Olin Corporation Q3 2009 Earnings Call Transcript

| About: Olin Corporation (OLN)

Olin Corporation (NYSE:OLN)

Q3 2009 Earnings Call Transcript

October 27, 2009 10:00 am ET

Executives

Joseph Rupp – Chairman, President and CEO

John Fischer – VP and CFO

John McIntosh – VP and President, Chlor Alkali Products Division

Analysts

Sabina Chatterjee – BB&T Capital Markets

Ed Yang – Oppenheimer & Co.

Christopher Butler – Sidoti & Co.

Don Carson – UBS

Philip [ph] – Royal Bank of Scotland

Kristen McDuffy – Goldman Sachs

Lavon Von Redden – Hocky

Richard O'Reilly – Standard & Poor's

Arun Viswanathan – UBS

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2009 Olin Corporation Earnings Conference Call. My name is Kiana and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions).

I would now like to turn the call over to Mr. Joseph Rupp, Chairman, President and CEO. Please proceed.

Joseph Rupp

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

Last night, we announced that net income in the third quarter of 2009 was $39.4 million or $0.50 per diluted share compared to $37.7 million or $0.49 per diluted share in the third quarter of 2008. For the third consecutive quarter, Winchester achieved the highest level of earnings in its history reflecting the combination of seasonally strong sales, the continuation of a stronger-than-normal demand that began in the fourth quarter of 2008, and lower costs.

Winchester earnings more than doubled in the third quarter of 2009 compared to the third quarter of 2008 driven by commercial sales which increased 22% year-over-year and improved costs.

While Alkali segment earnings of $3.9 million exceeded our expectations of a loss in the quarter due to improved pricing and higher volumes. As expected, Chlor Alkali earnings were significantly lower than last year due to lower ECU netbacks and lower volumes while Alkali sales declined 37% in the third quarter of 2009, compared to the third quarter 2008. This decline reflects both lower shipment volumes and lower prices.

Chlorine and Caustic soda shipment volumes declined 20% year-over-year, while ECU netbacks in the third quarter of 2009 declined 43% compared to the third quarter of 2008. Third quarter 2009 earnings included $44.3 million of pre-tax recoveries from third parties for environmental cost incurred and expensed in prior periods. And a $4.6 million pre-tax reduction in Selling and Administration expenses associated with the favorable resolution of a capital tax matter in Canada.

Fourth quarter earnings are forecast to be in the $0.15 per diluted share range, which includes an expected $35 million of additional recoveries of environmental costs incurred and expense in prior periods.

Fourth quarter 2009 Chlor Alkali earnings are expected to be similar to the third quarter of 2009 as higher ECU netbacks are expected to offset seasonally weaker demand. Earnings in the Winchester segment are expected to decline significantly from the third quarter due to normal, seasonally weaker demand, but are expected to exceed fourth quarter 2008 earnings. Winchester does expect fourth quarter 2009 demand to be stronger than historic fourth quarter levels.

Our third quarter earnings of $0.50 per diluted share exceeded our forecast of $0.20 per diluted share due to better than expected performance across our businesses. Chlor Alkali which we have forecast to lose money in the quarter, benefited from better than expected ECU netbacks and better than forecast cost performance.

A Winchester benefited from better than expected volumes and favorable cost performance. In addition to the favorable resolution of capital tax matter in Canada earnings are also benefited from a lower income tax rate than included approximately $4 million of favorable adjustments. I believe is especially noteworthy that in spite of the lowest ECU netbacks that we have seen since the third quarter of 2004 and continued weak volumes driven by general economic conditions, our Chlor Alkali business was profitable in the third quarter and furthermore we’re forecasting that Chlor Alkali business to be profitable in the fourth quarter.

Now let me discuss both segments in more detail. First I am going to talk about Chlor Alkali. In the third quarter 2009 our Chlor Alkali business continue to experience chlorine and caustic soda demand is well above historic levels, and these lower demand levels have been a significant driver of the reduced profitability that we’ve experienced this year.

During the first nine months of 2009, Chlor Alkali segment earnings have declined $121.6 million, 77% of which was attributable to lower volumes. Demand for chlorine and caustic soda remains a major challenge facing the business. While overall demand remained weak, chlorine and caustic soda volumes improved in the third quarter of 2009 compared to the second quarter of 2009, but remained well below historic levels.

The third quarter of 2009 improvement volume was 18% compared to the second quarter, but the third quarter 2009 volumes were 20% lower than the third quarter of 2008 volumes. On a nine-month basis 2009 chlorine and caustic volumes were 27% lower than the first nine months of 2008. Our Chlor Alkali business continued to experience weakness across our customer base.

Third quarter 2009 chlorine shipments to vinyls, urethanes, and titanium dioxide customers declined 18%, 43% and 1% respectively compared to the third quarter of 2008 levels. We also experienced 11% decline in shipments of potassium hydroxide and a 39% decline in shipments of hydrochloric acid during the third quarter of 2009 when compared to the third quarter of 2008.

One bright spot during the third quarter was bleach shipments which increased 21% compared to the third quarter of 2008, in our ECU basis these shipments exceeded 35,000 tons during the quarter which was our highest quarterly level ever. It should be noted that bleach is a seasonal business and that the third quarter of the year is typically strongest quarter for bleach shipments.

We expect fourth quarter 2009 bleach shipments to exceed the fourth quarter of 2008 levels. If consistently stated that we believe bleach is an attractive business as you know bleach consumes both chlorine and caustic soda and is a value added product that typically commands a $100 to $200 premium compared to chlorine and caustic soda.

We’ve recently initiated capital projects at three of our Chlor Alkali manufacturing locations to expand our capacity to manufacture and ship more bleach. We expect to spend approximately $12 million on this effort over the next 12 months.

Our third quarter 2009 operating rate was 74% which assumed that 100% of our demonstrated capacity was available for use. As we've discussed throughout this year, the capacity of our St. Gabriel, Louisiana plant has been idle all year and has not been available for use. The old mercury cell plant was made permanently inoperable during the first quarter of this year.

In addition, in response to the low levels demand this year, an additional 5% of our capacity is been idle during 2009 and is not currently available for use. If these capacity reductions are taken into consideration our effective third quarter operating rate was 86% and the year-to-date 2009 operating rate was 79%.

Our third quarter ECU netback was $375 per ton, which is – I mentioned earlier was the lowest level Olin has experienced since the third quarter of 2004. The third quarter 2009 netback declined 43% from the third quarter of 2008 and declined 36% from the second quarter of 2009.

During the third quarter of 2009 the entire decline and ECU netback was the result of lower caustic soda prices. Chlorine prices increased during the third quarter compared to the second quarter as we began to see a portion of the benefit from the chlorine price increases that were announced in the second quarter.

We anticipate chlorine prices to increase further in the fourth quarter of 2009 and continue to increase into the first quarter of 2010. We currently expect caustic prices to decline further in the fourth quarter of 2009 before the positive impact of the price increases announced in the third quarter begin to be realized. We expect to begin realizing these caustic soda price increases in the first quarter of 2010 with the expected fourth quarter movements in chlorine and caustic soda prices currently believe the third quarter of 2009 netbacks will be the lowest level we will see in this Chlor Alkali cycle as our fourth quarter 2009 ECU netbacks will improve compared to the third quarter.

In our second quarter 2009 earnings call, we discussed the substantial decline in Caustic Soda prices that began in the second quarter. One of the factors impacting that decline was an imbalance between chlorine and caustic soda demand that caused caustic soda production to exceed demand and resulted in caustic soda inventories held by producers to increase dramatically.

At the end of the second quarter, the volume of caustic soda inventory in our system was approximately 70% higher than normal. As of the end of the third quarter, this inventory situation has been corrected [ph] and caustic inventories in our system were actually slightly below normal levels.

Our third quarter Chlor Alkali results included positive cost performance. Our electricity costs, the largest component of our total Chlor Alkali costs declined approximately 20% in the third quarter of 2009 when compared to the third quarter of 2008. These costs had declined approximately 15% on a year-to-date basis.

We continue to aggressively manage our manufacturing schedules to optimize our electricity costs. Freight costs per ECU shipped on the other hand increased 8% in the third quarter of 2009 when compared to the third quarter of 2008 and on a nine-month basis freight costs per ECU shipped had increased approximately 9% from 2008 to 2009.

During the third quarter of 2009 we completed the construction of and the commissioning process for the production equipment at our new St. Gabriel, Louisiana facility. Start up process is expected to be completed, and the plant is expected to become operational this week. We anticipate that St. Gabriel conversion expansion project will reduce our annual operating costs at the facility by approximately $30 million due to more efficient electricity usage and the installation of a brine supply system. As a reminder, this facility has been idle since the fourth quarter of 2008.

Finally during our second quarter earnings call, we discussed legislation that had been introduced in the United States House of Representatives, which if enacted would ban the production of Chlor Alkali products using mercury cell technology two years from the date if it is enacted into law.

In the third quarter, the United States Senate introduced a Companion Bill. On October 21, the House Committee on Energy and Commerce passed a bill that would require Chlor Alkali producers using mercury cell technology to make a decision by June 30, 2012 as to whether they're going to shut down or convert the facilities. If the decision is to convert, the mercury cell plants would be required to be converted by June 30, 2015. If the decision is not to convert, the plants would be required to be shut down by June 30, 2013.

For this bill to become law, it must be passed by the full House of Representatives and the full Senate. No action has yet been taken by the Senate on this bill. Olin currently operates two facilities that utilize mercury cell technology totaling approximately 350,000 ECUs or 18% of our capacity.

Olin has and continues to operate these facilities in full compliance with all rules and regulations. We continue to closely monitor the progress of these bills, but it is not yet possible to determine what impact they will have on Olin or the Chlor Alkali industry.

Now turning to Winchester. During the third quarter of 2009, Winchester achieved record levels of quarterly sales and segment income as the business continued to experience elevated levels of demand that began in the fourth quarter of 2008. During the quarter, Winchester continued to experience strong demand across the majority of its product lines. Winchester's record third quarter 2009 sales of $168.2 million represents a 19% increase over the third quarter of 2008.

Commercial sales increased 22% year-over-year, which represent a 31% increase in units shipped. Contract sales, which include military and law enforcement customers increased 12% compared to the third quarter of 2008. Winchester's commercial backlog at the end of the third quarter of 2009 was $151 million, which represents a more than five fold increase from the third quarter of 2008.

Third quarter 2009 commercial backlog, as expected, declined from the second quarter level of 240 million reflecting the normal seasonally strong second quarter ordering and third quarter shipment patterns. Total backlog, including military and law enforcement, was $301 million at the end of the third quarter.

Winchester earned a record $23 million in the third quarter of 2009 compared to segment earnings of 9.8 million in the third quarter of 2008. The improvement reflects the combination of improved volumes and lower commodity and other material costs during the quarter. Winchester's average copper price in the third quarter declined 16% from the third quarter of 2008 and the average lead price declined 34% for the same period.

On a year-to-date basis, Winchester has earned $59.1 million in 2009 and compares with $29.3 million during the same period in 2008, and you will recall that Winchester's full year 2008 earnings of $32.6 million were a record.

We do expect Winchester's fourth quarter earnings to be significantly lower than the third quarter of 2009 but higher than historic fourth quarter levels and higher than the fourth quarter of 2008.

The fourth quarter of every year is typically Winchester's weakest. The hunting season demand typically concludes early in the quarter and the business has two production outages scheduled during the quarter. Based on September 30th 2009 backlog position, we expect the fourth quarter to be stronger than normal and on par with the fourth quarter of 2008. As we said in the past, previous surges in the purchase of commercial ammunition have lasted between four and six quarters.

The third quarter of 2009 represented the fourth quarter of unusually high levels of commercial demand in the Winchester business. The intensity of this surge in terms of products impacted and the level of demand has exceeded prior surges. Based on the backlog in the continuation of high levels of economic uncertainty, which is a condition that leads to increased commercial sales, we believe that Winchester's demand may remain strong into next year.

Finally, in August we successfully completed $150 million ten-year note offering. We took advantage of a market opportunity to enhance our liquidity, while maintaining staggered maturities, maturity amounts that we believe can be refinanced at all points in the Chlor Alkali cycle. I think that John Fischer and his team did an excellent job in positioning the Company with respect to this.

Now I would like to turn the call over to the Chief Financial Officer, John Fischer, who will review several financial items with you. John?

John Fischer

Thanks, Joe. First I would like to discuss a few items on the income statement. Selling and administration expenses decreased $4.4 million or 12% in the third quarter of 2009 compared to the third quarter of 2008. The decrease was primarily due to a decrease in non-income based tax expense of $5.4 million, the majority of which related to the favorable resolution of the Canadian tax matter.

In addition, recruiting, relocation, and travel costs decreased $2.3 million as a result of cost reduction efforts and the completion of the pioneer integration efforts in 2008. These decreases were offset by increased management incentive costs of $2.7 million primarily related to mark-to-market adjustments on stock-based compensation.

During the third quarter Olin's common stock appreciated 47% or $5.55 per share. As a reminder, every $1 change in the Olin stock price changes stock-based compensation expenses by approximately $400,000. Stock-based compensation expense in the third quarter of 2009 was $4.6 million compared to $400,000 in the third quarter of 2008.

Third quarter 2009 legal and legal related settlement costs increased $1.5 million compared to the third quarter of 2008. These legal and legal related settlement costs related to both the recovery actions for environmental costs that were incurred and expensed in prior periods and legal costs for other legacy environmental sites both former manufacturing and waste disposal sites.

Third quarter 2009 credits to income for environmental investigatory and remedial activities were $38.8 million, which includes the $44.3 million of pre-tax recoveries from third parties for costs incurred and expensed in prior periods. Without these recoveries, charges to income for environmental investigatory and remedial activities would have been $5.5 million in the third quarter of 2009 compared to $6.4 million in the third quarter of 2008. These charges relate primarily to remedial and investigatory activities associated with former waste sites and past operations.

As Joe mentioned earlier, we’re anticipating additional pretax recoveries $35 million in the fourth quarter from third parties for environmental costs incurred and expensed| in prior periods. Without giving consideration to the anticipated $80 million of recoveries in 2009, we currently expect full year 2009 charges for environmental investigatory and remedial activities to be in the $25 million range.

As a result of these projected fourth quarter 2009 recoveries, we do not believe that there will be additional recoveries of material amounts in the foreseeable future.

On a total company basis, defined benefit pension plan income was $4.6 million during the third quarter of 2009 compared to $2.9 million of defined benefit pension plan income in the third quarter of 2008.

We are not required to make any cash contributions to our domestic defined benefit pension plan in 2009 and also believe it is unlikely we will be required to make any cash contributions in either 2010 or 2011.

Defined contribution pension expense in the third quarter of 2009 was $3 million compared to $2.8 million in the third quarter of 2008. The majority of our active employees now participate in the defined contribution pension plan.

The tax rate for the third quarter was 29.5% compared to 46.4% in the third quarter of 2008 and 35% for the year-to-date 2009 period. The third quarter 2009 tax rate included several out of period adjustments that decreased third quarter 2009 tax expense by $4.3 million.

These items are related primarily to the finalization of the 2008 income taxes. Based on these items and our revised outlook for the business, we now forecast the full year 2009 tax rate to be in the 34% to 35% range.

The third quarter 2008 tax rate reflects the impact of a capital loss on the impairment of an investment in corporate debt securities for which no tax benefit was recognized.

Now turning to the balance sheet. Cash and cash equivalents at September 30, 2009, were $376.6 million compared to $200.2 million at September 30, 2008 and $192.2 million at June 30, 2009. The increase in the cash balance during the third quarter of 2009 reflects the proceeds from the $150 million ten-year note offering that was completed during the quarter.

September 30, 2009, working capital included the impact of a receivable associated with the environmental recoveries recorded in the third quarter, which will be received in the fourth quarter.

Working capital, after giving consideration to both the environmental recoveries and the second quarter working capital settlement associated with the metal sales is approximately equal to the year end 2008 level. As a point of comparison, during the first nine months of 2008, working capital increased approximately $162 million.

Cash flows during 2009 have also benefited from a $43.3 million decrease in cash tax payments. During 2009, Olin has reduced its cash tax payments by approximately $35 million resulting from the accelerated depreciation included in the 2009 American Recovery and Reinvestment Act. Our St. Gabriel, Louisiana conversion and expansion project is eligible for this accelerated depreciation tax deduction.

Capital spending during the third quarter of 2009 was $34.7 million compared to $61 million in the third quarter of 2008. The decline in the third quarter of 2009 capital spending compared to last year's third quarter is consistent with the completion of the St. Gabriel, Louisiana, conversion and expansion project and a multi-year major maintenance project at our McIntosh, Alabama facility.

Year-to-date capital spending totaled $122.3 million and is comparable to the first nine months of 2008 spending of $123.4 million. Approximately, 60% of the year-to-date spending in 2009 has been for the St. Gabriel, Louisiana conversion and expansion project.

We anticipate our full year 2009 capital spending to be in the $150 million range. The spending is higher than our prior forecast due to additional investments in our Winchester and bleach operation. We expect full year 2009 depreciation expense to be in the $75 million range.

Based on our preliminary outlook, we currently expect 2010 capital spending to be in the $70 million to $80 million range, and depreciation in 2010 to be approximately $90 million.

On October 22nd 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, 2009, to shareholders of record at the close of business on November 10, 2009. This is the 332nd consecutive quarterly dividend to be paid by the Company.

Before we conclude, let me remind you that throughout this presentation, we have 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 third quarter 2009 earnings release.

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

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Frank Mitsch of BB&T Capital Markets. You may proceed.

Sabina Chatterjee – BB&T Capital Markets

Hello. This is Sabina Chatterjee in for Frank Mitsch. Can you hear me?

John Fischer

We can. Good morning.

Sabina Chatterjee – BB&T Capital Markets

Good morning, great quarter. I was curious about the ECU trend, you had said down 40% sequentially and it was basically in line with what you had originally stated, but Chlor Alkali results were a lot better than we had expected, and you’d mentioned the volumes, but was there anything else that resulted in the big upside?

John Fischer

I think if you look at the ECU netbacks and you did the math, it was probably between $20 and $25 per ECU, higher than what we had forecasted. I would say volume was slightly favorable and then, Joe in his remarks, emphasized the favorable cost performance, the majority of which came from the management of electricity costs.

Joseph Rupp

Correct.

Sabina Chatterjee – BB&T Capital Markets

Okay. Will that favorable cost management continue into the fourth quarter?

John Fischer

Yes, it will.

Sabina Chatterjee – BB&T Capital Markets

Okay. And then on Winchester, we saw really good results, and it just seemed like you were operating on all cylinders, even in the second quarter and third quarter. And, just given the nature of today's times where there doesn't really seem to be any seasonality just driven by the legislative situation, do you really foresee seasonality being a big impact in the fourth quarter? I understand you have the two shutdowns, but it’s just hard for me to imagine that we would be down significantly?

John Fischer

We do see the seasonality unfortunately, Sabina. That historically happens because of hunting season. So you have all the shot shell that gets purchased in what we call hunting rifle, it gets purchased, it gets build in the second quarter, first and second quarter gets purchased in the second and early third quarter, and then we do almost always see that taper off. So, as we stated, we will see a better than historic fourth quarter, but we will see a decline in the fourth quarter.

Sabina Chatterjee – BB&T Capital Markets

Okay. Was there a benefit from mix in the third quarter?

Joseph Rupp

Was there a benefit from mix in the third quarter?

Sabina Chatterjee – BB&T Capital Markets

Yes.

Joseph Rupp

Not really.

Sabina Chatterjee – BB&T Capital Markets

Okay. All right, thank you.

Joseph Rupp

Thank you.

Operator

Our next question comes from the line of Ed Yang of Oppenheimer. You may proceed.

Ed Yang – Oppenheimer & Co.

Good morning.

Joseph Rupp

Good morning, Ed.

Ed Yang – Oppenheimer & Co.

First question, the 86% operating rate in the third quarter, what was that based on in terms of annual production volume?

John McIntosh

Ed, this is John. It was based on our roughly $1.9 million ECUs discounted for manufacturing capacity of our St. Gabriel facility that's idled and discounted by an additional

Joseph Rupp

5%.

John McIntosh

5% that was mentioned in the remarks of capacity that had been idled.

Ed Yang – Oppenheimer & Co.

Okay. So, John, what would that back into in terms of an actual volume number? Is it kind of $1.8 million or on an annual basis?

John McIntosh

$6 million and $1.65 million.

Ed Yang – Oppenheimer & Co.

$1.65 million. Okay, great. Thank you. On the CapEx side, question for John Fischer, you mentioned you raised the CapEx for bleach in Winchester. What are you spending on the Winchester side? Is that to increase your production volumes? I know you had been capacity constrained there.

John Fischer

It’s more cost reduction related, Ed.

Ed Yang – Oppenheimer & Co.

Okay. And staying on Winchester, there were some price movements on the competitive front. Did you see any market share shifts following your competitors moves and did you see any additional price action in the ammunition business?

Joseph Rupp

Normal pricing action that occurs in this period at a show that begins in November, and we have not really seen much shift from a marketplace perspective, market share perspective.

Ed Yang – Oppenheimer & Co.

Okay. Thank you, Joe, and on the $200 in caustic price increases that were announced late summer, how much of that has been accepted at this point?

Joseph Rupp

That price increase was really done in two pieces. The first increase based on what's been published in the industry has really – has been accepted or reflected in pricing towards the end of the quarter. So, we believe based on how our system is operating in our backlog that the second increase will be implemented later this quarter, and we should see the benefits of those into the first quarter of 2010.

Ed Yang – Oppenheimer & Co.

Okay. That's very helpful. And just lastly, you do sound quite a bit more optimistic on the Chlor Alkali cycle than you did in the last call, and you say that third quarter was the bottom in pricing.

How long do you think a new up turn would last? Have any past up turns lasted less than a year? Would this be a multi-year move up if we really have seen the turn? Like to get a better sense of some of the historical precedence and what your expectations are for margins and price and what peak margins and price will look in this cycle?

John McIntosh

Let me start by answering that it’s really dependent upon volume. As we look forward, we really don't have much visibility past this quarter. We are hoping that the macroeconomic trends will be in line with increased demand and increased volume for us to serve across all the market segments that we participate in.

But we're also all cognizant of the fourth quarter of last year when industry operating rates went from 85% in October to 50% in December. So, I guess, I would say that we don't expect another low point. We expect the third quarter was the low point in the industry, but for us to see a sustainable multi-year recovery is going to be driven by improvements in demand.

Joseph Rupp

I think the key point we want to make, Ed, is that we feel like we have bottomed out. We think we bottomed out, Ed, where we made a little bit of money. We think that we're still on the bottom here in the fourth quarter and we're hopeful that as we get into next year the demand picks up, but as John says we can't see that far out. We're hopeful that it does, and if it does, it will be a great move for our Chlor Alkali business.

Ed Yang – Oppenheimer & Co.

Okay. Thank you, Joe. And Just lastly on balance sheet. Your net debt, you basically have almost no net debt at this point, you’re sitting on $377 million in cash. What are your updated thoughts on some of the potential uses for that cash?

John Fischer

Ed, when we went out and issued the debt, we talked about three primary uses for cash. First of all, we looked at debt maturities that come up in 2011, and we wanted to make sure that we had the ability to service those, so we more or less pre-funded that.

The second point that we made was we want to make sure we have the resources necessary to restructure and/or down size the Chlor Alkali system based on whatever happens long-term with operating rates and whatever happens long-term with regulation.

And third, we're constantly on the lookout for acquisitions. I think at this point in time with the conservative view we would be looking more at small bolt on type things that might enhance our bleach business.

Ed Yang – Oppenheimer & Co.

Okay. Thank you very much.

Joseph Rupp

Thank you.

Operator

Our next question comes from the line of Christopher Butler of Sidoti and Company. You may proceed.

Christopher Butler – Sidoti & Co.

Hi. Good morning, guys.

Joseph Rupp

Good morning.

John Fischer

Good morning.

Christopher Butler – Sidoti & Co.

Just wanted to get back to the ECU question a little bit. You had mentioned that come in your netbacks that came – ECU netbacks came in $20 million, $25 million more than expected?

John Rupp

$25 per ton higher than expected.

Christopher Butler – Sidoti & Co.

Right. Are we looking at, you said that your cost controls are part of that. Is bleach a part of that? How do we – what happened that you came in stronger than you thought?

Joseph Fischer

We saw just a stronger seasonal component to bleach across the country than we had really forecast previously. In some sense, in the household bleach sector, it was really driven by some concerns over H1N1 virus and the disinfection capability associated with that, but that's only in the household sector. Industrial bleach sector was a little stronger than we had forecast, and our bleach business is growing. So we continue to bring on new customers and new demand.

Christopher Butler – Sidoti & Co.

And similarly help me understand that the cycle here a little bit. We seem to have picked up from the bottom as far as pricing for chlorine and caustic soda, the next leg to the cycle is going to be driven strictly by demand first, and then pricing second. Is that a good way of looking at it?

Joseph Fischer

Yes, sir.

Joseph Rupp

Yes, it is.

Christopher Butler – Sidoti & Co.

And as far as Asia is concerned, it sounds like that the issue with imports went away. Any guidance that you can offer as to at what price point Asia starts to look at the U.S. and start thinking about importing here?

Joseph Rupp

The imports of caustic in the third quarter of 2009 were 30% lower than they were in the second level, and that's really driven by the fact that pricing in North America had come down off of the first quarter peaks that we saw and also related to planned maintenance outages that were going on especially in the Chinese production sector.

What – in terms of where the breakeven point is, a lot of that’s determined by what freight costs are, and as crude oil prices go up, freight costs are going to go up as well. We have seen export pricing out of the Far East continue to improve. So, I think the only thing I can tell you is that, that breakeven point is getting higher than it was in the first and second quarters when there was significant increases in export volume into the U.S.

Christopher Butler – Sidoti & Co.

Thank you for that explanation. I will go back in the queue.

Joseph Rupp

Thanks.

Operator

Our next question comes from the line of Don Carson of UBS. You may proceed.

Don Carson – UBS

A few follow-up questions on ECU. John, did you get any of the final $75 price increase on chlorine, and we had heard that not all vinyl customers were paying all of the first 225s, just a comment on the chlorine pricing outlook?

John Fischer

Based on our system, I can tell you that we're comfortable that the great majority of the $225, the first two increases, have been accepted in the marketplace and will ultimately show up across our contracts subject to the limitations and timing associated with the nature of our contracts. We have not seen any benefit, and quite honestly, don't really expect to see any benefit from the last $75 at this point in time.

Don Carson – UBS

Okay. And speaking of contract timing, you mentioned that your – did I hear you right when you said your fourth quarter caustic price would be down sequentially from Q3, and if so, why would that be? Is that just because aren't you getting most of the first price increase now, and you'll get a portion of the second in the fourth quarter?

John Fischer

Most of the first price increase will not show up until the first quarter of 2010. The caustic price increases were announced in August, I believe, and if you look at the published index pricing that occurred in the third quarter, very little of that was reflected, and it was only reflected in the last month of the quarter. So, therefore the quarter lag which is the way our contracts have been structured, consistent for as long as I have been associated with reporting numbers, takes that improvement in caustic pricing into Q1 2010.

Don Carson – UBS

Okay. And speaking of contracts, I know you renewed your number by year-end, and the industry has bottomed and has recovered somewhat, but obviously it’s not where it was a year-ago. Are you seeing much pushback from customers on contract terms? And a related question would be, I know you don't sell much into the aluminum market for caustic, but we haven't seen a six-month contract for some time. Do you think we'll get back to that or is the industry more content to buy on a quarterly basis?

John Fischer

Your last question first. I think we already understand that negotiations for alumina – caustic into aluminum have already begun for the fourth quarter. So I think the industry is, at least in the short-term, is more comfortable with doing that on a quarter-to-quarter basis.

In terms of our contracts, I think where we have gotten the most pushback quite frankly is not in terms but in price, and that's where we have seen the most significant change. We think in the last – over the last cycle we have helped ourselves in contract terms and so we feel good going forward that as the industry comes out of these low points the trough for pricing that will be well-positioned.

Don Carson – UBS

And then two final questions. On operating rates, the industry seemed to go a bit too far in August at 85%, came down to 80% in September. That includes some outages such as part of Freeport. Where do you see the industry operating at in the fourth quarter and would you expect to be below that? And then finally I saw an announcement out of IP that they're closing some paper mills including one in Alabama. Does that negatively affect your volumes at some point?

Joseph Rupp

Your first question, I would expect industry operating rates to continue to come down gradually in the fourth quarter, because there still is a seasonal component to demand that we see and others see as well. I also would expect that derivatives, chlorine [ph] derivatives exported out of the U.S. will probably also come down in the fourth quarter, which will also drive operating rates down.

The IP announcements which, as I read it, were cardboard and corrugated plants in over three of them. We don't see that as impacting us in the short-term even though one of them was in our Alabama orbit, but if that is a sign or a trend of things to come in the pulp and paper market, then there will be impact across the industries based on the size of that market segment.

Don Carson – UBS

Thank you.

Operator

Our next question comes from the line of Philip [ph] of Royal Bank of Scotland. You may proceed.

Philip – Royal Bank of Scotland

Hi. Good morning.

Joseph Rupp

Good morning.

Philip – Royal Bank of Scotland

Can you tell me if there was a change in the inventory LIFO reserve during the third quarter?

Joseph Rupp

No, there was not.

Philip – Royal Bank of Scotland

Okay. And just a timing question with respect to the recoveries on environmental costs, the $44 million do you expect to receive that in cash in the fourth quarter?

Joseph Rupp

That's correct.

Philip – Royal Bank of Scotland

And the $35 million do you expect to receive that in the fourth quarter or that fall into 2010?

Joseph Rupp

I don't believe we commented on that.

Philip – Royal Bank of Scotland

Okay. Can you comment on that?

Joseph Rupp

I think we believe it will be received in the fourth quarter.

Philip – Royal Bank of Scotland

Okay. All right. Thank you.

Joseph Rupp

Thank you.

Operator

Our next question comes from the line of Kristen McDuffy of Goldman Sachs. You may proceed.

Kristen McDuffy – Goldman Sachs

Can you please talk about demand trend in the major caustic end markets in the third quarter?

John Fischer

Yes, I can. What we saw in the third quarter from a demand trend was that – although demand overall is way below historical patterns for what you would expect in the third quarter, we did see improvement from second quarter '09 to third quarter '09 across most of the caustic segments.

For our system we saw reasonable improvement in pulp and paper, we saw reasonable improvement in brominated [ph] chemicals, and in across a broad spectrum of different metals markets that we sell into, so the caustic market from an overall segment standpoint, it was favorable in the third quarter relative to what we had seen in the prior two quarters of the year, but everything is relative and when you compare it with what we would normally expect to see in the quarter, it was still well off.

Kristen McDuffy – Goldman Sachs

Okay. Thank you. Would you say that chlorine or caustic demand is driving your operating rates at this point?

John Fischer

Chlorine demand, our backlog on caustic is a significant number.

Kristen McDuffy – Goldman Sachs

Okay. And then just lastly for your Winchester business, I know you forecasted a sequentially seasonal decline on (inaudible) the seasonality. When you look into 2010, do you expect to continue to see high demand levels that you’ve benefited from in 2009?

Joseph Rupp

What we’ve said pretty much, Kristen is that this surge normally last for four to six quarters. We've completed the fourth quarter, so as far as we can see we would expect levels higher levels in the – certainly in the first two quarters of next year.

Kristen McDuffy – Goldman Sachs

Great. Thanks.

John Fischer

Thank you.

Operator

Our next question comes from Lavon Von Redden of Hocky. You may proceed.

Lavon Von Redden – Hocky

Good morning. Couple of questions. Gabriel, what's the capacity there?

Joseph Rupp

The new capacity of the plant will be roughly 245,000 ECUs a year.

Lavon Von Redden – Hocky

And you mentioned in the potential legislation. If you were, and I am sure you have probably done a number a look [ph] at the background work there, if you did need to change from the mercury process, what would that cost approximately for the two plants that you have currently?

Joseph Rupp

The type of costs that we have if we do that, the costs to convert is in the $800 to $1,000 per ECU range, which is obviously a significant cost, and it is dependent upon the materials, etcetera, that we have to – the coppers, the steels, etcetera, we have to buy to install in the plant.

Lavon Von Redden – Hocky

And so, just to take the – what you say 1 point? I think was accretive?

Joseph Rupp

We said we have 350,000 ECUs.

Lavon Von Redden – Hocky

Okay. And you mentioned this six-to-eight quarter kind of ramp in Winchester. Obviously, you have done some work there to kind of give yourself a lower cost perspective? Where do you see the margins returning to once we get through this ramp on the Winchester business?

Joseph Rupp

We had an improvement in margins before the run up in the surge, and that was a result of pricing actions that were taken in the year back in 2004 when commodities started to move. So we would continue to see margins that were back reflective of that range, which was back in 2008 prior to the surge which began in the fourth quarter.

Lavon Von Redden – Hocky

If you look at the 2008 numbers for margins for Winchester to kind of think about where we get return to?

Joseph Rupp

Right.

Lavon Von Redden – Hocky

And final question is, you kind of mentioned that the chlorine portion is really kind of driving the ship here. I guess the previous caller from Hong Kong [ph] had asked the question related to what's happening in the caustic markets, I was going to actually ask that question related to the chlorine end markets to get a better feel of what's happening there?

John Fischer

Chlorine has been less – chlorine improvement in the third quarter from the second quarter of '09 has been less robust. We have probably seen the strongest improvements in the TiO2 business. That has been a strong segment for us for the majority of 2009. That trend continued in the third quarter. We have seen some improvement in MDI/TDI, but that's off of very low base looking into the first half of this year. And a lot of the other market segments really have been flat in terms of growth and have not exhibited some of the more robust growth numbers we have seen on the caustic side.

However, again, when you put it in a relative perspective and you compare chlorine demand year-over-year and historically our demand continues to lag well behind what we would expect historically.

Lavon Von Redden – Hocky

Thank you.

Operator

Our next question comes from the line of Christopher Butler of Sidoti and Company. You may proceed.

Christopher Butler – Sidoti & Co.

Hi, guys, just a quick follow-up on Winchester. You had mentioned four to six quarters is fairly typical for this type of growth pattern. Could you speak to what happens after that historically? Do you find yourself in a trough as everybody kind of filled their pockets with shells?

John Fischer

That's what happened historically, Chris, there is a trough that occurs as you tail off of that. Our thinking is that the depth of that trough may be a little bit higher than what has been in the past, and that’s because of the fact that the surge, there has been a lot more handguns that have been purchased which require the consumable, which is the ammunition.

Christopher W. Butler – Sidoti and Company

I appreciate your time.

John Fischer

Thanks.

Operator

Our next question comes from the line of Richard O'Reilly of Stan and Poor’s. You may proceed.

Richard O'Reilly – Standard & Poor's

Hi. Good morning, gentlemen, Standard & Poor's. It is a question for John Fischer, and he answered part of my question, I realized part of the answer to my question, but what's that other corporate and allocated costs? What should we be forecasting or using for the fourth quarter for that? There is a lot of moving parts in there?

John Fischer

I think if you looked at that historically over a period of time, it’s between $15 and $17 million a quarter.

Richard O'Reilly – Standard & Poor's

Okay. Fine. Okay. And, Joseph, near the end of your prepared comments on Winchester, I thought I heard you use the word par and did I mishear you?

Joseph Rupp

Par?

Richard O'Reilly – Standard & Poor's

Yes, I might have just misheard you. I didn't know if you were implying the fourth quarter would be on par with a year-ago fourth quarter? I must have just missed it?

Joseph Rupp

Our outlook is that it will be – we anticipate that the fourth quarter of '09 should be slightly better than the fourth quarter of '08.

Richard O'Reilly – Standard & Poor's

Okay. Fine. Thank you, then. Okay.

Operator

Our next question comes from the line of Arun Viswanathan of UBS. You may proceed.

Arun Viswanathan – UBS

Hi, guys. Thanks for taking the question. Just wanted to clarify a couple of things. The 73% operating rate, is that off of, what’s that actually off of as far as capacity per days – completed 1955 or is it…?

Joseph Rupp

It is off the 1955.

Arun Viswanathan – UBS

Okay. And then can you give us some sense of how, I know the bleach shipments were up, but is that actually included in the 376 netback or is it not?

Joseph Rupp

No, no.

Arun Viswanathan – UBS

Bleach price? No?

John Fischer

No, sir, it’s not.

Arun Viswanathan – UBS

Okay. And then similarly, do you have a level of profitability for some of these products that you could help us understand?

Joseph Rupp

We've not given separate profit numbers for the different co-product’s businesses.

Arun Viswanathan – UBS

Right, but that's also not included in your ECU production per se, right?

Joseph Rupp

The ECU price is chlorine and caustic soda sales.

Arun Viswanathan – UBS

Right. But then the ECU production of 73% does not include any kind of relationship with the co-products per se?

Joseph Rupp

No, it does.

John Fischer

It does. The volume that is used to produce bleach and other co-products is part of the volume that the 73% is calculated.

Arun Viswanathan – UBS

Okay. All right. Thanks.

Joseph Rupp

Thank you.

Operator

With no further questions in the queue. I would like to turn the call back over to Mr. Joseph Rupp for closing remarks. You may proceed.

Joseph Rupp

Thank you for joining us today. We hope you will join us in January when we announce the results for full year of 2009. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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