Olin Management Discusses Q2 2012 Results - Earnings Call Transcript

Olin (OLN)

Q2 2012 Earnings Call

July 24, 2012 10:00 am ET

Executives

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

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

Analysts

Maggie Cheung - Wells Fargo Securities, LLC, Research Division

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

Christopher W. Butler - Sidoti & Company, LLC

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

Bobby Geornas - Susquehanna Financial Group, LLLP, Research Division

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Dmitry Silversteyn - Longbow Research LLC

Richard O'Reilly

Presentation

Operator

Good morning, and welcome to Olin's Second Quarter 2012 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

Good morning, and thanks for joining us today. With me this morning are John Fischer, our Senior Vice President, Chief Financial Officer; John McIntosh, our 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 2012 was $47.6 million or $0.59 per diluted share, which compares to $42.1 million or $0.52 per diluted share in the second quarter of 2011. Second quarter 2012 net income included a $1.8 million pretax restructuring charge, primarily associated with the ongoing Winchester centerfire relocation project, and second quarter 2011 net income included a $2.4 million pretax restructuring charge associated with the Winchester centerfire relocation project and the Chlor Alkali mercury cell technology conversion projects.

Sales in the second quarter of 2012 were $508.7 million compared to $529.1 million in the second quarter of 2011. During the second quarter of 2012, Olin generated adjusted EBITDA of $97.5 million, which represents the highest level of second quarter adjusted EBITDA ever. This record level of adjusted EBITDA was achieved in spite of our Chlor Alkali business experiencing a slowdown in chlorine demand that occurred during the second half of the quarter and which negatively impacted Chlor Alkali segment earnings. As a result of this slowdown, chlorine sales volumes in the second quarter of 2012 declined when compared to the seasonally weaker first quarter.

Second quarter 2012 Chlor Alkali earnings reflect increased contributions from bleach and hydrochloric acid compared to second quarter of 2011.

Winchester second quarter 2012 segment earnings were in line with the second quarter of 2011 segment earnings. And second quarter 2012 results also included a $5 million favorable tax adjustments.

Third quarter 2012 net income is forecasted to be in the $0.40 to $0.45 per diluted share range. Chlor Alkali segment earnings in the third quarter of 2012 are expected to decline compared to the second quarter of 2012, due to approximately $8 million of costs associated with 2 major plant maintenance outages and one-time startup costs associated with the Charleston, Tennessee mercury cell technology conversion project and the Niagara Falls, New York HyPure bleach plant, and the continuation of seasonally weak chlorine demand.

Winchester earnings in the seasonally strong third quarter are expected to improve compared to the second quarter. Third quarter 2012 earnings are also expected to include approximately $2 million of pretax restructuring charges primarily associated with the ongoing Winchester centerfire relocation project.

And finally, the third quarter 2012 forecast does not include any impact of the recently announced K. A. Steel Chemicals Inc. acquisition or any transaction costs related to the acquisition. And as you know, under the acquisition accounting rules that became effective in 2009, all transaction costs must be expensed.

Let me discuss Chlor Alkali in more detail. The key driver of second quarter 2012 Chlor Alkali results and our third quarter outlook is the weak level of chlorine demand which we began to experience in May and continued through the end of June. This decline is evidenced by the monthly trend in the operating rate over the second quarter. Our April rate was 84%, May rate, 80%, and June rate, 74%, which resulted in a quarterly rate of 79%. In the quarter, total chlorine and caustic soda shipments declined 11% compared to the second quarter of 2011, and also declined 2.5% for the first quarter of 2012's levels. The weakness in chlorine volumes was broad-based in our system, and we believe within the industry, with Olin's year-over-year shipments to vinyls customers declining 10%, shipments to titanium dioxide declined 20% and shipments to urethane customers declined 25%.

On the positive side, we continue to experience growth in the sales of bleach and hydrochloric acid. Year-over-year, bleach shipments increased 9.5% compared to second quarter of 2011 and reached the highest quarterly level ever with shipments in excess of 46,000 tons. Olin has now experienced 18 consecutive quarters of increased year-over-year bleach shipments. Hydrochloric acid shipments increased 7% in the second quarter of 2012 compared to the second quarter of 2011. In addition to the increased volumes, hydrochloric acid prices also improved compared to the second quarter of 2011 and as a result, year-over-year contribution to earnings from hydrochloric acid increased approximately $7 million in the second quarter of 2012 compared to the second quarter of 2011.

The third quarter 2012 earnings forecast assumes that chlorine and caustic soda volumes will improve only slightly compared to the second quarter but expected to be lower than the third quarter 2011 volumes. The third quarter 2012 operating rate is expected to be in the low 80% range which would be the lowest third quarter operating rates since 2009 and the second lowest in the last 10 years.

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