Olin's (OLN) CEO Joseph Rupp on Q2 2014 Results - Earnings Call Transcript

Jul.25.14 | About: Olin Corporation (OLN)

Olin Corporation (NYSE:OLN)

Q2 2014 Earnings Conference Call

July 25 2014 10:00 AM ET

Executives

Joseph Rupp - Chairman and CEO

John Fischer - President and Chief Operating Officer

John McIntosh - Senior Vice President, Chemicals

Todd Slater - Vice President and Chief Financial Officer

Larry Kromidas - Assistant Treasurer and Director, Investor Relations

Analysts

Frank Mitsch - Wells Fargo

Christopher Butler - Sidoti & Company LLC

Edward Yang - Oppenheimer

Herbert Hardt - Monness

Don Carson - Susquehanna

Edlain Rodriguez - UBS

Dmitry Silversteyn - Longbow Research

Jason Freuchtel - SunTrust

Arun Viswanathan - RBC Capital Markets

Richard O'Reilly - Revere Associates

Operator

Good morning. And welcome to the Olin Corporation Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Joseph Rupp, Chairman and CEO. Please go ahead, sir.

Joseph Rupp

Good morning and thank you for joining us today. With me this morning is John Fischer, President and Chief Operating Officer; John McIntosh, Senior Vice President of Chemicals; Todd Slater, Vice President and Chief Financial Officer and Larry Kromidas, our Assistant Treasurer and Director of Investor Relations.

Last night, we announced that income from continuing operations in the second quarter of 2014 was $36.6 million or $0.46 per diluted share, which compares to $43.7 million or $0.54 per diluted share in the second quarter of 2013. Sales in the second quarter of 2014 were $570 million, compared to $652 million in the second quarter of 2013.

Second quarter 2014 results included pre-tax restructuring charges of $2.3 million and pretax gains for the resolution of a contract matter of $1 million. Second quarter 2014 net income included after tax income from discontinued operations of $700,000 or $0.01 per diluted share. This after tax gain reflected a favorable resolution of a certain indemnity obligation related to our metals businesses that were sold in 2007. As a result second quarter 2014 net income was $37.3 million or $0.47 per diluted share.

The high level of commercial demand that was experienced by Winchester in 2013 continued in the second quarter of 2014 and Winchester generated the second highest level of second quarter sales and segment income in its history. As we move forward we continue to see strong, commercial demand in our system especially for pistol and rimfire ammunition. In Chlor Alkali and Chemical Distribution the environment was more challenging.

During the second quarter of 2014, Chlor Alkali experienced both lower chlorine and caustic soda volumes and prices compared to the second quarter of 2013. These were partially offset by higher bleach and hydrochloric acid volumes and lower operating costs.

Second quarter 2014 Chemical Distribution shipments declined compared to the second quarter of 2013. Second quarter 2014 adjusted EBITDA was $99.1 million.

Our third quarter 2014 net income is forecast to be in the $0.30 to $0.35 per diluted share range which includes approximately $9.5 million of pretax expense for the call premium and unamortized deferred debt issuance costs related to the $150 million 8.875% Senior Notes that are due in 2019 and that we intend to redeem in the third quarter. We anticipate interest expense savings of approximately $10 million during the first year after the redemption of these notes.

Chlor Alkali third quarter 2014 earnings are expected to decline compared to the third quarter of 2013 due to lower ECU netbacks, partially offset by lower costs. Last year's Chlor Alkali third quarter earnings included an $11 million favorable contract settlement. Third quarter 2014 Chemical Distribution earnings are expected to improve from the second quarter of 2014, but to be lower than the third quarter of 2013. Earnings in the Winchester segment are expected to decline from the record third quarter 2013 levels, for a forecast to reflect strong seasonal demand. Third quarter 2014 corporate and other expenses are forecast to be higher compared to the third quarter of 2013. Third quarter 2013 corporate and other expenses included a pretax recovery of $11.4 million of legacy legal costs. Third quarter 2014 earnings are also expected to include pretax restructuring charges of $1.5 million. As a result of the weaker than expected chlorine and caustic soda demand and pricing, we have revised our full year adjusted EBITDA forecast to be in the $350 million to $400 million range.

The outlook for the Winchester business continues to positive. We’re continuing to see ammunition demand at high levels and we now believe that the commercial ammunition demand will remain above the level experienced prior to the surge that began in 2012. We also expect Winchester will continue to realize additional cost saving from the ongoing centerfire relocation project.

In Chlor Alkali business we continue to emphasize the sale of our value added co-products bleach, hydrochloric acid and potassium hydroxide. During the second quarter of 2014 Chlor Alkali achieved record levels of hydrochloric acid shipments. The first half of 2014 potassium hydroxide shipments were also a record. We expect third quarter 2014 bleach shipments to be a record. We continue to look for ways to deploy our cash flow and in ways that can increase shareholder value. We continue to consider accretive acquisitions and investments, share repurchases and dividend policy.

During the second quarter we repurchased approximately 550,000 shares of our common stock and we continue to be a consistent, steady and opportunistic buyer of our shares over time.

Finally, I would like to make the comment that I continue to be optimistic about the prospects for Olin. We believe our Chlor Alkali business is in trough period for both demand and pricing and is consistently been strengthened by the increased production and sale of co-products. We also believe the prospects for Winchester are brighter than they have been and it has been strengthened by the ongoing centerfire ammunition relocation. As a result we are well positioned to generate consistent, positive cash flows to further grow the business and reward our shareholders.

Now I'm going to turn the call over to our President and Chief Operating Officer, John Fischer. And John is going to discuss the businesses in more detail with you. John?

John Fischer

Thank you, Joe. Let me begin with Chlor Alkali. Second quarter 2014 chlorine and caustic soda shipment declined slightly compared to the second quarter of 2013, but improved sequentially by 3% from the first quarter 2014 volumes. We continue to experience an erratic demand pattern for both chlorine caustic soda similar to what we have been experiencing for the last three years. This is evidenced by the second quarter Chlor Alkali monthly operating rate which range between 80% and 91% an average 86% for the entire quarter. The second quarter operating rate was a slight improvement from the second quarter 2013 rate of 84%.

Second quarter 2014 shipments of hydrochloric acid were quarterly record and increased 32% compared to last year's second quarter. In spite of slower start to the traditional bleach season due to weather conditions, second quarter 2014 shipments of bleach increased 5% compared to the second quarter of 2013, and this represents the 26th consecutive quarter of quarterly year-over-year increases in bleach shipment. Including the year-over-year improvements in bleach and hydrochloric acid, total second quarter 2014 Chlor Alkali product shipments declined 1% compared to the second quarter of 2013.

Second quarter 2014 ECU netbacks declined approximately 11% compared to the second quarter of 2013 and declined approximately 2% compared to the first quarter of 2014 level. This year-over-year decline -- year-over-year ECU netback decline reflects both lower chlorine and caustic soda prices. The sequential decline in ECU netbacks from the first quarter of 2014 to the second quarter of 2014 reflects lower chlorine pricing. Second quarter 2014 hydrochloric acid prices also declined compared to the second quarter of 2013 level, but still represented a meaningful premium to the price of chlorine. During the second quarter there were two hydrochloric acid price increases that we believe will have success in the market. And as a result we anticipate that the third quarter 2014 hydrochloric acid prices will improve from the second quarter of 2014 levels.

In the third quarter of 2014 we expect ECU netbacks to improve slightly compared to the second quarter of 2014, but they are likely to be lower than the third quarter of 2013 level. The expected improvement in the third quarter of 2014 compared to the second quarter reflects the positive impact that the reinstatement of the fourth quarter 2013 caustic soda price increase that occurred in the first quarter of 2014. In May, there was an additional $60 per ton caustic soda price increase announced that today has not yet been expected in the market. Chlor Alkali second quarter 2014 segment earnings were $40.8 million compared to the second quarter of 2013 segment earnings of $50.2 million. The year-over-year decline reflects lower ECU netbacks, lower hydrochloric acid prices and lower chlorine and caustic soda volumes partially offset by higher bleach and hydrochloric acid volumes and lower cost.

Second quarter 2014 Chlor Alkali segment EBITDA is $67.4 million. Third quarter 2014 Chlor Alkali segment earnings are forecast to decline to compared to the third quarter of 2013, as lower ECU netbacks are partially offset by lower cost. We said the third quarter 2014 operating rate to be in the mid 80% range. The third quarter 2013 Chlor Alkali segment net earnings included $11 million favorable contract settlement.

Electricity cost for ECU produced in the first half of 2014 was comparable to the first half of 2013. Typically the third quarter represents the peak quarter for electricity cost per ECU due to summer demand rate with several of our Chlor Alkali facilities. The seasonal cost increase and it represent a sequential quarterly cost increase with the business of approximately $5 million to $10 million; we expect the similar cost increase from the second quarter of 2014 to the third quarter of 2014.

In late June, we experienced an incident in one of our two Chlor Alkali production units at our Becancour, Canada facility. The other unit operates at normal rate. There were no injuries as the result of the incident. The unit which represents approximately 50% of the facility's capacity is not expected to operate in the third quarter. Based on the current demand forecast, we expect that this outage will have a limited impact on the third quarter 2014 results. Continue to make progress and our objective in the Chlor Alkali business is growing the amount of chlorine capacity as sold as bleach or hydrochloric acid. Second quarter 2014 bleach volumes were almost doubled the second quarter level of five years ago. The year-over-year volume improvements in both products offset most of the year-over-year decline in chlorine and caustic soda volumes. As we continue to grow businesses, we expect the operating rates in our system will improve and that will improve profitability.

Now turning to Chemical Distribution. The Chemical Distribution business continues to be challenging. While the business improved compared to the first quarter of 2014, the Chemical Distribution did not meet our expectations. We continue to experience aggressive pricing in the caustic soda market from large global distributors and as a result we are aggressively pursuing profit improvement initiative in the business. During the second quarter of 2014, the business achieved the highest levels of shipments Olin produced hydrochloric acid, bleach and potassium hydroxide. We encouraged that these are beginning to gain traction in our distribution customer base. In the second quarter of 2014 the business experienced decline in caustic soda shipments of approximately 29% compared to second quarter of 2013, but saw an improvement of 5% compared to the first quarter of 2014. Second quarter 2014 bleach volume increased approximately 8% compared to the second quarter of 2013 level. Chemical Distribution second quarter 2014 segment results were breakeven compared to the second quarter of 2013 segment earnings of $2.2 million. The year-over-year decline reflects lower caustic soda volume partially offset by higher bleach volume. Second quarter 2014 Chemical Distribution segment EBITDA was $3.9 million. The third quarter is typically the strongest quarter of the year for Chemical Distribution bleach sale. The third quarters of 2014 bleach sales are expected to represent approximately 10% of the total sale in Chemical Distribution and a greater percentage of its profit contribution. We also expect sequential improvement in Chemical Distribution sales volume produced hydrochloric acid and potassium hydroxide in the third quarter of 2014 from the second quarter of 2014. We expect Chemical Distribution's earnings in the third quarter of 2014 to improve from the second quarter of 2014 were declined compared to the third quarter of 2013 due to lower year-over-year caustic soda volume. While the financial performance in the Chemical Distribution has not met our expectations, it has been a positive generator of cash for Olin. Since the acquisition, the after tax cash flow has been approximately $40 million.

And now Winchester. Second quarter 2014 Winchester sales and segment earnings both reached second highest level of second quarter results in the history of business. While second quarter 2014 segment earnings declined compared to the second quarter of 2013, segment earnings for the first six months of 2014 increased approximately 4% compared to the first six months of 2013. Commercial demand continued at surge level for pistol and rifle ammunition, while shotshell and rifle ammunition demand has declined from last year. Second quarter 2014 sales were $181 million, 9% lower than the second quarter of 2013 sales and segment income was $33.1 million and 11% decline from the second quarter of 2013 level. The second quarter 2014 year-over-year decline in Winchester segment earnings reflects the combination of lower volume and higher commodity and other material cost which were partially offset by improved pricing and lower operating costs. Second quarter of 2014 Winchester segment EBITDA was $37 million which was below the second quarter of 2013 segment EBITDA of $40.8 million. While we continue to see strong commercial demand as we move into the third quarter 2014, we've started to see some products such shotshell and rifle ammunition declined compared to surge demand level. The commercial backlog at June 30, 2014, was approximately $345 million which while below the $400 million level we experienced throughout most of 2013, is substantially higher than the pre-surge level we experienced in 2012. As a point of comparison, the pre-surge for June 30, 2012 commercial backlog was approximately $125 million. During the second quarter of 2014, the purchase cost of copper declined compared to the second quarter of 2013 while the purchase cost of lead and zinc increased compared to the second quarter of 2013. We currently expect the full year 2014 purchase cost for copper to be lower than 2013 and the full year 2014 purchase price. For lead to be higher than the 2013 price. The Centerfire relocation project continues to move forward and to generate cost reductions. During the first half of 2014, the cost savings realized exceeded $10 million and we believe that full year 2014 cost savings will be in the $22 million to $26 million range. We expect that by the end of 2014 between 750 and 800 up to 1000 total jobs to be relocated will have been moved. We also continue to believe the annual cost savings realized from the project will be $35 million to $40 million. And at this level of savings will be realized annually beginning in 2016. Winchester's third quarter 2014 segment earnings is currently forecast to decline compared to the earnings in the third quarter of last year which was a highest quarterly earnings ever for Winchester. This decline reflects strong commercial demand but -- at a lower in surge level demand for shotshell and rifle ammunition. Third quarter Winchester expects to sell all the centerfire pistol and rimfire ammunition that can be manufactured.

We continue to see very strong demand for these products. As we look at the Winchester business going forward, we continue to believe there is a significant increase in gun ownership that is occurred over the past five years as well as the increase in the number of people who become regular target shooters will result in commercial ammunition demand in excess of historical level.

The combination of improved demand profile and the full realization of the $35 million to $40 million of annual cost savings from the centerfire ammunition relocation project makes us believe that Winchester can earn under normal demand conditions generate annual EBITDA in the $125 million range.

Now I would like to turn the call over to our Chief Financial Officer, Todd Slater, who will review several financial matters with you.

Todd Slater

Thanks, John. First, I'd like to discuss the balance sheet and the second quarter 2014 cash flow. Cash and cash equivalents at June 30, 2014, including the restricted cash associated with the Go Zone financing that are classified as long-term assets on the balance sheet, totaled $248.2 million.

During the first two quarter of 2014, working capital employed increased by approximately $93 million. Olin typically experiences seasonal working capital growth during the first two quarters of the year between $50 million and $100 million.

During the first two quarters of 2013 the working capital increase was approximately $66 million. During the second quarter of 2014 Winchester was able to begin replenish a portion of their typical seasonal inventory.

We expect that the full year 2014 working capital will increase between $25 million to $35 million.

Capital spending in the second quarter of 2014 was $13.9 million compared to $24.4 million in the second quarter of 2013. Depreciation and amortization expense during the second quarter of 2014 was $35.2 million. We have reduced or expectations for the full year 2014 capital spending and are now forecasting that the full year capital spending will be between $80 million and $90 million range. We continue to forecast that the full year 2014 depreciation and amortization expense will be in the $135 million to $140 million range. As Joe mentioned, we provide a notice of our intend to call our $150 million 8.87% Senior Notes that would have matured on August 15, 2019. We are anticipating recognizing pretax expense of approximately $9.5 million with the call premium and the write-off amortization debt issues cost during the third quarter of 2014 related to this action. Based on current interest rate we anticipate interest expense savings of approximately $10 million during the first year after redeeming these notes.

During the second quarter we entered into a new $450 million five year senior credit facility consisting of $265 million senior revolving credit facility which replaced the previous $265 million senior revolving credit facility, and a $150 million delayed-draw term loan facility that will be used to refinance the $150 million notes that would have been due in 2019.

The new credit facility will expire in June, 2019. Borrowing options have restricted covenants are similar to those of our previous $265 million senior revolving credit.

Now turning to the income statements. Selling and administration expenses decline $6.7 million in the second quarter of 2014 compared to the second quarter of 2013. This year-over-year decrease reflects the combination of lower legal and legal related settlement costs of $3.2 million and a decrease in incentive compensation of $2.4 million which include mark-to-market adjustments of stock based compensation.

Second quarter 2014 charges to income for environmental, investigatory and remedial activities were $1.2 million compared to $2.4 million in the second quarter of 2013. These charges relate primarily to expect future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites. In the third quarter of 2014, expense for environmental investigatory and remedial activities is expected to be in the $1 million to $3 million range. This forecast does not include any recovery of environmental investigatory and remedial costs incurred in expense in prior period.

On a total company basis, defined benefit pension plan income was $5.9 million in the second quarter of 2014, compared to $5.1 million in the second quarter of 2013. We expect to sign benefit pension plan income in 2014 to be higher than the 2013 levels of $20.5 million. We are not required to make any cash contribution to our benefit pension plan in 2014. In addition, other than pension plan funding relief provision of the Moving ahead for Progress in the 21st Century Legislation and it was an accident in 2012. We may not be required to make any additional cash contribution to our domestic defined benefit pension plan for several years. During 2014 we do expect to contribute approximately $1 million to our Canadian defined benefit pension plan.

During the second quarter of 2014, Olin recorded a pre-tax restructuring charge of $2.3 million associated with exiting of the mercury cell technology in the Chlor Alkali manufacturing process and the ongoing relocation of the Winchester centerfire ammunition manufacturing operations from East Alton, Illinois to Oxford, Mississippi. We anticipate third quarter 2014 restructuring charges of approximately $1.5 million.

The effective tax rate from continuing operation in the second quarter of 2014 was 33.2%, which included $600,000 unfavorable tax adjustment associated with the finalization of our 2013 US Federal and state income tax return, partially offset by the re-measurement of deferred taxes due to an increase in state effective tax rate.

We continue to believe that the full year 2014 effective tax rates are in the 35% to 37% range. We are also forecasting the 2014 cash tax rate will be in the 25% to 30% range. Also during the second quarter, we made a payment of $5.5 million to resolve certain indemnity obligations related to our metals business sold in 2007. As a result of this favorable resolution, we've recognized after tax gain of $700,000 and income from discontinued operations.

During the second quarter of 2014 we repurchased approximately 550,000 shares of Olin stock at a cost of approximately $15 million under the April, 2014, 8 million share authorization. A total of 1.1 million shares have been purchased during 2014 at a cost of $30 million .There was approximately 7.5 million shares remaining under the current authorization. And as Joe said earlier, we intend to continue repurchase shares on a steady and opportunistic basis.

We continue to feel confident about our financial condition and we believe the company is well-positioned to generate cash. We expect capital spending to remain well below depreciation for the foreseeable future. And between now and the second quarter of 2016, we face only $30 million of required debt repayments. In addition, we do not face any cash contributions to our large domestic defined benefit pension plan.

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 10, 2014, to shareholders of record at the close of business on August 11, 2014. This is the 351st 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 our second quarter earnings release. Copy of today's transcript will be available on our website in the Investors 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). And our first question will come from Frank Mitsch of Wells Fargo Securities.

Frank Mitsch - Wells Fargo

Good morning, gentlemen. I just want to make sure we are all in the same basis in terms of your guidance here of $350 million to $400 million of EBITDA. Is that excludes the charges for debt redemption and restructuring and so forth? And if I look at what you have earned so far this year at the mid point you are looking for something about $185 million in EBITDA for the balance of the year, is that correct?

Todd Slater

Frank, it includes the restructuring and excludes the debt refinancing.

Frank Mitsch - Wells Fargo

Includes restructuring, excludes debt refinancing.

Todd Slater

Yes.

Frank Mitsch - Wells Fargo

Okay, terrific. And really I guess I have a question too regarding the distribution business. We are seeing -- what was it, I think volumes were down 29% year-over-year, obviously that's well above what the market would have done. What's situation here? Is it market share loss? Is it supplier issues? What exactly is going on in that business and when might we expect to be back at the level of sales and profits that we thought that business would deliver?

John Fischer

Frank, we are in a very hyper competitive market in the caustic distribution business and that's really borne by the fact that we are in a no growth environment for caustic demand period. And because of that the competitive situation is that we have -- our volume is off because we have been -- we have lost market share to some aggressive actions by national distributors competing with us in that area. We are also faced with -- with issues with our suppliers who are pushing price increases that they are announcing into our purchase cost of material which we are not able to recover in the market place. So we are getting some margin compression as well. Quite frankly until we see a return to an environment in which we see demand growth for caustic, we are going to be in this kind of competitive environment, working hard just to maintain the situation we have today.

Frank Mitsch - Wells Fargo

So your Chlor Alkali business is not necessarily seeing caustic prices go up but your distribution business is taking price increases from the other suppliers?

John Fischer

In some cases, yes.

Frank Mitsch - Wells Fargo

And you mentioned the national distributors being very aggressive on price. Are they making money at these levels? Can they continue at these levels? I mean volumes down 30%, pretty significant.

Joseph Rupp

Frank, their information is not public, so we assume that they are in the same situation we are in. We are in a no growth situations at this point in time from caustic perspective. We would not anticipate that that's going to last forever. If we would take high level view we would say that we actually feel Chlor Alkali and distribution caustic is in a trough and the upside is when we come out of that trough, there are opportunities in both businesses.

Frank Mitsch - Wells Fargo

All right. And how are you feeling about the -- and how should we be thinking about the $35 million in synergies from KA Steel, I know you mentioned in the past that was somewhat delayed, can you give us an update on what your thought process is there?

Joseph Rupp

Yes. We still feel Frank that on the co-products synergies are there and unfortunately they are with the headwinds what we just talked about from a caustic, they are not as apparent. So we still feel okay from a synergy perspective.

Frank Mitsch - Wells Fargo

And could you give us some guidelines on what…?

Joseph Rupp

I think we said $35 million at the end of -- we were about a year delayed is what we’ve said from a synergy perspective.

Frank Mitsch - Wells Fargo

It was like $35 million by the end of year, three and the extra cushion is that that's one year delayed.

Joseph Rupp

Yes.

Operator

Our next question will come from Christopher Butler of Sidoti & Company.

Christopher Butler - Sidoti & Company LLC

Hi, good morning, everyone. Just want you to talk to the inventory levels that you are seeing for caustic soda out there in the industry and then specifically for you with your inventories up, it sounds like that's primarily Winchester, is that the right read there?

Todd Slater

That's correct. In terms of our balance sheet inventories being up that's Winchester, yes.

John Fischer

Let me talk about caustic inventory in general. If you look at year-to-date 2014 versus year-to-date 2013, there is a 26% reduction in net exports from the U.S. And so the implication of that is that with no demand growth for caustic domestically and with that kind of reduction in net export numbers, we are seeing caustic inventory levels increase in North America. And if you talked to people who are out buying caustic, you will hear that caustic is available, membrane caustic is available, diaphragm caustic is available. And so we are seeing that happen in the market place that does not -- is not the recipe for getting price increases and that's just the reality of what's going on today.

Christopher Butler - Sidoti & Company LLC

And if we are looking at the [peer] [ph] capacity expansion and reduction that's taken place in the first half of this year. Has that had any effect on this market place?

Joseph Rupp

The biggest affect on our market place is really the demand.

Christopher Butler - Sidoti & Company LLC

And as we look to the third quarter, what kind of maintenance should we be thinking about as far as this quarter is concerned specially with the outage?

Todd Slater

Nothing that would create an unfavorable comparison between Q2 and Q3 up 2014.

Christopher Butler - Sidoti & Company LLC

And then just shifting over to Winchester. Was working out something else, but did you say that you were expecting $125 million of annual EBITDA when things normalize in Winchester and is not an increase where you have been previously?

Todd Slater

Yes. That's what we said. We were saying -- we said previous last quarter $110 million to $125 million.

Operator

And the next question will come from Edward Yang of Oppenheimer.

Edward Yang - Oppenheimer

Hi, good morning, guys. I want to better understand what's going on with your ECU netback, that was down 11% year-over-year and that seem to have worsened the industry and may be comparing contrast your pricing trends versus the industry.

Todd Slater

Well, the industry is -- our pricing trends are not different from the industry. If you look at -- let's talk about -- I'll talk about chlorine and caustic both. If you look at chlorine, in the last 10 quarters there have been three announced price increases in the merchant Chlor Alkali market. And during that same period of time index pricing for chlorine is lower today than it was 10 quarters ago. So the matter of fact of that is price increases have been totally offset by the market situation and we are no different than anybody else in that regard. On the caustic side, in the last 10 quarters, there have been price increase announcements in 9 of those 10 quarters. If you look at that same period of time index pricing is lower today than it was 10 quarters ago. And again, we are in the merchant business, we are seeing the same kind of headwinds on pricing that's driven by demand that everybody else is seeing.

Edward Yang - Oppenheimer

May be just to clarify my question, John, I understand directionally but magnitude wise, I know I understand your pricing is also with the contractual lagging certain instances but now if I look at ECU netback for the industry year-over-year in the first quarter and the second quarter it was down about 5%, your ECU netback was down about 11% and last quarter with the caustic price increase you saw some sequential improvement in industry pricing but we didn't see any sequential improvement in Olin's ECU netbacks. Was it just more kind of timing issues or something else?

John Fischer

No, there is timing issue associated with that.

Todd Slater

And we just said we are going to see a sequential improvement in Q3 versus up 2014 versus Q2, 2014

Edward Yang - Oppenheimer

Okay, got you. And so the industry $60 per ton caustic price increase that's been outstanding. That hasn't been accepted by the market place yet, what are your thoughts there?

Todd Slater

We have not been able to take that price increase and make it happen in our system with our account, whether they are indexed account or accounts where we negotiate prices, are just Chemical Distribution business says the same story that there -- they don't see the price increase ticking in the distribution market. And so as it stands right now unless something changes and this industry is dynamic enough that something can change, we just -- we don't look for that to have any benefit for us.

Edward Yang - Oppenheimer

And may be a question for Joe. Any updated thoughts on industry consolidation and most specifically the Dow Assets?

Joseph Rupp

Well, we've consistently said that we believe in consolidation and when the Dow Assets become available I am sure there will be a lot people who will take a look at them. But believe in consolidation.

Edward Yang - Oppenheimer

And just finally on Winchester. I mean you saw some sanctions coming for just Russian rifles, can you -- are there any possibility that could extend to ammo and if so how would that affect pricing dynamics for the ammunition business?

Joseph Rupp

We love to see it go to ammo and there is nice little niche market there with the steel ammo that they bring into the United States, it would be helpful to the market if there was some curtailment to their access to the market.

Todd Slater

In terms of the source of ammunition import into United States, the largest source is Russia.

Operator

And next we have a question from Herbert Hardt of Monness.

Herbert Hardt - Monness

Good morning. I would like to go back to the caustic situation. Exports down that much 26% is that Latin American polythene paper or can you determine why it's down so sharply?

John Fischer

Well, a part of it is that as a matter of fact there have been instances in the last quarter where caustic has been exported from Brazil to the U.S. East Coast. That's a phenomenon that we haven't seen for a long time. And it has to be some indication polythene paper demand in South America. And we could not seen or heard anything from export companies or anyone else that tells us that this is a long-term trend, we still expect Latin and South America to be a market that an export market that the U.S. is most strategically and most cost effectively able to handle. And we expect to see that export demand tick back up. But so far this year it has not been as robust as in previous years.

Herbert Hardt - Monness

Thank you. The other part of the same question is, my understanding was caustic goes into lot of industrial processes and with U.S. economy going in forward, it seems little surprising that we see this absolutely flat demand in the U.S. as well.

John Fischer

Well, we serve a wide variety of the market segments where caustic is used in North America and for the most part. If you just look at all the market segments that we track, demand is either flat or off.

Operator

And the next question comes from Don Carson of Susquehanna Financial.

Don Carson - Susquehanna

Yes, thank you. Couple of things. Just back to caustic, obviously the $60 issue is dead issue you mentioned but I was wondering why you thought you were able to revive a fourth quarter price increase to died in the first quarter, so maybe if you could just go through some of those dynamics.

John Fischer

There was a price increase that was announced back in the fourth quarter on caustic. It wasn't followed by really -- it wasn't followed by many producers and it wasn't accepted in the market place. In the first quarter, there were -- there was some improve in caustic demand early in the first quarter and several producers including Olin who had not received that price increase but put it on hold basically, reinstated that price increase based on the market condition. Lot of that is driven by weather; you may remember the first quarter was a real difficult time for the transportation industry and real difficult time for parts of the country where there were production curtailments because of the weather. When that part of that increase was reinstated that helped move some of the index pricing up in the first quarter which we will see -- some have seen and will see some small benefit to it as John referenced earlier. But the $60 increase which has been announced since than, as a matter of fact it was announced at the end of May which would have meant first time we would have seen any impact to that would have been in the third quarter has not been reflected at all in price increases.

Don Carson - Susquehanna

So as you look at what index you posted in the newsletter, what sequential improvement do you see in caustic price in Q3 versus Q2?

John Fischer

Well, we have no idea what the index which was published. The only-- in the third quarter, the improvement in the second quarter index number was only $10

Don Carson - Susquehanna

Okay. So you will see a portion of that in Q3.

John Fischer

Portion, you are right.

Don Carson - Susquehanna

Okay. And then on Winchester, why shotshell and rifle down? Is it a case of demand finally subsiding and if this really result in -- normally you have Q3 seasonally surge as people get ready for hunting season, is that mean that seasonal surge is not going to be there this year?

John Fischer

No. I think you are going to see a normal seasonal pattern Don, where Q3 precise sale in rifle is much stronger than Q2. And I would say that Q2 just represent the step back from surge levels where we could sell anything we could make in the second quarter of 2013, that wasn't as much the case in the second quarter of 2014 and where we thought step back was shotshell and rifle.

Don Carson - Susquehanna

Right. And you said piston is still strong, but is that kind abating now? I noticed my local range is giving five bucks to the price for four 9 mm now is that an indication that things are rather subside.

Joseph Rupp

In certain categories it is not. And we still feel there is going to be fair, robust market there, Don. And lot of that is driven by the fact that a lot of gun sales etcetera, it increased in shooter has come right in the pistol category.

Operator

And our next question will come from Edlain Rodriguez of UBS.

Edlain Rodriguez - UBS

Good morning, thank you for taking my question. Quick question on Chlor Alkali. You mentioned the erratic pattern in demand. What do you think is behind that? Is that new normal?

John Fischer

Well, quite frankly, I hope it's not the new normal because it is disruptive to the supply chain and it is disruptive to a producer been able to most effectively and efficiently use your manufacturing assets. I think what we saw was in the early part of the quarter, we saw some recovery in operating rates that was driven by some of the downside in the weather related problems from the first quarter. So we saw some improvement early in the quarter, then we saw it back off a little bit and then we saw some improvement late in the quarter. I think the volatility is just -- it is becoming more of an issue, it is more of an issue when it plays in the seasonality, it becomes more of an issue as supply chain is to be managed more tightly, and producers who want to minimize inventories or consumers who want to minimize inventories. And so the expanded become somewhat of new norm, that will just be another challenge the industry have to deal with.

Edlain Rodriguez - UBS

And also another question. I mean if I am looking at IHS chemical forecast for ECU margins going forward, it looks like they are not forecasting an up cycle for ECU, I mean margins seems to be now flattish to down slightly. Do you share that view and where can they be wrong? What would cause like an up cycle in ECU?

John Fischer

I don't share the cycle that margins are going to remain that flat for that extended period of time. My perspective is that margins will improve when demand improves and operating rates improve. And there are varieties of things that can cause that to happen. Capacity rationalization, consolidation. There are a lot of things the industry over the years that have driven the industry to higher operating rates. And if demand improves at all, the industry has done a good job of taking cost out. And the industry I believe is on trough and is well positioned to get significant benefit when demand patterns change.

Edlain Rodriguez - UBS

Okay and one last question on Winchester. There is reverse most was (inaudible) between ATK and orbital science. Does that mean anything for Winchester? What do you think?

Todd Slater

Well, it creates -- outgrowth is that it creates an ATK that is focused on sporting products which include their ammunition business which competes with us. I don't think it changes the competitive landscape on the ammunition side at all because those businesses are there in ATK today.

Joseph Rupp

And 10 years ago they were independent of ATK. Just to return.

Edlain Rodriguez - UBS

Return to normal, okay, thank you very much.

Operator

The next question is from Dmitry Silversteyn of Longbow Research.

Dmitry Silversteyn - Longbow Research

Good morning, I guess it's good morning. Couple of questions sort of along the line that other people have been asking the question. On the KA Steel part of distribution part of the business. How should we think about the improvements there? Is it basically tied your Chlor Alkali business in terms of profitability and we are not going to see improvement there until we see improvement in ECU pricing or is that something that distribution business can do independently to start generating positive EBIT?

Joseph Rupp

You are going to see improvement in the business because we will generate positive EBIT on the co-products. We will continue to increase our penetration in hydrochloric acid, potassium hydroxide and bleach. To get the significant improvements the headwinds in the cost of caustic have to be abated and that will happen as the cycle moves forward.

Dmitry Silversteyn - Longbow Research

Secondly, you were talking about utilization rates being low and demand is not really being there to drive price increases, we have been stuck in this for about two three years and capacity keeps being added, is there any strength from the industry that demand may not come back in the near term and therefore something needs to be done with capacity or are people still sort of willing to suffer to this lower rates and hopes it would eventually rebound them, what would drive that rebound of caustic?

John Fischer

I guess I would -- my perspective on that is I would like to think that people will not invest significant money and capital incentive for Chlor Alkali assets with the kind of industry dynamics that we see today. I also believe that there are opportunities for capacity rationalization; every producer probably has the opportunity to think about how most effectively to use their asset. I know over the last several years we have reduced capacity in our system, what's the most effective and economic approach to move forward. I would like to think everybody is in the same position and constantly looking at that among other options they have to improve the contribution of their business. So the industry is proved that it will consolidate and it will rationalize. I believe that track record will continue.

Operator

And the next question is from Jason Freuchtel of SunTrust.

Jason Freuchtel - SunTrust

Hey, guys, good morning. Are you seeing any regional differences in the demand and pricing for caustic?

John Fischer

No more than we would routinely see historically, I mean some of the coastal markets that are served by product either move from the Gulf Coast the product moved from offshore. So they have tended to be in some cases to be more competitive. We don't see any trends that are different than what we have seen historically.

Jason Freuchtel - SunTrust

Okay. And then on Winchester. How much of the Winchester results were constrained by lowered demand for shotshell and rifle ammunition versus the lower inventory levels of pistol, rifle and rimfire in your system that you identified last quarter. And how do the margins for piston and rimfire compared to shotshell and rifle?

Todd Slater

We have never really disclosed margins across the breadth of the product line. First I would just say only million in the quarter hardly it is bad news when you look at the history of Winchester. I would say that the shotshell and rifle, the demand in the second quarter was better than what we have seen historically just less than what we saw in the second quarter of 2013. And there was probably a small amount of sales was associated with pistol and rimfire just because we were out of inventory.

Operator

And our next question comes from Arun Viswanathan of RBC Capital Markets.

Arun Viswanathan - RBC Capital Markets

Guys, thanks for taking my question. I guess I just have a question on distribution. Is there a possibility to increase the forward integration from Chlor Alkali products into distribution and would that be a benefit to you guys at all.

Todd Slater

That's what we have been talking about. What Joe talked about we are trying to do in the context of our co-products, hydrochloric acid and potassium hydroxide.

Arun Viswanathan - RBC Capital Markets

Right. But I guess I was asking more on the caustic side. Because you said you have been taking price increases from some of your suppliers but not able to get it in your product.

Todd Slater

I think you could, rest assure that we look at how much we supply versus how much we buy and attempt to optimize that across Olin.

Arun Viswanathan - RBC Capital Markets

Okay. And then on Winchester, did I hear you rightly when you said that you are actually sold out in 3Q, but it's just the surge levels -- it is lower than prior surge levels?

Todd Slater

We said we were sold out on pistol and rimfire certain category

Operator

And next level question from Richard O'Reilly of Revere Associates.

Richard O'Reilly - Revere Associates

Thank you, good morning, I am going to ask you to repeat a couple of numbers and then I have a bigger question. What was the operating rate in the second quarter in Chlor Alkali and what was the absolute ECU number that you are going to show up?

John Fischer

The operating rate was 86%, ECU was 510

Richard O'Reilly - Revere Associates

Okay, good. The second question is on, it's on usage of cash flow, your free cash flow and you commented early about, your view about industry consolidations and that's opportunities, when opportunities come up, and I think the comment about the share buyback was you will be a steady buyer of stock. How about the another way, the second way of returning the shareholders looking at the absolute dividend payment? It hasn't been changed in many years.

Todd Slater

I think if you look at our dividend, and we look at that in comparison to share repurchase, both our payout ratio and our yield is at the high end of our peer group and we think therefore that level is appropriate and we chosen at this juncture to return cash to shareholders by share repurchase.

Operator

And this concludes our question-and-session. I would like to turn the conference back over to Joseph Rupp for any closing remarks.

Joseph Rupp

We'd like to thank you for joining us today. And we look forward to speaking with you at the end of October as we announce the results of our third quarter. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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