Olin Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Olin Corporation is a leading vertically integrated global manufacturer and distributor of chemical products and ammunition, operating across three business segments: Chlor Alkali Products and Vinyls, Epoxy, and Winchester.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Olin’s business can be described as a mix of cyclical commodities and some specialty products.

Business Overview and Moat Analysis

  • Business Segments:

    • Chlor Alkali Products and Vinyls: This segment produces chlorine, caustic soda, hydrochloric acid, and other related products used in water purification, chemical manufacturing, and pulp and paper production. Olin is one of the world’s largest producers of chlorine and caustic soda.
    • Epoxy: This segment manufactures a range of epoxy resins, intermediates, and related products, and is the world’s largest producer of epoxy. These materials have applications in coatings, adhesives, and advanced composites.
    • Winchester: This segment produces and distributes ammunition for both commercial and military purposes. Winchester is the leading maker of ammunition, with a significant portion of revenues coming from the U.S. Army’s contract.

  • Moat Assessment:

    • Weak Moat (2/5): Olin’s moat is limited by its exposure to the highly cyclical and commoditized chemicals industry where they mainly compete based on cost. While it has some advantages in certain sectors, these are not always sustainable.
    • Limited Pricing Power: The core products in the Chlor Alkali and Vinyls business face significant competition and price pressures because they are more commoditized.
    • Economic Moats:

      • Intangible Assets in Winchester Segment: A strong brand and long relationship with the US government, especially with the Army, provides a narrow moat. The brand can give some pricing power and helps keep the government contract.

      • Cost Leadership in Chemical Production: Olin has the benefit of economies of scale in both its chemical and ammunition operations, which should lead to lower costs of production and a slight cost advantage over smaller players, however this can easily be replicated.

    • Proprietary Technologies: The Epoxy segment has some proprietary technologies, giving some cost and performance benefits, however it is not a durable moat since other players can also replicate.

    • Lack of Differentiation: Overall, Olin struggles with product differentiation. In the chemical industries, there are always other producers who produce similar products which makes it hard to create a strong, durable moat.

Risks to the Moat and Business Resilience

  • Cyclicality of Chemical and Commodity Market: The company is vulnerable to fluctuations in the broader chemical and commodity markets. These cycles can have negative effects on pricing and volume.

  • Raw Material Costs and Supply Chain: The cost of raw material, especially energy can cause downward pressure on ROIC and margins. Supply chain disruptions may also have a similar effect.

  • High leverage: Olin has taken up a lot of debt in the past, a lot of which was incurred for acquisitions. High leverage implies that the company will be more susceptible to financial pressures if they underperform for some time.
  • Environmental Liabilities: Olin’s manufacturing operations are linked with legal/environmental and regulatory risks. If these are not managed properly, there can be an impact on their business.
  • Competition: Olin faces high competition in the chemicals industry, which reduces its overall pricing power. Furthermore, most of their business involves no product differentiation so there’s no strong brand identity to protect it against cheaper options.

Business Resilience While the business is exposed to certain risks, their vertically integrated businesses can mitigate the effects of many of those risks. Furthermore, they have had a history of turning things around, however that may depend on favorable economic conditions.

Financial Analysis

  • Revenue Distribution: In the year ended December 31, 2022, Olin had sales of $8,996.7 million, broken down as follows:
  • Chlor Alkali Products and Vinyls: $5,140.1 million * Of this, $3,593.4 million was domestic, and $1,546.7 million was foreign.
  • Epoxy: $1,603.5 million * Of this, $740.9 million was domestic, and $862.6 million was foreign.
  • Winchester: $2,162.6 million, with virtually all sales in the US.
*   **Segment Results:** While Chlor Alkali Products and Vinyls form the largest chunk of revenues, the Winchester segment is a very stable contributor and consistently performs well on the back of the US Army contract. However, it's not the most profitable and often has lower margins.
  • Gross Profit: Total gross profit was $3,420.5 million, resulting in a gross profit margin of 38.0%. However, the gross margin was at 44.6% in 2021 compared to 38% in 2022 indicating a fall in profitability margins.

  • Operating Income: Operating income was $1,974.6 million, leading to an operating profit margin of 21.9%. Again, compared to an operating profit margin of 29.7% in 2021, it shows the significant reduction in operating profitability over the past year.

  • Net Income: Net income attributable to Olin Corporation was $1,200.8 million. This resulted in a net profit margin of 13.3%, a large drop from the 20% margin in 2021.

  • Cash Flow: Cash flow from operations has come down sharply from $1,810 million to $651 million from 2021 to 2022. Net cash from financing activities is very high at 1,323 million, however, most of this came from long term debt.

  • Growth: The company has been focusing on organic growth initiatives and new product development, it has made significant investments into these, which will fuel future growth. However, the company is expected to have lower overall growth rates in the long term.

    • Financial Health: Olin has considerable debt, the debt to capital is around 70% in 2022 compared to a debt to capital ratio of 53% in 2021, indicating a significant increase in their borrowings, especially when compared to companies with similar credit rating. That’s why it’s important to monitor their ability to pay off their current debt and leverage in a sustainable manner.

  • Recent Concerns/Controversies/Problems:

    • Economic Slowdown Impact: In the recent earnings call, management noted a significant slowdown in demand as economic conditions have weakened and customers are destocking inventory. This could affect Olin’s ability to pass on price increases and might reduce the overall sales volume.
    • Inventory Issues: There was an inventory buildup in the fourth quarter of 2022 in a few segments, and management expected some impact in the first quarter of 2023, which did happen as evidenced by their financials.
    • Inflation and Rising Costs: They noted the cost of goods sold and SG&A had risen year over year and that they were working on reducing that. It might be a challenge for them to achieve higher margins due to increasing cost pressures.
  • European Exposure: They also have a large European exposure, where the Russia-Ukraine war is impacting commodity prices and demand. It has had a slight negative impact on the business and a full effect has not been seen yet.
*   **Management's Response**: Management reiterated that they are focusing on controlling the costs and cutting down capital expenditures, so that they are able to maintain their margins. They are expecting an upturn in the economy in 2024, but it remains to be seen if that plays out.

Understandability

  • Rating: 3/5
    • While Olin’s individual segments are easy to grasp- basic chemicals and ammo- the complexity increases once you start diving deep into its supply chain and the industry trends. It requires some understanding of chemical industries and the global political situation. The accounting principles are also fairly complex and it needs the investors to look at the footnotes and understand non-recurring charges and special items.

Balance Sheet Health

  • Rating: 3/5
    • While Olin has a strong current ratio, with high amounts of cash and current assets when compared to current liabilities, it also has significant long term debt. And the company’s high levels of leverage also raise concerns over their financial health.
  • Summary Olin has a limited moat and is highly dependent on the current economic conditions to perform well. Investors who want safety will have to look at other places, though the company is able to generate decent revenues. However, the company is extremely sensitive to commodity and political risks.