Olin Corp (OLN) 2004 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by; welcome to the Pioneer Companies first-quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded Friday May 21st, 2004. I would now like to turn the conference over to Gary Pittman, Chief Financial Officer. Please go ahead, sir.

Thank you, Monica. Before we get started, I would like to also introduce Mike McGovern, CEO. He is also participating in the conference call this morning. This morning, however, we are at different locations. So we will go through the teleconference with us being in two different locations.

What I'd like to do is first start with the disclaimer, go through that; then we're going to turn it over to Mike, regarding the operational, and then we will move into the financial overview.

Starting out with the disclaimer, certain statements that we may make during the teleconference regarding future expectation of Pioneer's business and Pioneer's results of operations, financial conditions and liquidity may be regarded as forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are subject to various risks, including but not limited to Pioneer's high financial leverage, global economic conditions, the demand and prices for our product, Pioneer and industry production volumes, competitive prices, the nature of the markets for many of the product and raw materials, the affects of Pioneer's results of operations on its debt agreements and other risks and uncertainties. Attention is directed to our Form 10-Q and our annual report on Form 10-K for 2003, for discussions of such such risks and uncertainties. Actual outcomes may very materially.

Pioneer operates in one industry segment -- the production, marketing and selling of chlor-alkali products such as chlorine, caustic soda, hydrochloric acid and bleach. Pioneer operates in one geographic area, North America. The Company's combined annual capacity from our four chlor-alkali plants is 725,000 ECUs, after the curtailment of our Tacoma capacity representing approximately five percent of North American capacity.

At this time I would like to turn over to Mike McGovern.

Thank you Gary. I have several comments that I'd like to make. Let me start off on election of the Board of Directors. I think the shareholders who are a large constituency represented on the phone call, I think you all made wise decisions to reelect David Weinstein as the Chairman and Marvin Lessner and Gary Rosenthal as Directors, and to add a new member to our Board, Chuck Mears. I think David really summed it up in the press release -- Chuck brings extensive managerial experience, he has a broad long-standing knowledge of the space -- the chlor-alkali industry, and we really look forward to him joining. He had a long career with OXY -- over thirty-five years. And we think he's a real positive addition. So we really think we have a strong Board.

Moving to the operational issues -- first with Tacoma. You know as you probably read in the 10-Q, we had an additional depreciation of $3.4 million. We have a net book value of 1.3 million. Where we are is, we are evaluating the future use of the equipment -- we are looking to move part of it to one of our other facilities, and what to do with the land. The site is about 31 acres. It's part of an industrial complex. It's on a waterway. But given the site has the facilities, the visibility of the alternatives is not real clear right now. But we intend to pursue that.

Next is a move to pricing. As we laid that out in the 10-Q, you can see for the first quarter of last year 362 ramping up during the last year, and then down in the first quarter to 339 -- that's some positive news there. As you've read, in February we announced a price increase of $75 for chlorine and then in May, we came back of this year and announced a $50 increase for caustic soda. As of this morning, one of the major producers has announced -- it's rumored that they have announced a $20 increase in chlorine; that is in addition to these others -- and a 45 additional increase in the price of caustic soda. We will be looking at that over the next week. And I'm certain we will come out with the announcement to increase prices.

Again, in case I confused anybody, in February of this year we have a $75 increase, for chlorine. In May, we had a $50 -- and again, the point I was making is one of the large producers has announced an increase in the price of chlorine and caustic. One of the questions we always get is, what is the forecast for ECUs? We tend to use an outside party because we don't forecast. CMI's price outlook -- this was as of yesterday, before these proposed price increases -- for May, they had 377; June, 391; third-quarter, 418; fourth-quarter, 423. And that was again before these prior increases that we talked about.

The other point I need to mention is, we have disclosed that we're into order control. It's a tight market for both products, and that's very positive.

As we move to a look at production -- we've laid out again in the 10-Q, the our first-quarter 175,000 tons. First quarter of '04 was 169 -- we were down. We were down for two reasons; one, we had a logistics problem -- the railcars for the caustic weren't turning as fast in one of the orbits. We've allocated more cars to that -- we had an equipment problem. We use the word "addressed"; I want to be sure that everybody understands, both those issues have been resolved.

Then I'd like to talk just a minute about our STAR Project, striving toward accelerated results. There's about four or five key elements in this project -- one of them is labor productivity. And what we've stated in here is that we intend to have 12 percent fewer employees, based on our 12/31 number of 648. What we really didn't disclose clearly is, we've only looked at five sites. We've looked at our two offices that are Houston and Montreal -- the big plants, Bec, St. Gabriel, Henderson. And at those five sites is where we have the majority of the people. We focused this project. And at those sites, we're going to have a 20 percent reduction. The sites we've not looked at, but will be under review, but not with Celerant, who is our outside consultant is, Cornwall, Dalhousie, Santa Fe Springs, Tracy, Tacoma, and that has about 150 people.

The other areas of this project that we're looking at is the use of electricity, number of railcars, freight -- those are the major items.

On the use of electricity, as you know, we're a large user of electricity. And the more efficiently we can operate the sales and the better we forecast, the greater the efficiency. So we are starting to see some positive results -- positive results there. And at this time, Cary, those are the only comments that I have.

Okay. What I will do is, I will move into the first-quarter '04 results compared to the first-quarter '03.

We've reported a net loss of 7.3 million or 73 cents per diluted share in the first-quarter; that's compared to net income of 16.4 million or $1.63 per share in the comparable quarter. Our revenue for the first quarter of '04 were 90 million, as compared to 89 million for the same period. Revenues in the most recent quarter were favorably affected by increased prices and volumes for other products, with an increase of 2.5 million in revenue, resulting from improved bleach and hydrochloric acid sales. Our revenues from sales of chlorine and caustic soda decreased with lower ECU prices being offset in part by higher ECU sales volumes. Our average ECU netback for the first quarter of '04 was 339, compared to the 362 for the first-quarter, '03. Our ECU production was 170,000 tons in the first-quarter, as compared to 176 for the same period in '03. Cost of sales of products, for the first quarter of '04 were 1.7 million higher than in the comparable quarter, with increased variable production costs of 4.3 million resulting from higher purchase or retail volume and increased bleach production. Increased freight costs of 1.3 million, resulting from higher sales volumes, higher plant labor and maintenance costs of 2.3, and higher depreciation of 3.4 million due primarily to the charge recorded in the quarter for the nonproductive assets at the Tacoma chlor-alkali facility.

The increases in '04 were offset by the absence of the environmental charge, the 9.5 million charge that was recorded in the first-quarter, '03. Selling, General & Administrative expenses decreased by 1.8 million or approximately 21 percent to 6.6 million for the first quarter of '04, as compared to the comparable quarter in '03. The decrease was attributable to a decrease in bad debt expense of 2.2 million, and a decrease of local taxes of 600,000, offset by a 900,000 increase in professional fees that were incurred primarily in connection with the operational efficiency project. Asset impairment and other for the first-quarter '04 was 165,000; asset impairment and other for the three months ended March 31st, '03 of 40.8 million was comprised of an impairment charge relating to the Henderson facility.

Other income, net of 100,000 for the first-quarter '04, reflected currency exchange gain. Other expense net of 1.9 million for the first-quarter '03, reflected currency exchange loss.

During the first quarter of '03, all of the conditions were satisfied with respect to the settlement of the dispute regarding the supply of power to our Henderson facility. As a result of the settlement with the CRC we were released from all claims for liabilities with respect to the electricity derivatives agreement and CR retained all amounts it had received, relating to the derivative. Therefore, during the first quarter of '03 the receivables of 21 million that we had recorded, related to estimated net proceeds from mature derivatives was reversed. Also, the net liability of 87.3 million that had been recorded for the net mark-to-market loss on outstanding derivative position was also reversed. That occurred in the first quarter of '03.

Our borrowings under the revolver as of April 30th were 13.8 million; our additional availability in the revolver was approximately 13.6, and our liquidity was 13.1 million.

First-quarter '04 compared to fourth-quarter '03 -- we reported a net loss of 7.3 million or 73 cents per diluted share in the first quarter of '04 as compared to net income of 5.2 million, or 50 cents per diluted share in the prior quarter, '03. Revenues in the first-quarter '04 were 90 million as compared to 93.3 million for the fourth-quarter '03. Our average ECU netbacks for the first-quarter '04 was 339, as compared to 366 for the prior quarter. Our ECU production was 170,000 tons in the first-quarter '04 as compared to 160,000 tons for the fourth-quarter of '03.

Costs of sales of products for the first-quarter decreased by 2.8 million as compared to the fourth-quarter, as a result of lower operating and maintenance costs.

First-quarter Selling, General & Administrative expenses were 6.5 million as compared to the 3.2 million in the first quarter of '03. However, remember in the fourth-quarter of '03, the increase was primarily related to the absence of the offset of personnel costs which included reversals of bonus accruals, year-end pensions and other fringe benefits. Other expense for the first-quarter was comprised of 129,000 in exchange gains, compared to 1.3 million of a currency exchange loss in the fourth-quarter of '03.

At that time, that includes the summary of the financials, and what we will do is move into the Q&A at this time.

Thank you. (OPERATOR INSTRUCTIONS) Omar Jama from Merrill Lynch.

Good morning, guys. Let's see, you started to talk about moving some of the equipment from out west to some of your other facilities. And you also mentioned that the land there -- can you talk about the expenses, the investment associated with actually doing that, and what kind of a payback would you be expecting to get in order to take that action?

Mike, do want to respond to that?

Where we are in this project is, the first thing we did was ascertained whether we had a market. And we did that in the first-quarter. The questions you are asking as to the possibility of moving equipment and the future use of the land -- we are reviewing that right now and do not have the answer to that. The first thing we're looking at is possibly moving the membrane cells to Becancour and increasing of the membrane production of Becancour. But given that our staff is heavily involved in this efficiency program, the real heavy lifting of that will start in the third quarter. As to the land of 31 acres, it's on the waterway. To increase the value, one would need to go through a remediation and remove the silting that we have there and people could either use it as a tank storage or an unloading. Again, we've just started that project. And so that's why we went ahead and wrote down the additional depreciation of 3.4, because we were unable to answer those questions at this time.

Okay. And then, I guess I had a question on the announced price increase announcements that you are alluding to. First of all, in the second quarter, based on what you've already done, what's your expectation for ECU realized netback in the second quarter -- or do you have one?

Well, we had one. But we don't do a forecast. If I may, with our products, we try to have a portfolio approach. We have fixed-price quarterly redetermination index, so we manage the books. So, if -- it's a really good question -- you will not see all of the benefit, even when one achieves all of the price increase on the customers they can for that quarter. So, it would be -- what I can tell you -- it would be ill-advised to take the price increase that I'm suggesting and multiply it time our volume and assume we can get that. It's a lesser amount of that and we haven't disclosed that at this time.

Would you say a small amount of your contracts are rolling over at a favorable time, or is it a large percentage?

I would tell you -- on the chlorine, it's 40 to 50. And the caustic is a little less than that. But the flip side of that is, on the contracts that are indexed and lagged 90 days or such, while you don't see it in the front, you may see it in the second quarter. But likewise, when the price goes down -- which it will go down -- it doesn't go down as quickly. So it's a portfolio approach.

Okay, and then the recent announcements -- the $20 on chlorine and 45 on caustic -- was there a timeframe around those increases?

Okay, let me be clear on that. Because I get in trouble when I talk about other parties announcing price increases. It's rumored from our customers. But it comes from pretty strong sources on both of those. And the data that we've received, it is immediate, whereas one can do it -- and traditionally they do these like 30 days before the quarter, because a lot of contracts have a 30-day notice provision. So that's why you will see these announcements traditionally come 30-plus days before you start a quarter.

Okay, I'll let somebody else ask questions.

Okay. But did that help you with the pricing? And what we're doing is, we have been looking at the price and we will make an increase announcement next week. At this time, we have not decided on the dollar amount . Okay? Thank you.

Jeff Gates from Gates Capital Management.

I have a couple of questions. First, if there were a price increase announced for, you know, the beginning of July or let's say a price increase announced today, how long does it take for all of your volume to roll to market?

You know, Jeff, that's a really good question. I'm really unable to answer it with the data I have right now . And you know, part of the contracts we have are like fixed-price four-year. So -- and I don't have that information in front of me.

I guess the question is, like what percent of your ECUs that you sell, roughly, are at -- reset daily, or weekly?

Very little are weekly or daily. The vast majority of our products is set quarterly. I mean, our spot business, which is small -- particularly in the tight market -- is extremely small, or almost nonexistent for us, right now. So, the norm would be, these would be set quarterly.

Okay. Secondly, can you talk about any capacity additions or subtractions from North America, that you are aware of? And also, maybe a little bit about what you anticipate for demand growth for '04?

Yes. As far as capacity reductions, in this tight market I don't see any right now. Expansions -- well, the only reduction you may see on the caustic is the Olin switch, the KOH on the caustic, and that was a small line that they have announced that they are doing -- it was a small amount. So, on change in production in the marketplace, I don't see any right now. There's a plant that has announced -- a small plant on the West Coast that's purported to be coming up. But those are the only to pieces of information that I have -- the small plant on the West Coast and the announcement that Olin made on the caustic going to potassium.

How many ECUs is the West Coast division?

The announcement, I believe, is 70,000 or less -- it's something like that. It's in that neighborhood, Jeff. It's a small facility. But again, I only know what I've read in the newsprint, okay? So that's the only thing, and purportedly they are started in the West Coast -- it's the old warehouser facility. It's an independent that's trying to start it up. As to the market, the market is tight right now. We're on order control with both products. I can only assume that the other producers are likewise -- I mean a big driver in this space is the vinyl chain -- while we don't sell into it, it consumes maybe 39, 40 percent of the chlorine that's produced in the United States. And as long as that is robust, the market looks really strong. But you do see indicators, like with the cement, there's some shortages of that, the run-up in the steel prices and so the market looks in a pretty tight position in the plants, and when I look at the information on the sector, the plants as a whole look like they are running at a really high operating rates. So it looks very strong on the existing capacity that is available.

And I guess lastly, where do you stand with your 75 employee reduction -- where do you stand today?

Okay, we haven't given a specific number. I know you can multiply the numbers and work it out. That will be completed by the end of June.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS) A follow-up question from the line of Omar Jama from Merrill Lynch.

Thank you. Gary, I was wondering if you could -- it looked like you had some cash generated out of operating assets and liabilities. And I noticed, particularly here, the payables bumped up a little bit. I'm wondering if you could just walk us through what happened with the -- whether you expect payables to continue to increase, or whether that's going to go back down?

Okay. One of the things that -- to back up a little bit, if you recall, the debt instruments that we have outstanding, we have the original 50 million of notes that were issued, that we refer to as the Tranche-A notes, and then we have the Tranche-B which is the 150 million notes that were issued. If you recall that the Tranche-A notes have a mechanism in place, that it manages any excess cash flow that goes to pay down the debt, depending on some various tests, one of them being liquidity and another one being the EBITDA. One of the things that you will see as we manage our cash -- we are managing -- we are managing cash and we are managing in such a way that we're paying things that are due in the next 12 months, versus trying to pay something that is due in 2006. So that's where you are seeing the fluctuation. And as you'll notice, you've seen a flop between the revolver balance and the accounts payable, -- accounts payable. And that's where that change is. But if you look at your total current liabilities, they've pretty much remained constant from 12/31 to March 31st.

Okay. If you guys were to eventually refinance, and loosen up a little bit of liquidity, would you anticipate you would be able to start to generate any significant amount of cash out of working capital? Like for instance by running your payables little bit longer?

That's possible. Yes.

Okay. Particularly, since the business looks like it's on a relatively solid footing now, and from the sounds of it, the market is very tight. And I would think that you would be able to go to your trade creditors and say -- look, we are a better company now. We would like to have better terms. Is that how you would approach it, or how would that work?

Well, it's not really the terms, Omar, that we're talking about, of our AP. It's really me managing cash and managing liquidity, to pay things that are due within the next 12 months versus being in a situation with my liquidity test of paying something that's due in 2006.

Okay. I'm not sure I -- maybe I'm just not understanding. So you basically are saying, can you just explain it in a different way, maybe to help me understand it a little better?

If I choose to age my payables -- I do believe I have some room to age my payables.

But you don't want to do that, because you would just end up paying to the revolver?

That's right.

Okay, so there's definitely room there, though, you think?

(indiscernible)

Okay, thanks.

Julian Schroeder from Credit Renaissance Partners.

Thank you. I was wondering what portion of costs are actually denominated in Canadian dollars, or conversely if you have a rule of thumb, how much appreciation of the Canadian dollar depreciation affects cost or EBITDA.

That's not an amount -- that's not an amount that we have disclosed. And I would really rather not try to answer the call, at this time. If that's fine, Julian.

I mean, we do have consolidating financials. And you can see the pieces from Canada and the US. And that will -- that can give you some flavor of the differences between the two.

Can you give me any sense of the PCI Canada expenses -- what the portion would be in Canadian dollars and what proportion would be, I guess, in other currencies?

That's the part (LAUGHTER) I really need to pass on.

What happens, Julian, that steps into a much longer conversation. And I can only give you a piece of it -- a piece of -- you are headed which foreign currency gains or losses?

Not really. What I'm trying to understand is, obviously, you do have some expenses in Canadian dollars at the Becancour plant, principally. And presumably when the Canadian dollar is very strong, as it was in the first quarter, your expenses are going up. Presumably, in the second quarter, when the Canadian dollar has been somewhat weaker, you're going to have a better profit margins, even if all the prices are the same. And I'm just trying to get a sense of how much of the cost of sales and SG&A attribute to PCI Canada would be in Canadian dollars and therefore affected by that, and how much would be in effectively US dollars.

You're exactly right. But the other piece of that, when you look at it on a net basis, that you've got your revenue moving also in the same direction.

Why don't I let someone else ask questions (LAUGHTER)

A follow-up question from Jeff Gates of Gates Capital Management.

I noticed your captive usage of both chlorine and caustic increased from a year ago and even even adjusting for somewhat lower production rates, it looks like it's up. And I'm wondering, have you added capacity at your bleach plants? Or what's driving that increased integration?

Gary, I will take that one. We have -- we have a great deal of additional capacity at the bleach plant, so we did pick up markets in the bleach and the acid. So we do have even as we sit now additional available capacity at our bleach facilities. So there was increased volume, both in acid and in bleach.

Okay, and secondly, it looks like power costs were flat in absolute dollars, versus a year ago; sort of where you're seeing those today, and you know, based on --

I've got you, Jeff. If I may, and I don't mean to be wordy, but I have to break it into two pieces. The Canadian at Dalhousie and at Becancour are regulated. So those have been flat, basically, but for the swing in the Canadian dollar. Okay, when we bring them back. So I think there was a two percent increase at Becancour. But those are not subject to the volatility of the gas prices. I didn't look at the gas prices which drive the electricity -- I didn't look at the gas prices this morning. But they've been really robust. Therefore, I look for electricity prices to be strong. And, you know, I think they will -- second quarter to second quarter -- a comparison. I don't think it will be as high. But they will be very strong -- and the reason I say not as high is, if you remember last year's second quarter, that's when the gas prices ran. They got up to $10 an mmBtu, which really pushed electricity prices in the two markets we are in, in Louisiana and Henderson. So I think those prices will be strong. But it will be less than what they were for us in the second quarter of last year.

There are no further questions at this time. I will now turn the call back to you.

Thank you guys. I appreciate it. And we will be at the call for the first quarter results.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.