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Olin Corporation (NYSE:OLN)

Q1 2010 Earnings Call Transcript

April 27, 2010 11:00 am ET

Executives

Joseph Rupp – Chairman, President and CEO

John Fischer – VP and CFO

John McIntosh – VP and President, Chlor Alkali Products Business

Analysts

Frank Mitsch – BB&T Capital Markets

Christopher Butler – Sidoti & Company

Edward Yang – Oppenheimer

Sergey Vasnetsov – Barclays Capital

Don Carson – UBS

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2010 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. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would like to turn the conference over to your host for today, Mr. Joseph Rupp, Chairman, President and Chief Executive Officer. You may proceed.

Joseph Rupp

Good morning. 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 first quarter of 2010 was $14.1 million or $0.18 per diluted share compared to $46.7 million or $0.60 per diluted share in the first quarter of 2009.

Winchester achieved the highest level of first quarter earnings in its history and the second best quarterly results ever, reflecting the continuation of the stronger than normal demand that began in the fourth quarter of 2008.

Winchester’s record level of quarterly earnings occurred in the third quarter of 2009. In the first quarter of 2010, Winchester benefited from lower commodity costs and reduced bad debt related expenses when compared to the first quarter of 2009, which more than offset lower sales volumes.

First quarter 2010 Winchester volumes remain well above 2008 levels. Winchester’s first quarter 2010 segment earnings were $19.5 million compared to $17 million in the first quarter of 2009.

Chlor Alkali 2010 segment earnings of $10.6 million reflected a sequential improvement from the fourth quarter 2009 earnings of $5.2 million. Both ECU net backs of product volumes improved during the fourth quarter of 2009. First quarter 2010 Chlor Alkali segment earnings include approximately $1.4 million of costs directly associated with the first quarter force majeure event at the McIntosh, Alabama facility.

The first quarter 2010 Chlor Alkali operating rate was 75% compared to the fourth quarter 2009 rate of 70%. First quarter 2010 earnings included $2.6 million of pretax recoveries from third parties of environmental costs incurred and expense in prior periods. A $1.3 million pretax charge associated with an agreement to withdraw from a multi-employer defined benefit pension plan and a $3.8 million favorable adjustment of the income tax expense.

In second quarter 2010 net income is forecasted to be in the $0.15 to $0.20 per diluted share range. Second quarter 2010 Chlor Alkali segment earnings are expected to more than double compared to the first quarter of 2010, reflecting both improved pricing and improved demand. Segment earnings for Winchester projected to decline from first quarter levels, primarily due to higher commodity costs.

Charges to income for environmental and remedial activities were forecast to increase to the $6 million to $8 million range in the second quarter of 2010. The second quarter 2010 forecast for environmental and remedial costs does not include any recovery of costs incurred in expense in prior periods. The second quarter 2010 forecast includes approximately $2 million of favorable tax adjustments to income tax expense.

Now let me discuss the segments in more detail. First, Chlor Alkali. During the month of March Chlor Alkali business experienced its highest level of chlorine demand since the third quarter of 2008. And this level demand has continued into April.

Our operating rate during the month of March was 80% which represents a significant improvement over the 70% in January, 75% in February operating rates. The overall first quarter 2010 operating rate of 75% represents a meaningful improvement over the first quarter of 2009 rate of 65%.

During the first quarter of 2010 we experienced an unplanned seven day outage at our McIntosh Alabama facility that resulted in a force majeure to a declaration on January 15. We are able to satisfy our customers with shipments from other locations. It did result in approximately $1.4 million of additional first quarter expenses. The force majeure declaration was lifted by January 28.

First quarter 2010 chlorine and caustic soda demand increased 20% from first quarter 2009 levels. During the first quarter of 2010, we also experienced a significant increase in potassium hydroxide shipments which more than tripled over first quarter 2009 levels.

First quarter 2009 shipment levels were adversely impacted by a raw material availability issue which was associated with the labor stoppage at a supplier. First quarter 2010 shipments of hydrochloric acid declined 23% compared to the first quarter of 2009, reflecting the combination of lower levels of domestic oil and natural gas growing, and an increasing amount of bi-product acid available in the market.

Bleach sales which I will discuss I more detail in a minute increased 12% in the first quarter of 2010 compared to the first quarter of 2009. This represents a ninth consecutive quarter where we have experienced year-over-year increases in bleach shipments.

The increasing in chlorine demand was reflected in first quarter 2010 shipments to urethane and vinyls customers which increased to 61% and 4% respectively, compared to the first quarter of 2009. While first quarter 2010 chlorine demand has improved it does remain well below the levels experienced in the 2005 to 2007 period.

Looking ahead to the second quarter we are optimistic that the demand levels experienced in March will continue. As we move through the second quarter we anticipate seasonal demand from bleach to result higher operating rates. Also during the second quarter we have maintenance outages planned in four of our facilities including a 14-day outage in Henderson, Nevada and a 7-day outage in Niagara Falls, New York.

Over the past year we have continually taken steps to optimize operations in response to the reduced demand environment we are faced. The capacity of our Becancour Canada facility has been reduced by 65,000 tons or 20%. This is diaphragm capacity several months to bring back online and may never be restored. Because of its location the Becancour facility incurs some of the highest freight costs in our system.

In addition, we permanently eliminated a total of 5,000 tons at our mercury cell plants. The combination of these actions has reduced our total Chlor Alkali capacity by approximately 4% and we are continuing to assess actions that will result in the most cost-effective system.

We currently believe that the full amount of the first quarter $75 per ton caustic soda price increase has been accepted in the marketplace and has been reflected in the pricing indices.

Our first quarter 2010 ECU netback was approximately $440 which represents a 4% improvement over fourth quarter 2009 netback. And reflects the combination of improved caustic soda pricing and lower freight costs.

During the first quarter an additional $80 per ton caustic soda price increase was announced for implementation on April 1. There’s pressure to implement the price increase gradually throughout the quarter which limit the positive benefit we could experience in the second quarter.

We believe the industry is aggressively pushing this price increase. During the second quarter we also expect chlorine prices to weaken in our system. This decline in chlorine prices reflects the weakness of chlorine demand that industry experienced early in the first quarter which was reflected in price indices at March 31 and will impact our contracts in the second quarter. The decline in chlorine price will mitigate some of the benefit from the caustic price increase.

We continue to focus on optimizing our plant utilizations to minimize our manufacturing costs for the third consecutive quarter. Electricity costs per ECU produced decline. In the first quarter 2010 these costs were 8% lower than first quarter of 2009. And it continues to reflect on our efforts to produce our products at the most cost-efficient facility during the times days of the week that are the least costly.

During the first quarter of 2010 the recently completed St. Gabriel, Louisiana facility accounted for approximately 15% of our total production. Utilization at the same St. Gabriel facility and associated shipment of chlorine by pipeline resulted in a 6% reduction freight costs per ECU. It’s the first time since 2005 that we’ve seen a reduction in freight costs per ECU.

That being said, the cost of shipping our product by rail, especially the chlorine side of the molecule has been and will continue to be challenging. To put the degree of this challenge into perspective on the facilities specific bases since 2002 we are seeing freight costs increase in the compounded rate by as much as 25%.

As I said earlier, the freight costs were a key factor in our decision to reduce capacity at our Becancour Canada facility and in our decision to convert and expand the St. Gabriel facility.

As I mentioned earlier bleach volumes in the first quarter of 2010 increased 12% compared to the first quarter of 2009 and have increased 24% since the first quarter of 2008.

We continue to believe that we can grow our bleach volumes in 2010 by 30% compared to 2009. A portion of this growth will be accomplished by expanding our ability to ship bleach by rail which is expanding our geographic reach.

We’re also seeing an increasing number of municipalities electing to switch to bleach to avoid handling chlorine. This also presents an opportunity for Olin to grow its business.

In addition, we are continuing to look for and investigate investments further to expand the bleach business. In the first quarter we have made a small investment to expand our bleach joint venture which operates in the southeast. This investment will increase to joint ventures bleach shipments by approximately 25%.

As we have mentioned in the past we are currently in the process of expanding our bleach manufacturing and shipping bleach by rail capabilities at three of our Chlor Alkali locations. These projects are expected to be completed by summer.

We also expect to initiate in the next 30-days the low salt, high-strength bleach facility project that we discussed in our fourth quarter call. This facility which will be co-located with one of our Chlor Alkali facilities will require $15 million to $20 million of capital between 2010 and 2011. The facility will increase our bleach making capacity by approximately 15%.

We’re also in the early stages of evaluating a second bleach plant that could begin production in 2012.

In prior quarters we’ve discussed legislation and have been introduced in both the United States House of Representatives and the United States Senate, which if enacted would be in the production of Chlor Alkali products using mercury cell technology two years from the date it was enacted into law.

During October 2009 the House Committee on Energy and Commerce passed the bill that would require Chlor Alkali producers using mercury cell result technology to make a decision by June 30, 2012 as to whether a shutdown or to convert the facilities. The decision is to convert the mercury cell plants will be required to be converted by June 30, 2015. If the decision is to not convert the plants will be required to shut down by June 30, 2013.

For this bill to become law it must be passed by the full house of representatives in the full Senate. No additional action has been taken on this bill since October 2009 in the House of Representatives. And no action at all has been taken in the Senate. If the same bill does not pass both Houses of Congress prior to the end of the current legislative session the legislative process must begin over.

As a reminder, Olin currently operates two facilities with utilized mercury cell technology totaling approximately 350,000 ECUs or 18% of our capacity. Olin continues to operate these facilities at full compliance with all rules and regulations.

Now turning to Winchester. Winchester experienced the highest level of first quarter earnings in its history and the second highest level of quarterly earnings ever. First quarter 2010 Winchester sales were $131.4 million, a decrease of 1% compared to first quarter of 2009 sales. Despite the small decline in first quarter 2010 sales compared to 2009, sales remain strong by historical standards.

For example, when compared to 2008 first quarter 2010 sales were 19% higher. First quarter 2010 commercial volumes declined 5% compared to the first quarter of 2009, which reflects a lower level inventory in our system entering 2010, which limited our ability to ship product and not the reduction in demand.

Inventories entering 2009 were more robust. Our commercial backlog at the end of first quarter 2010 of $159 million, remain robust and compared favorably to the first quarter of 2009 commercial backlog of $148 million.

The first quarter of 2010 decline in commercial sales is partially offset, which includes military, law enforcement and industrial product sales which increased 12% year-over-year. Military and law enforcement sales represented in excess of 30% of Winchester sales during the first quarter of 2010.

Backlog at the end of the first quarter of 2010 for these products also remain robust at approximately $120 million.

During April, we received two additional military contracts totaling approximately $53 million. Deliveries on these new contracts will begin in the fourth quarter of 2010. Winchester at $19.5 million in the first quarter of 2010 compared to $17 million in the first quarter of 2009.

Winchester’s first quarter 2010 earnings benefited from lower commodity and other material costs as well as lower levels of bad debt expense which more than offset the negative impact of lower volumes.

During the first quarter of 2010 the acquisition price of three major commodity metals used by Winchester all decline compared to the first quarter of 2009. The average price of copper declined 25%, zinc 12%, and the average price of lead declined 10%.

As we look forward to the second quarter of 2010, Winchester does not expect to realize significant benefits from lower commodity and other material costs compared to the second quarter of 2009. Over the past three quarters there has been a steady increase in the price of these key commodities.

The spot price of coppers increased from $2.26 pound at the end of June 2009 to $3.55 per pound at the end of March 2010. While lead has increased from $0.78 to $0.96 and zinc has increased from $0.70 to $1.07 over the same period.

As a result of these increases Winchester has announced a price increases of 3% to 5% across its product line effective April 1, 2010. The success of these increases is uncertain. As we look forward to the second quarter and the balance of 2010 in the Winchester business we are going to see product areas with the level of inventory in the pipeline in the stores is improving.

This is especially true in certain paramilitary and hunting rifle products. This is not however the case for pistol ammunition which remains in very short supply. The combination of the shortages that still exists in the need to refill the supply line should allow the current elevated sales levels to be maintained at least to the second quarter of 2010. We continue to feel very good about our Winchester business.

From a total company perspective our first quarter 2010 results were well below the record earnings we experienced in the first quarter of 2009. However, the feeling today is much different than it was a year ago. Last year, we were faced with rapidly declining prices and demand in the Chlor Alkali business in a very uncertain future demand environment.

Today, we believe the demand environment for Chlor Alkali has stabilized. And we are looking forward to seasonal strength from some of our chlorine customers in a downstream potassium hydroxide and bleach businesses.

Looking back at the past three quarters they contained the lowest levels of Chlor Alkali demand that many of us have ever seen. And our Chlor Alkali business remains profitable. This is a far cry from what we have experienced in the trough of previous cycles in which Chlor Alkali business lost tens of millions of dollars. We have clearly benefited from the synergies realized from the pioneer transaction and from the contributions, value-added products such as potassium hydroxide and bleach MA [ph].

While we need a stronger sustained overall economy for the Chlor Alkali business to reach its potential we believe we are well-positioned. I would also like to reemphasize the significant contributions that Winchester businesses have made. We believe that Winchester will continue to contribute meaningfully to its own results and we believe that its earnings after the current surge and will be stronger than we saw prior to the surge.

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

John Fischer

Thanks, Joe. First I’d like to discuss a few items on the income statement. Selling and administration expenses decreased $7.1 million or 18% in the first quarter of 2010 compared to the first quarter of 2009, primarily due to a lower provision for doubtful accounts receivable of $4.6 million.

During the first quarter of 2009, we experienced multiple customer bankruptcies in both the Chlor Alkali and Winchester businesses. Legal and legal-related settlement costs declined in the first quarter of 2010 compared to the first quarter of 2009. These expenses relate to both recovery actions for environmental costs incurred and expense in prior periods, and for legacy environmental sites.

Finally, first quarter 2010 incentive compensation cost declined by $2.1 million compared to the first quarter 2009, but were offset by a $2.2 million increase in stock-based compensation expense due to mark-to-market adjustments. As a point of reference every $1 change in the stock price changes pretax stock-based compensation expense by approximately $500,000.

First quarter 2010 credits to income for environmental investigatory and remedial activities were $2 million, which includes the $2.6 million recovery is environmental expenses incurred and expensed in prior periods that Joe mentioned earlier.

During the first quarter of 2009, that were $4.8 million in charges related to environmental investigatory and remedial activities. These charges relate primarily to remedial and investigatory activities associated with former manufacturing operations and waste disposal sites.

Excluding the favorable impact of the recoveries in environmental cost incurred and expenses in prior period. We continue to forecast the charges to income for remedial and investigatory activities will increase 5% to 10% compared to 2009 levels. As Joe said in his remarks we expect these costs to be approximately $6 million to $8 million in the second quarter of 2010.

We do believe there are additional opportunities to recover environmental costs incurred and expenses in prior periods in 2010 but the timing and the amount of any additional recoveries is uncertain.

On a total company basis defined benefit pension plan income was $4.8 million during the first quarter of 2010 compared to $3.7 million of income in the first quarter of 2009. As I mentioned earlier, the first quarter of 2010 also included a $1.3 million charge associated with the voluntary agreement withdraw from a multiemployer pension plan at our Henderson, Nevada facility.

We are not required to make any cash contributions to our domestic defined benefit pension plan in 2010, and believe the earliest we may be required to make any cash contributions in 2012. We do have a small Canadian defined benefit pension plan which we will be required to make small contributions in 2010.

Defined contribution pension expense was $4.0 million in the first quarter of 2010 and in the first quarter of 2009. As a reminder, our defined benefit pension plan is frozen to all new entrants, all salaried, all non-union hourly and most union employees. As a result, the majority of our active employees participate in the defined contribution pension plan.

The tax rate during the first quarter 2010 was 7.2% compared to the first quarter 2009 rate of 37.2%. The first quarter 2010 rate included a $1.8 million reduction in expense associated with the expiration, statutes of limitation in domestic jurisdictions, a $1.6 million reduction in expense related to the release of a portion of the valuation allowance recorded against a foreign tax credit carry forward, deferred tax asset in Canada and $400,000 benefit associated with prior period tax returns.

In addition to these three items the permanent book to tax difference is normally recognized by the company reduce overall income tax expense. In periods of low taxable income these items have a disproportionate impact on the income tax rate. During the first quarter of 2010 these permanent items reduced the effect of tax rate by approximately 4%.

In the second quarter of 2010, we expect to recognize an additional $2 million of favorable tax adjustments related to both the expiration of statutes of limitation in domestic jurisdictions and an additional release of a portion of the valuation allowance recorded against deferred tax asset in Canada.

The Patient Protection and Affordable Health Care Act and the associated Reconciliation Act were signed into law in March. These acts did not have a material effect on our financial statements.

Now, turning to the balance sheet. Cash and cash equivalents at March 31st, 2010 were $411 million compared to $458.5 million at December 31, 2009 and $168.6 million at March 31, 2009. The decrease in the cash balance from December 31 reflects a normal level of seasonal working capital growth in both the Chlor Alkali and Winchester businesses.

In the Chlor Alkali business, the increase in working capital reflects the improved sales volumes that we experienced in March, while in the Winchester business the increase in working capital reflects a normal build up of inventory as the business moves towards a the ball hunting season.

We expect working capital in both businesses to continue to increase in the second quarter due to the same seasonal factors. Olin typically experiences working capital growth of $50 million to $100 million during the first two quarters of each year followed by a third quarter and fourth quarter liquidation.

Capital spending during the first quarter 2010 was $21.4 million compared to $49.8 million in the first quarter 2009. The year-over-year decline reflects the completion of the St. Gabriel conversion and expansion project which was ongoing during 2009. The full year 2010 capital spending continues to be forecast in the $70 million to $80 million range. Depreciation expense is forecast to be in the $85 million to $90 million range.

During 2009, Olin was able to reduce its cash tax payment as a result of accelerated depreciation allowances included in the 2009 American Recovery and Investment Act. During 2010 we believe it is likely that Olin will not after giving consideration to expected refunds to any cash income taxes.

On April 22, 2010, Olin’s Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on June 10th, 2010 to shareholders of record at the close of business on March end 2010. This is the 334th 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 or describe without limitations in the risk factor section of our most recent Form 10-K and our first quarter earnings release. A copy of today’s transcript will be available this afternoon on our Web site in the investor section under calendar of events. The earnings press release and other financial data and information are available under press releases.

Joseph Rupp

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.

Frank Mitsch – BB&T Capital Markets

Good afternoon, gentlemen.

Joseph Rupp

Hi, Frank.

Frank Mitsch – BB&T Capital Markets

Joe, you discussed that the $75 per ton price increase on caustic soda was implemented in the first quarter, but some of that obviously gets put due to contracts bled into the second quarter and it was late in the first quarters also that you see much of a benefit there. And then I think you indicated that the $80 per ton increase the industry is fighting hard for and has been implemented in certain geographies. So I’m trying to get a sense looking at what this is $155 increase in caustic mean for your ECU netbacks as we look at the second quarter and as we look at the third quarter. Can you give us some idea as to how you anticipate these increases of being reflected in your ECU netbacks?

Joseph Rupp

Quickly, I think John can talk in more detail. I think what we are going to see is we are going to see cost to coming up in the second quarter, chlorine coming down in the second quarter and then we will see increases in ECU in the third quarter.

Frank Mitsch – BB&T Capital Markets

Joe, would you anticipate that the chlorine would be anywhere near the order of magnitude at the cost of increase?

John Fischer

You are talking about the chlorine decrease?

Frank Mitsch – BB&T Capital Markets

Yes, that’s right. Is the order of magnitude of the chlorine decrease are not to offset the order of magnitude of the cost of increase?

John Fischer

Unfortunately it will offset a big piece of it. If you look at as an example in the last two quarters CMAI is reflected an $85 decrease in their index chlorine pricing and $105 increase in their index caustic pricing. So you use those as a proxy, there is a pretty significant erosion of the improvement in caustic pricing that chlorine will lead into. The first quarter is a transition quarter in some respects. Chlorine pricing is moving down, but that’s not a reflection of chlorine demand. We believe that the demand is such that in out quarters chlorine pricing will stabilize and if demand continues then we expect to see upward pressure on chlorine pricing as well.

Frank Mitsch – BB&T Capital Markets

I think Joe said that the use of chlorine in PVC was up 4% sequentially. Certainly, we expect much greater than that in the second quarter which is not?

John Fischer

We believe that would be the case. The first quarter theme was really on the demand side, was really exports, we saw chlorine derivative of exports strong, both in the vinyls chain but even stronger in MDI, TDI. We also saw pulp exports strong in the first quarter, which has the direct connection with caustic demand. And in the second quarter we don’t see that trend doing anything, but continuing. So as we look at all the different market segments we serve we see the demand improvement quarter-over-quarter being very broad.

Frank Mitsch – BB&T Capital Markets

You should also be realizing some benefit from lower energy costs, correct?

John Fischer

Correct.

Frank Mitsch – BB&T Capital Markets

All right. So the way to think about it that is your ECUs are better Q2 but should be even much better than that in the third quarter with chlorine erosion having stocks?

Joseph Rupp

That’s exactly right, Frank.

Frank Mitsch – BB&T Capital Markets

And lastly, Joe, I think you said that bleach volumes were up 12% in the first quarter yet you are anticipating it to be up 30% for the full year. And so, is that mostly a second half have been or we are going to see this ramp in the second quarter as well? How should we think about that?

John Fischer

When you think about bleach demand, Frank, you have to really partition of into the seasonal, non-seasonal quarters, and the second and third being quarters where you see the high seasonal demand. And we expect to see the significant improvement in demand to occur during the peak part of the season.

Joseph Rupp

Second and third quarters.

John Fischer

Second and third quarters.

Frank Mitsch – BB&T Capital Markets

All right, perfect, thank you.

Joseph Rupp

Thank you, Frank.

Operator

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

Christopher Butler – Sidoti & Company

Hi, good morning, guys.

Joseph Rupp

Good morning.

Christopher Butler – Sidoti & Company

Just wanted to circle back with the ECU pricing question a little bit more. As far as any declines that we’re seeing on the pricing for chlorine is that the lag in that pricing similar to what we experienced with on the caustic side or is there a difference there?

Joseph Rupp

No, it’s pretty similar. When you look at index pricing, in the first quarter of 2010, for chlorine that index pricing went down, and so, we will see the negative impact of that in the second quarter when you look at index pricing for caustic soda. In the first quarter it went up. And so we will see the positive benefit of that in the second quarter and on.

Christopher Butler – Sidoti & Company

And on the netback expense side, you guys had given us the bunch of numbers, the breakout there, but just simply, sequentially from the fourth quarter to the first quarter, could you give us an idea of what that is and what you’re expecting going into the second quarter, do you expect that to be down sequentially again?

Joseph Rupp

We said in our remarks that our electricity costs were down year-over-year. We would expect that trend to continue, right.

Christopher Butler – Sidoti & Company

But you had also said that your freight costs were down but your rail costs were up, so I was just trying to simplify all of that. Is there a way to do that?

John Fischer

Freight costs are going to continue to escalate, as we said in our earnings remarks. We will continue to get a benefit as St. Gabriel continues to operate and as we continue to increase operating rates there and take advantage of the benefit of that volume not having to move on the rails and not incurring freight to get from some other locations to the pipeline in St. Gabriel. So we will continue to see that positive benefit. I can’t forecast what the rail roads are going to do with freight increases, so I really can’t forecast what the net of those two trends are going to be but their bulk is going to continue in place. Increasing freight rates and a positive benefit to our system because of St. Gabriel when you compare year-over-year.

Christopher Butler – Sidoti & Company

And on that notice well with the outages that you are expecting for the second quarter. Could you give us any help as far as what you’re expecting for increased costs to do the maintenance and then possible outage shipping cost as well there?

Joseph Rupp

The outages have been in planning for a significant period of time which means you’ve been buying long lead time, components to do the outage, so our best forecast now is that there is not significant incremental costs that you will see in the quarter, that’s directly tied to the outages that are scheduled.

Christopher Butler – Sidoti & Company

I appreciate your time.

Joseph Rupp

Thanks, Chris.

Operator

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

Edward Yang – Oppenheimer

Hi, good morning. I apologize if I missed this, but in prior quarters you’ve given more specific ECU netback and capacity utilization guidance. Have you done that this quarter?

Joseph Rupp

Normally, we report on what it has been with our given guidance I don’t believe. What we’ve said was that we were 75% in the quarter that we were running at 80% in March is what we said and that we felt higher rate was going to continue into the second quarter.

John Fischer

We also said year-over-year operating rates went from 75% in this quarter, up from 65% in 2009.

Edward Yang – Oppenheimer

Okay, one of your competitors was talking about operating rates closer to the 90% range and some industry sources are talking about the industry operating at that rate down as well. Any guidance in terms of what you’re seeing for April?

Joseph Rupp

We had said that we expect that the operating rate improvement in the first quarter to continue or possibly even improve. In a lot of demand environment like we’re in right now, a merchant player like Olin is a little bit disadvantage because of our inability to export chlorine into some of the derivative chains that some of the other producers can satisfy.

And so as a result of that, our operating rates would be lower than some of these fully integrated producers are publicizing in this kind of environment. Where we will catch up and make up some of that difference is in the parts of the year once when some of our seasonal product demand like bleach demand kicks in and we will see an improvement in our operating rates as a result of that and some closure between our numbers and what some of the integrated players are talking about.

Edward Yang – Oppenheimer

Okay, John isn’t TPG a merchant player as well?

John Fischer

Well, they are partially integrated like Charles; they have the ability to move chlorine into the EDC export market like Charles.

Edward Yang – Oppenheimer

Okay, and on the price –

Joseph Rupp

Let me give you a range.

John Fischer

Just, just to summarize that what we believe is that the operating rate in the second quarter will be in the low-to-mid 80% range and we said that ECU netbacks would improve sequentially in Q2 compared to Q1.

Edward Yang – Oppenheimer

Okay. And the Q2 improvement just to summarize again reflects some chlorine decline with the $75 caustic increase and the $80 caustic increase once it gets accepted you will see most likely in the third quarter?

John Fischer

That’s correct

Edward Yang – Oppenheimer

And just moving onto Winchester, Joe, you kind of referenced it to 2008, so it’s still well above and you’ve been saying consistently that it’s been over earning or above normal level. And you mentioned the price increase set for April, 3% to 5% price increase and you said that it’s a little uncertain whether that’s going to get accepted or not. You were to kind of characterize all those statements together I mean is Winchester finally starting to drift down to more normal levels than we’ve seen in recent history in terms of slowing down of volumes and margin expansion?

Joseph Rupp

I would say characterize it as plateauing in the second quarter.

Edward Yang – Oppenheimer

But not meaningful volume or demand erosion?

Joseph Rupp

Not yet.

Edward Yang – Oppenheimer

Okay. And just a question on the capital structure. You don’t have any net debt but interest expense is eating up a pretty significant portion of your pretax operating income, is there anything that you could do in the near-term or the interim where you can bring down the interest expense somewhat because it is very high relative to again your net debt?

John Fischer

Edward, that all goes to the use of cash question. I would say that we did enter into some interest rate swaps that you will see in our 10Q we file tonight that should reduce interest expense at least through the balance of 2010 and probably in a fairly meaningful way. The rest of it goes to, as we have said, we have to be able to finance the business and we have this $50 million to $100 million increase in working capital that we experience every season, we saw a lot of that in the Q1.

We did talk when we raised $150 million of debt in the third quarter of last year that we’re looking at making sure we had pre-funded to $75 million of debt debentures next year so that the position we wanted to be in.

The last question really goes to investments in the business. And that continues to be a focus. What we talked about in this quarter where internal investments, such as the low salt, high-strength bleach in the investment in our joint venture. What we have been seeing is our opportunities to get superior returns at the moment are coming from internal investments rather than from the acquisition side. That said we continue to look at acquisitions that would enhance both the bleach business and the Chlor Alkali business.

Edward Yang – Oppenheimer

Okay. And just a final housekeeping question. Earnings of non-consolidated affiliates was pretty like this quarter. And what was driving that? Was that the SunBelt portion or the other businesses?

Joseph Rupp

SunBelt. The SunBelt issues really revolve around two things. Volume was off in the first quarter due to an extended customer shut down that occurred at their site and pricing was off, as we previously mentioned, the trend on chlorine pricing was down. The contracts related to the SunBelt affiliate are little different and that there is not the typical lag in those contracts that we see in some of the other portfolio of contracts that we have. So pricing changes both positive and negative tend to occur sooner in the pricing at SunBelt. The volume that we missed in the first quarter will be made up during the remainder of the year based on the structure of that contract. So that’s not going to be something that we’re not going to recoup.

Edward Yang – Oppenheimer

Okay, thank you very much.

Joseph Rupp

Thank you.

Operator

Our next question comes from the line of Sergey Vasnetsov of Barclays Capital. You may proceed

Sergey Vasnetsov – Barclays Capital

Good morning

Joseph Rupp

Good morning

Sergey Vasnetsov – Barclays Capital

Joe, you commented these profiles look for Olin for the U.S. Chlor Alkali industry has been little better than the last trough. Hopefully, we have already seen the worst of the trough. In the meantime Olin continues to carry very large cash position and presumably I thought in the past was done preparation for the trough, now if trough is better, maybe changes with you on what the appropriate level of cash should be fall in, in 2010 and 2011? So maybe you can comment on this since I guess my views are trying to be conservative, but certainly, a penalty for missed opportunities for being extra conservative, so where do you think you are on the scale of conservatism?

Joseph Rupp

Well, I think you now look exactly right, Sergey. I think everybody has been conservative based upon where we were last year. What we are feeling stronger as I stated in my comments we feel like we’re stabilized and so and actually we continue to look for opportunities that way we could redeploy the cash to get a better return for the shareholders and we did it a little bit with the swaps but the reality of it we are continuing to look for investments or acquisitions that will work for us really downstream primarily in our bleach business.

Sergey Vasnetsov – Barclays Capital

Okay, well I realize you cannot talk about specific opportunities of timing of those, but can you talk about what’s the appropriate level of cash for Olin should be you think in '10-11?

John Fischer

Sergey, I would answer that from the standpoint of what the appropriate level of debt

Sergey Vasnetsov – Barclays Capital

Okay.

John Fischer

We’re going to try to run the business with no more than 35% debt to total capital.

Sergey Vasnetsov – Barclays Capital

The gross debt or net debt>

John Fischer

That’s gross debt.

Sergey Vasnetsov – Barclays Capital

How about net debt?

John Fischer

We probably need at all points in time about $200 million of cash to run the business given the seasonal nature of our working capital. And the fact that while we are not faced with it today, we have a very large pension plan relative to the size of the company. We have to keep some level of protection against that. And the last point that I make is we have a fairly significant call on cash associated with legacy environmental liability. So we think about it in the $200 million and $250 million range and I would admit right now we are high

Sergey Vasnetsov – Barclays Capital

Okay, all right, thank you.

Joseph Rupp

Thank you.

Operator

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

Don Carson – UBS

Thank you. Joe, question on just on you mentioned Winchester plateauing and your commercial sales were down. I know you also mentioned discrepancy between for stocks of pistol ammunition and hunting ammunition for a long arm so is that more reflect of the fact that the desire people to buy ammunition for personal defense that you don’t see that plateauing in I guess potentially going into an election year you can get into further concerns about wanting to preserve gun rates and issues like that. So you do think this is sustainable?

Joseph Rupp

I think the pistol ammunition is done.

Don Carson – UBS

Okay. And what would the hunting ammunition being in reasonable supply, again, that is a seasonality figure that you are going to building up, preparing to put product into the pipeline ahead of hunting season?

Joseph Rupp

I think that all manufacturers got little bit caught up on hunting, which normally would happen at this time of the year. It didn’t happen last year because of what was going on with the surge. I think there has been a little bit of catch up there on the hunting. But as I mentioned there has not been on the pistol.

Don Carson – UBS

So overall, Winchester then were in what the sixth quarter now they sustained high demand and you do think that they well may not increase from here that is still sustainable at least going through the rest of the calendar year?

Joseph Rupp

I would say it’s definitely sustainable going through the Q2 end of the Q3. It’s hard to predict way out there, but definitely through the second quarter into the third quarter.

Don Carson – UBS

Okay. And then question for John McIntosh on Chlor Alkali. What impact did the outage at McIntosh have on your operating rate in the quarter? And I’m just wondering you mentioned pulp and paper exports were strong which obviously creates demand for caustic, but your sense there is a lot of restocking going on and hearing the distributor tanks are pretty full now. So were they buying aggressively ahead of the second $80 April 1st price increase which appears to differ until at least May 1st and maybe split into from here?

John McIntosh

I think that on the caustic side, supply is pretty tight right now, especially for high purity caustic. So we’re still on order control for caustic in our system. So where any indication than there hasn’t been the ability for people to go out and do a lot of forward buying to avoid potential price increase, that’s coming in a subsequent month or a subsequent quarter. I think there has been some restocking when you talk about pulp, but also if you talk to as we have to a lot of the big pulp producers, they have been servicing demand, not just inventory replenishment, but servicing export demand for pulp that has really helped their results in the first quarter.

And quite frankly, we were concerned about that segment and caustic consumption. Because the tax that was creating an energy subsidy for them ended at the end of the year and we’ve been positively confident as a result of seeing their results in the second quarter. They appeared to have gone on and not really missed a lick.

Don Carson – UBS

And so you are saying caustic is high despite these very high operating rates against what 89% in for the industry in March as they took advantage of the vinyls export opportunities?

John McIntosh

Yes, caustic suppliers balanced too tight, at least what we see, we actually tried to source caustic and been unable to do that from other producers. We see no indication that there is an excess or surplus of caustic.

Don Carson – UBS

And then just finally on the caustic side, could you talk about demand trends from the aluminum sector? Are you seeing any pick up there?

John McIntosh

Well we have to talk anecdotally about that because we don’t directly serve much of that market at all. However, we do continue to stay close to it because it has such an impact on the trade flow patterns for caustic around the world. What we hear and what we have seen evidence of is that aluminum production is going to be up 15% to 18% in 2010 versus 2009. And that supported by the fact that we know that at some alumina facilities we know operating rates have moved up, we also know, in some cases, there are plans being made and sourcing arrangements being put in place to restart idle units, idle aluminum units in the second half of the year. So we see all evidence of positive consumption trends in that market segment as well.

Don Carson – UBS

Okay, thank you.

John McIntosh

Yes sir.

Operator

With no further questions in the queue I will now like to turn the call over to Mr. Joseph Rupp for final remark

Joseph Rupp

We want to thank you for joining us this morning and we look forward to speaking with you in July as we report the results of our second quarter. Thank you and have a good day

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: Olin Corporation Q1 2010 Earnings Call Transcript

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