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Olin (NYSE:OLN)

Q3 2011 Earnings Call

October 28, 2011 10:00 am ET

Executives

John E. Fischer - Chief Financial Officer and Senior Vice President

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

John L. McIntosh - Senior Vice President of Operations

Analysts

Gregg A. Goodnight - UBS Investment Bank, Research Division

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division

Christopher W. Butler - Sidoti & Company, LLC

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Dmitry Silversteyn - Longbow Research LLC

Operator

Good morning, and welcome to Olin's Third Quarter 2011 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joseph Rupp, Chairman, President and CEO. Please go ahead.

Joseph D. Rupp

With me this morning are John Fischer, Senior Vice President and Chief Financial Officer; John McIntosh, Senior Vice President of Operations; and Larry Kromidas, our Assistant Treasurer and Director of Investor Relations.

Last night, we announced that net income in the third quarter of 2011 was $47.2 million or $0.58 per diluted share compared to $31.8 million or $0.40 per diluted share in the third quarter of 2010.

Sales in the third quarter of 2011 were $550 million compared to $432.8 million in the third quarter of 2010. Third quarter 2011 sales were the highest for Olin since the sale of the metals business that occurred in 2007.

The Chlor Alkali business's third quarter segment earnings of $76.7 million were the third highest quarterly earnings in history, and were realized despite an approximately $3 million negative impact due to a 10-day unplanned outage at our Charleston, Tennessee facility due to flooding caused by Tropical Storm Lee, and also due to weaker than expected chlorine demand that occurred late in the quarter. The Chlor Alkali business continued to experience positive pricing with ECU netbacks increasing sequentially for the eighth consecutive quarter. Also during the third quarter, bleach shipments were a record.

Winchester's third quarter results were in line with expectations but continue to be impacted by higher commodity metal costs. Also included in our third quarter results were pretax environmental recoveries of $1.5 million, a $3.7 million pretax gain on the sale of a former manufacturing site, and a pretax restructuring charge of $4.1 million associated with the Chlor Alkali mercury cell technology conversion in Charleston, Tennessee and the Winchester centerfire relocation project.

Fourth quarter 2011 net income is forecast to be in the $0.15 to $0.20 per diluted share range, reflecting normal seasonal weakness in both Chlor Alkali and Winchester and approximately $2.5 million restructuring charge primarily associated with the ongoing Winchester centerfire ammunition relocation project.

Chlor Alkali earnings were forecast to improve compared to the fourth quarter of 2010. Chlorine and caustic soda shipments are forecast to be lower than the fourth quarter 2010 levels but will be more than offset by higher selling prices. In the fourth quarter of 2011, Winchester results are forecast to be near breakeven and lower than the fourth quarter of 2010 as lower commercial volumes and higher commodity metal costs more than offset our improved pricing.

Now I'm going to discuss the segments, first with Chlor Alkali. The Chlor Alkali operating rate during the quarter was 85% and consistent with the outlook we provided during our second quarter earnings call. It declined as we moved through the quarter. Rate in July was 90%, and the rate in September was 81%. Expect this rate to decline further as we move through the fourth quarter. This reflects the normal seasonal slowdown in our bleach business and by many of our large chlorine customers. We've also seen a softening in demand from customers producing chlorine derivatives for export.

The third quarter operating rate included the impact of several planned and unplanned outages. The largest of these outages was the 10-day unplanned outage at Charleston, Tennessee facility. This was caused by approximately a 15-inch rain event associated with Tropical Storm Lee. We also had outages during the quarter at the Becancour, Canada plant, our Henderson, Nevada plant and our St. Gabriel, Louisiana plant. To take advantage of the weaker level of chlorine demand, we have scheduled additional maintenance and capital outages in the fourth quarter. Two of the outages are associated with electrical tie-ins of new capabilities.

At the McIntosh, Alabama facility, tie-ins will be done on the new high-pure bleach facility, which is approaching startup. And at the Charleston, Tennessee facility, initial tie-ins of the new membrane facility will be accomplished. Our operating rate during the fourth quarter is projected to be in the mid-70% range.

As a result of the weaker level of chlorine demand, we expect to see chlorine prices decline in the fourth quarter of 2011 when compared to the third quarter. Chlorine price declines in the fourth quarter of a year driven by weaker seasonal demand, are not unusual because of the weak outlook for the chlorine demand. As a consequence of lower operating rates, we expect caustic soda supply to remain tight. Therefore, we expect the $65 per ton caustic soda price increase announced in late August to be implemented consistent with our contract structure. We expect to realize some of this increase in the fourth quarter, and the largest amount will be realized in the first quarter of 2012.

Third quarter 2011 chlorine and caustic soda volumes declined 1% compared to the third quarter of 2010, and were 6% lower than the second quarter of 2011 levels. In addition to the outages, our chlorine production was negatively impacted by 2 large chlorine customers who began multi-month outages during the second half of the quarter.

On the positive side, we continue to experience growth in our bleach business. The third quarter 2011 volumes increased 7% compared to the third quarter of 2010. And during the first 3 quarters of 2011, bleach volumes have increased 19% compared to 2010 volumes. We expect our bleach business to continue to grow, driven by the investments we are making in high-pure bleach.

During the third quarter, we began construction of 2 additional high-pure bleach plants, one to be located at our Henderson, Nevada and the other at our Niagara Falls, New York chlor alkali plants. We expect these bleach plants, which represent capital spending commitments totaling approximately $40 million, to be operational by the fourth quarter of 2012. And as I said earlier, we expect our high-pure plant at McIntosh, Alabama to start production during the fourth quarter of this year.

The high-pure bleach process produces bleach that is twice the concentration of bleach produced by the processes we currently employ. It creates a higher value product that is less expensive to ship than either chlorine or conventional bleach.

Chlor Alkali has also experienced increased sales of hydrochloric acid during the third quarter. These shipments increased 6% compared to the third quarter of 2010 and 10% compared to the second quarter of 2011. We currently have the capability to produce this value-added product at 6 of our 7 chlor alkali manufacturing facilities, and we are in the process of modernizing and expanding that capability in Henderson, Nevada. In addition to being value-added products, both bleach and hydrochloric acid, because they are not classified as TH chemicals, are less expensive to ship than chlorine, and it's an important consideration for the business as our freight costs continue to be a major challenge.

Freight cost per ECU shipped in the third quarter of 2011 increased approximately 15% when compared to the third quarter of 2010. For the first 9 months of 2011, freight costs per ECU produced have increased 21% compared to the first 9 months of 2010. These cost increases continue to be driven by the cost of shipping chlorine by rail.

The Chlor Alkali business earned $76.7 million in the third quarter of 2011, which represents the third highest level of quarterly earnings ever and a significant improvement over the $44 million we earned in the third quarter of 2010. The year-over-year improvement reflects the combination of improved ECU pricing and the additional contribution from the acquisition of PolyOne's 50% ownership in Sunbelt.

The third quarter of 2011 ECU netback excluding Sunbelt was approximately $590 compared to approximately $465 in the third quarter of 2010. This represents the eighth consecutive quarter of improved ECU netbacks in our system. The acquisition of SunBelt contributed approximately $12 million of incremental profits in the third quarter of 2011. The Sunbelt ECU netback in the third quarter of 2011 was approximately $610.

Chlor Alkali fourth quarter 2011 segment earnings are expected to decline from the third quarter of 2011 but will exceed the fourth quarter 2010 earnings. ECU netbacks in the fourth quarter are forecast to decline slightly from the third quarter levels as chlorine price declines and less favorable customer mix more than offsets increases in caustic soda prices. Based on the lag we experienced in the realization of price increase, we expect that this ECU netback decline will be reversed in the first quarter of 2012.

In spite of the weaker forecast for the fourth quarter, the Chlor Alkali business in 2011 has experienced a significant improvement in earnings, above the levels that we achieved in 2009 and 2010. The business is also well positioned for further improvements in 2012. The business will begin 2012 in a strong pricing position and continued positive momentum on the caustic soda side. We also have the benefit of the 100% ownership of Sunbelt for the full year. We expect the bleach business to grow an additional 10% to 15%.

Now let me discuss Winchester. In early August, we announced that Winchester had been awarded a 5-year contract by the United States Army for the supply of 5.56-millimeter, 7.62-millimeter and 50-caliber ammunition. This contract, which is a follow-on to the second source contract awarded to General Dynamics in 2006, in which Winchester participated, the contract has the potential to generate total revenues of $300 million over the next 5 years. This is a significant accomplishment for our business, and it solidifies the outlook for Winchester's noncommercial sales for the next several years.

Winchester's third quarter 2011 commercial sales volumes continue to be stronger, and we would have expected it at the end of a surge period. This unexpected strength at commercial sales has been matched by continued strength in gun sales. Background checks, which are a strong indicator of future gun sales, remain well above the pre-surge levels.

The benefits from the better-than-expected levels of commercial sales have been more than offset by higher commodity metal cost. Third quarter 2011 purchase costs for copper have increased approximately 24% compared to the third quarter of 2010, and third quarter 2011 lead costs have increased approximately 16%. These levels of increase represent approximately $5 million in quarterly cost increases. On a year-to-date basis, in 2011, purchase copper costs have increased approximately 27% and lead cost approximately 14%, representing $16 million in annual cost increases. Metal costs have been a major challenge for the business in 2011.

During the third quarter, the initial relocation of production equipment from East Alton, Illinois to the new Oxford, Mississippi facility was successfully completed. There will be additional equipment relocations in the fourth quarter.

During 2011, the Winchester financial results are forecast to include $4 million to $5 million of costs associated with the overlap of support cost between East Alton, Illinois and Oxford, Mississippi facilities and other relocation-related costs. These costs, which negatively impacted the third quarter of 2011, will also have a negative impacted the fourth quarter of 2011 and into 2012. And as a reminder, we expect the relocation to Oxford, Mississippi to begin to generate meaningful cost savings in the second half of 2013, and we remain on target to realize the full $30 million of annual savings by 2016.

Winchester earned $13.1 million in the third quarter of 2011, which compares unfavorably to the third quarter of 2010 in which the earnings were $18.8 million. The decline reflects the negative impact, higher commodity metal cost and the additional cost associated with the centerfire relocation project, which more than offset favorable product pricing.

Fourth quarter 2011 Winchester earnings, which are expected to reflect normal seasonal weakness, are forecast to decline slightly from the fourth quarter 2010 levels. The combination of year-to-date Winchester earnings and fourth quarter outlook are projected to result in 2011 earnings that will be the third highest in the history of the business and more than double the average annual earnings in the 10 years prior to the 2009 peak year.

Strong earnings are consistent with our view, but after the completion of the surge, Winchester's earnings will be higher than prior to the start of the surge. With the confirmation of this view and with the longer-term benefits to be realized from the centerfire relocation project, we are optimistic about the future of Winchester and the contributions it will continue to make to Olin.

In spite of the weaker fourth quarter outlook, I remain optimistic about the prospects for the business. 2011 segment earnings in Chlor Alkali will likely more than double from 2010 levels, and Winchester's 2011 segment earnings continue to be well above historic levels. In addition, there's positive pricing momentum for caustic soda, and we're well positioned to continue the strong growth that we've experienced in the bleach business.

I'd like to turn the call over to John Fischer, who will review several financial matters with you. John?

John E. Fischer

Thanks, Joe. First, I'd like to discuss a few items on the income statement. Selling and administration expenses increased $6.5 million or 20% in the third quarter of 2011 compared to the third quarter of 2010. The year-over-year increase reflects the inclusion of approximately $3 million of Sunbelt selling and administration expenses as consolidated Olin expenses, higher salary and benefit cost, higher employee relocation expense and higher bad debt expense, partially offset by lower management incentive costs, which included mark-to-market adjustments that reduced stock-based compensation and lower legal and legal-related settlement costs.

The inclusion of the Sunbelt expenses of approximately $6 million have caused absolute year-over-year selling and administration expenses to be unfavorable on a year-to-date basis in 2011, and this will continue for the balance of the year.

Third quarter 2011 charges to income for environmental investigatory and remedial activities were $2.5 million, which included $1.5 million of recoveries from third parties for environmental costs incurred and expensed in prior periods. During the third quarter of 2010, there were $8.4 million of charges related to environmental, investigatory and remedial activities, which included $200,000 of recoveries for environmental costs incurred in expense from prior periods.

After giving consideration to the recoveries in both periods, year-over-year expense related to environmental remedial and investigatory activities decreased by $4.6 million. These charges related primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites.

We forecast that full year 2011 expenses for environmental, investigatory and remedial activities, prior to any recoveries, will increase as much as 25% from 2010 levels. We currently do not expect additional recoveries in 2011 of environmental costs incurred and expensed in prior periods.

On a total company basis, defined benefit pension plan income was $6 million in the third quarter of 2011 compared to $5.3 million in the third quarter of 2010. We are not required to make any cash contributions to our domestic defined benefit pension plan in 2011 and continue to believe the earliest we may be required to make any cash contributions to that plan is 2013. In 2011, we do expect to make a cash contribution to our Canadian defined benefit pension plan of less than $5 million. Under Canadian pension rules, service costs are required to be funded annually.

Defined contribution pension plan expense was $3.5 million in the third quarter of 2011 compared to $3.3 million in the third quarter of 2010. The vast majority of our employees now participate in the defined contribution pension plan. Our defined benefit pension plan is frozen to new entrants, all salaried, all non-union hourly and most union employees.

The third quarter 2011 effective tax rate was 32%. We continue to believe that full year effective tax rate will be in the 36% to 37% range with a fourth quarter rate similar to the third quarter.

During 2011, Olin will continue to benefit from the accelerated depreciation provided for in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, and we forecast a cash tax rate, excluding the taxes recorded as part of the remeasurement of Olin's 50% ownership interest in the Sunbelt partnership that took place in the first quarter, of approximately 23%.

Earlier, Joe mentioned the $4.1 million restructuring charge included in the third quarter 2011 results. This charge is associated with exiting the use of mercury cell technology in the Chlor Alkali manufacturing process by the end of 2012 and the ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, Illinois to Oxford, Mississippi. Over the next 3 years, we anticipate that additional restructuring charges will be recognized associated with these actions.

During the fourth quarter of last year, an initial $34.2 million charge was recorded associated with the Winchester relocation, the Chlor Alkali Charleston, Tennessee mercury cell conversion and the Augusta, Georgia plant reconfiguration. Under the current accounting rules, which were changed several years ago, certain types of costs, including employee relocation, building demolition and certain other employee costs, are required to be expensed as incurred. As a result, we expect to incur approximately $8 million of additional restructuring charges associated with the Chlor Alkali projects between now and the end of 2012 and approximately $18 million of additional restructuring charges associated with the Winchester relocation between now and the end of 2016.

Finally, during the third quarter of 2011, we recorded a pretax gain of $3.7 million on the sale of a former manufacturing site.

Now turning to the balance sheet. Cash and cash equivalents at September 30, 2011, including the restricted cash associated with the Go Zone and Recovery Zone financings that were completed in 2010 and are classified as a long-term asset on the balance sheet, totaled $389.9 million.

At the end of the third quarter of 2011, $36 million of the $153 million of Go Zone and Recovery Zone bonds issued were undrawn. We expect that this undrawn balance will be fully drawn by the end of 2011. We also expect that at the end of 2011, there will be approximately $40 million of cash that will remain restricted and will be available to fund 2012 capital spending.

During the first 9 months of 2011, there's been approximately $71 million of working capital growth. This reflects the normal seasonal pattern in both businesses amplified by the improved volumes of bleach sales in Chlor Alkali and higher commodity metal prices in Winchester. Consistent with the normal annual pattern, we expect the majority of this working capital growth to be liquidated by the end of the year.

In December 2011, we have $75 million of bonds that were issued in 2001 that matured. It's currently our intention to redeem these bonds using our cash. Also in December, $12.2 million of the Sunbelt notes will be repaid. The SunBelt notes require $12.2 million of repayments annually through the end of 2017.

Full year 2011 capital spending is projected to be approximately $255 million compared to $85.3 million in 2010. Approximately 65% of this spending is related to the Charleston, Tennessee mercury cell conversion project and the Winchester relocation project. Year-to-date, these projects have accounted for approximately 57% of total capital spending.

The capital spending for the Winchester relocation project will be partially financed by approximately $31 million of grants provided by the state of Mississippi and other local governments. We expect depreciation expense to be in the $100 million range for 2011.

During the third quarter, we initiated actions under the $5 million share repurchase program that was approved in July. In the third quarter, approximately 125,000 shares were repurchased at a cost of approximately $2.2 million. Yesterday, Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on December 9, 2011, to shareholders of record at the close of business on November 10, 2011. This is the 340th 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 then 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 factor sections of our most recent Form 10-K and in our third quarter earnings release. A copy of today's transcript will be available this afternoon on our website in the Investors section under Calendar of Events. The earnings press release and other financial data and information are available under Press Releases.

Now operator, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Frank Mitsch of Wells Fargo.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

I wanted to try and size the Chlor Alkali outages that you're planning in the fourth quarter and also talk a little bit about operating rates. In the third quarter, your operating rates, on average, were 85%, which was in line with the industry even though you had planned and unplanned outages, et cetera. But obviously, business started to slow down, and you're forecasting mid-70% in the fourth quarter. Do you expect the industry to also be dropping that far down? Or is it mainly related to some of the outages that you -- or the unplanned downtime or planned downtime that you have?

John L. McIntosh

Frank, I expect the industry to be in roughly the same operating rate range in the fourth quarter. We've seen pretty significant falloff in demand for chlorine, chlorine derivatives, and I expect that to translate across the industry. I would add that if you look at our outages, total outages in the fourth quarter, it represents, in our system, about 5% of capacity. Our expected operating rate for the fourth quarter, you know, mid-70s, is about the midrange of our fourth quarter operating rate for the last 3 years. So what we're seeing is not out of the ordinary for a fourth quarter for Olin's system.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

All right. Terrific. And John you mentioned that -- or the comment was that the 2 large chlorine customers, multi-month outages. When do you anticipate that they'll be back up?

John L. McIntosh

We have one customer that shut down in the end of July that should be starting up or is scheduled to start up next week. Another customer that started down -- shut down the end of August, that’s supposed to start up the end of November.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

All right. Great. And then --

Joseph D. Rupp

One of those customers, Frank -- one of the customers -- length of their shutdown is combined with a capital investment that they're doing. That's why it's pretty lengthy.

John L. McIntosh

That's why it's a little bit long.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

All right. Terrific. Terrific. And just if you guys could offer a comment with respect to the share buyback, $2.2 million in the third quarter. Any comments on the pace that you're planning to execute on that $5 million share buyback?

John E. Fischer

I think, Frank, we intend to be an opportunistic buyer of Olin shares and with a goal to offset dilution over time. And that's what we're targeting.

Operator

The next question comes from Edward Yang of Oppenheimer.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Joe mentioned that you still expect the Chlor Alkali business to improve in 2012 year-over-year. So how much can we extrapolate the operating rate that you expect in the fourth quarter in the mid-70s out into 2012? What would your expectation be, for example, for first quarter of next year?

John L. McIntosh

We have historically seen operating rates from fourth quarter of one year to first quarter of another -- of a subsequent year increase in the 5% to 8% range. And for us, peak quarters from an operating rate standpoint tend to be the second and third quarter, when we have the full benefit of all the seasonal business that we serve, especially our bleach business.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

And John, accounting for that seasonality then, would you expect your operating rate to be down year-over-year in the second quarter of next year versus today under -- given your current assumptions?

John E. Fischer

No.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay. And you mentioned that the mid-70s range that you see for the fourth quarter is kind of the average of what you've seen in the last 3 years, but that included a pretty severe recession. I would think that an operating rate this low -- that would sorry, go ahead.

Joseph D. Rupp

If you take the recession year out and just take the last 3 years -- and we're right in the midpoint of that to be quite frank about it. Forget '08, when everything collapsed. That was when we had the 67% operating rate.

John E. Fischer

'07, '09 and '10 averaged out to 75%.

Joseph D. Rupp

75%.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay. I thought that fourth quarter -- kind of a typically year would be more in the 80s or the mid-80s or so. But this mid-70s, you believe is -- okay. All right. So it's in the midpoint then. Okay. Got you. Are there any cost-cutting actions that you could take as you've this drop-off in chlorine demand?

John L. McIntosh

Well, for the kind of just one quarter demand that we see, it's pretty hard to make major changes on the cost side. What we do do is it does afford us the opportunity to take opportunistic shutdowns in a period of time in which we can do that in the most cost-effective manner, and it also allows us to manage the logistics side of our business in a manner in which we can limit out-of-order purchase shipments and take full advantage of our multi-plant network and really lower the supply chain cost that we have.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Maybe following up on that line of thinking then, John. When you made the SunBelt acquisition, I believe it was -- the final payment was going to be contingent on earn-outs, but that's probably one of your most profitable plants. So would the demand -- the diminished demand you're seeing on the chlorine side, does that -- would you see any benefit from that from, let's say, paying out less of the Sunbelt earn-outs or reversing any accruals that you might have had for that?

John E. Fischer

We haven't really talked about the amount of the earn-out. It is a 3-year earn-out, and I think we will run the business in the manner that generates the best financial return for Olin's shareholders.

Operator

The next question comes from Christopher Butler of Sidoti & Company.

Christopher W. Butler - Sidoti & Company, LLC

Just wanted to shift gears over to Winchester here a bit. Now that we have some visibility into the full year of kind of 2009 post peak demand Winchester, how do guts see this working out here over the next year, the next 2 years? Is this going to be a slow decline back to normal? Have we kind of found a stabilization here above where we expected? What do you think?

Joseph D. Rupp

Chris, we think we're troughed out is where we are. We're -- we'll stay stable, with the ability to increase as time marches on.

Christopher W. Butler - Sidoti & Company, LLC

And the pullout from Iraq is -- and things of that nature not a concern to you at this point?

Joseph D. Rupp

Not in the immediate future. Longer term, it will be, but not as we look forward here in the next year or 2.

John E. Fischer

Chris, one point I think we should make about the recent second source award. We were a participant in the prior second source award, but we only performed between 40% and 50% of that total contract value. The new contract provides us the opportunity to perform 100%, which if volumes are equal, that would double that component of our sales. Now we're not thinking that, because we do believe there'll be budget reductions and stuff and as we move through time. So that's actually an opportunity for us to actually have better military sales than we've had historically. And at worst, if the volume is purchased and the new second source are only half of what they were in the prior second source, we'd still be even. So I think that's really good news for us in terms of the business base.

Christopher W. Butler - Sidoti & Company, LLC

And looking at the profitability side of the equation, could you talk to the pricing environment and your ability to offset some of these higher metal costs that you've been dealing with?

Joseph D. Rupp

We actually have pricing action. It took effect the 1st of July, Chris. It's working its way in, and you know how we buy our metal. We're -- our -- we're hedged out a couple of quarters, and so that's all going to work its way through the system. So we would anticipate that as we get out further, that our pricing will start to offset the commodity cost increase.

Christopher W. Butler - Sidoti & Company, LLC

And just looking at the balance sheet really quick, you had mentioned that working capital normally increases during the year and falls by the end. But if we're look at working capital sequentially here into the third quarter, it looks like you reduced it when normally, it's fairly flat. With demand weakening in Chlor Alkali at the very end of the quarter, I'm surprised that there wasn't an uptick on inventory as a result. Can -- have you done anything differently there?

John E. Fischer

The bigger driver of the third quarter and most of the working capital growth during the year is Winchester. And we saw a very robust third quarter sales for Winchester, and that's really the bigger driver than the Chlor Alkali piece.

Operator

The next question comes from Herb Hardt of Monness.

Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division

Question is potential for overseas ammunition contracts. Is there anything in the wings on that?

Joseph D. Rupp

Not much, Herb. There's periodically are opportunities there but not many. Most of our sales are pretty much domestic.

Operator

The next question comes from Don Carson of Susquehanna.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Question on ECU pricing. You were $590 in the quarter. That was only up $7. Just wondering what the dynamics were of how much of the cost of increase rolled through and what the offset was on chlorine. And just remind me, your bleach realizations are not in that ECU number. Is that correct?

John E. Fischer

I think, Don, the quarter-over-quarter increase was $40. We were at $550, and now, we're at $590. And you're right. The bleach realizations are not in that number.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Okay. And what's was the dynamics? How much was chlorine down versus caustic up?

John E. Fischer

Chlorine was roughly flat. It was all cost caustic up.

Joseph D. Rupp

Offset by higher -- then you get the higher transportation cost, as you know, Don.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Now as we look into the fourth quarter, you said you're hoping to get a portion of that 65%, maybe 20% to 25%, but I assume that chlorine is going to offset much of that. So are you looking at relatively flat ECUs here in Q4?

Joseph D. Rupp

That's correct.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Okay. And then as you go forward with your bleach expansions, ultimately, just say if you look out a year, what proportion of your overall ECUs will be going into bleach? And is that -- are you still able to realize about $100, $150 ECU premium on bleach?

John E. Fischer

In 2011, Don, a little over 10% of our total capacity will be sold as bleach. And to date, we have continued to realize at the high end of the $100 to $200 per ton premium that we have talked about.

John L. McIntosh

Don, when you look at the addition of the high-pure bleach capacity that Joe alluded to in his remarks, the -- which will occur within the next 2 years, that will basically add 1/3 of our current system capacity. So we will have the opportunity to grow that 10% correspondingly.

Joseph D. Rupp

We stated that our -- we're trying to get it to 15% to 20%. That's where we're trying to get to.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

And just a question on ECU pricing as we get into 2012. Obviously, caustic's being held up here, because there's not much of an outlet for chlorine, but how would you see that unfolding? And I'm just wondering how much -- clearly, end market demands weakened for chlorine derivatives, not just vinyls, but it's a sign as well. But I'm wondering what impact this new capacity we've seen this year for Chlor Alkali has also contributed to the weakness in operating rates.

Joseph D. Rupp

We don't think it's contributing at this point, the new capacity. And what we think is going to happen is that caustic's going to be tight, and it's going to be tight into the first quarter. And then I think everybody's crystal ball will be what happens to the economy. Normally, what would start to happen is chlorine starts to pick up in the late February, early March period. It will for us, because we'll be heading into the bleach season.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Okay. And what's your outlook for freight rates next year, Joe? I know that's a subject of...

Joseph D. Rupp

I think they're going to continue to go up.

Operator

The next question comes from Alex Yefremov of BofA Merrill Lynch.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

I just wanted to ask a question on ECU, your expectation of higher ECU realizations in Q1 2012. Does this assumption include improvement or flattening in chlorine prices or continued decreases there?

John L. McIntosh

It assumes chlorine prices will stay relatively where they are. Just to comment on caustic, if you look at 2011 and you add up all the price increases in the year, there were a total of $240 of price increases announced. If you look at the benchmark indexes, through the third quarter of this year, only $100 of that $240 has been realized in the marketplace. We feel like there's still a lot of room to go, and we've actually seen improvement in caustic pricing in the fourth quarter, so far in the fourth quarter. So we believe, as has been said in earlier comments, that we have opportunity for caustic pricing to continue into the first part of 2012.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Okay. And a question on the high-strength bleach facility. Could you help us size potential impact on sales and EBIT after the startup sort of based on a steady state run rate in 2012?

John E. Fischer

John just said that we are expanding our bleach capacity by roughly 1/3, and we said today it's about 200,000 tons. So it would be roughly 60,000 tons, and we've set the margin. Favorable margin impact is between $100 and $200 per ton. I will caution you that that is a seasonal business, where about 70% of what we sell, we sell in quarters 2 and 3.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Sort of, I guess, a follow-up to that. Do you think as you ramp your bleach volumes, your seasonality would increase, and that's part of what's happening this year already, because your bleach volumes are higher?

John E. Fischer

That's absolutely one of the factors that's contributing to the move from Q3 to Q4. I would also add that we have seen a much more normal move in Winchester seasonally than we've seen in the last couple of years, because the surge sort of overcame some of that.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

I see. Do you see any other end markets where sort of there's more pronounced seasonality this year I guess other than maybe -- within chlorine derivatives, which markets are doing worse than others?

John L. McIntosh

I don't know that you can attribute it as much to seasonality as just kind of attribute it to worldwide demand patterns. But the derivative product, the derivative exports, chlorine-based derivative exports have really dropped off the end of the third quarter and at least, so far, in the fourth quarter. And I don't think that's seasonality as much as it's just worldwide economic -- worldwide demand driven by what the economies are doing.

Operator

The next question comes from Dmitry Silversteyn of Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

I'm still struggling a little bit with fourth quarter guidance. I understand the seasonal decline from the third quarter to the fourth quarter from point of view of bleach and lower chlorine demand and volumes. But it you just compare it to the third -- to the fourth quarter of 2010, I mean, you got more than -- $50 more in ECU netback if not greater. Volumes, actually, including SunBelt, are going to be up. So I'm just trying to understand -- how do I get my number down below $50 million in profits, I guess, is my question.

John E. Fischer

I think, Dmitry, if you look at last year's fourth quarter and you look at the segment results and you look at the corporate and other line, there's about a $10 million to $12 million year-over-year change. Last year's fourth quarter essentially included no environmental expenses because of the absence of discrete events and some recoveries. There were some good news in terms of a reimbursement from the government on retiree medical that went with the healthcare law, and there were some adjustments to asset retirement obligations. They ran through as a result of the restructuring charge. Those 3 alone, on a year-over-year basis, are -- 2011 is $10 million higher than it was in 2010, and I think that's probably the piece that you're missing.

Dmitry Silversteyn - Longbow Research LLC

Okay. So basically, you're talking about a higher corporate expense then. And your Chlor Alkali production or profitably is going to be -- I don't want to say 50% higher but significantly higher than it was in December of 2010 quarter, right?

John E. Fischer

That's correct.

Dmitry Silversteyn - Longbow Research LLC

Okay. All right. So that explains or helps to explain that a little bit. Secondly, on your tax rate, I mean it’s been fluctuating a little bit here. So what should we think about not just for the fourth quarter but as we look longer term at your tax rate?

John E. Fischer

I think after adjustments, it's a 36% to 37% rate, which is what we've set for the full year 2011.

Dmitry Silversteyn - Longbow Research LLC

Okay. So -- oh, even for the full year 2011, it'll be that high?

John E. Fischer

Yes. I think it was quite a bit higher than that in Q1.

Dmitry Silversteyn - Longbow Research LLC

Right. It was 35% in Q1, and it was 32% in Q3. So for us to get to 37% or 36%, we have to assume almost a 40% Q4 tax rate. Is that the right way to think about that?

John E. Fischer

No. I think if you go back and look at Q1 and Q2, I think we're above that 36% to 37% rate. To answer your question on future guidance, I would guide you to a 36% to 37% rate on a consistent basis going forward.

Operator

The next question comes from Gregg Goodnight of UBS.

Gregg A. Goodnight - UBS Investment Bank, Research Division

You mentioned that you're going to take some opportunistic shutdowns and do some tie-ins in the fourth quarter related to projects and others. My question is, is that work going to be expensed or capitalized? If it's going to be expensed, how much of an incremental cost of that is in the fourth quarter?

John L. McIntosh

There really isn't a significant incremental expense cost associated with it. The opportunistic stuff we're doing is really capital related.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. So it's -- it doesn't have an EPS impact then in the fourth quarter.

John L. McIntosh

Yes, sir.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. The second question I had was the -- any -- are there going to be any other environmental expenses or unusual charges in the fourth quarter that's included in your guidance for your corporate area?

John E. Fischer

I wouldn't call it unusual. There is variability in environmental expenses. We do not see any recoveries in Q4 of '11, whereas in Q4 of '10, we did, and so there's a year-over-year unfavorable comparison. But I think if you look at environmental across 2011, as we said, it'd be about 25% higher than 2010 but well within historic range.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. And the last question I have is your guidance that you're giving is on a GAAP basis, I assume. It's not an adjusted basis.

John E. Fischer

That's correct.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Oh, I'm sorry. I do have one more question. Energy costs, could you typify your energy cost in third quarter versus second and then fourth quarter versus third? Is it fairly flat? Or are we seeing any trends at all?

John L. McIntosh

We typically -- energy costs -- although the difference isn't significant, energy costs, during the peak times of the year, which are typically second quarter, third quarter, do tend to be a little bit higher. A lot of that's driven by operating rate, but it's also driven by just the fact that overall demand is higher in those quarters. And we buy a little bit higher price to mix of electricity because of that, but it's not a significant delta from those quarter-to-quarter.

Operator

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

Joseph D. Rupp

I'd like to thank you for joining us today as we've reported our third quarter results, and we look forward to speaking with you in January of 2012 when we report on the results of our full year and our fourth quarter. Thank you.

Operator

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

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