Olin Corp (OLN) 2002 Q2 法說會逐字稿

Please standby. We're about to begin. Good day, and welcome to the Olin Corporation 2nd quarter 2002 earnings conference call. This call is being recorded. At this time, I'd like to turn the call over to the President and Chief Executive Officer, Mr. Joseph Rupp. Please go ahead, sir.

Good morning. With me this morning from Olin are Tony Ruggiero and Dick Koch. And from Chase are John Steadman and Todd Slater. Last night we announced a loss in the 2nd quarter of 2002, of 15 cents per diluted share. Compared with income of 15 cents per diluted share in the 2nd quarter of 2001. Olin sales for the 2nd quarter of 2002 were $314 million compared with $325 million in 2001. Our 2nd quarter loss of 15 cents per diluted share, was in line with our previously announced expectations, and included the pre-tax gain on an insurance settlement of $4.5 million. The 2nd quarter loss is primarily a result of low ECU prices that impacted our Chlor Alkali business. The soft economy also continues to effect the electronics and telecommunications customers served by our brass business. Let's turn to Olin's 2nd quarter results starting with Chlor Alkali. Chlor Alkali's product sales for the 2nd quarter of 2002, were $75 million, a decrease of 29% from the prior year's 2nd quarter, and that was due to lower selling prices. Chlor Alkali posted an operating loss of $15 million, compared with operating income of $12.1 million in the 2nd quarter of 2001. Primarily because of lower selling prices, which were offset in part by lower manufacturing and operating costs. Soft market conditions caused a decrease in our ECU netback, excluding our Sun Belt plan, from approximately $235 in the 1st quarter of 2002, to $200 in the 2nd quarter of 2002. This compares with our ECU netback of approximately $330 in the 2nd quarter of 2001.

While our caustic prices fell from the 1st quarter to the 2nd quarter, due to soft market conditions and the terms of our contracts, demand for caustic has shown some improvement recently, particularly from distributors, and from the seasonal uptick from the bleach producers. In fact, Olin's 2nd quarter caustic volume was up considerably over the 1st quarter. In mid-May, producers announced a $50 per ton increase in the price of caustic, effective July 1. We expect to fully implement the increase over the next two quarters as our contract terms permit. Chlorine demand remains strong through the 2nd quarter, and in mid-May, producers announced price increases ranging from $125 to $150 per ton, which were to become effective for quarterly contracts on July 1, or as contracts permitted. We expect to get all of this increase over the next few quarters as our contract terms permit. As a result, we believe that there will be considerable improvement in our pricing in the 3rd quarter, and again in the 4th quarter. Given the terms of our contracts, it will take us until the 1st quarter of 2003 for us to see the full impact of all increases. Reports in the trade press indicate that other producers may have escalation provisions that will affect them in a similar way. Metal sales for the 2nd quarter of 2002, were $175 million, an increase of 11% from the prior year's 2nd quarter. Largely due to the sales of Monarch Copper and Brass, which was acquired in June of 2001. And due to higher volumes in other business lines.

Strip shipments to the automotive and ammunition sectors in the 2nd quarter, were well ahead head of last year's quarter. AJ Oster, our distribution arm sales were higher than last year. Shipments to telecommunications and to coinage customers, were lower than last year's levels. Metals operating income increased substantially from $200,000 in the 2nd quarter of 2001, to $9.1 million in 2002. Due to reduced manufacturing costs and increased volume. The lower costs in 2002 include the benefit of the early retirement incentive plan implement in late 2001. While the telecommunication market is weak, automobile manufacturers continue to be optimistic about their production schedules. Carnage demand is improving slightly. The housing market remains good. Confirming our earlier thoughts that inventory in the field has been depleted, demand from our distribution centers has been increasing. As a result of higher demand, we have placed certain equipment in production at our Indianapolis facility, which had been idled late last year. Moving now to Winchester, sales for the 2nd quarter of 2002 were $65 million, an increase of 4% from the prior year's 2nd quarter. This was due to higher volumes and selling prices. As a result of the higher sales and lower manufacturing costs, Winchester posted operating income of $2.9 million, compared with $2.3 million in the 2nd quarter of 2001. For the 3rd quarter, Winchester's sales and operating results will increase seasonally from their 2nd quarter levels, as a result of the upcoming hunting season. We are optimistic about the balance of the year, based on our first six months performance and our sales forecast for the second half, and we are pleased to report that Winchester received Supplier of the Quarter Award from Wal-Mart for the 1st quarter of 2002. Now let me turn the microphone over to Tony Ruggiero who will review with you several financial items. Tony?

Thank you, Joe. Our 2nd quarter loss was in line with our original projections. Our gross margin as a percent of sales rose from 8.4% in the 1st quarter of 2002, to 9.4% in the 2nd quarter of 2002. This compares with 13% in the 2nd quarter of 2001. We are making progress sequentially, due to the improvement in our metals business, and in spite of the downturn in Chlor Alkali, where ECU prices declined from the 1st quarter to the 2nd quarter of this year. These sequential improvement in metals is particularly important, because our metals business usually leads to recovery in Chlor Alkali by several quarters. And while the profits in metals are well below where we'd like to see them, they are trending in the right direction, aided by an aggressive cost reduction program. As Joe mentioned earlier, we recorded a pre-tax gain of $4.5 million on an insurance settlement we disclosed in our April earnings release. And that gain is included in the segment information. The loss on non consolidated affiliates is higher this year because of higher losses at Sun Belt. Interest costs are higher, due to the $200 million we borrowed in December of last year. In June this year we repaid $100 million of the 8% notes. So, we had borrowed in advance in order to be able to pay that liability off. Our effective tax rate for the quarter was 24% in 2002, compared with 40% in 2001. The tax benefit recorded on the loss was less than the statutory rate, because as we mentioned in the 1st quarter, we're accruing interest on taxes which may become payable in the future. The effect of this was to increase our reported loss by about 3 cents per share.

In the 3rd quarter of 2002, we expect our performance to improve over the 2nd quarter of 2002, and project that our results will be in the break-even range. Primarily due to improvements in the Chlor Alkali and Winchester segment, which should more than offset slightly lower earnings from the metal segment. Better Chlor Alkali are expected due to higher selling prices, and Winchester's earnings should increase with normal seasonality, as our customers build inventory prior to the hunting season. Brass earnings in the 3rd quarter are normally lower than the 2nd quarter, due to our regularly scheduled maintenance shutdowns. While business conditions in certain [INAUDIBLE] downstream markets remain below normal levels, there are some signs of recovery. Our guidance for the 3rd quarter does not include the impact of the anticipated acquisition of Chase, later in the 3rd quarter, just due to the uncertainty of the closing date of this transaction, although we expect it to close before the end of the quarter. As we look at the balance sheet, at the end of the quarter, we had cash and short-term investments of $114 million. We do not expect to borrow under our revolving credit facility this year, and expect to have excess cash at the end of the year. As we've stated on previous occasions, 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 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 303rd consecutive quarterly dividend paid by the company. Before I conclude, let me remind you 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 our outlook section of our most recent 10K, and our 2nd quarter earnings release.

Also want to note that the comments made by Joe and me, include the effects of the acquisition of Chase Industries. We have told you before that Chase considerably = strengthens our financial position, because we are issuing stock for a profitable debt-free company. I firmly believe that Olin and Chase are quite complimentary, and such a combination is in the best interest of both sets of shareholders. We believe that this has been reflected in the market since we've announced this combination. Each of our companies is a leader with strong premiere reputation and our respective fields. Our combinations will create a company with the sales, scope and critical mass to compete effectively, and will create a stronger, less cyclical company. Chase is the leader manufacturer and supplier of brass rod in the United States and Canada. Chase's diverse customer mix uses its trademark brass rod, commonly called blue dot, to produce a variety of products, including plumbing fixtures, industrial valves and fittings, heating and air conditioning components, cable and electronic connectors and automotive parts. Over the years, Chase has continued to strengthen its position as the highest quality, lowest cost, and most customer service oriented producer in the domestic world industry. Before I conclude my remarks, there is one other matter I wanted to point out. I'm sure that many of you are aware of the very serious decline that has recently occurred in the stock market. As a result of this, the market value of our pension plan portfolio, is less than the accumulated benefit obligation. And I'm sure what I'm going to tell you about Olin is true for many, many, many companies. But if at the end of this year, the market value of the assets is less than the accumulated benefit obligation, under FAS 87, one is required at that time to reduce equity to reflect this difference.

So, if the market stays where it is, between now and the end of the year, and interest rates stay where they are, between now and the end of the year, because that also effects the calculation, we would be taking a charge against equity, which is a non-cash charge in the $150 million range. This charge is not effect reported income. In that, it is a direct charge to equity. This would have no effect on cash. This would have no effect on loan covenance. This would have no effect for quite some time, for several years, on funding requirements, and would modestly affect pension income next year and the year thereafter. Of course, if the market were to reverse itself, and prove by year end, there is a possibility that there would be no charge. But I wanted to bring the matter to your attention, and just to repeat, the important facts are, that it doesn't affect contributions to the pension plan for several years. It doesn't affect pension income in any significant way for several years. It doesn't affect my current cash position. It doesn't affect my loan covenant compliance, nor my ability to pay dividends. We just wanted to be sure that you were aware of the possibility of this pension adjustment. And I'll say again, we are -- we have to be far from alone on this matter. I should add though, that in any event, when we close the Chase transaction, we will adding approximately $200 million to our book equity, which will more than offset this pension issue. I'd now like to turn the meeting over to John Steadman from Chase, who is going to report to you on his results.

Thank you, Tony. We are pleased to be discussing our results concurrently with Olin, and look forward to the upcoming merger. In Chase's earning release, issued after the market closed last night, we reported earnings of 19 cents per share for the 2nd quarter, and 38 cents for the first six months. Our business continues to benefit from the strength of the housing market, as well as from the gradual economic recovery that appears to be taking place. Plumbing products are our single largest market, and overall building and construction ,accounts for about 45% of the brass rod consumed in the United States. Housing has remained one of the strong points in the economy, and the most recently released data on new housing, starts for June 2002 at an annual rate of 1.7 million units, bodes well for the near-term. Sales of existing homes also drive demand for brass rod, as a significant number of home builders remodel within the first year of ownership, and kitchens and bathrooms are the rooms most likely to be remodeled. Existing home sales are tracking at a record rate of 5.8 million units through May, up 9% over 2001's record level. Aided by low mortgage rates and favorable demographic trends, we anticipate continued strength in residential housing. While housing was also strong last year, there was a tremendous amount of inventory liquidation throughout the supply chain. Inventories have stabilized, and we believe the current demand for brass rod, is now indicative of the consumption of finished products. In the 2nd quarter, our shipments were up for electronic applications. Most of this is driven by the cable TV industry, which is recovering from a difficult 2001. Shipments were also stronger in applications for consumer products and transportation.

Stronger demand for transportation applications, was driven by an increase build rate, for class 8 trucks. All of this translated into a 14% increase in our shipments in the 2nd quarter of 2002, over the 2nd quarter of last year, with almost half of the volume gain occurring with plumbing, building and construction customers. While the 14% increase in shipments is terrific, 2nd quarter volume is still below the pre-recession levels of 1998 and 1999. We do not expect to exceed these previous peak volumes until capital spending recovers, increasing the demand for valves and fittings, and non-residential construction, which is down 16% this year, rebounds. Traditionally, the 1st quarter is the strongest quarter for brass rod demand, compared with the 1st quarter of this year, our shipments were off 2%, which is considerably better than the 9% seasonal decline experienced in the three previous years. I take this as further evidence of a strengthening economy. For the first half, Chase's shipments were up 9% over last year, and with the year half-over, we believe we will, indeed, realize our projections of a 10% increase in volume for the year. Assuming that the strength in the housing market continues, the dramatic decline in the stock market does not flow into final demand, and barring any other jolts to the economy. The apparent recovery and demand coincides well with the expansion of our manufacturing in Mt. Pillar, Ohio. Phase three of our project 400 is now operational, on schedule, and on budget. We are extruding coil, and finishing on the two new drawing lines as part of our regular production.

I'm extremely pleased with product quality, and remain very confident that the anticipated efficiencies will be realized in future quarters, as we gain additional experience operating the new equipment. I have no doubt that we will exceed our goals for this project, as demand for our product grows, and we attempt to reach our goal of shipments of 400 million pounds. Bolstered by higher volumes, operating income before depreciation in the 2nd quarter, was slightly better than the 1st quarter, and even with the 2nd quarter of 2001. Because of higher depreciation from phase 3, operating income was 1.4% below the previous quarter, and 10% below last year. As I previously said, earnings per share from operations were 19 cents. Equal with the 1st quarter and 1% below the 2nd quarter of 2001. In the quarter we increase our cash position by $6 million, ending the quarter with $10 million in cash and no debt. I will now turn the speaker over to Todd Slater, our CFO to go over the financial results in greater detail.

Thank you John. I will discuss a few of the financial highlights, as you already have our press release, and the related financial statements. Chase's gross profit increased by 4.6 % in the 2nd quarter of 2002, compared with the prior year. And was up slightly in the first half of 2002, compared with the previous year. As compared to 2001, Chase increased shipments by 14% in the 2nd quarter, and 9% so far this year. That increase coupled with the operating leverage achieved in manufacturing cost, has enabled Chase to increase gross profit, despite the pricing pressures in the market place, which has forced Chase to lower it's processing charge to customers, what we call the [INAUDIBLE]. Manufacturing cost were lower on a per unit basis in the quarter by 7%, compared with 2001, and 8% so far this year, as compared with last year. SG&A expenses are slightly over 2001, with a 2nd quarter up by $100,000 and year to date up by $350,000. These increases were mainly due to management incentive cost, and increase tax consulting fees, which were partially offset by management personnel reductions. Chase incurred additional consulting and legal costs in the quarter, totaling $1.6 million related to the Olin transaction. As Chase is a company being acquired, these types are expense. Last year, Chase spent $900,000 in cost associated with the unsolicited tender offer. Excluding these additional cost, operating income for the quarter was down $500,000, mainly due to depreciation expense on the new extrusion press and finishing line. Earning from continuing operations per diluted share were 12 cents in the 2nd quarter, compared to 16 cents last year.

Excluding the tender offer and Olin transaction cost, diluted earning per share, would have been 16 cents in the 2nd quarter, I'm sorry, 19 cents in the 2nd quarter 2002, compared to 20 cents 2nd quarter of last year, and 19 cents in the first quarter of 2001--2 While completing it's 2001 federal tax return, Chase determined that that tax benefit from the loss on the sale of Lubbit, was $12.5 million, as compared to the $14--$11.4 million recorded in the prior year. Therefore in the 2nd quarter 2002, Chase recorded additional income tax benefits of $1.1 million, or 7 cents per diluted share. This resulted in earnings per diluted share of 19 cents in the 2nd quarter 2002 as compared to 16 cents last year. Through June 2002, Chase earned 38 cents per diluted share, as compared to 27 cents last year. Chase's balance sheet is debt free with about $10 million cash on hand. Through June 2002, Chase has generated $6.9 million of cash from operation, and has spent $10.4 million to purchase some equipment originally leased in 1997, and made capital expenditures totaling $4.9 million. We still have about $2-$3 million yet to spend in 2002 on the final payments and critical spare parts for the new extrusion press and finishing line. Our current ratios 2.6 to 1, and our working capital is $34 million. We are now ready to entertain questions.

Thank you. Ladies and gentleman, today's question and answer session will be conducted electronically. If you'd like to pose a question at this time, you may do so by pressing the star key, followed by the digit one on your touch tone phone. Once again that was star 1 to pose a question. If you find that your question has been asked and/or answered, you can remove yourself by pressing the pound key. We will pause for only a moment to assemble our roster. We'll take our first question from Steve Richio at Bear Stearns.

Hi, guys. Maybe I missed it, but did -- did Chase give an outlook, I guess, for the next quarter.

The only outlook that we have given is on our shipment where we--

I'm sorry, I can't hear you.

This is John Steadman. We have not given any earnings projections. We said in our comments that we anticipate volume will be up 10% this year over last year. And that's the only guidance that we have given.

Ok. Just getting back to the Olin side, the insurance settlement, do you recall if that's included in the AL assessments that are out there?

Yeah. When we issued--this is Tony Ruggiero, our second quarter estimate at 15% percent loss, we said at that time that that included a benefit, which is about 6 cents a share, of this loss--of this, excuse me, settlement gain, and so, and it actually has occurred. So the estimate of 15 cents, and what we're reporting are consistent. And both had, this settlement gain in them.

Great, thanks. One other question, the pension plan assumptions for this year, what is it? The return assumptions?

The return assumptions at the end of last year, which we put in our annual report, was 9.4% return on the pension plan. 9.5% -- we find in our studies, that more than 2/3 of the companies in the reporting universe were at 9.5% or higher, and we use a 7.5% discount rate at the end of last year, which is very much, again, right where all of the other companies are.

Right. I mean -- obviously a lot of the companies are higher than that, but that doesn't reflect reality. Are you guys going to look to, maybe lower the pension plan assumption given what you said obviously about the market, and the situation we're in?

I think we and everybody else is going to look at that assumption as it -- at the end of this year. I think you should -- you should understand in actuary, of people who take very long times to change things, do a lot of smoothing and averaging and so forth and so on. We will be looking at it, you know, along with everyone else, depending on, of course, where the market goes for the rest of this year. There's another school of thought that says that since the market is so low, that there is a greater propensity for future gains in the market to be greater, and -- and -- and I just passed that along.

Okay. With that 9.5% current assumption, what do you estimate your year-end profits to be in terms of like the -- the pension income? Or the pension profits?

I don't want to give you such a detailed number.

Well, how about a range?

I don't want to give you -- it -- I haven't given a projection for the year and I don't -- I've given a projection for the 3rd quarter, and last year's 10K, we reported that we had pension income in the aggregate, if you exclude this -- we had a catch-up adjustment of about $13 million, $14 million, is what we had last year.

Okay, fair enough. Thank you.

We will take our next question come John Roberts at Buckingham Research.

Thank you. Tony, just to make some things clear here, you're not talking about anything different than what we're hearing from all companies, indeed, these are macro issues, not Olin specific issues, right?

That's exactly right, John. But I just wanted to be forthcoming, and let you know. I mean if you look at the annual report from last year, as I know you did -- our market value of assets and our EBL were very, very close last year. We all know what's happened to the market this year, so, the -- you know, someone looking very closely like yourself would anticipate this. It is no different than any other company would have, it is a macro issue, and is not -- it is not Olin specific, but, you know, we just felt that we wanted to be, you know, forthcoming on it.

I appreciate that. I just wanted to bring forth -- you've been more forthcoming, I think than most other companies that we've dealt with, which maybe sounds a little more significant, but this is what we're hearing from all companies. And secondly, we're not talking about anything that affects this year, because the assumptions for this year were set back in January. This is a 2003 change to pension income if there was one.

That's correct.

Right. And --

And again, actuaries move very, very slowly, and I'll just say that. And, of course, it is something that we have to look at.

I wanted to ask a question, and I don't know if John Steadman or Joe might be the right one, but Chase's margins are higher, they've been relatively consistently higher, and I don't know if we can completely attribute that to the different mix, and maybe higher operating rates because their markets, which are having related or stronger than some of your markets, or are there some fundamental metrics that Chase is better on, such as cycle time, or product changeovers, or maintenance downtime, or procurement? I'm not asking for actual earnings guidance here, but have you had enough time now to get inside both companies, both of you looking at each other, to see if there are any material operating performance metrics that are different?

I think it's -- it's more, as you start out first, John, this is Joe Rupp, is more on the capacity that -- that -- that strip operations are running at, compared to the capacity that the Chase operations are running at, and it is mix, effected, what's happening, excuse me, from a brass -- from a strip perspective, is if the strength in the market right now is in automotive, and ammunition, and housing, and not--continues not to be in telecommunications, and Chase's product which goes more into the housing, as you know, their plant is more fully loaded than our plants are at this point in time.

And I would --

This is John Steadman. All I would add to that, I think Joe's right on--on the market's is, we really are in different segments of the bass business. It is not an apples and apples comparison. There are a lot of similar technologies, and we've had some discussions, and we believe that -- that the combined knowledge will help both of us.

Yeah, you know, I -- if -- if were you were kinda ahead John, a little bit, is there are things we can learn from one another. We think that there's some things that certainly that Chase does in their foundry, et cetera that, we think will have application in the Olin brass, which we think they do better than anybody in the world, to be quite honest with you. So--so if the question is, are we seeing potential cynergies? Yes, we had identified cynergies and are seeing some other things in addition.

Ok. So, I should be able to to go back, and I haven't completely done that, but I should find periods, where, Olin's brass margins were above Chase's and vice versa.

Yes, sir, you will see that.

Great. Thank you.

Once again, ladies and gentlemen, that was star, 1 We'll take our next question from John Diece at Granth and Mayo.

Good morning, all. Tony, I want to congratulate you for your candor with respect to the whole pension thing. I think you did a pretty lucid explanation of it.

Thank you.

In the process of John Steadman's recitation, I missed a little bit. He mentioned that the electronics component of Chase's business is principally the cable TV industry.

That is correct.

Is that fittings, connectors and such?

It is connectors and it is traps, and I guess the -- the connector is a -- is a fitting. Some of it goes in the home, some of it goes outside of the home, and the -- the transmission -- once you make that transition from fiber to wire.

I see. Fair enough. Now, incidentally, with the typical seasonality of your business, you were saying that the -- the 1st quarter is normally -- the March quarter is normally a bigger quarter seasonally than successive quarters. Is that the largest quarter, typically, in a typical year, whatever that is?

Yes, it is, John.

And that's getting ready for the summer home building season, pretty much? Or in part, is that, why it's that way?

That's what we attribute it to, and July, July is a month in our industry where some customers take maintenance shutdowns, and we do a little bit of maintenance scalebacks. So, July is normally a lower month in shipments, as is December with the way the calendar and the holidays fall in December.

Fair enough. That's all perfectly logical. I wish you folks a very happy marriage. Looks like it makes all the sense in the world.

Thank you, John.

And it appears we have no further questions at this time. I'd like to turn the conference back over to Mr. Rupp for any additional or closing comments.

Thank you very much for joining us. And we look forward to reporting our 3rd quarter results in the completion of our merger with Chase brands.

Once again, ladies and gentlemen that, does conclude today's Olin Corporation 2nd quarter earnings conference call. Thank you for your participation. You may now disconnect at this time.