Olin Q4 2007 Earnings Call Transcript

| About: Olin Corporation (OLN)


Q4 2007 Earnings Call

January 29, 2007 11:00 am ET


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

John E. Fischer - Vice President and Chief Financial Officer

John McIntosh - Vice President and President of Chlor Alkali

Larry Kromidas - Assistant Treasurer and Director of Investor Relations


Frank Mitsch - BB&T Capital Markets

Don Carson - Merrill Lynch

Christopher Butler - Sidoti

Sergey Vasnetsov - Lehman Brothers

Joe Herrick - Gutternam Research

Richard O’Reilly - Standard & Poor’s

Herb Hardt – Monness, Crespi, Hardt & Co.

Justin Boisseau - Gates Capital Management

Bob Goldberg - Scopus Asset Management


Good day ladies, and gentleman, and welcome to Olin’s Fourth Quarter 2007 Earnings Call. My name is Jen and I’ll be your coordinator for today. (Operator Instructions). I’ll now turn the presentation over to Mr. Joseph Rupp, Chairman, President and Chief Executive Officer.

Joseph D. Rupp

Thank you. Good morning and thank you for joining us today. With me this morning are John Fischer, Vice President and CFO; John McIntosh, Vice President and President of our core Chlor Alkali products business; and Larry Kromidas, our Assistant Treasurer and Director of Investor Relations.

Last night we announced that earnings from continuing operations in the fourth quarter of 2007 were $29.6 million, or $0.40 per diluted share, compared to $15.6 million, or $0.22 per diluted share, in the fourth quarter of 2006.

Sales from continuing operations in the fourth quarter of 2007 were $404.8 million, compared to $247.1 million in the fourth quarter of 2006.

Both our Chlor Alkali and Winchester businesses finished 2007 on a strong note. Chlor Alkali fourth quarter segment earnings were $68.1 million, which includes $20.9 million from the Pioneer operations acquired in August. Included in these results are approximately $5 million of realized synergies.

In achieving these Chlor Alkali earnings, we overcame a lower operating rates, reflecting both planned maintenance outages at seven of our plants, and seasonally weaker demand. Operating rates in the fourth quarter of 2007 were 88%.

Winchester earned $2.7 million in the quarter and completed its best year since 1994. During the quarter Winchester benefited from higher selling prices and stronger than expected demand, which more than offset higher commodity and manufacturing costs.

Fourth quarter 2007 results included a $1.3 million pre-tax recovery associated with a prior year’s divestiture, and a $1 million pre-tax reduction in stock based compensation expense due to the sale of the metals business.

Fourth quarter 2007 results also include a $3 million dollar pre-tax charge to adjust the asset retirement obligation previously recorded, as required under accounting standards for asset retirement obligations. Fourth quarter 2006 results included a $6 million pre-tax insurance recovery, which was related to Hurricane Katrina business interruptions.

For the full year 2007, earnings from continuing operations were $100.8 million, or $1.36 per diluted share, compared to $123.7 million, or $1.70 per diluted share in 2006.

Full year 2006 results included $700,000 of pre-tax gains associated with real estate transactions and a $21.6 million reduction in income tax expenses associated with the settlement of the tax treatment of capital losses generated in 1997 and other tax manners.

Sales from continuing operations in 2007 were $1.28 billion, compared to $1.04 billion in 2006. Earnings in the first quarter of 2008 are projected to be in the $0.50 per diluted share range. This forecast reflects a slight improvement in ECU pricing compared to the fourth quarter of 2007 as the most recent caustic price increase is implemented.

During January, we have seen normal seasonal weakness in chlorine demand, which has been exacerbated by weakness in the vinyl sector. Improvements in the current level of anticipated demand from the vinyl industry would favorably impact our projected first quarter earnings.

Winchester results are expected to be about equal to the first quarter of 2007, and pension expenses expected to decline by approximately $3 million compared to the first quarter of 2007. Olin’s earnings per diluted share from continuing operations in the first quarter of 2007 were $0.22.

Now, let me discuss our Chlor Alkali and Winchester segments in more detail. First, Chlor Alkali. Chlor Alkali products earned $68.1 million in the fourth quarter of 2007 and $237.3 million for the full year of 2007.

Included in the fourth quarter and full year earnings were $20.9 million in the fourth quarter and $29.2 million for the full year in the Pioneer operations, which we acquired at the end of August. In comparison, fourth quarter and full year 2006 Chlor Alkali earnings were $52.2 million and $256.3 million, respectively.

Chlor Alkali sales for the fourth quarter of 2007 were $302.1 million, compared to a $153.8 million in the fourth quarter of 2006. The increase in sales reflects a 70% increase in volume due to the acquisition of the Pioneer operations, which more than offset a 2% decline in Olin volumes during the fourth quarter.

The fourth quarter of 2007 ECU netback in the Olin system was $525, compared to $520 in the fourth quarter of 2006. Third quarter 2007 Olin-only ECU netbacks were $540. The decline from the third quarter of 2007 reflects weaker chlorine prices due to a less favorable customer mix which more than offset higher caustic soda prices.

The fourth quarter Pioneer-only ECU netback was $605 and the combined Olin-Pioneer netback was $555. The difference between Olin and Pioneer ECU netbacks reflects the higher level of chlorine that is shipped by pipeline and the higher ECU netback that is realized by Pioneer’s West Coast operations.

Unfortunately, Pioneer’s West Coast operations also have higher manufacturing costs. Pioneer typically ships approximately 40% of its chlorine by pipeline. Beginning in the first quarter of 2008, we will report only the consolidated ECU netback.

As we continue to operate freight and logistics across the combined Olin-Pioneer systems, maintaining separate ECUs is really going to no longer be meaningful.

We expect our first quarter 2008 ECU prices to improve slightly over the fourth quarter of 2007, driven by higher caustic soda prices. The increase in first quarter caustic soda price reflects the impact of the $75 per ton price increase announced in the fourth quarter. We do not expect the full impact of that price increase to be realized until the second quarter.

Freight costs in the Olin system increased 29% in the fourth quarter of 2007, compared to the fourth quarter of 2006. Escalating freight costs continue to be a major challenge facing the business and we anticipate further increases in 2008.

As a point of reference, the freight cost penalty included in the Olin fourth quarter 2007 ECU netback of $525 was $110 per ECU; that compares to $85 per ECU in the fourth quarter of 2006.

The freight cost included in the fourth quarter of 2007 Pioneer ECU netback of $605 was $100 per ECU. And in future periods we will report freight cost per ECU included in our netback.

As we have said before, the ability to optimize freight cost is a key synergy to be realized as part of the Pioneer acquisition. To date, we have identified and implemented changes in ship-to and ship-from locations that will reduce annual ton miles shipped by approximately 5%.

The benefits of these changes are already reflected in the Pioneer ECU netback. The $100 per ECU of freight cost included in the fourth quarter of 2007 Pioneer ECU netback was $10 per ECU lower than it was in the third quarter of 2007, prior to the implementation of these changes.

Fourth quarter Chlor Alkali segment earnings included approximately $5 million of realized synergies, and we remain confident that the full $35 million of annual cost savings will be realized.

During the first quarter of 2007, the Pioneer corporate office in Houston will be closed and the space has already been subleased. All those activities have been consolidated into existing Olin functions and facilities.

Looking forward, we believe our Chlor Alkali business is well positioned to have a strong 2008. We expect a $75 per ton caustic soda price increase announced in the fourth quarter of 2007 to favorably impact ECU netbacks in both the first and second quarters of 2008. But we have seen some weakness in chlorine demand from the vinyl industry beyond the typical seasonal slowdown.

Caustic demand continues to be robust. Within the combined Olin and Pioneer systems, we are currently struggling to meet our caustic demand. Throughout 2008, we will continue to realize additional synergies which will enhance our profitability.

Now I’ll turn to Winchester. As I said earlier, Winchester just completed its best year since 1994 and has effected a significant turnaround in its business. Winchester’s 2007 segment earnings of $26.4 million represent a 67% improvement over the 2006 earnings.

The key to the Winchester turnaround has been improved volumes and the positive impact of the eleven price increases that have been announced since the beginning of 2004. The most recent of these price increases was announced in the fourth quarter of 2007 and was effective January 1, 2008.

Some of the improved volumes represent the significant progress Winchester has made in expanding its military and law enforcement business. During 2007, Winchester received the largest federal law enforcement contract in its history, a five-year, $54 million contract from the FBI. Winchester’s currently pursuing an additional opportunity with the FBI.

Winchester also received an $18 million multi-year contract from the United States Army for shotgun shells, which was the second consecutive contract for this type. Finally, Winchester was recently awarded a 5-year, $29 million contract from the United States Navy for 556 millimeter frangible training ammunition.

This is currently Winchester’s largest United States Navy contract and is the largest contract Winchester has received in the growing area of lead-free military training ammunition.

During 2007, law enforcement and military sales increased 16% over 2006 levels, and as a further point of reference, military and law enforcement sales accounted for approximately 25% to 30% of Winchester 2007 revenues. Based on the recent orders and current backlog, law enforcement and military sales should continue at current levels through 2009.

During the fourth quarter of 2007, and continuing into the first quarter of 2008, the price of lead has moderated from a record level of $1.60 per pound to a range of $1.10 to $1.20 per pound. This moderation is good news for both Winchester and the commercial ammunition industry.

As we have said before, we’re concerned that unprecedented levels of commodity metal prices, specifically copper, lead and zinc, could force commercial ammunition prices to a level that would negatively impact demand. And as reminder, Winchester consumes approximately four times as much lead as copper.

That said, Winchester did experience a significant year-over-year increase in the price of lead. Lead prices in both the fourth quarter and full year 2007 were 100% higher than they were in the fourth quarter and full year of 2006.

Winchester has continued to aggressively pursue cost reduction programs. The business has recently begun analyzing an opportunity to relocate approximately 100 manufacturing jobs from its East Alton, Illinois facility. This relocation, if implemented, could generate annual cost savings of approximately $3 million.

Looking forward, I also believe our Winchester business is well positioned for another strong year in 2008. The business continues to pursue cost reductions and has seen a moderation in the escalation of commodity metal prices. It had success in implementing price increases and has diversified its revenue sources through the acquisition of law enforcement and military contracts.

The divestiture of metals, coupled with the Pioneer acquisition and the strategic actions taken to the funding and the position of our pension plan, made for an exciting and rewarding 2007.

We strategically positioned the company into a leading core alkali manufacturer, with financial flexibility to pursue additional investments in areas where we can earn the best returns.

Now let me turn the call over to our Chief Financial Officer, John Fischer, who will review several financial items with you.

John E. Fischer

Thank you, Jim. First I’d like to discuss a few items on the income statement. Selling and administrative expenses increased by $3.5 million in the fourth quarter of 2007 compared to the fourth quarter of 2006.

The increase reflects SG&A expenses from the acquired Pioneer operations, which more than offset lower corporate costs, primarily legal and legally-related costs. Looking at the 2007 SG&A expenses, I would remind everyone that these Pioneer costs are a significant component of the synergies expected to be realized as part of the acquisition.

For the full year 2007, other corporate and unallocated costs decreased $5.4 million from the 2006 levels. This reduction reflects the lower level of legal and legal-related settlement expenses, associated primarily with legacy environmental issues and environmental recovery actions.

As a point of reference, these legal and legal-related expenses represented approximately 25% of the total 2007 other corporate and unallocated costs. The decline in these expenses was partially offset by higher asset retirement costs and higher incentive and stock-based compensation expenses.

Fourth quarter and full year environmental investigatory and remediation expenses were $8.6 million and $37.9 million respectively. This compares to $6.3 million and $22.6 million of expenses for the fourth quarter and full year of 2006.

The increase in 2007 charges compared to 2006 relate primarily to a $7.9 million increase in costs at a former waste disposal site based on revised remediation estimates resulting from negotiations with a government agency.

These charges relate primarily to remedial and investigatory activities associated with former waste sites and past operations. We currently anticipate the 2008 charges for environmental, investigatory and remedial activities will be approximately 25% lower than 2007.

Total company defined benefit pension plan expense for 2007 was $14.4 million, compared to $27.8 million in 2006. The year-over-year decrease reflects the favorable impact of the $180 million of voluntary contributions made in 2006 and 2007, a 25 basis point increase in the discount rate in 2007 and favorable 2006 asset performance.

Pension expense in 2006 included a $2.4 million curtailment charge associated with the voluntary transition of certain Winchester union employees from a defined benefit plan to a defined contribution plan.

On October 5, 2007, we announced that Olin was freezing its defined benefit pension plan for salaried and certain non-bargained hourly workers effective January 1, 2008. This action continued our strategy of reducing the actuarial risks associated with defined benefit pension plans.

In 2008, we expect pension expense associated with the defined benefit plan to be $19 million lower compared to 2007. This reduction reflects the benefit of the plan freeze; an additional 25 basis point increase in the discount rate; the benefits of the $100 million voluntary contribution made in May; and favorable asset performance in 2007.

This reduction will be offset by an approximately $6 million increase in expenses associated with the defined contribution plan that replaced the defined benefit plan. We continue to believe that it is likely that no additional cash contributions to the defined benefit plan will be required.

Under SFAS 158, we recorded a non-cash after tax credit of $124.1 million to shareholders’ equity as of December 31, 2007, for the defined benefit pension plan and post-retirement medical plan. This credit reflects the use of a higher discount rate on pension benefit obligations and favorable returns on planned assets during 2007.

As a point of clarification, the December 31, 2007, balance sheet now reflects a pension asset denoting an over-funded position of $111.9 million. In addition, there are liabilities of $51.9 million associated with a non-qualified and unfunded defined benefit pension plan and $79.5 million associated with the unfunded retiree medical program on the December 31 balance sheet.

Other operating income for 2007 includes the $1.3 million pre-tax receipt of a contingent payment associated with a prior year divestiture. Other operating income for 2006 includes a pre-tax insurance recovery of $6 million related to Hurricane Katrina business interruption and $700,000 of pre-tax gains associated with real estate transactions.

The tax rate for continuing operations in the fourth quarter was 34.8% and for the full year was 33.1%. The fourth quarter rate reflects the impact of the Pioneer Canadian operations, the income of which is not eligible for the manufacturing credit available under the Jobs Creation Act of 2004.

The income from Canadian operations will continue to impact the 2008 effective tax rate, which we now believe will be in the 35% to 36% range.

On November 19, we closed on the sale of the metals business to a subsidiary of Global Brass and Copper Holdings, Inc., an affiliate of KPS Capital Partners, LP. For the year, earnings from discontinued operations were $0.39 per diluted share, and the loss on the disposal of the discontinued operations was $1.87 per share.

The final amount of the loss on the sale is dependent on the final determination of working capital in the business at the date of closing. Total cash proceeds realized from the operation and sale of the metals business in 2007 was approximately $480 million.

Now turning to the balance sheet. Cash and cash equivalents at December 31, 2007, were $333 million compared to $276 million at December 31, 2006. There are approximately $45 million of payments associated with the sale of metals that will be made in 2008.

These represent liabilities retained by Olin in the transaction and other purchase price adjustments which are contemplated in the $480 million of total proceeds from 2007 metals activities that I just mentioned.

As we move forward, we will continue to see cash flow volatility from working capital due to the seasonal aspects of Winchester’s business. During the first two quarters of the year, Winchester working capital levels typically increase $40 to $50 million. These increases should be liquidated by the end of the year.

Capital spending from continuing operations in 2007 was $76.1 million, which includes approximately $14.9 million of spending by the acquired Pioneer operations. In 2008, we forecast capital spending to be in the $200 to $210 million range.

The large increase reflects the Saint Gabriel, Louisiana facility conversion and expansion project spending of approximately $120 million. This project is expected to be completed in the first quarter of 2009. Full year 2008 depreciation is forecast to be approximately $70 million.

On January 25, 2008, Olin’s Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on March 10, 2008, to shareholders of record at the close of business on February 11, 2008. This is the 325th consecutive 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 Form 10-Q for the third quarter.

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 is available under Press Releases.

Operator, we’re now ready to take questions.

Question-and-Answer Session


Our first question comes from Frank Mitsch - BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

I jumped on just a tad late. I was wondering if you talked, when you were discussing the Chlor Alkali business, if you talked at all about the impact of plant turnarounds in the fourth quarter? And what your expectations are for the first and second quarter of 2008 in terms of what impact that might be?

John McIntosh

We didn’t touch on that. We have outages in the first half of 2008 scheduled at four different locations. In the first quarter, we have an outage scheduled at Henderson. It’s an annual outage; expected duration to be seven days. We also have an outage at the Sunbelt plant in March, which is expected to be five days in length.

Absent those two, there isn’t anything else scheduled of significance in the first quarter. In the second quarter, we do have a couple of annual outages scheduled, one at [Veccor] and one at Niagara Falls.

But those are pretty typical annual outage obligations that we currently have scheduled for the first half of the year. That’s quite a bit different than what we saw in the fourth quarter, where we had outages at seven different facilities across the entire combined system.

Frank Mitsch - BB&T Capital Markets

Any order of magnitude as to what those seven outages might have negatively impacted your earnings in the fourth quarter?

John McIntosh

I don’t have that information, Frank.

Frank Mitsch - BB&T Capital Markets

It’s bigger than a bread box, then?

Joseph D. Rupp

We did say that our fourth quarter operating rate was 88%.

Frank Mitsch - BB&T Capital Markets

John, obviously you ended the year with $74 million of net cash on the balance sheet, and I do realize that you are going to ramp up CapEx meaningfully in 2008. Although my guess is that 2008 CapEx is going to be higher than 2009 CapEx if you’re going to be done with the San Gabriel project early 2009. So you’re going to see that ramp back down. Any thoughts on what your target debt levels would be and what might you do with your cash?

John E. Fischer

Your first point is very good because we will be a user of cash in 2008, by virtue of both the level of capital spending and also some of the other uses of cash I mentioned in terms of settling out the metals transaction.

I would look at the level of debt and say something in the 2 to 2.5 of debt to EBITDA is a comfortable level for us. And if we could maintain that through the cycle, I think we’d been in good shape.

Frank Mitsch - BB&T Capital Markets

And then lastly, obviously 2007 was quite a transformational year for the company in terms of M&A. Any thoughts on possible M&A in 2008?

Joseph D. Rupp

Frank, we’re going to keep looking for ways that we can continue to create value, as we said, and you’ve got to assume that we’re actively looking at what we can do next.


Our next question comes from Don Carson - Merrill Lynch.

Don Carson - Merrill Lynch

A couple of questions for John McIntosh. John, what’s your view on Dow’s announcement this morning in terms of taking capacity out. Do you think that’s significant? Was it a surprise?

And then Joe, I know you talked at some length about freight. How do see your freight synergies unfolding in 2008, and is that enough to offset what seems to be an inexorable rise in railcar rates?

John McIntosh

Don, I really haven’t had time to look at Dow’s announcement in any detail, so I don’t really know that I have a comment on it yet at this point in time. In terms of your question about freight, when we look at our $35 million synergy objective for the transaction, a significant part of that commitment came from freight savings associated with consolidating and improving the logistics of the combined company.

And so we think that that will go a long ways towards offsetting some of the freight increases that we expect to see in 2008. It’s hard to predict the magnitude of those freight increases. However, if they run consistent with what they have run in the last couple of years, even the synergy that we expect to receive would not be enough to offset all of it.

Joseph D. Rupp

But I think it would be fair to say that from a budgeting perspective, we felt that we could offset the freight. The question that we don’t know, Don, is if the freight rates get out of bounds, beyond what we’re forecasting. That’s what John’s saying. That’s hard to predict at this point.

Don Carson - Merrill Lynch

And a couple of price questions. We talked about getting most of the $75 realization by the second quarter. My understanding is only about $50 of that has gone through as of today. Do you expect to gain the balance of that going forward?

And then secondly, Joe, you mentioned that your decline, the $525 ECU versus the $540 Q3, that that decline was due to something about your chlorine customers. Was that a specific customer or is there something unique about your chlorine mix?

John McIntosh

On the first one, on caustic realization, our position is that during the quarter we will implement the full $75 price increase. Some producers have announced that they are going to do $50 of it January 1 and then 25 of it February 1.

Where we fall out in terms of how that works in our system remains to be seen, but we are intending to implement the full $75 some time during the quarter. And it may not all come at once because of competitive situations created by others in the market.

In terms of the chlorine change, as the operating rates have gone down because chlorine demand has gone down, we’ve seen, first, spot chlorine prices trending off, and that’s being followed by contract chlorine prices, which are trending down.

As a result of that, across our portfolio we’ve seen some weakness in chlorine pricing. It’s not anything that’s specific to necessarily any given contract or given customer situation, but the worst or the most pressure is in the vinyl sector, which is driven by overall vinyl demand that everybody is aware of and has been reading and writing about.


Our next question is from Christopher Butler - Sidoti.

Christopher Butler - Sidoti

I’d like to ask you a question on the Winchester segment. You had made mention to concerns about demand being impacted by the price increases that have been going through the system. You didn’t mention whether you’ve seen any softness in demand as a result of that. Could you talk to that a little bit?

Joseph D. Rupp

I can, Chris. What we’ve been concerned about over the past couple of quarters is, as the price of lead has gone up and as we have announced price increases, we were concerned. For example, a box of shells has almost doubled in what it cost you 2 years ago. We were concerned that the shooter might quit buying and start slowing down in his purchases of product.

The good news is that we have not seen that yet. And the further good news that we are trying to point out is that right now, with lead sliding back a little bit in $1.10 range, we think that that alleviates or offsets some of those fears that we’ve been concerned about. So not to misinterpret, we are positive on what’s happening with lead at this point.

Christopher Butler - Sidoti

And looking at your overall guidance of at around $0.50, I noticed for the fourth quarter that Chlor Alkali volumes were down 2%. I was wondering what your assumptions were for volumes looking into the first quarter here.

John McIntosh

Chris, for the first quarter, we are assuming that operating rates are going to be in the low to mid 80s, which is quite frankly where we have started out the first part of the year. So on a combined basis, volumes are not going to move much one way or the other, looking at the combined system now. But our overall operating rate, with the new capacity added, will be a little bit lower.

Joseph D. Rupp

And the point we are making, Chris, is the upside to us is volume. And if vinyls were to pick up, which we all would hope and pray it would, there is upside to us.


The next question is from Sergey Vasnetsov - Lehman Brothers.

Sergey Vasnetsov - Lehman Brothers

What kind of pressure do you see, if any, on the western side of the United States of caustic exports from China?

John McIntosh

Sergey, what we have really seen is that caustic imports to China have not been a short term problem. And we have actually heard that in the short term, caustic coming out of China has been stopped because the Chinese economy is suffering from a shortage of coal and the resulting limitations on electricity production, and operating problems for their chlor alkali industry has really reduced the caustic available to ship.

Plus the economics have changed for the Chinese chlor alkali producer, in that not only the elimination of the value added tax subsidy but an additional export tax that’s predicted to occur in 2008 have really made exporting caustic not as attractive a situation as it was historically, even as recently as a quarter or two ago.

So we haven’t seen real issues from caustic into the West Coast, and have actually heard rumors that caustic pricing, on the West Coast, is following some of the pricing announcements that were made in the other part of the U.S. last month.

Sergey Vasnetsov - Lehman Brothers

Could you please remind us on the combined platform with Pioneer, what’s the net percentage of your caustic being exported out of the U.S.; where are the end markets for you?

Joseph D. Rupp

It’s a very small number, Sergey. Neither Pioneer nor Olin before the acquisition exported any continuing significant amount of caustic. So I would guess that number is in the low single digits in terms of caustic exports.


The next question is from Joe Herrick - Gutternam Research.

Joe Herrick - Gutternam Research

A couple of things regarding your operational improvement initiatives. Could you talk about what are you’re doing regarding lean manufacturing, taking it to Six Sigma , and how do you expect to see throughput throughout your plants to improve your stock price?

Joseph D. Rupp

We have a lean manufacturing program that we implemented several years ago with the help of outside consultants, so it’s actually been initiated in our old metals business, and it has been applied both to our Chlor Alkali business and to our Winchester business, and it’s currently being used as we integrate the Pioneer acquisition.

It embodies all of the Six Sigma and all the concepts with from a lean manufacturing perspective. And it’s reflected in our targets and how we improve our productivity and put together our annual cost reduction programs.

Joe Herrick - Gutternam Research

And a follow up to that question, what metrics are you using in your manufacturing facilities to figure out how well you are doing? Are you looking at O.E. and RONA? And also in the future, as we go into a very challenging environment, what systems and solutions are you going to be putting in place to accelerate your continuous improvement initiatives throughout your company?

Joseph D. Rupp

We’ll continue to put what are best practices from an industry perspective, and we happen to believe that return on capital and return on invested capital are excellent measures of our returns.

John McIntosh

We have an opportunity in that I think the Olin operating excellence program in our Chlor Alkali business was more maturer than the program that Pioneer had in theirs. So we really feel like we have got an opportunity to bring operating excellence and all those tools into the new plants in our organization and yield some significant improvements.

Joe Herrick - Gutternam Research

What can you tell a shareholder is your number one goal to help improve throughput throughout your organization, become a more efficient company and overall improve shareholder value?

Joseph D. Rupp

Our number one goal is to make more money for the shareholders.


Our next question is from Richard O’Reilly - Standard & Poor’s.

Richard O’Reilly - Standard & Poor’s

I just want to get a clarification on the pension expense guidance and the $19 million number that was given, but then something about $3 million reduction in the first quarter. I’m not sure, is $19 million what we see on the income statements on that segment? Can you just go through those numbers again?

John McIntosh

We said that pension expense associated with our defined benefit plan would be $19 million lower in 2008 than it was in 2007. And we said that that would be partially offset by increased expenses associated with the defined contribution plan that we put in place to replace the defined benefit plan, because, as we said, we have frozen the plan effective January 1, 2008. So those two go together on an annual basis; the $3 million related purely to the first quarter of 2008.

Richard O’Reilly - Standard & Poor’s

So you would see a greater reduction throughout the rest of the year than that $3 million?

John McIntosh

I think you’re going to see something in the $3 to $4 million range each quarter. $19 less $6 is $13, so...

Richard O’Reilly - Standard & Poor’s

Second, I am going to ask about any legal or regulatory issues that would be major if you wanted to sell the ammunition business. Is there anything out there that would be a significant impediment to you not being able to sell that business?

John McIntosh

I think there’s a fairly substantive discussion of those issues in our Form 10-K, and I would encourage you to read that because that will cover what I think you would be concerned about in terms of material issues.

Richard O’Reilly - Standard & Poor’s

And second, there was a lot of numbers on the ECU in the freights and I am just going to ask Larry to give me a call later and go through those numbers again.

Larry Kromidas

That will be fine.


Our next question is from Herb Hardt - Monness, Crespi, Hardt & Co.

Herb Hardt - Monness, Crespi, Hardt & Co

Did the recent moves by the Fed, if they were to stay at this level, would that change your pension assumptions at all?

John McIntosh

It should not, no.


Our next question is from Justin Boisseau - Gates Capital Management.

Justin Boisseau - Gates Capital Management

I was wondering if you can give me an update on your expectations for supply additions and subtractions in the next a couple of years in the industry.

John McIntosh

Obviously, the Shintech plant is currently in the final stages of construction or the early stages of start up, depending upon which dates you hear. We have heard recently that start up in production will not occur until possibly as late as the early part of the second quarter.

As we’ve mentioned before, there are other announcements for new capacity that have been made, but to our knowledge none of those projects are currently being worked on actively, and with the timing requirement of approximately 2 years to bring a world scale Chlor Alkali plant online, we really don’t see new capacity, absent the Shintech facility, coming on within that 2 year window that you mentioned.

I would also reiterate that the change being made in Oxy, with Oxy’s shutdown of its Muscle Shoals KOH plant and converting Taft will take caustic out of the North American market, which will tend to offset some of the additions being made by the new Shintech facility.

In summary, we see a relatively balanced supply-demand situation going forward. No significant additions of world scale capacity, which we think bodes well for the Chlor Alkali industry.


Our last question is from Bob Goldberg - Scopus Asset Management.

Bob Goldberg - Scopus Asset Management

A couple of questions. I was just curious, do you have data on how much of the combined Chlor Alkali business is exposed to the vinyls market? And I am also wondering what demand trends you are seeing outside of vinyls? Any change in demand ex-vinyls?

John McIntosh

About 17% of Olin’s volume before the acquisition was tied to the vinyls segment. Pioneer really had 0% of their volume tied to vinyls. So the resulting combination of the two is obviously something less than where Olin started prior to the acquisition.

The other market segments that we serve and we do serve the balance really of all the major market segments, none show the degree of pressure or weakness, however you want to characterize it, that we are seeing with vinyls.

To some extent some of the other market segments, especially for chlorine derivatives, have been helped by the ability, in the last half of 2007, to export derivatives overseas, so that’s helped some of those market segments.

And as we sit right now, taking into account the normal seasonality that we would see in the first quarter of any year, we don’t really see weakness in any market segment except for really the vinyls.

Bob Goldberg - Scopus Asset Management

I apologize if I missed this, John, but did you say the operating rates in Chlor Alkali would be in the mid to high 80s? Is that what you’re seeing right now?

John McIntosh

Low to mid 80s is our expectation for the quarter.

Bob Goldberg - Scopus Asset Management

It just seems a little bit on the low side to me, because even if you assumed a 20% drop in PVC, if it was 15% of the business that would knock three points off of the operating rate.

John McIntosh

Seasonally the first quarter is typically a slow quarter for us with seasonal business. So you have to take into account the seasonal impact as well.

Bob Goldberg - Scopus Asset Management

So second quarter might get back into the high 80s, low 90s?

John McIntosh

We would expect definite improvement in the second and third quarter, which are our highest operating rate quarters in any given year.

Bob Goldberg - Scopus Asset Management

And not to put words in your mouth, but if the full caustic increase is put through by the second quarter, would it be fair to expect ECUs to be up, 1Q to 2Q?

John McIntosh

We expect to see some slight improvement in ECUs from first quarter to second quarter, yes sir.

Bob Goldberg - Scopus Asset Management

And on Winchester, just one question there. The business has done very well over the last couple of years, has improved earnings significantly, and you are seeing a little bit of reduction in raw material costs now going into 2008. You put through price increases. Should we expect to see some more earnings growth in 2008 or do you just hope to maintain the level that you attained last year?

Joseph D. Rupp

We would expect to see a little bit of growth with it, is what we would expect to see. Obviously the side of the equation we’ve got to work on, that we have been working on, is the cost side as well.


As there are no further questions in the queue. I’ll turn the call back to management for closing remarks.

Joseph D. Rupp

Thank you for joining us today and we will look forward to speaking with you in April, where we will announce the results of our first quarter 2008. Thank you very much.


Ladies and gentleman we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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