Olin Corporation (OLN) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Olin's First Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Joseph Rupp, Chairman, President and CEO. Please go ahead.

Good morning, and thank you for joining us today. With me are John Fischer, Senior Vice President and Chief Financial Officer; John McIntosh, Senior Vice President of Operations; and Larry Kromidas, our Assistant Treasurer and Director of Investor Relations. Last night we announced that net income in the first quarter of 2013 was $40.5 million or $0.50 per diluted share, which compares to $38.7 million or $0.48 per diluted share in the first quarter of 2012. Sales in the first quarter of 2013 were $630 million compared to $507.2 million in the first quarter of 2012. During the first quarter of 2013, Olin generated $107.9 million of adjusted EBITDA, which is the highest first quarter level in the history of the company. The record adjusted EBITDA was driven by strong volumes and reduced costs in the Winchester business, contributions from the Chemicals Distribution business acquired in the third quarter of 2012. We now believe that during 2013, Olin can generate adjusted EBITDA in the range of $415 million to $445 million. In the first quarter of 2013, the Chlor Alkali business experienced lower demand and lower year-over-year prices. Sales volume of chlorine and caustic soda declined approximately 1% in the first quarter of 2013 when compared to the first quarter of 2012, while ECU netbacks in the quarter declined 3% compared to the first quarter of 2012. The pretax contribution from the hydrochloric acid sales declined approximately $8 million from the record quarterly level in the first quarter of 2012. The elevated level of commercial demand that the Winchester business began to experience in the fourth quarter of 2012 continued through the first quarter of 2013. First quarter 2013 commercial sales increased in excess of 40% compared to the first quarter of 2012 and, as a result, Winchester achieved the highest level of quarterly earnings in its history. Second quarter 2013 net income is forecast to be in the $0.45 to $0.50 per diluted share range. Chlor Alkali second quarter 2013 segment earnings are expected to decline compared to the second quarter of 2012 due to higher costs associated with 3 planned plant maintenance outages, continued lower pretax contributions from our hydrochloric acid sales and higher depreciation expense. Commercial volumes in Winchester expected to remain at elevated levels and as a result, Winchester's second quarter 2013 segment earnings are forecast to exceed second quarter 2012, and to be similar to the record level of first quarter 2013 segment earnings. Chemical Distribution second quarter 2013 segment earnings are expected to improve compared to the first quarter of 2013 due to seasonally stronger caustic soda and bleach sales. Year-over-year legacy environmental expenses are expected to increase in the approximate $2 million to $4 million range and second quarter 2013 results are expected to include approximately $2.5 million of restructuring charges. Let me discuss the businesses. I'll begin with Chlor Alkali. First quarter 2013 chlorine and caustic soda sales volume declined 1.4% compared to the first quarter of 2012. As we continue to experience an erratic demand pattern, we currently expect second quarter 2013 chlorine and caustic soda volumes to be similar to first quarter 2013 volumes and only slightly higher than second quarter 2012 levels. During the first quarter of 2013, chlorine shipments to vinyls customers increased 34% compared to the first quarter of 2012 which shipments to titanium dioxide customers declined 24% and shipments to European customers declined 3%. In addition, shipments of hydrochloric acid declined 23% in the first quarter of 2013 compared to the first quarter of 2012. First quarter 2013 decline in hydrochloric acid shipments was also accompanied by a 31% decline in prices for the record levels experienced in the first quarter of 2012. The combined impact of hydrochloric acid price and volume declines reduced first quarter 2013 segment earnings by approximately $8 million when compared to the first quarter of 2012 levels. We also expect second quarter 2013 hydrochloric acid profits to be lower than the second quarter of 2012 due to lower prices. In spite of the unfavorable year-over-year comparisons being experienced in 2013, and that's really due to the record pricing in the first half of 2012, we continue to view hydrochloric acid as an important value-added product for our Chlor Alkali business. During the second quarter, the hydrochloric acid expansion project at our Henderson, Nevada facility will be completed and will increase the amount of our total chlorine capacity that can be converted to hydrochloric acid to approximately 13%. First quarter 2013 shipments of bleach increased to 5% compared to the first quarter of 2012. And first quarter 2013 shipments of potassium hydroxide increased 23%. The first quarter increase in bleach shipments represents the 21st consecutive quarter of quarterly year-over-year increases in bleach shipments. During the first quarter, we achieved mechanical completion on our third HyPure Bleach plant in Henderson, Nevada and expect to reach full operations this month. We now have the ability to utilize in excess of 17% of our total Chlor Alkali capacity in the manufacture of bleach. We continue to realize premiums of the sale of bleach in the $100 to $200 per ton range when compared to the sale of chlorine and caustic soda, and this continues to be an area of strategic emphasis. Yield and operating rate during the first quarter of 2013 was 85% which reflects the impact of capacity reductions which took place in the fourth quarter of 2012. As a part of our mercury cell technology conversion reconfiguration project, our Chlor Alkali production at Augusta, Georgia facility was discontinued and the capacity of our Charleston, Tennessee facility was reduced. A total of 160,000 tons of capacity was eliminated. Had these capacity reductions not occurred, the first quarter 2013 operating rate would have been 79%. Yield and operating rate in March was 91%. The first quarter 2013 ECU netback was approximately $565 compared to approximately $585 in the first quarter of 2012 and approximately $580 in the fourth quarter of 2012. The first quarter 2013 ECU netback is reflected caustic soda prices which improved in the fourth quarter of 2012 but were more than offset by sequentially lower chlorine prices. We expect both chlorine and caustic soda prices to improve slightly in the second quarter of 2013 compared to the first quarter. In late February, there were price increases announced for both chlorine and caustic soda. It was a $60 per ton chlorine price increase that was not fully supported by all producers, which has not yet received support in the market. The caustic soda price increase announced its range between $30 and $50 per ton and were fully supported by the producers. We currently expect $10 to $30 per ton of the caustic soda price increase to be accepted in the market and to impact our results in the third quarter. Freight cost in the first quarter of 2013 increased approximately 6% compared to first quarter 2012 levels. First quarter 2013 freight costs were slightly below the full year 2012 level. During the first quarter of 2013, we began to experience the benefits associated with the conversion from our mercury cell to membrane technology at our Charleston, Tennessee facility. Our first quarter 2013 electricity usage in the production of caustic soda declined 25% compared to the first quarter of 2012, electricity usage in the production of potassium hydroxide declined 15%. In addition, the overall Chlor Alkali business has benefited from lower electricity costs to the elimination of our mercury cell technology, lower natural gas cost and lower coal cost due to the price pressure brought out by natural gas. Since 2008 through the end of 2012, our full year electricity costs per unit of consumption have declined approximately 12%. First quarter 2013 electricity costs were similar to the 2012 level. Second Quarter 2013 Chlor Alkali earnings are forecast to decline slightly from the first quarter of 2013 level. Second Quarter 2013 Chlor Alkali results will be negatively impacted by approximately $10 million in higher cost compared to the first quarter primarily due to spending associated with planned plant maintenance outages at our Henderson, Nevada plant, our Niagara Falls, New York plant, and our St. Gabriel, Louisiana facilities. These costs will more than offset the benefits from slightly higher ECU netbacks and seasonally stronger bleach volumes. Let me speak about the Chemical Distribution. During the first quarter of 2013, the Chemical Distribution made its first deliveries of all the produced hydrochloric acid and potassium hydroxide. These deliveries are important because they represent significant components of the long-term plan to realize $35 million of annual synergies at the end of the third year after the acquisition of KA Steel. Based on our first quarter performance, we now believe in excess of $10 million of synergies can be realized in 2013. First quarter 2013 Chemical Distribution sales were $110.4 million which consisted primarily of caustic soda sales, bleach sales similar to what is experienced in Chlor Alkali business exhibit a seasonal pattern and are concentrated in the months of May through August. Second and third quarter bleach sales should be more than double the first quarter levels. First quarter Chemical Distribution segment earnings were $4.1 million and first quarter Chemical Distribution EBITDA was $7.9 million. Second quarter 2013 Chemical Distribution earnings are expected to improve compared to the first quarter primarily due to seasonally stronger caustic soda and bleach sales and continued synergy realization. Now Winchester. The elevated level of commercial demand at the Winchester business began to experience in early November continued to the first quarter of 2013. As a result of the high-level of demand, first quarter 2013 commercial sales increased approximately 40% compared to the first quarter of 2012. Sales volumes were strong across; all product categories. The high-level of first quarter 2013 commercial demand resulted in record quarterly sales of $188 million for the business. During the first quarter of 2013, military and law enforcement sales declined approximately 4%. During the first quarter of 2013, the business continued to experience significant growth in its commercial backlog. The March 31, 2013 commercial backlog was approximately $495 million which compares to about $138 million at December 31, 2012 and approximately $137 million at the end of March 31, 2012. The total Winchester backlog at March 31, 2013, including military and law enforcement was approximately $640 million. Winchester's law enforcement backlog has also grown and at March 31, 2013, it was approximately 175% higher than it was at the end of the first quarter of 2012. We believe that at least some of the increase in law enforcement backlog is a result of the level of commercial demand and concern over product availability. Combined effect of a record quarterly sales level, lower commodity metal costs and the benefits associated with the Oxford, Mississippi centerfire ammunition relocation costs resulted in Winchester business generating a record level of quarterly segment income. First quarter 2013 Winchester segment income was $31.3 million in the first quarter of 2013 segment EBITDA was $35 million. In the first quarter of 2013, the per pound purchase cost of copper, lead, and zinc all declined compared to the first quarter of 2012. The per pound purchase cost of copper declined approximately 8%, lead 1%, zinc 10%. Declines had a favorable impact of approximately $1.9 million during the quarter. The cost savings realized for the centerfire ammunition relocation were approximately $3.1 million during the first quarter of 2013 compared to a cost increase during the first quarter of 2012 of approximately $5 million. In the first quarter of 2013, approximately 82% of all pistol ammunition was produced in the new facility. During 2013, the balance of our pistol manufacturing operations will be relocated to a new facility. Based on the level of first quarter savings, we now believe that we'll realize during the full year 2013 cost savings of at least $15 million associated with the relocation project. This forecast does not reflect the positive impact of the higher level of commercial demand. We continue to forecast that at least $30 million of annual savings will be realized once the relocation is complete. Based on the elevated level of first quarter commercial demand, which has continued through April, the level of commercial backlog and the absence of any significant inventory throughout the supply chain, we expect that the Winchester sales to continue at current levels and into, at least, the fourth quarter of this year. Currently, Winchester sales are limited only by our ability to produce the product. As a result, we expect second quarter 2013 Winchester segment income to be similar to first quarter 2013 levels. In spite of the inconsistent level of demand we experienced in our Chlor Alkali business, I continue to be encouraged by the overall performance, direction and opportunities in our company. Chlor Alkali has continued to expand its sales of bleach with a HyPure capacity that has been added over the past year and additional outlets provided by the KA Steel business, and growth should continue. I am encouraged of the synergy opportunities identified as a part of KA Steel acquisition can be realized. And I continue to be encouraged by the performance of the Winchester business and the benefits being realized from the centerfire ammunition relocation. Their performance confirms our belief that the Winchester business can generate recurring levels of annual EBITDA in $85 million to $100 million range. This said earlier, we have the opportunity in 2013 to generate EBITDA in the $415 million to $445 million range. This forecast does not include full year benefits from the third HyPure Bleach plant or the new HCL burner nor does include KA Steel-related synergies beyond the 2013 forecast of $10 million. And these are drivers for continued EBITDA growth beyond 2013. I'd like to turn the call over to John Fischer, our CFO, who will review several financial matters with you. John?

Thanks, Joe. First I'd like to discuss a few items on the income statement. Selling and administrative expenses increased $5.4 million or 12% in the first quarter of 2013 compared to the first quarter of 2012. This increase was due to the additional administration expenses of acquired KA Steel business of $2.5 million, higher stock-based compensation costs primarily related to mark-to-market adjustments, and higher benefit costs. As a point of reference, every $1 change in the Olin stock price has an approximately $800,000 impact on stock-based compensation expense. Selling and administration expenses as a percentage of sales were 8% in the first quarter of 2013 compared to 9% in the first quarter of 2012. First quarter 2013 charges to income for environmental, investigatory and remedial activities were $1.8 million. First quarter 2012 charges to income for environmental, investigatory and remedial expenses were $2.8 million. These charges related primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites. Second quarter 2013 expenses for environmental, investigatory and remedial activities are expected to increase in the $2 million to $4 million range compared to the second quarter of 2012. We now project that full year 2013 expenses for environmental, investigatory and remedial activities to be in the $15 million to $20 million range. Full year expenses for environmental, investigatory and remedial activities 2012 were $8.3 million. As a reminder, the 2012 level of environmental, investigatory and remedial expense was significantly below the historic level of $20 million to $25 million. On a total company basis, defined benefit pension plan income was $5 million in the first quarter of 2013 compared to $4.9 million in the first quarter of 2012. We are not required to make any cash contributions to domestic defined benefit pension plan in 2013. In addition, under the pension funding relief 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. We do expect to make cash contributions to our Canadian defined benefit plan of approximately $1 million in 2013. And as a reminder, under Canadian pension rules, service costs are required to be funded annually. During the first quarter of 2013, Olin recorded a $2.3 million pretax restructuring charge. This charge was primarily associated with the Chlor Alkali mercury cell conversion and reconfiguration project and the ongoing relocation of the Winchester centerfire ammunition manufacturing operations. First quarter 2012 pretax restructuring charges were $1.9 million. For the full year 2013, we expect to incur approximately $10 million of restructuring charges associated with the Winchester relocation and the Chlor Alkali mercury cell conversion and reconfiguration project. The effective tax rate in the first quarter of 2013 was 36.5%. And we continue to believe the full year 2013 effective tax rate will be in the 35% to 37% range. Primarily as a result of the accelerated depreciation provisions of the 2010 Jobs Creation Act that were extended in the Taxpayer Relief Act of 2012, we currently believe our 2013 cash tax rate will be in the 15% to 20% range. Now, turning to the balance sheet. Cash and cash equivalents at March 31, 2013, including the restricted cash associated with the Go Zone financings that are classified as long-term assets on the balance sheet, totaled $103.7 million. As of March 31, 2013, the restricted cash balance was $10.7 million. During the first quarter of 2013, working capital employed increased by $83.4 million. Our first quarter increase in working capital employed is consistent with Olin's normal seasonal pattern, but this year was higher than prior years due to the high level of Winchester sales. Winchester related receivables increased approximately $50 million from the end of the fourth quarter of 2012 to the end of the first quarter of 2013. The March 31, 2013 working capital balance includes approximately $47 million associated with the Chemical Distribution business. Capital spending in the first quarter of 2013 was $30.2 million compared to $75.9 million in the first quarter of 2012. First quarter 2013 capital spending, included spending for the third HyPure Bleach facility and a hydrochloric acid expansion at the Henderson, Nevada facility. Depreciation and amortization expense during the first quarter of 2013 was $32.9 million compared to $25.5 million in the first quarter of 2012. We continue to forecast full year 2013 capital spending to be in the $100 million to $130 million range. Full year 2013 depreciation and amortization expense is forecast to be in the $135 million to $140 million range. During the first quarter of 2013, $11.4 million of debt that became due was repaid. After this debt repayment, between now and the December of 2016, Olin faces less than $40 million of required debt repayments. And the average-weighted duration of all the Olin debt outstanding is currently in excess of 9 years. We continue to feel comfortable about our financial condition and believe we're entering a period of increased financial flexibility. This reflects the combination of the reduced levels of capital spending expected in 2013 compared to the 2012 and 2011 levels. The absence of any significant debt maturities and the absence of 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 10, 2013. This is the 346th 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 factor section of our most recent Form 10-K and our first quarter earnings release. A 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 also available under Press Releases. Operator, we are now ready to take questions.

[Operator Instructions] And our first question will come from Frank Mitsch of Wells Fargo Securities.

I remember the days when we only had to worry about Winchester in the third quarter but had very impressive results here. I apologize, Joe, did you say that you expected Winchester for the year at $85 million to $100 million? I wasn't sure I got that right.

We said that ongoing that we actually have a business that we believe ongoing was $85 million to $100 million business.

Ongoing. I mean, because what you did $31 million this quarter, you're looking at another $31 million in the second quarter, and then obviously we get into the seasonally strong third quarter but then again you're running flat out right now. I mean, so you had $90 million plus just in the first 3 quarters, it looks like. So that $85 million to $100 million, that's not referring to 2013, correct? That's referring to...

That is correct, Frank. That's correct.

Yes, we said, Frank, after the completion of the relocation project we expect to be able to generate that on a recurring basis in normal demand.

Okay, all right. And at this point you're sold out for the balance of the year. So normal will not be a 2013 event then? All right. Now, can you explain a little bit on the hydrochloric acid. I know frac-ing is a big use of that, what has happened to that market to show the material drop-off?

Frank, this is John. A couple of things I would say. The HCL market is really impacted by demand and you mentioned oil and gas demand, and the oil patch is down. We've also seen a decrease in mining, which is another area where HCL is used pretty significantly. The other thing that really impacts HCL pricing is by-product production. A lot of other chemical operations such as MDI, TDI, fluorocarbons and others generate a significant amount of by-product acid. And by-product acid rates are up significantly over the last several months. And that's really impacted the supply side. So, HCL was really hit with kind of the worst of all situations, reduced demand from some of the key markets that it serves and increased supply because of by-product acid levels.

All right, that's very helpful. And John if I could stay with you, just the last thing on the turnaround impact. It looks like that's $0.08 a share negative for Q2. How would you describe your turnaround schedule for the balance of the year? 3 facilities in 1 quarter seems rather high, was there a thought to maybe spacing it out a little bit more or basically they had come to kind of their end of service that you needed to get it done sooner rather than later?

Let me talk about the 3 in one quarter first. That's atypical for us. One of the 3 was delayed from the fall of last year, the Niagara outage. And we really delayed that because we were not in the position to take that out, it's with all of the capacity related projects we were working on, shutting down capacity at Augusta, converting the capacity and reducing it at Charleston. So we really just had to postpone that outage from the fall of last year into this year. Normally, we would balance our outages out a little better but our northern plants really have a pretty limited window for outages. They can't do them in the first quarter or the fourth quarter because of weather. And we try not to schedule major planned outages in the peak season, obviously, because of seasonal demand requirements that we have. So this was an atypical quarter for us both in terms of the cost impact of $10 million and the ECU equivalents lost because of the outage, which was about 3% to 4% of operating capacity. When we look at the year going forward, we really have no more outages as significant as the ones in the second quarter. We have a couple of small outages late in the third quarter in preparation for the end of the seasonal demand period and some other work that's going on. But this is by far, the most significant outage impact we'll see during the course of the year.

Our next question is from Christopher Butler of Sidoti & Company. Christopher W. Butler - Sidoti & Company, LLC: Joe, if I missed it, as far as the timing and progress of the HCL and the bleach facility, as far as this year goes, could you give me an update there?

We started up our third HyPure Bleach plant which is at Henderson, Nevada late in the second -- late in the first quarter with optimization continuing as we approach the seasonal peak period. So that plant is up and we have all 3 of our HyPure plant bleach is now operational across our system. We are actually -- as we speak, this week, in the start-up phases of the HCL plant, which is also being brought online at Henderson, Nevada, we expect that plant to be up and operational very soon, and then we will optimize the operation of that facility as we move through the second quarter. Christopher W. Butler - Sidoti & Company, LLC: And did I hear right that those are not being included in the EBITDA guidance for the full year?

No. We just pointed out that they will not contribute a full year's worth of EBITDA so that there will be incrementally more EBITDA from those next year as we move forward. Christopher W. Butler - Sidoti & Company, LLC: I see, I see. And looking at Winchester being strong, and if I'm not mistaken, you've kind of updated your outlook on Winchester to now include the fourth quarter, which you didn't in previous conference calls, if I remember correctly, and you also raised the expectations on synergies from KA Steel? Could you talk about those in terms of lifting the EBITDA guidance by $5 million? It sounds like you might have been able to lift it by more?

Yes. It's hard to forecast a surge from the Winchester business. We were asked in the last call what we thought. In that call, we said, we thought it would go through the third quarter. This now call -- we've announced it's going to the fourth quarter. I think that what we've laid out is our view of a full year as best we can at this point in time, Chris. And the two big issues for us going forward in Chlor Alkali is we've got pricing announced on both sides, both in chlorine and caustic, and ultimately, one or both of those are going to have to take traction going forward. Christopher W. Butler - Sidoti & Company, LLC: And just finally on the cash side of the equation, you pointed out a compelling case for good cash flow, could you talk about what you intend to do with that to generate your holder value?

We continue -- we're still interested in bolt-on acquisitions or investments that work near within our core businesses. It would help us to continue to enhance shareholder value. In this first quarter, we had to use some cash to support the high-level working capital from Winchester, which is a good thing. And if we can't find bolt-on acquisitions that makes sense, we will continue to have to evaluate share repurchase or dividend ways of providing capital reward back to our shareholders. Christopher W. Butler - Sidoti & Company, LLC: And from a valuation and strategic combination point of view, would downstream acquisitions make more sense or less sense than Chlor Alkali acquisitions?

We've always felt naturally if there was any more consolidation of Chlor Alkali that would be something that we're clearly interested in downstream for us more hydrochloric acid, more bleach -- totally interested in.

That is question is from Herb Hardt of Monness. Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division: Can you tell me, is there a sense of double ordering on Winchester, and if so, do you have any idea how much?

Yes, we have experienced in past surges incidents of double ordering, and we don't really have a good handle on how much that is. I would say to you, that the $495 million backlog probably had some softness in it. But based on where we are today, we won't experience any ramifications from that until the surge ends which as Joe just said, will not occur until 2014.

Our next question is from Don Carson of Susquehanna Financial.

Joe, I haven't seen any 9 millimeter at my local sporting goods emporium for 3 months. So the search does seem to be going on. Is it law enforcement that's exacerbating things here as they sort of used to buy in a just-in-time basis or finding out just in time as 2 to 3 months?

Well, I think law enforcement has joined the party, so to speak. That's not the right way of saying it. But everybody has a concern of not being able to get ammunition and so they've upped their requirements and their demands.

And again, would you think, you mentioned a $30 million Oxford relocation, I mean that was the number you put out, I guess 1.5 years ago, at much lower volumes. I mean, what you think at current surge time volumes, what could that relocation be worth to you in terms of cost benefits?

We haven't quantified that. But I think your observation, Don, is naturally correct if we were to stay at these higher levels, there will be more benefit because just strictly the ability to able to operate at a high-level at a significantly lower cost.

And then the final question, Winchester, post-surge you say you got a business with $85 million to $100 million of annual EBITDA potential, is that something large enough? You think you could spin off to shareholders or somehow do something with?

Well, Don, we certainly will have a business that's worth a lot more than what it was several years ago and provides us a multiple of options, I think, in the future.

Okay. And just a question on Chlor Alkali. John, we've got a lot of plant capacity for the second half of the year. Some of the existing producers are talking about maybe making some offsetting closures when the new capacity comes up. But how do you see pricing unfolding in the second half of the year? And what volume impact does the Oxy [ph] start-up in a new Johnsonville have and the new Westlake capacity, what volume impact will that have on your business?

I guess -- I would say that I don't have the same negative outlook on this capacity as a lot of people do. And that's really driven by the fact that unless we have -- as long as we have operating rates across the industry that are reflected in the mid-80s to the 90, this additional capacity coming online isn't going to create costing that is surplus because there isn't chlorine demand associated with caustic produced that doesn't have a home. We do expect and we believe the market in terms of projections, has forecasted in that there is some capacity coming online. But when you look at the North American chlor-alkali industry, they're in a unique position in their ability to export chlorine derivatives, offshore, because of competitive energy, pricing in the Gulf Coast. And so, I think that, to some respect, mitigates additional capacity coming online. And when you look at caustic import/export balances, for the last 5 years, the North America has been a net exporter of caustic. Most of it to South America to the tune of 1.5 million tons a year net export. So, and we will retain that market as a place to put caustic because on a cost basis, we're the most cost-effective producer to service that requirement. So we do expect, especially when we come out of seasonal demand periods and new capacity comes online, we do expect to see some dampening maybe in prices but we don't expect to see something significant that will have an impact much into 2014.

And what about your volumes with -- 2 of these new start-ups taking business away from you?

Well, we will lose business associated with some of the start-up activity that's going on. But we just didn't learn this yesterday and part of our focus on increasing the amount of chlorine and -- that we move into either bleach and/or HCL, which now represents 30% of our total capacity, is an outgrowth of the fact that we recognize that we really need to be moving our products, our base Chlor Alkali ECUs, into value-added products downstream.

Our next question is from Gregg Goodnight of UBS.

My first question was, in terms of this surge, you've said that the surge will go through the end of this year as a minimum. Looking back historically, over the last month we had '08, '09, the surge seemed to last a couple of years. Is there any reason to believe that the demand period wouldn't be extended at least equivalent to what it had been in the past?

I think the safest thing for us to say, Gregg, would be what you're observation was, we feel that the surge last time lasted 6 quarters and then started to come down. And it's difficult to forecast these things because they move to different issues that drive it. So we feel comfortable saying what we said in our comments right now. And I think historically, as a reference point to last one, lasted 6 quarters.

Second question, as you continue through this centerfire relocation, have you been able to increase the instantaneous rates which you're able to produce ammo, or has it been fairly constant or have actually have a little bump your ability to produce product?

We have had improvement in our productivity at our new facility.

Can you quantify that for us?

We wouldn't quantify -- we just said that we're very pleased with it.

Okay. Last question, for John, you gave a little bit of detail in terms of your electrical cost improvement, could you remind me what you said in terms of year-over-year where you're looking at electrical cost?

We just said that the first quarter 2013 cost were equal to 2012 levels.

Okay. But on intensity basis, you're reducing the electrical intensity per ECU ton, am I correct there?

That's correct, Gregg.

And can you quantify that at all? Or...

We typically do not quantify those.

Our next question is from Andy Cash of SunTrust Robinson Humphrey.

Just a question back on Winchester. There was an article a few weeks back in the New York Times talking about how most of the increase in firearms is with existing gun owners, so unless their usage of ammo increases dramatically, I'm just kind of curious, where's all this ammo going? I mean, is there a point where the inventories just -- and the clients are overflowing and the gun racks are overflowing? So do you know where the stuff is going? Are they shooting the bullets?

We think a lot of it is continuing to be shot. There is some, that historically, does get -- people buy it and store it and have it. And as -- what we forecasted last time was that when the peak ended, that there would be a downturn. Last time we forecast about 20% downturn over 2-year period. It's what we thought would happen. But the reality of it, Andy, there is a lot of ammunition being shot as we speak at this point in time.

Do you have any idea what that number is? I mean, has it gone up by 10%, 20%?

We don't have -- all we can -- ours is a qualitative from just inputs that we get from those that are shooting around the country.

Our next question is from Edward Yang of Oppenheimer. Edward H. Yang - Oppenheimer & Co. Inc., Research Division: Just -- I know you provided a lot of guidance on Winchester but just looking at the operating margin which move to like 16.6% versus 8.5% in 2012, it seems that there is probably like 200 basis points, which is from the relocation. So, I mean, of the rest, how much of that is kind of sustainable or is it just volume related?

The amount that comes from the cost savings is sustainable and that will grow. That is the point we're trying to make. We said that this year, we think we'll realize about $15 million of benefit from that and that that will be at least $30 million when the project is complete. And if you use a normal level of sales number, you're going to get about 500 basis points long-term of margin improvement from the relocation.

Our next question is from Dmitry Silversteyn of Longbow Research.

Question on the chlorine comment you made going into the TiO2 market. I think you said it was down by about 24% year-over-year, is that correct?

That is correct.

Was that sort of reflective of the industry demand being down or was that some share loss? Are you deemphasizing that market in any way, as you're moving to bleach...

Industry demand down.

Okay. So that is reflective of what the production levels are for the TiO2 producers.

That's correct.

That's correct.

You mentioned that on your caustic being exported and being -- the industry being that exporter, are you a player in that export market and is that a meaningful outlet for your caustic demand? And the reason I'm asking this, when you talked about people's ability to export chlorine derivatives and therefore not being that impacted by a new capacity coming online, unfortunately, there's also caustic component to chlorine production. So I'm just wondering if the caustic export demand is equally strong and are you a participant in that market?

We have participated on a limited basis, historically. Part of that was because, we're contracted -- very high percentage of our business is contracted. And we don't do much spot business or have much volume to put on the export market, typically. But we have done some, historically. My point is that, the industry in total, the North American industry in total, has a very significantly growing caustic demand area in South America driven by pulp-and-paper growth and caustic demand in that segment, that we are logically suited to fill that market, to meet that demand and the North American industry will continue to have that opportunity.

So as you look at this new capacity coming on stream and increased co-production of caustic, are you sort of proactively looking at -- maybe not contracts but maybe at least establishing relationships so you can push this product into the export market when the need arrives?

That is an opportunity for us and the other opportunity that we have quite frankly is our KA Steel acquisition affords us a chance to sell caustic into the distribution market, which is another channel that we, historically, Olin historically, hasn't have that same kind of access to. So I think those are 2 areas where we have the opportunity to help ourselves.

Got it. Got it. Switching gears really quickly to Winchester. Demand, obviously, is very strong. It's going to stay strong through the year. As a mentioned, you're selling everything you can produce, so I'm assuming your inventories are pretty depleted. Has there been any thought given to running the [indiscernible] plant that -- a little bit past the original closure time to at least until the search lasts or does that not enter into your considerations at all?

There's a limited amount that we can do on that. Because most of that equipment is all being sent to Oxford.

Okay. So you're not duplicating [indiscernible] all the time you're actually...

Unfortunately we don't have 2 fully integrated plants.

Got you. Got you. And just a follow up on the comment you made on the lack of successful of the chlorine price increases. Sort of, outside of a seasonal pick-up and demand, which I am assuming you're seeing, what else needs to change for that, for at least portions of the $16 a ton to go into the market, and has there been -- you talk about it's not being supported, has there been sort of a 1 or 2 biggest fund supporters?

Well, let me just talk about the dynamics that we think are likely to change that will support and improve chlorine pricing. In an earlier question about the TiO2 segment and the fall-off in demand for that segment in the quarter, we don't believe that that is a recurring demand level for TiO2 and if you look at what the TiO2 producers are saying, they are predicting that, that's going to get better. We believe that vinyls demand is going to improve driven by housing starts and other consumption, other markets where vinyl is consumed. Then if you look at the forecast for North American vinyls operating rates, their forecast to be up and over 90% in the next 2 quarters. So we believe that is consistent with dynamics which might support chlorine pricing improvement. And then we have what we believe will be a record bleach season in front of us and HCL demand and capacity available to us with our investments in new projects that will help us well on the chlorine side. So we believe those things are very possible as the market moves into the end of the peak season and those things would all support chlorine pricing increase.

Got it. So would you need another price increase announcement or you just continue to work the $16 that you already have in the market.

First, we would work what we've got in the market.

Our next question is from Alex Yefremov of Bank of America Merrill Lynch.

I just wanted to ask on the Winchester, if there's any opportunity for inter-year price increases. I know usually it's annual process but given the strength and demand, could you...

We introduced 2% price increase effective June 1.

So that's on top of your annual -- and how large was the increase that you implemented at the end of 2012?

We implemented January 1, 3% to 5%, we've increased -- we've added an additional 2% in June.

Great. And you mentioned in the prepared remarks, that you expect ECU pricing to increase about $10 to $30 per ton in the third quarter, if I got that correctly. Is that a factor of the current caustic soda price increases that are on the table or basically to what extent this is a done deal versus expectation?

It's reflective of our expectation that the market will recognize some part of the caustic price increases that were announced and we forecast between $10 and $30.

I just wanted to ask you about regional trends in the U.S. caustic soda market. Have you benefited from relatively tighter East Coast caustic soda supply demand and does it offset somewhat weaker pricing on the West Coast for you?

We have benefited from a lot of events in the Eastern U.S. that have impacted demand-and-supply disruptions, that have occurred in the first half of the year. We don't sell near as much caustic on the West Coast. And in all honesty, the West Coast caustic market is really served by product that's coming from China. So the benefit we've had, and we have had some meaningful results because of it being in the Eastern U.S.

Our next question is from John Roberts of UBS.

Joe, you used the term erratic demand when you were discussing Chlor Alkali. Was that specifically referring to say the TiO2 segment or was it broad-based and is it the timing of the way orders are coming in or is it across customer markets? Would you just give some granularity what you meant by an erratic...

John, I'll give you some granularity but it's pretty broad.

This is John McIntosh. It's really broad, it's more than just one market segment and it's month-by-month. I mean, the erratic pattern that we've seen creates a situation where we really have trouble optimizing where we produce the product based on where we're going to move it for ultimate sales. So that erratic demand creates a cost tail to be in our system, and just creates forecasting problems for us and inconsistent demand across the regions in the country.

You think it's reflecting the supply chain or customers anticipating the price changes or...

I think it's more reflective of supply disruptions and supply-chain-related issues and downstream uncertainty in the markets that our customers are serving than anything else.

Our next question is from Richard O'Reilly of Revere Associates.

Several quick questions. The first is a math one. If you look on at your ECUs year-over-year, if you could add back the freight cost, what would your gross ECU have looked like?

That's not a number we typically disclose.

Okay. Okay. Second quick question is, yesterday we saw an article in the Journal about GE credit withdrawing its support of gun shops. If you were to see that extend to other financial suppliers, will you be in a position to have to support your customers to a great extent than normal?

The largest part of our commercial ammunition sales do not go to gun shops and distributors but go to retailers and large sporting-goods stores.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Rupp for any closing remarks.

We'd like to thank you for joining us today and we look forward to reporting our results at the end of the second quarter in July. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.