Olin Corporation (OLN)

OLN 
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Olin (OLN)

Q1 2011 Earnings Call

April 29, 2011 11:00 am ET

Executives

Joe Rupp - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

John Fischer - Chief Financial Officer and Senior Vice President

Analysts

Don Carson - Merrill Lynch

Aleksey Yefremov - BofA Merrill Lynch

Andrew Cash - UBS Investment Bank

Donald Carson - Susquehanna Financial Group, LLLP

Richard O'Reilly - S&P Equity Research

Christopher Butler - Sidoti & Company, LLC

Edward Yang - Oppenheimer & Co. Inc.

Frank Mitsch - BB&T Capital Markets

Gregg Goodnight - UBS

Dmitry Silversteyn - Longbow Research LLC

Presentation

Operator

Good morning, and welcome to the Olin Corp. First 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. Please go ahead, sir.

Joe Rupp

Good morning, and thank you for joining us. 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 of the first quarter of 2011 was $133.7 million or $1.66 per diluted share compared to $14.1 million or $0.18 per diluted share in the first quarter of 2010. On February 28, we completed the acquisition of PolyOne's 50% interest in the SunBelt Partnership. And as a result, first quarter 2011 net income includes a one-time pretax non-cash gain of $181.4 million associated with the required remeasurement of the 50% of the SunBelt partnership, which Olin had previously owned. In conjunction with this remeasurement, a discrete deferred tax expense of $76 million was recorded.

Sales in the first quarter of 2011 were $436 million, compared to $362 million in the first quarter of 2010. The positive pricing and volume momentum we've been experiencing in our Chlor Alkali business began accelerating in the first quarter of 2011 and should benefit the business for the balance of the year. This momentum provides us with the opportunity in 2011 to achieve the highest level of EBITDA since the spin-off of Arch Chemicals in 1999. First quarter 2011 segment earnings were $45.2 million, which is more than quadruple the first quarter 2010 Chlor Alkali segment earnings of $10.6 million. This improvement reflects significant year-over-year increases in both volumes and ECU netbacks. Year-over-year chlorine and caustic soda volumes improved approximately 8% while ECU netbacks improved approximately 19%. The first quarter 2011 Chlor Alkali results include approximately $3.7 million of incremental segment operating earnings associated with the SunBelt acquisition. In addition, the overall Olin results include approximately $800,000 of SunBelt transaction costs and $500,000 of SunBelt interest expense.

Winchester's earnings declined approximately 35% compared to the first quarter of 2010 due to higher commodity metal and other material costs. First quarter 2011 earnings include $500,000 of pretax recoveries from third parties of environmental cost that were incurred and expensed in prior periods, and an approximately $3.4 million reduction in income tax expense associated with the remeasurement of deferred taxes related to an increase in our effective state income tax rate.

Second quarter 2011 net income is forecast to be in the $0.45 per diluted share range. Second quarter 2011 Chlor Alkali segment earnings are expected to improve compared to the first quarter of 2011, reflecting the continued improvement in both pricing and volumes and the contribution from a full quarter of the 100% SunBelt ownership. Earnings in the Winchester segment are expected to decline more than 50% from the second quarter record 2010 surge levels, reflecting lower volumes and less-favorable product mix and higher commodity metal costs. Second quarter 2011 results are also forecast to include approximately $6 million of higher legacy environmental costs compared to the first quarter, which should be more than offset by approximately $10 million of pretax recoveries from third parties of environmental costs incurred and expensed in prior periods.

I'd like to discuss SunBelt acquisition. During March, the additional 50% ownership contributed $3.7 million of incremental segment operating earnings, which included $400,000 of reduced depreciation expense associated with the remeasurement of the 100% of the SunBelt assets. This incremental contribution was partially offset by approximately $800,000, a one-time transaction cost recorded during March and interest expense on the SunBelt notes of $500,000. And as a reminder, the total SunBelt debt is approximately $85 million and the debt requires annual repayments of $12.2 million through the year 2017. As we said in our press release, announcing the transaction, we expect the transaction to be accretive to both EBITDA and earnings in 2011. SunBelt currently has the lowest manufacturing cost in the Olin system and utilizes membrane technology. The ability to more fully utilize this low-cost SunBelt capacity and increase the amount of our caustic soda sales to their higher value membrane both represent significant synergy opportunities for us.

The unfortunate earthquake and tsunami in Japan will likely have a continuing impact on the global Chlor Alkali industry into 2012. Based on our information, approximately 13% of the Japanese Chlor Alkali capacity was in the region affected by the earthquake and is currently really not operating. An additional 25% of the Japanese capacity is located in regions which border those directly impacted by the earthquake, and they're having their operations affected by disruptions in the supply of electrical power. It's estimated that Japan exports about 500,000 tons to 750,000 tons of caustic soda. That's approximately 1.5 million tons of chlorine derivatives annually. We believe ongoing efforts to conserve power could reduce these exports to near 0 for the balance of 2011. We also believe that there's sufficient capacity in China to fill a portion of this void, but it will likely be supplied at higher prices.

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