Olin Corp (OLN) 2005 Q2 法說會逐字稿

Good day and welcome to the Olin Corporation second quarter 2005 earnings conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Chairman, President, and CEO, Mr. Joseph Rupp. Please go ahead, sir.

Good morning. And thanks for joining us today. With me this morning are John Fischer, our Vice President and Chief Financial Officer, John McIntosh, President, Chlor Alkali Products; and Dick Koch, Vice President, Investor Relations. Last night we announced net that income in the second quarter of 2005 was $32.1 million dollars or $0.45 per diluted share compared with net income of $10.4 million or $0.15 per diluted share in the second quarter of 2004. Our second quarter results reflect improvement in both chlorine and caustic soda pricing, and as a result Chlor Alkali products achieved its third quarterly earnings record. Results were adversely affected by a higher level of legal and legal related settlement expenses associated with legacy environmental issues. Despite these higher legal expenses, we reported earnings in line with our expectations.

In the third quarter of 2005, Olin expects earnings to be in the $0.40 per diluted share range. Earnings in Chlor Alkali are expected to remain strong in the third quarter with slight improvements in ECU pricing likely more than offset by somewhat lower volumes and seasonally higher electricity costs. Winchester earnings are projected to increase significantly from the second quarter due to normal seasonal strength in the commercial business and continued strong levels of military sales. Metals third quarter earnings are expected to be lower than the second quarter due to seasonal customer shut downs. The higher level of legal and legal related settlement costs are the result of the concentration of activity on several cases into the second and third quarters of 2005. We expect these expenses to return to more normal levels in the fourth t quarter.

Now, let me turn to Olin's second quarter results by segment starting with Chlor Alkali products. Chlor Alkali sales for the second quarter of 2005 were $158.3 million. That compares to $106.6 million in the second quarter of 2004. The increase reflects a 68% increase in ECU prices and a 4% decrease in chlorine and caustic volumes. Chlor Alkali's segment income during the quarter was $64.8 million. That compares to 9 million in the second quarter of 2004. The significantly higher level of income reflects the impact of higher prices, partially offset by higher electricity costs and decreased volume.

To put our second quarter into perspective, Chlor Alkali operating income of 64.8 million was a record, exceeding our previous record of 58.6 million set in the first quarter of 2005. Our ECU netback, excluding Sunbelt, was approximately $505 dollars in the second quarter of 2005, compared with 300 in the second quarter of 2004, and 485 in the first quarter of 2005. Our selling prices increased more than our netbacks would suggest because our netback includes the impact of fuel surcharges, freight and other logistical costs which have increased over the past year. Performance at our SunBelt joint venture was also significantly better than the second quarter of 2004.

In the third quarter we expect further improve in the our ECU prices based on the implementation of the previously announced caustic price increase. In addition, in the third quarter we will begin renegotiating contracts expiring at year end to reflect current market conditions, which in some cases are quite different than when the contacts were initiated. Particularly some of the multiyear contracts. Also, we have other contracts that do not expire at the end of the year which contain a mechanism to reset contract price caps. Our second quarter chlorine and caustic sales volumes were up sequentially from the first to the second quarter. Our operating rate for the second quarter was 97%, which compared favorably to the industry operating range of 93% and 91% respectively. Those are for the first two months of the quarter. Industry data for June is not yet available.

Industry operating rates were reduced by scheduled and unscheduled outages at our competitors' plants. We expect our operating rate to decrease in the third quarter because of a variety of factors, including a scheduled maintenance turnaround, a few short duration unscheduled outages at our largest plant and as well as our managing production to avoid peak electrical prices. We continue to experience high electricity costs in our Chlor Alkali business. Systemwide these costs have increased somewhat from the 2004 levels. Electricity costs are typically higher in the second and third quarters of the year.

Now, I'm going to turn to metals. Sales for the second quarter of 2005 were $355 million compared to sales in the second quarter of 2004 of $329.4 million. The increase in sales is primarily due to higher copper prices in the second quarter of 2005 compared with 2004. Shipment volumes in the second quarter of 2005 decreased 4% from the second quarter of 2004. Shipments to ammunition and coinage customers were strong in the quarter and increased 52% in ammunition and 37% in coinage, compared to the second quarter of 2004. Shipments to building products, automotive, and electronics customers declined from the second quarter of 2004 by 9% in building products, 16% in automotive, and 4% in electronics.

The metal segment reported income of 13.3 million in the second quarter of 2005 compared to 10.7 million in the second quarter of 2004. Earnings in the second quarter of 2004 were negatively affected by approximately $4.7 million due to a fire that occurred in the hot mill production area. As we look at the strip and rod businesses, we estimate that year-to-date industry demand through May was behind 2004 by approximately 10%. With the exception of ammunition and coinage, most major metals market segments are weaker than 2004. In the third quarter of 2005, we expect that our strip and rod shipment volumes will be down from second quarter of 2004 - - 2005. The sequential decline is because of normal customer shut downs in the summer.

Winchester. Winchester's 2005 second quarter sales were $80.4 million compared to $70.5 million in the second quarter of 2004. The increase reflects higher military and law enforcement sales. Commercial sales in the quarter were slightly below the second quarter of 2004. Winchester generated breakeven results in the second quarter of 2005 compared to income of $3 million in the second quarter of 2004. This was due to higher manufacturing and material costs, including commodity metals, which more than offset the impact of the increased volume and increased prices to commercial customers. As we mentioned in January and April calls, higher commodity costs particularly for lead and copper are an issue for the entire ammunition industry in 2005.

Price increases have been implemented, but we have not fully recovered these higher commodity costs. The Army recently notified the supplemental ammunition procurement bidders that an award will be made no later than September the 15. Now let me turn the microphone over to John Fischer, our Chief Financial Officer, and John will review several financial items with you. John.

Thank you Joe. As Joe mentioned, our second quarter earnings met our expectations and we continue to be pleased with the earnings performance of our Chlor Alkali division. Now, let me discuss a few items on the income statement. Selling and administrative expenses as a percentage of sales were 7% in both the second quarters of 2005 and 2004. Selling and administrative expenses in the second quarter of 2005 were $7.6 million higher than in 2004 primarily due to higher legal expenses related to the concentration of activity on several legacy environmental issues in the second quarter of 2005.

We expect the higher level of legal expenses to continue into the third quarter and then return to more normal levels in the fourth quarter. A portion of these expenses relates to opportunities for Olin to recover costs incurred and expensed in prior periods. The earnings of nonconsolidated affiliates were 9.8 million for the second quarter of 2005, an increase of 8.8 million from 2004, primarily due to higher ECU selling prices at the Sunbelt joint venture. Our tax rate was 39%, consistent with our prior guidance. We do expect that the tax credit for U.S. manufactured sales that was included in the Jobs Creation act of 2004 will gradually reduce our effective tax rate over the next several years.

Looking at the balance sheet. At the end of the second quarter of 2005, we had cash and cash equivalents of 146.5 million compared with 117.8 million at the end of June, 2004. Our working capital has increased this year by $52 million, reflecting higher ECU prices in Chlor Alkali and higher copper prices in metals. The average COMEX copper price has increased 24% and average ECU selling prices have increased 23% from the fourth quarter of 2004. Deferred income taxes decreased from 98.5 million in June of 2004 to 56.2 million in June of 2005 . As we were able to realize the tax benefit from our 2004 pension contributions, which have reduced our tax liability and have positively contributed to our cash flow this year. Our depreciation and amortization in 2005 will be in the $73 million range.

Capital spending for the second quarter of 2005 was 15.2 million and we continue to expect that our capital spending in 2005 will be in line with our depreciation. This level of capital spending represents a significant increase over the past four years and reflects more maintenance spending on our Chlor Alkali business and cost reduction spending in Winchester. I want to emphasize that we will continue to exercise the capital spending discipline that has been in place over the past several years. In June, we repaid $50 million of debt that matured. This repayment reduced our debt to total capital ratio to 39% as of June 30, 2005. We plan to continue to be cautious in the deployment of our cash balances.

As you know, on Tuesday the Board of Directors declared a quarterly dividend of $0.20 on each share of Olin common stock. This is the 315th consecutive quarterly dividend to be paid by the Company.

Before we conclude, let me remind you that throughout this presentation we have made statements regarding our estimates of future performance. Clearly these are forward-looking statements and results could differ materially from those projected. Some of the factors that could cause actual results to differ are described in our most recent Form 10-K, and as updated in our quarterly reports on Form 10-Q, and in our second quarter earnings release. A copy of our prepared remarks today will be available on our Website in the Investor section under Recent Press Releases and Speeches, together with the earnings press release and other financial data and information. Operator, we're now ready to take questions.

[OPERATOR INSTRUCTIONS] We go first to Frank Mitsch with Fulcrum Global Partners.

Good morning Joe. You incurred about $0.06 a share in higher legal and legal related settlement costs in the second quarter. Could you do two things for me? One is explain in a little more detail what does that specifically refer to and then secondly with respect to your outlook for the third quarter, how much do you anticipate the legal and legal related settlement costs to negatively impact third quarter earnings?

Yes. I would just take it, Frank, back to what we said in the release is that we had some activities that got compressed on us. In other words, a couple of areas that we had to get involved in both. And what we said is a portion of the expense relates to opportunities for Olin recovery costs incurred and expenses in prior periods as well as some activities with some prior sites. We anticipate - - and, John, you can correct me if this is wrong, that the costs should be somewhere in the same range in the third quarter and then we believe that they'll come back to more normalized range in the fourth quarter.

So another $0.06. And you're talking about that this is related to - - part of this is related to recover costs expended in prior periods?

The opportunity to recover costs expended in prior periods.

So assuming that you're successful in this, what sort of dollars are we talking about?

I guess I would say we're not in a position to quantify that. I would tell you that we believe the opportunities are meaningful enough to invest legal fees to pursue them.

All right. So we're going to be flying blind here until there's a judgment awarded? Is that fair?

That would be fair.

So potentially you're going to recover these dollars expended. Thinking - - what sort of timeframe would you suppose, if you are successful, that you would more than recover the fees that you're expending today?

I don't know that we can put a timetable on that right now, Frank.

Okay. The suggestion that Chlor Alkali results in 3Q would be below 2Q struck me as a little bit surprising given that some of your contracts have a delay. So the price increases that the industry has already implemented in 2Q, some of that will flow into 3Q followed by the $30 - - or a portion of that $30 caustic increase coming into 3Q. So we're looking at least for Olin pretty sizeable or decent improvement in the ECU value. You mentioned on the call that you have a turnaround and as well as some unplanned outages on the Chlor Alkali. Can you quantify what the negative impact of that is and then just backing up a second, McIntosh, is my view of pricing of what you'd realize is that accurate?

Well, Frank let me talk to the outages first. The real issue in the third quarter is if we have a volume decrease quarter-over-quarter. We have always had it planned out in McIntosh in the third quarter -- towards the end of the third quarter, that's five days of duration. In addition to that, we have had the impact of Hurricane Dennis earlier this month and some unscheduled outages related to equipment malfunctions at our largest plant, which have also occurred earlier this month. We also are in a situation in the last two weeks, we have seen some of the highest energy pricing that we have seen historically not only just in our system but really for electricity prices across the eastern half of the U.S. As a result of that, when the opportunity has existed, we have used our ability to manage where we make product or our ability to take voluntary curtailments to manage through those high prices, and some of that activity has also occurred in July. And so that's the volume story.

Back to your question on the price story. There - - we do - - we are saying that we will have a price improvement quarter on quarter. However, your characterization of it as significant I think is more aggressive than we would say. We had an improvement from second quarter to third quarter. We continue to have the positive ability to raise prices. Right now the caustic price increase of $30 that was announced for July 1 implementation is really what's on the table in terms of an opportunity for us to get as our contracts allow into the third quarter.

And so in terms of catch up on chlorine and caustic from prior quarters, you would not realize any of that 3Q relative to 2Q?

There is some catchup, but it's not significant. There was really only $20 of chlorine on the table a quarter ago and $40 of caustic on the table a quarter ago. Some of those increases we were able to get in our second quarter results. So there is always some carry-over into the second quarter after the increase is being implemented. But it's not significant.

And then just getting back to the volume issue, do you have a size of impact - - negative impact - - on the planned and unplanned outage for 3Q?

Well, I mentioned the planned outage is a five-day outage at our McIntosh site. And we have typically not given out volume numbers. I would say that quarter-over-quarter from '04 to '05, our volume numbers are roughly the same in the third quarter comparing year-over-year.

Thank you.

We go next to John Roberts with Buckingham.

Good morning, guys. If the ECU were to stabilize at the currently high levels, how long would your average realized prices continue to go up?

John, we have several opportunities to continue to move pricing up as long as the current pricing environment stays where it is. First of all, we do have the ability for the increases that are still on the table that we haven't implemented yet to get those into our system and we're working very hard and feel good about our ability to do that over the balance of this year. We also will be renegotiating contracts in the second half of this year that would - - that will expire in '05. And we'll be renegotiating contracts with an objective to have them mirror the current market conditions. In some cases, depending upon the age of these expiring contracts, they may not necessarily reflect current market conditions. However, even in the absence of any further price increases, as long as the current pricing environment holds, we do have existing contracts that, by virtue of the way the contract is designed and structured, any contract caps or limits themselves at the reclock beginning of the calendar year. So we don't feel that - - we feel very positive that we have opportunity in front of us. Looking forward to continue to move our price.

And again if the market price is relatively stable at the currently high levels, should we think of, like, $5 to $10 million sequential rate of progress as you move along in your contracts?

John, we don't typically forecast an absolute number for pricing going forward.

But there shouldn't be any big discontinuous jumps, should there?

I wouldn't expect there to be, no.

And secondly, Joe, how do you reconcile the metals - - the volume performance in metals in the economically sensitive areas? Not the ammo and coinage but housing, automotive. How do you reconcile that with the macroeconomic trends we saw in the last quarter?

We think there's a couple things going on. First and foremost in automotive, which is a significant market for us, there was a significant pulldown from an inventory point of view and a pullback by the auto manufacturers from a build perspective, so that has had an impact on that segment of the business. Electronics, as you know, had slowed down at the end of last year. It's still a little bit slow on a global basis although somewhat picking up. In housing what we're seeing is - - in housing and electrical we're seeing, we believe, some issues as a result of the high price of copper. Copper has gone up - - I think it averaged $1.53 in the last quarter. It's now at $1.62 and is really putting some constraints on people wanting to buy and buy from an inventory perspective. So I think those elements are affecting us. There's a little bit of offshoring, we believe, that continues. But we believe that the other factors are the significant factors that are affected in the metals segment.

So, you think there's some demand elasticity happening in the housing and electrical market? It's going to be very hard to get further passed through if the raw materials went up, if copper went up further? Would you have trouble passing - - you've got contracts.

I don't think that's an issues as much that from an inventory point of view people are really watching what they buy and how much they buy and the timing in which they buy it. And I that's I think, affecting all fabricated parts of the copper based materials, rod and tube products as well.

Thank you.

We go next to Les Ravitz with John.

Good morning. A few questions and some rhetorical comments. One is can we assume that, if you have 14 million of unusual legal costs in the second and third quarter, that the expected recovery is multiples of this?

I'm not prepared to quantify it at this time.

I'm not asking for a number. I just don't want to hear that we're going to spend 14 million and our outcome could be maybe getting back 10 million.

I guess I would repeat what I said before that we consider the opportunities to be meaningful enough to invest the legal dollars.

So then you agree with me that the expected outcome is greater than 14 million? God, that's hard to get out of you.

He was trained by Tony.

Tony's no longer the boss. We're going to talk about that. That's a point that is the rhetorical part of my comments. And that is that I did a little look on my charts 'cause I'm such a detailed fundamental analyst, and your stock price in 2002 in July was higher than what it is today. Now, during this period, you have made acquisitions. You have issued equity. And you have not created any value for your shareholders. And so you talk about a buildup in cash and you talk about the fact where your debt is today, and you're talking about sustaining a credit rating. I've been asking you, Joe, for a couple three years what type of game plan or strategy you have to go forward to create value for the shareholders? And so far we haven't heard anything, so I just opened the question again. And that is what is the long-term strategy for Olin? What do we expect as shareholders to see?

Les, as we've said consistently, we've got a great cycle running from the Chlor Alkali perspective. We're optimistic about the opportunities on that side of the business. Our metals business has fought back from a cost side. And we believe that there are some opportunities within that business to generate some more profitability there. Our Winchester business, as you know, we're invested in some lower cost manufacturing and have bid aggressively on the second source opportunity. And what we've said in response to the cash question for the near term is that we're being prudent with what we're doing with the cash at this point in time. Recognizing the fact that, from a shareholder perspective, there's lots of ways to create value. Paying down the debt, paying the dividend and also making prudent investments are ways to do that. And we take all those into - - we're taking all those into account at this point in time.

Could you comment on where we stand in the second source issue?

The second source issue, Les, what's happened there is that the government actually asked for a best and final offer or bids, which were submitted about two weeks ago, and we have been told that they will make a decision no later than September the 15. And our sense is that there is no question that the military needs the ammunition and wants the ammunition and that they're going to make an award and get on with it. And we're anxiously awaiting their decision.

Thank you.

We go next to Richard Diamond with Inwood Capital.

I'd like to follow up on Les' question and take it from a more philosophical level. Since I calculate you'll basically be debt free - - net debt free by the first half of '06, would you consider more aggressive actions such as taking the Company private? Especially in light of the lack of the respect, quite frankly, that the Street accords Olin right now?

I don't know if we would comment on something like that at this point, Richard. I think what your question is, is will we continue to look at ways that we could create value for the shareholders, and the answer is yes.

Are there any limitations to the actions that you will consider? Are you fairly open to it?

What we've always said in the past is that we would consider anything that would - - anything and all things that would create value for our shareholders.

Right. It's interesting to me you guys have gone a yeoman's job in turning this Company around. You've never missed a dividend. And on a competitor's call, they mentioned that Shintec(ph) will probably not be operating till mid to late '07 so we could have another theoretically year to two and a half years of stellar ECU prices. It must be frustrating for you that not a lot of people are recognizing this value.

It's always frustrating. We would like to have our value recognized. There's no question about that.

Thank you very much.

[OPERATOR INSTRUCTIONS] We go next to John Carson with Merrill Lynch.

Thank you. Just a couple of clarifications on ECU pricing. You mentioned that the 505 realization is really up more than the $20 sequentially that that would indicate. What exactly has been the impact of freight costs, fuel surcharges? And on an ECU basis, what has been the impact sequentially of the higher power costs?

Don, this is John. You're asking me to quantify two pieces of what I consider to be some of the most competitive information associated with the business, and I'm not going to be able to quantify either. I will say, talking more from a qualitative standpoint, that the fact that when we reported netback, it is a number that we have seen erosion in when you go back and make a year ago comparison because we have seen fuel surcharges. We have seen increased freight costs. We have seen increased distribution costs. And when you add all of those together, it is not an insignificant impact to our reported ECU netback. In other words, it does have an impact. And there is an erosion associated with it. The electricity cost that you're asking for again, very competitive. And I don't want to quantify what that number is. I guess other than to say that it's a single digit kind of percentage change that we've seen.

Let me ask you another way. With these recent high electricity costs, have you lost your competitive advantage vis-a-vis most of your competitors who are running co-gen units?

No, sir. We think not. You have to recognize that these high costs for electricity are really not indicative of the entire range of - - the entire set of blocks of electricity that we would purchase. They're only indicative of what the true last kilowatt hour of energy you buy, peaking power for the incremental last ton you make. And that's a reflection of where the high costs are. When you look at base electrical pricing, although we've seen increases, we have not seen increases significant enough to disadvantage us relative to the marketplace.

Then a question on your contract renewals as they come up. What percentage of your contracts are reopening totally that presumably you would have the flexibility to remove any caps and start getting closer to an industry benchmark price? On the second group where you can reset price caps on existing contracts, is there a certain limit as to how much you can reset, a certain - - or are you free to reset it at what the current industry benchmark is?

Let me deal with your first question first Don. We said typically that our contract support folio has been in contracts that range from a three- to five-year duration. And if you look at that as an average, that can give you a bracket around which you can make some assumptions about how much of our contracted volume we would, in an average year we would be looking to renegotiate. In terms of limitations that might exist on resetting caps, it varies on a - - really on a contract by contract basis. In some cases, there is a fixed adjustment that the contract allows. In some cases where contracts are indexed, the number is not necessarily fixed, and we're able to make larger movements in those ceiling values. But it's really dependent upon the contract that you're dealing with.

Final question. You mentioned that you have a number of unimplemented increases. Is it really just the $30 July 1 caustic increase or is there some portion of the chlorine that you still haven't fully implemented? I just wondered if you would quantify the opportunity there.

I think what I wanted to convey earlier was that, for the most part, what's left on the table for us in terms of an opportunity is the $30 caustic increase that was announced in the second quarter to be effective as contract conditions allow July 1. So that's really the opportunity that we have in front of us.

Thank you.

That concludes today's question and answer session. At this time I'd like to turn the call back over to senior management for any additional or closing comments.

Thank you for joining us today. And we'll look forward to joining you at the end of the third quarter with the results of our third quarter. Thank you.

That conclude's today's conference call. Thank you for your participation. You may now disconnect.