Olin Corporation · NYSE:OLN
Olin — Buckingham Research Presentation, New York City, November 2003
67 slides from Olin's conference presentation, Nov 18, 2003
Slide 1: Buckingham Research Presentation
1 Buckingham Research Buckingham Research Presentation Presentation New York City New York City November 18, 2003 November 18, 2003
Slide 2: Attending Today
2 Attending Today Attending Today • Joseph D. Rupp – President and Chief Executive Officer • Anthony W. Ruggiero – Executive Vice President and Chief Financial Officer • John L. McIntosh, President, Chlor Alkali Products • Richard E. Koch – Vice President, Investor Relations and Public Affairs
Slide 3: Joseph D. Rupp, President & Chief Executive Officer
3 Joseph D. Rupp Joseph D. Rupp President & Chief Executive Officer
Slide 4: Company Overview
4 Company Overview Company Overview Winchester Chlor Alkali North American Producer of Chlorine and Caustic Soda Revenue: $305 Op. Inc.: 37 North American Producer of Ammunition Revenue: $239 Op. Inc.: 15 Metals Specialty Copper-Based Products and Related Engineered Materials Revenue: $657 Op. (Loss
Slide 5: Olin Corporate Strategy
5 Olin Corporate Strategy Olin Corporate Strategy Focused Portfolio of Businesses TRS in Top Third S&P Mid Cap 400 ROCE Over Cost of Capital Over the Cycle Olin Corporation Goal: Superior Shareholder Returns Operational Excellence Global Market Leadership • A Low Cost Producer in Our Strategic Busin
Slide 6: Investment Highlights
6 Investment Highlights Investment Highlights • Significant Operating Leverage and Cash Flow Potential • Chlor Alkali Selling Prices Forecast to Increase in 2004 • A Better Economy Is Expected to Improve Metals Results
Slide 7: Olin's Improved Results in 2003
7 Olin’s Improved Results in 2003 Olin’s Improved Results in 2003 • Significant Improvement Due to Higher Chlor Alkali Prices • Metals Volumes Are Down—Similar to Industry Peers • Winchester Sales and Operating Income Aided by Domestic Military Orders • Seeing Some Signs of Improvement in our Sector
Slide 8: Chlor Alkali Products
8 Chlor Alkali Products Chlor Alkali Products • Sept. YTD 2003 / 2002 Comparative Results: • Sales Increased $75 million or 32% From 2002 ($305.6 M vs. $230.9 M) • Operating Income Increased $75 Million (Income of $36.4 M vs. Loss of $38.4 M) • Olin’s ECU Netback, Excluding Sunbelt Joint Venture, Wa
Slide 9: Olin Has Leading Capacity Share in Eastern U.S.
9 Olin Has Leading Capacity Share in Olin Has Leading Capacity Share in Eastern U.S. Eastern U.S. Source: CMAI Chlor Alkali Report Total Industry Capacity Total Industry Capacity • 4th Overall in U.S. Capacity • #1 Capacity Share East of the Mississippi River • Strong Regional Supplier of Caustic an
Slide 10: A $10 Per ECU Change Equates to $12 Million
10 A $10 Per ECU Change A $10 Per ECU Change Equates to an $12 Million Equates to an $12 Million Change in Pretax Income at Change in Pretax Income at Full Capacity, or $.12 Per Full Capacity, or $.12 Per Share @ 40% Tax Rate Share @ 40% Tax Rate
Slide 11: CMAI Estimates of ECU Prices
11 CMAI Estimates of ECU Prices CMAI Estimates of ECU Prices (For Chlorine to Chemicals and Diaphragm Grade Caustic) (For Chlorine to Chemicals and Diaphragm Grade Caustic) $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 1999 2000 2001 2002 2003 2004 2005 2006 2007
Slide 12: Olin Chlor Alkali Factors
12 Olin Chlor Alkali Factors Olin Chlor Alkali Factors • Olin Operating Rates Expected to Be in 90% Range in 2004 • Olin’s Electricity Costs, a Key Component of Manufacturing Costs, Have Remained Relatively Stable in Spite of Higher Natural Gas Prices • High Gas Prices Impacting Other Chlor Alkali P
Slide 13: North American Chlor Alkali Capacity Reductions Since 2000
13 260,000 Baton Rouge, LA Formosa Plastics 2,051,600 Total Reductions 80,000 Delaware City, DE OXY 5,500 Albany, OR Oregon Metallurgical Oremet) 49,500 Vicksburg, MS Cedar Chem 80,300 Orington, ME Holtra Chem 159,500 Ft. Saskatchewan Dow 198,000 Gramercy, LA La Roche 224,400 Portland, OR Atofina 22
Slide 14: Chlor Alkali Products Fourth Quarter
14 Chlor Alkali Products Chlor Alkali Products Fourth Quarter Fourth Quarter • Seasonal Slowing of Demand • ECU Prices Still Well Ahead of 4Q2002 but Below 3Q2003
Slide 15: Metals
15 Metals Metals • Olin is Largest Manufacturer of Copper Alloy Strip and Brass Rod in the U.S. • Large Size Provides Economies of Scale and Manufacturing Efficiencies • Olin Possesses Leading Technology Position • Olin is the Leading Copper Based Sheet and Strip Distributor in the U.S.
Slide 16: Metals
16 Metals Metals • Significant Earnings Leverage as a Result of Cost Cutting and Capacity Rationalization • As the Following Slides Show, 2001 and 2002 Were Well Below Historical Consumption and 2003 Likely Will Be Below 2002 as Well
Slide 17: U.S. Strip Consumption
17 U.S. Strip Consumption U.S. Strip Consumption In MM Pounds In MM Pounds 0 200 400 600 800 1000 1200 1400 1600 1800 1998 1999 2000 2001 2002 2003E 2003 consumption est. to be lower than 2002. We believe the normalized market is somewhat below 1.3 – 1.4 billion pounds per year.
Slide 18: Brass Strip Mill Shipment Industry Profile
18 Brass Strip … Mill Shipment Brass Strip … Mill Shipment Industry Profile Industry Profile Base Index Market Segment 2000 2002 Auto Electrical 100 93 Computer/Telecom 100 66 Electrical 100 77 Bldg/Household 100 134 Other Transportation 100 36 Other Commercial 100 79 Coinage 100 43 Ammunition 100 1
Slide 19: Metals (Strip Portion Only)
19 Metals (Strip Portion Only) Metals (Strip Portion Only) • Sept. YTD 2003 / 2002 Comparative Results: – Operating Loss of $10.1 Million in this Period Compared to Profit of $16.0M in 2002 – 7% Decline in Strip Shipments (excluding Chase) Similar to Industry Decline. • Key Segments Were Well Below
Slide 20: U.S. Brass Rod Consumption
20 U.S. Brass Rod Consumption U.S. Brass Rod Consumption In MM Pounds In MM Pounds 0 200 400 600 800 1000 1200 1998 1999 2000 2001 2002 2003E 2003 consumption est. to be lower than 2002.
Slide 21: Metals (Rod Portion Only)
21 Metals (Rod Portion Only) Metals (Rod Portion Only) • Sept. YTD 2003 Results: – Chase Operating. Income was $6.4 Million – Olin Acquired Chase late in September 2002 so Chase was Not Included in Olin’s 2002 YTD Results. In the First Nine Months of 2002, Chase’s Operating Income Was $ 10.8 Million
Slide 22: Metals Summary
22 Metals Summary Metals Summary • We See Improving Macro-economic Factors • Historically our Businesses Generally Lag the Recovery by About 6 Months • We Have Limited Visibility
Slide 23: China Joint Venture
23 China Joint Venture China Joint Venture • Olin-Loutong Metals (GZ) Ltd., Co. • Distribution Center in Guangzhou, China • Will Process and Distribute Both Olin and Luoyang’s Copper Alloy Products • Expect to be Operational in 1Q’04
Slide 24: Winchester Products
24 Winchester Products Winchester Products Products Products End Uses End Uses Maintenance applications in power & concrete industries, powder-actuated tools in construction industry Industrial products — 8 gauge loads & powderactuated tool loads Infantry and mounted weapons Small caliber military a
Slide 25: Winchester
25 Winchester Winchester • September YTD 2003 / 2002 Comparative Results: • Sales up 9% Compared to 2002 Primarily Due to Higher Domestic Military Volumes • Operating Income Increased to $15.3 Million Compared to $14.0 Million in 2002 • Higher Sales More Than Offset Increased Manufacturing Costs and
Slide 26: A. W. Ruggiero, Executive Vice President and CFO
26 A. W. Ruggiero A. W. Ruggiero Executive Vice President and CFO
Slide 27: Fourth Quarter 2003
27 Fourth Quarter 2003 Fourth Quarter 2003 • Expect Loss in $0.05 Per Diluted Share Range, Compared to Loss of $0.21 Per Share in 2002, Which Included $0.18 Per Share COLI Charge • 4Q’03 Results Expected to Be Below 3Q’03 Because of Normal Seasonal Decline in Winchester, Lower Chlor Alkali Sales Vol
Slide 28: U.S. Economic Improvement
28 U.S. Economic Improvement U.S. Economic Improvement • Recent Reports Suggest That the U.S. Economy Is Improving • Third Quarter Increase in GDP Was the Largest in Nearly 30 Years • World-wide Computer Chip Sales Rose 6.5% in September From August, the Sharpest Month-to- Month Jump Since 1990 • Im
Slide 29: Investment Rationale
29 Investment Rationale Investment Rationale • Yield @ $16.00 = 5%; @ $18.00 = 4.4% • Potential for Improved Performance Based On: – Higher Expected ECU Prices in the Next Several Years – A Better Economy Is Expected to Improve Metals Results – Winchester Is a Solid Business and Provides Profits and
Slide 30: Cap. Ex. and D&A
30 Cap. Ex. and D&A Cap. Ex. and D&A 76 78 73 95 65 41 55 78 78 80 81 87 88 85 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 1997 1998 1999 2000 2001 2002 2003E ($ MM) Capital Expenditures D&A
Slide 31: Investment Rationale (continued)
31 Investment Rationale Investment Rationale (continued) (continued) • Commitment to Investment Grade Rating • Projecting Debt Covenant Compliance under Existing Revolver
Slide 32: Forward-Looking Statements
32 Forward Forward-Looking Statements Looking Statements This presentation contains estimates of future performance, which are forward-looking statements and results could differ materially from those anticipated in the forward-looking statements. Some of the factors that could cause actual results
Slide 33: Proud Heritage … Promising Future
33 Proud Heritage … Promising Future
Slide 34: Background Information Slides
34 The Following Slides Are Provided as Background Information and Come Primarily from Presentations Made Earlier this Year. These Slides May or May Not Be Used in the Presentation. In Some Cases, They Are Duplicate Slides From What Was Covered in the Above Slides.
Slide 35: Metals Products
35 Metals Products Metals Products Strip and Sheet Strip and Sheet Products Products End Uses End Uses Computer, telecommunications, medical, aerospace and military High performance, high reliability hermetic metal packages for microelectronics industry Coinage strip & blanks Printed circuit boards,
Slide 36: Overview of Brass Strip Processing
36 Overview of Brass Strip Processing Overview of Brass Strip Processing Scrap Metal Virgin Material Casting Hot Mill Coil Miller Cold Rolling Annealing/ Cleaning Slitting Integrated Mills (60%) Olin OAB PMX Revere Hussey Miller Scott Brush Wellman NGK Imports Reroll Mills (11%) Olin Heyco Wieland S
Slide 37: Key Drivers – Brass Strip
37 Key Drivers Key Drivers – Brass Strip Brass Strip • Sensitive to Changes in the Economy • Changes in Demand for Specific Sectors Affect Olin Performance: – Automotive – Computers – Telecommunications – Housing • Coinage Market Is Sensitive to Swings in the Economy
Slide 38: Olin Brass Competitive Advantages
38 Olin Brass Competitive Advantages Olin Brass Competitive Advantages • Largest Brass Mill in U.S. Provides Economies of Scale • Outstanding Manufacturing Capabilities • More Patents Than Competitors • Largest Distribution Business in U.S. (A.J. Oster) • High Performance Alloys and Specialty Produc
Slide 39: Chase Industries
39 Chase Industries Chase Industries
Slide 40: Chase
40 Chase Chase • Chase is a Leader in Brass Rod • Competitive Advantages Manufacturing Excellence, Low Cost, High Quality “Blue Dot” Trademark Leading Market Share Customer Service Focus • Leverage to Enhance Long-term Profitability and Return on Investment • Chase has New Efficient Facilities, Futu
Slide 41: U.S. Brass Rod End Uses
41 U.S. Brass Rod End Uses U.S. Brass Rod End Uses Building Products Industrial Machinery & Equip. Transportation Electrical & Electronic Consumer & General Exports
Slide 42: Brass Rod Demand Drivers
42 • Building Products – Housing Starts – # of Bathrooms – Home – Intensity of Use – Product Innovation – Average Age of Homes – Existing Home Sales – Low Mortgage Rates • Industrial Machinery & Equipment – GDP – Industrial Production • Transportation – US Auto Sales – Class Eight Truck Sales •Consu
Slide 43: Chase Financial Performance
43 Chase Financial Performance Chase Financial Performance Years Ending December 31 Years Ending December 31 In Millions of Dollars 0 5 10 15 20 25 30 35 1997 1998 1999 2000 2001 2002 Pretax Income
Slide 44: Factors Affecting Chase Brass in 2003
44 Factors Affecting Chase Brass in 2003 Factors Affecting Chase Brass in 2003 • Lower Commercial Construction • Less Capital Spending for Industrial Machinery • Lower Automotive and Truck Sales • Housing Remains at Healthy Levels
Slide 45: Key Drivers – Winchester
45 Key Drivers Key Drivers—Winchester Winchester • Supply / Demand Balance – Total U.S. Demand: 4.5 Billion Rounds With Excess U.S. Production Capacity – Non-Economic Factors Primarily Drive Demand Cycle • Political / Regulatory – Political Pressure Shifting From Federal to State/local Level • Compe
Slide 46: Winchester Strategy
46 • Leverage Existing Strengths to Grow Sales – Legendary Winchester ® Brand Name – Received “Ammunition of the Year” Award Last Six Years From Shooting Industry Academy of Excellence – Manufacturer of the Year Award from National Association of Sporting Goods Wholesalers in 2002 • Continue to Offe
Slide 47: Chlor Alkali Products
47 Chlor Alkali Products Chlor Alkali Products Products Products End Uses End Uses Industrial & institutional cleaners, textile bleaching Pulp, paper and food processing Hydrochloric Acid and Sodium Hypochlorite Paper, textile & clay bleaching Sodium Hydrosulfite Pulp & paper processing, chemical ma
Slide 48: Chlor Alkali Products
48 Chlor Alkali Products Chlor Alkali Products • Chlorine and Caustic Soda Are Co-Products of Salt Electrolysis • The Production of 1 Ton of Chlorine Results in 1.1 Tons of Caustic Soda • Together the Two Chemicals Are Called an Electrochemical Unit “ECU” • Supply / Demand Determine Pricing in This
Slide 49: Key Drivers – Chlor Alkali
49 Key Drivers Key Drivers – Chlor Alkali Chlor Alkali • Chlorine/caustic Demand Driven by General Economic Conditions • PVC Is the Largest End-use Market for Chlorine, and Pulp and Paper Is Largest Caustic Market • Manufacturing Cost Heavily Dependent on Energy (Natural Gas) • No North American Chl
Slide 50: Chlor Alkali Competitive Advantages / Strategies
50 Chlor Alkali Products Chlor Alkali Products Competitive Advantages / Strategies Competitive Advantages / Strategies • Olin’s Electricity Costs Have Been Relatively Stable Over Time Because We Purchase Electricity From Utilities That Are Primarily Coal, Nuclear and Hydro-Power Based • Olin’s Sunbe
Slide 51: Chlor Alkali Competitive Advantages / Strategies
51 Chlor Alkali Products Chlor Alkali Products Competitive Advantages / Strategies Competitive Advantages / Strategies • Focus on Being the Preferred Supplier to the Merchant Chlor Alkali Market • Continue Our Partnership Philosophy With Our Customers • Continue to Drive Cost Improvements Through Ma
Slide 52: Why Olin's ECU Netbacks Differ from Other Producers
52 Why Olin’s ECU Netbacks Differ Why Olin’s ECU Netbacks Differ from Other Chlor Alkali Producers from Other Chlor Alkali Producers • Methodologies and Definitions May Differ Among Producers • Pricing to Customers Can Vary Depending on Customer End Use and Location and Method of Shipment (Pipeline,
Slide 53: Olin's Chlor Alkali System
53 Olin’s Chlor Alkali System Olin’s Chlor Alkali System • Olin Contracts Nearly 100% of Its Chlorine and Caustic Sales • On About Two-Thirds of the Volume, Prices Change Quarterly, with a Combination of Formula-based and Negotiated Pricing • Many Contracts Have a One Quarter Lag in Them, Which Dela
Slide 54: U.S. Chlorine Uses
54 Source: CMAI Pulp & Paper 1% Water 5% Vinyl 40% Other Organic 28% Inorganics 5% Other 12% Propylene Oxide 9% U. S. Chlorine Uses U. S. Chlorine Uses 2002 Demand
Slide 55: U.S. Chlorine Segment Growth
55 U.S. Chlorine Segment Growth U.S. Chlorine Segment Growth 2002 2002—2006 2006 500 1,000 1,500 2,000 Cumulative Demand Increase (‘000 ST/Y) 1 Other Water P&P Inorganics Organics Urethanes Vinyl 2.3% 1.3% 0.0% 4.0% 1.0% 3.9% 6.6% Source: CMAI 3.9% AAGR
Slide 56: U.S. Caustic Soda End Uses
56 Source: CMAI U. S. Caustic Soda End Uses U. S. Caustic Soda End Uses 2002 Demand 2002 Demand Alumina 3% Water 2% Propylene 8% Inorganic 18% Organic 9% P&P 20% Exports 14% Soaps 6% Textiles 3% Others 17%
Slide 57: U.S. Caustic Segment Growth
57 U.S. Caustic Segment Growth U.S. Caustic Segment Growth 2002 2002—2006 2006—200 400 600 800 1,000 Cumulative Demand Increase (‘000 ST/Y) 1 Net Exports Other Water Inorganics Textile Organics Alumina P&P 14.8% 5.5% 2.4% 3.2% 2.2% 2.6% 2.1% 2.2% Source: CMAI 4.4% AAGR
Slide 58: Manufacturing Cost Structure (Gas at $2/mmbtu)
58 40% 9% 6% 6% 39% Electric Power Steam, less H2 credit Salt Fixed Cost Other Variable Manufacturing Cost Structure Manufacturing Cost Structure “Typical” Gulf Coast Diaphragm Plant “Typical” Gulf Coast Diaphragm Plant Nat. gas @ $2/mmbtu Nat. gas @ $2/mmbtu
Slide 59: Manufacturing Cost Structure (Gas at $5/mmbtu)
59 49% 12% 5% 5% 29% Electric Power Steam, less H2 Credit Other Variable Salt Fixed Cost Manufacturing Cost Structure Manufacturing Cost Structure “Typical” Gulf Coast Diaphragm Plant “Typical” Gulf Coast Diaphragm Plant Nat. gas @ $5/mmbtu Nat. gas @ $5/mmbtu
Slide 60: Note on Profit Summary Exhibit
60 The Next Slide Provides the Same The Next Slide Provides the Same Numerical Information Provided Numerical Information Provided on the Profit Summary Exhibit to on the Profit Summary Exhibit to Olin’s October 30, 2003 Olin’s October 30, 2003 Earnings Release and Reconciles Earnings Release and Re
Slide 61: Profit Summary From Earnings Release
61 Profit Summary From Earnings Release Profit Summary From Earnings Release (In millions, except EPS) The following table summarizes the significant unusual items impacting the reported operating re sults. Management monitors earnings per share excluding unusual items such as restructuring charges,
Slide 62: Metals Segment Operating Results—Third Quarter 2003
62 Metals Segment Operating Results—Third Quarter 2003 ($ in millions) On September 27, 2002 we acquired Chase. The acquisition was accounted for using the purchase method of accounting. Accordingly, the operating results of Chase have been included in the reported financial statements since the dat
Slide 63: Indianapolis Shutdown Reduced Cost Base
63 Indianapolis Shutdown Reduced Cost Base Indianapolis Shutdown Reduced Cost Base and About 10% of Domestic Strip Capacity and About 10% of Domestic Strip Capacity • Completed in Mid-February • Restructuring Charge of $29 Million Pretax Primarily Associated With This Shutdown • Cash Cost of Shutdow
Slide 64: Pension Plan
64 Pension Plan Pension Plan • In 2002, We Recorded a $220 Million After Tax Charge to Shareholders’ Equity • This Was a Non-Cash Charge • Lowered Discount Rate From 7.5% to 6.75% • Significant Cash Contributions to the Plan Not Expected Until 2006 • Expect Annual Pension Expense Could Increase in t
Slide 65: Key Initiatives Have Increased Olin's Financial Flexibility
65 Key Initiatives Have Increased Olin’s Key Initiatives Have Increased Olin’s Financial Flexibility Financial Flexibility • Completed $200 Million Public Senior Note Offering on December 11, 2001 • Closed on New $140 Million Three-Year Revolving Credit Facility on January 3, 2002 • Completed Common
Slide 66: Financial Policies and Objectives
66 Financial Policies and Objectives Financial Policies and Objectives • Commitment to Maximizing Total Return to Shareholders (TRS) Over the Long Run • Commitment to Lower Cost Structure – 2002 Cost Savings Estimated at $60MM ($20MM for Both Brass and Chlor Alkali, $10MM for Winchester and $10MM Ot
Slide 67: Olin's Demonstrated Shareholder Orientation
67 Olin’s Demonstrated Olin’s Demonstrated Shareholder Orientation Shareholder Orientation • Compensation System Assures Alignment With Shareholder Interests – Long Term Incentive Plan is 100% Stock Options and Performance Shares – Senior Management Compensation Highly Oriented to Stock Performance
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