Olin Corporation (OLN)

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Olin (OLN)

Q2 2011 Earnings Call

July 22, 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

John McIntosh - Senior Vice President of Operations

Analysts

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

Rafael Smith

Gregg Goodnight - UBS

Dmitry Silversteyn - Longbow Research LLC

Herbert Hardt - Monness

Presentation

Operator

Good morning, and welcome to the Olin Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Please also 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.

Joe Rupp

Good morning, and thank you for joining us today. With me this morning are John Fischer, our 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 second quarter of 2011 was $42.1 million or $0.52 per diluted share. That compares to $16.9 million or $0.21 per diluted share in the second quarter of 2010. Our second quarter 2011 earnings included better-than-expected results from both the Chlor Alkali and Winchester businesses, and these more than offset a $2.4 million pretax restructuring charge recorded primarily as a result of the ratification of the new Winchester, East Alton, Illinois 5.5-year labor agreement. This new labor agreement will facilitate a smooth transition as work is really relocated from East Alton, Illinois to Oxford, Mississippi.

The Chlor Alkali business continued to experience positive pricing and volume trends. ECU netbacks increased sequentially for the seventh consecutive quarter. Our shipments of chlorine and caustic soda reached their highest levels since the third quarter of 2008. We expect the positive pricing momentum to continue in the third quarter.

Second quarter 2011 Chlor Alkali earnings included approximately $11.3 million of incremental contribution related to the first quarter 2011 acquisition of the balance of the 50% of the SunBelt Partnership that we did not previously own.

Winchester's second quarter sales exceeded expectations and reflect continued high levels of demand for handgun ammunition. Second quarter 2011 earnings included $9 million of pretax recoveries from third parties of environmental costs incurred and expensed in prior periods and $900,000 of favorable income tax adjustments.

Third quarter 2011 net income is forecast to be in the $0.50 to $0.55 per diluted share range. Third quarter 2011 Chlor Alkali segment earnings are expected to improve compared to the second quarter of 2011 because of continued improvement in pricing and the seasonally strongest quarter for bleach sales. The combination of planned multi-month outages by 2 chlorine customers and a weakening of chlorine demand supporting chlorovinyls exports are expected to negatively impact shipment volumes in the second half of the third quarter.

Earnings in Winchester are expected to exhibit the normal third quarter seasonal strength, but are forecast to decline from the third quarter of 2010 levels, reflecting lower volumes, a less favorable product mix and higher commodity metal costs, partially offset by higher selling prices.

Third quarter 2011 results are also forecast to include approximately $1.5 million of pretax recoveries from third parties of environmental costs incurred and expensed in prior periods and approximately $4 million pretax restructuring charge associated with the ongoing Winchester centerfire relocation and the Chlor Alkali conversion projects.

Yesterday, the Olin Board of Directors approved a 3-year share repurchase program for up to 5 million shares of common stock. We believe our current financial profile and the outlook for both businesses makes this an opportune time to initiate a share repurchase program. The initiation of this program does not impact our ability to pursue strategic options.

During the second quarter, a new 5.5-year labor agreement was ratified with all the Winchester unions in East Alton, Illinois. This new agreement, which replaces a 5-year contract that was scheduled to expire this December, is important to the success of the multi-year Winchester relocation project. Included in this new labor agreement are certain post-employment benefits that trigger the majority of the $2.4 million restructuring charge that was recorded in the second quarter. Over the next 3 years, we anticipate that additional restructuring charges will be recognized associated with the Winchester relocation project and the Charleston, Tennessee Chlor Alkali conversion project, and the Augusta, Georgia Chlor Alkali reconfiguration project.

As a reminder, we expect that the Winchester relocation project will reduce Winchester's 2011 pretax earnings by $4 million to $5 million and generate annual cost savings of approximately $30 million at its completion in 2016. Now let me discuss both divisions separately, and we'll begin with Chlor Alkali.

I'd like to provide an update on Chlor Alkali's situation in Japan. It's our understanding that all of the Japanese Chlor Alkali plants impacted by the tsunami have been restarted at the end of June. We believe the recent decline of spot prices for caustic in Asia reflects improved supply dynamics as a result of these restarts. We also understand, however, that large industrial companies in Japan face electricity restrictions equivalent to approximately 15% of their 2010 seasonal consumption. We believe that these restrictions will keep a floor under Asian caustic pricing.

Our Chlor Alkali business continued to see positive trends in both pricing and volumes in the second quarter. Second quarter ECU netback, excluding SunBelt, was $550 compared to $525 in the first quarter of 2011 and $470 in the second quarter of 2010. The second quarter 2011 SunBelt ECU netback was approximately $610. We expect the ECU netback to continue to increase in the third quarter of 2011.

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