Joseph Rupp - Chairman, President and CEO John Fischer - Senior Vice President and CFO John McIntosh - Senior Vice President, Operations Larry Kromidas - Assistant Treasurer and Director, Investor Relations.
Frank Mitsch - Wells Fargo Don Carson - Susquehanna John Roberts - UBS Edward Yang - Oppenheimer Jason Freuchtel - SunTrust Dmitry Silversteyn - Longbow Research Herbert Hardt - Monness Alex Yefremov - Bank of America Merrill Lynch DeForest Hinman - Walthausen & Company Richard O'Reilly - Revere Associates.
Good morning. And welcome to the Olin Corporation First Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be opportunity to ask questions. (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, sir..
Good morning and thank you for joining us today. With me today morning are John Fischer, Senior Vice President and 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 first quarter of 2014 was $29.5 million or $0.37 per diluted share, which compares to $40.5 million or $0.50 per diluted share in the first quarter of 2013. Sales in the first quarter of 2014 were $577 million, compared to $630 million in the first quarter of 2013.
First quarter 2014 results included pre-tax restructuring charges of $1 million and unfavorable income tax adjustment of $1.6 million, which was associated with a March 31, 2014 change in state tax law and approximately $6 million one-time weather-related out of pocket costs in the chlor alkali and chemical distribution businesses that occurred during the quarter.
Yesterday, the Olin Board of Directors approved a three-year 8 million share repurchase program with the current financial profile and our outlook for 2014 and beyond. This program will allow us to be a consistent, steady and opportunistic buyer of our shares.
The high level of commercial demand that was experienced by Winchester in 2013 continued in the first quarter of 2014 and Winchester generated the second highest level of quarterly sales in segment income in its history.
In addition, the commercial backlog at the end of the quarter remained above $400 million, which is significantly higher significantly higher than the pre-surge backlog of $137 million on March 31, 2012.
During the first quarter of 2014, the Chlor Alkali business experienced lower chlorine and caustic soda shipments compared to the first quarter of 2013. These were partially offset by higher first quarter 2014 shipments of bleach, hydrochloric acid and potassium hydroxide when compared to the first quarter of 2013.
First quarter 2014 ECU netbacks declined compared to the first quarter of 2013 reflecting lower caustic soda prices. First quarter 2014 Chemical Distribution shipments declined compared to the first quarter of 2013 and were negatively impacted by the weather in the Midwest.
First quarter 2014 adjusted EBITDA was $91.8 million and we continue to forecast the full year adjusted EBITDA will be in the $375 million to $425 million range. Second quarter 2014 net income is forecast to be in the $0.40 to $0.45 diluted share -- per diluted share range.
Chlor Alkali second quarter earnings are expected to decline compared to the second quarter of 2013 due to lower ECU netbacks, partially offset by lower costs. Second quarter 2014 Chemical Distribution earnings are expected to be similar to the second quarter of 2013.
In the Winchester business, we continue to see strong commercial demand but second quarter 2014 earnings are expected to decline compared to second quarter 2013 levels due to a more historical level of seasonal demand for shotshell ammunition and reduced levels of pistol, rifle and rimfire inventory in our system, which will reduce total ammunition sales and earnings compared to both the second quarter 2013 and first quarter 2014 levels.
Second quarter 2014 corporate and other expenses are forecast to be comparable to the second quarter of 2013. Second quarter 2014 earnings are also expected to include restructuring charges of approximately $2.5 million. Let me just talk little bit more detail about the businesses, first, chlor alkali.
In late January during our fourth quarter 2013 earnings call, we described strength in the chlorine demand as we move through January.
Unfortunately, the January level demand did not sustain itself throughout the quarter as we experienced lower levels of chlorine demand from customers during February and March, some of whom were negatively impacted by the weather. Our chlor alkali logistic system was also negatively impacted by weather.
We struggled throughout the quarter with railcar availability due to slower than normal turnaround times and as a result ended the first quarter with a late list of both chlorine and caustic soda.
During the first quarter of 2014, the chlor alkali business incurred discrete out of pocket cost of $5.5 million attributable to the weather and both our McIntosh, Alabama and Charleston, Tennessee, plants experienced unplanned outages due to utility mandate and electricity curtailments, and the McIntosh facility experienced approximately three days of downtime as a result of weather conditions.
In addition to these increased maintenance costs, we also incurred energy costs from electricity surcharges and increase steam usage and transportation cost due to railcar demurrage costs.
The Olin operating rate during the first quarter of 2014 was 79%, which compares unfavorably the first quarter of 2013 operating rate of 85%, but it’s consistent with our full year average of 80%.
Without the combination of unplanned outages due to electricity curtailments and reduced production levels created by railcar availability, the first quarter 2014 operating rate would have been approximately 83%. During the second quarter of 2014 we expect chlor alkali operating rates to improve to 85% to 90% range.
The first quarter weather-related issues have for the most part been corrected, seasonal demand has improved and we expect to see a normal seasonal increase in bleach demand. The second quarter 2014 operating rate forecast includes maintenance outages at our Henderson, Nevada and our St. Gabriel, Louisiana and our McIntosh, Alabama facilities.
First quarter 2014 chlorine and caustic soda volumes declined 6% compared to the first quarter of 2013, but increased 3% compared to the fourth quarter of 2013 volumes.
Chlorine shipments to (indiscernible) customers is in the first quarter of 2014 declined compared to the first and fourth quarter’s of 2013 First quarter 2014, chlorine shipments to titanium dioxide customers were similar to the first quarter of 2013 and 32% higher than the fourth quarter 2013 levels.
While first quarter 2014 chlorine shipments to urethanes customers increased 16% compared to the first quarter of 2013. First quarter 2014 shipments of hydrochloric acid increased 44% compared to the first quarter of 2013 and first quarter 2014 bleach sales increased 6% compared to the first quarter of 2013 levels.
For bleach shipments this represents the 25th consecutive quarterly year-over-year increase in bleach shipments. Also during the first quarter of 2014 shipments of potassium hydroxide increased 23% compared to first quarter of 2013 levels.
First quarter 2014, potassium hydroxide shipments benefited from strong de-icer demand, including the year-over-year improvements in bleach, hydrochloric acid and potassium hydroxide shipments, our total first quarter 2014 chlor alkali shipments declined 2% compared to first quarter of 2013.
First quarter 2014, ECU netbacks declined approximately 8% compared to the first quarter of 2013 and decline approximately 1% compared to the fourth quarter 2013 level. The year-over-year decline reflects the lower caustic soda prices, partially offset by higher chlorine prices.
The sequential decline in ECU netbacks from the fourth quarter 2013 to the first quarter of 2014 also reflects lower caustic soda prices partially offset by higher chlorine prices. First quarter 2014 hydrochloric acid prices also declined compared to the first quarter of 2013.
Hydrochloric acid prices have declined consistently since they peaked in the first half of 2012 but the first quarter 2014 price still represents a meaningful premium for the price of chlorine. In the second quarter of 2014, we expect ECU netbacks improve compared to the first quarter of 2014.
But they will be lower than the second quarter of 2013 levels. The improvement in the second quarter of 2014 compared to the first quarter reflects the positive impact of the reinstatement of the fourth quarter 2013 caustic soda price increase that occurred in the first quarter of 2014.
Based on the operating rates experienced in the first quarter of 2014, we do not expect $50 per ton chlorine price increase that was announced in the first quarter and successful at this time.
We do expect to see operating rates increase significantly in the second quarter and into the third quarter which may support the first quarter chlorine price increase later in the year. Chlor Alkali first quarter 2014 segment earnings were $34.3 million compared to the first quarter of 2013 segment of $58.5 million.
The year-over-year decline reflects lower ECU netbacks, lower hydrochloric acid prices, lower chlorine and caustic soda volumes, partially offset by higher bleach, hydrochloric acid and potassium hydroxide volumes. First quarter 2014 Chlor Alkali segment EBITDA was $59.9 million.
Second quarter 2014 Chlor Alkali segment earnings are forecast to improve compared to the first quarter of 2014 but declined compared to the second quarter of 2013. Second quarter 2014 chlorine and caustic soda bleach and hydrochloric acid volumes are all expected to improve compared to the first quarter.
The first quarter of 2014 was difficult operating quarter for chlor alkali but we continue to make progress in our objective of growing the amount of chlorine capacity that is sold as bleach and hydrochloric acid.
First quarter 2014 bleach drivers were double the first quarter level five years ago and year-over-year volume improvements in both products, potassium hydroxide, offset most of year-over-year decline in chlorine caustic soda. As we continue to grow these businesses, operating rates in our system will improve and that will improve our profitability.
Because of this growth -- of this growth, we are currently evaluating additional investments which would further support our growth. We continue to believe that in slightly more robust chlorine demand environment, we could operate near capacity in the seasonally strong second and third quarters.
The first quarter of 2014 from a chemical distribution perspective was a difficult quarter and the financial performance of the business was negatively impacted by weather conditions that we experienced continuously throughout the quarter.
During the quarter, the business was forced to receive a much larger percentage of caustic soda by rail instead of barge because of the freezing of the river system. Rail transportation is more expensive to both operate and unload than barges.
In addition, the business experienced significantly slowly deliveries of rail cars due to the cold and actually received rail cars in which we had frozen product that had required to be thawed out at an additional steam cost. Finally the business also experienced lower overall demand as customer operations were negatively impacted by the weather.
Absent the weather-related occurrences, we believe the first quarter 2014 financial results would have been similar to the fourth quarter of 2013. In the first quarter of 2014, caustic soda shipments declined approximately 7% compared to the fourth quarter of 2013 and 33% compared to the first quarter of 2013.
In addition to lower sales volumes, caustic soda selling prices declined 7% in the first quarter of 2014 compared to the fourth quarter of 2013 and 12% compared to the first quarter of 2013. We continue to experience aggressive pricing in the caustic soda market which is really driven from the large global distributors.
First quarter 2014 bleach sales volume were similar to both the first and fourth quarters of 2013. The chemical distribution, the first and fourth quarters are seasonally weak quarters for all products with especially bleach.
On a positive note, the financial performance of the business improved as we progressed through the quarter and was profitable during the month of March. We expect the second quarter of 2014 financial performance of chemical distribution to improve compared to the first quarter and to be similar to the second quarter of 2013.
We expect sales volume of the second quarter for both caustic soda and bleach to improve compared to the first quarter of 2014. The business continues to aggressively pursue opportunities to increase the amount of Olin-produced bleach, hydrochloric acid, potassium hydroxide that sells in the Midwest.
The businesses also continues to pursue improvements in logistics both as a distributor but also in concert with our Chlor Alkali business. These improvements include the incorporation of distribution trucking capabilities into our Chlor Alkali facilities and a concurrent expansion of a truck loading capability.
Over the past 15 months, we’ve consistently described an annual synergy opportunity associated with the acquisition of the chemical distribution business of $35 million while the realization of the synergies has occurred slower than we would have liked. We continue to see a $35 million opportunity.
At the present, we believe the synergy realization would be shared between our chemical distribution and our Chlor Alkali business. While the financial performance in the chemical distribution has not met our expectations, the business has been a positive generator for cash for Olin and during 2013, the after tax cash flow was $30 million.
The business was a cash generator also in the first quarter of 2014. Let me talk about Winchester. Both first quarter 2014, Winchester sales and segment earnings reached the second highest quarterly level in the history of the business.
First quarter 2014 sales were $200 million, just 7% higher than the first quarter of 2013 sales and segment income was $38.3 million, a 22% of improvement over the first quarter of 2013 level. Winchester segment EBITDA during the first quarter of 2014 was $42.1 million.
The first quarter of 2014 year-over-year improvement in sales reflects the combination of higher commercial, military and law enforcement sales. First quarter 2014 commercial sales volumes increased 12% compared to the first quarter of 2013.
We continue to see strong commercial demand as we move into the second quarter of 2014 but have started to see some products such as shotshell become better supply.
The commercial backlog at March 31, 2014 remained above $400 million which is consistent with the levels seen throughout most of 2013 and more than tripled the presurge levels experienced in 2012. As a point of comparison, the presurge March 31, 2012 commercial backlog was $137 million.
The first quarter 2014 year-over-year improvement in Winchester segment earnings reflects as a combination of both the improved volumes and pricing and lower costs.
During the first quarter of 2014, the purchase cost of copper and zinc declined compared to the first quarter of 2013 while the purchase cost of lead increased compared to the first quarter of 2013.
We currently expect the full year 2014 purchase price for copper to be lower than 2013 and the full year of 2014 purchase price for lead to be higher than 2013 prices. The Centerfire relocation project continues to move forward and generate cost reductions.
During the first quarter of 2014, the cost savings realized exceeded $5 million and we believe the full year 2014 cost savings will be in the $22 million to $26 million range. We expect by the end of the year 2014, approximately 75% of the thousand totaled jobs will have been (indiscernible) announced have been relocated, will have occurred.
We also continue to believe that the full year cost savings realized project will be $35 million to $40 million and the discount on savings will be realized annually beginning in 2016. Since the fourth quarter of 2012, Winchester’s operated with inventory levels below historic norms.
The average 2013 quarter end inventory level was approximately 20% lower than both the 2011 and 2012 average inventory levels. And the March 31, 2014 inventory level was consistent with those seen in 2013 and approximately 20% lower than March 31, 2011 and 2012 levels.
In addition, Winchester is also seeing the level of its finished good inventory to decline over time. In the first quarter of 2014, the finished goods inventory for centerfire, pistol and rimfire declined by approximately $30 million and $15 million rounds respectively. These lower inventory levels will impact second quarter 2014 Winchester sales.
Winchester second quarter 2014 segment earnings are currently forecasted to decline compared to both second quarter 2013 and first quarter 2014. This decline reflects a more historical level of seasonal demand for shotshell.
During the second quarter, Winchester expects to sell all the centerfire pistol, centerfire riffle and rimfire ammunition that can be manufactured. We continue to see very strong demand for these products.
While we forecast second quarter 2014 Winchester segment earnings to be lower than the second quarter of 2013, we also forecasted the Winchester segment earnings in the first two quarters of 2014 will exceed the segment earnings in the first two quarters of 2013.
As we look at the Winchester business going forward, we continue to believe that the significant increase in gun ownership has occurred over the past five years, as well as the increase in the number of people become regular target shooters will result in commercial ammunition demand in excess of historic levels.
The combination of improved demand profile and the full realization of the $35 million to $40 million of cost savings from the centerfire ammunition relocation project makes us continue to believe that the Winchester business can earn under normal demand conditions and annual EBITDA in a $110 million to $125 million range.
In spite of the challenges our businesses faced in the first part of 2014, I continue to be encouraged. The Chlor Alkali business is well positioned to benefit from an improved economic activity and continues to consistently improve its bleach and its hydrochloric acid businesses.
The Chemical Distribution business showed improvement late in the quarter and has a much improved second quarter outlook. And finally, the Winchester business continues to operate at record levels.
I believe our Board of Directors demonstrated its confidence in our overall prospects by not only renewing but also expanding the scope of a share repurchase program.
Our full year 2014 EBITDA forecast remains in the $375 million to $425 million range and at any point in that range would represent the second highest level of annual EBITDA in our history. I would like to turn to call over to our CFO, John Fisher and John will review several financial matters with you..
Thank you, Joe. First, I'd like to discuss the balance sheet and the first quarter 2014 cash flow. Cash and cash equivalents at March 31, 2014, including the restricted cash associated with the Go Zone financing that are classified as long-term assets on the balance sheet, totaled $246.5 million.
During the first quarter of 2014, working capital employed increased by approximately $68 million. Olin typically experiences seasonal working capital growth during the first quarters of the year between $50 million and $100 million. The first quarter 2013 working capital increase was approximately $83 million.
We expect additional working capital growth in the second quarter 2014, and expect for the full year of 2014, that working capital will increase in the $25 million to $35 million range. Our portion as a full year of working capital growth assumes that Winchester business will begin to replenish their inventory during the second half of the year.
Capital spending in the first quarter 2014 was $18.6 million compared to $30.2 million in the first quarter of 2013. Depreciation and amortization expense during the first quarter of 2014 was $34.2 million.
We have reduced our expectations for full year 2014 capital spending and are now forecasting that 2014 capital spending will be in the $85 million to $95 million range. We continue to forecast that full year 2014 depreciation and amortization expense will be in the $135 million to $140 million range.
Now turning to the income statement, selling and administration expenses decreased $5.4 million in the first quarter of 2014 compared to the first quarter of 2013.
This year-over-year decrease reflects the combination of decrease stock-based compensation of $3.3 million primarily related to mark-to-market adjustments and lower legal and legal-related settlement costs of $2.1 million.
First quarter 2014 charges to income for environmental, investigatory and remedial activities were $3.5 million compared to $1.8 million in the first quarter of 2013. These charges relate primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites.
Second quarter 2014 expenses for environmental, investigatory and remedial activities are expected to be in the $3 million to $5 million range. This forecast does not include any recovery of environmental, investigatory and remedial costs incurred and expensed in prior periods.
On a total company basis, defined benefit pension plan income was $6.4 million in the first quarter of 2014, compared to $5 million in the first quarter of 2013. We are not required to make any cash contributions to our domestic defined benefit pension plan in 2014.
In addition, under the pension funding provisions of the Moving Ahead for Progress in the 21st Century legislation, that was enacted in 2012, we may not be required to make any additional cash contributions to our domestic defined benefit pension plan for several years.
During 2014, we do expect to contribute approximately $1 million to our Canadian defined benefit pension plan.
During the first quarter of 2014, Olin recorded a pre-tax restructuring charge of $1 million associated with exiting the use of mercury cell technology in the Chlor Alkali manufacturing process and the ongoing relocation of the Winchester centerfire ammunition manufacturing operations from East Alton, Illinois to Oxford, Mississippi.
We anticipate second quarter 2014 restructuring charges of approximately $2.5 million. The effective tax rate in the first quarter of 2014 was 38.8%, which included $1.6 million of an unfavorable tax adjustment associated with the March 31st change in a state tax law. Excluding these adjustments, the effective tax rate was approximately 35%.
We continue to believe that full year 2014 effective tax rate will be in the 35% to 37% range. During the first quarter of 2014, we repurchased approximately 600,000 shares of Olin stock at a cost of approximately $15 million. Yesterday, Olin’s Board of Directors approved a new 3-year 8 million share repurchase plan.
This plan replaces the 3-year 5 million share repurchase plan that would have expired on July 28, 2014. We continue to feel confident about our financial condition and we believe the company is well-positioned to generate cash. We expect capital spending to remain below the level of depreciation for the foreseeable future.
In addition, between now and the second quarter of 2016, we face less than $25 million of required debt repayments. In addition, we do not face any cash contributions to the large domestic defined benefit pension plan. Yesterday, Olin’s Board of Directors declared a dividend of $0.20 on each share of Olin common stock.
The dividend is payable on June 10, 2013, to shareholders of record at the close of business on May 9, 2014. This is the 350th 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 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 first quarter earnings release.
Copy of today’s transcript will be available 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. And operator, we are now ready to take questions..
(Operator Instructions) Our first question comes today from Frank Mitsch with Wells Fargo. Please go ahead..
Good morning, gentlemen..
Good morning..
Joe, as I look at your second quarter guidance, it’s kind of looking at the first quarter, plus the negative delta that you had in Q1 from the adverse weather. And as I think about Q2 for Olin, I typically think of a nice seasonal increase, particularly on the bleach side.
You mentioned that you expected ECU to be up sequentially, volumes will be up a bit as well. Although you did highlight I believe it was three planned outages, so that to me is kind of the big delta.
What’s the sort of order of magnitude that you’re counting on in terms of those outages?.
Of the three outages, the Henderson outage was a scheduled outage, a weak of that outage showed up in this quarter, it’s about a $4 million impact to results. The others -- the other outages that we were mentioned are nowhere near that significant and link, but they represent loss production volumes during the quarter..
So we are in the $4 million to $5 million range with that Frank..
Okay. All right. And obviously, you highlighted the disappointments on the distribution side. When would we anticipate seeing some of those -- I think you had sized the synergy is expected about $35 million by the end of year three.
When do you think we will start seeing that ramp up and show through in the results?.
Starting in the second half of this year..
Second half of this year, Frank..
All right. Great. And what would you anticipate by the end of 2015 we will see most of that, that $35 million on top of….
We are Frank probably a year behind. So we would have expected to see all of it by the end of ’15, and I think will probably half to two-thirds by the end of ’15..
And part of that John was due to the delays in some of the permitting on some of the equipments, were there other things that were hindering that?.
It does with the primary….
The biggest issue was the equipment and the permits..
Great. Thank you so much..
Thank you..
Our next question is from Don Carson with Susquehanna..
Thank you. A question on pricing in Chlor Alkali, you talked about how you expect sequential improvement in ECU, I guess, driven by caustic. So, of that $40 scheduled pricing fees we’ve seen what about $15 to $20 in spot.
Are you anticipating that you get all of the $40 or at least all of the $40 goes in the benchmark price in Q2 and that you get some realization in both Q2 and Q3 just probably generally you can talk about how you see prices unfolding in for Q2 and Q3?.
Now let me talk to that. We believe that our half of the $50 million increase which really occurred over three different months, 30, then another 10 and then the subsequent 10. So a net of 50 going back to the beginning of -- to the early part of the first quarter.
We believe of that 50, somewhere around half of it will ultimately be reflected in benchmark pricing. And so in the subsequent quarter, the majority of that -- of the impact that will show up in our system.
We have the opportunity to see some impact for distribution and 30-day accounts towards the end of this quarter, but the majority of it will be in the next quarter..
And then on the volumes, what impact did the start-up of new capacity have. I know one of those start-ups was a merchant customer of your.
So, did that have a volume impact as well and maybe just talk about the impact of some of the other starts-up of mid capacity where well they weren’t customers of yours but obviously have an impact in the market, because I know the overall industry operating rates were in the 83% range in Q1?.
Yes. Relative to the industry operating rate, our operating rate wasn’t much different than our historical average looking back for the last several years. We didn’t really see a significant impact from the new capacity that was -- at least the part of it that was operational during the quarter.
It’s our understanding that that capacity was a little later than scheduled in starting up. What we actually saw as we said in the comments that as we ended the quarter, we had significant late list both on chlorine and on caustic. So the incremental capacity that came online really wasn’t -- really didn’t impact us.
There just wasn’t a huge increase in demand for chlorine and/or caustic, but we did okay because we were late on both products..
Then turning to Winchester, Joe what was the backlog as of December 31st and how firm is that backlog because I'm seeing that availability is improving on [9 millimeter to 223] (ph) still tight room fire, but as availability improves could this backlog evaporate quicker than expected?.
Don, the backlog at December 31st was $410 million, so the backlog stayed relatively flat. We have made a conscious effort to keep that backlog as clean as we can make it from the standpoint of eliminating double orders and the types of things that go on during periods where we have surges. So we think that backlog really does represent future sales..
Thank you..
Our next question is from John Roberts with UBS..
Good morning, John..
Thanks.
Could you give us a sense of how far out the backlog extends, would you expect to turn most of it sales over the next three months, five months? Could you give us some timing sense and put that in perspective with history?.
It’s three quarters long, really which was the biggest amount of it..
And it's relatively level over the three quarters?.
It’s more -- it tapers as you get out to the third quarter though..
Okay.
And then on the Chlor Alkali side, do you have any sense of the timing on when you might get a chance to look at some of the Dow assets that are carved out?.
Yes, I think what we know is everybody else knows is what Dow was saying is that they're going to have some information later in the -- late in the second quarter or early third quarter..
Thank you..
Thank you..
Our next question is from Edward Yang with Oppenheimer..
Hi, good morning..
Good morning..
You moderated your CapEx guidance for the year.
But Joe, I think you mentioned that you have some additional investments in Chlor Alkali as well, so how do you balance two comments?.
If we do an investment in Chlor Alkali, the spending on that would begin very, very late in the year Edward and we would see it more in the next year. So it’s really that, it would fit in with the moderated forecast that we gave you for capital..
And this is -- this will be geared more I presume on the bleach and HCL side?.
It would be downstream like that, yes sir..
Okay. And Joe, I think you made a comment as well that you're hopeful that is operating rates turn up during the seasonally stronger period that you might revisit chlorine pricing.
Would you contemplate similar type of proposed price increase, $50 of ton and what's the best case scenario and the worst case scenario in terms of getting such price increase implemented in terms of timing?.
I think where we were in January, as we saw demand picking up such that we felt that $50 ton price increase was justified. And what we're seeing on this call, Edward, is, is that we can see a situation where we could get into a demand situation later in the year which would warrant reinstitution of the price increase in that range..
And I recall the kind of hold out in terms of following your price leadership on the chlorine was Oxy and they had brought only capacity.
How is that new capacity from Oxy operating, do have any visibility there?.
I probably wouldn't comment on it, Edward..
And switching to Winchester and on Winchester pricing, is that going to be impacted at all by some of the developments out in Russia? And by that, I mean, if you look at store shelves Russian steel case ammo tends to sale out at discount versus Winchester and Remington, could that be a potential and would like some color there?.
Your question is there a potential new market opportunity for us?.
Or would -- if there were any sort of disruptions in domestic imports of Russian ammo, was that healthy on the pricing side for Winchester?.
I think it would help the entire industry..
And is there any way to gauge or the probability of at this point?.
That will be difficult for us to gauge the probability of that, but there have been actions in the past against governments and there is several governments right now that are prohibited from shipping product in the United States and what actions government takes we certainly don't know, they're certainly, we're trying to keep pulse on that.
But it is a potential for the industry..
Okay. Thank you..
Thank you..
Next question is from Jason Freuchtel with SunTrust..
Hey. Good morning..
Good morning..
Absent weather related issues, how did the chemical distribution business perform year-to-date relative to your expectations at the end of last year and what is your expectations for when the aggressiveness in the marketplace will return to more normal levels?.
I would offer that absent the weather issues, the business performed in the first quarter 2014 similarly to the way have performed in the fourth quarter of 2013. And as we've said the business is typically weaker in Q4 and Q1. So we forecast and we believe that we'll see significant improvement as we move to Q2.
I'm not sure we're in a position to comment about the aggressiveness of the pricing and how long it's going to last..
Okay. And aside from the Dow chlor alkali assets that are for sale.
How would you characterize the current M&A environment and would you be more inclined to hold off on increasing the taste of our share repurchases until you get some clarity on some of those opportunities?.
Well, the M&A environment, as we've talk about in the past, certainly Dow is humongous M&A opportunity. But there are plenty of opportunities in downstream products that we continue to look at which we view on the bleach related side, distribution side.
And I think that your question is a good question, however, if we see at opportunity we certainly are going to pursue it..
Okay. Thank you..
Our next question is from the Dmitry Silversteyn with Longbow Research..
Good morning, guys. Just a -- returning for a second to Winchester.
Your guidance for the sort of post move sustainable EBITDA seems to be a little bit higher than in the past, I think in the past you talked about $100 million, now you are at sort of $110 million or $125 million? Can you talk about sort of what changed and how you are looking at the profitability of this business, is it grater than $30 million savings on the EBITDA that you are gaining from the move, is it higher sort of sustainable demand in the market that you're seeing or sustainably higher pricing?.
It is both. It’s not -- what's happened, Alex, is that, we've taken that EBITDA on annualized basis from $30 million up to $35 million to $40 million range, which is a result of better performance down on Oxford, Mississippi than what we had originally anticipated, so that's a positive for us.
And the second is, is that we believe that post-surge there is going to be a higher level of demand than what there was. And so when you combine both those together, puts us in that $110 million to $125 million range of EBITDA..
Got it. Got it. Well, that’s good news. In terms of the KA Steel business, you had it for a little bit over a year now I guess. In versus the expectation that you had for the business and the environment in which it was operating at the time that you made the deal.
So what --where is the shortfall and I'm assuming there is shortfall versus the expectations that you had for this business when you bought it? Outside of the weather in the first quarter this business has been struggling for much of 2013? Is it all related to the hydrochloric acid price coming down or is there some other issues or whether in the market or KA Steel that are difference from how you looked at the world when you are buying the asset?.
I think there was huge differences the comment that we made about the aggressive pricing environment. And the second piece of it is that is the delay in our ability to get equipment and permits to get the co-products which is really what we're interested in distributing that delay. I think the combination of both of those..
Okay.
So the sort of the aggressive pricing in the market from our competitors that there was change in no behavior or you just being sense that or I mean I'm just trying to understand what you looked at that world when you were buying it versus how it’s played out?.
That's changed since we bought it..
Okay. So it’s in development. All Right. And then finally in terms of transportation cost, freight costs particularly in chlorine.
How do they change sequentially or year-over-year and what’s the outlook for inflation in shipping cost for 2014?.
It was as per transportation costs..
Transportation costs were down year-over-year slightly and it was really a combination or is really due to mix, customer mix and just optimization of our system.
We continue to see moderated pressure on increasing rates, rail rates especially from the class one rail roads but I have no way to predict what the future -- what that’s going to look like in the future. But it has moderated from what it’s been historically over the last several years..
Okay. Thanks..
Thank you..
Next question is from Herbert Hardt with Monness..
Good morning..
Good morning.
I would just ask if these S&A savings or the lower number is going to stay for the year?.
Herb, some of the year-over-year change in that is a mark-to-market and stock-based compensation and that clearly reflects what happens to the stock price..
Since it is down today, that’s less?.
What you’re comparing to is what was the change in the stock price up or down in the first quarter of 2013 versus what was the stock price change up or down in the first quarter 2014. In the first quarter of ‘13, the stock was up $3 and something from like $21 to $24. This time it was down about $1.5 from say $28.50 to $27.
That creates $3.5 million year-over-year change and that’s really is. So I would be lying if I told you that was sustainable, I hope its not..
Okay. Thank you very much..
The next question is from Alex Yefremov with Bank of America Merrill Lynch..
Good morning. I think in the past you were talking about you outlook for Winchester business. You saw sustainably high earning at least through the first half of 2014.
Do you think that visibility window can be moved out further, maybe through the end of 2014? What’s your outlook there?.
Good morning. I think in the past you were talking about you outlook for Winchester business. You saw sustainably high earning at least through the first half of 2014.
Do you think that visibility window can be moved out further, maybe through the end of 2014? What’s your outlook there?.
I think, we could move up about one more quarter, Alex. As we stated in our comments, the first half of ‘14 will be better than the first half of ’13. We would anticipate a very strong fourth quarter, third quarter rather which is the normal hunting quarter. And I think the question that we don’t have visibility now is what will the fourth quarter be.
Historically that's the weakest quarter from a Winchester perspective. And we just don't have it sitting here in April..
Got it. Thank you. On the Chlor Alkali side, could you maybe talk about regional U.S. caustic soda market and describe how you see, maybe the differences in terms of pricing, supplied in demand dynamic et cetera.
Maybe can you compare East Coast pricing and Midwest, what do you see?.
Got it. Thank you. On the Chlor Alkali side, could you maybe talk about regional U.S. caustic soda market and describe how you see, maybe the differences in terms of pricing, supplied in demand dynamic et cetera.
Maybe can you compare East Coast pricing and Midwest, what do you see?.
I guess, the way I would put the east coast pricing. That pricing really didn’t change much. Gulf coast pricing, we talked earlier about the indexes moving up. Some part of the $50 increase that’s on the table. That’s really where the strength for caustic pricing is.
The North East corridor has really been impacted by some caustic coming into this country from Europe. Europe operated, much stronger operating rate in the fourth quarter and they had some caustic that they exported in. So we were competing with that and that really dampened some of the opportunity for price increases regionally.
There was some improvement in pricing on the west coast, as parcels of imported material from the Far East were late or just not existent because of the reduction in operating rates in the Far East. The South East is very competitive but we have seen some improvement in caustic pricing there.
So really the strength is in the caustic pricing area regionally is in the south, the South East and the Gulf Coast..
Got it. Thanks a lot.
And then switching back to Winchester, could you talk about from your vantage point, what is the retail availability of your key products? Have you seen any changes over the past three to six months?.
Got it. Thanks a lot.
And then switching back to Winchester, could you talk about from your vantage point, what is the retail availability of your key products? Have you seen any changes over the past three to six months?.
The key thing that we’re trying to say in our remarks, Alex, shotshell is available, some calibers are available, rimfire is still not available and much of the pistol is available. There has been some replenishment but not full replacement..
Great. Thank a lot..
Great. Thank a lot..
Thank you.
Our next question comes from DeForest Hinman with Walthausen & Company..
Hi. I got on the call little bit late, so I apologize in advance if this has already been asked.
But can you just explain the reason for the large increase in HCL forecasted volumes?.
Well, we have been very aggressively pursuing some of the strong market segments for HCL volume growth with that business. In the last several quarters, we were able to have success in metals and refining and in the oil patches, both in Canada and in the Marcellus Shale and some of the other shale basins across the country.
So those are really the two markets that are driving improved HCL consumption and our volume growth was just our ability to do that.
We also had additional capacity in our west coast Henderson operation that came online in 2013 and that volume fits very nicely into the metals and mining market segment, which we were able to use that capacity to gain inroads in..
Okay. Okay. That’s helpful. And then in some other industries when we see pricing of product declining, we see tendency of customers to just delay, you are waiting to kind to get the lowest price.
So you think it for really, I guess, getting a little bit more confident in the pricing on the caustic side that you will start to see some more of those volumes pick up?.
Yeah. We believe, I mean -- we believe as our volumes pick up in the next quarters, next two quarters driven partially by increased demand and driven also by our caustic, our bleach business where we’ll consume significantly more volume internally in producing bleach in the peak season of the year.
We believe that those factors will and continue operating in great environment we’re in, will create the potential or the opportunity to continue to push caustic pricing..
And do we have anyway of really knowing how much volumes are either in the distribution channel or with the end market customers on the caustic side?.
Not really. I mean, we have a sense from our customer base from the customers that we serve directly and the distributors that we sell to. But there is really no metric available that I know of that tries to quantify caustic throughout the entire supply chain, all the way from manufacturer to end user..
Okay. Thank you..
Thank you..
Our next question comes from Richard O'Reilly with Revere Associates..
Okay. Hey. Thank you. Good morning still..
Good morning..
Joe, in your opening comments about the volumes changes chlorine and bleach, you ended with a 2% number I thought.
Can you just add, trying it keeping up with you? Can you go over what that number represents by, I think, I know what you’re driving at but can you go over that again?.
This is John. We call that the chlorine and caustic soda volumes were down 6%. And we talked about HCL being up 44%, HCL use is growing. We talked about bleach being up 6%, that uses both the chlorine and caustic soda and KOH was up 23% and that is essentially a substitute for caustic soda.
When you translate all that into ECU produced or sold, we would lower by 2% year-over-year..
It was captive plus commercial..
Okay, fine. Okay. Good. Thank you. So that gives us a better. The rates being about 83% x the problems, that’s a more representative of your system than as looking at chlorine or caustic..
That’s where we are making our investments in those downstream products and they’re offsetting their commodity products..
Okay. That’s right. Okay, that’s what I thought.
And can you get the absolute ECU number? I think you just said it was down 8% and that’s roughly 520 or so? Can you give us the number?.
That’s the number that you will see in our 10-Q..
Okay, fine. Great. Thanks a lot, guys..
Thank you..
This concludes our question-and-answer session. I would like to turn the conference back over to Joseph Rupp for any closing remarks..
We'd like to thank you for joining us today. And we look forward to speaking with you in July, when we announce the results of our second quarter. Thank you..
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Take care..