Olin Corp (OLN) 2004 Q2 法說會逐字稿

Welcome to the Pioneer Companies second quarter results conference call. During the presentation all participants will be in a listen only mode. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, August 18, 2004. Your speakers for today's conference are Gary Pittman, Chief Financial Officer, and Mike McGovern, President and Chief Executive Officer. I would now like to turn the conference over to Gary Pittman. Please go ahead, sir.

Thank you and good morning everyone. What I would like to do is start the conference call off with the disclaimer that we need to go through. And then I will turn it over to Mike McGovern to have him review some of the operational items. Then, I will go over some of the financial results at the end of the call.

Certain of the statements that we may make during the teleconference regarding future expectations 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 difficult nature of the markets for many of our products and raw materials; the effect of Pioneer's results of operation on its debt agreements; and other risks and uncertainties.

Attention is directed to our Form 10-Q and our annual reports on Form 10-K for 2003 and 2004 for a discussion of such risks and uncertainties. Actual outcomes may vary 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 for our four chlor-alkali plants is 725,000 ECUs after the curtailment of our Tacoma capacity, representing approximately 5 percent of North America capacity.

At this time, I would like to turn it over to Mike McGovern and have him go over some of the operational highlights.

Thank you Gary. And thank all of you for participating. I have three topics I would like to talk about today -- pricing, results of the efficiency projects, and just touch on the plant turnarounds.

As to pricing, I would like to review the price announcements we have had in '04, provide some information forecasts made by third party on pricing; and on the efficiency, just talk about the results and then again just touch on the plant turnaround.

We had numerous price increase announcements in '04. The market for chlorine caustic is tight. It is anticipated to continue to be tight for the near-term. As a platform, we should probably start -- the announcements we have made on chlorine -- we announced the $75 price increase on January 29; chlorine, $20 price increase on May 18; caustic, $50 price increase, April 27; caustic, $45 price increase, May 18; caustic, $65, May 26; acid, $10, June 1.

As we move to Pioneer pricing, as we have disclosed in our Qs, the first quarter was 338 and it has advanced up to 358. The chlorine price increased. We had some softening in the caustic. As we have repeatedly stated, many of our contracts have pricing provisions that only permit price increases quarterly and annually. Some have caps -- ceilings. We have clearly stated this in our filings.

These provisions limit the immediate realization of these price announcements. I do want to note, however, that we do expect our ECU prices to increase during the balance of this year.

I would like to go ahead and touch on the Q&A. Probably the first question that will be asked -- did the translator correlate these price announcements to forecasted ECU prices for Pioneer? As we have repeatedly stated, we do not forecast ECU prices for Pioneer, nor do we provide details such as percentage of contracts with caps and fixed prices. But as I did state, we do expect the price to increase.

When we look at price projections, we tend to use CMAI as our reference point. And the forecast for both chlorine and caustic continue to be really strong for the next 6 quarters.

When you look at their forecast of July 30, for the third quarter of '04 they have an ECU forecast of 497; fourth quarter, 501. As you move into '05, they see turning down of (ph) TAB to 481; second quarter, back up to 576; third quarter, 536; fourth quarter, 508.

As you look at the prices for the forecast over the next year, those would be all-time highs. So the outlook is -- looks very strong, very robust.

As we move to the STAR Project, there's two parts of it we would like to look at. One is the expense, the other is the savings. I think it's been a very positive project -- Celerant has been our consultant. We think they've done really an outstanding job.

As we look at this in the second quarter, there are two components of the expansion -- the severance and there's the cost for the consultants. The total is 7.7 million. The severance is 3.2 and the consultants are 4.5.

As of this time, we have reduced our staff and contracts positions by 128 people. This exceeds the number that we had forecasted in the first quarter. And as you look at these costs of the severance, we accrued 3.2 at 6/30 and we have accrued –- and our (ph) expense, 2.9. So we have incurred, through 6/30, $6 million of these costs.

When you also look at the first quarter, we have suggested the project cost of the consultants was 2.8 to 3.6. That is for their fees for the project. The 4.5 that we talk about now includes the expenses and the first stage.

As we talk about the savings, as we have disclosed in the second quarter, labor and benefits $8 million, other 3, for a total of 11. You know, as we already noted, we've reduced the staff and the contractors during the second quarter.

The other items, or others as referred to, is more efficient use of electricity. And why you see our costs went up -- it is the more efficient use, the measurement and more attention to detail in steam (ph) and reduced over time.

On a transportation expense, which included reduction of railcars and negotiation with various carriers, we have not included any savings in the forecast of the 3 million. But we will continue to work on those and think we will have them.

The question that will be asked as to this reduction is -- is it sustainable? Is this just another Company that hacked a bunch of -- chopped a bunch of costs out in the short-term? That doesn't have a long-term benefit. We believe the reduction is sustainable.

The leaders of the project are our senior management team. Dave Scholes, who is Vice President of Operations, led the project, really did an outstanding job and really moved outside of his scope, just operations, to work on a total corporate; Jerry Bradley, who is the VP of Human Resources, heavily involved, because this is a major reduction of people, shifting of tasks.

Gary Pittman, who is the CFO, is very focused to be sure we maintain the integrity of what we're doing in our systems and our controls; Mike Mazzerella (ph), Vice President of Logistics and Purchasing, very involved; Ron Ciora, Vice President of Sales -- to change the flow of how we do the integration.

Each of these invested enormous time, energy and effort and are very committed. During this program, this project, second quarter particularly, we had 34 people of our staff working on this full-time, and another 30 probably working 50 percent. Celerant, or the consultants, they had 10 plus people. So we had a strong labor force working on this.

Our goal is to focus on value-added tasks. Our goal is to challenge the status quo. An example of our commitment to change is that we have contracted with the outside consultants to come in and assist with our staff to conduct an audit within the next 12 months.

We want to measure the progress we've made and if we've had slippage. While we do audit the financials, this will be a new step for us to audit our efficiency. Each member of our management team believes this will be sustainable.

Turnarounds -- we have been operating at 100 percent of capacity. In the third and fourth quarter, we will do half turnarounds at Anderson and Bec. And St. Gabriel will be early next year.

We have disclosed in the Q, I believe, about 8600 tons that we will be -- lost production or down production during the remainder of the year. Our goal has always been to maximize our production. But we will not compromise short-term gain for long-term problems. And we will not compromise our safety standards.

Conclusion -- the market is tight for both chlorine and caustic. And we anticipate it to be that way for the near term. The forecast from CMAI, a third party, validates this. And they have a strong forward curve.

We intend and believe we will receive the benefit of the price announcement in subsequent quarters. And the STAR Project has been very successful. It is our task to find -- everyone's task to insure this sustainability. And we will have these turnarounds in the next 6 months.

At this time, I would like to turn it back to Gary Pittman, who will give you a financial update.

What I would like to do is again begin comparing the second quarter 2004 results compared to second quarter 2003. In the -- we reported a net loss of 2.4 million or 24 cents per diluted share in the second quarter of '04, as compared to net income of 5 million or 50 cents per share in the comparable quarter of 2003.

Our revenues for the second quarter of '04 were 97.1 million, as compared to 96.3 million for the same period in '03. Revenues in the most recent quarter were favorably affected by increased volumes of our production, partially offset by a decrease in prices in caustic soda.

Our revenues for sales of chlorine and caustic soda were 2.5 million lower than the year earlier quarter, primarily as a result of lower ECU prices resulting from decreased prices for caustic soda, the effect of which was offset in part by higher ECU sales volumes.

Our average ECU net back for the second quarter of '04 was 354, compared to 406 in the second quarter in 2003. Revenues from other products increased by 3.3 million compared to the same period in 2003, primarily from an increase of 1.7 million in sales of hydrochloric acid due to higher sale volumes, along with increases in revenues from other products.

Our ECU production was 183,000 tons in the second quarter of '04, as compared to 162,000 tons for the same period in 2003.

Cost to sales products for the second quarter of '04 increased by 3.5 million as compared to the comparable quarter in '03, with increase to variable costs of 3.7 million resulting primarily from the 3.5 of higher salt and electricity costs due to higher production volumes, and 1.7 million of increased freight costs resulting from higher sales volume, partially offset by a 1.6 million of lower maintenance costs.

SG&A expenses increased by 2.7 million, or approximately 47 percent, to 8.4 for the second quarter of '04, as compared to the comparable quarter in '03. The increase was a primarily attributable to consulting fees and expenses of 1.9 million related to the organizational efficiency project.

Other items increased by 3.6 million for the second quarter of '04 compared to the same period of '03 as a result of the 3.2 million we recorded for severance and related charges associated with the organizational efficiency project.

A 400,000 gain for the earlier payment of a promissory note was also included in the 2003 period. Other income net of 600,000 in the second quarter of '04 reflected currency exchange gain. Other expense of 2.6 million in the second quarter of '03 reflected currency exchange loss.

Our borrowings on the revolver as of July 31, '04 were 17.8 million. Our additional availability on the revolver was approximately 4.1 million. And our liquidity was 5.9.

Now, I would like to compare the second quarter results to the first quarter of '04. We reported a net loss of 2.4 million or 24 cents per diluted share in the second quarter of '04, as compared to a net loss of 7.3 million or 73 cents per diluted share in the prior quarter of '04.

Revenues for the second quarter of '04 were 97.1, as compared to 90 million for the first quarter of '04. Our average ECU net back the second quarter '04 was 354, compared to 339 in the prior quarter. Our ECU production was 183,000 tons in the second quarter of '04 compared to 170,000 tons for the first quarter of '04.

Cost to sales products for the second quarter decreased by 2.1 -- by 2 million compared to the first quarter of '04 as a result of lower depreciation, offset by increased sales and volumes production.

Second quarter SG&A expenses were 8.4 million as compared to 6.6 in the first quarter of '04. The increase was primarily attributable to the consultant fees and expenses of 1.9 million related to the organizational efficiency project.

Other items increased by 3 million for the second quarter compared to the first quarter of '04 as a result of the 3.2 million we recorded for severance and related charges associated with the organizational efficiency project.

Other income for the second quarter was 600 to 9,000 compared to 130,000 that consisted primarily of currency exchange gain in both periods.

At this time, we would like to turn the conference call over to the Q&A period.

(Operator Instructions). John Levin (ph). Table Rock.

A couple of questions. The MD&A in the 10-Q talks about ECU production decline of 1600 tons during Q3 and 7000 tons in Q4. I am guessing that is a decline from the Q2 level. But can you please confirm that?

This is Mike. What those volumes are our estimates of how long we will be down at each one of the plants. So it's not a comparison from quarter-to-quarter. An example -- when we take Bec down, we think it will be 7 days times the production for the line that we would take down.

So it is the actual estimate that we think we will be down. We had assumed we would be running 100 percent in the second half of the year.

Okay. So would it a reasonable, then, to simply project second half production -- assume 100 percent utilization less 8600 tons?

Yes. What happens -- there is always a question, John, on what 100 percent production is, because you have various times where your plants trip (ph) out and such. But conceptually, yes, that's the right direction.

Mike or Gary, can you say what headcount is today?

I think it's 550 -- I believe it's --

Yeah, as far as headcount -- I mean if you go from the disclosure in the 10-K, that was reduced by approximately 100 employees. I think that would get you right around 550.

Yes.

Okay. I know you don't make ECU projections, but can you say what the Company's ECU realization is today?

No.

But you guys are good on asking those questions, John.

Can you say -- obviously the 354 ECU for the second quarter was a blend -- the average over the time period. Can you say what ECU realization was as you exited the quarter?

No. We hadn't reported that. I can tell you that those are good questions. I can tell you it's trending up. Yeah, I can tell you it's trending up. John, what really makes it tricky in a sense (ph) to forecast is several components. One is the existing contracts.

As we suggested, we have quarterly and semi-annual and annual price re-determinations provisions that cause a lag. The second is that there is there is (sic) some caps. The third is when you have rising prices, you shift -- there is some shift between customers.

And right now we are on order control, which changes the weighting of that. And so we would really be -- I think we would be foolish to forecast. I can tell you it is increasing. The market is strong. The market is tight. From all our data points, the entire sector is on order control. So this is demand driven, not just cost driven.

Okay.

I evaded your question again. I'm sorry. We just can't wander into that water.

Okay, understood. Can you say what portion of volume is subject to annual price adjustments?

No, we haven't done that either John.

Okay. That's fine. Lastly, the NOL -- can you state what the current value of the NOL is? Also, as I understand it, there's no deferred tax asset currently on the balance sheet. And I am wondering, should the Company arrive at a sustained profit position, would the Company then contemplate putting the deferred -- putting a deferred tax asset on the balance sheet, assuming I am right that it is not there now?

I'm going to take that one, John. When you look at the NOL, you need to break it into two parts in the US. You need to break post-bankruptcy and pre-bankruptcy. Pre-bankruptcy, you had a change of control. So as sophisticated as you are, you know that bleeds in at the treasury rate times the value. So it's a true NOL, but it has less value than those that are post. Those that are post, Gary, I think it's about $70 million.

Right, currently.

Yeah, currently, I think it was -- through the end of last year, it was about $70 million. All that -- we believe that does have value. We do believe that will be profitable. As to when we would book that, I don't think we've really addressed that. Our goal is to be profitable, and then address that. So, we really hadn't looked at that looked as putting it on the books as an asset.

Okay. But I'm right. Currently, there is no deferred tax asset that is carried on a balance sheet. Is that accurate?

That's correct.

Okay thank you.

Omar Jama, Merrill Lynch.

First of all, I just would like to make a comment. I think the disclosure that you guys have made here is very thorough. And we appreciate that. And you have certainly anticipated a lot of my questions.

I did have a question on the turnarounds. Is this just going to be a standard turnaround? Or are you doing some of the change-outs? Like for instance, I think in Canada you're thinking of changing -- taking some membrane units from Washington and moving those over. Is that going to take place? Or is this just a normal turnaround?

Okay. Two questions -- one, these are normal turnarounds. The second is on moving the membrane -- to the common (ph) change in some of those -- increasing the membrane production, that's still under review. So these will just be normal turnarounds.

And then I noticed you highlighted in the Q the liquidity. And I noticed that the payables kind of jumped up in the quarter, and was curious -- but then you also highlighted that as of July 31, the liquidity had gone back down.

I was wondering if you could give us any commentary on -- is your payables -- are they expect to be status quo, because of the more positive outlook for the Company? Are you guys actively going out and trying to push that?

I know you have, obviously, the revolver issue -- the sweep and all that. But can you give us some comment on the factors that were impacting liquidity?

This is Gary, Omar. There's a couple things -- the payables. We had some additional accruals with electricity price going up. We had some accruals associated with the severance.

So that is part -- you had 3.2 going in there. And then, in addition to that, we've had some purchase for resale that we have also incurred during that period. So at the 6 30, that is part of what you have seen as far as the impact on the payables.

When you looked at the July -- on the purchase for resale, part of what has occurred is we have had to place LCs for the purchase for resale. Given how tight the market is, no one is wanting to take any risk with their product.

So, historically, or shall I say last year, we necessarily did not have to put up LCs. This year we're having to. So that's being pulled down also and having an impact on the availability under the revolver.

But, with that level of liquidity at July 31 is not to be of concern or to alarm anyone. It's just -- once again, it's the way that we are managing our cash in addition to the LC requirements and other items.

It did drop down in July probably a little lower than we had probably internally anticipated, because of the not anticipating to have to put price up LCs for the purchase for resale, because those are the same vendors we did business with last year. But it's just given the tightness of the market as an indication they get pretty much what they ask. And they are not willing to take that risk. So it's just kind of a change in the marketplace.

But going with that is also looking at -- as you know, it's -- depending on the level of liquidity, has the potential of triggering various events to have a pre-payment on the Tranche-A. And we are continuing to manage that.

But if you continue to see prices increase and continue to see the level that that is anticipated by CMAI, I would anticipate at some point in time that you would be making a payment on the Tranche-A in the future.

Okay great. And then in an effort to try and -- since you're not going to give us an ECU forecast, which I understand, to understand what the free cash flow is going to look like, you also disclosed the pension payments for this year. Is there a pension cash payment that we should expect for next year?

There will be. But there's a lot of numbers that go into that calculation. I don't know what it's going to be compared (ph), but you are right. Of the pension required payment of 4.9, we have made 4 million of it to date.

Okay. So that's already out the door. Would you expect it would be in the ballpark, or radically different?

It's so hard to say. I mean, that's like asking me what's the stock market going to do, because obviously the market has a tremendous impact on the how the pension performs.

Omar, the one footnote I would add to that though, Gary, is on your defined benefit in the United States, it is frozen. So, your service costs are not continuing to accrue -- (multiple speakers)

That's correct.

-- as we go forward. So as you look at legacy, as you would traditionally look at legacy costs, Omar -- the U.S. piece, as I'm sure you remember, has been frozen. So, that should mitigate the additional cost of service --

Cash requirements.

-- cash requirements for the new cost of service that would go in there.

Okay. Well thank you very much, guys.

Julian Schroeder, Credit Renaissance Partners.

Good morning. This is Julian Schroeder. Two questions -- one, has the shortage of railcars had any effect? Or do you anticipate that it will have any effect on your business?

The second question is, using the CMAI forecasts, they are also forecasting cash margins of between $180 and $280 per ton and I would like to know if those ECUs are achieved, can we achieve those kind of cash margins?

I will take those. First, on the rail -- we have about 2100 cars in our fleet. As we started the year -- I don't know if this -- I may be answering more than you really asked. As we started the year, if you remember, we had the problem in the Northeast with the extreme weather conditions and the CN (ph) at various unions on strike. So that complicated things in the first quarter.

That has obviously been resolved, the weather and the strike. The issue we have with transportation right now is -- the UP is the carrier on the West Coast. And they have had enormous increased traffic with the strong economy. And so there is some issue with the transportation with them. They're working very hard. I think they added 4000 people in the last -- I think it's the last quarter. So, they are really tooling back.

If there is any question on transportation, it would be service because of the carriers having some experience there. The other -- there's been a tad of aggravation or whatever from the trucks where we bring some bleach and such across the border in Canada and the Northeast. Sometimes that is very protracted.

But, all-in-all, the railcars have not been a problem. We have an adequate fleet. And as a whole, they have caused us to catch our breath but not impacted our financials.

Your second question is -- first the forecast again, and instead of asking how we forecast prices, how we forecast margins. And again, we don't do that. So we are unable to answer that question.

All right. Thank you.

Jeff Gates, Gates Capital Management.

With regards to capacity, can you talk about what's happening with North American capacity, as well as global capacity and chlor-alkali, and what your CapEx directionally might be over the next couple of years?

So that's three questions. First, in North America, it is tight. The only players that have talked about additional capacity is (sic) Bayer. And they built a new plant in '99. They have the capacity data. I think it's about 150 to about 170,000 tons on site, which is -- if this was a set of Legos, it would just be three little blocks or whatever you would put.

I have not heard anything of anyone's announcement to add capacity in North America. You can tell from the pricing -- from CMAI in North America, the demand looks strong as we go out, clearly through '05.

In the world market, caustic is very tight. In the West, people are having trouble getting the imports in, because Australia is pulling a lot of it there for aluminum. The chlorine is enormous demand in China. There are various facilities to be started '06, '07 in the Far East and the Middle East -- only anticipated increased demand in Asia, particularly China.

So, Jeff, I don't have the percentages in front of me. But I think it's one to two in the United States growth and an ECU basis. And then in the world I think it's 3.5 to 4. And again, that's all driven -- or the vast majority of it is driven by China.

Right. And with regards to Pioneer's capacity, any -- what would it take for you to revisit bringing Tacoma back? Or is that off the table permanently?

Well, it would be very difficult for two reasons -- one, the passage of time. The longer you allow these plants to sit out, all the more difficult is it is to bring it back. Second, Tacoma power was very helpful with us. They are the party who would provide the electricity. And we had established a drop-dead date of March. And they were very supportive and worked with us very hard.

And when we were concerned that the market wasn't there and went away, we would have to go back to them. Again, they were very supportive on the jobs. But it would be a mountain to go over. So at this time, I would tell you it is unlikely. But it's not impossible for us to do that.

Okay. Thank you.

There are no further questions at this time. I will now turn the call back to you, gentlemen. Please continue with the presentation or closing remarks.

This is Mike. We appreciate the participants. We have strived, over the two or so years that Gary and I have been here, really to increase the disclosure in the Qs and the Ks. We understand the thirst, the need, the want for the forecasting of the ECU prices. Given where we are, as we have continually stated, we don't feel that would be appropriate for us to forecast that.

But from the historical perspective, you know, we're trying to disclose the ECU, the production, the electricity, to help you guys analyze where we are and where we're headed. And so our goal is to inform the best we can all the stakeholders. So we appreciate your support. And if we can be of any assistance to any of you guys, and gals, just give us a call. Thank you. At this time, that concludes our call.

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