Olin Corp (OLN) 2004 Q3 法說會逐字稿

Welcome to the Pioneer Companies (technical difficulty) third-quarter results conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, November 4, 2004. I would now like to the conference over to Mr. Gary Pittman. Please go ahead, sir.

Thank you. This morning we would like to get started with myself going through the disclaimer, as we have done in the past.

Before we get started, I'd like to let everyone know that I am actually conducting the teleconference call from Houston, and we have Mike McGovern joining us from the Montreal office. With that, I will get started.

Certain statements that we may make during this teleconference regarding future expectations of Pioneer's business and Pioneer's results of operations, financial condition and liquidity may be regarded as forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are subject various risks, including but not limited to, Pioneer's high financial leverage; global economic conditions; the demand and prices for our products; Pioneer and industry production volumes; competitive prices; the cyclical nature of the markets where many of our products and raw materials; the effect of Pioneer results of operations on its debt agreement; and other risks and uncertainties. Attention is directed to our Form 10-Q and our annual report on Form 10-K for 2003 as a discussion of such risks and uncertainties. Actual outcomes may vary materially.

The company background -- 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 4 chlor-alkali plants is 725,000 ECUs, representing approximately 5 percent of North American capacity.

With that, I will turn it over to Mr. McGovern.

This is Mike. We appreciate all the participants. I have several topics I'd like to talk about, the STAR project, pricing, production, shelf registration, (technical difficulty) assets at Henderson.

First is the STAR project. We discussed this in earlier calls. My comments are limited -- to the cost of the project is going to be about 7.7 million, with annual savings of 11 million. The most important thing about that is we believe most of these changes have occurred, and we believe they're sustainable.

As we move to pricing, this is a topic that gets great review and a lot of questions. As you know from a review of our 10-Q, we've laid out the quarterly ECU price. And as you can see for '04, it's strengthened as we move through the year, 339, 354, up to 409 for the third quarter.

We've added for this quarter -- for the month of October, average ECU netback was approximately 450. The reason we've done that is to show the continuing strength in the market and we thought it was important that we disclosed that.

As to price announcements that we have made, in August we announced a $20 chlorine price increase. In August, we announced a $45 caustic increase. I think it was November 3 -- we announced a chlorine $20 price increase. And on the same day, we announced a caustic $50 price increase. As we've repeatedly talked with our audience, we have legacy contracts that caused a lag in the realization of the announcements.

We've also added in this 10-Q attempt to disclose the volumes that are subject to fixed contracts. And what we've done is we picked a date, because the contracts always roll -- we picked a date as of October 25th. And we looked at our contracts for January 1. We picked January 1 because we have contracts that roll over quarterly, semi-annually, annually. And as of that date, okay -- October 25th, looking at January 1, we had 520,000 tons of caustic and chlorine that have priced cash, fixed-price.

Now to put that in perspective, when you look at the chlorine and caustic we have available if we ran at capacity is about 725,000 tons of chlorine. And as you know, caustic is about 1.1 times your chlorine, which gets you about to 1,500,000. So about a third of it has fixed-price -- our pricing casts (ph) as we go into next year.

Now some of that rolls off during the year, but this is all the information that we could provide. We don't give a pricing forecast, even though numerous participants ask during the quarter and on this call. Again, we don't do that. What we do provide it is the CMAI outlook. And as of October 29, their outlook for 2005 -- in the first quarter for an ECU, 635; second quarter ECU, 657; third quarter, 658; fourth quarter, 648. And we have talked about the legacy contracts.

As we move to production, during the quarter we operated at 97 percent of capacity. Again, we don't provide any forward-looking, but as to information we can provide is we've scheduled turnarounds at Becancour and St. Gabriel; Becancour in the fourth quarter, St. Gabriel in the first quarter. And the timing of those should be approximately -- we should lose probably 7,500 tons in each quarter.

I need to note -- those are the scheduled turnarounds. We've been running at capacity, and when we run at capacity, we have to remember that we will suffer bumps and bruises that will cause us some unscheduled downtime to make repairs.

The next topic is self-registration (ph). I believe most of you know, our statement was declared effective by the SEC last month. This gives us some additional flexibility to address our capital structure when appropriate circumstances exist. Our Board of Directors will consider whether the right opportunity exists on a regular basis, when to decide that we should proceed with an offering. We will make the appropriate announcement when that occurs. Until then, we cannot address whether or when it will happen. If there's any questions on that, I will just read that back to you.

As to possible asset disposition -- we have 60 acres that are not strategic to the plant in our Henderson -- Henderson is located very closely to Las Vegas. And we put that up for sale with 750 acre-feet of water. A question will probably come up is for us to estimate or forecast the value we will receive on that. It's undeveloped property. So we do not have a forecast or will make a forecast at this time.

Gary, those are my comments. I will turn it back over to you.

Thank you, Mike. One of the other questions that we thought that may occur that we thought we'd go ahead an answer is, why did Pioneer file its Form Q and issue its earnings release much earlier than it has in the past, because typically we have filed it following 45 days on the quarter.

But we seem to be in a period of rapid and substantial increase in demand for our products. And as a result, we've made a number of announcements with respect to increases in prices for caustic soda and chlorine.

We were concerned that there would appear to have been a number of assumptions about how quickly we realized the benefits of announced price increases in the ECU netback that we've received. Given that, concern we decided to increase the amount of explanation we provided in the form 10-Q about the relationship between our announced price increase on the one hand and the contract prices that CMAI reports, as well as CMAI's regular price forecast on the other hand.

We thought that we should provide that information to the market as soon as possible. So we accelerated the filing of the 10-Q compared to prior periods, and the release of the earnings for the quarter for the 9-month period.

With that, what I would like to do is go through the third quarter '04 results compared to the third quarter '03. We reported net income of 3.9 million, or 38 cents per diluted share in the second quarter of '04 as compared to net income of 2 million, or 19 cents per share in the comparable quarter in '03. Our revenues for the third quarter of '04 were 105 million as compared to 100 million for the same period in '03.

Revenues in the most recent quarter were favorably affected by increased volumes for our products, partially offset by a decrease in prices for caustic soda. Our revenues in the most recent quarter for sales of chlorine and caustic soda were 5 million higher than a year-earlier quarter, primarily as a result of the increased volumes of chlorine and caustic that were sold and the higher average ECU netback price, consisting of increased chlorine prices, partially offset by lower caustic soda prices.

Our average ECU netback for the third quarter of '04 was 409 compared to 392 for the third quarter of '03. Revenues from other products were relatively flat compared to the same period in 2003.

Our ECU production was 177,000 tons in the third quarter of '04 compared to 173,000 tons for the same period in '03. Cost of sales products for the third quarter of 2004 increased by 3.9 million as compared to the comparable quarter in 2003.

In the most recent quarter, our variable costs were 5 million higher than in the prior-year period, primarily as a result of a 2.1 million increase in salt and (ph) electricity due to higher production volumes and a 1.7 million increase in purchase for resale. Freight costs were also 1.1 million higher during the 2004 period. Partially offsetting these increases were lower fixed costs of sale, primarily resulting as 800,000 decrease in personnel-related expense and maintenance costs that were 1.4 million lower.

SG&A expenses decreased by 600,000 or approximately 9 percent to 5.4 million for the second quarter of '04, as compared to the comparable period in '03. The decrease was primarily attributable to lower personnel-related expenses of 800,000 partially offset by 0.5 million increase in consulting fees and expenses.

Other expense net of 1.8 million in the third quarter of 2004 reflected currency exchange loss compared to a currency exchange loss of 100,000 for the comparable period in 2003. Our borrowings under the revolver as of September 30, 2004 were 6.8 million. Our additional availability under the revolver was approximately 17.7 million. And our liquidity was 21 million.

Now I'd like to move to the third quarter of '04 results and compare them to the second quarter 2004. We reported net income of 3.9 million, or 38 cents per diluted share in the third quarter of 2004 as compared to a net loss of 2.4 million, or 24 cents per diluted share in the prior quarter in 2004. Revenues in the third quarter of '04 were 105 million as compared to 97.1 million for the second quarter of 2004.

Our average ECU netback for the third quarter was 409 compared to 354 for the prior quarter in '04. Our ECU production was 177,000 tons in the third quarter as compared to 183,000 tons for the second quarter of 2004.

Cost of sales products for the third quarter increased by $6 million as compared to the second quarter of 2004, primarily as a result of variable product costs -- were 4.5 million higher, primarily as a result of increased in electricity and salt costs, and an increase in purchase for resale costs.

The third-quarter selling, general, and administrative expenses were 5.4 as compared to 8.4 and the second quarter of 2004. The decrease was primarily attributable to consulting fees and expenses and lower personnel-related expenses.

Other items decreased by 3 million for the third quarter compared to the second quarter of 2004 as a result of the 3.2 million we recorded as severance and related charges associated with our organizational efficiency project.

Other expenses net of 1.8 million in the third quarter of 2004 reflected currency exchange loss compared to a currency exchange gain of 600,000 for the comparable prior quarter in 2004.

With that, we what we would like to do is turn it back over to the operator for a Q&A period.

+++ q-and-a.

(Operator Instructions) Jeff Gates, Gates Capital Management.

Just a question on -- if you had more capital to employ in the business, where would be the highest and best use of that capital?

That's an outstanding question. We feel we're meeting all of our capital needs right now. Some of the projects that we will look at as we go forward is whether we move the membrane from Tacoma to Becancour. But we have that under review. And so to date, I can't tell you that the capital constraint -- we just haven't completed the review. So that is one project that we would look at. And that's the principal one we have in front of us right now.

Omar Jama, Merrill Lynch.

I had a question on the STAR cost reduction project. In the Q, you had outlined that you believe you realized 3 million out of an expected 11 million in cost savings. And I'm just wondering, in '05, should we expect to see the remainder of those cost savings or something close to that? And can we expect that pretty much to drop to the bottom line? So you know, something on the order of the 7 or $8 million in additional cost savings dropping to the bottom line?

The answer is yes. We started project -- the key was, were we just doing cuts that would creep back in, or could we change our behavior? And we think we've changed our behavior in the way we approach our business, and we think 11 million -- 1, is real (ph); and 2, we think it's sustainable. So you should see a drop to the bottom line next year.

I think I heard Gary say that in the quarter you had 0.5 million in expenses, but you had 0.8 million in cost savings -- so a net benefit in the current quarter. Is that correct; did I hear that correctly?

Yes, you did.

And just in the next couple of quarters, should we -- is it might be sort of back-end weighted in '05, or should we start to see that kick-in with the consulting expenses rolling off in the near-term, and say, in the next two quarters, is the consulting expense going to decline?

Yes, in the fourth quarter, you're going to see the consulting expenses decline. If you recall, they've actually declined -- the third quarter was less than the second quarter associated with the consulting expenses. And the fourth quarter -- you'll continue to see a decline in that.

Let me add one thing to you as you look at your forecasting -- and again, we don't forecast -- as you know from prior conversations we've had, electricity is a major component. And you know at Henderson and St. Gabriel, those are market-driven. And the price curve on those are running. And so as you look your cost on a go-forward, please note that those should be higher going into next year.

Sure. The increase in the ECU, as the increase in electricity -- is it smaller than increase in the ECU realizations that you're seeing currently?

Let's see if I can answer it like this. We've disclosed our production capacity at St. Gabriel and Henderson. And we've disclosed it takes about 2.8 megawatts, I think is what we have disclosed, to make an ECU. So that's about 1 million megawatts-hours. And so one would need to look at their price forecast, if one assumes -- and I'm not assuming this, because we don't forecast -- but if one assumes it was a $10 megawatt increase, it's a $10 million hit. And so our assessment is by providing you with the MW that you can look at; then you can do your price sensitivity on that.

Okay. So it sounds like if it was a $10 increase, that would be a $10 million hit -- is that what you just said?

Yes.

So we would have to calculate the additional revenues due to the ECU price realizations benefit.

Yes.

Okay. And in terms of -- you have given us some great disclosure here on the ECU realization relative to CMAI. That's very helpful. Thank you for giving us that.

You also said that you have locked in a third of your production. How far out does that go? Is that a mix of annual, again, and quarterly contracts? Or have you been successful in reducing the tenor of some of your fixed-price contracts?

Well, what we did was -- and you know this space well. We took January 1 to look, because a lot of price redetermination occurs in the fourth quarter. Some of those roll off in '05. Some of those go for a longer period and have caps, not fixed-price, but caps, that limit the upside. And to go into more detail than that, we cannot. But we were hoping that would help. Part of that 520 we disclosed rolls off in '05 -- caps in the price restrictions.

Okay, so the remaining product that you sell -- should we assume that's sold on a monthly basis, or are you going to be (multiple speakers) trying to lock in more?

I got you, Omar -- we didn't say that. Part of that -- you know, we gave that legacy paragraph where we talk about mother pie (ph) and all those things in there. Part of ours is based on index, as you know with index, it lags a quarter. But we consider that market-driven. And so we will have some lag -- as the chart displays, that we have some lag in the uptick. And then we will also have some market issues. So if I was doing a forecast, I wouldn't -- it's not immediately going to go to market.

Does that mean -- historically the ECU highs are around $400 or so, at least in recent history. But now we're looking at $600 territory. Have you set your caps to account for that? Are you setting your caps relatively low?

Well, the caps that we're living with right now are those that were in places we came out of a trough. As we go forward, caps are something and fixed-price that we're trying to avoid.

The exception to that is with the municipalities that we deal with -- you bid those on an annual basis. So the bulk of that business rolls over on an annual basis. And you bid it with a fixed price. And so those volumes are included in the volumes that I told you as we go into the year have a fixed price that we will be bidding on. So no, the caps that we have are from days yesterday, and our goal is to -- and fixed prices (ph).

Gary, can you tell us what -- if the market ECU goes to the 600, whether these caps that you put in place are going to -- how significant of a drag they're going to be? Basically, what price level are they at?

We thought we would get an "atta-boy" (ph) for disclosing the 520. That's the limit we can disclose at this time, Omar.

Okay, sure. Final question -- you talk about the shelf filing that you made, and it's active. That seems to me like you guys are looking to delever the balance sheet a little bit. Is there any kind of maximum dilution that you think is appropriate?

Omar, the paragraph that I read, as you know, on our shelf registration -- that was written by our attorneys.

Okay; that's all you can say. That's fine.

I could read it again. But that's all I can say. And they're probably less (ph) going to slap on my hand if I say any more.

In terms of refinancing, it's only a 100 million shelf. But you have some debt that is actually callable in the relatively near term. And I would note that your 10 percent bonds are trading basically to the call price. And the tranche A loan, which is LIBOR plus 350 -- that interest rate is probably also significantly above what the bank loan market interest rates available are at the moment.

Have you guys given any thought to doing some kind of debt refinancing sometime in '05 that would allow you to really reduce your interest expense?

I've got to read the paragraph again. You know, that all relates to the shelf.

What I can say -- we're constantly looking at our cost of capital. And with the pricings, with the information -- you know, we hope organically we are not going to be forcing (ph) that debt down next year. And so the question is, do you use your organic, do you use your cash flow to pay that down, or would you do refinancing? So those are issues we continue to consider.

But the 5.5 -- that's not a bad rate for a company our size. We could do better, but that's not a bad rate.

And other thing that I might add, and I'm sure you're aware of, Omar, is that the fixed rate notes are not callable until after 12/31/05. And at that time, they're called at a premium of 5 percent.

I think if you were to propose the new financing, you'd be easily able to tender for those bonds at a small premium to the call price. But I will let somebody else ask a question. Thank you very much.

John Levin (ph), Table Rock (ph) Fund.

Three quick questions. Gary, can you say what headcount is or was at the end of the third quarter?

No, we have not disclosed that.

Can you say if it was up, down, flat, sideways, versus the June quarter?

It is down, as we've indicated that we're continually -- to reduce -- the Project STAR with 128 reductions -- positions. And we've also discussed that we've continued to reduce and to get to that number.

Now, we are not currently at 128 reductions as of now, and those will -- as we continue to move in and implement and train and -- at the end of the project, though, there will be 128 less positions.

Of the 128, can you say what portion -- how many have been --

No, I don't have that number off the top of my head.

But we can say most of those have been done, if not by the third quarter, been done by October. So the vast majority of those cuts have been made.

Understood. With respect to the floaters, last year the company tendered for a small amount of the floaters, because there was a covenant the required to tender excess cash flow or something like that. Do you know if that's going to apply as a result of your third-quarter result?

It will not. The third-quarter result will not require that. But I do anticipate the fourth-quarter result would end up requiring us to make a payment to the tranche A.

That's purely voluntary -- the tranche A does not have to tender. Am I getting that right?

That is correct on a portion of it. There's 2 pieces to the tranche A.

Okay. Lastly, Mike, can you comment on the Vulcan transaction? How, if at all, does that impact your business? And sort of where do you see the industry from, say, 10,000 feet or something like that?

I can tell you from Montreal where we see it. You know, the way we perceive that -- first, those are 2 well-run companies. And Vulcan has for some time in their public documents disclosed that they don't see those assets strategic to their future. And Oxy is the number 2 player; in some of the space, number 1. And so they're an aggregator of those assets.

And so what you had is you had a party that non-street (ph) strategic assets with a party who was aggregating. And they're both well-run companies. And we hope it works out for both parties.

So as to the market, there's one less player, and numerous customers like -- not all, but numerous customers like multi-suppliers. So that's one less supplier. That's really all I can comment on. But they're both well-run companies. We wish them the best of luck.

(OPERATOR INSTRUCTIONS) Jeff Gates, Gates Capital Management.

Mike, you talked about caps in a third of your contracts. But I'm wondering, are there also floors in those contracts that suggests that perhaps in a downturn that we could expect some cushion?

And secondly, can you talk about how you sort of view North Americas industry capacity this year and next year -- changes in it?

First on the floors -- you know, we were remiss in looking at that, because we are very optimistic right now, Jeff. As I sit here, I don't have any data on that.

As we go forward, we hope our contracts have more symmetry through -- on the upside and the downside.

You know, we've come out of a pretty tough time. You know, I think we've talked in the past -- over 2 million tons of capacity have come out of the market since about '98. The market seems tight. People are under audit control. '05 -- you can tell from the pricing; that's demand driven. It looks good, it looks strong. That could continue. Exports need to continue, because about 15 percent of the chlorine goes to derivatives -- EDC, VCM, PCV. So that needs to continue. So we need a strong local economy. And the pulp and (ph) paper on the caustic side needs to be strong.

So I think the people in the space feel very optimistic going into 2005 from a demand and a pricing perspective. And what we really hope to do is kind of an add-on on that is we really hope to be very good stewards from a cost standpoint, too, instead of just going -- the prices going up, that these are just good times in front of us.

I do caution, though, with the increased price, please, as you guys forecast on where you think we're headed, you need to look at the electricity. You need to look at the gas curve, which generates electricity for our facility at Henderson, the markets we buy from, and predominantly at San Gabriel. Those are walking up as we talk. So all in all, we feel demand and pricing is pretty favorable.

But are you seeing anyone excited enough about pricing to go out and add capacity?

We have not heard of any announcements. That has been the case in the past. When the world looks rosy, they throw up a plant. But at this time, we have not heard of any announced plant, or any rumors of any announced plants to be built.

And what would the lead time be if somebody tried to build a new one?

You know, Jeff, you're a pro in the space. You have to determine whether it's on an existing complex or not. If it's not, I'm not sure there is enough lead time. And that's just my opinion. If it's within a complex, 2 to 3 years -- that kind.

Now again, as I think I've noted, Bayer has the capacity to increase their production by about 170,000 tons for their own use. They are wired and plumbed to do that; they just have to put the cells (ph) in. They're the only ones that I know of that could just plug cells in. And so they probably have a shorter timeframe than any of the other parties.

Thanks.

Jeff, because you are such a student of the market, may I ask you a question, which is unusual -- what is your assessment of the lead time?

If we were financing at it would be a very long time. (laughter)

No, answer the question you asked me. Not if you were financing anything, but if someone was doing it, would you agree with the 2 to 3 years?

It would seem to be hard to get coring permits, right --?

I think so -- that's why I say, if it's not on an existing complex, I'm not sure you could do it.

(OPERATOR INSTRUCTIONS) There are no further audience questions at this time.

With that, that will conclude the third-quarter conference call. And we appreciate the participants and appreciate the questions that were asked this morning. Thanks for everyone's --

That does conclude the conference call for today. Thank you for your participation and ask that you disconnect your lines.