Olin Corp (OLN) 2003 Q1 法說會逐字稿

Good day everyone and welcome to the Olin Corporation First Quarter 2003 Earnings Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the President and CEO of Olin, Mr. Joseph D. Rupp. Please go ahead, sir.

Good morning, and thanks for joining us today. With me this morning from Olin are Tony Ruggiero and Dick Kosche. Olin Corporation yesterday announced that the board of directors elected Randall W. Larrimore currently an Independent Director of Olin is Chairman of the Board. Mr. Larrimore succeeds Donald W. Griffin who was reelected to the board for another term as Director. The election of Randy is consistent with an emerging trend and corporate governance to separate the roles of the CEO and Chairman with an independent director as chairman. As Chairman, Randy plans to concentrate his efforts on strengthening the board's corporate governance and also to lend his counsel to Olin's management. We, the management team, are excited in looking forward to working with Randy in the future. We also announced yesterday our earnings. We announced a net loss in the first quarter of 2003 of $39 million, which represents 67 cents per diluted share. That's compared with a net loss of $11.3 million or 26 cents per diluted share in the first quarter of 2002.

The first quarter of 2003 includes an accounting charge after-tax of $25.4 million, or 44 cents per share, which is in connection with the SFAS 143 accounting for asset retirement obligations, which the company adopted on January 1 of this year. It also includes a restructuring charge after-tax of $18.7 million or 32 cents per share for the shutdown of our Indianapolis Brass Mill and certain other actions. The company's adjusted net income then was $5.1 million, or 9 cents per diluted share, before the accounting change and restructuring charge. And when Tony gets into the financials, he will talk about that; and we had attached, to the release, an explanation to that under the term "Profit Summary."

Our first quarter results, excluding the accounting charge and restructuring charge, were in line with our previous guidance of earnings, which was in the 10-cent per share range. Our first quarter operating results were much more favorable than they were a year ago, and it's primarily because of the continued improvements in the Chlor (ph) Alkali market. Winchesters sales and profits were very strong in the first quarter, and that's a result of higher commercial and higher military demand. Results in our metals segments were adversely impacted by a number of factors, which include higher natural gas costs and continuing soft demand particularly for our specialized alloys. In the first quarter of 2003, we completed the shutdown of our Indianapolis Brass Strip manufacturing facility; and that was intended to further reduce our costs and rationalize capacity consistent with market demand. Let's turn to Olin's first quarter results starting with Chlor Alkali.

Chlor Alkali sales for the first quarter of 2003 were $97 million, an increase of 34% from the first quarter of 2002. Chlor Alkali posted operating income of $9 million compared with an operating loss of $15.1 million in the first quarter of 2002. The improved operating results were primarily due to the higher ECU selling prices. Our prices were up 35% over the first quarter of 2002 and up 56% over the second quarter of 2002. Our ECU netback, excluding our Sunbelt plant, was approximately $315 in the first quarter of 2003; and that is compared with approximately $235 in the first quarter of 2002. We are expecting prices for both chlorine and caustic to increase from the first quarter of 2003 to the second quarter of 2003, but since our contracts reflect the impact of previously announced price increases.

Industry pricing for the second quarter for both chlorine and caustic has not yet settled, and we will not speculate on the outcome of these previously announced increases. During the first quarter, we operated at about 90% of capacity; and we're expecting our operating rates to be in the mid 90% range as we move into the second quarter. And it's primarily due to demand for chlorine and caustic from bleach customers as this traditionally increases at this time of the year. For the full year of 2003, we're expecting a dramatic turnaround on the 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 were not projected to be a significant issue for us because, as you know, we buy our electricity from utilities that drive their power primarily from coal, nuclear and hydroelectric sources.

Let's turn to the metal segment. Sales for the first quarter were $222 million, and that compares to 160 million in the first quarter of 2002. Most of the increase is due primarily to the inclusion of sales of $58 million from Chase Industries, which you will recall Olin acquired at the end of September 2002. Sales in the first quarter of 2003 excluding Chase were slightly higher due to higher metal prices, which are generally passed through the customers. Strip shipment volumes were down 3% from 2002 mainly due to softer demand in automotive segment and other market segments being flat to slightly weaker. The metal segment operating income of $300,000 includes $3 million of Chase profits in 2003. In the first quarter of 2003, the metal segment recorded an operating loss of $2.7 million at the metal segment excluding Chase, incurred an operating loss of $2.7 million in comparison to a profit of $2.3 million in 2002. The Metal segment excluding Chase had lowered operating results in the first quarter of 2003, due to a number of factors, including software volume, higher natural gas costs, and cost escalations primarily in medical and workmen's compensation, but also in wage increases.

Chase sales and profits for the first quarter of 2003 were lower than the comparable period last year as a result of lower demand and lower selling prices. As we look forward to the second quarter for the metal segment, we forecast that overall demand for our strip and rod products could be flat or might in fact decline from the first quarter levels. As you know, automotive bill schedules look like they will soften a bit in the second quarter from the first quarter, connectors which were attracted by the semiconductor book to bill ratio have been hovered at about 1, which indicates that there is no pick up in that segment. Given continued soft market demand, we discontinued production at our Indianapolis Strip mill; and we've consolidated most of this manufacturing into Olin's East Alton Illinois facility.

Moving to Winchester, sales for the first quarter of 2003 were up 14% to $71 million compared to $62 million in the first quarter of 2002. The increase in sales was primarily driven by higher military demand, and higher commercial ammunition sales. The strength in commercial ammunition sales appears to be attributable to the Iraq conflict and concern over terrorism in the United States. Operating income of the first quarter of 2003 was $5 million compared with $3.4 million in 2002; and then, again, it's primarily due to higher military and commercial sales. Winchester is off to a very good start for the full year; and for the full year 2003, we project that Winchester will have a solid year. Now, let me turn the microphone over to Tony Ruggiero, who will review some several financial items with you. Tony.

Thank you, Joe. Let me call your attention again to the fact that we have provided a reconciliation of our adjusted income and related earnings per share, before the affect on the accounting change and restructuring charge on the scheduled and titled "Profit Summary" that is included with our press release and quarterly financial data on our website at "www.oln.com" in the "Investor Relations" section titled "Recent Press Releases and Speeches." In our January call, we said that as a result of the closure of our brass mill in Indianapolis and certain other actions, the company expected to record a restructuring charge in the $15 million free tax range in the first quarter.

As you will note from our income statement, our restructuring charge was $18.7 million after tax or $29 million pretax. Part of the difference between the $50 million estimates and the $29 million restructuring charge is because we had previously anticipated that $5 million of future environmental spending for the Indianapolis side would be included in the restructuring charge. But it was included in the SFAS 143 charge instead. Also, we had previously assumed that we we'll -- there would be about $5 million of post retirements and pension curtailment charges that were not necessary the remaining differences which is changes in estimated cost. In addition to the restructuring charge, we recorded an after tax charge of $25.4 million, in connection with the adoption of SFAS 143 accounting for asset retirement obligation.

We adopted this standard on January 1st 2003 and it relates to estimated closure cost related to a former operating facilities, certain hazardous waste unit at operating plant site and our Indianapolis facility, which we shut down in the first quarter of 2003 as I had previously mentioned. The after tax charge was recorded as the cumulative effect of an accounting change. The ongoing incremental expense resulting from the adoption of SFAS 143 is not expected to be significant and I should point that, this is an accounting change and has nothing to do with cash and cash flows of the company because they will continue to be spent on these site as we have included them in our plan. Let's turn to the income statement to discuss several items as I compare the first quarter of 2003 and 2002.

Our gross margin increased from 8% in 2002 to 11% in 2003, primarily due to higher selling prices for Chlor Alkali. We continue to forecast that Chlor Alkali will be the largest factor contributing to our earnings in the foreseeable future as Chlor Alkali prices are expected to remain high at least through 2005. Selling and administrative expenses in the first quarter of 2003 are essentially flat for 2002 except for higher pension cost. With respect to the $29 million restructuring charge, approximately $23 million is for the write off of property plan and equipment and good will. We continue to estimate that the pre-tax savings from this shutdown will more than offset the cost and that the savings will be higher in 2004, when the full year effect of the shut down will be realized.

The earnings of non-consolidated affiliates where $1.5 million to the first quarter of 2003, up $5.4 million from 2002, primarily because higher ECU pricing at Sunbelt. Since we expect ECU prices to continue to rise in 2003 we expect to report increasing income from non-consolidated affiliates. Interest expense for the first quarter of 2003 decreased from 2002, because of lower debt levels in 2003 and lower interest rates on the company's debt portfolio. You will recall that we repaid $1 million of principal amount in June 2002. Our effective tax rate was 31% in the first quarter of this year compared with 24% in the first quarter of 2002. And that is affected by the profit and loss mix in the first quarter. We estimate our tax rate for the balance of 2003 will be in the 45% range.

As we look to the balance sheet, I would remind you that we have consolidated the assets and liability of Chase, which we acquired on September 22, [7] 2002. At the end of the first quarter, we had cash and cash equivalent of $71 million compared with $205 million in 2002. We had borrowed $200 million in December of 2001 in part to repay the $100 million debt, which was coming due in June. And as a result we had that cash on hand. Receivables are higher in 2003 because of higher sale in Chlor Alkali and Winchester and the inclusion of Chase's receivable in 2003. Our inventories of $260 million -- $269 million in 2003 are higher than at the end of the first quarter of 2002, primarily because we are selling more brass on a metal price pass through basis rather than our toll basis and therefore we have to inventory more raw material for our customers.

We also built inventories to avoid customer disruption during the Indianapolis shut down. Also included are the inventories at Chase, higher inventories in our metal distribution centers and higher Winchester inventories as we build inventories for the upcoming hunting [ph] season. Property plant and equipment was $520 million at the end of the first quarter 2003 compared with $460 million at the end of the first quarter of 2002. The addition of Chase increased our PP&E [ph] by a $135 million. This increase was reduced by the Indianapolis write-off and depreciation exceeding capital spending in 2002. The goodwill associated with Chase was $40 million and there were intangible asset of 10 million associated with the Blue Dot trademark. Current debt, at the end of the first quarter of 2003 is significantly lower than last year because $100 million principal amount was repaid as I've mentioned several times in June 2002.

Account payables are higher at the end of the first quarter because our Chases' payables and the accrued pension liability is higher at the end of the first quarter this year than last year because of the pension liability adjustments that we recorded at the end of 2002. And other liabilities are higher at the end of the first quarter 2003 than last year because of the SFAS 143 charge. In the second quarter of 2003, we expect net income to increase to the 15 cent per share range, primarily because of continuous positive momentum in the Chlor-Alkali market. We expect demand for the Metal segment products to be flat or possibly declined from first quarter levels and as such we expect very little improvement in our Metal business results in the second quarter.

Winchester had an excellent first quarter or will likely see demands settle down a bit in the second quarter because of seasonal factors and as hostilities in Iraq and the concern over terrorism avail. We said in our January conference call that we expect to increase capital spending from $41 million in 2002 to the $60 million range in 2003 as our results improve. We are closely monitoring our spending and now forecast that we will spending about 10% less than the $60 million we had previously reported. Capital spending in 2002 and 2003 includes about 5 million for Chase. Our depreciation and amortization in 2003 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 all in common stock. This is the 306 consecutive quarterly dividends to be 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 the outlook section of our most recent 10-K and in our first quarter earnings release. Operator, we are now ready to take questions.

Thank you Gentlemen. 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 "*" key followed by the digit "1" on your touchtone phones. Again "*" "1" for questions. If you're using a speakerphone please be sure that your mute function is disengaged in order that your signal can reach our equipment. Again "*" "1". We'll pause just a moment to assemble our roster. We'll take our first question in today from John Teas [ph] with Grandsom Mayo [ph].

Good morning all.

Good morning.

Talking about operating rates, and realizations in Chlor Alkali. Did I understand you, to what you say a mid 90's operating rate expected in the current quarter?

Yes.

Mid 90's, not 1990.

No, mid 90's.

Fair enough. And, as for realizations, where did I bury mine all - oh here we go.

Okay.

Let's see, you said 235 in the first quarter a year ago, average ECU realization and something close to 315ish?

That is correct.

First quarter this year?

That is correct.

Okay.

And, we want on to make the point that the percent increase from the lower point of last year, which we referred in the second quarter was about 56% in the ECU.

Good now that's -- that was the bottom. As a matter of fact I started graphing [ph] that whole thing for about four years worth of quarters the other day and then ran into incomplete data. I'll talk with Dick about that. Thank you much.

Thank you.

We'll take our next question from John Roberts, Buckingham Research. Mr. Robert your line is open. We'll go next to Sergey Vasnetsov, Lehman Brothers.

Yes. Good morning.

Good morning.

I want to ask you about the Chlor Alkali. You mentioned that your second quarter will be up. How much of the price increase you would expect and may be you can talk about the industry in general if you want to protect your customers? Can we hope for some $90 to $100 sequential increase in ECU from first quarter to second quarter?

Sergey, this is Tony. We really don't want to comment on that. We're in negotiations with our customers, and we just don't think that would be appropriate.

Okay. Once we get through the price increase, although we guessed from second quarter, what is your directional view on that Chlor Alkali prices into third and fourth quarter? Flats like the [indiscernible] down?

Here again, I think we would refer you to the CMAI forecast that, for this period. I really don't want to go beyond the second quarter in our forecast.

Yes, I have looked at CMAI, that's what I was referring to. Do you have other comments? Okay, and sir on operation rates, do you see sequential [indiscernible] re-strengthen for you or for the industry?

I think again, we really want to stay within the second quarter. In these uncertain times, I think you even know many companies have stopped broadcasting at all, or completely whether, and I think we'd like to stay with where we've stood.

It's okay. Bye, thank you.

Thank you.

We'll go next to Jeffrey Peck with Janney Montgomery.

Good morning.

Good morning.

Couple of questions Tony, on the restructuring charge. How much of that is cashed in the first quarter? If any? With that on Indianapolis restructuring the $18.7 million. Besides all non -cash was - there's some cash in there?

It's suppose to be non-cash.

It's mostly non-cash.

Yes.

Okay. And then, on the Chlor Alkali side, looks like might to 315 realized these sum at the first quarter now the 315 realized ECU with margin there comes out to about 9%. And I'm wondering is there anything special that may have happened in the first quarter, or at that kind of a realized ECU price, that's a typical margin.

At this, there is, I would say it's a reasonably indicative quarter.

Okay.

The -- I'd also like to point out that the Sunbelt did quite well in the quarter, and, but it's reasonably indicative.

Okay.

We go next to Kunal Banerjee [ph] with Goldman Sachs.

Good morning. Two set of - two questions on your metals business. First could you just give us your operating rates in metals and a few goods split that by rod versus strip?

Yes. What we have in metals for our brass strip is in our East Alton operation we're running at about 88% a capacity but in our re-roll facility we're running which get product from the East Alton distribution facility we're running probably about 70% of capacity. In the Chase operations, we're running at about 85% -- 80% -- about 85% of the capacity.

Okay.

80% of capacity. That's not if I include the expansions that we'll put in we're running at about 75% of capacity.

Okay. And Tony, you've mentioned some thing about changing some of your revenue realizations from pass - from tooling to price pass through, I was just wondering whether a lot of that is occurring at Chase because, Chase came in with a fair bit of tooling business, if you could just talk little bit about that?

That - most of that occurred in the striping segment.

Strip.

Oh in the strip business.

Yes. We had significant customers well we now have to purchase the materials and inventory and -- rather than have a pass through.

So was this initiated by the customer or was this all?

It wasn't initiated by us. I can tell you.

Right. Right. Okay. And then you talked about the general belief there's a low gas exposure for Olin relative to the other producers in Chlor-Alkali but you did mentioned gas cost impacting your Metals business to some extent. Do you have kind of a rough number on the per ton basis as to what that exposure would be? I mean how much gas do you kind of consume per ton of whatever metal that's processed?

The incremental cost was - I will is more than the minimal [ph] and probably less than the material and try to keep in that range. It's -- the incremental cost may be in the $5 million range or so. It is based -- what we see [indiscernible].

Now this is a $5 million quarter to quarter or year over year.

It's the year.

Year over year. Okay.

For Metal.

Right. Right. And then just finally on Chlor-Alkali, you know this is slightly a bigger picture with margins moving pretty sustainable here toward mid-cycle, what surprised me was the decision by a few of these producers to actually either shelf expansions or actually announced some shutdowns as in the case of Formosa. Are you kind of encouraged, I guess, you are encouraged, but I guess, are you seeing a shift in the discipline in this industry with, I mean, in all other commodity industries you have actually seen producers come out and announced capacity as reinvestment margin beginning to kind of we achieved this, so you could just talk a little about that?

Yes. Needless to say we are very encouraged by -- what was behind my comment that we see high prices surviving at least till 2005, because some of that capacity was supposed to fact in that period. We do think that this is a much healthier market for us then has previously existed with the number of players in the market thus being significantly reduced over the last couple of years with more than 10% of the capacity and of the market with these produces indicating that they have not had these capacity with the fact that natural gas was putting pressure on other producers to increase price. So we are very encouraged by all of this.

Could you see them coming back with non-gas based Chlor Alkali capacity here in the future.

No, we do not see that. Okay.

Okay thanks Tony.

We will go next to Bob Goldberg at Newern and Associates [ph].

Good morning.

Hi Bob.

Joe how unusual is it or would it be for the metals business to have lower demands sequentially from 1Q to 2Q?

Yes. It has happened before Bob. You know, normally what happens is the first and second quarter repel each sometimes the second is a little bit stronger then the first, but it has happened over the last 20 plus years when we had a little bit of flat or slightly declining.

Could been a marked change in the tone of the marketplace from last month or two.

Yes, when the war began, the order stopped, what I mean, that we really saw that at that point in time. Our dilemma obviously is our visibility. We can work short term here and that's what we we're really reporting on.

Okay, so March was a weak month and then April looks to be a continuation of that.

It started out that way. Yes.

Okay. And you can say anything in term of any war related recovery at.

We do not.

Okay. With the metal business have been break even or excluding Chase, I mean, would have been breakeven or so without the Indianapolis shut down in other words were there cost involved in making that happen?

Yes there were a little bit, yes. In some inventory positioning and better to position ourselves for the -- but we also, you know, as we said in our statement, we also have energy cost hit us, as well as we do have higher pension and medical cost that will hit as well.

Okay. But if the shut down had not occurred, you still probably would have had modest loss for the quarter?

Yes.

Okay. And, you're still talking about $20 million in pretax savings in total from the shut down, is that still the estimate?

That is correct.

Yes.

Okay. And Tony, I just want to ask you about the balance sheet you had net debt moving up from the fourth quarter and of course, equity down with the charges I think your net debt to total capital is now about 57% or 58%. Any thoughts on, how important is it to get that down since it's really just the last few quarters that it's moved up on you?

We -- our investment grade - maintaining our investment grade is very important to us since the rating agencies look filthy. Accounting charge has been a non-cash charge and doesn't have any affect on the cash flows of the company and the restructuring charge, it is primarily non-cash $20 million annualized back, coming back and against it we'll very, very quickly recover that. So, I -- we have projected higher cost in that quarter based on the momentum for [indiscernible] and it is very important that we maintain our investment grade, watch these ratios low [ph], and as I mentioned we're looking at our capital spending trying to keep everything in the proper balance.

A related question is the cash flow which is decidedly negative in the first quarter, how quickly can you turn that around and get the working capital down and all the inventory that was in the system in the first quarter down?

That's very typical for us to have a build in the first quarter. We, then, in the fourth quarter and around, I had mentioned on the last fall, that we expect to have higher cash at the end of this year than last year and we still expect that to be so. Some of that inventory as we mentioned was build so that we would avoid customer disruptions as we were shutting Indianapolis down because last year we had some difficulty in that regard and so we wanted to be especially careful that we dissatisfy our customers. But we do believe that will -- that in -- that in fact was capital will be liquidated by the end of the year as is typically so and again Winchester had a higher inventory, to be there higher sales, as they look ahead.

You are targeting any particular number Tony for that net debt capital ratio, for the end of year?

We see to it -- the agencies that you know look for coverage ratios and we have coverage ration in our revolver. You know we are safely below limit of those coverage ratios. And you know we monitor that very carefully.

Okay, Thanks.

Because as I said, we really do want to make in our investment grade.

Thank you.

We will take our next question from Richard O'Reilly, Standard & Poor's.

Good morning gentlemen. Couple of quick question. In the Winchester business. How generally -- how big -- what percentage of your sales is military related?

%10 to 12% of after sales.

Okay I thought it was a low percentage so, I'm just -- it must have really have moved up by a large amount to have made a difference in the quarter.

And in the quarter we had a...

Right. Okay fine and a question for Tony. His forecast for the tax-rate, if I did my math right excluded in the chart in the first quarter. The tax rate would have been 55%. If that's right, that you indicated 45% and I'm just wondering why the first quarter wouldn't have deflected 45%?

Because there was some goodwill. And the restructuring charge that we are not going yet [indiscernible] asked it out for.

Well okay, fine. So you think for full year of 45% rate?

Of course yes for the rest of the year.

For the rest of the year but not okay for the -- so the full year will be a blend of the two?

Yes.

Okay, fine, okay great. Okay that's it. Thank you gentlemen.

Thank you.

Again ladies and gentlemen a reminder it is "*" "1" to ask your question and we'll now take a follow up from Jeff Peck at Janney Montgomery.

Thanks just one other question on the brass business, you well look for the second quarter of a flat to down. I'm wondering if you could help us out and give some more color on which of the end-market may be performing better or which end-markets are performing worse as far as orders or semiconductors or any of the other end-markets set that that business serves.

We are anticipating in the quarter for a slight fall off in the automotive - we are not the computer and telecom is actually off a year-on-year in the coinage where we are forecasting for that to be down as well.

Okay.

Rest of the market are somewhat flat. MO [ph] and housing are -- they were strong last again a last year and they remain about the same levels.

Okay. So, you mean was that they remain fairly strong?

Yes.

Okay.

But they are not increasing either.

Got you. Got you. Okay. That was good, its helpful Thank you.

Good.

then we'll go to a follow up now from Bob Richies [ph] at Bear Stearns.

Hi, this is Bob Richies. Let me ask a couple of questions. One, in terms of Chlor Alkali prices what do you say of Chlor Alkali prices for the realization was received for the first quarter and what are you - I know, you said that you - you know, on the call you were going to --- you didn't know what they were going to be till they came up what's your - could you - would you - can you bracket it for Q2?

315 in the first quarter Bob, but we're not going to bracket for the second quarter.

Okay. Let me ask another question what's the announced --- what is the announcing pricing for both chlorine and caustic for this quarter?

Joseph D. Rupp; 70 to 70.

You mean 70 price increase in 70 price increase.

Yes.

And what does that make it for is let me - give me this so we say in that what would that to be free shared product.?

70 product was the 147 for the ECU.

Okay. Are you saying that the announced price increases to be as higher as -- as I mean, okay I'm just trying to get an understanding.

I just you want to be sure you understand that realization is very different.

No. I understand that. Believe me I understand that I'm just trying to get an understanding of what you say about pricing.

Okay.

Okay. Thank you very much.

Thanks. Bob.

Again Ladies and gentlemen "*" "1" for you questions and gentlemen we have no other questions at this time. Mr. Rupp, I'll turn it back to you for additional closing remarks.

Thank you very much for joining us, and we'll look forward to giving you remarks at the end of the second quarter. Thank you.

Ladies and gentlemen, we thank you for your participation. This does conclude our conference for today, and you may disconnect at this time.