Olin Q1 2009 Earnings Call Transcript

Apr.28.09 | About: Olin Corporation (OLN)

Olin Corp. (NYSE:OLN)

Q1 2009 Earnings Call

April 28, 2009 10:00 AM ET

Executives

Joseph D. Rupp - Chairman, President and Chief Executive Officer

John E. Fischer - Vice President and Chief Financial Officer

John L. McIntosh - Vice President and President, Chlor Alkali Products Division

Analysts

Frank Mitsch - BB&T Capital Markets

Donald Carson - UBS

Christopher W. Butler - Sidoti & Company LLC

Edward Yang - Oppenheimer & Co.

Operator

Good day ladies and gentlemen and welcome to the Olin Corporation First Quarter 2009 Earnings Conference Call. My name is Michelle and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. And now I would like to turn the presentation over to your host for today's call Mr. Joseph Rupp, Chairman, President and CEO. Please proceed.

Joseph D. Rupp

Good morning and thank you for joining us today. With me this morning are John Fischer, Vice President, Chief Financial Officer. John McIntosh, Vice President and President of Chlor Alkali Products Business and Larry Kromidas our Assistant Treasurer and Director of Investor Relations.

Last night we announced that earnings from continuing operations in the first quarter of 2009 were $46.7 million or $0.60 per diluted share compared to $37.3 million or $0.50 per diluted share in the first quarter of 2008. During the first quarter of 2009, the Winchester business achieved the highest level of quarterly earnings in the history of the business.

In the first quarter of 2009 we realized $5 million of pre-tax gains, associated with the sale of land and other asset disposals. Our first quarter results also included a $4.9 million increase in the allowance for doubtful accounts related to the deterioration in customer credit. Sales in the first quarter of 2009 were $400.6 million compared with $399.1 million in the first quarter of 2008. Chlor Alkali earned $68.7 million in the first quarter as the record ECU net back of approximately $765 offset historically weak volumes.

Combined first quarter 2009 chlorine and caustic soda volumes declined 29% from the first quarter of 2008 levels. Our first quarter operating rate was 65% compared to 82% in the first quarter of 2008. In the first quarter of 2009 Winchester continued to experience the stronger than normal demand that began in the fourth quarter of 2008. The increased demand in combination with a year-over-year improvement in pricing resulted in record quarterly Winchester earnings of $17 million.

Earnings in the second quarter of 2009 are projected to be in the $0.30 to $0.40 per diluted share range. This forecast reflects the combination of continued weak demand and lower ECU pricing in Chlor Alkali. We expect ECU pricing in the second quarter to decline in the first quarter of 2009, but be higher than the second quarter of 2008. We do expect Chlor Alkali volumes including bleach to improve in the second quarter of 2009 when we compare it to the first quarter. Winchester second quarter 2008 earnings are expected to decline from first quarter levels which is really due to a normal seasonality of second quarter being a weaker quarter, as it's a non-hunting season quarter. But we expect it to be well above historic second quarter levels.

Let me discussed the Chlor Alkali and Winchester segments in more detail. First Chlor Alkali, the major issue our Chlor Alkali products business faced in the first quarter was the continuation of the historically weak demand environment that we began to experience in the fourth quarter 2008. As I just mentioned combined chlorine and caustic soda volumes declined 29% from the first quarter 2008, and were lower than we experienced in the fourth quarter of 2008. As a further point of reference were our chlorine to bios (ph) customers in the first quarter of 2009 were similar to the first quarter of 2008. Chlorine shipments customers to European customers were 48% lower and chlorine shipments to titanium dioxide customers were 16% lower.

One other characteristic of chlorine demand that we have seen in the first quarter is in the erratic ordering pattern; for example chlorine demand in February was significantly higher than in March, and we have seen better order flow in early April than we experienced in March. We believe this erratic ordering pattern reflects the low levels of inventories as the most end users. We also experienced a significant decline in caustic soda demand during the first quarter and we believe that overall demand for caustic soda may now be weaker than the overall demand for chlorine. For the first time in several years we ended the first quarter of 2009 with a meaningful level of caustic soda inventory.

Shipments of caustic soda are obviously a key variable and achievement of our second quarter earnings. On a positive note, we did experience a 4% year-over-year first quarter 2009 improvement in shipments of hydrochloric acid and 11% year-over-year increase in shipments of bleach.

As we look to the second quarter, we expect our operating rate to increase to low to mid 70% range. Demand on our industrial bleach business should increase as the quarter progresses. We also expect ECU netbacks to decline in the second quarter from the first quarter, as a continuation of weak overall demand for both chlorine and caustic put pressure on pricing. We've already seen a meaningful decline in caustic soda prices in an absolute dollar sense. Industry publications are forecasting the first to second quarter decline in ECU netbacks to be one of the largest ever.

We currently expect that ECU netbacks in Olin's system will decline over the course of 2009. Consistent with what we view as a normal Chlor Alkali cycle, the amount and rate of decline will be dependent on the demand for both chlorine and caustic soda. While imports of caustic soda have had a near-term impact on North America prices, we did not expect this to continue. Due to weaker demand for caustic soda in North America, U.S. producers have adjusted prices in an effort to regain market share. As our view that caustic soda imports are a normal part of the North American caustic soda pricing dynamics, but there are a number of factors that can limit their impact. The first factor is typically a 6 to 8 week lag, between the time the imported caustic soda is ordered and is actually available for use in North America. And secondly there is a limited amount of thermal and storage facilities in North America to store imported caustic soda.

The cost of ocean freight can be a significant deterrent to the economics of the importing caustic soda and this was demonstrated during late 2007 and early 2008 when higher fuel costs reduced these imports. And there are additional shipping costs that incurred after caustic soda is received on one of the coasts to deliver it to the end-use customer. Additionally over the past several years, North American Chlor Alkali industry has seen a net reduction in capacity and additional reductions are possible. The combination of these factors lead us to believe that while ECU netbacks are likely to decline over the balance of 2009, they will remain significantly higher and we have seen in previous downturns.

By the way fourthly we started our Henderson, Nevada facility which have been shut down due to equipment barrier since early December. The shutdown of this facility which represents approximately 8% of our total Chlor Alkali capacity resulted in a force majeure declaration for product shipments from both the Henderson and the border facility and the Santa Fe, California and Tracy, California bleach facilities. This force majeure was lifted on March 2nd.

Additionally our St. Gabriel Louisiana Facility, which is nearing completion of a major conversion and expansion project did not operate during the first quarter. We expect the facility which represents approximately 10% of Oiln's Chlor Alkali capacity to be restarted in June. Once the St. Gabriel plant is restarted, and assuming demand continues at our near current levels we intend to utilize our multi-plant system to optimize margins. This may include the idling of capacity at some sites. In addition to the Henderson, Nevada and St. Gabriel, Louisiana outage (ph) in addition to Henderson we had other outages in the first quarter. Our McIntosh, Alabama facility including the summed (ph) up joint venture and a 10 day planned outage and a three day unplanned outage during the quarter. The unplanned outage which occurred to the end of the quarter was caused by flooding that caused utility disruptions. There were no damage to our facilities.

The combination of Henderson, McIntosh and St. Gabriel outages resulted in approximately 18% of our capacity being idled in the quarter. The combination of McIntosh, Alabama and Henderson Nevada outages reduced pre-tax earnings during the first quarter by $4.2 million. In spite of the weak volumes, we continued to experience higher freight cost in the first quarter of 2009 compared to both the first quarter of 2008 and the fourth quarter of 2008. On a positive note, the rate of increase has been slowing. During the first quarter the average cost of electricity purchase declined. Driven by the Henderson, Nevada facility that purchases power from utilities that use a fuel mix that contains a significant natural gas component.

Now, let me turn to Winchester. During the first quarter, Winchester experienced a continuation of the above normal levels of demand that begin around the November Presidential election. The surge in demand has been across the majority of Winchester's product offerings including rifle, pistol and rimfire. Powder actuated tool volumes which are directly laid into the construction activity declined during the quarter.

The strength of the Winchester market is evidenced by their sales dollars and unit shipments. First quarter 2009 Winchester were $132.9 million compared to 110.8 million in the first quarter of 2008. Until the unit shipments increased 21% in the first quarter of 2009, compared to the first quarter of 2008. The quarter-over-quarter increase in commercial volumes was approximately 57%. The strength of the demand is further evidenced by Winchester's first quarter backlog position. The commercial backlog at the end of the first quarter of 2009 was a $148 million compared to $45 million at the end of first quarter of 2008. And during April this backlog has grown to $193 million.

A higher level demand allowed Winchester to exceed our prior expectations and to realize the highest level of quarterly earnings in the history of the business. Winchester earned $17 million in the first quarter of 2009 compared to $10 million in the first quarter of 2008. Previous level -- the highest previous level of quarterly earnings in Winchester the Winchester business was $11 million. Winchester quarterly results benefited not only from the higher volumes but also favorable pricing. The combination of which more than offset higher material cost. We expect Winchester to begin to realize lower material cost beginning in the third quarter. Winchester also continued to experience strong demand from the law enforcement and military customers.

During the quarter Winchester received a $22 million 50 caliber award which provides for deliveries through May of 2011 and a $12 million 9 Mm NATO award which provides for deliveries into 2011. At the end of the first quarter the total law enforcement and military backlog totaled a $144 million, which is an increase from the first quarter of 2008 level of $85 million. Winchester quarterly results also reflect excellent performance in its operations. The benefits of the relocation of activities to Oxford, Mississippi where we've seen an increase in productivity as well as lower costs have been amplified by the higher volumes.

This progress in the cost part will benefit Winchester after the current surge in demand stops. The obvious question surrounding Winchester is how long can this last; and the honest answer is we don't know. The last time the business experienced a surge of this type was in the early 1990s, and it lasted approximately six quarters. We are now in the third quarter of this surge and as our backlog numbers illustrated there is no sign of it easing.

I would emphasize that the continued success that the business has had in expanding its law enforcement military business, which currently accounts for 25 to 30% of Winchester sales compared to the approximately 15% several years ago. The increase in the law enforcement military business will likely continue after the surge run its course.

Before I turn the call over to John for some financial comments, I'd like to emphasize that I believe Olin is well positioned as we enter into this phase in the Chlor Alkali cycle. The acquisition of Pioneer has allowed us to reduce costs, and provide increased flexibility in dealing with lower levels of demand. It has also increased our presence in the industrial bleach market segment which provides the advantages of being essentially a non-cyclical business that commands a price premium while considering both chlorine and caustic soda. We currently have a capacity to sell approximately 10% of our easy-to-use bleach.

And finally as we have discussed, the Winchester business is well positioned for both near and longer term favorable performance. Now I'd like to turn the call over to our Chief Financial Officer, John Fischer who will review several financial items with you. John.

John E. Fischer

Thanks Joe. First I'd like to discuss a few items on the income statement. Selling and administrative costs increased $5.9 million in the first quarter of 2009 compared to the first quarter of 2008. The increase was primarily due to a $4.9 million increase in the provision for doubtful accounts receivable. During the quarter both the Chlor Alkali and Winchester to businesses encountered credit issues among their customer base.

In Chlor Alkali these issues were most evident among pulp and paper customers, while in Winchester the issues were focused in smaller retailer accounts. Also during the quarter higher salary and benefit cost were offset by a lower level of management incentive costs which included a $1.2 million reduction due to mark-to-market adjustments on stock based compensation. As a reminder $1 change in the prize of Olin's common stock changes pre-tax stock based compensation by approximately $400,000.

First quarter 2009 environmental, investigatory and remediation expenses were $4.8 million compared to the $5.1 million in the first quarter of 2008. These expenses relate primarily to remedial and investigatory activities associated with former waste sites and past operations. We continue to anticipate that full year 2009 charges for environmental investigatory and remedial activities will be similar to the full year 2008 level.

On a total company basis defined benefit pension plan income was $3.9 million during the first quarter of 2009, compared to $3 million of defined benefit pension plan income in the first quarter of 2008. We are not required to make any cash contributions to our domestic define benefit plan in 2009, and also believe it is unlikely we will be required to make any cash contributions in 2010. During the first quarter of 2009, $1 million cash contribution was made to our Canadian defined benefit pension plan. Defined contribution pension plan expense in the first quarter 2009 was $4 million, compared to $3.2 million in the first quarter of 2008. Over that period the number of employees participating in the defined contribution plan increased approximately 20%, compared to the first quarter of 2008. This reflects the continued transitioning of employees from the defined benefit plan to the define contribution plan.

The tax rate for the first quarter of 2009 was 37.2% compared to 36.7%, in the first quarter of 2008. We now expect the full year 2009 tax rate from operations to be in the 37% to 38% range.

Now turning to the balance sheet. Cash and cash equivalents at March 31,2009 were a $168.6 million, compared to $276 million at the end of the March 2008. The decline reflects the higher than normal levels of capital spending in 2008, which carried over into the first quarter of 2009, and higher levels of working capital in both businesses. Year-over-year increase in working capital reflects the high level of activity in Winchester and higher caustic soda and potassium hydroxide inventories in Chlor Alkali. March 31, 2009 working capital balances were approximately $89 million higher than the December 31, 2008 balances. Olin typically experiences a significant increase in working capital during the first two quarters of every year. This reflects the seasonal aspects of both the Chlor Alkali and Winchester businesses.

Based on our current forecast, we expect working capital to be a full year source of cash in 2009. In addition to the expected increase in working capital during the first quarter, Olin also made $20.6 million payment for the final settlement of the working capital adjustment on the sales of metals. This payment was consistent with the estimated working capital adjustment we anticipated from the transaction. Capital spending during the first quarter of 2009 was 49.8 million compared to 23.1 million in the first quarter of 2008. Approximately two-thirds of the 2009 spending was related to the same St. Gabriel, Louisiana conversion and expansion project. Based on a completion of these project we now expect 2009 capital spending to be in 135 to $140 million range. We also anticipate that approximately 65 %, of this spending will occur in the first half of 2009. We continue to expect full year 2009 depreciation expense to be approximately $80 million.

On April 23rd Olin's Board of Directors declared a dividend of $0.20 on each share of Olin's common stock. The dividend is payable on June 10, 2009 to shareholders of record at the close of business on May 11, 2009. This is the 330th consecutive quarterly 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. Clearly these are forward-looking statements and results could differ materially from those projected. Some of the factors that could cause actual results to differ are described without limitations in the risk factors section of our most recent Form 10-K and in our first quarter earnings release.

A copy of today's transcript will be available this afternoon on our website in the Investor Section under calendar events. The earnings press release and other financial data and information are available under press releases. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Frank Mitsch of BB&T Capital Markets. Please proceed.

Frank Mitsch - BB&T Capital Markets

Hey good morning guys.

Joseph Rupp

Good morning.

Frank Mitsch - BB&T Capital Markets

Joe, back on March 17th, you put out some guidance for the first quarter of a range of $0.60 to $0.65, which included $0.03 unusual in terms of land sale. So that would make in on an operational basis, 57 to 62 and you posed $0.56 on an operational basis. What accounts for the decline versus that mid March update?

Joseph Rupp

We can give it to you here, Frank.

John Fischer

Frank, this is John. There's three things that happened right at the end of the quarter. First we had an, a second asset disposal that was $1.3 million that happened right at the end of quarter, that we didn't think was going to be in the quarter. Second, we experienced significantly weaker box sales of caustic during the last 10 days of the quarter, and that reduced earnings between 3 and 3.5 million. And finally one of the bad debts that we discussed actually occurred after the quarter ended and we were forced to bring the effective debt back into the third quarter, and that was about $1 million. So if you net those three things, that's somewhere in the neighborhood of $3 million of pre-tax. That's really the difference.

Frank Mitsch - BB&T Capital Markets

I don't recall your bad debts being this high. Am I mistaken -- is this an unusual high level of bad debt expense?

Joseph Rupp

It is unusual.

Frank Mitsch - BB&T Capital Markets

And any thoughts on whether or not given the economy that we should anticipate this order of magnitude for a 2Q and beyond?

John Fischer

I have no reason to believe we'll see this level of magnitude in Q2. I think it would be safe to say that in this economy we're going to see more of bad debts going forward than we've seen in the last couple of years where essentially we haven't had any.

Frank Mitsch - BB&T Capital Markets

Okay, all right fair enough. Mr. McIntosh can you talk a little bit about the input situation to the West Coast coming up from Asia in terms of where's pricing in Asia and talk about a little bit about the shipping costs and I know that there was a discussion about some of the factors that you did not anticipate, the level of imports to remain at high levels; can you add some granularity to that?

John McIntosh

Yes, I can. If you go back to the last half of last year when caustic demand really, and pulp and paper and aluminum took some very precipitous declines the end of the year the Asian producers really found themselves with a surplus of caustic soda. No demand for the export markets that they normally would serve. At the same time in the North American continent we had historic high prices for caustic. And the combination of those two created -- what for lack of a better term I'll call an arbitrage opportunity for bringing caustic into the U.S., not only the West Coast but to the Gulf Coast and East Coast as well.

FOB Asia of caustic prices which were in the $500 range at the beginning of the year, dropped by the end of the first quarter to $200. And when you take that kind of a number and then you add $170 freight to it, to get it to the Gulf Coast and then you add $50 cost to get it through a shore tank, then you've got an FOB Gulf Coast caustic price in the $450 -- 420 to $450 range. And that's what led to the increase in imported caustic material coming into the U.S. in the first quarter.

Now, a couple of things have happened subsequent to that. Number one, the FOB caustic price in China has stopped dropping and in fact in April there are reports that it’s gone up some 30 to $50. And so, that's created -- that ripples through and creates a little higher landed price for caustic in North America. The other thing that's happened is the North American producers have met competitive situations to take back market shares that they lost to imported caustic.

Realistically, you have to understand that the total import caustic numbers if you look historically from China into North America are in the 800 to 900,000 tons a year, which represents a minority of the 13 to 14 million tones market in North America for caustic. So, although north although imported caustic into the US isn't the primary driver from a supply stand point, right now it is the primary driver from a price decline standard point. But as we see results from April we see some of that leveling out and stabilizing, at least in the short term.

Frank Mitsch - BB&T Capital Markets

John is fair to say that given the very high freight costs that are involved to ship the material over from Asia -- and by the way, just for clarification purposes I know there is some confusion out in the marketplace but caustic soda is typically shipped as a liquid and not a solid, is that correct?

John McIntosh

Correct.

Frank Mitsch - BB&T Capital Markets

Yes, thank you. Given the very high freight and steeper door (ph) cost etcetera, you are basically looking at a floor in the four plus $100 range such that the decline from the hurricane spike that we saw in the in fourth quarter and that carried through in the first quarter, the declines that you are talking about are starting to level out. Is that not fair to say?

John McIntosh

From our perspective, we believe that's a fair statement based on what we're seeing in the market and what we're seeing reported for pricing, not only FOB Asia but also pricing in North America.

Frank Mitsch - BB&T Capital Markets

So, it’s really more of a volume issue in terms of the economic activity?

John McIntosh

For us it is a volume issue.

Frank Mitsch - BB&T Capital Markets

Thank you, guys.

John McIntosh

Thank you.

Operator

Your next question comes from the line of Don Carson of UBS. Please proceed.

Donald Carson - UBS

Yes, thank you. John Macintosh, I just wanted to add -- ask you more Chlor Alkali questions. First off, if you could may be outline the difference between your realizations in the market, how much is your contract lag going to help you this quarter. For example, you talked about your expectation that this quarter's realizations will be above last year's Q2 590. And what impact does bleach play on your realizations in Q2 and Q3? Do you still expect bleach to be 100 and $120 ECU premium?

John McIntosh

Let me do the last question first Don. We continue see bleach at the high-end of that premium range for from comparative to an ECU and we've said historically that range can be anywhere from a 100 to $175. So what we've seen so far would put us at the high-end of that range. Both in our year-to-date performance of what we're seeing in this quarter. In terms of your first question was...

Joseph Rupp

Contract lags.

John McIntosh

Oh, contract lags. Let me just give you an example of how that would work. This is an ideal world example; our caustic pricing are for contracts that are indexed in the second quarter of 2009, would be impacted by a comparison of what the fourth quarter of 2008 pricing was relative to the first quarter of 2009 index is. Comparing those indexes for those two periods and then applying the change to a customer's price at the end of the first quarter to give a 2Q price.

So, in an ideal world if the fourth quarter index averaged a $1000 a ton, first quarter index averaged $800 a ton, then customer contracts driven by those indexes in the second quarter would see a 20% reduction. And that, because we're comparing quarters that are lagging; that's what drives the fact, that our prices lag going up, because the same mechanism works on the way up as it does on the way down. So, we continue to expect to see that continue. Now, in the real world the thing you overlay onto that is the fact is that there are competitive situations that you are forced to meet, because volume is an important consideration for us. But in balance when you put everything together we still see our prices lag going down and that's because of the contract mechanisms.

Donald Carson - UBS

And John, two follow ups. One, what percentage of your shipments in Q2 and Q3 are bleached, and then you thought that the floor be around this 420 range. I assume that's a contract floor because we do see some reports of even domestic spot business at prices slightly below that.

Joseph Rupp

Well those numbers I reported were really a combination of some spot prices that were reported and then some contract -- some competitive situations where contracts are being forced to lower levels. So it depends upon the situation. But in terms of bleach we've said that bleach represents about 10% of the ECUs we produce. There is a seasonal component to that obviously, so 2Q and 3Q bleach volumes are higher than the other two quarters of the year. So, it’s not a 10% number across evenly split amongst the four quarters and there will be some seasonal strength that we expect to see in the next two quarters.

Donald Carson - UBS

And just one question on volume, I heard reported that you've put border control on chlorine, is that just to manage your caustic inventories. And then secondly, once again we've seen proposals to perhaps force a closure of mercury cell plants. I assume that could actually -- the first Senator proposed that, and I know he's now President but if the current bill is more successful, could that help from a capacity standpoint, if the mercury plants have to be closed?

John McIntosh

Don, let me answer the first question and I'll let Joe answer the second one. We did enact order control for chlorine for our customers system wide early in the month of April. Driven by the dynamics of the situation that changed in our remarks, we commented that caustic demand is now what's driving industry operating rights and that's the first time that's been in place for several-several quarters.

And that reversal or flip flop between demand for the various parts of the ECU that are driving operating rates has created the situation where we're significantly behind in chlorine shipments to our customers and in order to protect our entire customer base we established order control for that part of our customer portfolio.

Joseph Rupp

Don, on the mercury question as you correctly pointed out similar legislation was introduced, actually Barack Obama introduced legislation a couple of years ago. So as in the past we're monitoring it and we're going to evaluate it carefully and one of the part of the evaluation is, does it make sense to convert to another technology or not and one option obviously is no conversion at all. So, we will evaluate all options.

Donald Carson - UBS

Thank you.

Joseph Rupp

Thank you.

Operator

Your next question comes from the line of Christopher Butler of Sidoti & Company. Please proceed.

Christopher Butler - Sidoti & Company LLC

Hi, good morning guys.

Joseph Rupp

Good morning.

Christopher Butler - Sidoti & Company LLC

I was hoping you might be able to speak to what your utilization rates as they progressed through the quarter. I understand that you're at 65% which is a little less than the fourth quarter, but could you give us a map of how things progressed?

John Fischer

If you are talking about the first quarter, Chris, we were an average of 65% for the quarter. But that really span numbers as low as the low 50s, in March and as high as the upper 70s in February and as our comments said the order pattern for chlorine over the quarter was in fact very erratic.

Joseph Rupp

We stand at being in the low 70s.

John Fischer

And we had significant outages which helped drive March's number, low and as we saw it in March in the low 50s. In the second quarter, we said in our remarks that we expect to be in operating rates in the low 70s.

Christopher Butler - Sidoti & Company LLC

And talking to the weak caustic demand, could you give us a little bit more color on exactly what's going there? Is this something that we can expect continues through the remainder of the recession or is this more temporary, what are you seeing there?

John McIntosh

Well I would tell you that from a visibility stand point we just have visibility to see when demand is going to return and we'll tell you -- I'll give you some first quarter facts to help you with the demand in the two key market segments that are really driving caustic consumption, low in pulp and paper -- global operating rates for pulp and paper in March were 88 % and that's better than North America which was only 77%.

In alumina, global aluminum consumption in the first quarter was down 20%, year-over-year. So at least looking backwards in the very short term both those industries which are key caustic soda consumption mark -- end-markets are weak and there is many things that leads us to believe in the short term that there's going be a very dramatic turnaround. How far we go before we start to see strength in those markets is be unknown that creates both lack of visibility, we have.

Christopher Butler - Sidoti & Company LLC

And if we're looking at the netback side of the ECU netback equation, should we be giving a bit of a benefit year-over-year with energy prices being down?

John McIntosh

The energy prices will be down and we've seen that in our comments about lower electricity prices. In terms of netback sort of remarks that we expected netbacks in the second quarter to be better than they were in 2Q in '08. And that's driven I think more by the fact that our contract prices or contracts lag and prices going down, that lag will be prevalent as we look into the second quarter.

Christopher Butler - Sidoti & Company LLC

I appreciate your time.

Joseph Rupp

Thank you.

Operator

Your next question comes from the line of Edward Yang of Oppenheimer, please proceed.

Edward Yang - Oppenheimer & Co.

Hi, good morning.

Joseph Rupp

Good morning.

Edward Yang - Oppenheimer & Co.

Are you expecting any alleviation on freight cost, certainly up 10% is better than up 30% which have been more the recent trend but with volumes down, do you think that freight costs will come down?

John McIntosh

I guess, I would hope the trend that we saw in the last year was one that could be repeated. But in all honesty, rail roads (ph) are under similar financial pressures because the overall economic conditions, reduced their revenue and reduced the volume of material they're moving and they continue to try to put pressure on the industry -- on our industry, on the chemical industry to raise rates to cover the, risk profile that they say is inherent upon the chemicals that they move for us. So, although I would hope that we're not going to see 30%, kinds of annual increases in the future I don't expect our freight cost to go down any time soon.

Joseph Rupp

The rate at which they will rise will be lower. We hope.

Edward Yang - Oppenheimer & Co.

Okay. Thank you, and back to the bad debt expense. How was that distributed in the income statement and was it one or two particular customers within pulp and paper or was it much more broad based?

John Fischer

In the income statement its shows up in the SG&A line. If you look at the segments it is included in the business segment operating income of the segment where it has a bad debt, the pulp and paper was actually two customers that were substantial. And that was really pre-clerical (ph) like where it was.

Edward Yang - Oppenheimer & Co.

And John do you expect additional. I mean it sounds like or how does two customers compare to your overall pulp and paper customer base. Do you have 30 customers or just size that relatively please?

John McIntosh

I don't know the exact number. I mean we have a significant number of pulp and paper customers. And even larger number of total mills that we serve -- serving multiple locations within one customer entity. So, its not a -- obviously it's not a large percentage of our portfolio of pulp and paper customers.

Edward Yang - Oppenheimer & Co.

Okay. And final question on the clarification on free cash flow. The declining cash -- your cash balance decline around 78 million or so and most of that as you know that was in the working capital side. I understand what's going on with the inventory situation with caustic. What's going on the payable side? Was that just all related to metals or is -- there is something else going on there as well?

John McIntosh

The majority of it is the metals, thing that I discussed.

Edward Yang - Oppenheimer & Co.

Okay thank you.

Joseph Rupp

Thank you

Operator

Your next question comes from the line of Thomas Hue of FR (ph), please proceed.

Unidentified Analyst

Good morning guys.

John Fischer

Morning.

Unidentified Analyst

Just wanted to know a little more detailed about the regional supplies in north (ph) that you see a specially when the St. Gabriel facility is coming back up? What kind of impact do you expect that's going to insert on your target market going forward?

Joseph Rupp

The question is what kind of impact will the start up of St. Gabriel have on our target market?

Unidentified Analyst

Yes.

Joseph Rupp

As we mentioned in the comments is that we are not expecting that facility to come up until June and when it comes up based upon market conditions we'll optimize running our multiple plants to where we get the best margins, meaning that some if necessary other operations would be curtailed if that's required.

Unidentified Analyst

And then would you say that going forward that the entire industry will be or even more rational in terms of a pricing?

Joseph Rupp

I don't know what's going to happen with the industry from a pricing perspective, to be honest about it at this point.

John Fischer

But I think its fair to say that the industry in the first quarter has demonstrated that they're willing to take capacity offline based on reduced overall demand. And most recently there's been an announcement that a producer is going to idle a plant a Chlor Alkali facility in Geismar, Louisiana and for at least the majority of the month of May. So, the producers are continuing to react to the North American supply-demand dynamics and I think we'll continue to continue to see that.

Unidentified Analyst

Okay, thank you.

Operator

That concludes the question-and-answer session. I'll now turn it back to Mr. Rupp for closing remarks.

Joseph Rupp

Thank you for joining us today and we look forward to speaking with you in July when we will announce the results of our second quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference, this concludes the presentation, you may now disconnect. Have a great day.

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