Olin Corporation (OLN) Q4 2012 Earnings Report, Transcript and Summary

Good morning, everyone and welcome to the Olin Corporation Fourth Quarter Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to your moderator, Mr. Joseph Rupp, Chairman, President and CEO. Mr. Rupp, please go ahead.

Good morning, and thank you 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 fourth quarter of 2012 was $34.6 million or $0.43 per diluted share, which compares to $18.7 million or $0.23 per diluted share in the fourth quarter of 2011. Sales in the fourth quarter of 2012 were $587.6 million compared to $445.8 million in the fourth quarter of 2011. During 2012, Olin achieved $373 million of adjusted EBITDA, which is the highest in the history of the company. The record EBITDA was driven by strong results in the Winchester business, improved contributions from bleach and hydrochloric acid in the Chlor Alkali business, contributions from K.A. Steel, chemical distribution business that we acquired in August. Fourth quarter 2012 results included pretax restructuring charges, $2.5 million compared to fourth quarter 2011 restructuring charges of $4.1 million. These charges are primarily associated with the conversion of the Charleston, Tennessee Chlor Alkali plant, mercury cell to membrane technology and the ongoing relocation of the Winchester centerfire ammunition manufacturing operations in East Alton, Illinois to Oxford, Mississippi. Fourth quarter 2012 results also included a $4.9 million insurance recovery related to an unplanned first and second quarter 2012 Chlor Alkali customer outage, the $3 million favorable settlement of property tax dispute. In the fourth quarter of 2012, Chlor Alkali business experienced seasonally weak demand, which improved late in the quarter. This demand profile is reflected by the operating rate to a 76% in the quarter that increased 81% in the month of December. ECU netbacks in the quarter declined 2% compared to the fourth quarter of 2011, but increased 4% compared to the third quarter of 2012. Winchester business began to experience increased demand around the time of the election when the elevated level of demand continued to the balance of the year. Fourth quarter 2012 commercial volumes increased in excess of 20% into the fourth quarter of 2011. First quarter 2013 net income is forecast to be in the $0.40 to $0.45 per diluted share range. The first quarter earnings per share forecast equates to a $95 million to $100 million adjusted EBITDA forecast. [indiscernible] first quarter 2013 earnings are expected to decline compared to the first quarter of 2012 due to lower volumes and pricing. Commercial volumes in Winchester is expected to remain at elevated levels as a result of first quarter 2013 earnings were forecast to significantly exceed first quarter 2012 earnings. First quarter 2013 results were expected to include approximately $3.5 million of restructuring charges. 2012 was a significant year for Olin, and we achieved a number of strategic milestones. During October, Olin successfully exited all Chlor Alkali manufacturing using mercury cell technology. The Charleston, Tennessee facility, the sodium hydroxide mercury cell room was shut down in September and the new membrane cell room began operation appearing the same month, and is currently operating at design rate. Charleston potassium hydroxide mercury cell room was shut down in October and the new membrane cell room began operation in November, and it too, is operating at the design rate. And finally, the mercury cell room at the Augusta, Georgia facility discontinued production in September. As a company, Olin is extremely pleased to have completed these actions and the associated capital -- having to have the associated capital spending behind us. In August, we completed the acquisition of K.A. Steel, and in the 4 plus months we've owned it, it generated approximately $10 million of EBITDA. And excluding Olin's one-time transaction costs, was accretive to both earnings and cash flow in 2012. We continue to believe this uniquely focused chemical distributor will enhance our Chemical business, increasing the amount of our Chlor Alkali capacity that can be sold as value-added products. During 2012, we also continued to grow our Bleach business. Bleach shipments in 2012 increased 11% compared to 2011. And with 2 of the 3 planned HyPure bleach plants in operation and running at plant rates, we expect to increase bleach shipments in additional 10% to 15% in 2013. We also expect the third HyPure plant that will be located in Henderson, Nevada to be operational in the first quarter of 2013. Finally, the ongoing Winchester center relocation project began to generate positive profit contributions in the third quarter of 2012, which continued into the fourth quarter. This has been accomplished less than 18 months after the new building was completed and the project remains on schedule for the expected completion in 2016. Let me discuss the Chlor Alkali chemical distribution Winchester segment in more detail. First Chlor Alkali. The fourth quarter 2012 chlorine demand was in line with the weak level of fourth quarter 2011 demand. But as I said earlier, it did show some improvement in December. Fourth quarter 2012 chlorine shipments to titanium dioxide customers declined 26% year-over-year as demand from that major chlorine consuming product remained well below prior year levels. It was offset by increased shipments in vinyls and urethanes customers. Weakness in chlorine demand resulted in chlorine price to decline from the third quarter level. Chlorine prices in Olin system have declined for the last 5 consecutive quarters, and we expect an additional decline from the fourth quarter of 2012 into the first quarter of 2013. Chlorine price declined in the fourth quarter of 2012 from the third quarter. It was more than offset by improved caustic soda pricing. In the fourth quarter, caustic soda prices in the Olin system reached the highest level since the second quarter of 2009. As a result, ECU netbacks improved from approximately $560 in the third quarter to approximately $580 in the fourth quarter. At this point, we do not believe that the caustic soda price increase that was announced in November will have a meaningful impact in Olin's first quarter 2013 ECU netback. And as a result, chlorine prices, we expect first -- as a result of chlorine prices, we expect first quarter of 2013 ECU netbacks to be slightly lower than the fourth quarter of 2012 level. Over at this point, we do expect Olin's caustic soda prices to benefit from that announced price increase in the second quarter of 2013. We also expect that improves chlorine demand could result in chlorine price increases as we move through 2013. Bleach shipments in the fourth quarter of 2012 increased 20% compared to the fourth quarter of 2011. We now have experienced 20 consecutive quarters of year-over-year increases in bleach shipments. During 2012, the premium realized in the sale of bleach in excess of growing caustic soda netback exceeded $150 per ton. When the Henderson hydro bleach plant begins operation early 2013, we'll have the capacity to utilize in excess of 15% of our Chlor Alkali capacity in the manufactured bleach. Hydrochloric acid shipments declined 7% in the fourth quarter of 2012 compared to the fourth quarter of 2011. And for the full year 2012, hydrochloric acid volumes increased 2%. The positive year-over-year contribution to Olin's Chlor Alkali business came from hydrochloric acid pricing, which increase 15% in the fourth quarter of 2012 compared to the fourth quarter of 2011, and 64% for the full year of 2012 compared to 2011. In the first half of 2013, the hydrochloric acid expansion project at Henderson, Nevada will be completed and that will increase our capacity by approximately 10%. The completion of that project, we'll have the ability to utilize approximately 13% of our Chlor Alkali capacity for the manufacturing of hydrochloric acid. Freight cost per ECU produced increased 4% in 2012 compared to 2011 levels. This rate of increase was less than half the average increase we have experienced over the past 7 years. Chlorine shipments are the biggest driver of these costs, and we continue to pursue opportunities to reduce the amount of our chlorine that is shipped by rail. Our initiatives that increased chlorine shipped as either bleach or hydrochloric acid or a significant part of that opportunity. Let me talk about K.A. Steel. During the fourth quarter of 2012, K.A. Steel generated revenue of $108.7 million on sales of caustic soda and bleach. In normal year case, deal caustic soda shipments do not exhibit a significant seasonal pattern. Bleach sales, similar to what is seen in Olin Chlor Alkali business do however, they exhibit a seasonal pattern and are concentrated in the months of May through August. Actually, 60% of K.A. Steel's annual bleach sales occurred in the second and third quarters, and approximately 50% of the sales occur in the 4 heaviest months. Because of the Bleach business, we expect earnings from K.A. Steel to exhibit a seasonal pattern similar to the Olin Chlor Alkali business. As a reminder, 2011, K.A. Steel generated EBITDA on an Olin basis of $31 million. We continue to expect realizing total of $35 million of manual synergies at the end of 3 years, and $7 million to $10 million in the first full year. Based on our progress realized to date, we were highly confident that we will meet or exceed the first year of target, expanding the sale both Olin-produced bleach and hydrochloric acid and rationalizing caustic soda freight costs are key synergies to be realized during 2013. In the fourth quarter of 2012, K.A. Steel generated pretax profit of $2.6 million. Depreciation and amortization expense was $3.9 million. Majority of which reflects the impact of the write-ups made by Olin as part of the acquisition accounting. We currently expect first quarter of 2013 K.A. Steel profitability to improve compared to the fourth quarter of 2012. Now turning to Winchester. Consumer purchases of ammunition began to trend upward the Saturday before election day 2012 and the trends has continued where sales is currently only being limited by product availability. Additionally, the higher level of commercial demand in the fourth quarter, Winchester also experienced an improved level of military and law enforcement sales in the fourth quarter of 2012 when compared to the fourth quarter of 2011. Fourth quarter 2012 law enforcement sales increased 28% compared to the fourth quarter of 2011, and the domestic military sales increased 25% year-over-year. Winchester's fourth quarter segment earnings were 16.5 million and included a $3 million settlement of a property tax dispute. During the quarter, Winchester also experienced a sizable growth in its commercial backlog, which increased from $92 million at the end of September to $138 million at the end of December. During January, the commercial backlog has grown to approximately $280 million. As a point of reference, commercial backlog at December 31, 2011, was $29 million. Winchester's total backlog including military and law enforcement at December 31, 2012, was $264 million. It is our view that the current surge is stronger and has expanded across the product line more quickly than the late 2008, early 2009 surge. Net sales in the fourth quarter of 2012 increased 15% compared to the fourth quarter of 2011. Fourth quarter 2012 unit sales compared to the fourth quarter of 2011 increased across all product lines. The quarter totaled Winchester sales increased 27%, reflecting a 36% increase in commercial sales, and a 19% increase in contract sales, which includes military and law enforcement and industrial. Commodity metal costs are in the fourth quarter of 2012 decreased slightly compared to the fourth quarter of 2011 and were similar for the full year 2012 when compared to the full year 2011. We currently expect commodity metal costs in 2013 to be similar to 2012. The relocation of our centerfire pistol and centerfire rifle manufacturing operations, East Alton, Illinois to Oxford, Mississippi, remains on schedule and remains a significant long-term profit opportunity for Winchester. At the end of 2012, the large majority of all pistol ammunition are to be manufactured in Oxford. As a result of this, during the fourth quarter of 2012, relocation activity has generated approximately $1.6 million of incremental pretax earnings. The full-year 2012, the negative impact of the relocation in Winchester earnings is approximately $5 million. We continue to expect the project to generate savings of $10 million to $15 million in 2013. The annual savings of $30 million at the completion of the project, which is expected in 2016. We believe the completion of the Oxford relocation project will result in the Winchester business that is capable of generating annual EBITDA in the $85 million to $100 million range. As Olin enters 2013, we're optimistic that we can generate adjusted EBITDA in the range of $410 million to $440 million. Winchester business is well positioned to benefit from the current market conditions and we'll realize an increased level of benefit from the Oxford centerfire ammunition relocation project. Olin will benefit from a full year of ownership of K.A. Steel, including synergy realization. Chlor Alkali will benefit from increasing bleach and hydrochloric acid capacities. These improvements will all be realized in a year when capital spending should be 50% to 60% lower than the 2012 level. I'd like to turn the call over to our Chief Financial Officer, John Fischer, who will review with you several financial matters. John?

Thank you, Joe. First, I'd like to discuss a few items on the income statement. Selling and administration expenses decreased $2.2 million or 6% in the fourth quarter of 2012 compared to the fourth quarter of 2011. This decrease was primarily due to lower legal and legal-related settlement costs partially offset by expenses associated with the acquired K.A. Steel business and higher salary and benefit costs. Incremental selling and administration expenses related to the K.A. Steel business were approximately $2.5 million. The inclusion of 4-plus months of K.A. Steel, 2 additional months of Sunbelt expenses of approximately $5 million caused the absolute year-over-year selling and administrative expenses to be higher in 2012 compared to 2011. Fourth quarter 2012 charges to income for environmental, investigatory and remedial activities were $1.6 million. Fourth quarter 2011 charges to income for environmental, investigatory and remedial activities were $5 million, which included $400,000 of recoveries of costs incurred and expensed in prior periods. For the full year 2012, charges to income for environmental, investigatory and remedial activities were $8.3 million, which included the recovery of $100,000 of costs incurred in expense in prior periods. Full year 2011 charges to income for environmental, investigatory and remedial activities were $7.9 million, which included the recovery of $11.4 million of cost incurred and expensed in prior periods. After giving consideration to the recoveries in both 2011 and 2012, year-over-year expense related to environmental, remedial and investigatory activities decreased by $10.9 million. These charges related primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites. Expenses for environmental, investigatory and remedial activities in 2013 are forecast to be in the $18 million to $22 million range. We are not forecasting any environmental recoveries in 2013. On a total company basis, defined benefit pension plan income was $5.2 million in the fourth quarter of 2012 compared to $5.9 million in the fourth quarter of 2011. The final benefit pension plan income for the full-year 2012 was $21.1 million, and we forecast that full year 2013 defined benefit pension plan income will be similar to the 2012 level. We did not make any cash contributions to our domestic defined benefit pension plan in 2012 and are not required to make any in 2013. Under the pension funding relief provisions of the moving ahead for progress in the 21st century legislation, we may not be required to make any additional contributions to our domestic defined benefit pension plans for several years. During 2012, we did make cash contributions to our Canadian defined benefit pension plan of less than $1 million. As a reminder, under Canadian pension rules, service costs are required to be funded annually. During the fourth quarter, Olin recorded a $2.5 million restructuring charge. This charge was associated with the employee severance and relocation expenses associated with the ongoing Winchester centerfire relocation project and the demolition of the Chlor Alkali mercury cell plant in Charleston, Tennessee and Augusta, Georgia. Total 2012 restructuring charges associated with the Winchester centerfire ammunition relocation and the Chlor Alkali and mercury cell conversion projects were $8.5 million. 2013, we expect to incur approximately $10 million of restructuring charges primarily associated with the Winchester relocation and the reconfiguration of the now former, Augusta, Georgia Chlor Alkali manufacturing site. Between 2014 and 2016, we expect to incur an additional $5 million to $7 million of restructuring expenses associated with the Winchester centerfire ammunition relocation project. The effective tax rate for the fourth quarter 2012 was 36.7% and the full-year 2012 rate was 33.6%. The full year rate includes approximately $4 million of net favorable adjustments to the statutory rate. Due to the level of capital spending in 2012 and the accelerated appreciation provisions of the 2010 Jobs Creation Act, the cash tax rate was approximately 11% in 2012. In 2013, we currently expect the effective tax rate to be in the 35% to 37% range. The recently passed Taxpayer Relief Act of 2012 extended the accelerated depreciation provisions through the end of 2013. And as a result, we are currently forecasting our 2013 cash tax rate to be in the 20% to 25% range. Now, turning to the balance sheet. Cash and cash equivalents at December 31, 2012, including the restricted cash associated with the Go Zone financings that are classified as long-term assets on the balance sheet, totaled $177.1 million. As of December 31, 2012, the restricted cash balance was $11.9 million. During the fourth quarter 2012, the working capital employed declined by approximately $53 million. A decline in working capital employed in the fourth quarter is consistent with Olin's normal seasonal pattern, but was higher than expected due to the high level of Winchester sales, which translated into an unusually low level of inventory in the business. Winchester inventories declined approximately $18 million in the fourth quarter of 2012 from the third quarter and declined approximately $11 million in 2012 compared to 2011. As a result of this fourth quarter decline, we anticipate that Olin's first quarter 2013 working capital build will be approximately $60 million. The year-end 2012 working capital balance of approximately $150 million included approximately $50 million associated with the K.A. Steel business. Capital spending during 2012 was $256 million. Of this total, approximately 42% related to the Charleston mercury cell technology conversion project and approximately 23% supported the 3 low-salt high-strength bleach projects. With the completion of the Charleston conversion project in 2012, and the completion of 2 of the 3 hydro bleach facilities, we expect 2013 capital spending to be in the $100 million to $130 million range. Depreciation and amortization expense, it was $111 million in 2012 and we expect 2013 depreciation and amortization expense to be in the $135 million to $140 million range. The par value of Olin's debt outstanding at December 31, 2012, was $703.2 million. During 2013, we expect to repay $23.6 million, $11.3 million of which was repaid early in January. Including the amount paid in early January, there are less than $50 million of debt repayments required between now and December of 2016. The weighted average duration of all the Olin debt outstanding is in excess of 9 years. As Olin begins 2013, we are entering a period of increased financial flexibility. In addition to not facing any significant debt maturities, we're entering a period of significantly lower capital spending and we do not foresee any near-term cash contributions to the large domestic defined benefit pension plan. On January 25, Olin's board of directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on March 11, 2013, to shareholders of record at the close of business on February 11, 2013. This is the 345th 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 in our fourth quarter earnings release. A copy of today's transcript will be available on our website in the Investors section under calendar events. The earnings press release and other financial data and information are available under Press Releases. Operator, we are now ready to take questions.

[Operator Instructions] And our first question comes from Frank Mitsch from Wells Fargo.

This is Sabina Chatterjee in for Frank. Just a question on the EBITDA guidance you've given. What are the assumptions underlying the $410 million or $440 million range? I'm just curious as to what level of housing starts, GDP growth, operating rates and maybe average ECU that you factored in?

We're not going to comment on the ECU. We're looking at housing starts in the 900,000 to 1 million range and looking at GDP growth of 2% to 2.5%.

Okay. And then just on the Winchester relocation, it began generating profits in Q3, can you tell us what that level was roughly in Q4?

It was $1.6 million.

Okay. And it looks like given the elevated backlog in Winchester, it looks like Winchester earnings will be up in 2013 versus 2012. Now, do you expect typical seasonality to play out this year in the business or is that basically overridden given the marketplace conditions?

Sabina, if you look at what happened in 2009, which was the last full year of a surge, there was very little seasonality of it during that year. And based on where we are, we would expect high levels of demand to continue at least through the third quarter. So I would say, up through at least the first 3 quarters, we would not expect a lot of seasonality.

Our next question comes from Edward Yang from Oppenheimer. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: First question. Just on pricing, you're looking for ECU netbacks to be, I guess, flattish to down sequentially, and there's been some confusion in the marketplace whether the $35 to $50 caustic soda price increase is sticking. What are your thoughts on that?

The price increase, the lowest common denominator for the various price increases that were announced is the $35. We really expect it, some of that $35 increase to show up in the marketplace in the fourth quarter, but it didn't for a variety of reasons, I think. Operating rates were -- it was a wide range of operating rates in the fourth quarter, all the way from 80% to 88% from an industry average. So there was a lot of people thinking it was a point of transition. We had the hurricane on the East Coast, which created some demand destruction and just a lot of disruption in the marketplace, and that kept some people on the sidelines. And so I think overall, we expected in the fourth quarter and it didn't happen for legitimate reasons. We still believe that there will be pricing increase activity in the first quarter, which we would see reflected in our numbers in the second quarter. And as it stands now to our knowledge and the best of understanding, there isn't anybody that's backed away from pushing the $35 price increase. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay, got it. And the updated CapEx outlook, I believe previously, you were looking for $100 million to $150 million that you tightened that range to about $100 million to $130 million. Why the decrease there?

I just think, we are numbers -- we were able to get our numbers dialed in closer as to we get to the end of the year, and I think that's enough capital to do what we need to do. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Okay. And Joe, considering that you're freeing up a lot of cash with that big decline in year-over-year CapEx, what's your thinking on the dividend?

Well, at this point, I think what we want to do is generate that cash, Edward. And our first thought naturally from -- we have to accumulate cash is to take a look at where other things we could do from a bolt-on acquisition perspective. Absent that, then we'll take a look at our dividend policy.

Next question comes from Chris Butler from Sidoti & Company. Christopher W. Butler - Sidoti & Company, LLC: Could you give us a sense on the K.A. Steel business on how that performs on a year-over-year basis?

I think, Chris, we gave you that for the 4 months, we have generated approximately $10 million of EBITDA which is consistent with a business that would generate $30 million to $32 million on an annual basis. So I think, we're very happy with where we've performed. We actually didn't own it for the best part of the year where they generate their peak earnings. As we said in the remarks, their peak earnings typically occur in the May through August periods. So I think it's performing as we would have expected. And as we move forward, we expect that plus synergies. Christopher W. Butler - Sidoti & Company, LLC: So if we're looking at this business, you're already looking at your 4-month run rate, you're already at $30 million if we just multiply it out. If we take into consideration the seasonally strong summer, you should be well ahead of that $30 million to $32 million that you just spoke of, right?

That's correct. Christopher W. Butler - Sidoti & Company, LLC: And what kind of impact did you have on that business from Sandy, can you quantify that?

We -- I don't know that we've really ever quantified it in terms of dollars. There was a significant amount of disruption in the supply chain. We were forced to move caustic and freight illogical ways to service terminals that hadn't -- by truck that really had no ship-bound way to receive product. So it did show up, there was an impact, small impact in our earnings. But we were also able to count on our suppliers and count on the people of K.A. Steel to do what was necessary to satisfy the customer demand. Christopher W. Butler - Sidoti & Company, LLC: Any impact or concerns going forward on the Mississippi River and the water levels?

The best of our knowledge would indicate that the concern level, although it's not disappeared, it has moderated some both based on just increased water flow from the watershed that would help and the action by the corps of engineers to strategically release water and to work on clearing the channel of obstructions. So I think most people are feeling a little better about the situation. I think most barges headed north are still being short loaded. But there is a sense that we may have avoided a much worst case situation. Christopher W. Butler - Sidoti & Company, LLC: And just finally, with the Winchester demand, any change to the restructuring, keeping extra lines open or things to that nature?

No, no.

Our next question comes from Don Carson from Susquehanna Financial.

John, a question on the second half for Chlor Alkali outlook. Just what impact you're anticipating from higher operating rates due to some of these capacity startups. And what impacts specifically will some of these startups have on Olin's business given that you've got customer back integrating?

Well, I mean, obviously there are, in one of the cases, a company that's bringing on capacity that was a customer of ours that we have served. So obviously, that will change that dynamic. However, when you look at it from an industry standpoint and look at it from a bigger picture perspective, additional capacity isn't in and of itself a negative sign for what the market is going to see because what drives the market is supply and demand. And just because additional capacity comes online and creates new supply, unless there is a demand to satisfy it, nothing really happens except operating rates get pushed a little bit lower and prices really don't move much. Obviously, if depending upon how much you believe some of the anecdotal stories about the return of housing, if you believe high operating rates are going to be what we're going to see, in 2013 then that speaks to the fact that there will be pressure on caustic pricing downward, but there will also be pressure and price increases on the chlorine side. And the work we've done to produce more HCL and more bleach with our products, gives us, affords us an opportunity to take chlorine price increases and move it into those value-added byproduct as well. So I feel like we're in a position where we have the ability to respond to whichever one of those directions the market takes us in 2013.

And then John, what about freight rates? What's your expectation for freight in calendar '13 versus calendar '12? What kind of surge there?

Well, we said in the remarks that 2012 was notable because we saw in that year a less -- a smaller increase in percent freight rates than we had seen in any year for recent history. My sense is that, 2013 is going to continue the trend towards smaller freight rate increases. I don't believe that we're going to see flat freight rates year-over-year. But it's my sense with all that's going on in the market, and the fact that with the infrastructure that we purchased with K.A. Steel, we now have situations where we can create competitive options for ourselves that will, in essence, keep freight rates a little more competitive that the railroads would have to offer.

Then one final question. Speaking of surges, you mentioned you thought the Winchester demand surge would last through at least Q3. Some of the restrictions people are talking about seem rather unprecedented. We're hearing talk of ammunition taxes or ID to buy ammunition in states like New York. What impact do you think this ultimately has on ammunition demand? Is it the case you're seeing a greater surge, which could be followed by lower trend level of demand for commercial ammunition?

I do think that would see that. I think there could be some small couple percent kind of impact on ammunition. I think you got a surge is what happened the last time that surge will end and we'll see a drop-off. I think last time we projected a drop-off in the 10% to 20% range over a 2-year period. I think our thinking would be there would be something similar to that. The length of the surge, it's hard to project. But certainly, I think our statement -- I mean, getting it well into the third quarter is a pretty fair statement.

Our next question comes from Herb Hardt from Monness. Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division: Can you tell us what you're bonded average cost of debt is? And secondly, the way you discussed it, it sounds as if you're not too anxious to repay it, is that a correct assumption?

I think that's a correct assumption. I would say the blended average rate is probably about 6.5%.

And our next question comes from Gregg Goodnight from UBS.

This is Bill Carroll in for Greg. A question on the Chemical Distribution segment. You mentioned that Mississippi River levels were not really impactful to earnings, but the earnings did seem rather low. Were there any one-time items there that can explain the levels there?

As I said, we did have some impact in earnings, not necessarily from the Mississippi River, no constraints. But on the aftermath of Hurricane Sandy, which caused us quite a bit of disruption, us and everybody else on the East Coast in getting product where we needed terminals to serve our customers. So there were additional cost in the fourth quarter associated with that.

And I think it's important to note that you're looking at the weakest quarters seasonally that the business has.

Sure. Great, that's helpful. And then on Chlor Alkali, with the Charleston conversion complete and Augusta down, what's the name, like, capacity for chlorine now?

2.04 million tons.

Our next question comes from Dmitry Silversteyn from Longbow Research.

A couple questions if I may. You mentioned the sharp decline in chlorine demand for TiO2 in the fourth quarter. Can you talk about what you're seeing in the first quarter so far in January and what your expectations for that business are for 2013? Should we see a recovery in there to go along with a vital growth or do you expect to see continuing pressures in the volumes going into that market?

We have seen some improvement in that market segment so far in the fourth quarter or in the first quarter. We've actually seen an improvement in operating rates across our system. But in part it's driven by better results from the TiO2 market. But continuing strength in vinyls and in the TDI market segments.

Okay. So it sounds like your chlorine demand after maybe some end-of-year inventory adjustments by your customers mitigating back to more normal levels and you expect it to be up year-over-year?

Well, the first quarter, because of the seasonality of our business is obviously not quarter in which we would sell the maximum amount of chlorine into the marketplace. But we have seen an improvement from what we saw in the second half of the fourth quarter.

Got it, okay. On the K.A. Steel business section, I want to make sure I understand the guidance and the magnitude of earnings you're looking for in 2013. I think you said that if you -- and obviously, if you could take the 4-month run rate, you were at that $30 million to $32 million EBITDA level run rate which can be improved with cost savings and maybe a little bit of faster growth. But then if I remember correctly, G&A is somewhere like $16 million, $18 million, is that correct? So you're looking at EBIT of something of less than $20 million for the year, is that the right way to think about that business?

Excluding the synergies.

Excluding the synergies. Okay, okay. So the math is okay. Correct. Finally -- not finally, but next question is on the Winchester business, you talked about the surge in demand and that's obviously helping the business. Have you also been able to get some pricing action there given that from what you're describing, you're sort of running flat out and selling everything you can make?

Yes. There was a price increase that was announced last fall. It was implemented on January 1.

And would you expect further pricing actions there or given the high demand or is this a response to raw material inflations? But what was the justification for pricing?

The reality of it was last fall it was more associated with commodity prices. But I think that we'll have -- we'll be monitoring it closely as we move forward.

Okay, okay. So in addition to strong volumes during the surge, we should also expect or can expect an improvement from pricing in terms of profitability of the business?

Now, there's already an announced pricing. Right.

Okay. Just to try to understand your guidance on environmental expense for 2013, from what -- I'm sorry, my model, did we have about an $8 million, give or take, in the environmental expense in 2013 excluding some special items. Did you say you expect it to go up to $20 million, did I hear you correctly?

Yes, you did. If you look at the walk, the history over a long period of time, that number averaged about $25 million a year. From say, 2005 through 2011, we saw just a confluence of events that caused a low number in 2012 and we're forecasting it to be higher than '12 but lower than the historic average, and we gave guidance of $18 million to $22 million.

Okay, so I did hear it correctly. Okay. And then final question, again looking at your long-term trends, you really haven't done much in terms of increasing the dividend going back to over a decade. Has there been some thought given to your dividend policy is going forward? Or other thoughts to the use of cash?

Remember what we've stated. We just finished 2 years of significant capital spending. Last year, we returned $50 million, turned $40 million a year before. And of course, then made the acquisition K.A. We think that we're positioned now for a very good year, the opportunity to slash our capital spending in half. Our preference, which we stated in the past, would be to fund bolt-on acquisitions or investments in our core business. And absent that, then we will look at other methods to return our cash to shareholders.

Our next question comes from Alex Yefremov from BoA Merrill Lynch.

Could you address the latest trends in electricity cost at Chlor Alkali, maybe what's your outlook for 2013?

Fourth quarter electricity costs were reduced from third quarter. But that's traditional for us, because as we move into the fourth quarter, which is a slower seasonal period for us. Our operating rate typically tends to be a little bit lower and electricity -- overall, electricity cost tends to follow that. You don't see electricity cost moving significantly one way or the other. We're in a period of very stable energy prices and then energy advantage and the North America holds. And so we really see our energy prices being relatively flat moving forward.

And a follow-up on Chlor Alkali, are you traditionally or somewhat underweight in the vinyls market in terms of your end markets for chlorine? Given expectations of stronger housing, do you -- are you changing your marketing strategy, are you going after the vinyls market to a larger degree this year, if that's possible?

Well, the vinyls market tends to be very much captively focused. The people are in it tend to be very self-sufficient in terms of their chlorine requirements. And so, the amount of chlorine for the chloro-vinyl chain that's available for merchant sale it is not a big number. And so we'd rather limit it on how much we can chase or rather a smaller piece of the market that isn't already taken care of by the captive producers.

Okay. Now maybe switching to Winchester. Just trying to assess the type of earnings you could do in 1Q. If so, if we take your year-over-year increase in EBIT in the fourth quarter of 2012, would it be fair to assume that your increase in the first quarter of 2013 could be similar in magnitude or it will be higher because of seasonality?

It's going to be lower because of seasonality. The fourth quarter is traditionally very weak, and it wasn't weak at all this time. So you'll see the biggest level of improvement in Q4 and lesser levels of improvement just because Q1 tends to be a very strong quarter seasonally.

Right. So basically you were almost running almost flat out in the 4Q and what will have changed in 1Q is price increases and potentially some metal cost changes, is it a fair assumption?

We think you'll also see better volumes in Q1 year-over-year, better pricing in Q1. I think metals, as talked, are essentially flat as we look at it year-over-year.

Yes, you'll have actually more operating days, with holidays are still farther away.

And our next question comes from Andrew Cash from SunTrust.

This is Jason Freuchtel for Andrew Cash. All our questions have been asked and answered.

And our next question comes from Richard O'Reilly from Revere Associates.

I have a few questions. A couple of easy ones and a couple of bigger-picture ones. The easy ones are, your operating rates in ECU prices, are those just for chlorine caustic soda or are those systemwide? I should know that.

The ECU pricing is just chlorine and caustic soda. The operating rate is everything.

Okay, fine. And on your EBITDA estimates or adjusted EBITDA numbers, do those include or exclude restructuring expenses and all those little items?

Include those.

Okay, fine. So for those of us who need to come up with an EPS estimate, we can take your $400 million or $430 million, subtract the D&A, subtract the tax rate, the interest expense is about $32 million or so for the year?

That's fair.

There's no other numbers that we should be thinking of?

I don't think so.

Okay, fine. And then a bigger-picture question. I don't know how to ask this, but I'm wondering when you're talking to your shareholders and if they express risk to the stock from political or headline news, what is your response to that?

I think where we are with regard to that, Richard, is that we've been in the ammunition business since 1892. We don't manufacture guns, which some people have a misnomer that we do. And we think that there's a lively debate out there that, that will occur. But I think that often times, people think that we make guns, and we don't.

Okay. And how would you respond to a question of would you get out of the Ammunition business or why would you get out of the Ammunition business?

We've been asked that question many times as you know. I mean, we really happened to be a chemical company that happens to own a very profitable ammunition company. Our thoughts are is that our Ammunition business has a lot of runway ahead of it with what we're doing down in Oxford, Mississippi as far as continue to improve the profitability of that business, and it's also a business that we have a very low tax basis in. So would we consider selling it? In an appropriate time, we may. But right now, that's not on the table.

And we have an additional question from Alex Yefremov from BoA Merrill Lynch.

I just have a very basic question about commercial ammunition. What are the shelf life of this commercial ammunition? I'm assuming people are stockpiling it, so I'm just trying to assess whether this inventory may take time to...

There's no shelf life. And the only thing I would just remind you is that people have stockpiled in every surge. And ultimately, it will get used. But there is no shelf life. If it's [indiscernible].

And we have an additional question from Herb Hardt from Monness. Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division: Can you give us a sense of the capacity increase of an industry 2013 versus '12?

In the Chlor Alkali industry? Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division: Yes.

I can tell you that there's been an announcement by Westlake that they're going to add somewhere between 250,000 to 350,000 tons of capacity than there was -- there has been discussion, public discussion by Dow that they are converting 700,000 tons of capacity at one of their plants in the Gulf Coast from diaphragm to membrane. But there's no public announcements other than what we have said about capacity coming out, and we took 160,000 tons of capacity out of the industry in 2012 with our mercury cell shutdown.

And I'm showing no additional questions. I would like to turn the conference call back to Mr. Rupp for any closing remarks.

Thank you for joining us today. And we will look forward to reporting the results of our first quarter in late April. Thank you.