Olin Corp (OLN) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Olin Corporation second-quarter 2003 earnings conference call. This call is being recorded. At this time, I would like to turn the call over to Mr. Joseph Rupp, President and Chief Executive Officer of the Olin Corporation.

Good morning and thank you for joining us today. With me this morning from Olin are Tony Ruggiero, Executive Vice President and Chief Financial Officer; John McIntosh (ph), President of our Chlor Alkali Products and Richard Koch, Vice President of Investor Relations.

Last night, Olin Corporation announced net income in the second quarter of 2003 of $8.5 million, or 15 cents per diluted share, compared with a net loss of $7 million, or 15 cents per diluted share in the second quarter of 2002. Sales for the second quarter of 2003 were $396.4 million, compared with $314.3 million in 2002. Our second-quarter results were in line with our previous guidance of earnings being in the 15 cent per share range. Our second quarter operating results were more favorable than they were a year ago, and that is primarily because of the turnaround in the chlor alkali market. Winchester sales and profits improved in the second quarter as a result of higher domestic and military demand, and slightly higher commercial ammunition sales. Earnings in our metals segment were adversely impacted by a number of factors, the most significant being continued soft demand for our strip and rod products.

The weakness in the manufacturing sector in the United States has adversely affected our brass strip and rod businesses and it now appears that the softness in our metals business may be more prolonged than previously anticipated. Key domestic end-use segments, such as automotive, coinage, commercial construction, computer and telecommunications, show continued signs of week. Domestic demand for our products has been impacted not only by the weak economy, but also by the transfer of production of end-use products and component parts to offshore locations.

In light of this situation, Olin will implement a series of cost reduction and operational improvements initiatives and I have every confidence that our dedicated and talented workforce can achieve significant cost reductions and efficiency enhancements. In addition, our focus on international growth will intensify. Olin's leadership position in sales, technical support, manufacturing and technology will be an important competitive advantage in achieving our goals.

Let's turn to our Olin second quarter results and we will begin with chlor alkali. Chlor alkali products sales for the second quarter of 2003 were $107.4 million, which is an increase of 43 percent from the second quarter of 2002. Chlor alkali posted operating income of $14.2 million. That compares to an operating loss of 15.2 million in the second quarter of 2002. The improved operating results were primarily due to higher ECU selling prices. Our ECU net back (ph), excluding our Sunbelt plant, was approximately $330 in the second quarter of 2003, which compares to approximately $200 in the second quarter of 2002. Our operating rate in the second quarter was in line with industry operating rates. We are expecting ECU prices to increase slightly from second quarter of 2003 to the third quarter of 2003 as our contracts reflect the impact of previously announced price increases on a delayed basis. However, softer volumes will likely offset the benefit we expect from these higher prices in the third quarter. It is too early to project volumes or prices for the fourth quarter.

Taking a long-term view of our chlor alkali business, 2003 has been a dramatic turnaround for us due to higher ECU prices, increased chlorine caustic sales volumes and continued initiatives to reduce costs. Natural gas prices, which are a significant cost factor for other chlor alkali producers, are not projected to be a significant cost issue for us because as you know, we buy our electricity from utilities and derive their power primarily from coal, nuclear and hydroelectric sources. CMAI continues to forecast for other improvements in ECU prices in 2004 based on expected growth in the economy and the chlor alkali capacity rationalization that has taken place.

Let's turn to the metals segment. Sales for the second quarter of 2003 were $218.3 million, and it includes sales of 52.9 million from Chase Industries, which Olin acquired in September of 2002. Sales in the second quarter of 2002 were $174.5 million, while shipment volumes excluding Chase were down 10 percent from 2002, mainly due to softer demand in the automotive and coinage segments with other segments being flat to slightly weaker. Reported sales, excluding Chase, were off only 5 percent and that's because of higher copper prices and a product mix containing a higher metal component. The metals segment operating income of 1.1 million includes 1.8 million of Chase profits in 2003. In the second quarter of 2003, the metals segment excluding Chase recorded an operating loss of $700,000 in comparison to a profit of 8.9 million in 2002. The metals segment, excluding Chase, had lower operating results in the second quarter of 2003 primarily because of softer volumes and margin pressures. In addition, higher natural gas costs, higher wage and fringe benefit cost and the adverse impact of reducing inventories also affected our operating results. Chase sales and profits for the second quarter 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 third quarter for the metals segment, we've forecasted overall demand for our strip and rod products is expected to decline from the second quarter. Ammunition cups for shell cases is one segment of that that will decline, and it's normally a seasonal event. Our financial results for the third quarter will also be affected by our regularly scheduled summer plant shutdown and our decision to reduce our inventories further, thus reducing our working capital, consistent with the current market demand. To put the performance of our brass sheet and strip business in perspective, we estimate that industry wide demand is down 3 percent year-on-year through May from last year's soft level. At this point, we see the few signs of improvement in fact, we see some signs of further softening of demand in the near-term. The U.S. automobile build schedules are expected to decline by 17 percent at Ford and by 12 percent at GM from second quarter to third quarter, and this will result in Ford's automotive builds being 15 percent below the third quarter of 2002 and GM's being 6 percent below the third quarter of 2002.

While some economists are expecting significant improvement in the overall economy in the second half, at this point, we have not seen signs of this in either our strip or rod business. We believe the recent increase in the price of copper is more a reflection of the expectation of our improvement in the economy than actual improvement in the end-use demand of sheet and rod customers.

Moving now to Winchester. Sales for the second quarter 2003 were up 9 percent to $70.7 million, compared with 64.6 million in the second quarter of 2002. The increase in sales was primarily driven by higher domestic military demand and slightly higher commercial ammunition sales. Operating income in the second quarter of 2003 was 3.1 million, and that compares to 2.8 million in 2002, primarily due to the higher domestic military and commercial sales, which were offset in part by higher wage and fringe benefit costs. We are anticipating that Winchester will have a good third quarter as customers stock their shelves in advance of the hunting season. Now let me turn the microphone over to Tony Ruggiero, who will review several financial items with you. Tony?

Thank you, Joe. Let's turn to the income statement to discuss several items as I compare the second quarters of 2003 and 2002. Our gross margin increased from 9 percent in 2002 to 12 percent in 2003, primarily due to higher selling prices in chlor alkali. We continue to forecast that chlor alkali will be the largest factor contributing to our earnings in 2003 and 2004 because of higher chlor alkali prices. The earnings of our nonconsolidated affiliates were 3.1 million for the second quarter of 2003, up 7 million from 2002, primarily because of higher ECU pricing at Sunbelt. Interest expense for the second quarter of 2003 decreased from 2002 because of lower average debt levels in 2003 and lower interest rates on the company's debt portfolio. This is attributable to the fact that we borrowed 200 million in December of 2001 and used a portion of this to repay $100 million principal amounts in June of 2002. Our effective tax rate was 45 percent in the second quarter of 2003, compared with 24 percent in the second quarter of 2002, and that variation is due to last year's being a loss and this year's being a profit and our accrual of the interest on some unpaid tax balances. We estimate our tax rate for the balance of 2003 will remain in the 45 percent range.

As we look to the balance sheet, I'd like to remind you that we've consolidated the assets and liabilities of Chase, which we acquired on September 27, 2002. At the end of the second quarter, we had cash and cash equivalents of 94.5 million, compared with 89.3 million in 2002. Receivables are higher because of higher sales in chlor alkali in 2003 and the inclusion of Chase's receivables. Our inventories of 270 million in 2003 are higher than at the end of the second quarter of 2002, primarily because we are selling more brass on a metal type price pass-through basis, rather than on a toll basis and, therefore, have to inventory more raw materials. Also included is the inventory at Chase and slightly higher Winchester inventories to support our higher level of sales this year.

Property, plant and equipment was 508 million at the end of the second quarter of 2003, compared with 441 million at the end of the second quarter of 2002. The addition of Chase increased our PP&E by 135 million. This increase in PP&E was reduced by the Indianapolis shutdown and depreciation exceeding capital spending in 2003. The goodwill associated with Chase was 40 million and there were intangible assets of 10 million associated with the Blue Dot (ph) trademark. Net debt, defined as total debt less cash and cash equivalents, was 234 million in 2003 compared with 215 million in 2002. The accrued pension liability is higher at the end of the second quarter of 2003 than 2002, primarily because the minimal pension liability adjustment we recorded in December of 2002. Our other liabilities are higher at the end of the second quarter than last year, primarily due to the SFAS-143 charge recorded in the first quarter of 2003. In the third quarter of 2003, Olin expects net income to be in the 10 cent per-share range, compared with 15 cents per share in the second quarter, primarily because the seasonal improvement in Winchester will be more than offset by continuing soft demand in the metals segment. In the third quarter, chlor alkali operating income is expected to approximate the second quarter as lower sales volumes will likely offset the impact of higher expected ECU prices. We continue to project that we will remain in compliance with our debt covenants. As you may know, both our consolidated leverage ratio and consolidated interest coverage covenants are 3.5 times at September 30th and remain at that level thereafter in our revolving credit agreement. And let me say again that we expect to remain in compliance with these covenants. We expect to increase capital spending from $41 million in 2002 to the 55 million range in 2003 as our results have improved from last year. Capital spending this year includes about 5 million for Chase. Depreciation and amortization in 2003 will be in the $85 million range, and I should point out that depreciation and amortization is about $1.50 a share -- is what we're projecting for this year. 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 307th consecutive quarterly dividend to be paid by the company.

Before I conclude, let me may 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 form 10-K and in our second quarter earnings release. Operator, we're now ready to take questions.

(Caller Instructions). John Roberts, Buckingham Research.

Good morning, guys. Last year when the spotty seas (ph) started picking up, you guys lagged a little bit because you had I think a fair amount of contracts away from current market conditions, and now it looks like you're doing a little bit better going into the third quarter here than what the spot market is because of the renewal of the contracts that has occurred over the past several quarters. Is there any -- are you substantially away from the market over the next couple of quarters? I'm curious in terms of whether they're layered in fairly evenly so that you won't get too far away from market conditions, or do a lot of things come off all at once as we get into the next couple of quarters?

This is John McIntosh (ph). Our estimate for the third quarter is that pricing will improve slightly, as Joe had said, and that would take care of most of the effective caustic price increase that was announced in May, or was announced at the beginning of the second quarter. It will be through the end of the third quarter for that increase to predominately work its way through our pricing structure. And absent any further price increase, announced price increases, then we don't expect much additional movement.

Because in the third quarter here, it looks like the spot ECU at least any be coming down a little bit with caustic weakening here and you're going to be moving up. Do your contracts that you have in place give you any visibility into the fourth quarter, whether you continue moving up?

We don't have any visibility at this time. The spot price differences now for both chlorine and caustic are in excess of $70, lower than contract pricing. Obviously, if that continues, there will be more and more pressure on contract pricing in the fourth quarter.

Thanks. I will be back into queue.

Bob Goldberg, New Vernon (ph) Associates.

Good morning. Joe, you had in the past talked about normalized strip consumption in the U.S. of 1.3 to 1.4 (ph) billion pounds, and I guess this will be the third year that you are running in the 1.1 range, maybe this year a little bit below that, depending on how the second half goes. I am just wondering if you've changed that assessment, given the trends you talked about and movement of fabricated product to Asia. What are your thoughts on the U.S. market now?

First, your comment of being in the 1.1 range is correct, and it will be the third year in the 1.1 range, and we are now sensing that we will be actually less than 1.1 this year, which takes us back to about 1993 levels. And as we look forward, we think that we can approach a more normalized condition, not really and the 1.3 billion range or 1.4 billion range, a little bit less than that. But we also believe that it will take longer to get there. Our sense is that there is about 5 percent of what we would call offshoring (ph) that has occurred that is strip that has permanently left the United States and gone elsewhere to be fabricated into parts.

How do you get it back if the 5 percent may continue to grow? I assume -- you're going to be working against the headwind with more and more product leaving the country?

MR. JOSEPH RUPP We will be working against that. We also believe there are some other elements of our market that there will continue to be some growth in. You said you're seeing some weakness in the third quarter in some of the market. I guess automotive is one. Are you seeing any stabilization or recovery at all in your electronics?

MR. JOSEPH RUPP We're not in electronics at all. In automotive, as you know, the build schedules are down, as we talked about. I think GM has 77 days of inventory, Ford has 74 days of inventory, and they have cut their bill schedules down. The other area that is down for the year is telecommunications, and remains down. It is off, compared to last year, year-on-year probably 20-plus percent. And coinage remains (indiscernible) down as well. You have now --

MR. JOSEPH RUPP Addressing some of this, because I didn't state it earlier. As you know, in the fourth quarter this year, we are opening a facility in China which is the joint venture with the largest Chinese brass mill over there, so I don't want to leave you with the impression that what are we going to do to capture some of the growth that is going on in other areas of the world. I will get back in. Thanks.

Leslie Ravitz (ph), Morgan Stanley.

Good morning. A couple of questions. Going back to ECU realizations, John, what percentage of your business is contract versus spot?

In excess of 90 percent of our business is contract business.

And did you see higher chlorine realizations? You mentioned caustic. Did you see higher chlorine in the second quarter?

We saw higher realizations across both molecules in the second quarter, but the majority of it was caustic.

I'm sorry -- the majority of it was which?

On the caustic side.

What I'm curious about is -- one of the things hat we thought from the outside looking in is that your cost position it is favorable versus the industry. I am wondering if your customers also see that and, therefore, you are not getting industry pricing for chlorine and/or caustic because they're saying your cost structure is different?

I don't think that is the case, Les, and I base that on the fact that, although we report netback numbers when we talk about our financial performance of the chlor alkali products division, we are obviously aware of other competitors that report pricing as opposed to netbacks. And without quoting numbers, whenever we have looked at our selling prices relative to what has been reported by other people in the industry, we find our numbers to be comparable.

Okay. And your operating rate you said was in line with the industry in the second quarter?

Yes, it was.

And your operating rate, at least for July, is lower?

Yes. Our operating rate and the industry operating rate have really paled (ph) down from second quarter into the beginning of the third quarter.

Has it continued low as you look at your August orderbooks? Continued lower?

I think as we look at August, we see August looking a lot like July, at least at this point.

Very good, thank you.

Bob Wright (ph), Bear Stearns.

Hi. This is Bob Wright, not Mark. But the question I have to ask you is relating to brass, a couple of questions. One -- the efficiencies that you are going to install in brass -- have you put a dollar amount on it? In other words, how much cost do you think you can cut out that you can keep? Is there any (MULTIPLE SPEAKERS)?

There's two things we want to do there, obviously, is we continue to the reconfiguration of our manufacturing operations to get it consistent with the market. And remember -- we did shut our Indianapolis operations down earlier this year along those lines. Additionally, we're working on the cost initiatives and our objective is to offset the cost creep (ph) that we get on the variable side that affects those margins.

You said words, but you didn't put any numbers?

I'm not going to at this point.

Let me ask you this. Right now, you're doing about $200 million plus a quarter in sales and you're basically making $1 million. If the sales continue to run at that level and we have to make the assumption that they're going to run between 2 and 250 for awhile, even if business picks back up, what kind of returns can we look for there? You had huge returns a few years ago. There is no help you're going to help us with, in terms of -- you must have some goals and you must -- if you're out there trying to at least lower expectations on brass, which may or may not be true after this quarter is over if the economy picks back up, but what kind of -- you obviously are going to cut costs, so just give us help. As a shareholder, I would like to know.

I think as we look ahead, I think we obviously are conveying that we think this market is not going to recover as we had originally anticipated. As we look back and study this situation in the business, there has been cost creep over the years. Our goal at a minimum as we look ahead is to have programs in place and identify, much of which we do, to be sure that the cost creep in the future is not there, at a minimum, and then beyond that, to have programs to expand our revenue base. I know I am being vague, but I can't really be much more specific than that as we talk about the future, because the future is very uncertain and we do not have a good visibility on the future. And that is what particularly what we're trying to convey here in the metals business.

I understand all of that, but there -- and you are being vague, which is -- I'm not asking for specifics, I'm just saying that if business stays around to 220 per quarter, which is probably at a low -- I'll call back (ph) -- if things stay at this level, what can we look forward to? Do you want to get a 3 percent margin? Do you want to be profitable?

Obviously, we want be profitable. As you know what are margins were prior to the downturn, the significant impact that we have on ourselves at this point in time is the significant volume downturn that we've had, which impacts the heavy capital base that we have with business. And so I think we should just stick with what we're saying is we're addressing the capital side of the business, which is the fixed part of the business (MULTIPLE SPEAKERS) variable part.

Before I let you go, because this is obviously an interesting issue to shareholders. You shut down a plant in Indianapolis. Is that included in this -- when do we see the full impact of the consolidation of the plant, in terms of your numbers? Should we start seeing that in the third quarter or should we have seen it in the second quarter?

Actually, we will see it actually in the last half of this year, going into next year. The issue there is that, at the same time we've shut that plant down, there has been continual market erosion from a volume perspectives.

Alright.

Thank you.

Kunal Banerjee (ph) (indiscernible), Goldman, Sachs & Co.

Good morning. Just a couple of questions. First, have you disclosed the extent of the debottleneck at Sunbelt?

The second quarter of this year, we completed a debottlenecking project at Sunbelt. The impact of that project, in terms of capacity, is 40,000 ECUs on an annualized basis. That works out to a 20,000 ECU increase for each of the partners.

Okay. Then on the metal side with the run-up in copper prices that you mentioned and your pass-through structure, is that actually choking off additional demand? Obviously your brass pricing is going up as a formula of the copper price, so are you running that additional risk as well?

We do not believe so at this point because the run-up in copper prizes is up in the 80 cent range and that really won't impact buyers. I don't think it will closer to the way (ph) over a dollar and I don't think that that is impacting volumes at this time.

Do you have that same pass-through structure on the Chase volumes or is it only on the strip?

Chase remember it uses a total different input material, which is more of a cycle material so the price of copper really is not affecting that.

Okay, thank you.

Jeff Peck (ph), Jenny Montgomery (ph).

Good morning. I was wondering if you could quantify the lower sales volume that you're looking at in the third quarter? I mean give us some kind of a ballpark. Are we looking at a double-digit decline in volumes? Is it a 2-5 percent decline in volumes and kind of -- is there any way you can quantify that a bit?

Well our volumes year-to-date are running off about 10 percent and the second quarter or third quarter, I think we're looking probably for another 4 or 5 percent decline of that.

Okay, great. That was helpful. And then you mentioned your pricing ex-Sunbelt, and I'm wondering if - does the Sunbelt pricing, is that materially different from the realized ECU that you spoke about?

Over the cycle, Sunbelt pricing will at times be higher than our system pricing, and at times be lower than our system pricing. But over the cycle, it begins (ph) to average out.

At this point, are you still catching up there? Are or are you behind the average or are you above?

Sunbelt's pricing reacts quicker to increases in chlorine pricing going into the vinyls (ph) segment. And as a result of that, Sunbelt pricing is higher now than our system pricing.

Okay, that makes sense. Finally, on the brass side, are all of your brass sales in the strip and road -- are they all formulated off of copper copper prices? Do you have any net exposure to copper prices, or your entire business is kind of formulated off of that?

We don't have exposure to copper prices at all. We have the ability as we've talked about to be able to pass those on through.

That's what I thought. Thanks for your time.

You're welcome.

(Caller Instructions). Greg Rudick (ph), UBS.

Good morning, gentlemen. Just a question. In terms of the weakness you're seeing in volumes, I'm wondering if you could typify the various product segments in usage, like chlor vinyls, pulp and paper, solvents, epoxies, etc., etc.. And not in great detail, but which segments are running about normal, which are anticipating being below normal in the third quarter and the like?

The segments that we see as being weakest in the third quarter are really the chlorine consuming segments. We have yet to see the increase in vinyls demand that has been talked about and conjectured that would appear later in the third quarter. And in terms of urethanes market, in terms of titanium dioxide market and in the market associated with the seasonal bleach consumption, those markets still appear weak. Pulp and paper for our system has picked up earlier in the year and remains pretty steady looking into the third quarter.

Okay, that is all I had. Thank you very much.

Ladies and gentlemen, we have no further questions on our roster at this time. Mr. Rupp, I'll turn the conference back over to you for any closing remarks.

We thank you for joining us this morning and look forward to talking to you with our third quarter report. Thank you.

Ladies and gentlemen, this concludes today's Olin Corporation second quarter earnings conference call. We do appreciate your participation and you may disconnect at this time.

(CONFERENCE CALL CONCLUDED)