Olin Corp (OLN) 2003 Q4 法說會逐字稿

Good day and welcome to the Olin Corporation fourth quarter 2003 earnings conference call. This call is being recorded. With us today from the company, is the President and Chief Executive Officer, Mr. Joseph Rupp. At this time, I would like to turn the call over to Mr. Rupp. Please go ahead, Sir.

Good morning, and thank you for joining us today. With me this morning from Olin are Tony Ruggiero, our Executive Vice-President and CFO, John McIntosh, President of Chlor Alkali Products and Dick Koch, our Vice-President of Investor Relations.

Last night, Olin Corporation announced net income in the fourth quarter of 2003 of $400,000 or 1 cent per diluted share compared with a loss of $12 million or 21 cents per diluted share in the fourth quarter of 2002. The fourth quarter of 2003 includes a $1.8 million pre-tax restructuring charge, associated with the write-down of certain offshore assets that were netted with a reduction of a previously established reserve related to the company's Indianapolis restructuring. Excluding this write-down, Olin would have earned 3 cents per diluted share. The fourth quarter of 2002 included a $10.4 million provision for taxes that were in connection with the surrender of life insurance policies purchased under the company-owned life insurance program. Excluding the $10.4 million tax charge, Olin's net loss would have been 3 cents per share in the fourth quarter of 2002.

Sales for the fourth quarter of 2003 were $385 million compared with $352 million in the fourth quarter of 2002. A reconciliation for the adjusted numbers is included on the profit summary table of the press release. For the full year 2003, Olin reported a net loss of $24.1 million compared with a $31.3 million net loss in 2002. Excluding certain charges in both 2003 and 2002, as outlined in the profit summary table, Olin reported adjusted net income of $21.1 million, or 36 cents per diluted share in 2003 compared with a net loss of $20.9 million or 42 cents per diluted share in 2004.

Our fourth quarter earnings of 1 cent per diluted share were better than our previously expectation of a loss in the 5 cents per share range and this was due to better than expected performance from our metals and Winchester operations. The improvement in the roll and shaped product portions of our metals division is particularly significant after a protracted period where there has been low industry-wide demand for brass products. We now expect this strength to continue in the first quarter of 2004.

Last night, the company separately announced a decision to relocate its corporate offices to East Alton, Illinois, for organizational, strategic and economic reasons. We expect to incur one-time costs of approximately $12 million with annualized savings of about $6 million. We will separately identify these costs when they are recorded. None of these costs are included in the first quarter of 2004 estimate. We expect the relocation to be completed by year-end.

Let's turn to Olin's fourth quarter results and I'm going to start with Chlor Alkali. Chlor Alkali product sales for the fourth quarter of 2003 were $93.9 million, compared with $89.9 million in the fourth quarter of 2002. Chlor Alkali posted operating income of $11.4 million compared with 6.7 million in the fourth quarter of 2002. The improved operating results were primarily due to higher ECU selling prices. Sales volumes were slightly lower. Our ECU netback excluding our Sunbelt plant was approximately $315 in the fourth quarter of 2003, compared with $280 in the fourth quarter of 2002. We are expecting ECU prices to decrease from the fourth quarter of 2003 to the first quarter of 2004 as our contracts reflect the impact of fourth quarter market price declines.

According to reports in the trade press, both chlorine and caustic prices have declined about $20 per ton from the end of the third to the end of the fourth quarter. And there has been some additional downward pressure on caustic in January. The caustic soda market has not recovered at the same rate as the chlorine market resulting in some excess industry caustic supply. However, within the past few days, a chlorine price increase of $75 per ton has been announced by a major producer effective immediately or as contracts allow.

Operating rates have increased in the early part of the first quarter with a corresponding reduction in chlorine inventories. The chlorine supply demand situation is very tight, and it's due to increased demand from vinyls and other sectors. Taking a longer-term view of our Chlor Alkali business, 2003 was a dramatic turn around for us and it was due to the higher ECU prices. Natural gas prices, which are significant cost factors for other Chlor Alkali producers, are not projected to be a significant cost issue for us, because we buy our electricity from utilities that derive their power primarily from coal, nuclear and hydroelectric sources.

CMAI forecast that first quarter ECU price will be the lowest of the year and that prices will increase in each successive quarter of 2004 and that in 2005, prices will increase further. This improvement in ECU prices is based on expected growth in the economy and the Chlor Alkali capacity rationalization that has taken place. Let's turn to metals. Sales for fourth quarter of 2003 were $226.4 million compared to sales in the fourth quarter of 2002 of $197.9 million an increase of 14%. With most major markets strengthening over 2002, overall shipment volumes increased by 5% from the previous fourth quarter -- prior fourth quarter. The remaining 9% increase in sales was due to higher copper prices and a product mix that contained a higher metal component.

Shipments to the automotive segment increased in 2003 by 7% as automotive production strengthened from the fourth quarter of 2002. Four engine Electronic shipments were up 44% and 14% respectively from last year. However, they are still below --well below our historical averages. Shipments to the ammunition segment in 2003 increased from 2002 by 19% due to continued strong demand from the military. The metal segment operating income of $3.6 million in the fourth quarter of 2003 compares to an operating loss of $400,000 in 2002. The metal segment improved operating results in the fourth quarter of 2003 of primarily due to the increased volumes and the cost savings resulting from the closure of the Indianapolis facility, which occurred in first quarter of 2003.

Partially offsetting these improvements were continued margin pressures, higher wage and fringe benefit costs and higher natural gas costs. For the first quarter of 2004 in the metals division, business continues to improve. The level of booking activity and the comments we hear from customers are more encouraging than three months ago. However, visibility is still limited. Clad clients from the United States Mint is up 40% from first quarter of 2003 to 2004 indicative of a stronger economy. In the new Lewis & Clark remembered of Nickel program, which will be in 2004 and 2005, is also increasing demand. Brass strip used to manufacture ammunition continues at 2003's second-half levels, and is 30% up over 2003's first quarter. With defense budgets still strong, we expect these levels to continue for all of 2004.

Sales to the auto motive electrical market, which was strong in 2003, continue which supports our more demanding, higher performance alloy sales. Moving to Winchester, sales for the fourth quarter of 2003 were $64.4 million compared with $63.9 million in the fourth quarter of 2002. The increase in sales was pry primarily driven by higher commercial demand. Operating income in the fourth quarter of 2003 was $2.2 million compared with $600,000 in 2002. And this was primarily because of higher commercial sales volumes and favorable manufacturing costs.

Winchester was the winner of a contract to provide ammunition for the department of homeland security that will begin commencing shipments in the second quarter of 2004. The army has awarded Winchester a contract to produce 70 million rounds of 5.56 millimeter rifle ammunition beginning in June to supplement production at the army's arsenal. In addition, there are several military emergency procurements that are pending that could favorably affect Winchester later this year. Now, let me turn the microphone over to Tony Ruggiero who will review several financial items with you. Tony?

Thank you, Joe. In the fourth quarter of 2003, the company changed the reportable segments to include a corporate other segment. And the change was made to allow the external segment reporting with how management evaluates and allocates resources to the various businesses and provide more transparent disclosure to the investors. The segment operating results under the old and new structures for 2001, 2002 and 2003 are provided on the schedules accompanying the press release. Let me discuss the new item called corporate other costs.

First, let's turn to footnote F at the end of the segment information schedule. In 2002, total pension income was $3 million and in 2003 the company reported a pension expense of $5 million resulting in a $8 million increase in total pension costs. The service cost and prior services cost components of pension expense, which are included in both the corporate and operating segments, but mostly in the operating segments were equal in both years. As previously noted for the full year 2004, the company estimates that it's non-cash pension expense will increase in the $20 million pretax range, which is about 5 million a quarter, over 2003 and may continue to increase by about $10 million per year over the next few years.

These estimates are based on historical plant experience and certain assumptions regarding the future. Under statement of Financial Accounting Standards number 87, the company recorded a $220 million after-tax charge with 360 million pretax to shareholders equity as of December 31, 2002. Reflecting an accumulated benefit obligation in excess of the year-end market value of assets of our pension plan. In 2003, the decline in interest rates more than offset a significant rebound in the value of the plan's assets, which necessitated the recording of a small additional after-tax charge of $19.5 million, which was 32 million pretax.

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 only minimal contributions are required until 2006. In 2003, charges to income for environmental investigatory and remedial activities were 19.6 million, compared to 14.8 in 2002. These charges relate primarily to remedial and investigatory activities associated with former waste sites and past operations. In 2004, we currently estimate that these charges to income may be in the $25 million range.

Environmental costs for ongoing plant operations, for example, wastewater treatment, are included in the operating segments and are not expected to change significantly in 2004. And then other corporate and unallocated costs increased from 29.6 million in 2002 to 40.8 million in 2003. The increase relates primarily to an insurance gain of 4.5 million that we had recorded in 2002 and disclosed to you. We had higher consulting fees this year. We had somewhat higher compensation costs, which is more timing than it is anything else. And we have accretion expenses of $1 million a year associated with our asset retirement obligations that we recorded in accordance with FAS 143, accounting for asset retirement obligations which we adopted earlier in the year.

Let me just discuss a couple of items on the income statement. Selling, administrative and expenses in 2003 were 3.1 million higher than 2002 primarily because of higher pension costs and other administrative expenses, such as consulting, which I mentioned and legal costs. We recorded an income tax benefit of 1.5 million because our final tax calculations for the year indicated that we had been accruing taxes at a slightly higher level than we needed earlier in the year. We estimate our tax rate for 2004 will be in the 55% range, compared with 42% in 2003 because as we have mentioned to you before, we accrue taxes for interest on taxes which may become payable in the future.

Let me just turn quickly to the balance sheet. At the end of the fourth quarter, we had cash and cash equivalents of $190 million compared with 136 million of cash in short-term investments in 2002. Receivables were higher in 2003, because of higher Chlor Alkali sales and metals in 2003 and higher metal prices. Our inventories of 242 million in 2003 were 13 million lower than last year, due primarily to our efforts to reduce inventories in the metals businesses consistent with market demand. Property, plant and equipment was 501 million at the end of the fourth quarter of 2003, compared with 552 at the end of the fourth quarter of 2002. This decrease in property, plant and equipment was largely attributable to the Indianapolis shutdown and the fact that the depreciation exceeded capital spending in 2003.

Net debt, which we define as total debt less cash and cash equivalents was 138 million in 2003 and 194 million in 2002. A positive cash flow was favorably impacted by keeping our capital spending below our depreciation and our efforts to reduce inventories. The accrued pension liability was higher at the end of the fourth quarter of 2003 than the fourth quarter of 2002, primarily because of the charge to Alkali that I mentioned that we recorded in the fourth quarter. And our other liabilities were higher at the end of the fourth quarter of 2003 than the fourth quarter of 2002 primarily due to the SFAS 143 charge that we recorded in the first quarter of 2003.

In the first quarter of 2004, Olin expects to be at least break even. For the first quarter of 2004, the metals division is expecting improved results over the first quarter of 2003, because of higher volumes as a result of the improving economy. Winchester's profits will be slightly below the first quarter last year. And Chlor Alkali profits are expected to be somewhat below the first quarter of 2003 with projected increased volumes partially offsetting lower pricing. Non-cash pension expenses are expected to be about 5 million per year pretax, a quarter higher in 2004 compared with 2003.

Comparing -- compared to the fourth quarter of 2003, the metals division is expecting improved results again in first quarter of 2004 because of higher volumes as a result of the improving economy. Winchester's profits will be improved over the fourth quarter of 2003 primarily because of seasonal factors. Chlor Alkali profits are expected to be somewhat higher in the fourth quarter as increased volumes are expected to offset lower pricing. We continue to project that we will remain in compliance with our debt covenants.

Capital spending for 2003 was 55 million consistent with our guidance. We expect our capital spending will be in the 60 million range in 2004. Our depreciation and amortization in 2004 will be in the $75 million range. Depreciation and amortization will be about $1.27 per share 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 309th consecutive quarterly dividend to be paid by the company.

Before I conclude, let me remind you that throughout there 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 as updated in our quarterly reports on Form 10-Q and in our fourth quarter earnings release. A copy of our prepared remarks today will be available on our Web site, www.olin.com, in the investor section under recent press releases and speeches together with the earnings press release and other financial data and information. Information regarding any non-GAAP measures we have mentioned appears in that press release and the related financial summary data.

Operator, we're now ready to take questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Eric Sirotta of Merrill Lynch.

Good morning.

Good morning.

Joe, you certainly sounded more optimistic about the outlook for the metal shipments for the first quarter, but you also mentioned that visibility is still relatively low. I'm wondering whether you could update us on lead times in strip and rod versus where they were at the beginning of the fourth quarter and versus where they are now?

Yes, I could. If you recall, our visibility back in the fourth quarter we were in the two, three week lead times, and in strip we have seen an extension of lead times out to the four or five lead period. We'd like to get out to the six to eight lead period and we're moving in the right direction there. At Chase, seeing not an extension of lead-time. So the strength we are seeing is in the sheet and sheet and strip area.

And I noticed that you had a price increase announcement out in the Chase rod business. I realize it was couched in the terms of needed to catch up with rising base metals prices. If the increase is fully realized would it be enough to actually expand your manufacturing margins there and if you haven't seen the increase in lead times in the rod business yet, how do you judge your chances of success of that increase?

The increases is on the metal component as you -- as you have correctly observed, Eric, and, you know, the question is on the success of the increase we believe that the increase will remain -- remain there for the year.

Would the increase more than cover the metal component or just cover the metal component?

It's the metal component.

OK. Thank you.

And we'll now go to Robert Goldberg of New Vernon Associates.

Good morning, Joe.

Good morning, Bob. How you doing?

Doing well. How are you?

Good.

Just a followup on Eric's question. Why do you think that you're not seeing the improvement on the rod side of the business? Is the end market issue you mentioned coinage and of course electronics being improved automotive but what about the on the construction side for the rod business?

Well, we are anxiously anticipating for the nonresidential construction and for the capital spending markets to start to pick up, and that's what has to happen, Bob, for that to go and they haven't gone at the same rate as the strip markets have started to pick up yet.

And when you had your third quarter earnings I guess was at the end of October, you weren't really indicating any visibility at all in the brass business. When did you start seeing the strip demand pick up?

Bob what confused us, as you recall, is that because that from Thanksgiving till the end of the year there's so many plant outages and we shut our plant down and et cetera, we started to sense some stuff in December but we weren't sure if it was sustainable and the lead times didn't jump out. Really we started to see this as we got into late January. We started to see the lead times starting to move and there's when we started to people a little better about some visibility. And I just would state that they're not out where they need to get to yet, but they're moving in the right direction.

On the Chlor Alkali side, I'm interested in the fact that -- is it just one producer that's announced a chlorine increase? I'm not aware of spot prices having moved up. I believe the spot ECU is still well below the contract level. Am I right about that or has there been some -

There's one producer, Bob, who announced yesterday.

OK. But how about the issue of spot prices still being well below contract and is that --does that inhibit the ability of the industry to move contract prices up any further?

Bob this is John. The spot price is well below the contract price, but I think the strong demand that we're seeing across all of the end market segments for chlorine right through will make this price increase stick.

OK. I guess the fact that chlorine is so strong, I mean that's going to keep caustic under pressure for the short term?

We believe the pressure on chlorine -- the strength of the chlorine market we believe has led to an increase in operating rates across the industry and that will continue some of the pressure that we have seen on caustic inventories and pricing in the last few months.

Thanks very much.

We'll go to John Roberts of Buckingham Research.

Thanks. Tony, I don't know if I misheard you. Did you say the tax rate in --5%?

I said it would be 55% and that's based on our accruing interest on taxes that may become payable in the future. Until those orders are done, you would accrue those taxes because if we're pretty well reserved for potential liabilities, we think we have very favorable positions on those matters. But, you know, we tend to be very conservative, but in any event if we were to lose them, the IRS also impose interest on the amount of taxes you owe them. So when you get that fixed component of interest, included in the tax provision, it tends to artificially raise the tax rate.

And you weren't doing this in '03?

We did not do that in '03 as we trued up our reserves and as a result of that, I mentioned we had a fourth quarter adjustment. We found the reserves were adequate to have covered that. And therefore, in '03 we did not have that accrual because the reserves were more than adequate to cover that.

OK. You indicated you don't expect any meaningful pension payments until 2006. Do you just not have visibility into 2006 or trying to signal that you at this point know in 2006 you've got some meaningful step up there?

We have -- we have visibility. We run models -- I mean, based on what we've recorded as pretax charges, that's an indication of the level of under fundedness in the pension plan. And there are specific of ERISA guidelines that tell you when you must put money into the pension plan and that we based on that modeling, with our actuaries, do not see any --really any meaningful contribution before 2006.

And after 2006, I think that over the future years, these models get very complex, but that we will over that period of time be contributing to the plan over the next, you know, four or five years or whatever in an amount that would bring the plan into balance. But that doesn't begin as I said till 2006 as we see it.

Now, maybe 20% to 25% of the balance might be what in 2006 you would start putting in?

That's not an unreasonable order of magnitude number, John.

OK. Great. Then lastly, when you give the guidance about the first quarter for Chlor Alkali in the operating segment that doesn't include any -- all of the increase in the pension costs is in corporate, is that correct?

What we have done -- and --to try to make things clearer. And I hope we have. Is we have included in the operations, the service costs, which is the increment that is earned by the employees in that sector each year, as well as any amortization or product service cost charges. What we have tried to do is keep all of the variations between that and let's say total pension income of expense in corporate. And so that way you can see what's going on in the businesses and we don't disturb the business trends with this recording of this pension expense on a consolidated basis, which is as I mentioned we expect to increase at about --increase about $20 million pre-tax, non-cash in 2004.

And then one last pension-related question and then I'll get back in the queue. But most of the company if you look PPG or DuPont that we deal with, the Delta between '04 and '03 on pension is less than the Delta between '03 and '02. You have gone from an 8 million swing '03 '02 now to a $20 million swing in '04 versus '03. Have your actuaries or anyone looked at other companies and what's the thing that's different here, you versus other companies have you have any insights into that?

John, the numbers I'm using of course are prepared by my actuaries. And I would have to look at the other plans to determine why their trends are not similar.

You don't know if it's your plan asset mix or interest assumptions or -

We'd have to look. I can't -- I don't know why they wouldn't be experiencing the same situation we are. A big factor in the 2004 increase is the -- is bringing into expense now the results of the very bad market conditions that occurred in 2000, 2001 and 2002 and they would have similarly have that. It is also influenced by the state of the fundedness in the plan. We had very good results in our plan in 2003. And -- but I would have to go back and look. I mean, I don't want to -- I know my numbers are right and I'm sure their numbers are right and I have to just look at that -- at that factor. It may be the relationship of retirees to actives that may be causing that in some fashion. And that's the -- but, you know, we will look at that.

Thank you.

But believe me, we have really looked at these numbers and I know our numbers are right.

They are what they are. OK. I'll get back in the queue.

Our next question comes from Les Ravitz of Morgan Stanley.

Good morning. Sorry to hear you're moving to the Midwest. What happened to the Chlor Alkali guys, aren't they in the East Coast? Don't they feel put upon by this move?

They're all down in Tennessee. They're glad we're not going to be there.

A couple questions. You didn't mention Telecom when you talked of the order changes in strip, is that included in what you referred to as electronics?

Yes.

Is that showing more strengthen that the traditional electronic markets and we think of electronics more as PCs, televisions, radios?

It's Telecom, but also it's -- yeah, it's Telecom. I was going to say also the computer base too, some of the hardware stuff.

Yes. And are you -- are you comfortable -- I guess I'm trying to ask the question in a funny way, that this isn't just a one-time catch up that we really -- you know, we passed the bottom there and looks like we're now in a -- at least starting to have a recovery in this business.

We've got two quarters here. We've had the fourth quarter of last year and the first quarter that we're feeling good about. I think you get too much to forecast too far out visibility wise, you know, I'm just not there yet.

OK. And Tony, on the balance sheet, the other asset number went up almost 40 million bucks. I was curious what was in that.

Yeah, that's based on a change in deferred taxes and I've never really understood deferred taxes, so I chose not to mention it. Because it's so complicated that that -

Good enough. I never understood them either, so we're in the same boat. And you mentioned that there's an interest expense calculation in your tax reserves, which is raising it to 55% so far this year. Could you give us the size of the interest expense that you're accruing? The dollars?

I guess I'd rather not. I'd really rather not.

Because that 55% assume a certain pretax level.

There's why I don't want to give it to you, because I know what you will do. You will back calculate.

Tony, I wouldn't do that. My competitors do that. I never do that. The step up in capital spending, anything in that size? Projects?

Well, we have a project that we're working on with Winchester that has -- is anticipated but not completed yet with a relocation and some of Winchester's manufacturing there and is out in the public. We're looking at relocating our room fire operations out of East Alton down to Mississippi.

Two more quick questions. The total revenues from the two contract that Winchester has received, the home security and the new military contract, is that a $5 million business a $20 million business -

The 556 contract is $9.2 million of revenue, and the Homeland security I think is somewhere in that same range.

That's a nice increment to business in 2004.

Yes, it is.

That starts in the second quarter?

The -- yes. The homeland security starts in the second quarter and the 556 as well.

Great. Last question, when you shut down the strip plant in first quarter of 2003 in Indianapolis, there was expected to be I think annual savings -- and I'm going to mess up the number up in the 10 million range? Are they fully in the fourth quarter numbers or is there still more increment to come in the fourth quarter?

It's fully in.

Thanks very much.

Thank you.

And we'll move on to Kunal Banerjee of Goldman Sachs.

Good morning. Just one question on your Chase business, you know, you have had it now in your portfolio for about a year and if I'm not mistaken, that's the business that also expanded capacity through its project 400 initiative. Is that completely in the books now, all the 400?

Yes.

So could you just comment on, you know, the business of 14 million last year in '02, it's down to about 8 million this year. And that is with the expanded capacity running. And we have had a pretty decent housing market and 40% of the volumes I guess go into construction. What's actually held that business back and if you were to basically look back and give it a grade over the last year, what would you be assessing it?

The issue with that business has been the fact that capacity -- or not capacity, but consumption in rod has dropped off as you are aware. And while housing has remained strong, non-residential construction and capital spending has not. And actually has declined further in 2003 as you look backwards to 2002 and 2001. So those two segments of the economy have to pick up and have to contribute to what's happening -- have to contribute to Chase. You know, additionally what's happened is that we added, you know, the capacity and we're not using the capacity at this point in time.

OK. And so if I am reading you right here, this business made about 30 million in 2000, which was pretty -- which was probably a pretty good year from a general economy standpoint. Are you saying that with good recovery we could start getting back to close to those levels if the nonresidential and the other parts of the business actually pick up? I mean, is the earnings intact in this business?

We're back to the 30 million range. What I would say is those two other markets start to pick up, we'll start to get earnings track and start the see it go upwards again.

And we believe we're a low-cost efficient producer with the amount of capital we have put in, and the modern facility. It is in one facility, as you know.

Right.

And so we would significantly leverage our profits as the revenue picks up.

OK and then on -- just following up on a clarification for the fourth quarter. You talked about the strip and rod business, you know, being a -- benefiting from not just the pickup in demand but the -- I guess the shut down of the Indy facility. Can you tell us what portion of that benefit was just the Indy facility shut down as opposed to you know, better end market fundamentals?

The impact of Indy in fourth quarter -

Would it be the 2.5 million, that you know 10 million annualized and therefore 2.5 million?

I think that's a correct assumption.

OK. And finally, just one cash flow item. You know, you talked about charges to income on the related to environmental spending, and my understanding was you also have reserves that debt depleted yearly on environmental-related stuff. What would you be packing cash flow related to environmental spending at in '04? I mean, you gave us the income statement charge, but -

It's about the same.

It's about the same?

Yes.

So is all of -- and what percentage of that charge to the income statement would be cash?

The -- what happens -- the way you look at the income statement? You take your net income -- I know you know this, but you add back your non-cash provision. That's included in the net income. And then you subtract the actual spending in order to get to the affect on your cash flow.

Right.

And in 2003, the provision and the spending were about the same.

OK.

And the same would be true --I mentioned 2004 and 2004 so that the reserve level would be about the same.

Same, OK. All right. Thank you.

And we'll now go to Jeff Peck of Janney Montgomery Scott.

Good morning. Curious about first Chlor Alkali your operating rates. Maybe you can give us an idea of fourth quarter and then where you are now since the market has tightened a bit on the chlorine side?

Our operating rates in fourth quarter were in the low to mid 80's. We did see some you know weakening in orders into the late part of the fourth quarter. But we forecast an improvement in that in the first quarter into the low 90's in terms of operating rate, and we have seen that occur in our operation at this rate (inaudible).

OK. Thank you. And in the metals business -- I just want to make sure I heard you right. I think you were mentioning some first quarter guidance on coinage. Would it again be up did you say 40% in first quarter?

I think that was what we said.

That is correct.

OK. And then on -

From historical -- yeah. That's right.

Does that bring you -- are you getting back to, you know, if you have those kind of improvements is that going to bring you back to kind of where you kind of an historical number are you still going to be below?

We'll still be below, Jeff. I think the point we're trying to make there is we have always stated that as the economy picked back up that the demand for coinage would start to pick back up and it usually lags - it lags the pickup of the economy, which has occurred. And we're starting to see it pick up as we speak.

OK. And -- I'm trying to get a feeling I guess from what less was saying. You know just - you know for coming up off the bottom. It seems like we are so I just want to get a better feel. I -- one of the question, the electronics end market. I think it will -- increased 14% in the fourth quarter. In through the first quarter, is that -- it's still early, but you still seeing that same kind of number or is it getting better?

Yes, we are -- remember we said over historical lows we are seeing increases, there's no question. But it's -- we're seeing improvement but our visibility again, Jeff, is - that you know, not where it used to be, but it's better than where we were in 2003.

OK.

The visibility point of view.

Right. OK. Thank you.

[OPERATOR INSTRUCTION] At this time, we'll take a followup question from John Roberts.

Thanks. I just wanted to clarify, Joe, those percent changes by end market that you gave for brass, that was fourth quarter versus fourth quarter? That was what Jeff was just implying but I thought you were giving the full year percent change?

It was first -- no, it was fourth quarter. Right. At full year.

Say again, which was it?

It was first -- it was --what we said is that our declared, declaration investments was up 40% from first quarter 2003 to 2004, not full year.

Got it. Thank you. Secondly, if the industry forecast for Chlor Alkali that you cited with ECU prices turning up in the second quarter, if that the industry actually follows that track, will your current portfolio of contracts allow your pricing to move along with the industry forecast? So you would have up second quarter pricing in Chlor Alkali?

: We would expect based on the success of any chlorine price increase that's enacted, we would expect to see improvement moving from the first quarter into the second quarter.

OK. Thanks. Secondly, Joe, the automotive production I think global is expected only about very modestly over the next couple of years. Are you expecting to significantly outgrow the automotive production numbers because of the increased electronics in a car?

Certainly as we look forward to the next year John, as we're seeing some substitution as some of our products as well as some higher electronic applications that will give us some growth in the market.

You said drive-by wire and things like that go into cars we'll see more brass per vehicle?

More -- what's happening is we're seeing some upgrade in a lot of the connections in vehicles to some higher performance alloys.

OK. All right. Just because of the higher voltage and greater electrical needs well.

Due to other electrical needs and more the ability of our product to provide better conductivity and a little higher strength as much thinner thicknesses.

And lastly, if you were able to do this relocation of some of the Winchester operations from east Alton down to Mississippi, how much of Winchester's left in east Alton still the vast majority?

Yeah. We're talking about 10 to 12% of the Winchester operations from a head count perspective that will go down there.

Thank you.

And our next question is a followup from Bob Goldberg.

Thanks. On the two contracts for Winchester, those are 9 million or so, both of them annual revenue contributors?

Yes.

Is that the total value of the contract?

Yes. Right.

It's annual?

Annual.

How many years do those respective contracts run, do you know?

The 556 will run into -- into 2005.

And the Homeland security?

This year.

And on the -- back to the metal side, Joe, what was the operating rate for the business in the fourth quarter and where are you operating at today?

On if metals side we're in the high 80's, and that's where we are. We were and are. Let me correct Bob. On if homeland security, that's a five-year ongoing contract on a needs basis. The 9 million is what's impacted in this year.

OK. So it would be re-examined at the beginning of every year?

On a needs basis.

OK. And finally, Joe, on -- again on the metals business, are you seeing any shift in the trade balance in the strip business? I know there's a fairly big import component. Are you seeing any less imported strip coming into the US because of the change in the exchange rates and are you seeing any opportunities to export business for yourselves?

We saw a slight, slight decline in imports coming in this last year from a total percentage perspective. And, but we haven't felt the full impact of higher exchange rates quite yet. We're not anticipating obviously to see any increases in imports as we move forward.

When will your business in China start to impact?

In first quarter. It will be starting up.

That will be -- will that be contributing to profit immediately or does it take some time?

It will take a little time, Bob, as we get it going through 2004. Be looking for a contribution in 2005.

Thanks very much.

And we have no further questions at this time. I would like to turn the call back over to you, Mr. Rupp for any closing remarks.

We just thank everyone for their participation and we look forward to our call at the end of the first quarter in April. Thank you.