Olin Corp (OLN) 2005 Q3 法說會逐字稿

Good day and welcome to the Olin Corporation third quarter 2005 earnings conference call. This call is being recorded. [OPERATOR INSTRUCTIONS]. At this time for opening remarks and introductions, I would like to turn the call over to the Chairman, President, and Chief Executive Officer, Mr. Joseph Rupp. Please go ahead, sir.

Good morning and thank you for joining us. With me are John Fischer, Vice President and Chief Financial Officer, and John McIntosh, President of Chlor Alkali Products.

Last night we announced that net income in third quarter 2005 was $31.4 million, or $0.44 per diluted share, that compares with net income of $18.7 million, or $0.27 per diluted share in the third quarter or 2004. Net income for the first nine months of 2005 was $100.7 million, or $1.41 per diluted share, compared with net income of $32 million, or $0.47 per diluted share in the first nine months of 2004. Sales in the first nine months of 2005 were $1 billion, 753 million, compared to $1.5 billion in the first nine months of 2004. Our third quarter net income of $0.44 per diluted share is in-line with the updated guidance we provided on October 4th .

Earnings in our Chlor Alkali business more than doubled from the third quarter 2004, as higher ECU netbacks more than offset lower volumes. Our third quarter ECU netback improved to $515 per ton, compared to $335 in the third quarter of 2004. Profits in our Metals business declined, as we continue to experience lower volumes than 2004. In addition, we experienced increased costs partially due to higher energy costs and hydrogen unavailability.

The results in our Metals operations are clearly unacceptable, and we are initiating a series of actions to optimize manufacturing capabilities, and to improve the profits of our Metals business. These actions will likely include a combination of plant closures, realignments, and head count reductions.

Earnings in the fourth quarter of 2005 are projected to be in the $0.25 per diluted share range. This forecast reflects the continued strong Chlor Alkali pricing environment, partially offsetting weaker volumes. Historically weak fourth quarter demand and the continuing effect of higher commodity and energy costs will continue to impact results from both Metals and Winchester.

The fourth quarter earnings projection does not reflect possible charges associated with the Metals actions, and the possible recovery from third parties of environmental costs incurred and expensed in prior periods. In addition, the fourth quarter earnings projection does not reflect a noncash, pre-tax charge for an accounting change, required to comply with Interpretation 47 of FAS-143, which is accounting for asset retirement obligations.

Now let's turn to Olin's third quarter results. I'll begin with Chlor Alkali. Our third quarter was particularly challenging in Chlor Alkali, as we suffered through precautionary shutdowns, due to hurricanes Dennis, Katrina and Rita, and saw significant interruptions and disruptions, to both customers, and in our transportation capabilities. These disruptions have continued into the fourth quarter, as one major Gulf Coast customer remains closed, and several others continue to operate at reduced rates. Many of our major chlorine customers operate on the Gulf Coast. The good news for Olin is that our Alabama location in Mackintosh, Alabama, did not sustain any damage.

On the transportation front, primarily as a result of the hurricanes, we have seen the need to reroute shipments which has increased our costs. In addition to the impact of the hurricanes, we saw some slowing of chlorine demand in the vinyls, and in the urethane segments during the quarter. Chlor Alkali sales for the quarter were $151.5 million, compared to $111.7 million in the third quarter of 2004. This increase reflects a 54% increase in ECU netbacks, and an 8% decrease in chlorine and caustic volumes.

Chlor Alkali segment income during the quarter was 57.3 million, compared to $21.6 million in the third quarter of 2004. Higher ECU netbacks more than offset lower volumes and higher electricity costs. Despite some significant challenges, the segment income represents the third highest level ever for our Chlor Alkali business.

Our ECU netback excluding Sunbelt was approximately $515 in the third quarter of 2005, compared to $335 in the third quarter of 2004, and $505 in the second quarter of 2005. We expect further improvements in our ECU netbacks in the fourth quarter, based on the implementation of a $50 caustic soda price increase, which was announced in August, and a $20 chlorine price increase, which was announced in September. A second caustic price increase of $75 announced at the end of September should improve our ECU netbacks in 2006.

In addition in 2006, we will see additional improvement, due to the benefit from favorable contract rollovers, and price resetting. We expect volumes to decline slightly further in the fourth quarter, as we experience both normal, seasonal weakness, and the impact of continued disruptions among our Gulf Coast customers. A September maintenance turnaround scheduled for Mackintosh in Alabama was delayed, due to a lack of equipment and contractors, and had been rescheduled to the late fourth quarter, or early in the first quarter of 2006.

For these reasons, we expect operating rates in the fourth quarter to be approximately 85%, and that compares to our third quarter operating rate of 87%. During the third quarter, we announced plans to increase our production capacity for bleach, at each of our four manufacturing facilities. We believe that the markets for bleach are both stable and growing, and provide an outlet for both chlorine and caustic soda. Bleach is a regional business where transportation costs are an important competitive factor, and the co-location of bleach manufacturing with chlorine and caustic production, provide Olin with an important advantage.

Now let's turn to Metals. Metal sales for the third quarter of 2005 were $347.1 million, and that compares to $313.8 million in the third quarter of 2004. The increase in sales reflects higher copper prices, which more than offset lower shipment volumes. The average price of copper increased from $1.29 per pound to $1.70 from the third quarter of 2004 to the third quarter of 2005. Third quarter 2005 shipments were down approximately 5% in the strip business, and 9% in the rod business, when compared to the third quarter of 2004. Shipments in coinage were up 7%, were flat in ammunition, and declined by roughly 9% in electronics, automotive, and building products.

On a year-to-date basis, through August, Olin strip and rod volumes have declined 4% and 6% respectively. For that same time period, total industry strip and rod volumes have seen a greater decline, of 11% and 9% respectively.

The Metals segment reported income of $2 million in the third quarter of 2005, that compares to $14.1 million in the third quarter of 2004. The combination of lower volumes, higher maintenance costs associated with the turnaround at our East Alton facility, and higher natural gas prices, and reduced hydrogen availability, unfavorably impacted pre-tax profits during the quarter. We believe the negative impact of higher natural gas prices will be greater in the fourth quarter and will continue into 2006.

As we stated in the press release, we have initiated a series of actions to improve the profits of our Metals business. These actions will likely include a combination of plant closures, realignments, and headcount reductions. We anticipate these actions will be completed in 2006. After we finalize and begin the implementation of these actions, we will provide details on their likely timing, and the projected financial impacts.

Now I'd like to talk about Winchester. Winchester sales for the third quarter were $100.4 million compared to $94.6 million in the third quarter of 2004. The increase is the result of higher sales to the commercial market, military, and law enforcement customers. Segment earnings declined from $10.4 million to $4.7 million as Winchester continues to be impacted, by higher copper, led, steel and resin costs, as well as startup costs at the Oxford, Mississippi facility. In August it was announced that a General Dynamics team, in which Olin participates was awarded the second sourced small caliber ammunition contract. Winchester should begin to realize meaningful revenue from the contract in the second half of 2006.

During the quarter we continue to experience an high level of legal and legal-related settlement expenses, primarily associated with legacy environmental issues. We did realize a $18 million recovery from a third party.

And before I turn over to John I want to remind you our labor contract in our East Alton location expires on December 4th, and we are currently in contract negotiations with that. Let me turn the microphone over to our Chief Financial Officer, John Fischer, who will review several financial items with you.

Thanks, Joe. I'd like to discuss a few items on the income statement. Selling and administrative expenses as a percentage of sales, increased from 6.8% in the third quarter of 2004, to 8.1% in the third quarter of 2005. Third quarter 2005 selling and administrative expenses were $12.7 million higher than the third quarter of 2004, primarily due to higher legal and legal-related settlement costs. In our July call we indicated that we expected a high level of legal expenses in the third quarter, due to a concentration of activity, which included opportunities to recover costs incurred and expensed in prior periods. A $18 million recovery was realized in the third quarter.

We expect additional recoveries over the next few quarters. Fourth quarter legal and legal-related expenses will continue to exceed the levels experienced in 2004. The earnings of non-consolidated affiliates were $8.5 million during the third quarter of 2005, a increase of 5.2 million from 2004, primarily due to higher ECU selling prices at the Sunbelt joint venture. Our tax rate during the quarter was 38.7%, slightly below our prior guidance of 39%. We still believe the full year rate will be approximately 39%.

Looking at the balance sheet, at the end of the third quarter of 2005, we had cash and cash equivalents of $227.1 million, compared with 92.3 million at the end of September 2004. A September 30, 2005 our investment in receivables was $305.6 million, which reflects higher ECU prices from Chlor Alkali, and higher copper prices in Metals. The average COMEX copper price at the end of the third quarter had increased 20% from December 2004, and has increased further during October. ECU selling prices have increased approximately 26% since the fourth quarter of 2004. These increases have been partially offset by inventory reductions in the Metals business.

Deferred income taxes decreased from 128.1 million in September of 2004 to 59.6 million in September 2005, as we have continued to realize the tax benefits created by our 2004 pension contributions. The utilization of these deferred tax assets have positively contributed to our cash flow this year. We continue to forecast that depreciation and amortization for 2005 will be in the $73 million range. Capital spending for the third quarter of 2005 was $18 million.

The major components of our spending this year, have been the relocation of a product line in Winchester to Oxford, Mississippi, and an increase in maintenance and reliability projects in the Chlor Alkali operations. Capital spending for the full year of 2005 will be between 70 and $75 million. Spending in our Metals segment has been reduced, and we are evaluating additional projects in the Chlor Alkali division, which could cause spending to be at the high end of the forecast range.

In spite of a 2005 capital spending forecast that is significantly higher than the past four years, I want to emphasize that we will continue to exercise discipline in this area. During the quarter, we made a $6 million voluntary contribution to our pension plan. This contribution allowed us to achieve a 90% risk of funding level for the second conservative year, which allows us to avoid mandatory contributions for two years. We may elect to make additional voluntary contributions in the future, as conditions warrant.

One final note that relates to our Metals business, Delphi, through its Delphi Automotive subsidiary is a customer of our strip business. As you are away aware they filed for bankruptcy protection in early October. Because of steps we had taken early in this year, this filing will not impact our fourth quarter earnings.

As you know yesterday, the Board of Directors declared a quarterly dividend of $0.20 on each share of Olin common stock. This is the 316th conservative 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 are updated in our quarterly reports on Form 10-Q and in our third quarter earnings release. A copy of our prepared remarks today will be available in our website under the Investor section under Recent Press Releases and speeches, together with the earnings press release and other financial data and information.

Operator we are now ready to take questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll take our first question from Richard Diamond with Inwood Capital.

Yes. Good morning.

Good morning.

If you could dimension for us in your Chlor Alkali business, the potential threat from Chinese caustic exports to the United States? I would be grateful.

Richard, this is John McIntosh. We think that the capacity growth of Chlor Alkali China is significant, and will continue to be significant. Currently import caustic volumes into the U.S. are roughly a million tons net a year. And we would expect over time for Chinese caustic to find its way into that import caustic volume number.

But in the near-term, I think we're comfortable that the majority of the caustic from the Chinese mainland, will find itself into the aluminum markets in Australia, and other parts of the world, where caustic is consumed.

Should we expect that the Chinese caustic will depress caustic pricing going forward in the U.S., or is it small enough not to be a factor, at least for the foreseeable future?

I think the answer to that question is one that I can't predict because it depends really on a couple of factors. It depends upon how many of the planned or proposed chore Chlor Alkali plants that have been mentioned in China actually get built, and it secondly depends upon the internal consumption of caustic within China's own economy.

Those are two pretty significant unknowns at this point in time. But as the answers to those questions evolve we'll have a better picture for how much caustic coming out of mainland China there will be, to be sourced into other parts of the world.

Now, last two questions. Do we see this as being a '06 issue or is it beyond? Do your predictions go beyond that?

We don't see it as being a near-term issue.

And secondly, on previous calls there have been a number of questions about appropriate levels of leverage. And it looks like Olin will be net cash positive by year end. If we could understand your thought process now from share buybacks to special dividends, I would be grateful. Thank you.

Richard, this is John Fischer. I guess we would say that we are going to continue to be very cautious as we look at our balance sheet. This net debt position is relatively new. And if you look at what we've done over the past 12 months, we've repaid a significant amount of debt. I think that's been about 75 to $80 million, and we are constantly looking at initiatives to try to improve the value of the business.

These initiatives that we've looked at have been small initiatives that have had quick paybacks. A couple of examples that I'll give, are last year we made an announcement in the regarding K.O.H. in our Chlor Alkali business. Joe just talked about some investments in the bleach business. We've also invested in relocating a portion of our Winchester business to improve the profitability and the cost structure, and as Joe said in his remarks we're looking at how do we improve the Metals business.

Thank you very much. I'll get on line to ask more questions after others. Thank you.

Thank you.

We go next to Kunal Banerjee with Morgan Stanley.

Hi. Good morning.

Good morning.

Just an few questions on the Metals side. Because one of the presumptions here was that Metals was going to kind of hold up, and then you'd get the Chlor Alkali story to work for the stock. When I look back over the last three years, '01, '02, '03 were pretty poor years, specifically '03 on the Metals side. Then the last two years you actually kind of came off that bottom and were doing okay. And then the fourth quarter obviously you had a downturn.

So my question is, all of this restructuring that you're now going through, is that precipitated by your outlook into '06, which is telling you that '06 would be even worse, or is there some delay? I know you have taken some action against or in idling the Indianapolis mill. What restructuring are you going to be doing? More importantly is this because you think you're looking out to '06 and '07, and you see some structural issues in the business?

I think that your observation is totally correct. Obviously we had a downturn in the business as you point out, '01, '02. '03 we were on a good growth curve I think coming out of that trough in 2004, and through the first half of 2005. Our concerns at this point in time is that there has been volume dropoff and we believe that some of our segments do have some pressure, which weren't there in the past. For example, Automotive which is a major market for us, and some uncertainties that occur with what's going on at Delphi, et cetera.

That coupled with the fact that we do have cost issues on the Metals piece that we didn't have before, we have energy costs for natural gas, we've recently had a hydrogen issue, longer term the copper cost is an impact on how customers buy, what kind of inventory levels they want to have, and it does effect us a little bit. It does effect us in our plant waste, what we call shrinkage.

So our belief is we still have the opportunity to improve that cost structure. As you know woo have 8 manufacturing locations, plus roughly 8 distribution locations in North America, and we believe that we can still work on the cost side of the business, and improve the returns of it. So that's what we're attempt to go do.

Now, you've lost less volume relative to the industry. I'm just trying to get an sense for you know the other big competitive in strip I guess is P.M.X. Do you have any intelligence on how they're doing, and in the 9% loss that you quoted in the ROD, could you give us some sense for how much is being offshored, versus how much is just demand destruction, like you just cited in response to the previous question?

Yes. Let me say that, if I can say it correctly, I don't think that P.M.X. is -- it would be difficult for me to talk about competitors. I would just say on a global basis that the profitability is not where it needs to be with our competitors. And we'd like to believe that we, being a low-cost producer, have a preferred position with regard to the profitability.

Offshoring is a fact of life. I don't believe that it -- I think there is offshoring that's going on. We know that. I don't believe that there's a massive amount of offshoring, but I believe that there is a constant trickle of offshoring that's going on, and we have to adjust to those things.

As you know, we did make an investment in China. We have a distribution facility in China. We are currently in the process of expanding that, and adding stamping capabilities there. So we believe that there is opportunities for us to adjust with the tide, so to speak.

Okay. And then quickly on Chlor Alkali with the [Lindell] shutdown of the P.D.I. facility, any impact on your chlorine volumes? Or are you being able to find an home for those volumes?

Kunal, this is John McIntosh. In the quarter we saw some weakness in both urethanes and vinyls, pre-hurricane disruptions we had seen weakness in those market segments. Industry operating rates have been reduced by pretty much across the board. The latest industry operating rate number was in the 75% range for September.

What we've seen now, coming out of the disruptions from the hurricanes, is really a little bit of bounce back. We assume because that inventory levels in some of those key market segments have been drawn down, because of all the production disruptions in the Gulf Coast. So right now, you know, we're are managing the mix of both molecules, and as a matter of fact, we're well behind our shipment schedule on caustic.

But once we return to normalcy, is the shutdown of the P.D.I. facility going to have a big impact on your volumes or - ?

Kunal, Lindell was not a large customer of ours. So the impact to Olin is not significant.

Okay. Then lastly for John, there's been some talk about the requirement for all companies to totally fund up their pension plans, to kind of lift the load on the PBGC a little bit. Is that something that you're considering, or where do you stand on that? And where does this whole proposal stand, if could just give us a update on that?

It is something that we pay quite a bit of attention to. If you look at our third quarter balance sheet it would suggest that we have an underfunding of about $254 million. Which under at least one version of the plan would say you'd have to get fully funded, which would not be our objective, absent some change in regulation. So if something went through that said we had to be fully funded in some period of time, that would have a adverse effect on our cash flow.

Okay. Thank you.

We go next to Don Carson with Merrill Lynch.

Good morning.

Yes. A couple question on the Chlor Alkali side. I joined later. I don't know if you mentioned these. There's $125 of caustic increases on the table. Should you be able to realize all that this quarter? And what's your strategy going into next year, with the current tightness in the markets, and forecasts for continued tightness? Are you going to lift your caps with your customers?

Don, this is John McIntosh. In the remarks the $50 caustic soda price increase that was announced in August, we see impacting our ECU values, both in the fourth quarter of this year and on into 2006. The $75 price increase on caustic soda that was announced in late September should impact our results into 2006 as well. And then there was a $20 price increase on chlorine announced in August, or in September that we think will also impact our results in the fourth quarter.

So we have often said in discussions, that our best position is in a market with rising caustic prices. And sitting here in the fourth quarter with two announced price increases for caustic, and with spot caustic currently at $600 a ton, we believe we're well-positioned going into 2006 to realize some good value from these price increases that are on the table.

In response to your second question, the beginning of a year for our system typically afford us the opportunity to reset price caps. And we also have that opportunity in front of us. So we're very positive as we look forward, into our ability to move pricing in 2006.

And John, how much of your contracts typically rollover at year end? When you say reset, could reset mean eliminate entirely, as you roll these over?

When I say reset I'm really referring to contracts that we have in place, that have some kind of a ceiling or a cap. And in terms of how they react, it's really almost on an individual contract by contract basis. Some have fixed amounts that the ceilings can move. In some cases, the ceilings will disappear. Any new contracts that we've negotiated in the current market environment, we have taken advantage of putting in place contracts, where caps and ceilings are not a issue going forward.

And what percentage of your existing contract base would still have any caps or ceilings?

We have not disclosed that number quantitatively before. But I guess I would say that, we have said our average contract is 3 to 5 years in length. And so you can estimate from that, the kind of roll over we get on contracts on a annual basis. And as I mentioned earlier, we're working hard on new contracts to position ourselves with the current market situations, which is in part to eliminate those kind of caps.

One final question. What trends are you seeing in power costs as you go to renew your utility contracts?

Well, we don't have any utility contracts that we're currently renewing. At least in the '05-'06 timeframe. But in our plans where we buy realtime price power, especially when we're operating at high load factors, or near capacity operation, we do see electricity increases that are predominantly driven by the fuel costs that the utilities we buy from are paying.

Okay. Thank you.

We go next to Richard Diamond with Inwood Capital.

Yes. I'd like to ask a question of philosophy. And that is, you know, looking at the stock prices, Olin, it really hasn't moved all that dramatically even though the cash position of the business, the pension fund, have all improved dramatically. And your stock is really not a currency for doing acquisitions at this point. I'd love to here what your thoughts are, about whether Olin should remain a public company. And it's clear over your history from Arch Chemical, you've always done the right things. I would just like to hear your thoughts on remaining a public business. Since the valuation according to, the valuation that's being accorded to your equity right now is very cheap.

Richard, obviously this might not be the right forum to make an proclamation about something like that. I think that our belief is that we can deliver return to our shareholders by pursuing the path that we've been down, and that's by being a low-cost, high quality producer and ultimately earn our cost of capital over the cycle. And long-term that's what our strategy is, and will continue to be. And we believe that we can ultimately deliver that value to our shareholders in the public.

Thank you very much.

Thank you.

We go next to Les Ravitz with John Levin.

Good morning, gentlemen. John, if I understand you correctly you have a normal rollover contracts. But when you split off Arch, there was a long contract with them, that was on a favored nations basis. When does that contract expire?

Les, that contract has already expired and we're into a new contract from the initial one that was in effect after the spin.

Are there any other single large contracts, or large customers without naming them, and not naming the number of contracts, but large contracts that exist with caps that are going to come off over the next couple of months?

We have some contracts that we're that were negotiated in the 2001, 2002 timeframe. That will come off at the end of 2005, and either be replaced by rollover contracts with different price ceilings, or replaced with different contracts that have no price ceilings.

Okay. So is this a unfair question if we said that, if your contracts that do roll over just bring you up to market, or as close to market as your other contracts are, could you give us a indication of what that gain would be, if no other price increases took place in your average ECUs?

Les, we've resisted and I'm going to continue resist trying to forecast future ECU numbers.

Why are you trying to resist that?

That's just a matter of competitive information.

All right. Fine. Then Joe, just going back to your comments, and John on the balance sheet, on uses of cash, your stock's off about 20% this year. Your borrowing costs short-term are after tax significantly lower than your dividend yield.

So on a cash flow basis it's definitely advantageous to buy in shares and borrow money short-term. You have virtually no debt left on the books. What, 30 million of net debt. So what exactly is the logic to continue to pay dividends on these shares, and to build up cash? I'm having a tough time seeing how that creates shareholder value?

Well, I think we've always said that the dividend represents a major component of our shareholder value proposition. And I think when you look at having paid an dividend for 316 conservative quarters it's obviously important to the Company.

As I said before, the buildup of cash on the balance sheet is a fairly recent phenomenon. We've benefited from the Chlor Alkali earnings, and we've also benefited from the fact that those earnings have been essentially untaxed. When you talk about the change I talked about in deferred taxes. So I wouldn't say that we've had a long-term situation where this has occurred. And as my predecessor used to say, if you look at what happens over the cycle it argues for being very cautious.

Well, your predecessor sold stock what was it two years ago at 18? Stock's now at 17 you could buy that back and make $1 a share, which is probably higher a return than you're making in some of your other businesses right now.

Point well taken.

We go next to John Roberts with Buckingham.

Morning, guys.

Morning, John.

If I remember right you took an strike in your brass operations the last time you had a renegotiation, and now with the restructuring your announcing coincident, is that going to be a difficult renegotiation for you?

We're not anticipating that, John. We're anticipating a normal negotiation. We felt we should just call it to everyone's attention that we are in negotiations. In today's environment it's hard to predict.

Our objective it is to offer a fair contract and to get an settlement. It's a large operation for us.

Secondly, were all the Automotive, building materials, and electronics all down equally 9%?

All roughly about 9%, yes.

Then lastly in the business if I remember right the majority of material is scrap coming in. Does the scrap price instantaneously adjust for copper and nickel, or is there a lag that once copper and nickel stabilize, you might still be seeing your costs go up?

The scrap price, it doesn't always move exactly in lock step with the copper price. But it will lag it, normally. And then there's other factors which will effect it which will be availability of it. So it can actually not necessarily move always how copper does. But directionally it normally is going that way.

Just trying to figure out with Winchester which is where a lot of the margin pressure is from the Metals pricing going up, does that flow through, and will Winchester be under pressure for a little longer, than what we might see in the spot metals market?

Yes.

All right. Thank you.

We go next to Frank Mitsch with Fulcrum Global Partners.

Yes. Great question from John Roberts. Do you guys plan on updating us on how the labor talks are progressing?

Normally we don't give updates on that, Frank, in the past we have not given updates because it's just a thing that we, you're in negotiations and et cetera, you know, the contract is due in December, at the end of December. Not the end of December, December the 4th. And obviously we would give an update at that point in time.

Okay. So that would be the next milestone that we could look to. All right, Joe, thanks for anticipating my question on the operating rates 4Q versus 3Q on Chlor Alkali, you said they were going to be down 2% in the fourth quarter. Does that anticipate the turnaround occurring in December, or does that anticipate the Alabama turnaround in January?

Frank, this is John McIntosh. That number really assumes the turnaround will occur in December.

Okay. Great. Now, one would anticipate, given the price increases that you're realizing on the ECU in the fourth quarter, and that your input costs aren't rising as fast as perhaps the other folks located in the Texas, Louisiana, Gulf Coast area, that you should see some margin pickup in your Chlor Alkali business. So as you look at your Chlor Alkali segment for the fourth quarter, does the delta in shortfall in volumes, equate with the pickup in margins? Is that one way for us to look at that business?

That's close. Our volumes are slightly off. And we will see some slight improvement in ECU numbers. But we do have the impairment impact of a outage thrown in there from the cost side.

Okay. Fine. And then on the Metals business I would anticipate based on what you've talked about today, since you only earned 2 million in the third quarter, and you're citing higher costs in the seasonal slowdown in the fourth quarter, so we should be factoring into our models red ink on the Metals business in the fourth quarter.

Our sense is that we would be looking at a fourth quarter similar to the third quarter.

Okay. And then on the Winchester side of the business, you've got some of these smaller emergency contracts that you're working on, but generally the input costs are a little bit higher. I think, Joe, you said we should look at some of these other military contracts really helping out the second half of '06? Is that correct?

The second source, Frank, will kick in meaningfully in the second half of 2006.

Meaningfully in the second half of 2006. Did you make any determination on what percent of the 300 million bullets you would like to keep, versus others involved in the consortium?

That has not been totally firmed up at this point yet.

But suffice it to say that it's going to be enough for Olin, that we ought to be able to see these numbers in the second half of '06 in the Winchester business.

We've said all along that the second source will be meaningful to Winchester, and we continue to believe that.

Terrific. Thank you.

We go next to Robert Rice with Bear Stearns.

Yes. Just a couple housekeeping questions. You may have said -- I came in a little late -- on the pensions do you see any additions to the pension fund next year, or is that now up to date?

We said we made a $6 million contribution that brought us to a 90% risk of funding level that will allow us to avoid mandatory contributions for the next two years. And then we qualified that by saying we may make voluntary contributions if conditions warrant.

Okay. And right now, if you basically, you guide the Street down substantially, are all your facilities now fully up and running after the hurricane? Everything's okay?

This is John McIntosh. All of our plants are running. We obviously started the quarter off at a operating rate in our system less than the 85% that we forecast for the quarter. As our customers have resumed operations at their end, we have gradually increased our operating rates across our system. And so we're back up and operational, although not where we would expect to be before the quarter's over.

Is that part of the reason for the guide down, is just the facilities aren't 100%? Do you think they'll be 100% by the first quarter of '06?

We have said our operating facilities in our facilities will be 85% for the quarter. Obviously that's got to match pretty closely to the demand we're seeing from our customers. At this point in time, I don't want to forecast what first quarter operating rates are going to be.

Okay. And just obviously we just note directionally caustic prices are moving up pretty substantially. And I know you dodged the question for competitive reasons. If you guys continue to, for example, generate the kind of cash you're doing, is there a chance you're going to increase the dividend, or would you buy back stock? I'm just curious. How would you address that question?

We've addressed that question by saying we're going to be very cautious at this point.

And the last thing, when are you guys ready to throw in the towel on the brass business?

We're not ready yet.

How long before the -- it seems like -- I know the logic of it but it never seems to have worked. So I'm just curious how long before you say uncle?

Well, I have we have some opportunities still with it. And that's what we're pursuing at this point in time.

What are those opportunities? Just curious.

I think there's further cost reduction here, and there's some global opportunities that are available to us as well. As we mentioned earlier, we're having some success over in Asia, and we think there's some more opportunities there.

Okay.

Thank you.

We go next to Richard O'Reilly, Standard & Poors.

Good morning, gentlemen. In the Metals business, you mentioned you have 8 manufacturing sites. East Alton is the big one there. How much can you change the capacity within that site? I mean, there are other plants that are rerolls, and other specialty things. What can you do at East Alton?

As far as restructure East Alton?

Yes.

There's a wide variety of things that we could do with East Alton, or with satellite sites where we could move operations out of satellite sites into East Alton. So I think that there's a fair amount of flexibility there.

Oh. So it's not just downsizing East Alton.

No.

It's broad. Okay, fine. The other plants are like you said, rerollers, some specialty chase, things like that. Okay. They're much smaller than East Alton, right?

That is correct.

Okay. Fine. And I get under the comments in the chlorine business, did I hear that one major customer is still down? Is that what you said?

Yes, that's correct.

Can you give us an idea what type of customer that is?

This is a customer in the titanium dioxide business.

Okay. Fine. Thank you, then. Okay.

[OPERATOR INSTRUCTIONS] We go next to Sergey Vasnetsov with Lehman Brothers.

Good morning. This question was asked a little earlier, but I want to expand upon this and limit myself to one question and one comment. You are the fourth largest producer of Chlor Alkali, so you are in the best position in the best chain, in particular with your electricity costs, and I think I'm growing frustrated looking at your numbers in the report, not because bad, they're good. But looking at your numbers for the past four years, I can't recall an single great quarter, let alone great year.

So looking forward into the fourth quarter and particularly into '06, you talk about improvements, which is nice. But in the meantime, you are really in the best position, your plants have not been impacted, all your see competitors, and lift the umbrella prices for you at 13, $14 natural gas.

So my question is, that if you're not looking to get a terrific, great, fantastic, quarter, year, whatever, you name it, month, now when is that? If not, why? It sounds like you're like an oil company which sold their output 3 years ago forward at $35/barrel, and you're doing well right now but way lower than you should be. You're behind Saudi competitors by 40%. So that's a question to you. Maybe you can help me.

We'll make two comments in regard to your question. Number one, we believe we had, and are having a very good year. We've had the three highest quarters of profitability in 2005, that this business has ever seen. As long as it's been in the Chlor Alkali business.

Secondly, when we compare metrics just broader than ECU values, between ourselves and other people we compete with, we don't come away with the same conclusion that we're 40%, or whatever the number you quoted was, away from valuations of others in the group we compete with.

But ECU really is the main output. I'm not talking about bleach and other things. That's really your core business. And maybe your analysis is more specific because it's your business, a look at broader companies.

But let me rephrase the question. What stops you from having a great, and I mean a really great next two quarters?

Well, again I will just go back to what I said. Our fourth quarter we have forecast that we will see an improvement in pricing, from a third quarter number that was the highest we had ever seen. We do have a flat volume that we have to, from quarter-to-quarter. The first quarter of '06 we have not made any forecast for, but we have said repeatedly that our best position is with caustic prices increasing. And that's where we find ourselves looking into 2006.

Okay. Thank you.

There are no further questions at this time. I'd like to turn the call back over to senior management for any additional closing comments.

Thank everybody for joining us. We look forward to our call in January where we will report results of our full year. Thank you.

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