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Olin Corp (OLN 1.25%)
Q3Â 2018 Earnings Conference Call
Oct. 30, 2018, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Olin Corporation Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Larry Kromidas Olin's Director of Investor -- Director of Investor Relations. Please go ahead.
Larry Kromidas -- Director of Investor Relations
Thank you, operator. Good morning, everyone and thank you for joining us on our third quarter earnings call. Before we begin this morning, 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 actual results could differ materially from those projected. Some factors that could just 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 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. With me this morning are John Fischer, Olin's Chairman, President and Chief Executive Officer; Pat Dawson, Executive Vice President and President Epoxy and International; John Mackintosh, Executive Vice President, Synergies and Systems; Jim Varilek, Executive Vice President and President Chlor Alkali Products and Vinyls and Services and; Todd Slater, Vice President and Chief Financial Officer.
Now I'd like to turn the call over to John Fischer, John?
John Fischer -- Chairman, President and Chief Executive Officer
Thank you, Larry. Good morning and thank you for joining us today. During this morning's call I will begin by highlighting the key takeaways from the third quarter followed by a more discussion of each of our business segments and the current market environment for each segment. We now turn to Slide three I will talk about some highlights. Building upon record performance in the second quarter Olin's third quarter 2018 adjusted EBITDA was $398 million. This is the highest quarterly adjusted EBITDA level since the acquisition of the Dow Chlorine Products Assets in late 2015. As we progress through the balance of the year, there are several short-term market headwinds that I will discuss in more detail in a moment. In addition to the normal seasonal demand slowdown. These will likely dampen our earnings performance in the fourth quarter. As a result, we now expect full year 2018 adjusted EBITDA to be in the $1.26 billion range with upside opportunities and downside risks of approximately 2%.
Now turning to the business segments beginning with Chlor Alkali Products and Vinyls which is summarized on Slide four.
For the third quarter of 2018 Chlor Alkali Products and Vinyls reported adjusted EBITDA of $333 million, an improvement of more than 40% over the third quarter of 2017. The increased earnings were primarily due to higher pricing for caustic soda, chlorine, ethylene dichloride and other chlorine derivatives. For example ethylene dichloride prices in Olin system have more than doubled so far this year. During the third quarter, we experienced higher ethylene costs as a result of higher ethane prices in addition to higher freight costs. Ethane which averaged approximately $0.27 per gallon during the first half of the year, average $0.43 per gallon during the third quarter, a 60% increase. We are forecasting that ethane prices will average in the mid $0.40 per gallon range in the fourth quarter. We expect ethane prices to remain higher than the first half of 2018 through 2019.
And as a reminder, $0.01 change in the price of a gallon of ethane impacts our EBITDA by approximately $3.2 million on a full year basis. In addition, freight costs increased approximately 15% in the third quarter of 2018 compared to the third quarter of last year, reflecting both higher truck and rail road freight rates.
Now turning to caustic soda pricing on Slide five. Over the past year or so caustic soda pricing has been influenced by a series of one-time events, including Hurricane Harvey, the European Mercury shutdowns and most recently the Alunorte alumina plant curtailment. The first two were supply disruptions that created favorable price momentum. The Alunorte curtailment represents a demand disruption. This demand disruption combined with seasonally strong PVC operating rates has been putting pressure on caustic soda pricing in the export market, which will impact caustic soda export and domestic contract prices into the first quarter of next year.
On a positive note, we have recently seen caustic soda prices in both China and Europe increased from their recent lows. If Olin's caustic soda price remains at the current fourth quarter 2018 levels, 2019 adjusted EBITDA would have a headwind of approximately $100 million compared to 2018 levels. As we look forward into 2019, there are opportunities that can provide offsets to the earlier challenge that caustic soda pricing presents. Iif pricing in our chlorine-derivative portfolio including merchant chlorine, bleach, hydrochloric acid, ethylene dichloride and chlorinated organics remains at current fourth quarter 2018 levels, 2019 adjusted EBITDA would improve by $60 million to $75 million compared to 2018 levels. We expect chlorine, ethylene dichlorine and chlorine derivatives pricing to improve further in 2019.
In addition, maintenance turnaround costs, especially in the Epoxy business are forecast to be approximately $30 million to $40 million lower in 2019 compared to 2018. Finally, while we expect our ethylene costs to be higher in 2019 compared to 2018 due to higher ethane pricing, we anticipate higher ethylene dichloride pricing in 2019 to more than compensate for these higher ethylene costs.
Let's move now to the performance of our Epoxy segment, which is summarized on Slide six. Third quarter 2018 Epoxy adjusted EBITDA of $56 million was approximately $33 million higher than the third quarter, 2017 results. The significant earnings improvement was driven by higher product pricing and volumes, partially offset by higher raw material costs primarily benzene and propylene. Sequentially to $6 million adjusted EBITDA improvement from the second quarter was driven by lower turnaround costs and higher volumes, partially offset by higher raw material costs primarily propylene. The third quarter is typically the strongest seasonal quarter for the epoxy resin demand. Therefore, we are forecasting fourth quarter epoxy resin sales and adjusted EBITDA to be sequentially lower than third quarter results.
We are encouraged by the results in the Epoxy business this year and the overall supply and demand dynamics present in the market. With the successful completion of our maintenance turnarounds earlier this year in North America and late last year in Europe we expect improved volumes and improved results into 2019. On Slide seven, we have a chart that displays liquid epoxy resin pricing in the United States, Europe and Asia. Resin pricing has improved in each region since the beginning of 2016, a portion of these increases have been necessary to recover the higher raw material cost experienced primarily benzene and propylene.
Supply and demand fundamentals have resulted in tighter market conditions for liquid epoxy resin adding to the price momentum. Epoxy resin pricing dynamics have been different by region. In Asia, resin prices have increased dramatically in the latter part of 2017 into early 2018 and moderated during the first and second quarters of 2018 . In North America and Europe,.price increases -- prices increased late in the fourth quarter of 2017 and through the beginning of the second quarter of 2018 and then declined slightly. During the third quarter of 2018 resin prices were stable globally. Excuse me. Increased global pricing for bisphenol-A and epichlorohydrin have continued to support the current epoxy resin pricing levels.
Moving onto our Winchester business on Slide eight. Third quarter 2018 Winchester, adjusted EBITDA was $15.2 million, a decrease of $6.8 million from the third quarter of 2017. The year-over-year decrease is attributable to higher commodity and other material costs of $4 million, lower commercial volumes and pricing of $5 million, partially offset by lower operating costs of $3 million. During the first nine months of 2018, commodity and other material costs have increased approximately $18 million as compared to the first nine months of 2017. We now expect overall 2018 commercial demand to decline by approximately 20%, which follows a 17% decline in commercial demand in 2017. While, we have confidence that ammunition usage at the consumer level has remained strong, we believe consumers are continuing to reduce their personal inventories. The fourth quarter has a historically been the weakest ammunition demand quarter and as a result, we expect that there will be a normal sequential decline in fourth quarter results, as compared to the third quarter.
Turning to Slide nine, I will discuss our view of the market. Olin continues to be bullish about the long-term prospects for its chemical businesses.This bullishness reflects the continuation of the favorable energy position that producers in North America realize, forecasts for continued growth in key product areas that will drive improvement in the supply and demand dynamics for caustic soda, chlorine derivatives, epoxy resins and epoxy resin precursors and the cost and related investment requirements of new capacity for both Chlor Alkali and the required Vinyls or other derivatives required to utilize the chlorine as well as the cost of new capacity for the upstream products like allyl chloride, phenol, bisphenol-A and epichlorohydrin required to produce additional liquid epoxy resin.
More specifically on these points over the next five years, we expect global caustic soda demand to grow by approximately 3% annually, led by growth in the alumina industry of 5%. We also expect global chlorine demand to grow at approximately 2.5% with the largest growth area being in the PVC industry. This growth will translate into increased global ECU demand of approximately 10 million tons. At this point in time there is only been approximately 2 million tonnes of capacity additions announced. We do not believe that the current economics justify the additional investment required to fill this gap. We also do not believe this additional demand can be filled by higher operating rates, which would have to increase and be sustained at approximately 10 percentage points higher than the long-term global average. These factors lead us to continue to believe the chlor alkali and the caustic soda business is in the midst of a structural change that will result in improved profitability over time. The improved profitability would be necessary to justify the additional investments needed to meet chlorine and caustic soda demand growth.
Now turning to Slide 10. In the past we have referred to a mid-cycle adjusted EBITDA forecast of $1.5 billion. This forecast was developed based on our view of the business when the Dow Chlorine Products transaction closed in October of 2015. Today, we believe $1.5 billion of adjusted EBITDA is a point on a long-term improvement curve that will be achieved in the next 24 months. As a point of reference, the impact of higher ethane prices, lower export caustic soda pricing and weaker commercial ammunition sales reduced Olin's third quarter adjusted EBITDA by approximately $25 million. The third quarter performance, plus those adjustments demonstrate our ability to achieve the $1.5 billion of adjusted EBITDA. Finally, it is our intention to host an Investors Day in New York in early February to provide a detailed analysis of our industry views.
Now I'd like to turn the call over to Todd Slater, Olin's CFO.
Todd Slater -- Vice President and Chief Financial Officer
Thanks, John. Turning to our 2018 cash flow forecast, which is on Slide 11. We expect to generate approximately $550 million of free cash flow this year. Our top priority for free cash flow remains debt reduction and with the combination of debt reduction and EBITDA growth over the last 12 months. As of September 30, our net debt to adjusted EBITDA leverage ratio has been reduced to 2.6 times. We expect the leverage ratio to be in the 2.5 times range by year-end and to be further improved in 2019 to the 2 times range. Starting with the midpoint of our full-year adjusted EBITDA forecast of $1.26 billion on the far left of the waterfall chart. We deduct $50 million of estimated cash tax payments, which primarily reflect income tax payments made to foreign jurisdictions in 2018. We are forecasting that our cash tax rate will be in the 10% to 15% range for the year. Since 2015, Olin has not been a U.S. federal taxpayer because of the utilization of net operating loss carry-forwards, primarily arising out of costs associated with the acquisition in 2015. Because of this, we do not expect to be a U.S. federal taxpayer in 2018 .
Why we are continuing to analyze the full impact of the Tax Cuts and Jobs Act of 2017, which was signed into law in December 22, 2017. The cash tax benefit Olin of the changes in the tax law is minimal in 2018 due to the tax credit carry-forwards. We do expect the new tax law to provide cash tax benefits to Olin beginning in 2019. The new tax law is currently estimated to reduce our cash tax rate for 2019 and beyond to the 10% to 20% range. Column 3 reflects the midpoint of our current forecast for capital spending of $400 million, which includes annual maintenance capital spending of between $225 million and $275 million and the investment associated with our multi-year information technology project of approximately $100 million. As we have previously discussed in 2017, we began a multi-year project to implement a new enterprise resource planning, manufacturing and engineering systems across the heritage Olin and the acquired Dow Chlorine Products businesses. The project includes the required information technology infrastructure.
Now turning to the 4th column, we are expecting working capital be a use of cash in 2018 of approximately $50 million. The estimated increase in working capital is primarily due to higher selling prices, and inventory costs associated with higher propylene costs in the Epoxy business. We currently expect revenue in 2018 to increase approximately 12% compared to 2017 levels. And the next column one-time items represent a full-year benefit of approximately $30 million. The one-time items include an $88.5 million insurance recovery net of legal costs incurred for various environmental remediation sites. Integration and cash restructuring costs and the first quarter's $8 million business interruption, insurance recovery and the approximately $50 million for the expense portion of the multi-year IT project that I just spoke about.
During the third quarter, we settled certain disputes with respect to insurance coverage for costs that various environmental remediation sites totaling $120 million, which was reduced by an estimated liabilities of $10 million associated with claims by subsequent owners of certain of these settled environmental remediation sites.
Furthermore, we recognized a pre-tax -- therefore we recognized a pre-tax gain of $110 million. Olin incurred legal fees of $21.5 million in 2018 to affect this insurance recovery. As a result, adjusted EBITDA excludes the $88.5 million of environmental insurance recoveries. The cash associated with this recovery was received in the fourth quarter. The next column represents an estimate of interest expense. We currently have approximately 15% of our debt at variable interest rates after the debt refinancing we completed in January. And we are forecasting 2018 interest rates to be higher than those we experienced in 2017.
Now turning to capital allocation. During the first nine months of the year, we prepaid approximately $250 million in debt. In addition, we have returned $117 million to shareholders in the form of dividends and share repurchases. Given our confidence in the outlook for the chemicals businesses and our positive outlook for cash generation and the environmental insurance recovery received, we expect to be more balanced in our capital allocation in the fourth quarter. Finally, on Thursday, October 24th Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on December 10, 2018 to shareholders of record at the close of business on November 9, 2018. This is the 368th consecutive quarterly dividend to be paid by the company.
Operator, we are now ready to take questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Don Carson of Susquehanna. Please go ahead.
Emily Wagner -- Susquehanna -- Analyst
Good morning. This is Emily Wagner on for Don. Just going over the guidance update, we calculate that $45 million EBITDA declined from that caustic or lower caustic prices translates to roughly about $30 per short ton for lower prices in the second half. So, knowing that the index declined about $25 in 3Q, could you give us some more color on the change in export pricing? And what do you expect to happen to the index in the fourth quarter?
James Varilek -- Executive Vice President and President
Emily, this is Jim. The index -- the domestic index as you mentioned has moved down in the third quarter and currently is forecast for another $15 a ton in the fourth quarter. As far as export pricing goes, that's a dynamic marketplace right now and we are seeing some of the reductions that are taking place bottoming out and we're expecting to see some level of -- I'll say, leveling out right now. And we would expect with a few of the demand changes taking place early part of next year, we would expect that to start to reverse.
Emily Wagner -- Susquehanna -- Analyst
Thank you. And then for a follow-up. If you take those three items reducing guidance, it seems to imply 15 -- sorry $12 million, $15 million for the full year. What is the offset from that it seems like there is about $45 million that's better offsetting those things? Is that just better epoxy or can you break that down a little bit?
James Varilek -- Executive Vice President and President
We talked about the year-over-year improvement and that we've been part of the year. Improvement we've seen on the chlorine side, the chlorine derivatives, et cetera, and that is the biggest driver of that.
Emily Wagner -- Susquehanna -- Analyst
Okay. Thank you.
Operator
Our next question comes from Jim Sheehan of SunTrust. Please go ahead.
James Sheehan -- SunTrust -- Analyst
I think you talked about ethane impacts and you might see those continuing in 2019. Ethane prices have collapsed back into the low '30s. Do you think your 2019 outlook might be more conservative? Are you banking on volatility in ethane next year?
Unidentified Speaker --
Yeah, I think the -- the thing about ethane right now is, it is very volatile and so, we do expect that from the spikes that we've seen here in the September-October timeframe, we do expect it to settle back albeit, we do expect that to be at a higher level than we experienced in the first half of 2018.
James Sheehan -- SunTrust -- Analyst
Thanks. And on the Alunorte situation, when would you expect that facility to return to operating rates above 50%?
Unidentified Speaker --
All right. It's a good question. It's one we've been asking for a while. The situation is that one of the barriers has been recently removed last week from an -- the equivalent of the Brazilian EPA, remove their embargo on this site. And so, now it's strictly in the hands of the federal court to remove that embargo and now that elections are over, we're hopeful that will be resolved. I can't give you any kind of date. It's really in their hands, but the technical hurdles have been removed.
James Sheehan -- SunTrust -- Analyst
Thank you.
Operator
Our next question comes from Frank Mitsch of Farium (ph) Research. Please go ahead.
Analyst -- -- Analyst
Yes. Hi, good morning, gentlemen. Not following up on Alunorte Jim, but what about the Rusal sanctions. What are you hearing there? What is your expectation there and what impact that might have on caustic export pricing?
Unidentified Speaker --
Yeah. I don't -- in Rusal, we had earlier in the year and it caused a bit of excitement for a couple of months, but I would not expect anything more from Rusal on the sanctions. trade flows adjust relatively quickly. So, I'm not expecting any impact.
Analyst -- -- Analyst
All right, terrific. And Todd, you made the comment that you anticipate being called more balanced in capital allocation in 4Q. Can you elaborate on what that means and what might be the implications in terms of money spent on share buyback, et cetera?
Todd Slater -- Vice President and Chief Financial Officer
Frank, as we said we repaid approximately so far in 2018 $250 million of debt and we returned $117 million to the shareholders as in dividends and share repurchases. What I would say is, we expect a higher percentage of our free cash flow in the fourth quarter to be returned to shareholders.
Analyst -- -- Analyst
All right, terrific. So the flywheels obviously share buyback. All right, I appreciate it. Thanks so much.
Operator
Our next question comes from Neel Kumar of Morgan Stanley. Please go ahead.
Neel Kumar -- Morgan Stanley -- Analyst
Hi, good morning. On the $100 million headwind in 2019, EBITDA expected cost prices stay at 4Q levels. Does that incorporate any decline in the October caustic price, which I guess since you're projecting? And also, does that consider any improvement in your system pricing for the reset of some of your legacy contracts at the end of the year?
Unidentified Speaker --
No , it is simply a point in time measurement of the prices that we had in our system at the end of -- that we have in our system as of last week. So, if we get a favorable reset from our contract pricing, that's a positive. And if the indices move up, that's positive. If they move down, that's a negative.
Neel Kumar -- Morgan Stanley -- Analyst
Also we see some reports of Northeast Asian export prices coming down recently due to a disruption of trade flows in India from the new bureau industrial standards. Can you give us your thoughts how you think the issue will play out and it will be resolved in the near-term?
James Varilek -- Executive Vice President and President
Hi, Neel. This is Jim. Yeah, the India situation, it's basically its a reset on registration that needs to take place to import product into India. What it really means is that for a period of time, there'll be some kind of activity that will be taking place again is as caustic is the trade flows are adjusted. I don't expect it to be a long-term thing. It's a technical government registration that will pass, because frankly, India will need to continue to import caustic.
Neel Kumar -- Morgan Stanley -- Analyst
Thanks.
Operator
Our next question comes from Kevin McCarthy of Vertical Research Partners. Please go ahead.
Analyst -- -- Analyst
Good morning. It's Matt on for Kevin. So, I have a questions, it relates to the ethylene component of your guidance. I mean what is the ethane feedstock cost kind of baked into that number? And shouldn't at least most of this be recovered by better EDC prices. I mean it seems like particularly throughout the year, the guidance has been fairly conservative on EDC price and we're going to continue to push to the upside on that. So, I'm little confused as to why there's a negative discrepancy of that size coming in 4Q?
Todd Slater -- Vice President and Chief Financial Officer
I think what's embedded in our guidance as we have said -- this is Todd, the mid $0.40 a gallon range. Just let's go back a second to what's in our guidance. We had said -- we have said we are going to make $1 billion or $1.26 billion, and that compares to what we had said before, plus or minus 2%. We said $1.03 billion plus or minus 5% -- plus or minus 4%.
We gave a bridge of $25 million associated with ethane, $45 million associated with caustic and $15 million associated with Winchester. So if you add that off of the $12 billion, of the $1.26 billion that puts you right at the top end of our prior guidance that we had given on August 1st. So, yes, there were offsets as John mentioned for chlorine, all the chlorine derivatives as well as EDC.
Analyst -- -- Analyst
Okay. And then as it relates to Winchester, copper prices starting to move lower year-over-year basis, lead prices moving down. Do you expect to receive any kind of raw material relief or benefits on that end or do you just think most of it will get competed away on price? until we have any better volume return to the market? Thanks.
Unidentified Speaker --
My gut tells me that the answer to that is the latter. I think when you see a 35% decline in commercial volumes, I think it would normally get competed away. I think what you will stop hearing next year, is that the year-over-year is impacted by negatively by higher commodity costs.
Analyst -- -- Analyst
So it's probably tricky to put a number on this, but do you have any idea about inventories on the commercial side and on the consumer end and how elevated they might be versus historics. And how much we have to work through here.
Unidentified Speaker --
I would be lying if I said I had any idea, I mean other than, if you look at, you can go back and look at ammunition purchases in North America from the period the very end of 2018 through the end of 2016 and look at them compared to an historic level and they were 30% to 40% higher for almost seven years.
Unidentified Participant -- -- Analyst
Okay, that's helpful. Thank you.
Operator
Our next question comes from Jeff the caucus of JPMorgan. Please go ahead.
Jeff Zekauskas -- JPMorgan -- Analyst
Thanks very much. And the, in your near-term adjusted EBITDA potential, you say your potential is about $1.5 billion. In over a shorter period of time the value of Olin has really come down to high I think because people have economic fears. And you have all kinds of both cyclical businesses and counter-cyclical businesses in the normal recession what might your EBITDA potential would be?
Unidentified Speaker --
Well, Jeff, the first thing I would say is typically if you think back through what happens in a chlor alkali cycle as we enter a recession.
Jeff Zekauskas -- JPMorgan -- Analyst
Yeah.
Unidentified Speaker --
You see a significant drop-off in demand for chlorine before you see a significant drop-off in demand for caustic. So at the front end of any recession and we saw this in spades in 2008 in early 2009, you get a near-term run up in caustic and then you get a rollover. So we don't -- we're not in the business of forecasting recessions, but I think in a recession the first step for Olin would be the results would be more positive on the caustic side than they are today and we obviously very highly levered to caustic.
Jeff Zekauskas -- JPMorgan -- Analyst
Okay. Can you talk about some of the dynamics behind the positive chlorine pricing and how sustainable you think they are?
Unidentified Speaker --
I think, Jeff, what's happened over the long span of time and I can go back 25 years or 30 years is the merchant market for chlorine has shrunk dramatically primarily because most of the vinyls producers in North America have over the last 20 years backward integrated and become their own chlorine supplier. So, the merchant market itself has shrunk quite a bit. On top of that there has been significant increase in freight rates around delivery of chlorine by rail. So merchant for them -- the merchant market itself has shrunk as has the supply and I think in an environment where chlorine and chlorine derivatives are growing at 1% to 2% a year, we're actually shrinking the available supply because some of that growth is in the vinyls chain and it's being handled by the vinyls guys were actually shrinking the amount of chlorine available for the merchant market and that is putting pressure, upward on chlorine itself.
Jeff Zekauskas -- JPMorgan -- Analyst
Thank you so much.
Operator
Our next question comes from Mike Leithead of Barclays. Please go ahead.
Mike Leithead -- Barclays -- Analyst
Good morning, guys. Just to piggyback a bit on Jeff's question on the $1.5 billion EBITDA number just to be clear here is that no longer considered a mid-cycle target, and if so, what would be a fair new mid-cycle number?
Unidentified Speaker --
I think the way I would answer that is, yes, it is no longer considered a mid-cycle target. It is a point on a long-term improvement curve and what we would say to you is, we think the structural changes that occur -- have occurred in the chlor alkali and chlorine derivatives business and in the Epoxy business are such that we're really not going to see cycles like we've seen in the past. We will see supply and demand changes in price changes around broader economic levels of activity. We're not going to whipsaw up and down, like we have in the past. Therefore, I would -- I don't want to call a mid-cycle because I don't think we're really looking at a cycle here.
Mike Leithead -- Barclays -- Analyst
Okay. And then in your 2019 comments, you talked about if we flat line today's caustic soda price, but can you maybe just expand a bit up on how you're seeing caustic soda dynamics here so far in the fourth quarter and how you guys expect the trend heading into 2019?
Jim Varilek -- Executive Vice President -- Analyst
Yeah, Mike, this is Jim. Yeah. As far as the caustic soda demand what we're seeing is there on the export market in particular. We've been the beneficiaries in the past, a number of supply events. As John mentioned in his comments that it's spike the market, quite honestly. And you can go back to whether they'd -- they would be Mercury shutdowns, whether they'd be outages of any individual plants freeze hurricane those things spike the market. And now since that time we've had a demand event or that has limited the demand and that specifically the Alunorte. So what you're seeing is, you're seeing a readjustment of, so the trade flows out of the Gulf Coast that have impacted the export market. And interestingly enough in September, for example, the exact amount of export, spot export that was done was 25,000 tons which is about the exact amount you would expect from Alunorte on an ongoing basis. So you've got that readjustment taking place, and we believe that when that comes back that demand event is over, then we'll start to see a more balanced approach in the upward positive movement that we've seen in the past on the caustic side of things. And just like on the upside, there was some, there is some pressure on the domestic market that pulls the domestic market up and we're seeing the same thing on the downside, which is why you're seeing a minor move in the indexes over the past period of time. So that's really what's taking place right now. The dynamics are there. We do expect the seasonal slowdown on chlorine and operating rates and that should also help the market pull out.
Mike Leithead -- Barclays -- Analyst
Got it. Thanks, guys.
Operator
Our next question comes from Aleksey Yefremov of Nomura Instinet. Please go ahead.
Aleksey Yefremov -- Nomura Instinet -- Analyst
Hi. Thank you. Good morning, everyone. Just going back to your guidance, you mentioned lower expected caustic soda pricing of $45 million , is this really should we think about this as a sequential decline in the fourth quarter, is that really that your realized price decline in Q4 versus Q3?
Unidentified Speaker --
No. That was designed to describe, the difference between our -- the guidance we provided at the end of the second quarter, which was a $1.3 billion, and the guidance we provided at the end of the third (Technical Difficulty) quarter for the full year. So that is the full-year impact that we've realized from lower caustic pricing than we would have expected when we gave you guidance on August 1st.
Aleksey Yefremov -- Nomura Instinet -- Analyst
Alright. So it's really representative of the second half of the year, so to say change in your price expectations?
Unidentified Speaker --
Yes. And that is true also of the comment on ethane and true of the comment on Winchester.
Aleksey Yefremov -- Nomura Instinet -- Analyst
Understood. Thank you. In your caustic soda export contracts, will you -- do you expect to renegotiate any of those contracts as far as new customer commitments, the level of pricing relative to the benchmark, et cetera, and have you concluded any of those negotiations itself?
Unidentified Speaker --
Those, those are
Aleksey Yefremov -- Nomura Instinet -- Analyst
I'm really talking about 2019, sorry.
Unidentified Speaker --
Yeah, understood. The contracts, we're in a constant state of renegotiation and we have contracts that come up all the time. There is a significant amount of the volume that is contracted over the last few years, given the tightness in supply and caustic we have and the industry has moved toward the increased amount of caustic and that is contracted. So the answer is, yes. We'll continue to contract that and there's always price discussions in those, in those contracts.
Aleksey Yefremov -- Nomura Instinet -- Analyst
Thank you.
Operator
Our next question comes from John Roberts of UBS, please go ahead.
John Roberts -- UBS -- Analyst
Thanks. I think China exports caustic soda to the West Coast of the U.S. has there been any change in the dynamics of that particular part of the market?
Unidentified Speaker --
No, other than there were in the early part of this -- of mid-summer and late summer, there were some pricing impacts that are well known, but the dynamics in the movement haven't dramatically changed.
John Roberts -- UBS -- Analyst
Okay. If you think it will be stable here as we go through the end of the year?
Unidentified Speaker --
I think it won't, it won't change that much overtime. China's continue to export less and if there's a demand pickup in China, you may see move less movement to the West Coast.
John Roberts -- UBS -- Analyst
Okay. And then you indicated there really hasn't been any demand, any demand destruction in Winchester, could you just give us an update on some of the metrics that you look at, to give yourself comfort with that?
We have as well first, the National Shooting Sports Foundation looks at consumption around shooting ranges, et cetera, and that's our primary data source. So there is that actual activity of going out and finding out what activity levels are at different shooting ranges, which is where the predominance of the ammunition is consumed.
Okay. Thank you.
Operator
Our next question comes from Eric Petrie of Citi. Please go ahead.
Eric Petrie -- Citi -- Analyst
Hi, good morning. What are your expectations for alumina capacity closures in China during this winter and do you expect to see a similar ramp up in prices as we did last year into November?
Unidentified Speaker --
I don't have really good visibility into what the Chinese are going to do for this particular season. Over the last couple of years, we've seen shutdowns or curtailments that have taken place that have impacted the supply side, which obviously increased the pricing and then we've also seen the demand side being impact by curtailments as well. So I don't have a real good visibility into what to expect this year.
Eric Petrie -- Citi -- Analyst
Okay. U.S. contract prices for caustic soda have increased to premium compared to exports. Is that just purely a function of lower exports to Alunorte or do you expect greater pressure on contract prices, export prices continue to decline?
Unidentified Speaker --
As I mentioned before, I think the export prices have probably bottomed out and there's going to be poles in either direction. If export pricing is above is above U.S. pricing, then you're going to see an upward pull if it's down you're going to see a downward pull and the volatility on that export market has been significant. And when it moves to the upside, it will once it crosses over the equivalent value then you'll start to see upward pressure but yes, it does, it does create some amount of pressure in either direction.
Eric Petrie -- Citi -- Analyst
Great, thank you.
Operator
Our next question comes from Matthew Blair of Tudor, Pickering, Holt. Please go ahead.
Matthew Blair -- Tudor, Pickering, Holt -- Analyst
Hey. Good morning. I think you mentioned a normal seasonal demand slowdown in your opening remarks. When I look at the Chlorine Institute data, it really doesn't show that much of a reduction in average Q4 operates compared to average Q3 operate. So I was hoping you could maybe just quantify, what kind of impact seasonality should have in Q4, whether in terms of volumes, or perhaps EBITDA?
Todd Slater -- Vice President and Chief Financial Officer
Matthew, this is Todd. I guess if you look historically, we would say chlor alkali industry operating rates declined between 3% and 8% between the third quarter and the fourth quarter. So, that's what we would expect a similar decline in Q4 compared to Q3.
Matthew Blair -- Tudor, Pickering, Holt -- Analyst
Very helpful, thanks. And then could you talk about any sort of demand trends you're seeing on the chlorine and chlorine derivative side maybe today versus six months ago. I think housing and construction is perhaps, perhaps one quarter of chlorine demand are you seeing any softness, there?
James Varilek -- Executive Vice President and President
This is Jim. Actually the chlorine side of the equation is it's been very interesting over the last year, year and a half in that. And typical times when you see caustic pricing move as aggressively as it has you often oftentimes, see the opposite side of the ECU be under pressure. What we've seen over the last year to two years is actually both sides of the ECU moving up the chlorine, on the merchant chlorine, the chlorine derivatives, whether it would be HCL or whether it would be EDC you're seeing upward movement on that side of the equations.
So we're seeing both sides of the ECU move, which speaks to the structural change that we believe is taking place in the industry. So we do expect that to continue over the course of the next several years.
Matthew Blair -- Tudor, Pickering, Holt -- Analyst
Thank you.
Operator
Our next question comes from Stephen Byrne of Bank of America Merrill Lynch. Please go ahead.
Stephen Byrne -- Bank of America -- Analyst
Hi. Your longer-term demand growth forecasts for caustic is more robust than the chlorine derivatives and my question for you is, how does the industry balance that differential given the production is equal more?
Unidentified Speaker --
The normal way that gets balanced is by pricing. And that leads us to a bullish outlook on caustic soda pricing long-term.
Stephen Byrne -- Bank of America -- Analyst
But is it -- does the end market make the adjustment in switching to some other alternative raw materials, given that there will be more production of caustic than chlorine, there will be more demand for caustic than chlorine?
Unidentified Speaker --
I think on the margin, there is an ability to convert from caustic soda to soda ash but that is not -- that it would not be sufficient to plug a 10 million ton shortfall.
Stephen Byrne -- Bank of America -- Analyst
And have you seen any increase in that switching over to soda ash in this year?
Unidentified Speaker --
No, that's not a decision you make every day. It's an expensive process change and historically when you look at people they did they more often than not regret that they did it because of the time they spend the money and get it done, you see a reversal in caustic prices that makes it not justifiable. So we are not concerned about that.
Stephen Byrne -- Bank of America -- Analyst
And are there any new technologies and developments that would potentially increase demand for chlorine derivatives?
Unidentified Speaker --
Nothing that jumps out at this point, no.
Stephen Byrne -- Bank of America -- Analyst
Okay, thank you.
Operator
Our next question comes from Arun Viswanathan of RBC Capital. Please go ahead.
Arun Viswanathan -- RBC Capital -- Analyst
Great, thanks. Good morning. Just wondering if you know if you still see a trajectory toward $1.5 billion is mid-cycle EBITDA over the next couple of years. And if so, how would that kind of breakout in the different businesses? Do you still see in light of the Winchester pull back and some of this caustic kind of moderation recently? Thanks.
Unidentified Speaker --
I think we said a little bit earlier. We no longer look at $1.5 billion as mid-cycle. We look at it as a going on a longer-term improvement slope that the businesses are on and we said that we think it's achievable in the next 24 months. And obviously if you looked at our Q3 and adjusted for the ethane penalty in the caustic penalty and added that back in the EBITDA, you can clearly see a path, on a quarterly basis to getting there. Our view is that we're going to see continued growth in demand across the chlor alkali portfolio both on the chlorine side in the caustic side as Jim talked about and we also expect the same dynamics to play out in the Epoxy chain and we've seen improved liquid epoxy resin pricing very consistently since 2016.
And we also are starting to see tightness in the precursors of epoxy which are allyl chloride, epichlorohydrin phenol and bisphenol-A all of which as those get tighter, they're going to force liquid epoxy resin prices up longer term. So we don't view the $1.5 billion as a mid-cycle now. We just view it as a point in a longer-term improvement trend and that improvement trend will come from the chemical businesses.
Arun Viswanathan -- RBC Capital -- Analyst
Thanks. And then on the cash flow, obviously you're generally, a lot of cash for the next couple of years. Your leverage, I think we'll be in a relatively manageable level two times or so. How do you I guess prioritized buybacks and other investments given , given where your leverage would be in your generous cash flow? Thanks.
Todd Slater -- Vice President and Chief Financial Officer
I think, yeah, Arun. This is Todd. I think consistently with what we have said on the call as we, as we look in the fourth quarter, we expect a higher percentage of free cash flow to be returned to shareholders and as we de-lever we would expect to continue to have a higher percentage of free cash flow going forward to shareholders.
Arun Viswanathan -- RBC Capital -- Analyst
Thanks.
Operator
Our next question comes from Karl Blunden of Goldman Sachs. Please go ahead.
Unidentified Participant -- -- Analyst
Hi, good morning guys. I think we started touching on epoxy resin pricing in the last question, just wanted to get more detail on what your thoughts are on the margin outlook for that business and for 2019, clearly feedstocks, you mentioned are tight now pushing and supporting epoxy prices, but how did the puts and takes all balance out for your business?
Pat Dawson -- Executive Vice President and President
Yeah, Karl. This is Pat. Listen, we've seen a pretty ranked run up on the indices market indices in Epoxy here over the last 12 months. I mean since the beginning of '16 liquid epoxy resin is up almost 56%. If you just look quarter-on-quarter, had the market indices, liquid epoxy resins is up 41%, Epi is up 49%, bisphenol-A up 40% on a year-over-year, third quarter basis. So we see, we saw a big change in epichlorohydrin here about this time last year. And we see the supply demand fundamentals continue to be very favorable outside of China.It would appear that in China, what we've seen is any Epi that comes out of which there is very little Epi that comes out of China has been coming out of it, -- 6-day $800 ton higher than the chlorohydrin Epi because a lo of that Epi in China is based on glycerin-to-epi . So I think that is a potentially a structural change that we have not seen in the past, So I see fundamentals on the Epi continuing to stay high.
Phenol as John mentioned there's been a lot of pressure on phenol with some decreases in capacity out in the industry is tight in that market. Polycarbonate market has been strong and robust that has driven BPA prices up and there hasn't been any capacity of any significant built on Epi or BPA in recent times nor have we seen any additional significant capacity build for liquid epoxy resin.So I think the fundamentals around supply demand in some of the changing dynamics due to things going on in China bodes well for good stability at the prices it that you're seeing right now and Olin's epoxy resin prices have been very stable here in Q3. So the puts and takes, I think it also calls for ongoing demand Europe, one of the cautious optimism is out there is that Europe has been growing at 3% or 4%. It looks like, more like 1% or 2%. On the flip side of it, the U.S. market has been stronger this year than past years, mainly driven by oil and gas. So overall, I would say that the input costs, the supply demand fundamentals. The fact that there hasn't been capacity additions made either on the input costs of the precursors or in the resin market would bode well for stable margins and I think you could see a run-up in price again here like we saw earlier in the yea, if you have a few unplanned events.
Karl Blunden -- Goldman Sachs & Co. LLC -- Analyst
It's a lot of detail. I appreciate it. Just a quick one on the balance sheet, is it too early or would you intend to at some point give a debt reduction goal for 2019 or at a place where when you look at the equity is just too many things to consider to give that kind of guidance?
Todd Slater -- Vice President and Chief Financial Officer
I think Karl. This is Todd. In early and when we provide our fourth quarter results in early February, I think we'll be able to give a better sense as to what our expectations are for 2019 in that -- on that area.
Karl Blunden -- Goldman Sachs & Co. LLC -- Analyst
Okay, great. Thanks a lot. I appreciate it.
Operator
Our next question come from Roger Spitz from Bank of America. Please go ahead.
Roger Spitz -- Bank of America. -- Analyst
Thanks very much and I apologize if I missed this explanation, but how much of the ethane price spike, that we see in Q3 '18? Was it some of it or all of it or will some of the shop in Q4 ' 18 and should we think about the impact of Dow's ethylene capacity for you're having a half-month or a one-month delay before go through your income statement?
Unidentified Speaker --
The impact that we gave for ethane was on the second half of our 2018 results, so I covered both Q3 and Q4. And the answer to your second question is, no. We essentially pay an average market price for the month.
Unidentified Speaker --
For ethane.
Unidentified Speaker --
For ethane.
Roger Spitz -- Bank of America. -- Analyst
Okay. So you're going to see it if it happens that month and a sharp in your income statement that month?
Unidentified Speaker --
That's correct.
Roger Spitz -- Bank of America. -- Analyst
Perfect. And then on the epoxy side, could you comment whether you're in Q3, If you're epoxy spreads were out flat or down year-over-year. I mean the prices were up, you also mentioned that the benzene propylene costs were up, I'm assuming the margin expanded but I just want to or the spread expand I just wanted to hear what you have to say?
Unidentified Speaker --
Yeah. Listen, Roger. I think I'm not commenting specifically here on the spread. I mean, what we saw in Q3 versus Q2, is that propylene was up 17% in North America and propylene was up 5% in Europe.So there's no question that the hydrocarbon headwinds curtailed our margin expansion in Q3.
Roger Spitz -- Bank of America. -- Analyst
All right. Thank you very much.
Operator
As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to John Fischer for closing remarks.
John Fischer -- Chairman, President and Chief Executive Officer
Yes. Thank you to everyone for joining us today and we look forward to speaking to you again at the end of our fourth quarter.Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 56 minutes
Call participants:
Larry Kromidas -- Director of Investor Relations
John Fischer -- Chairman, President and Chief Executive Officer
Todd Slater -- Vice President and Chief Financial Officer
Emily Wagner -- Susquehanna -- Analyst
James Varilek -- Executive Vice President and President
James Sheehan -- SunTrust -- Analyst
Unidentified Speaker --
Analyst -- -- Analyst
Neel Kumar -- Morgan Stanley -- Analyst
Unidentified Participant -- -- Analyst
Jeff Zekauskas -- JPMorgan -- Analyst
Mike Leithead -- Barclays -- Analyst
Jim Varilek -- Executive Vice President -- Analyst
Aleksey Yefremov -- Nomura Instinet -- Analyst
John Roberts -- UBS -- Analyst
Eric Petrie -- Citi -- Analyst
Matthew Blair -- Tudor, Pickering, Holt -- Analyst
Stephen Byrne -- Bank of America -- Analyst
Arun Viswanathan -- RBC Capital -- Analyst
Pat Dawson -- Executive Vice President and President
Karl Blunden -- Goldman Sachs & Co. LLC -- Analyst
Roger Spitz -- Bank of America. -- Analyst
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