of evolving the way you see it or is it slightly below your expectations on volume or price?.

I think it's improving the way we forecast. I mean, we're looking at a year-over-year improvement in EBITDA of 40%. And I think we had a chart in our Investors Day slide, I think where we're forecasting that to come out is consistent with that chart..

Okay. Thanks..

Our next question is from Aleksey Yefremov with Nomura Securities. Please go ahead..

Good morning. Thank you.

Are you happy with the way your caustic soda contracts are currently structured? And if not, do you see opportunity to improve pricing terms that specifically lags as you negotiate 2017 contracts?.

I would say, generally, we're happy with where they are. The terms under which you negotiate contracts tends to change depending on whether the market's short or long. Contracts that we would be negotiating this year and into next year look like they're going to be negotiated in an environment that's favorable to the seller.

So we would expect that we should be able to improve that group of contracts..

Thank you. And then turning to EDC market, EDC prices do not seem to be rising as much as PVC prices in Asia.

What do you attribute that to? Do you have any theories behind that?.

Yes. This is Jim Varilek. The reason that we've seen a lag in EDC pricing is basically because you've got continued low oil pricing. And therefore, the ethylene is not moving as much in Asia as a result and putting pressure on EDC. So PVC prices have moved up.

And as a result of that, we do think that there's room for EDC prices to move and we're not going to participate in that market further until we see the prices on EDC move..

Thank you. And then, in your press release, you mentioned that in the fourth quarter one of the headwinds could be higher purchased ethylene costs.

Are you assuming higher price of ethylene or is there something else going on in Q4, because benchmark seem to be pointing to roughly flat ethylene monomer?.

That is just purchased ethylene. And based on the forecast we have, we're assuming that fourth quarter is slightly higher than third quarter..

So, there's nothing as far as outages, or you are in need to purchase more ethylene, none of that is going on in Q4?.

No..

Okay. Thank you very much..

Our next question is from John Roberts with UBS. Please go ahead..

Thank you.

Have you actually notified Dow of intent to exercise the option for the second tranche, or do you wait as long as possible in case something unusual happens in ethylene spreads?.

We have actually already notified Dow per the terms of our agreement with Dow..

Okay.

And is there anything that could shift it from the mid-2017 implementation date?.

The implementation date is entirely dependent on Dow bringing their new cracker in Freeport online. And mid-year is the best estimate they've given us most recently..

Okay. So your timing is linked to their startup. They don't have to make up anything if they're late in their startup..

No. We don't have to (33:17).

Yeah. Do have any early look on 2017 CapEx? I assume no electricity like payments in 2017..

I would say, John, that we continue to say that we believe maintenance CapEx for the business is in the 225 million to 275 million range. We have not given any real guidance. I think something in the neighborhood of $300 million plus or minus is probably a reasonable number..

Thank you..

Our next question is from Dmitry Silversteyn with Longbow Research. Please go ahead..

Good morning. Thanks for taking my question. A couple of questions to follow-up perhaps. You talked about your expectations for Epoxy EBITDA could be up about 40% in 2016 for the full year versus pro forma in 2015.

So, what was the 2015 annual EBITDA for Epoxy?.

Well, remember, it was partially Dow, partially Olin..

Right. So, I'm asking – I mean, you've given that pro forma number up 40%. So I'm just trying to figure out what that implies for the fourth quarter? That's why I'm sort of interested in what was 2015 EBITDA..

It was somewhere in the $80 million to $90 million range, although it's not entirely apples-to-apples anymore..

Okay. So the 40% is to apples or to oranges? I mean, is it – so it's 40% up versus $85 million.

Is that how I should think about 2015 EBITDA?.

Dmitry, this is Todd. We provided guidance on Epoxy. We said we thought it'll be similar to the third quarter. The fourth quarter will be similar to the third quarter..

Okay. All right. So I'll calculate backwards from there. Okay. Second question on the caustic price optimism (35:19), you mentioned, a multiyear environment for positive price is shaping up. And you mentioned one of the reasons for that was the decline in production in Europe through the Mercury transition.

So the 1 million to 1.5 million metric tons that are expected to come out by the end of 2017, what would that represent as a percentage of industry capacity in Europe currently?.

8% to 12%..

8% to 12%, okay. So basically, you're looking to pick up that minus whatever the decline in industrial production in Europe would be over that year as export volume. Okay, got that. And then final question of EDC, you talked about volumes basically holding off production, given these low prices.

If they persist or don't recover enough for you to exploit your assets more fully, what can we be thinking about in terms of volume declines in EDC on a year-over-year basis for 2017?.

I would say you get to mid-year 2017 and the dynamics of our business change because all of the ethylene becomes cost based. So, I think it would not be a good assumption to assume you're going to see meaningful declines in EDC volumes in 2017 versus 2016..

Okay.

So basically just the first half of 2017 where we have to worry about that?.

Yes..

Okay.

And then, are we talking about sort of single-digit declines or are we talking about more drastic curtailment of production?.

Dmitry, I would take you back to 2016. In the first quarter of this year, we actually didn't run particularly hard because the prices were even lower than they are today. And you just heard some commentary that we're not running as hard now..

Right..

I think when you balance those two facts in 2016 against what we expect to see in 2017, again, I think talking about a decline in EDC, we're probably talking about something that would be on the margin..

Got it. Got it. Thank you, John, I appreciate that color.

And then final question on Winchester, as you sort of come to the end of the relocation and you got your $40 million in cost benefit, as you look out to 2017 EBITDA levels or longer term EBITDA levels, can you update us what sort of the normalized EBITDA profile for Winchester should look like now?.

Well, what we've said historically is once this was complete, we expected Winchester to be able to generate a minimum of $125 million of EBITDA under all market conditions..

Okay. All right. And I'm assuming that it'll be probably something better in 2017. Okay, very good. Thank you..

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

Yes. Good morning. I want to come back to the phase out of mercury-based production in Europe. At one point in time I think that you had indicated an expectation for 1.3 million tons to 1.5 million tons to come out, and I thought I heard you say 1.0 million to 1.5 million in the prepared remarks.

First of all, is that accurate? And second, if it is, I'm wondering why the change on the south end of the range? Are you seeing any more than you had previously expected in the way of conversion of diaphragm or membrane capacity? Thanks..

I think over the course of the year, we've seen about our – the actual, how I say this, declarations by producers in Europe change by about 100,000 tons. So there would be 100,000 tons more converted than we might have thought earlier in the year..

Okay, so relatively small then. Very good. And then second question on Epoxy, maybe two pieces. I was wondering if you could comment on the base liquid Epoxy resin pricing trend that you have embedded in your guidance in the fourth quarter, and also remind us of what will be a typical seasonal pattern in that business 4Q versus 3Q..

Yeah. This is Pat Dawson. I would say on Epoxy pricing, I wouldn't say there's a seasonal trend on pricing. There is a seasonal trend on volume where you typically see Epoxy volumes go down anywhere between 8% and 12%. 10% is a good number just simply because people can't get outside to do things from an industrial coatings standpoint mainly.

Pricing, we see as being stable to improving going from Q3 to Q4. Some of that, of course, we've already mentioned before around hydrocarbon increases. We had propylene up about 16% from Q2 to Q3 and we see that maybe up another 6% from Q3 to Q4.

So that will certainly drive a lot of our formula pricing that we have that typically lags around a quarter or less..

Very helpful. And then a final question.

How would you characterize natural gas hedges or lack thereof for the fourth quarter and beyond?.

We've not commented on hedging. We're not hedged at the end of the second quarter. And I think if you look at the trend out in gas, you're looking well over $3 at this point next year..

Okay.

I am trying to understand if we see future moves in natural gas, looking forward from today, should we assume that your economics are floating with the market in general?.

I think you can assume that over the long haul, we can't beat the market..

All right. I'll follow up offline. Thank you..

Our next question is a follow-up from Jason Freuchtel with SunTrust. Please go ahead..

Thanks. I just had a couple follow-ups. I think you previously indicated, you should realize about 30% to 70% of changes in chlor alkali market prices depending on the environment.

And in the current environment, is it safe to assume you'll realize at or near the 70% of the price changes in market prices?.

No, because that 30% to 70% depends on the mix of contracts..

Okay.

So is there a good assumption based on maybe your contract structure we should assume?.

Yes, I think 50% which is the midpoint of 30% to 70% over a 12 month period is a good assumption..

Okay. And I think you also indicated, on average, roughly all of a price increase that is accepted into the market in the beginning month of a quarter will flow through in the following quarter and a small portion of the price increase accepted in the last month of a quarter will flow through in the following quarter.

Is that still accurate?.

Yeah. I think that's fine..

Okay, great.

And longer term, once you receive the producer economics for your entire ethylene need, will you be able to run your chlor alkali plants harder and potentially above the industry average, since your end market cost structure will be much lower?.

Yes..

And which end markets could we assume that impact, I guess, EDC, Epoxy's, chlorinated organics, all of the above, or is it primarily benefiting one specific end market?.

Well, the acquisition or the ability to have 100% of our ethylene be cost-based primarily benefits the vinyls industry, the vinyls shipments..

Okay.

And then, I guess roughly what percentage of COGS within Epoxy is driven by benzene and propylene?.

I don't know that we've disclosed that..

Okay. And then lastly, it looks like you were able to reduce your expectation for capital spending and investments this year. What's driving the lower investment spending in 2016? And it doesn't look like it's having an impact on expected synergies.

Is that correct?.

It is not having an impact on synergies, no..

Okay, great. Thanks..

And our next question is a follow-up from Arun Viswanathan with RBC Capital Markets. Please go ahead..

Great. Thanks. I just wanted to go back to your comments on natural gas. So maybe can you just help us understand how you guys think about the potential headwind? I guess I'm of the understanding that in the industry each dollar change is around $25 to $30 on the ECU. You guys have about 3 million merchant ECUs, which is about 70% gas-based.

Are those in the ballpark of the right assumptions to use in calculating your potential headwind?.

Those are exactly the assumptions you should use..

Okay. So if we go through that math, then I get something like each dollar per Mmbtu is around $65 million or $70 million annual change, so unhedged that is. And I think I heard you say something like $200 million. So I'm just making sure getting the right calculation here..

I'm not sure what the $200 million was..

Okay, I guess I misheard that. So, okay, great. And then, I also just wanted to confirm, in earlier comment, you said that the increase in natural gas is helping on the margin.

So, I guess, is it generally the case that increases in raw materials over the long run does drive increased margin within Chlor Alkali and Vinyls?.

Just to clarify, I believe the question was, are the caustic price increases you're getting creating a positive benefit or are they just offsetting gas? And we said they are creating a positive benefit.

I would say this, if you looked at natural gas prices over a 20 year period and plotted it against caustic soda pricing, there is a broad correlation there..

Okay, great.

And then the question I had was have you disclosed what the cash outlay to Dow next year was for any kind of ethylene payments?.

Yeah. That's been in all of our Investor presentations. I don't have the number in front of me, but -.

It's around $210 million..

Right. Okay, great. Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to John Fischer for any closing remarks..

I'd like to thank everybody for joining us today and we look forward to speaking to you about our fourth quarter results in about 90 days. Thank you, all..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..