Olin Corp (OLN) 2006 Q2 法說會逐字稿

Good day, and welcome, everyone, to the Pioneer Companies second-quarter earnings 2006 results conference call. Today's call is being recorded. At this time I would like to turn the conference over to Mr. Gary Pittman.

Thank you, Regina. Good morning, everyone, and welcome to Pioneer's 2006 second-quarter conference call. With me today is Mike McGovern, President and CEO, and Dave Scholes, Senior Vice President of Operations. We're pleased to have the opportunity to review with you the Company's results of the second quarter.

Before I turn the call over to Mike McGovern, I would like to inform you that this conference call is being recorded, and that all participants presently are in listen-only mode. Following management's discussion, the operator will provide instructions on how you may ask questions.

Let me remind everyone that as a result of this conference call, Pioneer's management may make certain statements regarding future expectations of Pioneer's business and Pioneer's results of operations, financial conditions, and liquidity. These statements may be regarded as forward-looking statements within the meaning of the Private Securities Litigation and Reform Act. Such statements are subject to various risks, including, but not limited to, Pioneer's financial leverage, global economic conditions, the demand in prices for our product, Pioneer and industry product volumes, competitive prices, the cyclical nature of the market, for many of our products and raw materials, the effect of Pioneer's results of operations on its debt agreements, and other risks and uncertainties. These risk factors are also listed in the Company's filings with the SEC, including, Pioneer's Form 10-K and Form 10-Q.

Pioneer operates in one industry segment, the production, marketing and selling of chlor-alkali products such as chlorine, caustic soda, hydrochloric acid and bleach. Pioneer operates in one geographic area, North America. The Company's combined annual capacity for our four chlor-alkali plants is 725,000 ECUs, representing approximately 5% of North America's capacity.

With that, I would like to turn the call over to Pioneer's President and CEO, Mike McGovern.

I just have a few comments I'd like to make. First, the second quarter for Pioneer was another good quarter. We had an EBITDA in the second quarter of $25.6 million, and a rolling 12-month EBITDA of $111 million. But I do want to note here, we really should have had a better quarter. We really should have had a better quarter.

We had some hits -- there was a change in the interpretation of certain regulations that negatively impacted our Dalhousie site, required a onetime charge. We had some operating issues, and Scholes is going to talk about those later. That caused us to increase our purchase for resale.

Dalhousie first. We had about 26,000 tons of non-hazardous sludge that we had accumulated in storage since 2000. And it is in need of disposal. In May of '06, we were informed by the New Brunswick Department of Environmental that our planned disposal option was no longer allowed. They changed the interpretations. This caused us to record an additional $1.7 million, and we already had recorded $600,000. So we continue to work on this, and we hope we can do better. We generate about 2400 tons of sludge each year, that will require -- disposal.

As we move to production, if you look at the first quarter at 165,000 tons of ECU production, in the second quarter we had approximately 170,000 tons. We had a scheduled maintenance outage for Becancour Circuit 2 in the second quarter, and we have the Circuit 1 scheduled in the fourth quarter.

During the second quarter, the number two circuit, which accounts for about half, was shut down for the scheduled maintenance. That caused us a loss of production of about 3600. In addition we had some equipment failures back in Henderson during the second quarter. That reduced our outputs by about 4000 and 5000, respectively, or 9000 for the quarter. That plant came back to fall capacity end of June, and Henderson came back at full capacity at the very early August, like the 1st or the 2nd. This caused us to purchase about 10,000 tons of chlorine in the second quarter that we had not done in the past. So there was additional cost for the purchase and the transportation.

As we look at prices, the price -- and we disclosed this in the Q -- the price in the first quarter was 616 per ECU and it dropped to 577 per ECU, which was the same as it was in the second quarter of last year.

Now, just a couple comments as we look forward. As we state, we don't forecast but we wanted to give some updated color on the Henderson and Pittsburgh transaction and then prices and possibly production.

At the Henderson, it seems like we've been talking about this since the beginning of time. We finally cleared some major hurdles with the local government. We have expectation that we should close at the very end of the third quarter of the first or the fourth. And we feel much more positive now that we've cleared that hurdle. The Pittsburgh, $2 million net proceeds closed and received.

As we move to pricing, we want to note, when we look at TMAI, they have downward pressure, particularly on caustic as we go into the rest of the year. And on production I think I will wait and let Scholes talk about the turnaround scheduled for the rest of the year. So at this time I'll turn it over to Dave Scholes.

As Mike mentioned, we had our scheduled maintenance turnaround for the number two circuit at Becancour in the second quarter. That represents about half of our capacity at Bec, and we were off-line for a week for that outage. And as we reported earlier, we did our Henderson 2006 outage during the first quarter of this year. The remaining turnarounds that are scheduled for this year are for our Dalhousie plant in the third quarter, and our Becancour No. 1 circuit in the fourth quarter. As we have mentioned previously, we do not have any outages scheduled to St. Gabriel in 2006.

I wanted to go back to the production and equipment issues that Mike mentioned. The major equipment problem that we ran into at Becancour involved the unexpected failure of a spare refrigeration unit that was in operation while the primary unit was being overhauled. That overhaul was completed in June, and we have a temporary unit that remains on site, providing backup until the overhaul of the spare unit is completed later this month.

The problem at Henderson involved two failures of the same rectifier. Following the second failure, it was seen necessary to redesign the protective systems on that rectifier. This extended the time for the rebuild of the unit, but it provides us much greater assurance of preventing future failures. I'll turn it back to Gary.

At this time I would like to review the results of operations. What I would like to do is start with the cost of sales. In the second quarter of '06, cost of sales increased by $9.4 million as compared with the three months ended June 30th '05 and an increase of 2.4 million compared with the prior quarter. The increase of the $2.4 million compared to the prior quarter included a decrease in variable costs of 800,000, and an increase in fixed costs of $3.2 million.

When we look at the variable costs in the second quarter compared to 2005, the increased variable costs of the $6.8 mainly included an increase of variable product costs of $4.1 million, and distribution costs of $2.4 million.

If you included in our 10-Q, we have set forth the amounts that we've spent on electricity for the production of our chlor-alkali products during the past six months, which shows $56.2 million for the six months ended June 30th, and $45.6 million for the six months ended June 30th of '05, representing a 19% increase.

The reason that we've laid this out is to give you a feel for the impact that energy costs has on the electricity portion of our production. And additionally, what we have also included in our 10-Q is what we've spent on the transportation. If you look at the same analysis, it shows that we've spent $48.9 million for the six months ended June 30th, and $43.2 million for the six months ended June 30th of '05, representing 11% increase from period to period.

If I move to fixed costs, I look at the second quarter comparison to the 2005. Our fixed cost increase of $2.6 million was mainly comprised of higher maintenance costs of $1.2 million, and the $1.7 million of environmental costs.

If I look at -- for the six months comparison to 2005 of fixed costs, we have an increase of $3.7 million, which was primarily comprised of higher utility costs of $1.3 million, the $1.7 million of the environmental costs at Dalhousie.

If I look at the SG&A costs, and I do a comparison to the SG&A costs to the second quarter of '06 to the second quarter of 2005, we have an increase of 900,000. As we disclosed, it was primarily related to higher professional fees in the current period related to our ongoing efforts of compliance with Sarbanes-Oxley.

One thing I would like to highlight is during 2005, the professional fees related to our efforts of compliance of Sarbanes-Oxley incurred in the third and primarily in the fourth quarters. If you look at the six months comparison of SG&A, it was an increase of 500,000. To get to $17 million for the six months ended June 30th '06.

The increase resulted primarily as $2 million of higher professional fees on a comparative basis, an increase of $1.7 million, which includes stock-based compensation expense of $700,000, and it was offset by a decrease of $1.3 million of bad debt expense, and a reduction in employee bonus.

Once again, if you look at the six-months comparison of '06 the six-months comparison of '05, I wanted to highlight that the professional fees for Sarbanes-Oxley did not occur in 2005. If we look at interest expense, was $2 million less for the three months ended compared to '05 and $3.8 million less for the six months period compared to '05 as a result of lower debt balances during the 2006 period.

Other income and expense, if we look at other expense of $2.1 million in the second quarter of '06 included a currency exchange loss of $2.3 million. Additionally if we look at other expense for the first six months, it included $4.4 million, which included a $2.5 million redemption payment, and a currency exchange loss for the six months of $2.1 million.

Looking at income taxes, we had income tax expense of $2.1 million for the quarter ended June 30th '06 compared to $3 million tax expense for the second quarter of '05. Our effective tax rate for the current quarter was 12% because a onetime tax benefit of $2.9 million from the impact of the recently enacted lower Canadian tax rate for the future years.

If we look at the six months, we had income tax of $8.8 million compared to the $6.4 million tax expense for the first half of '05. Our effective tax rate for the current period is 22%, less the onetime tax benefit from the impact of the currently Canadian tax rate.

Now I would like to move over to address the refinancing. If we look at our senior secured notes as of June 30th, we had $100 million outstanding. What we have indicated is that we're looking to redeem the senior notes, once the premium decreases from its current 5% to the 2.5% in the first part of 2007.

We're continuing to evaluate our capital structure and anticipate that we will, in the first quarter of '07, we will consider refinancing a portion of all the senior notes. One of the things that we're continuing to look at, as we have discussed in the 10-K, is the redemption of the senior notes will create a tax liability due to the changes of the exchange rate. If you recall, in the 10-Q, we went through -- excuse me, the 10-K -- we redeemed $50 million of the senior notes, and it created a gain of approximately $18.7 million. However, we had a capital loss carryforward to offset that gain. For the remaining $100 million, we do not have as much -- we will not be able to offset the capital gain there.

When we turn to the revolver, the revolver matures at December 31 of '06. We currently have no borrowings outstanding, we have a letter of credit adding to the total of $4.5 million, and we're currently looking to reevaluate and refinance that. With that, I will turn it back over to Mike.

Then we're ready to entertain any questions at this time.

(OPERATOR INSTRUCTIONS). Aaron Weitman, Appaloosa Management.

In the past -- good quarter. Also in the past you guys had mentioned possibly considering acquisitions. I was wondering, as your stock continues to trade down, and you're the cheapest chemical company, why you would not consider that option? Could you -- do you potentially see benefits from these acquisitions that would be greater than buying back your own stock?

We continue to look -- we continue to look -- this is Mike. We continue to look for acquisitions and opportunity. What we want to do is we want to be sure that they would be accretive. So at this time that's all I can say on the acquisitions. We're still in dialogue and in search for those opportunities.

Okay.

Any further questions, Mr. Weitman?

No.

Jeff Gates, Gates Capital Management.

Gary, at the current exchange rates, what would the taxable gain be on refinancing the additional $100 million, and what will the tax rate be applied to that? Would that be a Canadian tax rate?

Yes, it would. If the exchange rate is not too far off from where it was when we did the first redemption. It's a little bit lower. We did the redemption at 1.16. I think the exchange rate is about 1.14. So it would be close to the same calculation that you had with the $50 million at the $18.7 million gains. And that would be at a tax rate of 16%.

So about $5 million or something like that.

Yes.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Edward Yang, CIBC World Markets.

Good morning. Two questions. One, what do you think is your trough level of EBITDA if the chlor-alkali cycle turns down? Do you think you've taken the steps to variabalize your costs enough to have positive EBITDA and free cash flow at the bottom of the cycle? And second, this is just following up on Aaron's earlier question, but would your openness to stock buybacks be a function of price? Do you have a certain level of the stock in mind where you think that -- versus an acquisition -- buying back your stock would be more attractive? And what are your thoughts on a possible dividend?

I believe those are three questions. Let's see if we can -- let's see if -- if we can answer those. And we can start from the stock dividend. Our whole -- our entire objective is to maximize shareholder value, and so we intend to look at all forms of -- and means to enhance shareholder value.

As you look at stock purchase, we have limited float as it is. So if we purchase stock, we reduce our float even further. But we're open to all alternatives to maximize the value of the stock. As to -- so that takes care of that one. What was your other two questions?

Just on the level of trough level EBITDA that you think you could be at. Back in 2002 I guess your EBITDA level was more around the $40 million range; 2005 it was close to $125 million. So depending on the cycle, if things turned down, is it possible that we go back to the $40 million level or do you think that -- it's a difficult question to answer, but do you think that you've taken additional structural changes and cost-cutting, that there is a higher level of trough EBITDA at the bottom of the cycle?

Each one of these cycle beasts appear to have its own demon. So I'll start with that. And I will tell you that we don't forecast, but what I will tell you is we've done several things.

One, we've looked at our portfolio where we think we can manage it better. Our book of business with our customers, we think we can manage it better in the dip.

The second component of that is the cost structure related to it. We've tried to take the -- squeeze all the costs we can out of the fixed component and set up the variable components where they will work if there is margin compression. And so at this time -- not at this time, we don't intend to forecast a trough level. We do think we're better prepared than we were.

But as you know, with your experience, each one of these cycles, they have their own demons that you deal with. I think this is the first time, if you look back, in this space, that you've seen sustained electricity, which is driven by natural gas, particularly in the Southeast.

I think it's a new phenomena, I think it's a paradigm shift where you move from gas from $2.5, $3 up to $6, $7, $8. Again, with our hydro in Canada, with that being 55% of our baseload, that mitigates that run -- and you know, the curve -- if you look at the natural gas curve and related electricity curve, it looks robust and doesn't have a big dent. So that may be different for us this time in cycles than say it had been in the past. And your third question --

That was it, actually. Thank you.

Aaron Weitman, Appaloosa Management.

I also wanted to get a sense of -- where do you guys think we are in the cycle, and how much lower do you think EBITDA margins can go in terms of just producer economics?

If we knew the answer to that we would probably have your job. There is margin compression, there's some downward pressure on the price of caustic, as we look to the rest of the year, and you have rising electricity. But as I come back, our flagship is in Becancour, which is hydro. And so as the price moves, it does impact some of our operations that we have that built-in benefit from Becancour. That's very difficult to say.

One of the things that is unique in this cycle, from our perspective, is a great deal of the chlorine, 39%, 40%, goes into the PVC chain. And as you know, the export of that EDC to the PVC is very difficult right now because of the major cost components that go in the EDC, the chlorine and the ethylene.

So as that backs up, the question is, will the integrated players continue to produce because they really produce the chlorine to go into that PVC chain. If they don't, that may back up at production, backs up at production. Then it reduces the amount of caustic on the market. So I think you have a lot of drivers and factors you'll need to watch and as we go over the next couple of quarters, and to see how each one of those interplay.

Do you think competitors can bring in, particularly international competitors, can bring in caustic cheaper? I believe shipping rates are around 150 to ship it, per ton.

If you look at Europe, the PVC market has been -- difficult. And so it's backed up the chain of chlorine backed up the caustic. So they seem tight. The same thing has happened in Asia, which reduced demand, which reduces the production of caustic. I think you start with the PVC.

The second question is the fright, is the way we look at it. As you look on the West Coast right now, which had a lot of pressure last year, the market is snug. I mean it is snug on the West Coast. So that's always a risk, and you have the increased production coming on [to measure], but I think you need to look at the PVC and where you think it is going.

Thank you, guys.

(OPERATOR INSTRUCTIONS). Robert Bresticker, Brigadoon Bay Capital.

How much production was lost in July and August from the Henderson plant?

In July, about --

About 3000 tons.

Right, thank you. One other question. With regard to the asset sales that you hope will close in Q3, do you have a feel for how much cash tax you'll be paying on that, or will it all be covered by net operating losses, or what?

On the sale of Henderson?

Yes.

That is a very good question. And it is terrible, Gary stepped out of the room just for a minute and he's the guy with the knowledge and the answer. Do you have another question that --?

Maybe later on when he --

I'm sorry, he stepped back in. He stepped out because he had -- Gary. I'm sorry, would you repeat your question?

The question is, you'll be receiving like $20, $25 million on the asset sales, hopefully, in Q3. And I'm trying to get a feel for how much of that will go out as cash tax payments.

Part of it will be sheltered by the NOL that we have in the U.S. A lot of it depends on -- most of our tax paying generation is coming from the Canadian operations. So it really depends on the next six months, on how much of the NOL that we'll be able to use. But we will either shelter the operations income, or will use it against the Henderson.

To summarize that, our expectation is we're bleeding rapidly through the NOL, and it will be gone by the end of the year.

Okay, I think that gives me a bit of a feel. Thank you very much.

That is all the time we have for questions. I'd like to turn the call back to Mr. McGovern for closing remarks.

We appreciate all of our investors. We appreciate all the parties on the call that are interested in what we have -- in what we're doing, and your support and look forward to talking with you all next quarter. Thank you.

Thank you. That does conclude today's conference call, we thank you all for your participation. Have a great day.