Olin Corp (OLN) 2006 Q4 法說會逐字稿

Good day and welcome, everyone, to the Pioneer Announces [2000] results. Today's call is being recorded. At this time I would like to turn the program over to Mr. Gary Pittman. Please go ahead, sir.

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

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 Reform Act of 1995.

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 10-Q. With that I would like to turn the call over to Pioneer's President and CEO, Michael McGovern.

We always start with our mission statement. We are a customer-driven company that safely manufactures and markets our products. We work to be the preferred supplier.

As we look at an overview of 2006, we had another great year for Pioneer. We had a strong EBITDA, sustained product prices, outstanding operating rates, alignment of our goals and objectives with those of our customers. We have one issue that requires additional discussion, which is an increase in income tax provisions, and Gary will handle that later.

But before we review 2006, what we would like to do is talk about our St. Gabriel project expansion. We talked about this before, but we think it warrants a review again. It's customer driven, and what we're trying to do is to provide -- what we will do is provided a competitive delivered price through our pipeline.

If you look at St. Gabriel right now, the existing annual plan capacities is 197,000 tons of chlorine. All of this is delivered through our pipelines. Currently, competitors ship 150,000 tons of chlorine by railcar to our St. Gabriel plant, we unloaded it, deliver it through our pipeline to various customers. This expansion is anticipated to displace the competitors' volume.

What this will do is it will expand our capacity by 25% from 197,000 to 246,000 ECUs. We will convert to membrane cell technology for Mercury that will purchase brine rather than rock salt, and the estimated cost of this is about $142 million. We expect to be completed by the fourth quarter of 2008.

What does this do for us? Our estimated annual benefit is $31 million, and this comes from reduced power, reduced cost of other raw materials, fixed cost reductions and the incremental margin from additional production of the 49,000. What it also does is provides infrastructure for potential further expansion of additional 97,000 ECUs, which should take the plant up to 343,000 ECUs.

This is subject to securing long-term chlorine customer contracts. We have had some very favorable conversations but none to announce at this time. The cost is a mere $25 million.

As we started what is the customer benefits, we will provide competitive delivered prices through our pipeline. For us, we expect a $30 million plus increase in cash flow. Operationally, we will expand our plan from 197,000 to 246,000. We will be much more energy-efficient. We will eliminate the use of mercury, and for a mere $25 million we can expand it up to 343,000.

We would like to move now to the 2006 review, and I will start with the market review. As you look at the year, for chlorine, finals was strong in the first half of the year, and it weakened in the back part. This caused a reduce and demand that caused a reduce in the price of demand for chlorine and price.

Caustic -- it was lower-than-expected. Imports from Asia and Europe, and the price held.

At this time I would like to turn it over -- well, I'm sorry. I had another comment here on the pricing. As you look at our pricing, the average price for 2006 was 571, in 2005 was 581. This is our net back for ECUs. We have had sustained strong prices in both of these years, and we'll talk about the first quarter after we review 2006.

At this time I would like to turn it over to Dave Scholes.

I would like to start out by talking about production volumes for 2006. While those of you who have listened to our calls in 2006 know that we did have a couple of operating issues during midyear, our overall operating range for the year was about 95%. This is not our onstream rate, which is somewhat higher than that due to market demand, which tends to be a little less robust during Q1 of each year. Over the past three years our average operating rate has been 95%, and over the past two years we have operated about four percentage points above the industry average.

Next I would like to touch on our variable costs for electricity that is discussed in the 10-K. In 2006 we experienced some moderation in the historically high natural gas cost experienced in 2005. Nonetheless, when compared with years prior to 2005, we continue to experience much higher than historical power prices in our U.S. plants, which are served largely by natural gas based electrical providers.

This continues to add emphasis to the advantage that our Becancour plant, which is served by Hydra Quebec, continues to enjoy.

Next I would like to discuss transportation costs, which are again covered in the K. We continued in 2006 to experience significant increases in our product transportation costs, particularly rail transportation and most specifically chlorine. What we're experiencing in rail transportation certainly supports our duel strategies of expanding a pipeline supply of chlorine at St. Gabriel and moving more chlorine front our plants in the form of hydrochloric acid and bleach.

As we had previously reported, we're starting up our internal trucking operation in the West. We're continuing to build that capability and expect to begin to see the real benefits of that by mid-2007.

On fixed costs, in 2006 we experienced $3 million to $5 million of nonrecurring fixed costs, which were largely related to facility reliability. We have been running our plants hard over the past three years, and some work that needed to be accomplished -- and there was some work that simply needed to be accomplished to meet our liability expectations. We do not expect that to recur in 2007.

Finally, I did want to touch on our environmental reserve allowance. We have a practice of updating our environmental reserve analysis every two years, using an outside third party who is very familiar with our operations. That was completed in December, and we increased our reserves by $6.9 million to reflect the results of that analysis.

The primary drivers were higher operating and maintenance costs for treatment facilities; the expectation of new equipment requirements in those facilities; and increased regulatory activity. Going forward, we will change the frequency of updating our environmental reserve analysis to annually, and we will review the reserves internally every six months.

Now I will turn it over to Gary.

As my case reviewed with everyone the revenues and Dave has made some highlights on the cost of goods sold, there will be a couple other items that I would like to go over with in the income statement. The first thing being again on the asset dispositions, in 2006, we had a little over $26 million gain, primarily related to the Texas property at Henderson that we sold in 2006.

The other item I would like to highlight is the other expense on the income statement; that was about $2.3 million and 2006, which was primarily related to the early payment of the senior notes throughout the year, redemption payment of $2.5 million.

The next item I would like to highlight was the 2006 taxes. Starting out with the income before taxes of about $98.7 million compared to the $83 million of the prior year, so we had income before taxes of about $15 million higher in 2006 compared to 2005. That gave us a result of an increase in taxes of 2006 of about $5 million.

Then the other impacts of taxes of 2006 compared to 2005, we will look at the NOL. In 2005 we released a significant portion of the valuation allowance. In 2006 we released the remaining valuation allowance of the NOL. It was not subject to the 382 limitation, which was much smaller compared to 2005. In 2006 that was also partially offset by the valuation allowance of the foreign tax credit on the Canadian tax paid.

Also in the NOL is we have the stock options that did not hit the income statement in 2006, but you can see the benefit in shareholders equity. In 2007 you will see the case benefit of the stock option deduction going through the cash flow statement. So the question comes is what will taxes look like for 2007?

I believe you can expect to see statutory rates both for the federal and the state. Also we would like to highlight the tax impact, potentially, on the refinancing of the senior notes.

Then the third thing is that will impact our tax rate of 2007 will be the continuing evaluation of the foreign tax credit utilization.

Next thing I would like to discuss for a moment would be the EBITDA for 2006. As we reported, we've got $130 million EBITDA. If you look at the fourth quarter, we reported a $19.3 million EBITDA. But if you look at a couple of the non-cash items that the fourth quarter, $7 million being the environmental reserve, a little over $1 million associated with the Cornwall closure on pension in 2005, you can look at the EBITDA of about $27 million. We had an ending cash balance at year end of $115 million.

Now I would like to just highlight a couple items on the 2007 financing objectives. In 2007, we intend on refinancing the existing senior notes to extend the maturity date. With that, we're looking to find lower cost of capital.

Then the third item that we're focused on is implementing a capital structure to maximize the flexibility of Pioneer in the event of a downturn in the marketplace.

With that I would like to turn back over to Mike McGovern.

So, that includes the 2006. For 2007, just a couple points in how we see the first quarter. First, the prices we have disclosed for our net back is approximately 522; it's relatively the same as the fourth quarter, a little bit of a drop. But a lot of that relates to the customer mix.

Then, as we have disclosed, in the first quarter of 2007 we've made price announcements. Chlorine in February of 2007 increased $25 per ton in the U.S., $30 in Canada. In caustic, diaphragm, $40 increase in March, $60 in Canada. As those that have followed our Company knows, the vast majority of our pricing is driven off a quarterly basis. So we will start seeing the impact of these April 1.

So that concludes our presentation, Gary, so we will --

At this time we will turn it back over to the operator for questions at this time.

(OPERATOR INSTRUCTIONS). [Aaron Whitman], Appaloosa Management.

Great quarter in a challenging environment. I wanted to start off with a question on the expansion. You guys have given an estimate of 31 potential benefit. If I thought you guys could get $200 a ton increase on the old ton and into the 300s on the new tons, I would arrive at a [read] of 57 million potential increase. Do you guys view your 31 number as being conservative?

Let me see if I can answer that a little different. The calculation we have done is heavily weighted to the cost savings; and so, as one looks at the margin and the margin sensitivity, one could come up with a larger number.

But ours is heavily weighted to the energy, the salt and the other related savings we would have. So the difference you would use on the margin for those 49,000 ECUs could easily come with a higher number.

You guys have mentioned spending $20 million on downstream investments. Do you see new opportunities there? Are you still considering that? And are these investments accretive?

There is about 20 in the $80 million total that we have disclosed, as a potential. It's up to $1 million. Those projects are under review. Yes, we believe they would be accretive.

In terms of some of these one-times, is there are a reason you have got -- one times, I guess, being the asset retirement obligations -- is there a reason in your income statement you didn't more clearly break those out or provide an adjusted EPS?

On the asset retirement obligations --

I mean the expense recorded in the Q4.

Okay.

You guys reported in [costs].

The portion that was reported in the fourth quarter related to the environmental research. That is just an adjustment in the environmental reserve, and so that's -- we accrue up to that. That is something that the study was completed in the fourth quarter, and so, once we re-evaluate the study, we record that reserve on the period in which we do that study.

As Dave mentioned when he was discussing it, we intend on doing it on an annual basis and reviewing it semi-annually. That study we do outsource. But if you look, we look at spending what we have incurred historically is anywhere from $1 million to $2 million of that reserve that we do spend each year. But we do accrue up to the total reserve each time we do the study.

Are you guys considering a buyback of your stock to at least better protect your stock from the volatility it has seen?

We have disclosed that we are looking at various forms of financing to position us for the future. So that's all we can comment at this time.

Edward Yang, CIBC World Markets.

I didn't think I heard the ECU commentary very clearly. But Mike, did you say first quarter, $522?

Yes. Well, yes, for January and February.

Oh, so it's not a forecast for the full first quarter ECU that you're expecting?

No. What we do is we disclose actuals that have occurred. So for January and February it is 522. Then I disclosed -- I might have not been very clear. We made a price announcement on chlorine, increase of 25, and in March 40 on caustic.

So, 65 on top of that for March?

Well, as we have stated in the past, the vast majority of our contracts are on a quarterly basis. So one would look at that as April. Again, we don't capture all that in April because there's a lag, there's other issues. So that's a price announcement that we have made.

So if you boil it down all down together, what do you think the second quarter ECU net back would look like?

We don't forecast forward ECU prices.

But it should be somewhat higher. Are you getting any pushback from the proposed contract price increases?

Always. You know, always. But the market looks rather tight right now.

Yes, that's certainly the case. On the CapEx guidance, the $20 million downstream investments -- how certain are you of spending net cash?

At this time we have them in our plan. But as you know how chemical companies work, we have not approved individual [AFEs]. So at this time none of the projects for that have been sanctioned and approved. So they are under detailed review.

Mike, you mentioned the current environment being fairly tight. Would you hazard a guess in terms of what utilizations would look like for 2007, at least directionally? Do you think it will be up significantly, down significantly, about the same?

Sorry, I didn't hear the question.

Capacity utilization?

Our outlook on that is robust. We believe ours will be strong again this year.

Dow has recently said on a conference call that they will earn a certain amount of EPS regardless of the cycle. Do you have enough visibility to say that you can maintain a certain level of positive margin, despite what happened to the chlor-alkali cycle?

I would think that you have a little bit more visibility with your improved cost structure, I would think, (technical difficulty) Gabriel.

That will add to our advantage; but, again, we don't forecast the ECU price or the anticipated margin.

Do you think that you can at least maintain a positive EBITDA margin if things do slow down? Do you have enough flexibility on the cost side?

Well, you know the components of our cost structure, which are heavily weighted to electricity, on the raw materials electricity and soft and the related fixed component. We think where we're located we have flexibility, particularly the way we run our supply-demand more in a distribution model than a manufacturing.

But with the uncertainty of what margins will be tomorrow, that's very difficult.

Let me say this. We're embarking on a major capital project, 142 million over the next 24 months on this one project. So we would not embark on a project like that if we did not think that we were -- could financially manage that project today and tomorrow. So I think our vote on that project should be a signal of where we think we are and what we can manage.

Sure, that makes a lot of sense. My final question is just on the stock. You do trade at a fairly low valuation, and it's a discount to other commodity chemical makers.

When you think about it, why do you think this is the case? How would you think about trying to bridge this gap, the valuation gap?

What we do is, we focus on the operations and hopeful that our performance will be noted in the marketplace. So with projects like St. Gabriel and other projects we are looking at, we hope the market will recognize who we are. We hope our prior performance will be an indication of what our future performance is. So ours is very performance-driven.

You've spoken frequently about making value-accretive acquisitions. But flipping that around, would Pioneer ever be part of a larger organization in terms of taking part in industry consolidation?

We are always focused on maximizing the value to the shareholders. And in the acquisitions we have pursued several over the last couple of years but have been able to -- been unable to close because of expectation of the seller. So, again, we're very focused on our performance.

(OPERATOR INSTRUCTIONS). Jeff Gates, Gates Capital Management.

It looks like the spread between your industry operating rate and the industry was wiped out considerably in the fourth quarter. Can you talk about what caused that and the sustainability of that going forward?

For the last several years, we have had a spread with the industry. We believe this is attributable to that we try to run the supply and demand more like a distributor than a manufacturer, and we focus as our competitors do. But we focus a great deal of time on how to maximize that supply-demand balance. We have great integration with our production. And we actually have a vice president of distribution, which is unusual in the manufacturing, logistics and sales.

So it's the way they work together to meet the customer demands that we think gives us the extra points. Again, we're smaller than some of the other players, so we tend to be, I think, a little bit more nimble.

Alex Mitchell, Scopist Asset Management.

Can you talk about how the NOL came through the quarter and the effect of that on the quarter?

What we did is in -- throughout 2006 we came up with our estimated tax rate, including end release in our NOL. That is as we continue to get through the end of the year, truing that up. As you can see, in the fourth quarter your tax expense was much higher than it had been in the prior quarters. That predominately comes through truing up the quality of all of your estimates throughout the year and having your [end final] results and being able to look at the NOL and the fact that you are able to utilize the complete NOL throughout 2006. Because the only NOL that we have left at this point is the predecessor NOL.

Part of that NOL that was utilized was associated with the stock options, as I discussed.

So what was the effect, the dollar effect, of that in the quarter?

That was $5 million.

What was the EBITDA for the quarter?

It was $19 million. That also, I had indicated that there was a couple non-cash items that was recorded, and that got it up to about $27 million.

If you take out the non-cash?

Yes.

So $27 million without -- was EBITDA, without the non-cash items?

Associated with it -- what I had stated earlier is that if you look at that at the EBITDA of the $19.3 million, then if you look at the Cornwall closure that had associated with the pension that had a little over $1.1 million, a little over $1.1 million in the first quarter and then if you look at the environmental reserve that went through the cost of goods sold. Those were the only two adjustments that I had made reference to.

Can you talk about some of the -- at least in the qualitative sense as to what is going on in the industry that I guess this is the first time and maybe a little while that the industry is putting through price increases? Can you talk about, I guess, are there diminished imports? Obviously, I think maybe the effect of the Dow closures because the consultants, I guess, were universally pretty negative on the ECU last year. And I just wondered whether this has been --

What has happened is it seems that the third parties continue to push out the legs underneath the cycle. So they keep pushing it out. Some of their competitors seem to have had some operating issues, there's some issues in Asia that has reduced exports. They are still hitting the West, but not with the strength people thought. Europe is tight so the caustic is not coming in to the East, so that has allowed caustic to be stronger.

So, while the finals was weak in the second half of the year, the prices have failed on caustic and held better than anticipated on chlorine.

To the point where you actually think you can get through a chlorine increase?

Yes, yes. Now, how much of that we get through and when we get through is the question. But again, the chlorine increase we announced in February 25 and caustic in March of $40.

Can you help me out with SG&A, which was low in the quarter, and where you think that will level out in 2007, as well as energy costs?

Talking about the SG&A, there was a couple things that occurred in 2006. In 2006 I think we made reference to the fact that there was a lower bonus that occurred in 2006 compared to 2005. Also you had a reduction in your bad debt allowance that went through 2006. I'm not sure what would happen in 2007, but I don't think we continue to see the reduction in that in 2007. But those were kind of the two primary points I think we highlighted in the 10-K.

So we should use this new level as a -- going forward?

That's probably a pretty good estimate.

And energy costs?

On energy costs, we continue to see volatility in the natural gas price, which of course drives the electrical cost for our U.S. plants. Then at Becancour, we're seeing a very modest increase in the price of hydropower, as we have seen for the last several years.

So net they would be -- do you think they are flat with kind of how you ended up 2006?

Are you trying to look at the 2007 forecast?

Yes.

About half of our electricity comes from Becancour. It's a tariff, it's a modest increase. Then what you can do is you can basically just look at your volatility at your gas, and it impacts the -- it drives your St. Gabriel and your Henderson. So you had some run in the early part of this year, which pulled up the curve.

But the key is what happens after the winter (indiscernible) , if it retreats like it normally does. So about half of it is driven by natural gas. So the key is what happens as we get to March and April, is it normally retreats at that time.

Asset sales? Any more asset sales to come?

Yes. We see that as -- oh, asset sales? I'm sorry; I wanted you to ask you whether there are going to be greater asset sales, and I wanted to tell you yes on that. I'm sorry. But the question you asked was asset sales, and no, none in the foreseeable future

No more land sales or anything?

No. We sure like them, though.

Okay, but you're not projecting any?

No.

Could you just talk about the operating rate and whether you still expect to operate, whether you are currently -- I guess the industry was operating at 91% in January, and whether you are operating still above that? Or whether you can kind of -- how you look at, going forward, whether you still would be (multiple speakers) --

January was about mid-90s, February was in the high 80s. March looks like 100%, and the rest of the year looks strong.

I'm sorry. Those numbers that you just gave me were your operating rate?

Yes.

(OPERATOR INSTRUCTIONS). We have no question standing by. I would like to turn the conference back to our speakers for any additional or closing comments.

We appreciate everyone's participations and the questions, and hopefully we have answered those. We think 2006 was a solid year for Pioneer. We think 2007 is going to be a very good year for us also. We're excited about our outlook, and we're excited about the St. Gabriel project. Look forward to talking to you all at the next quarter. Goodbye.

Thank you, everyone, for your participation on today's conference. You may disconnect.