Olin Corporation Q2 2010 Earnings Call Transcript

Jul.23.10 | About: Olin Corporation (OLN)

Olin Corporation (OLN)

Q2 2010 Earnings Call Transcript

July 23, 2010 10:00 am ET

Executives

Joseph Rupp – President, Chairman and CEO

John Fischer – VP and CFO

John McIntosh – VP and President, Chlor Alkali Products Division

Analysts

Frank Mitsch – BB&T Capital

Edward Yang – Oppenheimer

Christopher Butler – Sidoti & Company

Adam France – 1492 Capital

Operator

Good day, ladies and gentlemen, and welcome to the second quarter Olin Corporation earnings conference call. My name is Kianna, 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) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Joseph Rupp, President, Chairman, and CEO. You may proceed.

Joseph Rupp

Good morning. Thank you for joining us today. With me this morning are John Fischer, Vice President, Chief Financial Officer; John McIntosh, Vice President and President of 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 second quarter of 2010 was $16.9 million or $0.21 per diluted share, compared to $27.8 million or $0.36 per diluted share in the second quarter of 2009. Second quarter 2010 results in our Winchester chlor alkali business has improved, compared to the first quarter of 2010. These improvements were partially offset by a higher effective tax rate in the second quarter of 2010.

Winchester achieved its highest second quarter segment earnings and its history and the second best quarterly earnings ever, reflecting the continuation of the stronger than normal demand that began in the fourth quarter of 2008. In the second quarter of 2010, Winchester benefited from strong sales to commercial, military, and law enforcement customers. Winchester's second quarter 2010 segment earnings were $21.1 million, compared to $19.1 million in the second quarter of 2009.

Chlor alkali second quarter 2010 segment earnings of $26.1 million more than doubled, compared to the first quarter of 2010, and represented the third consecutive quarter of sequential earnings improvement. Both ECU netbacks and product volumes improved during from the first quarter of 2010.

Second quarter 2010 chlor alkali segment earnings include approximately $6 million of costs associated with our second quarter planned maintenance outages at five manufacturing locations. The second quarter 2010 chlor alkali operating rate was 83%, which was higher than both the first quarter of 2010 rate of 75% and the second quarter 2009 rate of 70%. Second quarter 2010 earnings include $2.8 million of pretax recoveries from third parties of environmental costs incurred and expensed in prior periods. However, our second quarter 2010 earnings did not include the $2 million of favorable tax adjustments that were forecast as a part of our second quarter earnings guidance.

Third quarter 2010 net income is forecast to be in the $0.35 to $0.40 per diluted share range. The third quarter 2010 chlor alkali segment earnings are expected to improve, compared to the second quarter of 2010, reflecting continued improvement and pricing. Earnings in the Winchester segment are expected to decline from the record third quarter 2009 levels. They are forecast to reflect strong seasonal demand. Charges to income for environmental and remedial activities are expected to be comparable in the third quarter with the second quarter after giving consideration to the second quarter recoveries. Third quarter 2010 results are also forecast to include approximately $6 million of favorable adjustments to income tax expense.

Now, let me discuss both segments beginning first with chlor alkali. In the second quarter of 2010, our chlor alkali business continued to experience improved demand for both chlorine and caustic. As I mentioned earlier, the operating rate during the second quarter of 2010 of 83% represents an increase from the first quarter of 2010 rate of 75%.

The second quarter 2010 operating rate includes the negative impact of five planned maintenance outages, including a 19-day outage at our Henderson, Nevada facility; and a 10-day outage at our Niagara Falls, New York facility. There are also planned outages during the quarter in Augusta, Georgia; Charleston, Tennessee; and, in our McIntosh, Alabama facilities.

As I mentioned earlier, second quarter chlor alkali segment earnings included approximately $6 million of maintenance expenses associated with these shutdowns. Giving consideration to the manufacturing capacity was unavailable during the prior capacity reduction actions – due to the prior capacity reduction actions during the month of June, the chlor alkali business operated at a 94% rate.

Our third quarter planned outages are limited. And last week, we completed the five-day outage at the St. Gabriel, Louisiana location. However, chlorine customer outages during the third quarter may cause our third quarter operating rate to remain in the mid-80% range.

The higher operating range reflects improved demand for not only chlorine and caustic soda during the quarter, but also bleach. Second quarter 2010 chlorine and caustic soda volumes improved 7%, compared to the first quarter of 2010, but 23% when compared to the second quarter of 2009. I should point out that even though we have experienced a significant improvement in chlorine and caustic soda shipments this year, demand remains well below historic levels.

Bleach volumes increased 37% in the second quarter of 2010, compared to the first quarter of 2010, and 19% when compared to the second quarter of 2009. This represents the tenth consecutive quarter we have experienced year-over-year increases in bleach shipments. We believe we are in pace to increase bleach shipments by 20% to 25% in 2010, compared to 2009.

During the second quarter of 2010, potassium hydroxide shipments were consistent with the first quarter of 2010, but increased 88%, compared to second quarter of 2009. The second quarter 2009 potassium hydroxide shipment levels were adversely impacted by a raw material availability issue associated with the labor stoppage at a supplier. We currently believe that the full year 2010 shipments of potassium hydroxide will increase the price by 50%, compared to 2009 levels.

And finally, second quarter 2010 shipments of hydrochloric acid increased 26%, compared to the first quarter of 2010, and increased 21%, compared to the second quarter of 2009. During the second quarter of 2010, we experienced increased chlorine shipments to each of our major energies or groups. Shipments to urethane customers more than doubled compared to the second quarter of 2009. Our shipments to vinyls customers increased 7%. And shipments to TiO2 customers increased 6%, compared to the second quarter of 2009.

Our second quarter 2010 ECU netback was approximately $4.70, which is a 7% increase from the first quarter of 2010 ECU netbacks. The second quarter 2010 increase also represents the third consecutive quarter of increases in our ECU netback from the approximate – for approximately $375 experienced in the third quarter of 2009, which we believe was the low point of the cycle. We also believe that we will see an additional increase in ECU netbacks in the third quarter of 2010, compared to the second quarter.

Olin second quarter 2010 ECU netback reflected the positive impact of the $75 per ton caustic soda price increase that was announced in December. The second quarter ECU netback also included a small benefit from the $80 per ton caustic soda price increase that was announced in February. The majority of that impact will likely be realized in our system in the third quarter. We do believe that industry pricing indices have reflected the majority of this increase. As we had forecast during our most recent earnings call, we did see chlorine prices, in our system, decline in the second quarter of 2010 from the first quarter of 2010 levels.

During the second quarter of 2010, there were additional price increase announcements of $50 per ton on chlorine and $35 to $50 per ton on caustic soda, depending upon the grade. At this point, neither of these increases has been included in market indexes and any benefit from the most recent point of caustic price increases will likely be realized in the fourth quarter. A final word on pricing, during the second quarter, Olin did announce price increases of $60 per ton for potassium hydroxide and $20 per ton for hydrochloric acid.

Freight costs for ECU shipped in the second quarter of 2010 were comparable to those experienced in both the second quarter of 2009 and the first quarter of 2010. This trend reflects the benefits of the St. Gabriel, Louisiana facility, which accounted for 14% of the chlorine produced by Olin during the second quarter, all of which were shipped by pipeline. During the second quarter of 2009 there was no chlorine produced at St. Gabriel plant. And the cost savings from the increased pipeline shipments offset higher railroad freight rates.

As I mentioned earlier, bleach volumes in the second quarter of 2010 increased 19%, compared to second quarter of 2009, and were 35% higher than the second quarter of 2008. Growing this element of our chlor alkali business continues to be a priority.

As we discussed in our first quarter earnings call, we've recently invested in expanding a bleach joint venture. And it began construction of a low salt, high strength bleach facility in our McIntosh, Alabama location. This facility will require $15 million to $20 million of capital over 2010 and 2011, and is expected to begin operations in 2011. It will expand our bleach manufacturing capacity by approximately 15% and reduce the cost of shipping bleach.

We are also in the early stage of evaluating two additional low salt, high strength bleach facilities that will be co-located at existing chlor alkali facilities. We also continue to investigate additional opportunities to expand our bleach business. But at present, as evidenced by our decisions to invest in low salt, high strength facilities, we found that return opportunities favor internal growth over acquisition.

For the past several quarters, we've discussed legislation that has been introduced to both the United States Senate and 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 when the bill is enacted into law. Over the past 90 days, there have not been any new developments regarding this legislation.

Olin believes that there remains a risk that the legislation or regulation may ultimately cause mercury cell technology for the production of chlor alkali products be phased out in the United States. The timing of the potential phase-out, obviously, remains uncertain. Olin currently operates two facilities, Augusta, Georgia and Charleston, Tennessee that utilize mercury cell technology. These facilities have a combined capacity of approximately 350,000 tons or 18% of our total manufacturing capacity.

Based on experience during the recently completed St. Gabriel, Louisiana conversion expansion project, Olin beliefs that the costs to covert to most modern – to the most modern membrane technology is approximately $800 to $1,200 per ton. Because of the magnitude of these costs, the decision to convert or shutdown must consider the individual attributes of each facility, including the customer base, the sustainability and proximity of the customers, the cost inputs of the facility and the co-products produced at that site, and the network and capabilities of other facilities. These analyses are currently ongoing within Olin.

Now turning to Winchester, Winchester experienced the highest level of second quarter earnings in its history. And it was the second highest level of quarterly earnings ever. Second quarter 2010 Winchester sales were $147.7 million, an increase of 5% compared to the second quarter of 2009. The increase in the second quarter 2010 sales reflects the combination of higher – a higher level of military law enforcement and international sales, partially offset by lower commercial sales.

Military and law enforcement sales increased 21% in the second quarter of 2010, compared to the second quarter of 2009. It had increased 15% during the first six months of 2010, compared to the first six months of 2009. Second quarter 2010 military and law enforcement sales were also substantially higher than they were in the second quarter of 2008.

During the second quarter of 2010, commercial sales declined approximately $6 million, compared to the second quarter of 2009. And commercial sales have declined approximately $12 million during the first six months of 2010 when compared to the first six months of 2009. It should be noted that second quarter of 2010 commercial sales remain well above second quarter 2008 levels.

During the third quarter of 2010, we are forecasting that the combination of the most robust seasonal quarter of the year and the continued refilling of the inventory pipeline will result in a strong third quarter for Winchester, although we expect the segment earnings to be lower than they were in the third quarter of 2009. We believe that this could be the last quarter of the surge. Winchester's commercial backlog was $117 million at the end of June of 2010, which is a reduction of over 50% from the June 2009 level and a reduction from the March 2010 level of $160 million.

Winchester's customers, including distributors and retailers, are now reporting a decline in the sales of commercial ammunition from the 2009 levels. Winchester does expect to continue to experience robust sales of ammunition to military and law enforcement customers. This backlog, which has been studied throughout 2010, was $118 million at the end of June. Winchester earned $21.1 million in the second quarter of 2010, compared to $19.1 million in the second quarter of 2009. And as I said earlier, this represents the best second quarter ever for the Winchester business and the second best level of chlor alkali profit in its history.

Improved second quarter 2010 Winchester profitability reflects lower manufacturing costs and improved pricing, which more than offset a less favorable product mix and higher commodity costs. During the second quarter of 2010, Winchester's acquisition costs for both lead and zinc increased approximately 13%, compared to the second quarter of 2009, while the acquisition price of copper declined 12%. For the balance of 2010, based on current levels of commodity prices, Winchester is forecasting a negative year-over-year impact from commodities.

In spite of the slow – slowdown in commercial demand, I remain optimistic about the prospects for Winchester. Over the past several years, Winchester has experienced growth in both the law enforcement and military product areas as well as in some commercial products. This growth, we believe, will result in a higher level of earnings in the future non-surge periods that were experience by the business prior to the start of the most recent surge.

As we look forward to the second half of 2010 and into 2011, I continue to believe that both our chlor alkali and Winchester businesses as well as the company in total are well-positioned. The chlor alkali business has positive momentum on the pricing front, and continues to realize growing benefits from both the bleach and potassium hydroxide initiatives that were undertaken over the past several years. While we remain cautious about the overall level of demand, the fact that the chlor alkali business has been solidly profitable during the down part of the cycle is noteworthy. And at the same time, Winchester has proven to be a solid complementary business to chlor alkali and has a positive long term outlook.

Finally, as a company, we have a solid balance sheet that affords us the opportunity to look for and pursue investment opportunities and options that will enhance the value. Now, I'd like to turn the call over to our chief financial officer, John Fischer, who will review several financial items with you. John?

John Fischer

Thank you, Joe. First, I'd like to discuss a few items on the balance sheet. Cash and cash equivalents at June 30th, 2010 were $388.4 million, compared to $411 million at March 31st, 2010 and a $192.2 million at June 30th, 2009. The decrease in the cash balance for March reflects the continuation of the normal seasonal working capital growth in both the chlor alkali and Winchester businesses.

In the chlor alkali business the increase in working capital reflects the increased sales volumes and improved pricing that we're experiencing in the second quarter. While in the Winchester business, the increase in working capital reflects the normal build-up of inventory as the business moves towards the fall hunting season. We expect working capital in both businesses to decline in the second half of the year due to these 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 and fourth quarter liquidation. We are currently forecasting that Olin will finish 2010 with a cash balance of at least $425 million. The seasonal swings in working capital are the key component of our cash planning.

In addition to the working capital needs, we have a continuous call-on-cash associated with funding legacy environmental liabilities. Spending associated with legacy environmental matters has averaged approximately $25 million annually over the past five years. We also have a defined benefit pension plan that while not in issue today is large relative to the size of the company.

And as Joe discussed earlier, we also currently face uncertainty and potential investment decisions surrounding chlor alkali facilities that utilize mercury cell technology. For these reasons, we believe that it is prudent and appropriate for Olin to maintain a cash balance of between $200 million and $250 million at all times. It should also be noted that a portion of the proceeds from our 2009 debt offering, which are currently being carried as cash, were targeted to repay the $75 million of debt that matures in 2011.

Capital spending during the second quarter of 2010 was $20.3 million, compared to $37.8 million in the second quarter of 2009. For the six – first six months of 2010, capital spending has been $41.7 million, compared to $87.6 million during the first six months of 2009. The year-over-year decline reflects the completion of the St. Gabriel, Louisiana conversion and expansion project, which was ongoing during 2009. Full year 2010 capital spending continues to be forecast in the $70 million to $80 million range. In 2010, depreciation expense is forecast to be in the $85 million to $90 million range.

During the second half of 2010, Olin has the opportunity to issue approximately $50 million of variable rate tax advantage five-year bonds to the state Alabama's allocation from the Gulf Opportunity Zone Act of 2005. If obtained, this would be our lowest cost debt. These bonds would be used to fund capital projects at the McIntosh, Alabama facility.

In addition, Olin may also redeem approximately $19 million of fixed rate tax exempt bonds that mature in 2016. The combination of these two actions, if successful, could result in the small increase in expense in 2010 and a reduction of interest expense in 2011 and beyond. Olin also has $75 million of debt that matures in 2011. That, when repaid, will reduce interest expense by approximately $4 million per year.

Now, turning to the income statement, second quarter 2010 charges to income for environmental investigatory and remedial activities worth $2.7 million, which includes $2.8 million of recoveries from our third parties for environmental costs incurred in expense in prior periods. During the second quarter of 2009, there were $7.2 million of charges related to environmental investigatory and remedial activities, which includes $800,000 of recoveries of environmental costs incurred in expense in prior periods.

During the first six months of 2010, these charges, excluding recoveries have totaled $6.1 million. These charges relate primarily to remedial and investigatory activities associated with former manufacturing operations and waste disposal sites. Without the full year 2009 recoveries of $82.1 million of environmental costs incurred in expense in prior periods, we anticipate that the full year 2010 charges for environmental investigatory and remedial activities will be 15% to 20% less than the 2009 level of $24.1 million. We continue to believe there are additional opportunities to recover environmental costs incurred in expense in prior periods during 2010, but the timing and amount of any additional recoveries is uncertain.

On a total company basis, defined benefit pension plan income was $5.3 million in the second quarter of 2010, compared to $4.6 million on income in the second quarter of 2009. We are not required to make any cash contributions to our domestic defined benefit pension plan in 2010, and believe the earliest we maybe required to make any cash contributions is 2012. As a reminder, we do have a small Canadian defined benefit pension plan to which we will be required to make small contributions in 2010.

Defined contribution pension expense was $3.2 million in the second quarter of 2010, compared to $3 million in the second quarter of 2009. As a reminder, our defined benefit pension plan is frozen to new entrants, all salaried, all non-union and hourly, and most union employees. As a result, the majority of our active employees participate in the defined contribution pension plan.

Included in our second quarter 2010 earnings guidance of $0.15 to $0.20 per diluted share was the expectation that we would realize approximately $2 million of favorable adjustments to income tax expense related to the release of a portion of a valuation allowance recorded against defined tax credit carry-forward deferred tax asset in Canada. This approximately $2 million will likely be realized in the future period. Included in the actual second quarter 2010 results was approximately $900,000 of favorable adjustments associated with the expiration of statutes of limitation. The tax rate during the second quarter of 2010, after giving consideration to the approximately $900,000 of favorable adjustments, was 36.5%.

In the third quarter of 2010, we expect to recognize approximately $6 million of favorable tax adjustments related to both the expiration of statutes of limitations and the release of a portion of valuation allowance recorded against the foreign tax credit carry-forward deferred tax asset in Canada.

Yesterday, Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on September 10th, 2010 to shareholders of record at the close of business on August 10th, 2010. This is the 335th 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 the actual results to differ are described, without limitations, in our Risk Factor section of our most recent Form 10-K and on our second 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.

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 with BB&T Capital. You may proceed.

Frank Mitsch – BB&T Capital

Good morning, gentlemen.

Joseph Rupp

Good morning, Frank.

Frank Mitsch – BB&T Capital

Joe, when you're talking about the results in the chlor alkali business in the first – in the second quarter, you mentioned your operating rates were on 83%. Much of that – lower operating rate than perhaps others had reported. In fact, you're one company within the low 90s. It could be attributed to the turnarounds that you took.

Now, if you look at the third quarter, do you have – what would be the impact on operating rates from turnarounds? And I think you said you were looking for 85%. Part of that is due to lower demand from a chlorine customer, and so therefore, it would run at lower rates. Is that 85%, though – is that what you also think the industry will operate at? Or do you think the industry will be above or below that?

Joseph Rupp

I think we would say – and John can – is that probably the industries in that 85% to 90% range is really where they are, which is where we've been operating. You correctly point out it got impacted in the second quarter because of our outages. We do have – a customer is going to take a major outage in the second – in the third quarter, which will affect us. But I think some of it depends upon what happens with the ability for everybody to continue to export in the vinyls market to the extent that that can continue that the industry will run at a higher rate.

Frank Mitsch – BB&T Capital

All right. But sequentially, though, you – at this stage – at a minimum, flattish operating rate, if not higher. And then, looking at the other side of the equation, the ECU, you talked about the price increases, the fact that you realize the majority of the $80 caustic increase here in the third quarter. Sequentially, I think you're up 5% to 7% on ECU in the second quarter. Are you looking for that order of magnitude or more or less in the third quarter?

Joseph Rupp

More or less in the third quarter is really where we'll be looking for it.

John Fischer

A lot of it I think, Frank, is due to what happens to the price increases that are – have been announced last quarter that have the potential, if they're accepted in the marketplace, to have some small impact for us in the third quarter, even though the majority would be in the fourth quarter, above the chlorine and the caustic price increase that were announced. Some of our contracts allow us to get benefit for increases in the current quarter as opposed to having to wait a quarter.

The clarity of those is unsure at this point in time. There's been some early evidence that some of the indices may recognize part of the chlorine increase and part of the caustic increase. And if that happens, then that would be a positive for us not only partially in the third quarter, but mainly – give us momentum mainly in the fourth quarter.

Joseph Rupp

Yes, yes. Our theme is that – is that the – we're going to get the balance of the 80% in the third quarter and there's the potential for the latest price increase within the fourth quarter. But that's in negotiation.

Frank Mitsch – BB&T Capital

I understand that on the chlorine side that there are some customers that have – that are resisting more than others and that others have already taken the increase. So that would be – you probably keep part of that in the third quarter, but most of that in the fourth quarter then?

Joseph Rupp

That is correct.

Frank Mitsch – BB&T Capital

All right. And then lastly, Joe, in talking about Winchester, you mentioned that you think they'll be down year-over-year. Last year, you're in around $23 million. And obviously, you had a great second quarter here at $21 million. I don't think you've ever had a third quarter that was less than your second quarter in terms of results. Is 2010 possibly that year?

Joseph Rupp

It could be slightly less, Frank.

Frank Mitsch – BB&T Capital Markets

And then, you're talking much – much of this is the impact of higher commodities as well as your backlog is going to trend down?

Joseph Rupp

That is exactly right. I would still say a big – a very good quarter by (inaudible) standards.

Frank Mitsch – BB&T Capital Markets

All right. Terrific. Thank you so much.

Joseph Rupp

Thank you.

Operator

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

Edward Yang – Oppenheimer

Hi, good morning. Thanks for taking my question. On chlor alkali, could you provide the monthly breakout in terms of operating rates in the second quarter and where you are currently running at around in July?

John McIntosh

This is John. The operating rates for the quarter were, by month, were 80%, 81%, and 89%, roughly, for the third quarter. And our average was 83%, 84%.

Joseph Rupp

Second quarter.

John McIntosh

That's right, for the second quarter.

Edward Yang – Oppenheimer

And John, where are you running so far in July?

John McIntosh

We're running at roughly the same levels.

Edward Yang – Oppenheimer

Eighty-three percent or closer to the 89% that you exited in the second quarter.

John McIntosh

No, no. Close to the – where comments are – our comments said earlier whether we expect to be in the mid-80s in the third quarter. And that's where we're currently at.

Edward Yang – Oppenheimer

Okay. And it looks like June operating rates for the industry bounced back from a disappointing May. What do you think accounts for so much of the volatility in terms of operating rates going from above 90%, low 80%, and now we're back to close 90% again for the industry.

John McIntosh

Well, I think that there were turnarounds that were major by some of the major producers that occurred in the month that had an impact on the specific months that was low. And then I think the bounce back came from some demand probably that moved from month-to-month because of that. So I think that the one thing that's been relatively constant is the amount of export volume that we've seen out of North American chlor alkali derivates products into the export markets. And I think that's continued to be strong. But I think the anomaly was more driven by the supply side.

Edward Yang – Oppenheimer

And in terms of further price increases and your ability to get traction on price increases, what kind of operating rate do you need? I mean, you've been – I think this cycle's been a little bit different in that you've been able to raise – and the industry's been able to raise prices when operating rates were very, very low, mid 60s, 50% range. But going forward, do you a need an industry operating rate to be at a minimum 85% or give or take? What's the pressure level there for price increases?

John McIntosh

I guess I don't think that there is a finite threshold anymore. I think you have to sort out all the pieces of the demand that are out there when there're strong demand for this export-based as opposed to merchant chlor alkali demand in North America. And I think the operating rate numbers are influenced high. And that doesn't necessarily mean that it's export volume is being fulfilled by the integrated producers, that it's – that it signals underlying strength across the broader market segments that Olin meets with its merchant chlor alkali business. I don't think you can just look at one number and from that define whether you've met some threshold or not, if you have to sort it out and look at where the demands coming from, and how broad that demand is across all the market segments.

Edward Yang – Oppenheimer

Okay. I appreciate the color. And circling it back around Winchester, Joe, you mentioned that you think this is the last quarter of the surge. Where do you think demand, revenues, and earnings for Winchester will plateau?

Joseph Rupp

Obviously, we haven't forecast it out. And what we think is that as the surge ends and starts to come down, that it'll come to a higher level than it was pre-surge.

Edward Yang – Oppenheimer

Okay. Thank you very much.

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, Chris.

Christopher Butler – Sidoti & Company

Just jumping off that last question, historically, how quickly has demand decline following a surge like this?

Joseph Rupp

It will decline over a one to two-year period, it just depends.

Christopher Butler – Sidoti & Company

And how much of your sales do you sell into law enforcement there?

Joseph Rupp

We've increased this – we say it before, Chris, we're in the law enforcement, military 30% plus range, which is a change from where we used to be.

Christopher Butler – Sidoti & Company

And switching gears to chlor alkali, with the maintenance outages that you had in the quarter, where there any volumes that you lost as a result or added costs for – that were in your ECU netback for freight or something of that nature that wouldn't have been there otherwise?

John McIntosh

We don't believe that we were impacted by necessary sales that were lost. We ended the month with – on a significant late list on both products, chlorine and caustic. But we think that's volume that will be able to have the opportunity to make up as long as demand – underlying demand stays strong. Our freight numbers for the quarter were really no change from prior quarter on an ECU basis. And we don't think there was – and the impact in that cost category compares to the outages. We have built-in inventory – appropriate inventory at the locations where we had planned outages just so we didn't run into a negative freight burden for the month.

Christopher Butler – Sidoti & Company

And do you have ECU netback implied in your guidance that you're expecting for the third quarter?

Joseph Rupp

Just that it's up versus the second quarter.

Christopher Butler – Sidoti & Company

And finally, looking at the balance sheet, you thrown out a number of numbers as far as the capital structure is concerned. I was furiously typing into my calculator, but it seems, at the end of the day, that you may have about $100 million of cash more on the balance sheet than you would need as a prudent reserve. Is that a good way of looking at it?

John Fischer

I think that's a fair analysis, Chris.

Christopher Butler – Sidoti & Company

And the thoughts on what you're going to do with that going forward?

Joseph Rupp

Chris, as we've stated before our preference would be to further invest in our business or to find acquisitions that will allow us to go downstream. They'll allow us to get an acceptable return on that money. And obviously, we're continuing to work on that – down those avenues.

Christopher Butler – Sidoti & Company

It seems that you're leaning more towards internal investments than–?

Joseph Rupp

I think that the key word that we said there is presently. We actually have some good investments that we can make. We believe that the high strength blows out bleach. It's an excellent investment for us. It gives us the kind of returns we're looking for. And I think as we've stated in the past – is in the acquisition area is valuations are still the issue. And when we find something that meets the valuation that we're looking for, we would not hesitate to make the acquisition.

Christopher Butler – Sidoti & Company

I appreciate your time.

Joseph Rupp

Thank you.

Operator

Our next question comes from the line of Adam France of 1492 Capital. You may proceed.

Adam France – 1492 Capital

Yes, good morning. Thank you for taking my call. I have two quick questions here. Well I'm putting together a model before the $6 million in tax benefit that you're expecting. What is the tax rate that I should be using?

John Fischer

What we've said is the statutory tax rate typically is somewhere between 37% and 39%. One factor to consider is the permanent items that run through our tax rate on a quarterly basis are credits so they reduce the rate. And those credits have, in periods of lower earnings, a disproportionate effect on the rate. But as a base statutory rate, I'd say, 37% to 39%. The permanent items drive that down to the low end of that range.

Adam France – 1492 Capital

Okay. If I heard it correctly, General Manyard [ph] talked about the industry pushing for a $50 chlorine increase, and you all are doing $20. Is it normal for you not to be with the industry move? Explain the thinking in terms of being so much lower, I guess.

Joseph Rupp

We may have miscommunicated that. We're right there with the industry. We actually announced the price increase on chlorine. We had actually announced the $75 price increase, of which we're pushing on $50 and had a TVA, the $25, due to competitive situations. But we're out trying to get every penny we can with that price increase.

Adam France – 1492 Capital

Okay, perhaps I misheard you there. And then on the caustic soda, did you say $60?

Joseph Rupp

Caustic soda is $35 to $50 depending upon the grade, so higher grade caustic's $50, lower grade caustic's $35.

Adam France – 1492 Capital

Okay. Is that what you were doing or what the industry is doing?

Joseph Rupp

That's what we are doing and pretty much what the industry is doing.

Adam France – 1492 Capital

Okay, very good. Thank you.

Joseph Rupp

Thank you.

Operator

With no further questions at this time, I would like to turn the call back over to Mr. Joseph Rupp.

Joseph Rupp

Thank you for joining us today and we look forward to speaking with you in October when we report the results of our third quarter. Thanks.

Operator

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

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