Olin Corporation (OLN) Q1 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Olin First Quarter 2015 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 and CEO. Please go ahead, sir.

Good morning and thanks for joining us today. With me this morning are John Fischer, our President and Chief Operating Officer; John McIntosh, Senior Vice President of Chemicals; Todd Slater, Vice President and Chief Financial Officer; and Larry Kromidas, our Assistant Treasurer and Director of Investor Relations. Last night, we announced that net income of the first quarter of 2015 was $13.1 million or $0.17 per diluted share, which compares to $29.5 million, or $0.37 per diluted share, in the first quarter of 2014. Sales in the fourth quarter of 2015 were $518 million, compared to $577 million in the first quarter of 2014. First quarter 2015 results included acquisition related cost of $10.4 million mark-to-market adjustments on the stock-based compensation expenses of $6.9 million and pretax restructuring charges of $1.2 million. The first quarter of 2015 was a significant one for Olin. We announced a transformational transaction to acquire a significant portion Dow Chemicals chlor alkali and downstream derivative businesses. In addition there were positive developments in each of our three businesses. The chlor alkali business overcame a series of first quarter customer and company planned and unplanned outages which included a 23 day force majeure on chlorine. We began the second quarter with operating rates near 90%. During the first quarter chlorine prices increased for the first time in four years and the first quarter 2015 ECU netbacks improved from the fourth quarter 2014 levels. The chemical distribution business experienced a turnaround in the first quarter of 2015 when compared to the first quarter of 2014 and it was driven by the increased sale of Olin produced bleach, hydrochloric acid and potassium hydroxide. Winchester had a strong first quarter supported by the growing level of cost savings generated by our ongoing Centerfire Ammunition relocation project. We now expect to realize approximately $35 million of savings from this relocation project during 2015. First-quarter 2015 adjusted EBITDA was $71.2 million and we continue to forecast the full-year adjusted EBITDA in the $340 million to $380 million range. Second quarter 2015 net income is forecasted to be in the $0.10 to $0.15 per diluted share range which includes pretax acquisition related cost of approximately $8 million and acquisition financing expenses of approximately $10 million. Chlor alkali second-quarter earnings is expected to be similar to the first quarter 2015 segment earnings as higher ECU net backs and seasonal improvements in bleach volumes are anticipated to be offset by approximately $5 million decline in the earnings contribution from hydrochloric acid sales. Cost associated with planned and unplanned maintenance outages were also increased Second quarter 2015 chemical distributional earnings were expected to be higher than the first quarter 2015 primarily due to seasonal increase in bleach volumes. In the Winchester business, second quarter 2015 earnings are expected to be comparable with the second quarter 2014 levels. Second quarter 2015 corporate and other expenses of forecasted to be similar to the first quarter of 2015. The second quarter 2015 earnings is expected to include restructuring charges of approximately $1 million. We believe the chlor alkali business has reached the trough of the cycle and during the first quarter 2015, chlorine prices increased for the first time in four years, and we are experiencing higher operating rates at the same time. The business continues to be strengthened by increased production and sale of coproducts. In the chemical distribution business we are experiencing increased demand for, and shipments of Olin- produced bleach, hydrochloric acid and potassium hydroxide year-over-year. First-quarter chemical distribution shipments of hydrochloric acid, potassium hydroxide broke quarterly records. The outlook for the Winchester business in 2015 and beyond continues to be positive and we believe that commercial ammunition demand will remain about the levels experienced prior to the surge that began in late 2012. These prospects for Winchester being enhanced for the ongoing Centerfire Ammunition relocation project. We continue to expect segment earnings in all three businesses to improve in 2015 compared to 2014. I have never been more optimistic about the prospects for Olin. Our recently announced agreement to acquire a significant portion of Dow's chlor alkali and downstream derivative businesses will create a broader long-term business platform with significant synergy and growth opportunities. The Dow businesses are complementary to our existing assets and we create an industry-leading chlor alkali and chlorine derivatives company of significant scale. Olin will be less cyclical as we expand from three primary chlorine products that we have today to acquiring these businesses that will put Olin into 18 products. The opportunity for Olin to combine its chlor alkali operations with Dow's businesses allows us to take our business to the next level. These complementary assets will provide substantial opportunities to optimize and enhance the operating capabilities and financial returns on these assets which is expected to lead to significant incremental shareholder value. I would like to turn the call over to our President and Chief Operating Officer John Fischer who will discuss the businesses in more detail.

Thank you, Joe. Let me begin with Chlor Alkali. During the first quarter of 2015 the ECU net back was approximately $505 per ton compared to approximately $520 per ton in the first quarter of 2014, and the fourth quarter of 2014 level of approximately $490 per ton. Both chlorine and caustic soda prices improved sequentially from the fourth quarter. In the second quarter of 2015 we expect the ECU net backs to increase compared with the first quarter of 2015 and the second quarter of 2014 levels. The sequential improvement in ECU net backs reflects chlorine pricing. Chlorine price in indices increased $20 per ton in March 31, 2015 which is the first increase in the chlorine price index since second quarter of 2011. We expect additional increases in chlorine prices to occur as the industry answers the seasonally stronger second and third quarters. Chlorine demand in our system has been strengthening going into the traditionally stronger demand period. The combination of customer outages and Olin planned and unplanned outages, resulted in first quarter 2015 closing shipments declining 15% compared to the first quarter of 2014. Several of our larger chlorine customers had planned and unplanned maintenance outages, and during a scheduled maintenance outage at our Macintosh Alabama facility, we determined that additional maintenance work was required beyond what was anticipated. This additional work cost the outage to be extended by approximately 10 days. Primarily as a result of this extended outage our first quarter 2015 operating rate of 81% was lower than it was originally forecasted. The estimated in given the cost of the Macintosh outage in the quarter was $4 million to $5 million. As we said, chlorine demand in our system has been strengthening going into our traditionally stronger second and third quarters, which are driven by higher seasonal bleach demand. As a result we expect the chlor alkali operating rates to improve to the 85% to 90% range for the second quarter. The second quarter of 2015 operating rate forecast includes maintenance outages of the Henderson Nevada and Niagara Falls New York facilities. The estimated cost of these outages is in the $5 million to $7 million. As Joe mentioned earlier, we believe that the chlor alkali cycle has reached the trough level. Our typical chlor alkali cycle improvement is led by improved demand for chlorine which is reflected in improved operating rates and ultimately higher chlorine prices. We believe the industry is slowly moving in that direction. First-quarter 2015 shipments of hydrochloric acid decreased 3% compared to the first quarter 2014 and potassium hydroxide shipments decreased 12% from the record first quarter of 2014 level. First quarter 2015 shipments of bleach were similar to the first quarter 2014. First quarter 2015 hydrochloric acid prices increased compared to the first quarter 2014 levels which contributes to an approximately $5 million year-over-year improvement in segment earnings. Due to weaker demand which is also negatively impacting product pricing, we expect the second quarter 2015 product profit contribution from hydrochloric acid to decline approximately $5 million from first quarter levels. I would emphasize that we continue to be able to sell hydrochloric acid at a premium to the price of chlorine. A key objective in the chlor alkali business continues to be growing amount of our chlorine capacity, that salt is bleached in hydrochloric acid. Over the past five years our bleach volumes have grown at a compounding annual growth rate of 10%, and hydrochloric acid volumes have grown at a rate of 9%. First-quarter 2015 chlor alkali segment earnings of $23.1 million decreased compared to $34.3 million in the first quarter 2014 primarily due to lower chlorine and caustic soda volumes and more ECU net backs partially offset by higher hydrochloric acid prices and lower manufacturing and other costs. Chlor alkali segment EBITDA during the first quarter of 2015 was $48.3 million. Chlor alkali second-quarter earnings are expected to be similar to the first quarter of 2015 segment earnings as higher ECU net backs and seasonal improvement in bleach volumes are anticipated to be offset by an approximately $5 million decline in earnings contributed by hydrochloric acid sales and costs associated with planned maintenance outages. Now turning to chemical distribution. The financial performance for chemical distribution in the first quarter of 2015 was a significant turnaround compared to the first quarter of 2014 and was fueled by the growth in shipments of Olin produced bleach, hydrochloric acid, and potassium hydroxide. During the first quarter of 2015, the business achieved record levels of quarterly shipments of hydrochloric acid and potassium hydroxide. We are encouraged that we are gaining track selling these products through our distribution customer base. Increased sales of these coproducts will be a key component in the continued improvement of chemical distribution profitability as we move forward. In the first quarter of 2015 caustic soda shipments in the distribution business was similar to the first quarter 2014 levels. In the chemical distribution business sales of caustic soda and bleach are seasonally weaker in the first and fourth quarters. Chemical distribution first-quarter 2015 earnings were $1 million compared to a loss of $800,000 in the first quarter of 2014. The increase in earnings is a result of higher shipments of hydrochloric acid and potassium hydroxide. First-quarter 2015 chemical distribution segment EBITDA was $4.9 million. We expect the second quarter 2015 financial performance of the chemical distribution business to improve compared to the first quarter 2015 and the second quarter of 2014. We expect sales volumes in the second quarter to increase compared to the first quarter due to seasonal increase in bleach and we expect to see continued our earnings contributions from Olin produced hydrochloric acid and potassium hydroxide. As a result of the growth in bleach, hydrochloric acid and potassium hydroxide sales, and the continued focus on improving the returns and caustic soda, we continue to expect that the EBITDA generated by the chemical distribution business in 2016 will be double of 2014 levels. In addition to the growth in chemical distribution segment EBITDA, we expect the chlor alkali business to realize $10 million to $15 million of annual benefits beyond the chemical distribution EBITDA from producing coproducts as well as from logistics and infrastructure cost savings. Now turning to Winchester. Winchester had a strong first quarter. Segment earnings benefited from the continued growth and cost savings from our Centerfire Ammunition relocation project which partially offset the expected decline from surgery levels of commercial ammunition sales. During the first quarter of 2015, the cost savings realized exceeded $8 million. We now believe the full year 2015 cost savings will reach approximately $35 million. These savings in 2014 were $24 million. We also believe the annual cost savings realized from the project when completed will reach $40 million and that this level of annual savings will be realized beginning in 2017. Winchester experienced up 5% decline in ammunition shipments in the first quarter of 2015 compared to the first quarter of 2014 with the level of commercial ammunition demand experienced was significantly higher than the pre-surge demand. As a point of reference, the first quarter 2015 commercial volumes were 14% higher than the first quarter 2012 levels which was the last non-surge first quarter. The strength of the business is reflected by the commercial backlog which at the end of the quarter was in excess of $280 million, which was more than double the pre-surge March 31, 2012 commercial backlog of $137 million. As we discussed in the fourth quarter, consumer demand for pistol, shot shell and rifle ammunition well below surge levels, remained robust. Segment earnings for the first quarter 2015 were $29.8 million compared with 38.3 million in the first quarter of 2014 which was a record first quarter earnings. Winchester segment EBITDA during the first quarter of 2015 was $33.9 million. The first quarter 2015 year-over-year decline in segment earnings reflects a lower level of demand for pistol, shot shell and rifle ammunition, partially offset by lower commodity and other material cost and decreased operating cost. During the first quarter of 2015 the purchase cost of copper declined compared to the first quarter of 2014 while the purchase cost of lead and zinc increased compared to the first quarter of 2014. As a matter of fact it was a reduction in the year-over-year commodity cost. We currently expect the full-year 2015 purchase price for copper to be lower than the 2014 price and the full year 2015 purchase price for lead and zinc to be higher than the 2014 price. We are still confident that commercial ammunition demand will remain higher than the levels experienced prior to the surge that began in 2012. We expect that our ammunition volumes in the second half of 2015 to experience a year-over-year improvement compared to 2014 and that combined with the relocation cost reductions will result in improved Winchester's segment earnings in 2015 compared to 2014. Now I would like to turn the call over to our chief financial officer Todd Slater, who will review several financial matters with you.

Thanks, John. First, I’d like to discuss the balance sheet and the 2014 cash flow. Cash and cash equivalents at March 31, 2015 totaled $196.8 million compared to $242.9 million at March 31, 2014. During the first quarter of 2015 working capital employed increased by approximately $53 million. This is consistent with our normal pattern. Olin typically experiences seasonal working capital growth during the first two quarters of the year, of between $50 million and $100 million, followed by decreases in the second half of the year. The first quarter 2014 working capital increased, was approximately 68 million. Capital spending in the first quarter of 2015 was $23.3 million. Depreciation and amortization expense in the first quarter of 2015 was $34.4 million. 2015, continued to forecast that capital spending will be in the $120 million to $130 million range and that depreciation and amortization expense will be in the $140 million to $145 million range. During the first quarter, Olin repaid $1 million of term loan debt that matured under the amortization schedule. During 2015, there will be $16.4 million of payments on maturing debt. Now turning to the income statement. In the first quarter of 2015, included acquisition cost of 10.4 million associated with advisory, illegal, accounting and other professional fees. Interest expense included $400,000 for financing fees. In the second quarter of 2015 we expect acquisition related cost approximately $8 million, and acquisition financing expenses of approximately $10 million to being prudent in interest expense. Selling and administration expense increased by 3.5 million in the first quarter of 2015 compared to the first quarter of 2014. This year-over-year increase was primarily due to higher stock-based compensation expense of $7.6 million which includes Mark-to-market adjustments partially offset by a lower legal and legal related settlement cost of $1.4 million, and decreased consulting fees of $1 million. The Mark-to-market adjustments associated with stock-based compensation reflects approximately $9 per share increase in the overall stock price experienced in the first quarter of 2015. Each dollar change in the stock price, increases or decreases selling and acquisition expenses by approximately $750,000. In the first quarter of 2014 the stock price decrease approximately $1.50 per share. Selling and administration expenses as a percentage of sales were 9% in the first quarter of 2015 compared to 8% in the first quarter of 2014. First-quarter 2015 charges to income for environmental investigatory and remedial activities were $700,000 compared to $3.5 million in the first quarter of 2014. These charges related primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites. Second quarter 2015 expenses for environmental investigatory and remedial activities were expected to be only $2 million to $4 million range. This forecast does not include any recovery of environmental, investigatory and remedial cost incurred expenses in prior periods. On a total company basis, defined benefit pension plan income was $5.8 million in the first quarter of 2015, compared to $6.4 million in the first quarter of 2014. The decrease in pension income was primarily due to the newly mandated mortality tables issued in the fourth quarter of 2014 by The Society of Actuary. As a result of these new mortality tables we now expect 2015 defined benefit pension plan income will be approximately $2 million lower than 2014. We are not required to make any cash contributions to our domestic defined benefit pension plan in 2015. However during 2015 we do expect to contribute approximately $1 million to our Canadian defined benefit pension plan. During the first quarter of 2015, Olin recorded of pretax restructuring charge of $1.2 million associated with permanently closing a portion of the Becancour, Canada chlor alkali facility and the ongoing relocation of the Winchester Centerfire Ammunition manufacturing operations from East Alton, Illinois to Oxford, Mississippi. We anticipate second quarter 2015 restructuring charges to be approximately $1 million. The effective tax rate in the first quarter of 2015 was 33.2%. We continue to believe that the full-year 2015 effective tax rate will be in the 34% to 37% range. On April 23, 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, 2015 to shareholders of record at the close of business on May 11, 2015. This is the 354th consecutive quarterly dividend to be paid by the company. Before we conclude that we remind you that throughout this presentation we have made statements regarding estimates of future performance. Clearly these statements are forward-looking and results could differ materially from those projected, some factors that could cause actual results to differ from our described without limitations and the risk factor section, in most recent form 10-K in our first quarter earnings release. A copy of today's transcript will be available on our website in the investor section, under Calendar of Events. The earnings press release and other financial data and information are available under press releases. Operator, we're now ready to take questions.

[Operator Instructions] The first question comes from Frank Mitsch of Wells Fargo, please go ahead.

Hey, Joe, I know it's only been a month, but I have to ask, what your latest and greatest thoughts are on the RMT with Dow? Where do you think the approval processes stand? When do you think that you may be able to finish it up, and has there been anything positive or negative that has surfaced over the past month, as you've gone through this process?

I would say only positive, as we continue to look at the future for the combined entity, Frank. From a transaction perspectives we talked about, it will close in the later third quarter or early sometimes in the fourth quarter. And you have the three things, the regulatory approvals, the tax approval, Olin shareholder vote and then the financing, all the stuff that has to happen before it close. But we are fully confident, it's going to close this fall. So I'm looking forward to that moment.

All right. Terrific. Thank you. And I just -- I had a clarification on the guidance for Q2, with respect to chlor alkali, because you're guiding it to be flat. And I believe when John went through it, he was talking about the planned incremental maintenance being $5 million to $7 million. I believe the incremental maintenance in addition to what you thought at -- you'd spent in McIntosh was $4 million to $5 million. So just a few million dollar difference there, and then, of course, you did mention the HCL negative impact of $5 million. So call it $7 million or $8 million, from those sort of items. But you're talking about better operating rates. You're talking about better ECU pricing which is always nice too -- which is always nice to hear. Where might the delta be, in terms of why you're thinking it would only be kind of flat with the Q1 level?

Frank, if you look at the pattern that we have in terms of our electricity costs, they typically are quite a bit higher in the second and third quarter. So Q1 to Q2 there is a big change negatively in the electricity.

All right. That's the delta there then.

Our next question comes from Christopher Butler of Sidoti & Company, please go ahead.

I was hoping that you might be able to walk us through the chlor alkali pricing environment. You talked about the chlorine price increase. There's caustic soda talk going on as well. Could -- give us your outlook here, as this second quarter progresses?

This is John, Chris. Let's talk about caustic first. We don't see, even though we have announced, the industry has announced price increases every quarter [indiscernible] as far back short-term memory exists, we'll get to see any of those price increases being accepted into the market place and as we look at caustic prices going forward, there are set of price increases that have been announced, that are out there now as there appears to be. There is no acceptance of caustic in our system. It's balanced to slightly long, and that's with some of the outages that we had in the first quarter. And when you look at the rest of the industry there were a lot of scheduled producer outages also in the first quarter. So even with all of that we are seeing caustic tight enough to help drive any price increases. Chlorine is different. We finally have seen strength in chlorine. And that has translated into the first time in four years, where we have actually seen chlorine price increases stick in the marketplace. So we are predicting, we are forecasting an improvement that helping drive our ECU pricing improvement between first quarter and second quarter. We're predicting that that will continue and we will see some additional chlorine pricing improvement in the second half of the year.

And as far as the chlor alkali business, could you talk about the impact of falling oil prices here over the last six months? Anything with the hydrochloric maintenance going on here, that's tied in with the lower oil or reduced demand?

That's the place we've probably seen the most impact to our businesses in the oil fields. Rig counts are as low in the oil fields now as they have been since 2010. And exact number is different depending upon which source you look at, but just a set of macrolevel the rig count is low. There a lot of rigs -- there a lot of wells that are down. The wells that are operating are much more efficient and they are much better able to control, how often you they need to fract those wells to keep them operating. And so that's just led to -- that's been the net effect in the oil field since the change in oil prices and be of seen it in our HCL business. And although in the first quarter we did hold on to volumes pretty well. And we did see weakness in price and we will see that really manifests itself in second quarter pricing in the oil field and as we mentioned in our remarks that impacted alone is about a $5 million, here to our second quarter forecast.

Would there be a corresponding hit to the distribution business from that outage as well?

Our distribution business is not typically focused on selling into the oil pads as we are [indiscernible] they have a much broader spectrum of small volume users that they are servicing. So we don't expect to see the same price or volume impact in the distribution side.

Our next question comes from Jason Freuchtel of SunTrust, please go ahead.

Does your guidance for 2Q 2015 corporate and other expenses assume the stock-based compensation expense will be similar to the experience in 1Q?

This is Todd, no, that's not what we are guiding. But we are saying the overall cost will be comparable and we are saying that the environmental cost will be up from first-quarter to second quarter. I think the first quarter was 700,000; we're saying the second quarter will be $2 million to $4 million.

Okay. But if I -- if the stock-based compensation increased $6.9 million, and say, it doesn't really increase that much in 2Q, should you see maybe a potential benefit, relative to what you're guiding to?

Our guidance is that we think they will be compatible.

Okay. Fine. Thank you. And how much did the force majeure impact the operating rate in 1Q?

It was about a 3% to 3.5% impact on our operating rates associated with the outage of Macintosh.

Okay. And it sounded like you don't think that the caustic increases will go through in the market. What is your view on, if the chlorine operating rate remains high, could there be a potential decline in the caustic pricing?

If you look historically, when the industry has reached an inflection point, although inflection point in the market and started to recover, chlorine has typically led that recovery both in terms of volume and price, and that has a natural consequence, putting some pressure on caustic price. We believe that if that's what plays out this time there will be some pressure but we don't forecast that the pressure will be significant enough to negate the chlorine pricing opportunity that will be in front of us. And I think the most important thing as we've said, ECU pricing, the total ECU pricing improved fourth quarter to first quarter and is going to improve first quarter the second quarter which means that chlorine is going to overcome some of the decline in costing.

Our next question comes from Herb Hardt of Monness, please go ahead.

My question relates to the combined entities. Once the transaction with Dow takes place, how much of your product will be outside the U.S.?

About 35% of our revenue of the combined entity would be outside the U.S.

Our next question comes from Dan Carson of Susquehanna, please go ahead.

This is Bobby Jordan for Don Carson. So you mentioned that Q1 tightness in caustic has yet translate into higher caustic pricing. But it seems that at least in the second half of April, there was some additional tightness. Do you believe that you get any sort of price increase on the caustic side, maybe in the second half of the year? And does your full-year guidance assume any type of pricing improvement for caustic, or do you just assume that's flat?

From the standpoint, we have seen export pricing go up in the second half of April which is -- has in times in the past been a precursor, it actually seeing contract prices move, whether contract prices more not at this point in time something that I wouldn't predict because there's so many variables associated with it. We would believe overall the second half of the year will reflect improved ECU pricing and how that falls out between chlorine and caustic is just yet to be seen.

Okay. And early in the year, you guided in the $340 million to $380 million in EBITDA for the full year, which included the $6 million of restructuring charges. Are you adjusting for the incremental acquisition costs in your latest guidance?

Yes, we are.

And our next question comes from John Roberts of UBS.

It sounds like the Winchester outlook is better for the year, and the first quarter adjusted EBITDA was in line. So why aren't you raising the adjusted EBITDA guidance for the rest of the year?

Well I think John if you looked full year and you looked at what the second quarter guidance is it suggest that the second half in chloralkali needs to be stronger and that based on price increase that are not quite in place yet. So we're being cautious.

Okay and then what's the outlook for chlorine outside of bleach and hydrochloric right now. Things like TiO2 and urethanes, et cetera?

We believe that those segments will see improvement over the first quarter, especially urethanes we have a lot of customers in urethanes segment that had planned outages in the first quarter, we believe that we will see improvement in the seasonal part of some of those businesses, we will see improvement in the construction of season and so we are forecasting improved demand from those segment in the second half of the year.

Our next question comes from Arun Viswanathan from RBC. Please go ahead.

I guess, my question is also on the pricing environment. I guess, I'm trying to understand the chlorine move. What do you think is driving the near-term strength in chlorine? Is it seasonality from constructions markets? Do you have any confidence that this could persist greater than the second quarter kind of restocking?

Yes we do. We believe the overall ECU pricing will reflect improved chlorine, flat maybe slightly declining in caustic price but net-net we will see overall ECU pricing improvement in the second half of the year and we believe that will be driven by the typical segments we see recovering the first band which are the ones that are associated with infrastructure vinyl urethane, Tio2 that’s the best information we have. We also believe as trends have settled out in the export markets that North American chlorine derivative producers will be in a position to support export markets around the world. We're still the lowest cost place to produce these derivatives and although information is only available for January of this year because of lagging in reporting, we have seen chlorine equivalence improve in the first month of the year relative two year ago from an export standpoint. So as we look forward, we believe will be strength across that broad segment.

And I guess, similarly looking out longer-term, we've had a lot of fits and starts to ECU margins over the last couple of years. It seems like we get some momentum on chlorine, but then that's dissipated on the caustic side. Is there anything that's different that's going on right now, that leads you to really believe that ECU margin will be higher? Or what are those components in the second half, and potentially in 2016?

Well, I can take a couple of things. We are seeing strength in operating rates, we have seen some capacity rationalization across the industry and we think that, in part which providing a tighter operating rate environment. We also, quite frankly have seen over the last couple years a significant amount of chlorine that used to service the merchant market withdrawn from the lab to service the HCL burners that are being invested in by other on purpose asset producers. So we believe that there is some change in when chlorine going into the merchant market as a result of that. So those are the things that are different in the last couple of years. We believe they'll manifest towards a difference in the pricing environment.

That's helpful. Just as a follow-up, with the lower oil and gas activity, is there any risks that we're oversupplied ultimately on the HCL side, looking out over the next couple of years?

I believe we're already seeing, at least on the pricing side the impact of all of the HCL capacity that has come online in the last couple years and I think that the big flywheel in that is what the by-product guys are doing and how they're running their plants and how much by-products, they have is you know making it to the market. But we believe over that period of time, all of those balances will work themselves out and that we're not at a point where there's a significant amount of downside in front of us but we're at a point where that market stabilized and we should start to see some gradual improvement.

Our next question comes from Dmitry Silversteyn of Longbow Research. Please go ahead.

Great. Just want to make sure I heard you correctly, did you say that the chlorine pricing was up about $20 a tonne sequentially, in the first quarter versus the fourth? Or is that what you're expecting to be up in the second quarter versus the first?

We said that the index was up in the first quarter $20 compared to the index at the end of the year.

Got you. And then, typically you guys lag by about a quarter I think, is that correct on the index?

We said qualitatively chlorine pricing was better in Q1 for us thank Q4, we didn't give a number we just did the index change.

Fair enough. And as far as HCL pricing, is the only thing impacting the sort of the level of demand and the level of pricing in that business, the change in demand from the fracking and the drilling market? Or are there other areas where that's putting pressure either on pricing, or is there a new capacity that's coming online that's putting upward pressure on supply?

The steel, HCL consumed in steel has been down, the steel imports coming in this country [indiscernible] but that’s removed some demand in the short term from the steel side. There has also been some change in demand on the food side as well but I would say probably that the biggest demand change, I am going to see how it has been associated with the oil and gas but not the only demand trend.

And then just, I guess both -- I don't know if I call it a theoretical question or a modeling question but your utilization rates were up sort of meaningfully in the low 80%s, versus where they were a year ago, but chlorine pricing was up sequentially, but you just didn't see that lever, in terms of operating margin on the chlor alkali side of the business. So can you -- one of thesis that's been put forward by you, is that the higher chlorine pricing, even if they're offset by the lower soda pricing, will still be positive for you, because it implies high utilization rates, and therefore higher fixed cost absorption and incremental margin. So it should still be positive for March, and that didn't seem to play out in the first quarter. So can you sort of talk about what held you back, and how we should think about that going forward?

The operating rate Dmitry was 81% in the first quarter which is below the point where we've said that occurs. We have really talked about that leverage point of being running consistently above 88% to 90%. So while we are positive in terms of the movement of operating rates we haven't really reached the point where I would say we that -- we're at optimal from a fixed cost absorption and profitability standpoint.

So the real leverage is going to come in the second and third quarters, when you get utilization rates up into the hopefully, high 80%s, if not low 90%s?

That’s correct.

And next we have a follow up from John Roberts of UBS. Please go ahead.

Thank you. Have you said anything yet, in terms of how you tend to be -- you intend to be organized, once you close the Dow transaction, how many segments you might have? I know Winchester will still be separate, but on the chemical side, how do you think you'll be structured?

John, we have not made any public statements with regard to that. As you know we're still dealing with the regulatory agencies et that’s true but at the appropriate time we will talk about that.

Our next question comes from James Finnerty of Citigroup. Please go ahead.

Good morning. Just one quick credit question, in terms of the balance sheet, I believe you've stated where you would like to get leverage over time. But in the longer-term, would you target investment grade ratings and do you think your business mix would warrant that from the agencies?

I think we believe that over the long haul, after the Dow acquisition is complete and we work through the capital spending we’ve talked about, it’s metal to achieve synergies and the transition costs we would be in a position to achieve investment grade. [indiscernible] metrics for sure and we have to say. They are not going to run he business on the basis of achieving investment grade rating.

And if the agencies asked, would -- if the agencies asked if you want to obtain change investment grade ratings, if that is was a strategic objective, would the answer be yes or no?

The answer will be we are aspired to run the business with investment grade metrics.

Got you. And just one follow-up. I know this question was asked on the March call. But I know the Winchester segment will be part of Olin for the next two years post the transaction. But longer-term, is there potential for that to be no longer a part of Olin, because in the past you've stated that, if the right transaction came along, and it was big enough that you would consider divesting of Winchester?

The key part of that we would get rid of it, if we needed to help finance the transactions. Its true that they don’t needed financial transaction and I think it’s always an option for us but as we have said it has got low tax basis, so the real issue there is to make sure that we make a value creating transactions. So it’s certainly something that we will always think about.

But it is performing at a very high level.

Our next question is a follow up from Arun Viswanathan from RBC Capital Markets. Please go ahead.

Thanks, guys. I just had a question about your commentary on the export side. Is it the case that you're seeing -- can you comment on what you're seeing regionally? I guess, most of the intelligence out there, is that Latin America is still pretty challenging. Have you seen a shift there, or is this a shift in Europe, or to Asia? Or where are you seeing the strength on the export side?

Are you talking about export caustic?

Yes exactly.

We have really not seen much change in all the export markets that North America typically stars, typically South American, Brazilian markets and that’s continued to be the case. On export caustic numbers volumes have been really flat over the first quarter of relative to last year first quarter. So we haven’t seen much change and really there is not being much change in the markets that have traditionally been served by exports either.

Okay. I just -- I thought you said that, that there was some improvement on the pricing in the second half of April, and that would ultimately translate to contract going up?

I was talking about chlorine derivative exports, not caustic when I say that.

This concludes our question and answer session. I would like to turn the conference back to over to Joseph Rupp for any closing remarks.

Thank you for joining us today and we look forward to reporting the results of our second quarter in July. Thank you.