Olin Corp (OLN) 2002 Q1 法說會逐字稿

Please stand by, we're about to begin. Good day and welcome to the Olin Corporation's First Quarter 2002 Earnings Conference Call. This call is being recorded. At this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Joseph Rupp. Please go ahead.

Good morning. Thank you for joining Dick Koch, Tony Ruggiero and myself today. Last night, we announced a loss in the First Quarter of 2002 of 26 cents per diluted share, compared with income of six cents per diluted share in the First Quarter of 2001. Our sales in the First Quarter of 2002 were $295 million, compared with $334 million in 2001.

Our First Quarter loss of 26 cents per diluted share was lower than the 30 cents per share loss we previously projected, primarily due to better than expected cost performance from our operation. The First Quarter loss is primarily a result of low ECU prices and volume. The continuing soft economy also affected the electronics and telecommunications markets we serve. Now, I'm gonna ask Tony Ruggiero, Executive Vice President and Chief Financial Officer to review the First Quarter results. Tony?

Yeah. I apologize in advance if you find some of what I'm going to say to be repetitive. But Joe clearly has a very bad cold and if we let him speak too much, he won't be able to answer all your good questions later. So, let me move on and talk about Olin's First Quarter results, starting with Chlor Alkali.

Chlor Alkali product sales for the First Quarter of 2002 were $72 million, a decrease of 31% from the prior year's first quarter, due to lower selling prices and volumes. Chlor Alkali posted an operating loss of $15.1 million, compared with the operating income of $4.3 million in the first quarter of 2001, primarily because of lower prices and volumes and higher losses from the Sun Belt Joint Venture set in part by lower operating costs.

The lack of a pick-up in caustic demand in key end use markets has kept Chlor Alkali operating rates for Olin and the industry in the low to high 80% range over the course of the First Quarter. Relatively low caustic demand, the resulting low operating rates, combined with a significant increase in chlorine demand has created a tight supply of chlorine. The continued improvement in EDC pricing and volumes to the Asian Market is having a favorable effect on chlorine prices and sales volume.

Chlorine prices in the spot market have moved up sharply in recent weeks to over $300 per ton. We believe all producers have implemented a $50 per ton increase on chlorine, effective immediately, or as contracts permit. Due to the timing of these price increases, price increase announcements, and the nature of our contracts, the increase did not have any significant effect in the First Quarter, but will favorably affect our Second Quarter chlorine contract sizes.

However, the continued excess supply of caustic, relative to demand, is having a very negative effect on caustic prices which will result in lower overall ECU prices in the Second Quarter than we experienced in the First Quarter. We forecast that the Second Quarter will be the low point this year for our ECU prices, and a possibility, and that prices will improve in the Third Quarter as a greater percentage of our contracts reflect the higher chlorine prices that are in the market today.

Soft market conditions have caused a decrease in our ECU net back, excluding our Sun Belt Plant, of approximately $275 in the Fourth Quarter of 2001 to $235 in the First Quarter of 2002. This also compares with our ECU net back of approximately $335 in the First Quarter of 2001. Metal sales for the First Quarter of 2002 were 160 million, a decrease of 8% from the prior year's first quarter. First Quarter 2002 sales include $15 million from the acquisition of Monarch Brass And Copper. Volumes, excluding Monarch, were down. We were also negatively impacted by a significantly less favorable sales net. Stripped shipments to the automotive market in the Firs Quarter were ahead of last year's quarter. AJ Oster sales were higher than last year. Shipments to all other market segments, primarily electrical connectors, telecommunications and coinage, were lower than last year's levels.

Metals operating income, though, increased from $6 million in 2001 to $2.5 million in 2002, primarily due to reduced manufacturing costs. The lower cost in 2002 includes the benefit of the Early Retirement Incentive Plan implemented in 2001, the idling of the mill at Indianapolis, and the impact of the strike in 2001. First Quarter 2000 sales and profits were adversely affected by a strike at the East Alton Illinois Facility that manufactures products for both metals and Winchester segments.

Our projection for the Second Quarter is that overall demand from our customers will improve over First Quarter levels. While the telecommunications market is still weak, automobile manufacturers are raising their production schedules. Coinage demand is improving. The high level of new building permits indicates future strength of the housing market for brass products. Confirming our earlier thoughts that inventory in the field has been depleted, demand from our distribution centers has increased considerably.

As a result of higher demand, we are beginning to place in production certain equipment at our Indianapolis facility which has been idled. Given the cost reduction actions we implemented last year, this increase in sales volume will have a favorable impact on our profits in the Second Quarter. Based on this improved forecast for the Second Quarter, and given our performance in the Firs Quarter, which was also stronger than we originally expected, we have become more optimistic about our prospects for the year.

Winchester sales for the First Quarter of 2002 were $52 million, an increase of 12% from the prior year's first quarter, primarily due to higher volume. As a result of higher sales, Winchester posted operating income of $3.4 million, compared with a loss of $0.7 million in the strike-impacted first quarter of 2001. For the Second Quarter, Winchester sales and operating results will likely decrease modestly from their First Quarter levels due to the fact that some of the sales occurred in the First Quarter due to a program.

We are optimistic about the balance of the year, based on our First Quarter performance and our sales forecast for the second half. As I said earlier, our First Quarter loss was less than we thought it would be. Much of the improvement came as a result of the actions we've taken to reduce costs. As I mentioned, these actions included the Early Retirement Incentive Plan at East Alton, a voluntary retirement program that lowered costs of Chlor Alkali.

We've been very careful about all our spending this year in all three of our businesses . You can see that we've reduced our SG and A costs by nearly 10%. We've also reduced our manufacturing costs in a number of areas. And we have in place a number of initiatives to lower our costs in the coming months. While we are focusing on the statement, let me just say that our gross margin as a percent of sales was 8.4% in 2002, compared with 11.8 in 2001.

The erosion of gross margin, again, was primarily due to the downturn in Chlor Alkali, so the ECU prices are sharply down this year. Metals and Winchester have turned around from their strike-impacted first quarter of 2001. The sequential improvement from metals normalized fourth quarter is particularly important this year because our metals business usually leads the recovery in Chlor Alkali by several quarters.

And while the processing metals are well below where we'd like to see them, we believe they are trending in the right direction, again, aided by an aggressive cost reduction program. The loss from non-consolidated affairs is higher this year because of higher losses at Sun Belt, which, again, I mentioned earlier. Usage costs are higher, due to the $200 million dollars we borrowed in December of last year, some of which is in anticipation of repaying $100 million dollars we have due in June.

Other income is lower in 2002, due to a non-recurring fee payment we received in 2001. Our effective tax rate for the quarter was 24% in 2002, compared with 40% in 2001. The tax benefit we caught on the loss was less than the statutory rate because we are accruing interest on taxes which may become payable in the near future. The effect of this was to increase our reported loss by about five cents a share.

In the second quarter of 2002, we expect our performance to improve, and project that our EPS loss will be in the 15 cent range, primarily due to higher earnings in the metals segment, an income of approximately five cents per share from an insurance settlement, which should be somewhat offset by lower caustic selling prices. While business conditions in certain of Olin's downstream markets remain below normal levels, there are some early signs of recovery.

Based on normal seasonal factors affecting Winchester, and the expected gradual improvement in the economy that will benefit metals and Chlor Alkali, we anticipate an improvement in our quarterly results as the year progresses. As we look at the balance sheet, at the end of the quarter, we had cash and short term investments of $230 million, of which, as I mentioned, $100 million will be used to repay the 8% notes do in June.

The balance will be used to finance seasonal working capital needs in the second and third quarters. We do not expect to borrow under our revolving credit this year. And in fact, we now expect to have a cash surplus at year end. During the quarter, we issued 3.3 million common shares and received approximately 56 million dollars, which strengthened our financial position.

The company also refinanced $35 million to create additional capacity under its revolving credit facility by eliminating the need for an equivalent amount of letters of credit. These actions increased the company's potential liquidity by more than $90 million dollars. Although, as I've mentioned, we do expect to have cash surplus at the end of the year. In 2001, we reduced our capital spending to 65 million.

Our appreciation and amortization was $87 million in 2001. As we've previously stated, in 2002 we plan to manage our capital spending at a level approximating 50% of depreciation, or about $40 million. We expect our depreciation and amortization in 2002 will be in the $85 million dollar range. As you know, yesterday the Board Of Directors declared a quarterly dividend of 20 cents on each share of Olin Common Stock.

This is the 302nd consecutive quarterly dividend paid by the company. Before I conclude, let me remind that, throughout this presentation, we have made statements regarding our estimates of future performance. Clearly, these are forward-looking statements and results could differ materially from those projected. Some of the factors that could cause actual results to differ are described in the Outlook Section of our most recent 10K and in our First Quarter Earnings Release.

We would now be pleased to take your questions. Thank you.

Today's question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit one, on your touch tone phone. Again, that is star one if you'd like to ask a question. We'll pause a moment to assemble our roster. We'll go first to John Roberts, Buckingham Research.

Good morning, gentlemen.

Good morning.

Could you update us on the metals sales mix. I believe about a year ago, or a little bit more than that, just before we had the decline, that about 40% was electronic/electrical. And again, that's where a lot of the decline has occurred. That must be a lot smaller today, especially since auto and construction have remained relatively strong.

John, I'd say that that's probably in the 20 to 25% range. For your question. But I would also point out that some of the high performance materials, et cetera, to go into the automotive sector. And that is extremely strong at this point in time.

Okay, so, a big chunk of that 20, 25% is auto related, then.

That is correct.

Okay. And could you give us any of the other percentages that you might have off the top of your head?

Automotive is actually stronger for us, and in fact, order entry in automotive is as strong as it's been since the first quarter of 2000. And so, that, where it was down 28% last year, it is up equivalently at this point in time from an order entry perspective. Telecommunications still remains off, in the 50% range, as does coinage. Electrical products are picking up slightly and housing has remained strong and actually has picked up a little bit.

But that 20 to 25% is electrical/electronic. That other 75 to 80%, how would you roughly break that up between coinage, construction products, et cetera?

Do we want to break that up? Yeah, I would, of that other 75, I'd say about 10% of that is coinage. Probably 15 to 20% is housing. And then the balance of that is other products.

Thank you.

We'll go next to Bob Goldberg, New Vernon Associates.

Morning. Just to follow up on what's happening in the business. Can you talk about your operating rate as you went through the quarter and I wanted to also follow up on the comments about, what are you doing at the Indianapolis Mill? You said you were bringing back some equipment into the facility. What exactly is happening there?

What's happened to us, actually, Bob, is that our operating rates were in the mid 60 range as we ended last year. And our operating rates are now in the high 70 range. And what we've done is brought selected pieces of equipment back up at Indianapolis to help us take care of that increase in demand.

Okay, and this is, is it all related to automotive improvement? Again...

We're seeing automotive improvement. We're also seeing improvement from a variety of industries that come in through our Distribution Segment, which handles people, obviously, who need short lead times and smaller quantities. And what we're seeing is a fairly significant increase in that perspective. Which is contract stampers, automotive, electrical, housing, et cetera.

And is that something you're seeing, did that start in March, or, I mean, when did the, I'm just wondering when you started to see this significant impact from...

We started to see it in March.

And that's...

It's actually a little bit in March and it really started to pick up in April.

Okay. Thank you very much.

You're welcome.

Once again, it is star one if you would like to ask a question. We'll go next to Barry , Sage Asset Management.

Good morning. You talked about some of the issue in chlorine prices, but I wonder if you could just give us a little more information on caustic prices. What they averaged in the quarter versus a year ago and where the spot prices are now. Thanks.

Barry, this is Dick Koch. We don't provide the specific prices for both our chlorine and caustic soda. We only can give you price, what we...

Can you tell us what the spot market price is in the market?

Current spot market price, this is off of the Chlor Alkaline Market Wire, for caustic soda is twenty to thirty-five dollars a ton.

Okay, thanks.

The contract price is $60 to $90. This is as of their April 19th publication.

Thank you.

By the way, they're also showing domestic spot chlorine at $300 to $350 dollars, and domestic contract chlorine at $80 to $110. These are dollars per short ton.

Great, thanks a lot. That helps.

Once again, it is star one if you have a question. We'll go next to Richard Diamond, .

Yes, could you discuss how rising natural gas prices may benefit Olin, based on your sort of unique market decision, using electric and nuclear powered generation in your ECU operations?

Sure. This is Tony, and let me try to comment on that. As you know, we are minimally affected by rising natural gas prices. We do believe we are one of the low cost producers. And when natural gas prices get to be above about $4 per mm BTU or whatever, we are the low cost producer. But we are also not the market leader in the sense of being able to set prices. And so, what happens is when natural gas prices get high, the other producers have incredible pressure on their costs.

Because they are very vulnerable to natural gas prices. That tends to create pressure on prices, even though they may not be running at full volumes. It also causes the other producers to begin to take production out of line, which further puts pressure on prices. And so, what happens is, as prices are under pressure and are high, so, we just sit there and make more money. Because we are not in a position to go lower our prices and gain more market share.

So, the overall affect is very favorable for us. We don't really speak of it as a competitive advantage. But we certainly do enjoy sitting there with others with high pressure on their costs, putting pressure on their prices. They raise their prices, they take out production. And we just sit there and make more money as all of this is happening. That's the effect on Olin of the natural gas situation.

Thank you very much.

Once again, it is star one if you have a question. It appears there are no further questions. At this time, I'd like to turn the call back over to Mr. Rupp for any closing remarks.

We'd just like to thank everyone for participating in our call and look forward to talking to you at the end of the Second Quarter. Thank you.

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