Operator
Operator
Good morning and welcome to the Olin Corporation's Second Quarter 2016 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Larry Kromidas, Director of Investor Relations. Please go ahead. Larry P. Kromidas - Director-Investor Relations & Assistant Treasurer: Thank you, Ed, and good morning, everyone. Before we begin, I want to remind everyone that this presentation, along with the associated slides and the following question-and-answer session, will include statements regarding estimates of future performance. Please note that these are forward-looking statements and that 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 second quarter earnings release. Also, please note that during today's call we will reference quarter-over-quarter comparisons as the prior-year results do not reflect the contribution of the acquired chlorine products businesses. Finally, a copy of today's transcript and slides will be available on our website in the Investors section under Calendar of Events. The earnings press release and other financial data and information are available under Press Releases. Now I'd like to turn the call over to John Fischer, Olin's President and Chief Executive Officer. John? John E. Fischer - President, Chief Executive Officer & Director: Thank you, Larry, and good morning, and thank you all for joining us today. In addition to Larry, with me this morning are Pat Dawson, Executive Vice President and President of Epoxy and International; John McIntosh, Executive Vice President, Chemicals and Ammunition; Jim Varilek, Executive Vice President and President, Chlor Alkali Products and Vinyls; and Todd Slater, Vice President and Chief Financial Officer. I will begin with a few highlights and then review our adjusted EBITDA forecast for the third quarter and full year before going into some details on the businesses. Todd will then provide an update on our cash flow before we open the call to questions. On slide three, are some of the highlights for the quarter and our full year expectations. Last night, we announced second quarter 2016 adjusted EBITDA of $180.4 million which reflects depreciation and amortization expense of $132.4 million, restructuring charges of $8.2 million and acquisition related integration costs of $16.3 million. The second quarter was negatively impacted by lower caustic soda pricing, primarily driven by exports comprising a higher than normal percentage of total caustic soda sales. On July 22, we talked about the lower than expected domestic caustic soda demand in the Olin system during the second quarter, this was the result of the unplanned outages that too large pulp and paper customers as well as the large multi-plant industrial customer in June. Third quarter demand from these customers is expected to reflect normal operations. Other factors, contributing to weaker than expected performance this quarter, include higher natural gas and ethylene costs and softer chlorinated organics demand from refrigerant, packaging and agricultural customers. Second quarter synergy realization met our expectations. Our synergy teams continued to build positive momentum particularly in the maintenance and procurement areas. We now expect to achieve $60 million of total synergies in 2016 and exit the year with a $80 million annualized run rate. We are forecasting full year 2016 adjusted EBITDA to be in $840 million to $900 million range. This guidance reflects our expectation that earnings in the second half of the year, should benefit from higher domestic and export caustic soda pricing partially offset by higher costs for raw materials including natural gas and ethylene, compared to the first half of 2016. Additionally, softness chlorinated organics demand is expected to continue, negatively impacting our volumes and pricing in the second half of 2016. We continue to forecast profitability improvement for the Epoxy business during the second half, compared to the first half of 2016, due to higher expected volumes, expected improvement in productivity and lower planned maintenance outage costs. We also continue to expect Winchester's 2016 results to improve compared to 2015 levels. Before I turn to the segment-by-segment performance, I would like to present some slides that should provide more clarity into our outlook and business dynamics. For the third quarter, we are forecasting adjusted EBITDA to be in the $220 million to $250 million range and reported net income to be in the $0.10 to $0.20 per diluted share range. We expect sequential caustic soda pricing improvement in the third quarter due to higher domestic and export pricing. Epoxy earnings are expected to benefit from higher volumes and lower scheduled maintenance outage costs. Winchester should benefit from its normal seasonal peak earnings quarter, and we expect incremental synergy capture in the third quarter above second quarter levels. Higher natural gas and ethylene prices will partially offset these positive factors, as we expect third quarter input prices to continue at June levels. Turning to slide five, I would like to take a moment to describe the new Olin's caustic soda business and the dynamics of caustic soda price realization in our system. First and foremost, as a reminder, a $10 per ton change in Olin's caustic soda price equates to an annual $30 million change in adjusted EBITDA. Unlike heritage Olin, in the new Olin, caustic soda is exported and represents a meaningful component of the total caustic soda business. The majority of Olin's export sales are made using either negotiated or index prices. For Olin's index-based export pricing, Olin will typically realize the index change 30 to 90 days after it occurs, and Olin should receive – excuse me – approximately 80% to 100% of the index price change. Similarly, a significant portion of Olin's domestic caustic soda sales are linked to index pricing with Olin's pricing typically reflecting index changes on a 30- to 120-day lag. Depending on domestic market conditions, Olin should realize 30% to 70% of the index price change. On a positive note, July's $20 per ton domestic contract index increase, and a $20 per ton average export spot increase should have a favorable impact on our business during the latter part of the third quarter and into the fourth quarter of 2016. Now turning to slide six, I would like to reiterate our long-term views on caustic soda. Olin believes several favorable trends are developing in the global caustic soda market. Olin has reduced capacity by 433,000 tons and in North America we believe there is a bias towards further capacity reductions. Additionally, no major chlor alkali capacity increases have been announced in North America. Outside of North America, we have seen caustic soda exports from China decline by approximately 30% since 2012, with these declines expected to continue. We believe this reflects the combination of reduced supply, driven by lower chlorine production and increased internal consumption. Finally, the mandated elimination of European mercury-based chlor alkali production by the end of 2017 should result in chlor alkali capacity reductions of 1 million tons to 1.5 million tons. Some of these reductions have already occurred. We believe that as a result, Europe should become a net importer of caustic soda rather than a net exporter during 2017. The long-term view of caustic soda is supported by the fact that caustic soda export sales from North America reached a record quarterly level in the first quarter and caustic soda exports reached a record monthly level in April. Because of these factors, Olin believes we're entering into a favorable multi-year caustic soda pricing environment. Now turning to segment performance. On slide seven, you can see Chlor Alkali Products and Vinyls performance in the second quarter. We covered the majority of these points in our prior discussion on July 22, so let's move to the performance of the Epoxy segment on slide eight. For the second quarter, Epoxy sales were $450 million, declining $10 million sequentially and adjusted EBITDA was also lower versus first quarter levels. These declines came as a result of planned maintenance outages. For the third quarter, we expect sequential improvement in Epoxy sales and adjusted EBITDA due to the absence of any significant planned maintenance related outage costs, combined with expected improvement in volumes and productivity. We expect sequential demand improvement in North America as well as Europe, which is expected to benefit from continued strength in midstream and downstream products, including differentiated and wind energy resins. In North America, we expect increased sales of upstream and midstream products, which improve the productivity and utilization of our Freeport, Texas facility. And as a reminder, increased upstream production also increases the quantity of caustic soda Olin has to sell. I would now like to turn to Winchester performance, which we summarize on slide nine. Sales were $181 million, a slight decrease compared to the first quarter, with demand for seasonal items such as shot shell and hunting rifle ammunition shifting to a more traditional pattern versus what we've seen in recent years. Adjusted EBITDA was $35.7 million, a $2.4 million increase sequentially. Improved results reflect lower commodity, other material and manufacturing costs, partially offset by slightly lower commercial sales. In the second quarter, Winchester completed the relocation of substantially all of the Centerfire Operations from East Alton, Illinois to Oxford Mississippi. We continue to believe cost savings from this five-year project should be $40 million annually. We are forecasting sequential adjusted EBITDA improvement in the third quarter for Winchester as the business enters its seasonally strongest quarter. We continue to believe full-year 2016 Winchester earnings should improve compared to 2015, primarily as a result of expected incremental savings from the Oxford relocation, expected decreases in commodity and material costs and expected improvement in volumes, partially offset by lower prices. Earlier on the call, I said we expect full year adjusted EBITDA to be in the $840 million to $900 million range. On slide 10, I want to reiterate our long-term view of the business and highlight that the opportunities for Olin are unchanged. As I said earlier, the near-term outlook for caustic soda supply and demand is favorable which bodes well for pricing. In fact in July, the domestic caustic soda price indices increased $20 per ton, which should have a favorable impact on our business during the latter part of the third quarter and into the fourth quarter of 2016. The Epoxy business is on track to deliver improved profitability in 2016 and beyond through volume growth and mix enhancement. Our synergy capture efforts are moving forward at a pace that has allowed us to increase the 2016 realization estimate to the top end of our range. In a few minutes, Todd will present our free cash flow forecast, which will illustrate the cash generation power of the business. I would like to remind everyone that one of the key factors for Olin in the business combination with Dow is the power of the expanded chlorine envelope. Expanding the outlets of chlorine from 3 products to 19 products has increased the operating flexibility for Olin. One of the new products in Olin's chlorine envelope is EDC, which we'll review on slide 11. EDC has produced by the reaction of Olin produced chlorine and ethylene, while also liberating caustic soda for sale. Ethylene dichloride is an export product for Olin, sold primarily in Asia. As demonstrated by the IHS spot EDC pricing data, EDC export pricing improved during the first half of 2016, rising to approximately $0.08 to $0.09 per pound from lows of approximately $0.06 per pound in the fourth quarter of 2015. Despite this improvement, EDC has not recovered to the levels we originally forecasted in our full year 2016 outlook. As you can see from the chart on the right, which shows the EDC export market from 2000 to present, it illustrates both the price volatility and the fact that we're currently in and historically low pricing range for EDC. For nearly 80% of the months during this period, EDC pricing has surpassed the levels we've seen over the first half of 2016. And as a reminder, Olin has significant financial leverage to EDC pricing, an annual $0.01 improvement in EDC pricing equates to an expected improvement in EBITDA of approximately $20 million. That said, at this point, we believe EDC represents upside potential with relatively limited downside. Additionally, we have recently made investments to enhance the profitability of EDC in our system, which – is expected to improve full-year adjusted EBITDA. On slide 12, we review chlorinated organics, another new product that has a unique value proposition for the operation and integration of our chlorine envelope. We take low cost EDCs and combine them with internally and third-party produced chlorinated byproducts to produce the variety of chlorinated organics products. Third parties pay us and dispose of their chlorinated organic byproducts which results in negative raw material costs for a portion of our usage. The pull through of chlorine production of chlorinated organics products then also liberates caustic soda for sale. During the second quarter, demand from refrigerants, customers in both Europe and North America was softer than expected, as demand – as was demand from packaging, agricultural customers in North America. In addition, refrigerants imported from China to North America and Europe increased. These headwinds resulted in volumes and pricing lower than we initially anticipated in our full-year 2016 guidance. Before I turn the call over to Todd, I want to update everyone on our synergy efforts. As we continue to exceed expectation on our synergy capture efforts, we now expect $60 million in total synergies for 2016 and an expected $80 million annual run rate for the year. The other significant change relates to the synergy forecast for capital spending and investments which Todd will talk about. Now, I would like to turn the call over to Todd Slater. Todd? Todd A. Slater - Chief Financial Officer & Vice President: Thanks, John. Before I review our cash flow forecast for 2016, I will comment on the book income tax rate. The second quarter tax rate was a tax benefit of 95.7% of the pre-tax loss, this reflects the combination of a taxable loss, favorable permanent book to tax differences, and return to provision adjustments. As you are aware, in periods of low taxable income, these items have a disproportionate impact on our income tax rate. We would expect this non-traditional relationship between income tax expense and book pre-tax income for the full year 2016 as well. Now turning to our 2016 cash flow forecast, which is on slide 14. We are forecasting to generate $391 million of free cash flow before dividend payments in 2016. Walking from left to right on the waterfall chart, starting with the midpoint of our full year adjusted EBITDA guidance of $870 million. Based on this new adjusted EBITDA guidance, we now forecast cash taxes to provide approximately 25% of positive cash flow in 2016. This reflects the expected benefit from the utilization of net operating loss carry-forwards created by the acquisition costs incurred last year and income tax refunds from prior years, primarily resulting from the ability to utilize net operating loss carry-backs. The capital spending and investments include the midpoint of our current forecast for capital spending of $300 million which is a decrease – which is decreased by 6% from prior estimates. Remaining $175 million represents investments made in the second and third quarters for additional low cost electrical power for the next 20 years at the Freeport, Texas and Plaquemine, Louisiana facilities. These investments should increase our manufacturing flexibility at both facilities, reduce overall electricity cost, and accelerate the realization of cost synergies. We are now forecasting working capital should generate $175 million of cash flow in 2016. We entered into a program to accelerate the collection of receivables, which should create a permanent working capital reduction. The one-time items include integration, cash restructuring costs and asset sales. The next column represents interest expense, we have approximately 65% variable rate debt in our debt profile. As a result, we are estimating the third quarter 2016 interest rate to be approximately 5%. During the second quarter, we repaid $17 million of term loan debt, and $125 million, 6.75% notes originally issued in 2001. For the full year 2016, approximately $205 million of debt will mature, all of which is expected to be repaid using available cash. As you can see for 2016, we are forecasting to generate $259 million of free cash flow after paying our normal quarterly dividend. One comment on 2017 cash taxes: based on our forecast of net operating loss carry-forwards for 2016, we are expecting lower than normal cash tax rate in 2017. Finally, on July 28, Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on September 9, 2016 to shareholders of record at the close of business on August 10, 2016. This is the 359th consecutive quarterly dividend to be paid by the company. Operator, we are now ready to take questions.