Olin Corp (OLN) 2006 Q3 法說會逐字稿

Good day, everyone and welcome to this Pioneer Companies third quarter earnings results conference call. As a reminder today's call is being recorded. At this time I would like to turn the call over to Mr. Gary Pittman. Please go ahead, sir.

Good morning, everyone, and welcome to Pioneer's 2006 third-quarter conference call. With me today is Mike McGovern, President and CEO and Dave Scholes, Senior Vice President operations. We are pleased to have the opportunity to review with you the Company's results for the third quarter. Let me remind everyone that as a result of this conference call Pioneer's management may make certain statements regarding future expectation 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 means of the Private Securities Litigation Reform Act. Such statements are subject to various risk factors that are also listed in the Company's filings with the SEC, including Pioneer's form 10-K and form 10-Q. With that I would like to turn the call over to Pioneer's President and CEO, Mike McGovern.

Thank you, Gary. We are very pleased with our excellent operating and financial results for the third quarter. Our plants operated at approximately 98% of our production capacity with no major outages during the third quarter. And we had correspondingly higher sales volumes. Our EBITDA for the third quarter 2006 was approximately $54 million, and the rolling twelve months was $133 million. This included the sale, finally, I say finally of the 60 acres of vacant land adjacent to Henderson and the sales price that we've talked about was 24, we netted 22. It had a nominal book value.

Our product prices held relatively firm with a moderate decline in ECU net back from 577 in the second quarter of this year to 557. As a result our cash flow from operations together with the sale of Henderson leaves us with a cash balance of approximately $103 million. Since our outstanding debt at September 30 was $101, we are essentially debt free. This marks a major achievement for our company and its employees.

We anticipate we will make an additional voluntary redemption of the Senior Notes in early 2007 when the redemption premium decreases from 5 to 2.5. With this I would like to turn it over to Dave Scholes who would like to make some comments about the operation, and then Gary will make some comments about the financials.

Thanks, Mike. Starting out with production we had a very good third quarter at the plants with production at 178,000 ECUs or about 98% of our operating capacity. Some of the mechanical problems at Becancour, electrical problems at Henderson that were discussed during the second quarter call were resolved, and those plants have operated very well since. Our St. Gabriel plant operated very well as it has in the previous two quarters. In October we completed the last of our scheduled outages for 2006, which was our Becancour number 1 plant.

Next, energy costs, the volatility of our energy costs as they relate to electricity at St. Gabriel and Henderson is discussed in the 10-Q. As I am sure most of you are aware, our Becancour plant has supplied Hydro power from Hydro Québec while our Henderson and St. Gabriel plants rely largely on power producing natural gas. We have also experienced significant increases in the cost of producing steam and boilers using bunker fuel at our Becancour plant this year. In September we began receiving co-generated steam from a new plant located near our facility. This change will reduce both the absolute cost and the volatility of cost of our steam for Becancour.

Next, transportation in the 10-Q we discussed the substantial, and by substantial we are talking about approximately 25% increases that we are experiencing in rail rates throughout North America. Rail freight represents approximately 50% of our transportation costs with the balance being truck freight, terminal operating costs and logistics fixed costs which are largely the leases for our railcars. While we have very limited leverage with regard to rail freight rates we are making every effort to increase the use of product exchanges through the rail miles.

In the 10-Q we also discussed our new motor carrier subsidiary the Pioneer Transportation which we are currently utilizing for a portion of our product deliveries at our Tacoma and Henderson plants and one of our California terminals. This initiative is primarily in support of our strategy to move more of our product to customers through our terminals and by truck to provide better service to those customers. It is not primarily focused on cost reduction. And then finally environmental as we indicated in the 10-Q we are updating our independent and environmental analysis this quarter. We will complete that work by year end, and we have no information at this time regarding any changes from our 2005 study.

And I will turn it back to Gary.

Thank you, Dave. Before discussing the results of operation I would like to come back to the energy costs and transportation costs as discussed by Dave and as described in our 10-Q. When we look at the amounts that we have spent on electricity for the production of coal alkali products and other power equipment requirements during the past seven quarters, it is $85 million for the nine months ended 9-30-2006 and it is a $71 million for the nine months ended 9-30-05 representing a 19% increase. These increases are seen in both the variable costs and fixed costs.

If I move over to transportation as we've discussed in the 10-Q we have included amounts that we spent on transportation or for the sale of our products during the past seven quarters which shows $76 million for the nine months ended 9-30-06 and $66 million for the nine months ended 9-30-05 representing a 16% increase. These increases are seen in our variable costs and our fixed costs. In order to improve the reliability of product deliveries to our customers we have formed a motor carrier subsidiary, Pioneer Transportation, which we will own or lease it's owned trucks and hire company drivers. We intend to deliver a portion of our products to our customers in the western United States through this subsidiary.

These costs are for the current period are captured in the fixed costs of costs of goods sold. The above transportation and energy costs just discussed are included in both variable and fixed. One consideration that we have for the next quarter and for year end is to group the cost of sales by three categories; transportation, variable costs and fixed costs. Hopefully this will provide more clarity in the change in the comparison of the amount.

With that, I would like to review the results of operations. Our ECU production was 178,000 ECUs in the third quarter of '06 compared to 164,000 ECUs in the third quarter of '05. Our ECU production was 513,000 for the nine months '06 as compared to 507,000 for the nine months of '05. If we look at cost of goods sold in the third quarter of 2006 cost of sales increased by $9 million as compared to three months 2005, which included an increase in variable costs of $5.6 million and an increase in fixed costs of $3.4 million. Cost of sales increased by $30 million as compared to the nine months ended June 30 '05, which included an increase of variable costs of $23 million and an increase of fixed costs of approximately $8 million.

Variable costs for the third quarter comparison to 2005 increased by $5.6 million mainly included an increase of variable product costs of $2.3 and distribution costs of $3.3 million. For the nine month comparison to 2005 the increase in variable costs of $23 million mainly included an increase in our variable product cost of $14.4 million and distribution costs of $8.4 million.

Fixed costs. For the third quarter comparison our fixed costs increased $3.4 million, which half was comprised of higher logistics costs of $1.7 million. For the nine months comparison our fixed costs increased $7.7 million was mainly comprised of higher logistics costs $2.3, higher utility costs of $1.1 million and $1.7 million of environmental costs recognized in the second quarter for the brine material disposal at our Dalhousie site.

SG&A was comparable for the three months and the nine months. However, in 2005 we had a sharp increase in the fourth quarter due to the professional fees related to the efforts of compliance with the Sarbanes-Oxley. We will not see this in the fourth quarter of 2006.

Other items represented a gain of $24.3 million for the third quarter of 2006 compared to a cost of $0.5 million in the same period in 2005. The 2006 period primarily included a gain of $22.5 million for the sale of land at Henderson and the $1.6 million from the sale of land in Pittsburgh.

The Company's income tax expense for the three months ended September 30 was $14.6 million with an effective break for the three-month period of 32%. The company's income tax for the nine months ended September 30, 2006 was $23.4 million consisting of $19.3 million of tax for the U.S. operations, and $14.1 million for the Canadian. The nine months ended September 30, 2006 included a onetime adjustment of $3 million recorded in June of 2006 to Pioneer's deferred tax liability for its Canadian operations, which reduced the tax expense. The effective tax rate for the nine months period was 27%.

During 2006 we expect to utilize all of our NOL except for $500,000 per year of the $7.1 million predecessor NOL which was generated prior to our emergency of bankruptcy. EBITDA, our lender defined EBITDA for the third period is $54 million, if you exclude the gain from the sale of Henderson it would represented $31 million.

Now I would like to highlight a couple items that we expect to see in the fourth quarter. As Dave had mentioned earlier in the fourth quarter of '06 we are updating our independent environmental analysis, which is scheduled to be completed by year end. This study will include any updates or requirements from regulatory agencies along with updates from operations.

In the fourth quarter we also anticipate an additional funding of approximately $2.3 million in Canada in connection with the plant settlement of Cornwall. If this occurs it will also result in recognition of pension expense of approximately $1.7 million. This is something that we have had in our 10-Q each quarter. It looks like it will happen in the fourth quarter.

In regards to refinancing we are evaluating our future capital needs and optimum capital structure. We will review the revolver prior to the year end for an additional six months and then may refinance both the revolver and the outstanding senior notes in the first half of 2007. We will take the following items into consideration as we look at refinancing, a stock repurchase, a onetime dividend. We will look at a regular scheduled dividend payment and any major internal capital project.

With that, I will turn it back over to Mike McGovern.

I just have a couple comments to make about the outlook, and then we will answer questions. First on the refinancing, we are looking at all the alternatives Gary talked about. (indiscernible) there is the very low probability that Pioneer will make a large onetime dividend distribution. We don't think that is in the best interest of the shareholders. So as we look at our fourth quarter outlook the core industry operating perspective, we think the operating rates should retreat from the third to the fourth quarter due to reduced EDC exports off of PVC demand. This concern about auto and housing and the water treatment, which is seasonal, is by our operating rates I think we disclosed that we had a nine-day schedule outage at Bec 1. That is about half the production of Bec but for the rest of the quarter as today it appears our rates are holding.

Want to look at HCL. Market looks tight due to certain plant interruptions and the plant (indiscernible) outages for some MDI TDI producers. Caustic market looks balanced with slight oversupply. But the oversupply is rapidly being absorbed with the reduced operating rates should stabilize. We heard an announcement from a large producer yesterday that he had made a $40 per ton caustic price increase. As we looked at the supply of caustic in Europe it was tight. Asia seems balanced. So the price outlook there looks good.

As we look at our strategy from a longer-term horizon, we continue to focus on maximization of margin growth and to leverage the existing human resources we have here. The alternatives we look at are purchase of bleach facilities which at this time we have been unsuccessful. We have had a gap between our expectation and the parties we've talked to. We looked at the potential of building bleach facilities or salt to bleach, use the distribution site similar to our West Coast operation. Add productlines that use our products, add capacity at existing facilities and add productlines independent of our existing productline so we utilize our existing core competencies; manufacturing, blending, logistics and our distribution. At this time I will turn it back to Gary.

At this time what we will do is turn it back over to the operator, and we will move into the Q&A portion of the conference call.

(OPERATOR INSTRUCTIONS) Ed Yang, CIBC World Market.

Good morning, Mike, good morning Gary. What do you expect your tax rate to be in the fourth quarter and next year?

For 2007?

2007 but also the fourth quarter of '06.

The fourth quarter of '06 I would look at it to be around the 27 to 29% tax rate.

And next year just sort of more typical statutory rate?

I would think that there would be right around the 30%.

A 30% rate?

Right.

And is that lower than the more like 38%; is that because of Canada or --.

Part of that has to do with tax credits and we've had valuation allowances against that having to do with foreign tax credits.

And you think that is a sustainable rate for the foreseeable future?

That I don't know.

And on the rail contracts, approximately half that are being renegotiated now, the other half, will that be renegotiated at a later time or were those already at the higher costs?

Those were renegotiated earlier this year and are already at the higher cost.

I see, so that the renegotiation that is going on now with the cost going up that will be the end of that, no more?

We cannot say that with any degree of certainty. We are seeing continued escalation of rail rates in the second year in some cases.

And typically how long do these contracts last?

Right now they are one year.

Okay, great.

Historically they have been three to five, with change in the climate they have moved to one year.

I see.

If I could add, part of what Dave was telling me also is we do have a major carrier that comes up next year that has been long-term. So there is one. But as a whole you are totally correct.

And Mike, you spoke about different potential uses of cash and also in the capital structure, what do you think your optimum leverage is? And also what are you -- what are the things that you are considering when you are trying to determine whether you deploy free cash flow towards dividends, whether recurring or onetime to buy back and potentially building out bleach facilities or acquisitions of -- what is your thought process around that?

What we are looking at right now is the future uses of funds. And we want them to be accretive, with these investments we want to be accretive; we want to leverage off the skills that we have, want them to complement the businesses that we have. So that is the analysis we are going through. We're in a different position than we've been in the past. In the past we've had this level of debt, and we've been more in a maintenance mode. As we look forward for growth mode part of what we are looking at is possibly a greater use of funds for internal capital projects. So as we look at what level of debt are we comfortable with? We think with the anticipated cash flow that we have right now that we have raised, we thought 100 million was without any type of expansion that with the cash flow we think it is exciting, we think a 200 million base debt is something we can manage comfortably.

So up to $200 million in debt?

Yes, up to $200.

And when you say accretive, are you thinking just on earnings and free cash flow or are you also speaking about being accretive to your valuation?

Clearly it has to be the number one would be accretive to the valuation. Number two, accretive to the cash flow and number three accretive to the earnings. But if it is not accretive to the value then we are just turning dollars.

It is not necessarily -- it is a pretty high-quality problem to have, having a lot of cash. Thanks very much.

Aaron Weitman, Appaloosa Management.

Another great quarter. I wanted to ask how has your view and outlook for the chlor-alkali market changed from a quarter ago with the Dow announcement? And have you started to see any effect from that? And then also how does the location of your plant set you up advantageously?

The Dow announcement that you're making reference to was where they've shut down the western part of California -- Canada -- yes, California and Canada, I get those two confused -- excuse me. I'm sorry; that was terrible. The West of Canada. That takes capacity out of the market, which is beneficial for us. The markets they serve are pretty much on the West Coast but the system will balance. So for us it is a plus. Can we reach some of those markets from Becancour? Some of the most eastern markets they serve. But it impacts (indiscernible) balance in the system.

Can you reach those markets with Henderson?

No, that will be difficult. I think part of that will be served from [Connectis]. They have a plant up in Vancouver and talking about an expansion there. This is a long reach for Henderson.

Okay.

Anything further, sir?

I will pass it back to the queue.

Jeff Gates, Gates Capital Management.

Nice quarter. I guess the question -- you had a high level of bonus accruals in last year's fourth quarter, but you mentioned you are going to use more restricted stock and options. Is that why the bonus accruals are down year-to-date? And if so, do you expect the lower bonus accruals in this fourth quarter?

The bonus accruals are the absolute amount of the bonus will be less this year than it was in the prior year; part of the prior year bonuses was for several years of service. So it will be a lower absolute number this year.

One thing I may add, Jeff, is my reference into the fourth quarter. If you will recall last year we were going through SOX compliance. And so we incurred a lot of fees in the fourth quarter associated with that. That is why SG&A was also a lot higher in the fourth quarter. That we will not see in 2006.

How much capital do the existing operations can you employ, and what kind of return would you expect to get on those types of projects? And I guess more specifically when would you expect to possibly convert St. Gabriel's mercury cell to membrane and what would that cost?

You have several questions. The first is our future use of funds our forecasted CapEx. And we are in the throes of looking at a five-year forecast on that. We are not ready to disclose that at this time. Your question on the conversion of mercury to membrane at St. Gabriel, we are always looking at what is the most efficient and effective process to use. At this time we don't have any announcement to make. On the size that we could ramp it up to with the existing infrastructure currently our capacity is about 540 a day. We could take it to approximately less than 1000 tons a day changing the cell house and using the existing infrastructure we have there. That would be the preferred way. But at this time we don't have anything to announce on any conversion or expansion.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) At this time Mr. Pittman there appears to be no further questions in the queue.

Thank you very much this morning for joining us, and we will see you next quarter.

That does conclude our teleconference for today. We'd like to thank everyone for your participation, and have a wonderful day.