Olin Corp. 3Q 2008 Earnings Call Transcript

Oct.24.08 | About: Olin Corporation (OLN)

Olin Corp. (NYSE:OLN)

Q3 2008 Earnings Call

October 24, 2008 10:00 am ET

Executives

Joseph Rupp – Chairman, President, CEO

John Fischer – Vice President, CFO

Analysts

Frank Mitsch – BB&T Capital Markets

Donald Carson – Merrill Lynch

Michael Judd – Greenwich Consultants

Christopher Butler – Sidoti & Company

Barrett Evnon – Brownstone

[Costas Carastonis – Goldman Sachs]

[Keith Wiley – Goldman Sachs]

Operator

Welcome to the Olin Corporation third quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to your host today Mr. Joseph Rupp, Chairman, President and CEO.

Joseph Rupp

Thank you for joining us today. With me this morning are John Fisher, Vice President and Chief Financial Officer, John McIntosh, Vice President and President of our Chlor Alkali Product Business and [Larry Comedis] our Assistant Treasurer and Director of Investor Relations.

During the third quarter of 2008 Olin earned operating income of $87 million which is a record for the company and represents a 130% increase from the third quarter of 2007. Both the Chlor Alkali and Winchester businesses performed well and both are expected to post record full year results in 2008.

Sales for the third quarter of 2008 were $502.9 million compared with $350.3 million in the third quarter of 2007. Net income from continuing operations in the third quarter of 2008 was $37.7 million or $0.49 per diluted share. This includes the impact of the previously announced $26.6 million impairment charge at our corporate debt securities. Third quarter 2007 net income from continuing operations was $32.7 million or $0.44 per diluted share.

Chlor Alkali earnings improved 47% compared with the third quarter of 2007 which reflects the contributions and synergies of the Pioneer acquisition and improved prices. These factors allowed the business to overcome continued increases in freight and electricity costs. Year over year ECU netbacks improved 20%. Winchester's third quarter 2008 earnings of $9.8 million reflects the positive impact of improved pricing which offset higher costs.

Third quarter 2008 earnings benefited from a lower level of stock based compensation expense due to the decline in the stock price that occurred during the quarter and a $2.5 million reduction in income expense primarily associated with the finalization of the 2007 income tax returns.

Finally our third quarter results include $6.4 million of environmental expenses which are 60% lower than the unusually high third quarter of 2007.

Fourth quarter 2008 earnings are projected to be in the $0.65 per diluted share range which represents the highest level fourth quarter earnings since the spin off of Arch Chemicals in 1999. In Chlor Alkali improvement ECU netbacks is expected to offset the combination of seasonally weaker volumes and a lower level of overall activity. Winchester expects approximately break even results in the seasonally weak fourth quarter.

And now a more detailed discussion by business. I'm going to begin with Chlor Alkali. First an update on the impact of hurricanes Gustaf and Ike. Hurricane Gustaf which impacted central Louisiana forced a shut down of our St. Gabriel facility on August 31. The storm caused minor damage to our plant which we were able to repair within one week. Our third quarter results do include approximately $750,000 one time expenses associated with the shut down, repairs and restart of this facility.

On September 10 we issued a force majeure declaration for products shipments from St. Gabriel which lasted for seven days. The restart of the plant was delayed by the inability of some of our pipeline chlorine customers to accept deliveries due to damage to their facilities, our disruptions to the transportation system which disrupted the delivery of raw materials. The St. Gabriel facility was restarted without incident on September 13.

One additional impact of hurricane Gustaf was to delay the completion of the St. Gabriel conversion and expansion project scheduled for the first quarter of 2009 by an estimated three to four weeks. This will also delay some of the capital spending associated with this project from 2008 to 2009 and John will provide a capital spending update in just a few minutes.

Hurricane Ike did not directly impact any of Olin's facilities but did directly impact one of our Sunbelt joint ventures primary chlorine customers. As a result of this customer's inability to operate its facility to receive or return rail cars, Sunbelt issued a force majeure declaration for caustic soda on September 17.

This declaration was lifted on October 6 and the Sunbelt plant was restarted without incident.

Continued issues with transportation and other raw materials supplies along the Texas Gulf coast has limited Sunbelt to an operating rate since the restart of approximately 65%.

In addition to the one time expenses I mentioned earlier, the force majeure declarations reduced total Olin Chlor Alkali production in the third quarter by approximately 3% or approximately 12,000 ecu's.

In spite of these challenges, Chlor Alkali products earned a record $103.6 million in the third quarter which included a $31.7 million contribution from the Pioneer operations. The contribution from Pioneer includes the benefit of the synergies realized. The contribution from these synergies was approximately $10 million during the quarter. Chlor Alkali earnings in the third quarter of 2007 which included one month of contribution from Pioneer were $70.7 million.

Chlorine and caustic soda shipment volumes increased 29% year over year due to the inclusion of the Pioneer operations and as I mentioned, volumes were negatively impacted by approximately 3% due to the hurricanes.

Our operating rate during the quarter was 89% which compares to 97% in the third quarter of 2007. Chlorine demand has remained below the levels experienced in 2007. Caustic soda demand has continued to exceed chlorine demand and therefore remain tight in the Olin system throughout the quarter.

We expect operating rates to decline in the fourth quarter to the low 80% range reflecting a combination of a normal seasonal slow down, the conclusion of the peak bleach season and a lower overall level of activity.

Our ECU netback in the third quarter was $660 which represents a 20% increase of third quarter of 2007 and a 12% increase from the second quarter of 2008. The increase reflects the combined impact of lower chlorine prices and higher freight costs offset by higher caustic soda prices. Chlorine prices have now declined for four consecutive quarters and caustic soda prices have increased for eight consecutive quarters.

Looking forward, we expect Olin's ECI netbacks in the fourth quarter of 2008 to increase from the third quarter and to continue to increase into the first half of 2009. The impact of the two hurricanes which caused approximately 75% of the North American Chlor Alkali capacity to be shut down for some period of time makes it likely that a significant portion of $130 caustic soda price increase that was announced during the third quarter will be realized in the Olin system.

During the quarter the Chlor Alkali business continued to face higher costs, specifically electricity and freight costs. Freight costs, which as a reminder are reflected in a reduction of our ECU price, increased 27% in the third quarter of 2008 compared to the third quarter of 2007.

Year to date the freight component of our ECU netback has increased 30% compared to the first nine months of 2007. Third quarter 2008 freight costs were negatively impacted by work arounds made necessary by the disruptions to the transportation system which was caused by the hurricane.

Third quarter 2008 electricity costs increased approximately 16% compared to the third quarter of 2008 and increased 8% compared to the second quarter of 2008. We expect electricity costs to decline in the fourth quarter of 2008 compared to the third quarter due to lower seasonal rates at some of our plants, the lower projected operating rates which allow peak electricity prices to be avoided and the recent decline in natural prices.

Our efforts to achieve synergy savings from the Pioneer acquisition continues to be successful. During the third quarter of 2008 we began to realize the full benefit of the shut down of the Dalhousie, New Brunswick facility that was completed in the second quarter. Year to date we have realized approximately $26 million of synergies and based on the results achieved through the end of the third quarter we now believe it is likely we will achieve more than $45 million of synergies on an annualized basis.

Now let me turn to Winchester. Winchester's third quarter 2008 sales of $148 million and earnings of $9.8 million compared to sales of $129 million and earnings of $10 million in the third quarter of 2007. This reflects the combined impact of improved product prices, higher costs including commodity and metal costs, higher law enforcement sales volumes and lower commercial volumes.

The higher level of law enforcement sales reflects a robust order flow and as a point of reference, during the first nine months of 2008, law enforcement orders received by Winchester have increased 20% compared to the first nine months of 2007 and the backlog of orders has increased 33%.

During the third quarter of 2008 Winchester received law enforcement orders from the Canadian Border Services Agency, the Department of Homeland Security and the Federal Law Enforcement Training Center. These awards covered both training and service ammunition. Winchester has also continued to receive new military orders which totaled in excess of $20 million during the third quarter.

The products ordered by the military include shot shells, ejection cartridges and frangible ammunition as well as more standard nine millimeter, 556 millimeter and 50 caliber military ammunition. These orders provide for deliveries into 2010. During the third quarter of 2008 law enforcement and military contract sales accounted for approximately 25% of total Winchester sales.

While overall demand for the Winchester business during the third quarter was strong, we continue to see weakness in the distributor chain, some softness in the seasonal demand and for shot shells. Sales in the distributor trade channel declined 17% from the third quarter of 2007 to the third quarter of 2008. This decline was more than offset by the law enforcement and military contract sales increase of 23% from the third quarter of 2007 to the third quarter of 2008.

While we're seeing weakness in some commercial sales areas, we are also encouraged by the growth that has been achieved in the law enforcement and military contract area. The contracts that support law enforcement and military sales tend to be multi-year and they provide a stable base of business for Winchester in 2009 and beyond.

In spite of the recent declines in the prices of copper and lead, the cost of commodity metals and other materials continues to be a challenge for the Winchester business. In the first nine months of 2008 the purchase cost for copper, lead and zinc have all increased compared to the first nine months of 2007.

The increase has been especially pronounced in the price of lead which increased 85% year over year. The price of lead has been especially volatile over the past six months starting at the period at a price near $1.30, falling to approximately $0.70 per pound and rebounding back to over $1.00 per pound before falling back to the $0.70 range.

Winchester continues to work towards completing the relocation of its military packing operations from its East Alton facility to Oxford Mississippi. This relocation which involves approximately 100 jobs is now expected to be completed by the end of the year. It is expected to generate annual cost savings of approximately $3 million

Before I turn the call over to John, I'd like to emphasis two points. First, our third quarter results and fourth quarter outlook continue to demonstrate the benefits of our 2007 acquisition of Pioneer. During the third quarter, the benefits allowed us to overcome the negative impacts of two hurricanes and the continued escalation in the costs of electricity and freight. We are continuing to realize the expected synergies which should enhance our results as we move forward.

Secondly, the Winchester business has successfully offset escalating and volatile commodity costs. It is well positioned to combat lower sales volumes that might occur due to the weakening economic conditions. Winchester has successfully diversified its sales base which will benefit the business for the next several years.

Now I'd like to turn the call over to our Chief Financial Officer, John Fischer who is going to review several financial items with you.

John Fischer

First I'd like to discuss a few items on the income statement. Selling and administration expenses increased 15% or $4.6 million during the third quarter of 2008 compared to the third quarter of 2007. The increase is due primarily to the inclusion of the Pioneer operations for the entire quarter in 2008.

Legal and legal related settlement costs were $3.4 million higher in the third quarter of 2008 and were partially offset by lower management incentive costs resulting primarily from lower mark to mark adjustments on stock based compensation.

The mark to mark adjustment in the third quarter of 2008 which reflects a decline in the stock price from $25.99 per share to $19.15 reduced stock based compensation expense by $2.9 million. In the third quarter of 2007, mark to mark adjustments increased stock based compensation expense by $1.8 million. As a reminder, every one dollar change in the Olin stock price changes stock based compensation expense by approximately $450,000.

Corporate and other expenses in the third quarter of 2008 increased $1.3 million compared to the third quarter of 2007. Higher legal and legal related expenses were partially offset by the lower level of stock based compensation.

Third quarter 2008 environmental investigatory and remediation expenses were $6.4 million compared to $16.2 million in the third quarter of 2007. These costs relate primarily to remedial and investigatory activities associated with former waste disposal sites and past operations.

The unusually high third quarter 2007 charges included a $7.8 million increase in costs at a former waste disposal site that was based on revised remediation estimates resulting from negotiations with the government agency.

We believe the fourth quarter 2008 charges for environment, investigatory and remedial activities will be lower than the fourth quarter of 2007 by $8.6 million and we continue to believe that charges for environment expenses for the full year 2008 will be $25% lower than the full year 2007 charges.

Total company defined benefit pension plan income was $2.9 million during the third quarter of 2008 compared to an expense of $13 million in the third quarter of 2007. The expense level in the third quarter of 2007 included a curtailment charge of $6.6 million associated with the sale of the metals business.

The year over year improvement in the defined benefit pension plan expense reflects the impact of the $100 million voluntary contribution made in May of 2007, the favorable investment returns earned in 2007, a required basis point increase in the discount rate used to value liabilities, an increase in the period used to amortize plan losses and the impact of the plan freeze for salary and non-bargain hourly employees that became effective January 1, 2008.

The $15.9 million decline in defined benefit pension plan expense was partially offset by higher defined contribution pension plan expenses of $2.2 million. The employees affected by the pension plan freeze are now participating in a refined contribution plan.

Through the end of September the defined benefit plans investment portfolio had declined approximately 8%. The decline reflects the weakness in both the domestic and international equity markets and interest rate increases that reduced the value of some of the plans fixed income investments.

During the same period, interest rates on corporate bonds which are used to determine the plans liability discount rate have increased. This has resulted in an estimated 125 basis point increase in the discount rate. The combination of these two factors have preserved the overfunded position that existed in the plan at December 31, 2007.

As we announced earlier, third quarter 2008 results included in the other expense line, a $26.6 million impairment charge representing the full value of an investment in corporate debt securities. During the second quarter, a temporary unrealized pre-tax loss of $6.1 million was recorded on these securities against equity.

We are currently unable to utilize the capital loss resulting from this impairment. As a result, no tax benefit has been recognized in the financial statements. However, capital losses may be carried forward to offset future capital gains which may reduce future income tax expense when utilized.

The absence of a tax benefit on the impairment resulted in an effective tax rate during the quarter of 46.4%. This rate also includes a $2.5 million reduction in tax expense associated with the finalization of the 2007 income tax returns resulting from a larger than expected benefit from the domestic manufacturing deduction.

For the full year, including the impact of the third quarter items I just described, we expect the effective tax rate to be approximately 39%.

Now turning to the balance sheet. Cash and cash equivalents at September 30, 2008 were $200.2 million compared to $42.1 million at September 30, 2007. The September 30, 2007 cash balance did not yet reflect the impact of the sale of the metals business.

Year to date the cash balances declined by $105.8 million. This decline reflects the combination of several factors. First, the normal seasonal growth in working capital which is most pronounced in the Winchester business but also occurs in Chlor Alkali. Second, a higher overall level of working capital in the business, reflecting both higher selling prices and higher raw material input costs and third, the high level of capital spending in 2008.

Cash and cash equivalents are expected to be increased by approximately $50 million during the fourth quarter as the seasonal growth and working capital that occurs during the first three quarters of each reverses itself.

We continue to forecast that Olin will be a user of cash during 2008. The impact of higher selling prices and higher raw material costs in Winchester and higher selling prices in Chlor Alkali will cause working capital to increase during 2008 by $30 million to $30 million.

Capital spending during the third quarter of 2008 was $51.9 million of which $38.6 million was for the St. Gabriel, Louisiana facilities conversion and expansion project. Year to date capital spending has totaled $123.4 million compared to $40.1 in the first nine months in 2007. The St. Gabriel project has accounted for approximately 60% of the year to date capital spending.

For the full year 2008 we are now projecting capital spending to be in the $190 million to $200 million range which is $10 million lower than our prior forecast. As Joe mentioned earlier, the hurricane related outage at our St. Gabriel, Louisiana facility delayed the conversion and expansion project by approximately four weeks. This will delay approximately $10 million in spending on the project from 2008 to 2009.

Third quarter 2008 depreciation expense was $17.3 million and we now project full year depreciation expense to be approximately $70 million. As a reminder, annual depreciation expense is expected to increase approximately $10 million with the completion of the St. Gabriel project.

Yesterday, Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on December 10 to shareholders of record at the close of business on November 10, 2008. This is the 328th consecutive dividend to be paid by the company.

Before we conclude, let me remind you that throughout this presentation, we've made statements regarding our estimates of future performance. Currently 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 without limitations in the risk factor section of our most recent 10-Q and our third quarter earnings release.

A copy of today's transcript will be available this afternoon on our web site in the investors section under calendar events. The earnings press release and other financial data and information is available under press releases.

With that, we're now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Frank Mitsch – BB&T Capital Markets.

Frank Mitsch – BB&T Capital Markets

During the presentation you talked about the trends in ECU pricing third quarter up nicely from the second quarter, expecting the fourth quarter to be up from the third quarter. I think you talked about the first half of '09 being up further still. Can you talk about your confidence in that occurring particularly given some of the broader economic concerns that are out there?

John Fischer

Let me make two comments. As of the end of the third quarter, all of the $120, the lightest caustic price increase and some portion of the combined second quarter announced increases have yet to be implemented. As those are implemented in the fourth quarter we're comfortable that the impact of those will roll into the first half of next year.

There are geographies in the U.S., the west coast being one where 100% realization of those price increases will probably not occur just because of the impact of caustic being exported from other parts of the world, especially from China. But we're comfortable in the markets that we serve that we're going to have continued price increase opportunities into the first half of the year.

Frank Mitsch – BB&T Capital Markets

How about on the volume side? You indicated that fourth quarter is going to be down due to seasonality as well as economic concerns, what's your expectation for volumes as we start the new year?

John Fischer

The volume side of the equation is the one that we have the least clarity on and it's going to be driven at least in North America what happens in the vinyl's market and what happens in the overall level of economic activity. Our business historically sees fourth and first quarter as being the lowest volume quarters of the year for us, and we don't expect that trend to change.

I think the question for which I don't have an answer is just how much more downside is there for the vinyl's market. The last information I had post hurricane was the vinyl's market was operating in the mid 70% range. We wouldn't be surprised to see that number drop a little lower.

However, if it does, it just adds to the continued supply side complications for the caustic buyers.

Frank Mitsch – BB&T Capital Markets

So in a reverse way it's beneficial for your caustic pricing into next year.

John Fischer

That's correct.

Frank Mitsch – BB&T Capital Markets

On use of cash, I know you talked about postponing $10 million of CapEx into '09. Obviously your net debt level is extremely low. You've got solid cash flows. In the fourth quarter and into next year, what are your current thoughts on uses of cash particularly with your shares below $16.00?

John Fischer

As we've talked about before, we continue to look at ways to expand our chemical business, and we've often said that as we get into 2009 if we can't come out with something then we have to figure a way to reward shareholders. I would also say that in this volatile situation that we're going to be real careful what we do with the cash at this point in time.

Operator

Your next question comes from Donald Carson – Merrill Lynch.

Donald Carson – Merrill Lynch

Alumina and paper demand is coming down but the offset to that would be operating rates. I know in pvc domestic demand was down 11% this year and exports were up sharply and that window looks like it's closed. Are you expecting operating rates to come down even further and that enhanced supply tightness would offset any demand erosion for caustic? And as we look sequentially, as bleach season goes away that reduces your realization somewhat, but what kind of an increase would you expect sequentially with the fade in bleach and the implementation of these previously announced price increases?

John Fischer

Let me talk about operating rates first. It's very likely that fourth quarter operating rates for the industry will be lower than the third quarter. The industry rates for the third quarter were 82. That number was impacted significantly by September which had in the 60% operating rate range because of the hurricanes. But as I mentioned, we continue to see weakness in vinyl's across North America and we expect fourth quarter operating rates because of that and just overall economic activity to be lower.

As we move into the first part of the year, that's the big unknown for us and whatever downside there is on volume we expect an opportunity on caustic because if operating rates continue to drop, there are certain segments, especially in our business where we haven't seen significant drop off in caustic demand.

Our caustic customers are running strong and we continue to be behind in shipments. So for us, an operating rate reduction going into the first half of next year isn't necessarily an overall downer for our business.

Donald Carson – Merrill Lynch

What exposure do you have to the Alumina industry either indirectly through the Alumina contract. If I recall, the Alumina contract was 645 so one would expect that to be up even if it doesn't get up to the thousand spot level.

John Fischer

We would expect Alumina contract to go up as well. Our exposure to Alumina directly is basically zero. We don't export caustic out of our business and consequently we don't service any part of the aluminum market either in South America or Australian market.

Donald Carson – Merrill Lynch

Looking at power costs, will the reduction in power costs in Q4 be enough to offset the ever escalating freight costs?

John Fischer

We don't know. Let me just talk about them separately. We do expect electricity costs to go down and that's a typical pattern for us in the fourth quarter of the year and it's driven by lower operating rates and in this case it will be helped by lower overall fuel costs, natural gas costs.

Freight costs we continue to expect to go up. There are two components to freight costs; base freight rates for which the railroads have no competitive restraint and they will continue to raise those rates. The other part of overall freight is fuel surcharges, and those are tied to crude oil prices and diesel prices and with some lag in it. So we would expect to see those trend down at least based on what's happened in crude oil pricing in the last several weeks.

Operator

Your next question comes from Michael Judd – Greenwich Consultants.

Michael Judd – Greenwich Consultants

I wanted to be sure I understood what you were indicating backing up for the September quarter, if you were to exclude the special charge, what was the underlying tax rate in the September quarter.

John Fischer

In the September quarter, there was a discrete $2.5 million credit associated with the filing of our 2007 tax return. If you exclude that we continue to believe our effective tax rate on a recurring basis is somewhere between 36% and 27%.

Michael Judd – Greenwich Consultants

So if you had pre-tax income of $97 million and you applied a 36% tax rate, the underlying earnings per share was around $0.81. Is that right?

John Fischer

In that range, yes.

Michael Judd – Greenwich Consultants

If I understand correctly, the underlying clean tax rate that we should be using for the December quarter is approximately 39%. Is that correct?

John Fischer

That would be the reported full year effective rate giving consideration to all the unusual items. The rate that I would suggest you use for the December quarter is the 36% to 37% I just mentioned.

Michael Judd – Greenwich Consultants

We've obviously seen a pretty sharp decline in prices and other metal prices. I understand that you expect Winchester to be break even seasonally because it typically is in the December quarter. As you look to next year, it seems to me that business should improve. Shouldn't profitability be heading in the right direction for next year?

John Fischer

We have said that historically the most profitable times for the Winchester business are periods of slowly declining raw material costs. That doesn't typically trigger significant demands for price increases. I would not say that what we've seen in the copper and lead markets recently qualifies as slow declines.

All in, I would say ultimately it should be favorable for the business. I think you will see it will all lag out at some point in time. I would also point out that last year at this time, copper dropped down well over $1.50 and then ran right back up in the first quarter. I don't what to tell you is really going to happen there.

Michael Judd – Greenwich Consultants

I think you typically provide some operating rate information in your press release for the ECU's. I didn't see it this time, but you did indicate the industry operating rate was around 82%? Was your operating rate similar to that?

John Fischer

Our operating rate for the third quarter was higher than the industry rate. Theirs was 82%, ours was 89%. We said in the fourth quarter we would expect operating rates for Olin's system to decline and be in the low 80% range.

Michael Judd – Greenwich Consultants

In terms of pricing for the ECU, you had provided some information about time lag and you have contracts that basically limit on a quarterly basis the amount of price increase. Has that changed at all since last time we got an update or is it still pretty much the same.

John Fischer

It's still pretty much the same. There's not really been any change in how price increases get translated into realized price changes in our system.

Michael Judd – Greenwich Consultants

You've only got a few moving parts here and as I model these things out, I come up with a substantially higher earnings estimate for the fourth quarter than $0.65. Is there something else that I'm missing here?

John Fisher

We've said in our outlook those factors that we think are important to be considered.

Operator

Your next question comes from Christopher Butler – Sidoti & Company.

Christopher Butler – Sidoti & Company

During the conversation you touched on imports coming from China. I'm just wondering if we could get a little more color on that in light of the recent strengthening of the U.S. dollar. Also, is there a tipping point with the dollar that we can look at? Can you help us out in that degree?

John Fischer

Caustic prices from China have trended up $100 a ton or so in the last two to three weeks. I think that reflects several things. There have been imports of caustic from China into the U.S. predominately in the west coast, but it also reflect demands for vinyl's in Asia and overall Chlor Alkali production rates in Asia are headed downward so there is a beginning supply constraint on caustic in that part of the country that would even be available for exporting.

When we look at MedEx, net caustic exports from the U.S., we see both phenomena. We see that Med exports will decline by a little over 100,000 dry metric tons from 2008 to 2007 and that's on a base of over a million dry metric tons.

Chinese shipments comprise an increase. European caustic shipments into the U.S. are expected to remain relatively flat. So I think that even though there has been an improving situation, if you're trying to export caustic into the U.S. from a dollar standpoint, that's not offset totally by the supply constraints that both the European producers and the Chinese producers are seeing. They just don't have it available to send.

Christopher Butler – Sidoti & Company

You talked about the pension plan and the contribution in the quarter. With everything that's happened here in the market the last few weeks could you give us an idea what we're looking at for 2009 as far as the pension plan is concerned and the portfolio allocation and some changes that we might see here for the end of the year.

John Fischer

The pension plan allocation right now is about 75% fixed income and has been for most of the year. We do not foresee the scenario where in 2009 we're going to have to make any cash contributions. The last contribution we made was in May 2007 and we've said we don't expect to have to make additional contributions based on where we were as of September 30. I would say that view has not changed.

The last three weeks have been somewhat unusual and I don't know that I can comment on that because I don't have a full view of what's exactly happened.

Operator

Your next question comes from Barrett Evnon – Brownstone

Barrett Evnon – Brownstone

I missed the part where you talked about Pioneer's contribution to last years earnings as well as this years.

John Fischer

We said that Pioneer contributed $31.7 million during this quarter to the total earnings. That's all we said.

Barrett Evnon – Brownstone

What were the caustic prices in the second quarter versus the third quarter this year for you?

Joseph Rupp

We don't break those out.

John Fischer

ECU prices in the third quarter, in our remarks we said $660. ECU prices in the second quarter of this year were roughly $590.

Barrett Evnon – Brownstone

What were they last year in the third quarter?

John Fischer

Last year in the third quarter $542.

Barrett Evnon – Brownstone

You see them going higher in the fourth quarter?

John Fischer

We've said that we see the trend improving in the fourth quarter.

Barrett Evnon – Brownstone

On the caustic exposure, you're heavily exposed to Alumina? I understand the idea of reducing capacity rate they're going to be higher to support prices, but overall if demand declines. What do you think supports prices falling from where they are now? Is there something that you're exposed to personally that's going to keep your prices higher?

John Fischer

It's all supply and at least in North America we feel very comfortable that the impact of Alumina will be felt other places conceivable before it would be felt in North America. As we look forward for the next several quarters, we're comfortable that we see continuing improved bcu pricing.

Barrett Evnon – Brownstone

Are there certain sectors that use caustic that you are more exposed than others in the industry are? Are you benefiting from that or no?

John Fischer

We have our caustic market segment exposure in North America that the largest is probably pulp and paper and in the geographies where we serve the pulp and paper market, we historically believe that our customers are more cost competitive than some of the people they compete with. In recent history in terms of pulp and paper mills that have been closed or have been forced to reduce size or reconfigure would support that.

Our customers tend to be in market geographies where they remain more competitive than in some other geographies in North America.

Barrett Evnon – Brownstone

On the EPS front, what was your EPS excluding any one time charges for the quarter?

John Fischer

The best way to do that is to take $26.6 million added to net income and divide by the shares outstanding.

Barrett Evnon – Brownstone

It came around $0.68?

John Fischer

I think that's low. I think it's something up in the '80's.

Operator

Your next question comes from [Costas Carastonis – Goldman Sachs].

[Costas Carastonis – Goldman Sachs]

Have you seen the weaker CDP starting to reduce the domestic cost of demand? You mentioned China, prices over there are over $100, but again China slowed down. Do you see a gain cost to demand decline over there and the whole import/export situation changing?

John Fischer

We have not seen in North America any reduction in demand or any signs of weakness in the caustic consuming market segments that we serve. In terms of China, let me reiterate again. What's happening in China based on the information that we have is that [pro-oplyrates] operating rates are heading down because there's less demand for vinyl's and vinyl related products both for internal consumption and for export purposes out of China.

That reduction in operating rates is lowering the amount of caustic that's available and therefore the lower end of the amount of caustic available for export. We see that trend, although it won't eliminate imported caustic from China, it will put a supply side constraint on how much of it will show up so we don't see it being a significant impact at least in the short term.

[Costas Carastonis – Goldman Sachs]

I understand the supply part of the question. I was talking more of the demand equation, if the slowdown over there is going to reduce the actual users of caustic.

John Fischer

It may, but I think you have to remember that the swing for caustic demand in most of those countries is export, so to the extent that they have less caustic available on the supply side, that's going to have more of an impact on the amount they export than it's going to have on what they consumer internally. So even if there is a reduction in what they consume internally, we still don't expect that to be significant enough to make a big difference in the world wide trade and flow patterns for caustic.

Operator

Your next question comes from [Keith Wiley – Goldman Sachs].

[Keith Wiley – Goldman Sachs]

Could you break down your shipments? How much goes into pulp and paper industry for caustic and what are the other top three industries? What percentage goes into each of those industries?

John Fischer

We've not done that with Olin's business before. We have provided some information from an industry standpoint and I'd be glad to do that. For North America caustic core end demand by end use, the three largest segments are vinyl's, organics which includes eurothane, polycarbonates and then several smaller uses and then a whole host of others. Those two in and of themselves are the biggest two and account for nearly 65% of all chlorine consumption in North America.

From a caustic standpoint, caustic uses are much more evenly spread out and much more diverse. Pulp and paper is one of the largest organics which again includes eurothane, polycarbonates and other chemicals is another large category.

Inorganics which is titanium dioxide, silicates, is another significant category for caustic consumption in North America.

[Keith Wiley – Goldman Sachs]

If we just see the pulp and paper industry, is that maybe 30% of shipments of total industry caustic?

John Fischer

It's less than that for North America.

Operator

You have no further questions. I will turn it back to Mr. Rupp for closing remarks.

Joseph Rupp

Thank you for joining us and we look forward to reporting our full year results in January. Have a good holiday season.

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