Olin Corp (OLN) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to the Olin Corporation fourth 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, sir.

Good morning, and thank you for joining us today. With me this morning from Olin are Tony Ruggiero, Dick Koch (ph), and John MacIntosh (ph), President of our Chlor-Alkali Products.

Last night we reported earnings which we will talk about this morning, and Tony Ruggiero will talk in detail about the financial aspects of it.

Our fourth quarter pretax loss was less than we expected, as we had better than expected results from each of our business segments. In 2002, we controlled our manufacturing and administrative costs and our capital spending in response to the sluggish economy. In the first quarter of 2003, we announced the shutdown of our Indianapolis brass strip manufacturing facility to further reduce our costs and to rationalize capacity consistent with market demand.

Let's turn to Olin's fourth quarter results, starting with Chlor-Alkali. Chlor-Alkali products sales for the fourth quarter of 2002 were $90 million, which is an increase of 13 percent in the fourth quarter of 2001. Chlor-Alkali posted operating income of $2.8 million compared with an operating loss of $8.9 million in the fourth quarter of 2001. The improved operating results were primarily because of higher selling prices and volumes at lower costs. This represents considerable improvement from the loss of $8.1 million in the third quarter of 2002, and it's the first profitable quarter in the last four quarters.

Our ECU netback (ph), excluding our Sun Belt plant, was approximately $280 in the fourth quarter of 2002, which compares with approximately $275 in the fourth quarter of 2001. Our ECU realizations in 2002 bottomed out in the second quarter at approximately $200, increased then to $240 in the third quarter of 2002. We are expecting prices for both chlorine and caustic to increase from the fourth quarter of 2002 to the first quarter of 2003 as our contracts reflect previously-announced price increases. We expect further price improvement in the second quarter of 2003 as well.

During the fourth quarter, we operated at about 90 percent of capacity, and we expect our operating rates to be in the 90 percent range in the first quarter, as demand for chlorine from the vinyl industry seasonally increases.

For the full year 2003, we are expecting a dramatic turnaround in our Chlor-Alkali business due to higher ECU prices, increased sales volumes, and continued initiatives to reduce costs. Natural gas prices, which are a significant factor for other Chlor-Alkali producers, are not projected to be a significant issue for us because we buy our electricity from utilities that derive their power primarily from coal, nuclear, or hydroelectric sources.

Let me talk about metals. Sales for the fourth quarter of 2002 were $198 million compared to $136 million in the fourth quarter of 2001, and this was due primarily to the inclusion of sales of $52 million from Chase Industries. Sales in the fourth quarter of 2002, if you exclude Chase and the metal value of these products, approximated the levels that we experienced in the fourth quarter of 2001. Although script shipments were up in our automotive and electronic segments by 6 percent and 28 percent respectively, this was more than offset by 35 percent lower shipments. Sales to the electronics segment continue to be well below their historical norms.

In the fourth quarter of 2002, the metal segment, excluding Chase, recorded an operating loss of $3.9 million in comparison to a profit of $10.9 million in 2001. The fourth quarter of 2001 was favorably impacted by earnings from LIFO (ph) inventory adjustments rutting from lower operating volumes, as well as lower compensation costs.

On a normalized basis, the metals segment excluding Chase lost approximately the same amount in 2001 as 2002. The metal segment loss of 1.7 million includes $2.2 million of Chase profits in 2002.

As we look forward to the first quarter for the metal segment, we forecast that overall demand for our strip and rod products will be increasing from the fourth quarter levels, which were impacted by our customers' desires to reduce inventories at year-end. In general, we believe that for the full year 2003, the brass strip and rod markets will improve only marginally over 2002. Given this slow improvement in market demand, on January 10th, 2003, we announced our intention to cease production at our Indianapolis strip mill and to consolidate production within Olin's East Alton (ph), Ohio main manufacturing facility. We expect that the shutdown will be essentially complete by the middle of February.

As a result of this closure and certain other actions, the company expects to take a -- to record a restructuring charge in the $50 million pretax range in the first quarter. The closure of the Indianapolis plant, a marginally stronger brass strip market, and continuing efforts to reduce costs across the metal segment should allow us to significantly improve our operating income in 2003. The full impact of the closure of Indianapolis will not be felt until the second quarter of the year.

Moving now to Winchester, sales for the fourth quarter of 2002 were $64 million, essentially unchanged from 2001. Operating income in the fourth quarter of 2002 was $100,000 compared with $1.8 million in 2001 due to higher pension expenses that we incurred in 2002, and the absence of certain nonrecurring income item that is were present in 2001. For the full year, we project that Winchester will have a solid year.

Let me turn the microphone over to Tony Ruggiero, who will review several financial items with you - Tony.

Thank you, Joe. We have included a profit summary, which is the last page of the press release announcement so that you can better understand our financial results because of the number of restructuring and nonrecurring items. So I would suggest that each of you look to that page and try to follow it through as I speak, and then we can answer any questions later that you have about it.

As Joe mentioned, yesterday we announced a net loss in the fourth quarter of 2002 of 12 million, or 21 cents per diluted share, compared with net income of .9 million or 2 cents per diluted share in the fourth quarter of 2001. The fourth quarter of 2002 includes a 10.4 million provision for taxes in connection with the surrender of life insurance policies purchased under the company-owned life insurance program. Excluding that $10.4 million tax charge, Olin's net loss would have been 3 cents a share.

Fourth quarter 2001 earnings contained a restructuring charge and a number of nonrecurring and other items. And on a normalized basis, the company would have recorded a loss of approximately 20 cents per share. We had explained this to you last year when we reported those results. Olin's sales in the fourth quarter of 2002 were 352 million compared with 278 in 2001, the increase largely due to the inclusion of sales of 52 million from Chase Industries, which as you know, merged with Olin in September of 2002.

For the full year 2002, Olin reported sales of 1.3 billion, a net loss of 31.3 million, including the Coli (ph) provision, and a net loss of 63 cents per diluted share. For the full year 2001, Olin's sales were 1,271,000,200 and the net loss was 9.5 million or 22 cents per share. The 2000 results included restructuring charge and unusual items of 67 cents per share. And again, I think you'll understand why we have included that profit summary to try and help you through so that we can discuss apples and apples.

Let's just turn to the income statement to discuss several items as I compare the full year 2002 results with 2001. For 2002, we reported a net loss of 63 cents per diluted share, as I've mentioned. The Coli tax charge of 10.4 million equates to 21 cents per share so our normalized loss was 42 cents per share. The 42 million pretax restructuring charge and unusual items equates to 67 cents per share, and the nonrecurring and unusual income items were 49 cents per share. So our normalized loss for 2001 was 4 cents per share. Losses from our Chlor-Alkali business more than offset improved earnings in our metals and Winchester businesses. Chlor-Alkali is making money again, and is expected to be the largest factor contributing to our earnings in 2003 and 2004, as Chlor-Alkali prices are expect today be in -- expected to be increasing for the next two years.

Selling and administration expenses in 2002 are essentially flat with 2001 on an as-reported basis. Pure selling and administration costs are actually down on a comparable basis by approximately 12 percent because of a reduction in salaried head count, achieved in large part due to the actions associated with the 2001 restructuring charge. The losses of unconsolidated affiliate were in the 7.5 million range for both full year 2001 and 2002. However, in the fourth quarter of 2002, we reported income of 1 million compared with a loss of 3 million in 2000 earnings primarily because of higher ECU pricing at Sun Belt.

We expect ECU prices to continue to rise in 2003. We expect to report increasing income from our non-consolidated affiliates as the year progresses. Interest expense for the full year 2002 increased from 2001 due to higher interest rates on the company's debt portfolio. For the full year 2002, we had an income tax provision of 4.3 million on a pretax loss of 27 million. Income taxes for 2002 include a provision of 10.4 million in connection with the surrender of life insurance policies purchased by Olin under the Coli program as I've mentioned.

In 2002, we also saw interest on taxes which may become payable in the future and will continue to do so in 2003 which will result in a tax rate in the 45 percent range in 2003. As we look at the balance sheet, I remind you that we now have consolidated the assets and liabilities of Chase as of September 30 September 30th. At the end of the quarter, we had cash and short-term investments of $136 million, 13 million of which came from Chase compared with 202 million at the end of 2001. Our inventories of 255 million, even excluding Chase inventory of about 15 million, are higher at the end of 2002, primarily because we are selling more brass on a metal price passthrough basis rather than on its whole basis and, therefore, have to inventory more raw materials.

The addition of Chase increased our property plant and equipment by 135 million, and increased our working capital by 9 million. The goodwill associated with Chase was 40 million, and there were intangible assets of 10 million associated with the blue dot trademark.

Due to the significant decline in the equity markets during 2002, the market value of our pension plan portfolio at December 31st, 2002 was below the accumulated benefit obligation. We had mentioned this to you on prior calls. Under Statement of Financial Accounting Standards Number 87, we recorded a $220 million after-tax charge to shareholders equity to reflect this difference. The after-tax charge of 220 million was higher than our previous estimate of 150 million, primarily due to the decline in interest rates which had the effect of lowering our discount rate from 7.5 percent to 6.75 percent, and, therefore, increasing the accumulated benefit obligation. This is a non-cash charge and does not affect our ability to borrow under our revolving credit agreement.

Based on our assumptions and estimates, we continue to believe that we may be required to make contributions to the pension fund, but those contributions would not be required until 2005, and pension expense may be higher over the next few years. We estimate that that could be in the $10 million per year range. I'm pleased to say that in the first quarter of 2003, Olin expects to return to profitability with net income in the 10-cent per share range. This estimate excludes the effects of a restructuring charge in the range of $50 million pretax primarily because of the shutdown of the Indianapolis brass facility. I will return to that charge in a moment.

The company expects improvement from the fourth quarter of 2002 to the first quarter of 2003 in the Chlor-Alkali, metals and Winchester segments and expects each segment to be profitable. We also expect the first quarter to be the lowest profit segment for each of our business. Better Chlor-Alkali results are expected primarily due to higher selling prices in the first quarter. Metals and Winchester profits should improve as customers restock their inventories and ramp up production from end of year levels. We expect higher profits as the year progresses because of higher ECU prices and a lower cost base in the metals segment. Olin expects to increase capital spending from 41 million in 2002 to the 60 million range in 2003, as our results improve.

Our capital spending in 2002 and 2003 includes about 5 million each year for Chase. Depreciation and amortization 2003 will be in the $85 million range. The first quarter 2003 restructuring charge will be in the $50 million pretax range. We expect one-time cash costs to be in the $10 million range, and for the full year 2003, we expect to achieve pretax savings associated with this charge in the $10 million range. These savings depend on the precise timing of the Indianapolis shutdown. We will update you on these estimates at the end of the first quarter.

For 2004, we expect to have a full year's benefit from these savings of about $20 million. We'll also continue in our efforts to closely monitor and adjust our costs in all operations. These cost reduction programs are important and significant. For example, in 2002, we achieved 60 million in cost savings with 20 million achieved in each metals and Chlor-Alkali, 10 million in Winchester and 10 million in corporate and other savings.

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 350th prospective quarterly dividend paid by (inaudible).

Let me add a comment on the first quarter being the lowest quarter for each of the business. That's with the exception of Winchester, which has a seasonally low quarter in the fourth quarter of the year. 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 the outlook section of our most recent 10-K in the fourth quarter earnings ((inaudible)).

Operator, we are now ready to take questions.

Thank you. Today's question and answer session will be conducted electronically. If you'd like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touch-tone tell telephone. If you're on speakerphone, please turn off your mute function. Once again, that is star 1 for questions today.

And we'll be taking our first question from John Roberts at Buckingham Research.

Morning, guys.

Morning, John.

The portfolio of Chlor-Alkali contracts that you currently have, back at the bottom it looked like at least the duration sort of went out further, which is why it took a little longer to get the price increases to start flowing through your P&L. Is that duration of your contract staying roughly the same, or as you're renewing them or re-opening for the price increases, are the terms shortening up at all?

John, this is John MacIntosh. The terms for both our chlorine and caustic (ph) contracts are remaining mostly the same. In terms of price protection, about 75 percent of our chlorine volume has quarterly price protection, about two-thirds of our caustic volume also has quarterly price protection. And those numbers haven't changed significantly from year to year.

OK. But if the durations are changing, then we should expect your average realized ECU to be tracking at least in parallel where the renewal or contract levels have been over the past six months then. It took longer for you to sort of get started up, but now you should at least be moving up with the rates that we were seeing in the second half last year.

Yes, sir. We typically have the lag that's built in to our realization of industry price increases, but we will consistently, you know, follow in a general term what those increases are.

Secondly, the brass sales to the electronic and electrical markets, they were up year over year from a very low level, but I think I remember, Joe, you were talking about the segments were softening in the fourth quarter, so were they down sequentially? Even though they had easy comparisons that made the reported numbers up year over year?

Yeah, fourth to fourth, they were up, but sequentially, they were down. I think another way of looking at that, John, is that basically what's happened in that connector industry is that we drop down in mid year and we've leveled off and we have just slight increases that have occurred. But if you go back to 2000, that segment is still off well in excess of 30 percent.

And first quarter here, orders look stable. Is this ...

They're stable. That's the right answer.

Great. Thank you.

We'll take our next question from Leslie Ravitz at Morgan Stanley.

Good morning. Just a couple questions on 2003. Tony, can you talk about how you see your cash flow developing this year, and more importantly, what is your sense over the next 12, 24 months as your earnings ratchet up as to how you plan on using your new cash flow?

As we look at our cash flow, we tend to use cash in the early part of the year due to the seasonal factors in Winchester and then generate cash in the fourth quarter. We expect a positive cash flow and expect to have more cash at the end of the year than at the beginning of the year after paying all of the obligations of the company. And we expect that cash flow to accelerate in 2004 consistent with what we've projected to be rising ECU prices.

The second part of your question is how I plan to use that cash flow. I'm going to use that cash flow to allocate resources to maximize the profitability of the company, and to continue to try to maximize my total return to shareholders with that cash flow.

You're trying to figure out what I'm asking? It's really simple. Do you have deferred capital projects that are going to prior you to step up capital over the next couple years as the earnings improve, or should investors expect you to either restart up your share repurchase program and/or change your dividend rate?

We spent a considerable amount of capital in the years preceding this last three years on major projects, as you may recall, in brass and HPAs (ph), and in some other parts of the business. We intend to focus on maximizing the profitability from those investments. We also spend cash, as you may recall, on the monarch acquisition. And I think it's there that we would focus on, as I said, maximizing profitability.

We have managed our capital spending through this period, and I think it's healthy to do that from time to time, in any of that. We don't have a large number of projects that we wish we had done and had not. We have -- we don't have a large number, so I don't think you will see a significant increase in capital spending, and it may be that as our profits improve, we may get back to spending teddy appreciation level, but I -- at the depreciation level.

Our plants are safe, we'll maintain them in good operating condition, and we have funded those projects that have given us very quick cash recoveries, and in these uncertain times, we have lowered our criteria and are imposing very stringent criteria on profit-generating projects that -- and fourth, just because of the uncertainty of the time.

And so ...

So ...

What happens to all this wonderful cash you're generating?

Les, I think you know our objective is to maximize a sustainable return to shareholders. The dividend is an important element in that total return. This is our, what, 305th consecutive dividend. The dividend, I think you also know, is ultimately the decision of the board of directors, but certainly we consider our yield to be an important element, and an important reason why people -- invest ores invest in the company.

As far as the share repurchase, again, that's an issue for the board of directors, and I would just rather not comment on that at the moment. You know we've issued equity in this past year. We are maintaining our investment grade rating, that's very important to us, and our financial position with the acquisition of Chase is significantly improved from last year. And I think that's as much as I'd like to tell you on that.

OK.

We'll be taking our next question from Robert Goldberg at New Vernon Association.

Good morning. Joe, you mentioned that the orders were stable right now on the metals business. I was wondering if you could differentiate between some of the different end markets. I think you mentioned coinage was particularly weak. Are there any end markets where you're still seeing weakness?

It would probably be best to kind of give you it generically. Automotive was better last year and we're not seeing a downturn in automotive, although we're seeing -- we expect to have just a little bit smaller build schedules this year than last year, 16 million versus 16.7. We think that the connector which is the computer telecom is stable. Housing actually is stable and we forecast it for the future -- the near-term future for it to remain that way.

Coinage is down, although forecasts are for it to be up slightly this year as we go in, but it has been down, and so what I'd say right now is relatively the markets are fairly stable, albeit at a much lower level than where we were at 2000, and that's really why we addressed situation with our Indianapolis capacity.

And the Chase business, while it is profitable, is a very low level of profitability. I mean, they have such a high housing component to their business, I'm just wondering why it isn't doing a little bit better.

Well, but that market also overall has dropped off in total volume what has held up has been the housing aspect of it, but other key element in that business is the industrial machinery business which represents greater than 25 percent of the total market, and that's directly related to capital spending, and that's been down, and that's a fairly significant component as well as the nonresidential construction is another key element, and those are two areas that are starting -- that have impacted that business.

OK. And Joe, when you move the production from the Indianapolis to EastDalton, at the given level of orders we are today, can you give us an idea where you would be operating the EastDalton plant at?

We'll be getting that up over 90 percent capacity.

OK. And finally, I just wanted to touch on Tony's point about the savings from the shutdown. You mentioned 10 million for zero three, 20 million for full year 04. I guess that's a pretty lengthy transition since you're shutting the plant mid February but you're only getting a half year of savings. Is that the right way to look at it?

And also some costs that are in the P&L in the first quarter associated with that. And that's another reason why we're not getting the savings in 2003.

OK. That would be, what, a couple million dollars in the P&L first quarter?

I think I'll tell you that when we report the first quarter results, and see exactly, you know, when we terminate full operations there.

OK. Thanks for the help.

Thank you.

We'll go next to Mark Kurland at Bear Stearns.

It's Bob Risas (ph) for Mark. I've got a couple questions. The first one is pretty easy. What's your depreciation -- what did you say your depreciation would run for 2003 and what did you say your cap ex would run?

We had said that cap ex would rise from 40 million to 60 million as our profits improve during the year, and our depreciation is around $90 million in 2003. Maybe a little lower but that's a round number

And the second question, I know what you said about the first quarter. Did you give any guidance for full year or did you not? For EPS or for sales for the full year, you did not?

No, we did not, and we do not give guidance on the full year because of the uncertainty of the times more than anything else.

OK.

And I think you all know how much the changing ECU affects our earnings for each $10 change in the ECU, we get about an $11 million change in pretax or 12 cents a share. So $100 change in the ECU affects our pretax by $110 million, so we are very sensitive to that.

Absolutely. Let me ask you another couple questions. Going back to Les's question on cash, one of the things I guess if, for example, you guys make a fair amount of money next year or two, is it safe to -- I guess what Les was saying, you have three choices or four choices to spend money, pay down debt, raise the dividend, buy stock or make acquisitions. I guess in your preference right now, obviously if something great came up, in your preference right now, I don't think you'd raise the dividend, and my guess is that you'd pay down debt and, you know, is that a fair assumption? Is that where you're coming from? I guess that's ...

I think that the way you would answer that is I would want to look at my economic opportunities at the time and do whatever I thought would maximize my sustainable long-term return to shareholders.

OK. That's fair.

But, I mean, I can't answer such a hypothetical question.

OK. And the last question, the last question in terms of the dividend, can we make the assumption in this day of dividends, et cetera, that your dividend is reasonably secure?

I think, you know, that's -- I've said that the dividends are important to the company, and we realize its importance to the shareholders. They're an important component of our total return to shareholders, and you do know this business while from an earnings point of view, we may not be earning the dividend. From a cash flow point of view because of our (inaudible) appreciation, we have significant cash flows which enhance our ability to continue to pay the dividend, but I can't really comment on what the board of directors may wish to do in the future relative to the dividend.

That is a decision they make each quarter, our management, of course, has a chance to make its recommendation in that regard, and, you know, consistent with our objective of maximizing total sustainable return to shareholders, we would, you know, make that recommendation.

That's fair. Last question. Based on your assessment of the industry, the Chlor-Alkali industry, can you give us what you think capacity utilization is both for you as a firm and for the industry as a whole?

This is John. Our capacity utilization in the fourth quarter was near 90 percent, and we expect the first quarter to be a little lower than that because of the normal seasonal fall-off that we see in most of our markets associated with the first part of the first quarter. So we would expect our operating rate and the industry operating rate to be in the mid 90's before the year -- for the year.

All right. Thanks for your answers and thanks for the conference call.

Thank you.

As a reminder, please press star one for questions today.

And we'll go next to Richard Diamond at Inwood Capital.

Yes, good morning, gentlemen. I wondered if you could provide some more color on the supply/demand dynamics in electric chemicals. I've heard it said that demand is growing 2 percent to 3 percent while capacity is still declining. The second part to my question is if you could quantify the lag between the pricing receive from your purchasers, and it we took that pricing at today's market rates, what that differential would have been.

This is John. Let me try to answer the questions. The second one you asked on pricing lag, as I mentioned earlier, our portfolio of contracts in both cases a majority of our contracts include quarterly lags for price protection, so an increase announced this quarter in most cases has at least a quarter lag built into our portfolio of pricing. And that is very similar for both chlorine and caustic prices. The first question that you asked?

Supply/demand characteristics.

In the last three years, there has been a nine-plus percent reduction in production capacity in North America. That translates in raw numbers to nearly 1.5 tons million tons of production capacity that has come out. That has significantly tightened the supply/demand balance, and even with a modest growth rate for chlorine along the lines of the 2-2.5 percent that you mentioned, that's still -- that still allows for the increase in capacity Ute utilization to the mid 90's that I spoke of earlier.

What are the close enough for government work type numbers for ECU values currently?

For the industry?

You know, if I was to say, you know, what is the ECU value right now, what is your thought about what those prices are?

Contract ECU's are in the $375 range now, with spot ECU's being a little bit lower than that.

Thank you very much.

And we'll take our next question from Jeff Peck from Janney Montgomery.

Good morning. Tony, I have a question for you. The cap capital expenditure is up 50 percent in '03. Is that just -- is there any specific projects that you're doing there or anything that you must do or is that productivity projects you're doing? I'm curious with about the increase there.

Some of that funding is for our China project, where we've entered into a distribution agreement which we had previously announced, and there are several very quick return profit generating projects in there as well, so -- and just both numbers include, as I said, about 5 million from Chase. Chase is finishing up some of the major capital spending projects that they had underway.

I should just mention that about Chase has spent a considerable amount of money in recent years building their capacity to where it is today, and so they have very modern new facilities, and we expect Chase to be generating cash flows well in excess of the dividends that are required on the shares that we issued for that purchase.

OK. And then a question on the -- in the metals segment. You know, you mentioned the electronics numbers are still well below kind of normal levels. But I'm thinking that when you look back in 1999 and 2000 with the whole boom in telecom, is it possible that those volume levels are really not -- it's going to be difficult to get back to that kind of level? Just I know not in the other segments but just in the electronics part of the metals business?

We think that 2000 was probably a bubble there, Jeff, but we think that while we may not get to the levels of 2000, we're going to get substantially beyond the levels that we are now and where we were in 1999. Historically, if you look at the connector industry, which really picks up all those different elements, I mean, there have been those historic growth rates, you know, if you go back 30 years, and so our belief is, is that as time marches on, that that will start to -- it will come back if we're not leveled off in any way shape or form back in the '98, '99 levels.

OK. Makes sense. Again, thanks for -- I think I said this to Dick, but thanks for changing the time of the conference call. Appreciate it.

Welcome.

OK. Thanks.

And we'll take our next question from John Thies at Grantham Mayo.

Good morning, all. Tony, I think you deserve a medal for your straight-faced answer to Bob Risas' dumb questions on the dividend.

With respect to ECU realizations, I think Joe said that they bottomed in the second quarter around 200, third quarter averaged around 230. Was that correct?

We said 240.

OK. And then the fourth quarter, 280-ish ex-Sun Belt. Are the Sun Belt realizations significantly different from that 280 average?

They are higher.

OK. Good to know. Thank you much.

You're welcome.

Have nothing further questions at this time, I'd like to turn the conference back over to Mr. Rupp for any additional or closing remarks.

We thank you very much for joining us and look forward to talking to you tend of at the end of the first quarter.

Thank you for your participation. You may disconnect at this time.