Olin's First Quarter 2005 Earnings Conference Call Remarks
April 29, 2005 - 9 AM Central Time
By
Joseph Rupp, President and CEO; and
Anthony Ruggiero, Executive Vice President and CFO; and
John Fischer, Vice President Finance and Controller
Joseph Rupp
Good morning and thank you for joining us today. With me this morning are Tony Ruggiero, Executive Vice President and CFO; John Fischer, Vice President Finance and Controller; John McIntosh, President, Chlor Alkali Products; and Dick Koch, Vice President, Investor Relations.
Before I begin, I would like to point out that Tony Ruggiero, our Executive Vice President and CFO will be retiring from the Company at the end of May. Tony is completing a 42 year career in the industry and the last 25 as CFO of three major companies, Squibb, Reader's Digest, and Olin. Although retiring at the end of May as Executive Vice President and Chief Financial Officer, Tony will remain on the Board of Directors, and we want to wish him the best in his retirement. As a result of that, last night we announced that John Fischer has been elected by the Board of Directors to succeed Tony as Chief Financial Officer when he retires in late May, and we welcome John to this important assignment.
Now let me begin with our announcement. Last night we announced that sales for the first quarter of 2005 were $560.9 million compared with $482.9 million in the first quarter of 2004. Net income in the first quarter of 2005 was $37.2 million, or $0.52 per diluted share, compared with net income of $2.9 million, or $0.04 per diluted share, in the first quarter of 2004.
Our first quarter net income of $0.52 per diluted share exceeded our previous expectation of earnings in the $0.40 per diluted share range primarily due to better than expected performance from Chlor Alkali Products and approximately $6 million of net income gains (or $0.08 per diluted share) primarily associated with real estate dispositions. We experienced improvement in pricing for both chlorine and caustic soda during the quarter, and as a result Chlor Alkali Products surpassed its previous quarterly earnings record, set in the fourth quarter of 2004. We expect improvement in Chlor Alkali results in the second quarter of 2005.
Now let's turn to Olin's first quarter results starting with Chlor Alkali Products.
Chlor Alkali sales for the first quarter of 2005 were $143.7 million, compared to $99.9 million in the first quarter of 2004. The increase reflects the combination of a 62% increase in ECU prices and a 3% decrease in chlorine and caustic volumes. Chlor Alkali segment income during the quarter was $58.6 million, compared to $10.4 million in the first quarter of 2004. The significantly higher level of income reflects the impact of higher prices, partially offset by higher electricity costs and slightly lower sales volumes due to rail service problems and customer outages.
Our ECU netback, excluding Sunbelt, was approximately $485 in the first quarter of 2005 compared with $300 the first quarter of 2004, and a $410 netback in the fourth quarter of 2004. We are expecting our ECU prices to increase somewhat from the first quarter to the second quarter of 2005 as our contracts begin to reflect the impact of the first quarter price increase announcements.
Industry wide chlorine and caustic soda demand was very strong in the first quarter, which is driving chlorine and caustic prices upward. The Chlorine Institute reported that the January and February industry-operating rates were 101% and 103%, respectively. Our operating rate for the first quarter was 96%, which was negatively impacted by rail service problems and customer outages as noted previously.
Sales for the Metals segment for the first quarter of 2005 were $333.9 million compared to sales in the first quarter of 2004 of $308.3 million. The increase in sales is principally the result of higher copper prices in the first quarter of 2005 compared with the first quarter of 2004. The average Commodity Metals Exchange (COMEX) copper price was approximately $1.47 per pound in the first quarter of 2005 compared with $1.23 per pound in 2004, or an increase of 20%. Shipment volumes in the first quarter of 2005 decreased 4% from the first quarter of 2004. Shipments to the ammunition segment remained strong with continued demand from military ordnance. Building products shipments increased 3% from the 2004 first quarter. Continued strong construction industry demand resulted in increased shipments to the building products segment.
Shipments to the automotive, electronics and coinage segments declined from the 2004 first quarter by 8%, 13% and 7%, respectively. Coinage shipments were down from last year primarily due to the U.S. Mint's introduction in 2004 of two new nickels commemorating the 200th anniversary of the Lewis and Clark Expedition.
The Metals segment reported income of $13.7 million in the first quarter of 2005 compared to $14.6 million in the first quarter of 2004. The lower earnings were primarily because of lower volumes.
As we look at the strip and rod businesses, we estimate that year-to-date industry demand through February was behind 2004 by 7%.
In the second quarter of 2005, we expect that strip shipment volumes will be about equal to the first quarter of 2005 and the second quarter of 2004. On the other hand, we expect rod shipment to be down from the first quarter of 2005 and from the second quarter of 2004 because of generalized market softness.
Moving to Winchester. Winchester 2005 first quarter sales were $83.3 million compared with $74.7 million in the first quarter of 2004, reflecting higher U.S. military and law enforcement volumes. Commercial sales were similar to the first quarter of 2004. Income in the first quarter of 2005 was $3.4 million, compared with $6.1 million in the first quarter of 2004. The favorable impact of higher volumes and increased prices to commercial customers were more than offset by a $6.0 million increase in costs of commodity metals and other raw materials.
As we mentioned in our January call, the higher commodity costs, particularly for lead and copper, will be an issue for the entire ammunition industry in 2005. Price increases have been implemented but we do not expect them to fully recover the higher commodity costs.
We continue to believe that the Army will award the supplemental ammunition procurement at the end of the second quarter of 2005.
In September 2004, Winchester announced that it would relocate its East Alton rimfire manufacturing operation to Oxford, Mississippi. The Oxford, Mississippi location will allow Winchester Ammunition the ability to reduce costs, improve efficiencies, better utilize existing technology and achieve improved profitability in the product line. The relocation of equipment has begun and we still anticipate completing this move in the second quarter of 2005. This relocation, which will affect about 150 salaried and hourly employees, does not impact the shotshell, and centerfire rifle and pistol manufacturing operations which are located at East Alton, Illinois.
Now let me turn the microphone over to John Fischer who will review several financial items with you. John ---
John Fischer
Thank you, Joe.
As Joe mentioned, our first quarter exceeded our expectations primarily due to better than expected performance from our Chlor Alkali operations.
In the second quarter of 2005 we expect our earnings to be in the $0.45 per diluted share range. As previously noted, earnings in the Chlor Alkali business are expected to improve with higher ECU prices partially offset by higher transportation and seasonally higher electricity costs. Winchester earnings are expected to decrease from the first quarter of 2005 due to normal seasonal factors and start-up costs at our new Oxford, Mississippi facility. Metals earnings are expected to be lower than the first quarter as we continue to experience soft demand across most market segments.
Now let me discuss a few items on the income statement. Selling and administration expenses as a percentage of sales were 7% in 2005 and 2004. These expenses in 2005 were $6.5 million higher than in 2004 primarily due to higher legal expenses related to increased litigation activity.
Other operating income for the three months ended March 31, 2005 included gains on two real estate dispositions. The dispositions were related to land associated with a former warehousing facility and land associated with a former manufacturing plant. These dispositions generated net proceeds of $12.2 million, resulting in a pretax gain of $8.2 million.
The earnings of non-consolidated affiliates were $8.6 million for the first quarter of 2005, an increase of $8.1 million from 2004, primarily due to higher ECU selling prices at the SunBelt joint venture.
The first quarter tax rate included an $800,000 reduction resulting from a refund of interest from a prior period. Our tax rate excluding the impact of this refund was 39%, consistent with our prior guidance.
Looking at the balance sheet. At the end of the first quarter of 2005, we had cash and cash equivalents of $156.8 million, compared with $147.3 million at the end of 2004. Let me put this in perspective. Typically during the first quarter, Olin consumes cash due to higher seasonal activity levels in Metals and Winchester. During the first quarter of 2004, excluding the issuance of stock and a pension contribution, Olin experienced a reduction in cash of $57 million. The $10 million increase in cash in the first quarter of 2005 is due to the improved operating results offset in part by a higher investment in working capital. This increase in working capital was due to higher accounts receivable as a result of higher sales in Chlor Alkali (increased ECU prices) and Metals (increased copper prices). The increase in accounts payable was a result of the Metals increased copper prices. Inventories were higher primarily due to Winchester's seasonal inventory build and increases
military activity.
Prepaid pension costs increased from $224.7 million in 2004 to $257.8 million in 2005 primarily because of the $43 million contribution in September 2005.
The accrued pension liability was $36.0 million higher at the end of the first quarter of 2005 than the end of the first quarter of 2004 primarily because of the charge to equity that was recorded in the fourth quarter of 2004.
We continue to project that we will remain in compliance with our debt covenants.
Our depreciation and amortization in 2005 will be in the $73 million range. Capital spending for the first quarter of 2005 was $12.1 million and we expect that our capital spending in 2005 will be in line with our depreciation.
As you know, yesterday the Board of Directors declared a quarterly dividend of 20 cents on each share of Olin common stock. This is the 314th consecutive quarterly dividend to be paid by the company.
Now let me turn the microphone over to Tony.
Thanks John. Before we conclude, we thought it would be fitting that I 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 in our most recent Form 10-K, and as updated in our quarterly reports on Form 10-Q, and in our first quarter earnings release. A copy of our prepared remarks today will be available on our website www.olin.com in the Investor section under Recent Press Releases and Speeches, together with the earnings press release and other financial data and information.
And finally, I want to thank all of you for your interest and support during my ten years at Olin. While at times these meetings have been quite challenging, they have always been professional and stimulating. I have enjoyed them and I will miss them. |
