Olin Corporation · NYSE:OLN
Olin — Morgan Stanley Presentation, New York City, February 24, 2004
76 slides from Olin's conference presentation, Feb 24, 2004
Slide 1: Morgan Stanley Presentation
Morgan Stanley Presentation New York City February 24, 2004
Slide 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 • John E. Fischer – Vice President, Finance • Richard E. Koch – Vice President, Investor Relatio
Slide 3: Joseph D. Rupp
Joseph D. Rupp President & Chief Executive Officer
Slide 4: Company Overview
Company Overview Olin Year Ending Dec. 2003 Revenue: $1,586 Op. Inc.(Loss): 53 Metals Specialty Copper-Based Products and Related Engineered Materials Revenue: $883 Op. Inc.: 11 Chlor Alkali North American Producer of Chlorine and Caustic Soda Revenue: $400 Op. Inc.: 63 Winchester North American Pro
Slide 5: Olin Corporate Strategy
Olin Corporate Strategy Olin Corporation Goal: Superior Shareholder Returns TRS in Top Third S&P Mid Cap 400 ROCE Over Cost of Capital Over the Cycle Focused Portfolio of Businesses • Improve Profitability of the Metals Business • Increase the Value of and Generate Cash From Chlor Alkali • Leverage
Slide 6: Olin's Improved Results in 2003
Olin’s Improved Results in 2003 • Significant Improvement Due to Higher Chlor Alkali Prices • Metals Volumes Were Down—Similar to Industry Peers. Better than Expected 4Q 2003 Demand • Seeing Signs of Improvement in our Sectors – Sustainability Still Uncertain • Winchester Sales and Operating Income
Slide 7: Investment Highlights
Investment Highlights • Significant Operating Leverage • Chlor Alkali Selling Prices Forecast to Increase in Late 2004 and 2005 • A Better Economy Is Expected to Improve Metals Results • Winchester Has Additional Earnings Potential from Defense Related Opportunities
Slide 8: John L. McIntosh
John L. McIntosh President, Chlor Alkali Products
Slide 9: Olin Has Leading Capacity Share in Eastern U.S.
Olin Has Leading Capacity Share in Eastern U.S. Total Industry Capacity Other 4% Bayer 3% Mexichem 2% Georgia Gulf 3% Vulcan 6% Pioneer 5% Formosa 6% Olin 9% PPG 12% Occidental 19% Dow 31% Source: CMAI Chlor Alkali Report • 4th Overall in U.S. Capacity • #1 Capacity Share East of the Mississippi Riv
Slide 10: A $10 Per ECU Change
A $10 Per ECU Change Equates to a $12 Million Change in Pretax Income at Full Capacity, or $.11 Per Share @ 40% Tax Rate
Slide 11: CMAI Estimates of ECU Prices
CMAI Estimates of ECU Prices (For Chlorine to Chemicals and Diaphragm Grade Caustic) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Slide 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 • High Gas Prices Impacting Other Chlor Alkali Producers May Cause Prices to Increase ($1 / MMBTU = $25-$35 / ECU)
Slide 13: Capacity Deletions and Additions
Capacity Deletions and Additions North American Chlor Alkali Capacity Reductions Since 2000 Short Company Location Tons as Chlorine Dow Plaquemine, LA 385,000 Oxy Vinyls LP Deer Park, TX 382,800 Pioneer Tacoma, WA 226,600 Atofina Portland, OR 224,400 La Roche Gramercy, LA 198,000 Dow Ft. Saskatchewa
Slide 14: Chlor Alkali Products
Chlor Alkali Products • Full Year 2003 / 2002 Comparative Results: – Sales Increased $79 million or 25% From 2002 ($ 400 M vs. $321 M) – Operating Income Increased $87 Million (Income of $63 M vs. Loss of $24 M) – Olin’s ECU Netback for 2003, Excluding Sunbelt Joint Venture, Was $325 Compared With $
Slide 15: Chlor Alkali Products First Quarter 2004
Chlor Alkali Products First Quarter 2004 • Seasonal Improvement of Demand From 4Q Levels • Olin ECU Prices May Be Slightly Below 1Q2003 Due to Falling Caustic Prices • Demand in January and February Somewhat Better than Expected • A Chlorine Price Increase of $75 per ton Has Been Announced
Slide 16: Metals
Metals • Olin is Leading 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 17: Metals
Metals • Significant Earnings Leverage as a Result of Cost Cutting and Capacity Rationalization • As the Following Slides Show, 2001, 2002 and 2003 Were Well Below Historical Consumption
Slide 18: U.S. Strip Consumption
U.S. Strip Consumption In MM Pounds 1998 1999 2000 2001 002 2003 2003 consumption est. to be about 7% lower than 2002. We believe the normalized market is somewhat below 1.3 billion pounds per year.
Slide 19: Brass Strip Mill Shipment Industry Profile
Brass Strip — Mill Shipment Industry Profile Base Index Index Market Segment 2000 2002 2003 Auto Electrical 100 94 90 Computer/Telecom 100 65 53 Electrical 100 78 74 Bldg./Household 100 138 142 Other Transportation 100 36 28 Other Commercial 100 81 69 Coinage 100 40 30 Ammunition 100 106 120 Exports
Slide 20: U.S. Brass Rod Consumption
U.S. Brass Rod Consumption In MM Pounds 1998 1999 2000 2001 2002 2003
Slide 21: Metals
Metals • Full Year 2003/2002 Comparative Results: – Sales Were $883 Million (Including Sales of $222 Million From Chase) Compared With $697 Million in 2002 (Including 4Q2002 Chase Sales of $52 Million) – Excluding Chase, Sales Were $661 Million vs. $645 Million – Shipment Volumes, Excluding Chase, D
Slide 22: Metals Summary
Metals Summary • We See Improving Macro-Economic Factors • Historically our Businesses Generally Lag the Recovery by About Six Months • Visibility Has Improved but Remains Limited • Cost Reduction Initiatives Are Expected to Offset Cost Increases
Slide 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
Winchester Products Products Winchester ® sporting ammunition — shot-shells, small caliber centerfire & rimfire ammunition Small caliber military ammunition Industrial products — 8 gauge loads & powder-actuated tool loads End Uses Hunters & recreational shooters, law enforcement agencies Infantry an
Slide 25: Winchester
Winchester • Full Year 2003 / 2002 Comparative Results: – Sales Up 7% Compared to 2002, Primarily Due to Higher Volumes – Operating Income Increased to $22 Million, From $16 Million in 2002 – Increase Primarily Due From Increased Military Demand
Slide 26: Rimfire
Rimfire • To Improve Its Competitive Position, Winchester is Considering Relocating Its Rimfire Manufacturing Operation from East Alton • No Final Geographic Decision Made As Yet
Slide 27: Corporate Office Moves
Corporate Office Moves • Closing Norwalk, CT Headquarters and Moving to East Alton, IL by End of 2004 • Decision Driven By Organizational, Strategic, Economic Advantages • One-time Costs of Approximately $12 Million; Annualized Savings of about $6 Million
Slide 28: A. W. Ruggiero
A. W. Ruggiero Executive Vice President and CFO
Slide 29: Recent Stock Offering
Recent Stock Offering • 10 Million Shares of Common Stock • Done Overnight on February 3, 2004 • Net Proceeds: $178 Million •$ 125 Million Contributed to Pension Plan •$ 53 Million for General Corporate Purposes – Debt Maturities: March 2004 = $17.5 Million; June 2004 = $8.1 Million; June 2005 = $50
Slide 30: Rationale for Stock Issuance
Rationale for Stock Issuance • Strengthens Balance Sheet and Increase Financial Flexibility – Companies with Stronger Financial Positions Have Better Multiples • Company Stock Price Was Close to 52-Week High and Reasonably Close to Its Average High Price for the Past 5 Years • Market Receptive to Ch
Slide 31: Stock Offering Accretive Up to EPS of $0.90
Stock Offering Accretive Up to EPS of $0.90 Assumed Use of Proceeds Proceeds Pretax After Tax EPS Pension Return 9% 125.0 11.3 6.9 0.69 Debt $17.5 at 6.875% 17.5 1.2 0.7 0.07 Debt $8.1 at 4.5% 8.1 0.3 0.2 0.02 Series A notes at 7.11% 27.4 1.9 1.2 0.12 178.0 14.7 9.0 0.90 All values in $ millions, ex
Slide 32: Accretion / Dilution Matrix
Accretion / Dilution Matrix EPS Before Block Trade Post Block w/ Use of Proceeds Accretion EPS Net Inc Avg Shrs EPS Net Inc Avg Shrs (Dilution) $ 0.00 0.0 58.3 $ 0.13 9.0 68.3 $ 0.13 $ 0.50 29.2 58.3 $ 0.56 38.2 68.3 $ 0.06 $ 1.00 58.3 58.3 $ 0.99 67.3 68.3 $ (0.01) $ 1.50 87.5 58.3 $ 1.41 96.5 68.3
Slide 33: Pension Plan
Pension Plan • At 12/31/2003, Pension Plan Under-funded by Approximately $400 MM (as measured under SFAS 87) Before Recent $125 MM Pension Contribution. • During 2003, a 24% Gain in Value of Plan Assets Was More Than Offset by Interest Rate Effect • In 2002, We Recorded a Pretax Charge of $360 MM ($
Slide 34: 2003 Overview
2003 Overview • 2003 Full Years Results: – Sales Increased 22% – Net Loss of $24 Million, Compared With Net Loss of $31 Million in 2002 – Excluding Certain Charges, Olin Reported Adjusted Net Income of $21 Million ($0.36 Per Diluted Share), Compared With Net Loss of $21 Million ($0.42 Per Diluted Sh
Slide 35: Profit Summary
Profit Summary From Earnings Release Full Year—2003 Operating Pretax Net Diluted Income/(Loss) Income/(Loss) Income/(Loss) EPS As Reported $ 21.8 $ 5.5 ($ 24.1) ($ 0.42) Accounting Change (d) - - 25.4 0.44 Restructuring Charge (b) 30.8 30.8 19.8 0.34 As Adjusted $ 52.6 $ 36.3 $ 21.1 $ 0.36 Average D
Slide 36: First Quarter
First Quarter • Expect Earnings At Least Breakeven • Compared to 4Q 2003: – Metals Expecting Improved Results Due to Higher Volumes From Improving Economy and Normal Seasonal Factors – Winchester’s Profits Will Improve Primarily Because of Seasonal Factors – Chlor Alkali Profits Expected to Approxim
Slide 37: Investment Rationale
Investment Rationale • Yield @ $16.00 = 5%; @ $18.00 = 4.4% • Potential for Improved Performance Based On: – Higher Expected ECU Prices in the Next Several Years – A Better Economy Is Expected to Improve Metals Results – Winchester Is a Solid Business and Provides Profits, Cash Flow and Participatio
Slide 38: Cap. Ex. and D&A
Cap. Ex. and D&A ($ MM) 2004 E Capital Expenditures D&A
Slide 39: Investment Rationale (continued)
Investment Rationale (continued) • Commitment to Investment Grade Rating • Projecting Financial Covenant Compliance under Existing Revolver
Slide 40: Forward-Looking Statements
Forward-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 to differ are described in the
Slide 41: Proud Heritage ... Promising Future
Proud Heritage … Promising Future
Slide 42: The Following Slides Are Provided as Background Information
The Following Slides Are Provided as Background Information and Come Primarily from Previous Presentations. 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 43: Metals Products
Metals Products Strip and Sheet Products Copper and Copper Alloy Sheet & Strip (standard / high performance) Network of Metals Service Centers Posit-bond ® clad metal Rolled copper foil, Copperbond ® foil, stainless steel strip Copper alloy welded tube Fabricated products High performance, high reli
Slide 44: Overview of Brass Strip Processing
Overview of Brass Strip Processing Olin is the leader in each of these categories. 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
Slide 45: Key Drivers – Brass Strip
Key Drivers – 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 46: 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 Products
Slide 47: Chase Industries
Chase Industries
Slide 48: 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, Future Cash F
Slide 49: U.S. Brass Rod End Uses
U.S. Brass Rod End Uses Exports Consumer & General Electrical & Electronic Transportation Industrial Machinery & Equip. Building Products
Slide 50: Demand Drivers
Demand Drivers 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
Slide 51: Chase Financial Performance
Chase Financial Performance Years Ending December 31 In Millions of Dollars 1997 1998 1999 2000 2001 2002 2003 Pretax Income
Slide 52: 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 53: Key Drivers—Winchester
Key Drivers—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 • Competition – Alliant TechSyste
Slide 54: Winchester Strategy
Winchester Strategy • 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 •
Slide 55: Chlor Alkali Products
Chlor Alkali Products Products Chlorine / caustic soda Sodium Hydrosulfite Hydrochloric Acid and Sodium Hypochlorite End Uses Pulp & paper processing, chemical manufacturing, water purification, manufacture of vinyl chloride, bleach, swimming pool chemicals & urethane chemicals Paper, textile & clay
Slide 56: 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 Commodity Business
Slide 57: Key Drivers – Chlor Alkali
Key Drivers – 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 Chlor Alkali Producers Have Ann
Slide 58: Chlor Alkali Competitive Advantages / Strategies
Chlor Alkali Products 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 Sunbelt Joint Venture Has Low Manufacturing Costs Due to Membrane
Slide 59: Chlor Alkali Competitive Advantages / Strategies
Chlor Alkali Products 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 Manufacturing and Logistics Optimization • Significant Opportun
Slide 60: Why Olin's ECU Netbacks Differ from Other Producers
Why Olin’s ECU Netbacks Differ 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, Railcar, Truck, Barge, Terminal) • Delivered Price – Freight = Netb
Slide 61: 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 Chlorine Volume and One-Third of the Caustic Volume, Prices Change Quarterly, with a Combination of Formula-based and Negotiated Pricing • Many Contracts Have a One Quarter Lag in T
Slide 62: U.S. Chlorine Uses
U. S. Chlorine Uses 2003 Demand Inorganics 5% Other 13% Pulp & Paper 1% Water 5% Vinyl 39% Propylene Oxide 10% Other Organic 27% Source: CMAI
Slide 63: U.S. Chlorine Segment Growth 2003—2008
U.S. Chlorine Segment Growth 2003—2008 2.8% Other 2.1% Water -0.7% P&P 1.3% Inorganics 1.8% Organics 0.1% Urethanes -0.3% Vinyl 1.0% AAGR %’s are Segment Annual Growth CMAI & Olin Estimates Annual Demand Increase (‘000 ST/Y)
Slide 64: U.S. Caustic Soda End Uses
U. S. Caustic Soda End Uses 2003 Demand P&P 19% Propylene 9% Alumina 3% Exports 13% Water 2% Organic 12% Inorganic 21% Soaps 7% Others 11% Textiles 3% Source: CMAI
Slide 65: U.S. Caustic Segment Growth 2003—2008
U.S. Caustic Segment Growth 2003—2008 1.3% AAGR -2.5% Net Exports 3.2% Other 1.7% Water 1.5% Inorganics -1.5% Textile 2.2% Organics 0.0% Alumina 0.3% P&P %’s are Segment Annual Growth Annual Demand Increase (‘000 ST/Y) CMAI & Olin Estimates
Slide 66: Manufacturing Cost Structure
Manufacturing Cost Structure “Typical” Gulf Coast Diaphragm Plant Nat. gas @ $2.00/mmbtu Steam, less H2 credit 3% Salt 12% Electric Power 40% Other Variable 2% Fixed Cost 43%
Slide 67: Manufacturing Cost Structure
Manufacturing Cost Structure “Typical” Gulf Coast Diaphragm Plant Nat. gas @ $5.5/mmbtu Steam, less H2 credit 4% Salt 9% Electric Power 56% Fixed Cost 30% Other Variable 1%
Slide 68: The Next Slides
The Next Slides Provide the Same Information Provided on the Profit Summary Exhibit to Olin’s January 29, 2004 Earnings Release and Reconciles Reported and Adjusted Earnings
Slide 69: Profit Summary
Profit Summary From Earnings Release (In millions, except EPS) The following table summarizes the significant unusual items impacting the reported operating results. Management monitors earnings per share excluding unusual items such as restructuring charges, unusual charges/credits and accounting c
Slide 70: Profit Summary
Profit Summary From Earnings Release Fourth Quarter—2003 Operating Pretax Net Diluted Income/(Loss) Income/(Loss) Income/(Loss) EPS As Reported $ 2.8 ($ 1.1) $0.4 $ 0.01 Restructuring Charge (b) 1.8 1.8 1.1 0.02 As Adjusted $ 4.6 $ 0.7 $1.5 $ 0.03 Average Diluted Shares 59.0 Fourth Quarter—2002 Oper
Slide 71: Profit Summary
Profit Summary From Earnings Release Full Year—2003 Operating Pretax Net Diluted Income/(Loss) Income/(Loss) Income/(Loss) EPS As Reported $ 21.8 $ 5.5 ($ 24.1) ($ 0.42) Accounting Change (d) - - 25.4 0.44 Restructuring Charge (b) 30.8 30.8 19.8 0.34 As Adjusted $ 52.6 $ 36.3 $ 21.1 $ 0.36 Average D
Slide 72: Profit Summary
Profit Summary From Earnings Release (a) Unaudited (b) Reflects the restructuring charge for the shutdown of our Indianapolis Brass mill and certain other actions. (c) Income taxes for the 2002 fourth quarter and year included a provision in connection with the surrender of life insurance policies p
Slide 73: Indianapolis Shutdown
Indianapolis Shutdown Reduced Cost Base and About 10% of Domestic Strip Capacity • Completed in Mid-February 2003 • Restructuring Charge of $29 Million Pretax Primarily Associated With This Shutdown • Cash Cost of Shutdown Estimated to Be in the $5 Million Range • Pretax Savings From Shutdown Estima
Slide 74: Key Initiatives Have Increased Olin's Financial Flexibility
Key Initiatives Have Increased Olin’s Financial Flexibility • Completed $200 Million Public Senior Note Offering on December 11, • Closed on $140 Million Three-Year Revolving Credit Facility on January 3, 2002 • Completed Common Stock Offering on March 11, 2002 Which Raised $56 Million and Lowered O
Slide 75: 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 – Targeted Headcount Reductions – Optimized Manufacturing – Reduced Capital Spending • Commitment to Investment Grade Rating • Commitment to Maximizi
Slide 76: Olin's Demonstrated Shareholder Orientation
Olin’s Demonstrated 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 – Stock Ownership Guidelines for Senior Managem
Olin — Morgan Stanley Presentation, New York City, February 24, 2004 on 6ix