Oct 26, 2012
Executives
Joseph D. Rupp - Chairman, Chief Executive Officer, President and Chairman of Executive Committee John E.
Fischer - Chief Financial Officer and Senior Vice President John L. McIntosh - Senior Vice President of Operations
Analysts
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division Christopher W.
Butler - Sidoti & Company, LLC Edward H. Yang - Oppenheimer & Co.
Inc., Research Division Donald Carson - Susquehanna Financial Group, LLLP, Research Division Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division Aleksey V. Yefremov - BofA Merrill Lynch, Research Division Dmitry Silversteyn - Longbow Research LLC Gregg A.
Goodnight - UBS Investment Bank, Research Division Richard O'Reilly
Operator
Good morning, and welcome to the Olin Corporation's Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Mr. Joseph Rupp, Chairman, President and CEO.
Please go ahead, sir.
Joseph D. Rupp
Thank you. Good morning, and thank you for joining us today.
With me this morning are John Fischer, Senior Vice President, Chief Financial Officer; John McIntosh, our Senior Vice President of Operations; and Larry Kromidas, our Assistant Treasurer and Director of Investor Relations. Last night, we announced the net income in the third quarter of 2012 was $28.7 million or $0.35 per diluted share, which compares to $47.2 million or $0.58 per diluted share in the third quarter of 2011.
Third quarter 2012 earnings in our Chlor Alkali business declined compared to the third quarter of 2011 due to lower chlorine and caustic soda volumes and lower ECU netbacks. These declines more than offset increased bleach and potassium hydroxide volumes and improved hydrochloric acid pricing.
Third quarter 2012 bleach shipments of 50,000 ECU set a record, and the Winchester third quarter 2012 segment earnings improved compared to the third quarter of 2011 segment earnings, and that was due to improved pricing and lower commodity costs. During the third quarter of 2012, Olin generated adjusted EBITDA of $81.3 million, and we continue to believe that we have the opportunity to generate a record level of adjusted EBITDA in 2012.
Fourth quarter 2012 net income is forecast to be in the $0.30 to $0.35 per diluted share range. Chlor Alkali Segment earnings in the fourth quarter of 2012 are expected to increase slightly compared to the fourth quarter of 2011 with higher volumes more than offset lower pricing.
Fourth quarter 2012 Chlor Alkali volumes are forecasted to be negatively impacted by anticipated seasonal customer outages and weaker-than-expected customer demand. The fourth quarter Chlor Alkali forecast also includes onetime costs totaling approximately $3 million associated with 4 scheduled plant maintenance outages.
Winchester earnings in the seasonally weak fourth quarter are expected to more than double compared to the fourth quarter 2011. Fourth quarter 2012 forecast includes approximately $3 million pretax restructuring charges.
The third quarter was a significant one for Olin as we achieved a number of strategic milestones. First, we completed the acquisition of the K.A.
Steel on August 22. K.A, Steel is a chemical distributor, uniquely focused on the distribution of only chemicals that Olin produces.
For this reason, we believe the acquisition will enhance our commodity chemical business increasing the amount of our chlor alkali capacity that can be sold as value-added products. K,A.
Steel contributed segment earnings of $1.9 million and EBITDA of $3.6 million in the third quarter. The acquisition of K.A.
Steel should enhance Olin's profitability, while improving our performance at all points of the economic cycle. We believe that it will realize between $7 million and $10 million of synergies during the first year of ownership, and we'll achieve annual synergies of at least $35 million at the end of 3 years.
These synergy opportunities include increasing the sale of bleach, hydrochloric acid, potassium hydroxide, freight and logistic cost rationalization and improve caustic soda sales and distribution. Our second accomplishment in quarter was to support the K.A.
Steel. We did issue $200 million of Senior Notes.
These notes, which have an interest rate of 5.5% and a 10-year maturity, fit nicely with our objective of maintaining staggered maturities while maintaining manageable towers of debt that come due in any single year. Third, in September, the Chlor Alkali business successfully started the second of our low-salt high-strength bleach plants in Niagara Falls, New York.
This follows the successful startup of our first salt-to-bleach plant at McIntosh, Alabama, that occurred during the first quarter. The new plant has the capacity to manufacture approximately 33,000 ECUs of bleach which increases the amount of our chlor alkali capacity that can be sold as bleach to 15%.
We expect a third low-salt high-strength bleach plant located in Henderson, Nevada to be operational in the first quarter of 2013, and this will further increase the amount of our chlor alkali capacity that can be sold as bleach to 17%. Fourth accomplishment in the quarter was the first of the 2 new membrane technology, chlor alkali cell rooms, at Charleston, Tennessee successfully started up in September.
This cell room produces caustic soda. The second Charleston membrane cell room, which will produce potassium hydroxide, is scheduled to start up in November.
And with this, the production using a mercury cell technology in Charleston will be completed. At that point, Olin will have successfully exited the chlor alkali in Charleston.
The fifth accomplishment was the start up of the first cell room in Charleston. The mercury salt chlor alkali production on Augusta, Georgia plant was also discontinued.
The Augusta facility will continue to operate as a distribution facility, and will no longer manufacture chlorine and caustic soda. Finally, the ongoing Winchester Center for our relocation project also achieved a significant milestone in the third quarter.
Less than 1 year after the new building in Oxford, Mississippi was completed, the project began to operate and began to generate positive returns. We continue to believe that the annual cost savings after the relocation is completed will be approximately $30 million, and the benefit 2013 should be in the $10 million to $15 million range.
The combination of these strategic initiatives provides Olin with the opportunity to generate in excess of $400 million of adjusted EBITDA in 2013. This will be driven by the inclusion of the K.A.
Steel cash flow benefits and synergies for a full year from the center for our ammunition relocation and further growth in the sale of bleach in the range of 10% to 15%. This opportunity exists in an environment where 2013 capital spending should decline to levels well below what have been incurred annually in 2011 and 2012.
Let me discuss the Chlor Alkali and Winchester segments in more detail. The third quarter of 2012 Chlor Alkali segment earnings were negatively impacted by a number of factors.
Third quarter 2012 chlorine and caustic soda volumes declined 5% compared to the third quarter of 2011. Chlorine shipments to 2 large end-use markets, vinyls and titanium dioxide declined 15% and 24%, respectively, when compared to 2011 third quarter levels.
Chlorine volumes late in the quarter were also negatively impacted by an earlier-than-normal seasonal outage at a pipeline customer and the normal seasonal slowdown in bleach. The third quarter 2012 operating rate was 83% compared to 85% in the third quarter of 2011.
We did not experience any significant impact due to the hurricane Isaac. Currently, expect fourth quarter volumes to be seasonally weak reflecting several customer outages and 4 scheduled Olin plant outages.
We currently expect the fourth quarter operating rate to be in the mid-70% range. During the third quarter, bleach continued to be a positive contributor to our earnings.
Year-over-year third quarter 2012 the bleach volumes increased for the 19th consecutive quarter and reached a record level of 50,000 ECUs. Third quarter 2012 volume represented a 9% increase over third quarter 2011, and the premium earned in the sale of bleach compared to sales of chlorine and caustic soda exceeded $150 per ton.
ECU netbacks in the third quarter of 2012 were approximately $560 compared to approximately $595 in the third quarter 2011, and approximately $575 in the second quarter of 2012. The sequential decline in the netback reflects lower chlorine prices.
In the fourth quarter of 2012, we expect netbacks to improve as benefits from the second quarter of 2012 with $60 per ton caustic soda price increase more than offsets continued weakness in chlorine pricing. We believe that approximately $40 of the second quarter price increase will ultimately be reflected in the market.
The current weakness in chlorine demand will support caustic soda price increases. We also believe that some portion of the third quarter price increase, which range between $35 and $80 per ton, will be reflected in the first half of 2013.
The Chlor Alkali segment earned $59.5 million in the third quarter of 2012 and generated approximately $80 million of segment EBITDA during the quarter. This compares to third quarter 2011 segment earnings and EBITDA of $76.6 million -- $76.7 million, and approximately $90 million, respectively.
The year-over-year decline in the Chlor Alkali segment earnings reflects the combination of lower chlorine and caustic soda volumes, lower ECU prices and the startup costs associated with the new Charleston membrane plant and the Niagara Falls low-salt high-strength bleach plant. This costs totaled of $4.9 million during the third quarter.
Fourth quarter 2012 Chlor Alkali segment earnings are expected to improve slightly compared to the fourth quarter 2011 segment earnings. Now let me turn to Winchester.
Winchester continues to experience robust commercial demand with year-to-date ammunition purchases nationally estimated to be 25% higher than during the same period 2011. Winchester September 30, 2012, commercial backlog, which was more than double the September 30, 2011, level evidence of the current strength of the commercial market.
Winchester's total backlog, as of September 30, 2012, exceeded $200 million. As a result of this, third quarter 2012 commercial sales increased to 13% compared to the third quarter 2011.
The strength offset weaker law enforcement and military sales, which declined 21% in the third quarter of 2012 compared to the third quarter of 2011. A portion of this decline was due to the timing of military shipments which were delayed until the fourth quarter.
Winchester sales in the seasonally weak fourth quarter are forecast to decline compared to the third quarter but are forecast to increase year-over-year. Winchester earned $16 million in the third quarter of 2012 compared to $13.1 million in the third quarter of 2011.
The combination of improved pricing and lower commodity metal costs more than offset higher manufacturing costs and other material costs. A portion of the year-over-year increase in manufacturing costs is attributable to higher depreciation, created by the ongoing centerfire relocation project.
For the first time in several quarters, Winchester's commodity metal costs declined on a year-over-year basis. The average acquisition price of lead declined approximately 10%, while average zinc and copper acquisition prices declined 12% and 5%, respectively.
I mentioned earlier that during the third quarter, the centerfire relocation project began to generate positive returns. During the first quarter of 2012 -- fourth quarter of 2012, these returns will become significant.
And this contributes to our forecast of Winchester's fourth quarter 2012 earnings will more than double compared to fourth quarter of 2011. And I'll remind you that's our seasonally weak quarter, the fourth quarter.
In late September, we notified the United States Army that our joint venture company, U.S. Munitions, was not the successful bidder for the Lake City Army Ammunition Plant contract.
However, also in late September, Winchester was awarded a $22 million addition to the second year of the 5-year second source small caliber ammunition contract with the United States Army. The second year of the second source contract will be delivered in the middle of the 2013 to the middle of 2014.
In spite of the year-over-year decline in earnings in our Chlor Alkali business, I feel positive about the direction that Olin's headed as we move towards 2013. Within the Chlor Alkali business, the value-added by bleach should continue to grow while the benefits of the centerfire ammunition relocation will become significant.
Further, the addition of the K.A. Steel business for a full year, when combining realization of the synergies should provide a meaningful year-over-year improvement in earnings and cash flow.
I'm going to turn the call over now to our Chief Financial Officer, John Fischer. John?
John E. Fischer
Thanks, Joe. First, I'd like to discuss a few items on the income statement.
Selling and administration expenses increased $2.6 million or 7% in the third quarter of 2012 compared to the third quarter of 2011. This increase was primarily due to an increase in mark-to-market adjustments for stock-based compensation and expenses associated with the acquired K.A.
Steel business. Selling and administration expenses were approximately 7% of sales in both the third quarter 2012 and the third quarter of 2011.
Third quarter 2012 charges to income for environmental investigatory and remedial activities were $3.6 million. Third quarter 2011 charges to income for environmental, investigatory and remedial activities were $2.5 million, which included $1.5 million of recoveries from third parties from environmental costs incurred and expensed in prior periods.
After giving considerations to the recoveries in 2011, year-over-year expense related to environmental, remedial and investigatory activities decreased by $400,000. These charges related primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites.
We now estimate that full year 2012 expenses for environmental, investigatory and remedial activities will be in the $8 million to $12 million range. We do not expect any environmental recoveries in the fourth quarter of 2012.
On a total company basis, defined benefit pension plan income was $5.6 million in the third quarter of 2012 compared to $6 million in the third quarter of 2011. We are not required to make any cash contributions to our domestic defined benefit pension plan in 2012.
Under the pension funding relief provisions of the Moving Ahead for Progress in the 21st Century legislation, we may not be required to make any additional contributions to our domestic defined benefit pension plans for several years. The plan will, however, face higher PBGC fees as a result of the legislation.
During 2012, we have made cash contributions to our Canadian defined benefit pension plan of approximately $600,000. As a reminder, under Canadian pension rules, service costs are required to be funded annually.
Defined contribution pension plan expense was $4.2 million in the third quarter of 2012 compared to $3.5 million in the third quarter of 2011. The vast majority of our employees now participate in the defined contribution pension plan.
As a reminder, our domestic defined benefit plan is frozen to new entrants, all salary and nonunion hourly and most union employees. During the third quarter, Olin recorded a $2.3 million restructuring charge.
This charge was primarily associated with employee severance and relocation expenses associated with the ongoing Winchester centerfire relocation project, and exiting of the use of mercury cell technology in our chlor alkali manufacturing process. We expect to incur approximately $7 million of additional restructuring charge associated with the Chlor Alkali projects through 2013, and approximately $11 million of additional restructuring charges associated with the Winchester relocation between now and the end of 2016.
We expect total restructuring charges in 2012 related to these projects to be approximately $9 million. The effective tax rate for the third quarter was 38.5%, which included $1.2 million of onetime expenses primarily associated with previously undistributed earnings from Winchester's Australian operations and the finalization of 2011 federal and state tax returns.
Excluding these items, the third quarter 2012 effective tax rate would have been 36%. We currently expect the full year 2012 effective tax rate, which reflects the favorable adjustments recorded in the second quarter, to be approximately 34%.
Due to the level of capital spending in 2012 and the corresponding accelerated depreciation, the forecasted 2012 cash tax rate is approximately 17%. Now turning to the balance sheet.
Cash and cash equivalents at September 30, 2012, including the restricted cash associated with the Go Zone and Recovery Zone financings that are classified as long-term assets on the balance sheet, totaled $121.6 million. As of September 30, 2012, the restricted cash balance was $18.5 million, and we believe the majority of that restricted cash will be utilized during 2012.
During the third quarter of 2012, the working capital employed declined by approximately $36 million. This is consistent with the normal seasonal pattern that causes working capital to increase during the first 2 quarters of each year to be followed by 2 quarters of working capital declines.
During the first 2 quarters of 2012, working capital increased by approximately $72 million. We expect an additional reduction in working capital in the fourth quarter of 2012 of approximately $40 million.
Capital spending during the first 9 months of 2012 was $210.8 million. Of this total, approximately 48% supported the Charleston mercury cell technology conversion project, and approximately 22% supported the 3 low-salt high-strength bleach projects.
As a result of this projects, we currently expect full year 2012 capital spending to be in the $240 million to $250 million range. With the completion of the Charleston conversion project in 2012, the completion of 2 of the 3 HyPure Bleach facilities, and lower levels of Winchester centerfire ammunition relocation capital spending, we expect 2013 capital spending to be approximately $100 million to $140 million lower than the elevated 2012 level.
The combination of high levels of capital spending and the acquisition of K.A. Steel will result in increased levels of depreciation and amortization expense.
2012 depreciation and amortization expense is forecast to be in the $110 million range, and we expect this to increase to the $130 million to $140 million range in 2013. During the third quarter 2012, as Joe mentioned, we issued $200 million of 10-year senior notes at an interest rate of 5.5%.
This issuance, which was used to help fund the acquisition of K.A. Steel, increased Olin's total debt to $715 million.
Within the debt outstanding, there are no significant maturities until 2016, and the weighted average duration of the debt is in excess of 9 years. Contributing to this duration is $80 million of the Recovery Zone bonds, which mature in 2033 and 2035.
During the fourth quarter of 2012, $12.2 million in debt payments will be made on the SunBelt notes, which require annual payments through the end of 2017. In spite of the additional debt that has been added to support the recent investment projects and the acquisition of K.A.
Steel, the Olin balance sheet remains strong. As I just mentioned, the company does not foresee any significant debt maturities for several years, we are entering a period of significantly lower capital spending and we do not foresee any near-term cash contributions to the large domestic defined benefit pension plan.
Yesterday, Olin's Board of Directors declared a dividend of $0.20 on each share of Olin common stock. The dividend is payable on December 10, 2012, to shareholders of record at the close of business on November 9, 2012.
This is the 344th consecutive quarterly dividend to be paid by the company. Before we conclude, let me remind you that throughout this presentation, we have made statements regarding our estimates of future performance.
Clearly, these are forward-looking statements, and results could differ materially from those projected. Some of the factors that could cause actual results to differ are described, without limitations, in the Risk Factor sections of our most recent Form 10-K and in the third quarter earnings release.
A copy of today's transcript will be available on our website in the Investors section under Calendar of Events. The earnings press release and other financial data are available under Press Releases.
Operator, we are now ready to take questions.
Operator
[Operator Instructions] Our first question will come from Frank Mitsch of Wells Fargo.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
Joe, I got to tell you, your facility in Oxford is something to behold. Very impressive, and I must say the food is great, too.
You're talking about the chlor alkali demand and chlorine demand being down, I think, 15% for PVC customers and 24% in the TiO2 arena. How -- what are you hearing from your customers with respect to the fourth quarter in those areas?
John E. Fischer
Frank, this is John. We don't -- we've not heard anything that would indicate to us that there's going to be a dramatic change in demand.
We're looking really for volumes to be relatively flat.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
All right, great. And as I -- and I would assume then that if your operating rates are in the mid-80s, something like that, that you've got a lot of confidence with respect to the caustic price increases being realized?
John E. Fischer
We do. If you look at the last industry operating rate numbers that were are released, there was a pretty significant drop in the industry operating rates.
And we don't expect that to get significantly better in the fourth quarter either. So we think we're positioned well for caustic pricing momentum to be positive.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
So that September rate, I think it was 79% for the industry overall, so that September rate is indicative of where you think the fourth quarter is trending, might trend?
John L. McIntosh
Yes, sir. I believe that to be the case.
The operating rate dropped 5%, and from September to October. So we -- as we look at operating rates for the industry, we think that's going to be indicative of what we're going to see in the fourth quarter.
There have been several outages, including some in our system that have been announced by the various producers, so everything seems to support that same trend.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
All right. Great.
And Mr. Fischer, you talked about lower capital spending next year and a lack of pension contribution, et cetera.
So can you just remind us of your priority uses of cash with respect to debt pay down share buyback, et cetera.
John E. Fischer
Well, debt pay down, we're just going to pay down based on the terms of the debt we have. So we don't have any significant maturities until 2016.
We have between now and then about $12 million a year to repay on the SunBelt notes, and there's one other small issuance of $11 million or $12 million that gets repaid next year. So that's not a priority.
I think our priorities would go in order of -- we continue to look for opportunities to invest in the business that will improve cash flow and EBITDA. I think as we've said historically, we believe that the dividend is a key component of our shareholder value proposition.
And that Olin has had a lot more success over a long period of time, rewarding shareholders with dividends than we have with share repurchases.
Operator
And our next question will come from Christopher Butler of Sidoti & Company.
Christopher W. Butler - Sidoti & Company, LLC
This question may be better suited for your customers than you, but as you look at the demand environment for chlorine, looking out a little bit, and with some of the more optimistic numbers coming in from the U.S. housing market, how do you see volumes beyond the fourth quarter as we look into 2013 a bit?
Joseph D. Rupp
I would guess that at face value with very little historical information, you would tend to believe that operating rates are going to go up. But the first quarter again doesn't have much seasonal chlorine demand in it, and even the vinyls demand associated with housing use typically isn't first quarter -- -- seen as a first quarter impact.
So in order to be -- we're going to have get a lot closer to the second quarter of next year, I think, Chris, to really be confident that there's really increased demand behind some of this anecdotal evidence on housing improvement.
Christopher W. Butler - Sidoti & Company, LLC
And I'd have to imagine, correct me if I'm wrong, but due to your position in the supply chain and when vinyl often gets used in the construction of a house, that there's generally a decent lag before you would start to see any real benefit, does that sound about right?
Joseph D. Rupp
That's why I mentioned the second quarter, yes, that would be right.
Christopher W. Butler - Sidoti & Company, LLC
And shifting gears to Winchester a little bit. Could you give us an idea of what the savings were here in the third quarter from the restructuring?
And could you talk to the demand environment this year with the election and how you think this plays out next year in a post-election year?
John E. Fischer
The savings in Q3 were not significant that would -- Q3 was the quarter where we actually went from them being a negative to them being a positive. And we talked about fourth quarter savings actually becoming significant.
So we talked about the doubling, more than doubling of Winchester's earnings driven by that in the year-over-year in the fourth quarter.
Joseph D. Rupp
And you have the demand has certainly picked up. The question is, what's the major driver for one big piece of it is that we're in the peak season for hunting right now.
So historically, our demand picks up very dramatically right now and it has -- we've had a pretty good hunting season. And of course, there's concerns as what happens from an election perspective as you recall.
So we forecast that they'll a pretty reasonable demand through the balance of the year, and then actually, our sense is that, that will carry over into the first quarter.
Christopher W. Butler - Sidoti & Company, LLC
And just to be clear, when you're saying just kind of turning the corner on the savings versus the cost, that's net the restructuring cost that you point out, correct?
John E. Fischer
No. That is the cost that are embedded in the Winchester results.
Operator
Our next question will come from Edward Yang of Oppenheimer.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Maybe start with some modeling questions. The $1.1 million charge to eliminate the K.A.
Steel contribution, how does that work? Was it eliminated on the revenue line, and then well, maybe an explanation there.
John E. Fischer
That represent sales of caustic soda from Olin Chlor Alkali to K.A. Steel.
The revenues are eliminated and to the extent that, that the product that was shipped from Chlor Alkali to K.A. Steel was not sold by K.A.
Steel, the profit recognized by Chlor Alkali was reversed. That is showing up as a charge in our corporate and other segment line.
That number will -- there will be a number there every quarter because we will be selling caustic to K.A. Steel from our Chlor Alkali business and it will get trued up every next year.
Our expectation is that the volumes sold through there will not change dramatically in the short run, so that number will not be significant moving forward.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Okay. Well, why don't you just eliminate it as an intercompany elimination versus closing up the numbers and then taking a charge?
John E. Fischer
We're going to do that, and we're going to just take it as an intercompany elimination in the corporate and other line.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Okay, got it, got it. And then the interest expense on the $200 million notes, you pay that I believe, semiannually, but from a book purpose, are you accruing the interest quarterly?
John E. Fischer
The interest was accrued in the third quarter from August 22 forward.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Okay. And then -- but again, accruing going forward, it's going to be quarterly, although you pay it out semiannually?
John E. Fischer
That's correct.
Joseph D. Rupp
Yes.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Okay, got it. And the 4 scheduled outages that you're going to have in the Chlor Alkali business s, how much is that subtracting out from your utilization?
Joseph D. Rupp
We -- in one of the earlier questions we were talking about in industry operating rates, in mid- to high 70s, these outages will reduce our available capacity by about 3%. So we're talking about, for our system, a mid-70s number for the fourth quarter.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Got it. And staying with Chlor Alkali, John, maybe thinking longer term, operating rates really over the last 2 to 3 years have been in the mid-70s to the low 80s, et cetera.
And historically, those levels are not indicative of a very healthy demand and more associated with kind of a sluggish demand levels. If we see this types of operating rates going forward, what do you think, I mean, how close are we in terms of like you're seeing some additional industry capacity rationalization?
And is there any movement on that front in terms of taking down capacity in this industry?
Joseph D. Rupp
First and foremost, Edward, we're taking -- we took capacity out of his quarter, as you know. So there's 160,000 tons that has come out in September and October of right now.
So it's a -- that's a first step. There is still a little dab of mercury cell capacity sitting out there unknown to us exactly what those who own it will do.
But I don't think as we think that, that might be kind of capacity would come out. And there's some other stranded capacities that I'm sure the higher cost facilities that would be taking a look at in an environment of over-capacity.
Edward H. Yang - Oppenheimer & Co. Inc., Research Division
Well, do you think that if we could just kind of stay within a range here in the 70s and the 80s, that are we going to see pricing continue to flatten out or are there improvements. I know, in the short term, you're seeing some improvement on caustic soda pricing, but I would assume that you're not going to have a lot of pricing power -- or the industry's not going to have a lot of pricing power until you see operating rates move up higher.than current levels
John E. Fischer
I think our thinking is that the caustic -- this slowdown that we're experiencing on the chlorine side is going to strengthen caustic, as you know, which will allow the remainder of announced price increases to come into fruition in the first quarter of next year. If things remain that way, it will keep caustic tight.
If the economy picks up, with building and the repair and replacement market picks up, as well for the building, ultimately and exports pickup, you'd see higher operating rates on chlorine, which ultimately will manifest itself in increase prices on the the chlorine side.
Operator
Our next question will come from Don Carson of Susquehanna Financial.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
John, I just wanted to clarify a few things on Chlor Alkali. So you're indicating that, that 81% September effective industry rate was already down 5 points in October?
John E. Fischer
Yes, sir. That was the announcement that came out just very recently.
81% was the September number, which was down 5% from August. October won't be available for another...
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
Okay . I heard you say -- I thought that I heard you say that October was down another 5 points.
John E. Fischer
Yes. [indiscernible]
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
Okay. And then secondly, just remind me, what was your ECU realization this quarter versus last?
John E. Fischer
It was approximately 560, third quarter was approximately 570.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
All right, okay. And John, what's your TiO2 customer telling you about their level of demand in Q1?
Are you still expecting some weak TiO2 end markets going into next year as well?
John E. Fischer
Well, I don't know that we've really gotten an indication directly from any of our TiO2 customers about anything past the current quarter. I believe there are long-term trends into 2013 indicate that they expect that market to pick back up.
But I'm not seeing any indication whether that's a first quarter, second quarter or when in '13 that expectation is.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
Okay. And then shifting over to the caustic side.
With the slowing industrial economy, what are you seeing from a demand standpoint from your caustic customer domestically?
Joseph D. Rupp
We've not seen a significant change. I mean, if you look at our last quarter segment analysis, we did see relatively flat pulp and open paper numbers.
Demand on pulp and paper, we did see a little bit of decrease on the superabsorbents' market segment. But that was driven in some case by customer normally -- normal scheduled outages.
We've not seen much change in caustic. We have a minimal caustic inventory in our system.
We built some caustic inventory to deal with outages we have scheduled in the fourth quarter. And we're still operating on 100% order controlled basis with our caustic customer base.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
Okay. And then final question.
Do you think previous people have been trying to get what sort of your sweet spot in terms of operating rates. But what would think of as a threshold where industry operating rate where caustic would lose pricing power?
Is that getting up over 90% operating rates again?
John E. Fischer
I think if you look historically, that's been the range at which chlorine demand will cause caustic supply to move to the long -- to a long position. So that would be a pretty good number to use, I think, based on history.
Operator
And our next question will come from Herb Hardt of Monness, Crespi, and Hardt.
Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division
Now that you've got this capacity pretty much online, what is your maintenance CapEx expected to be next year?
John E. Fischer
Maintenance capital is probably in the $70 million to $90 million range across the spectrum of Chlor Alkali and Winchester.
Joseph D. Rupp
And K.A. Steel.
John E. Fischer
And K.A. Steel, yes.
Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division
Second question is the $60 million tax benefit from the K.A. Steel.
Is that just going to show up as a lower tax rate or is it a one-time item? How will that be reported?
John E. Fischer
It's going to show up as lower cash taxes, it will not run through the effective tax rate and it will be realized over a 10 to 15-year period. We talked about it, Herb, it's actually that gross value of the benefit is about $120 million, the $60 million is the net present value of it.
Herbert Hardt - Monness, Crespi, Hardt & Co., Inc., Research Division
Our next question will come from Alex Yefremov from Bank of America Merrill Lynch.
Aleksey V. Yefremov - BofA Merrill Lynch, Research Division
John, could you talk about latest trends in freight rates and also electricity cost?
John E. Fischer
Freight rates have been relatively flat. Our third quarter freight rates, sequentially, were flat with what we saw in the second quarter of this year.
And when you look at year-to-year on freight, the freight rates actually down marginally in the third quarter of 2012. Electricity rates, as we move into the fourth quarter, which is the nonpeak period for electricity, we, for sure, won't see any peak pricing.
The industry operating rates are such that we should see relatively flat, no change kind of electricity pricing.
Aleksey V. Yefremov - BofA Merrill Lynch, Research Division
Great. And in terms of your volumes this quarter, were are your volumes impacted at all by your, I guess, outages, plant shutdowns and startups?
Or is this purely a function of a customer demand?
Joseph D. Rupp
Purely a function of demand. The outages that we had associated with the conversions and the normal maintenance outages we're well within the window that we could have -- would have made -- would have met demand regardless.
Aleksey V. Yefremov - BofA Merrill Lynch, Research Division
Okay. And finally, if I may.
On -- could you just talk about K.A. Steel?
K.A. Steel transition, how is it going so far, customer feedback, et cetera?
Joseph D. Rupp
We have -- it's been very positive so far. We have seen nothing that would deter us from what we have said before that it's a very positive investment opportunity for Olin.
We've seen nothing that would change our commitment to the synergy levels in year 1 and year 3, that were mentioned in the remarks. We're very comfortable with our ability to retain customers and suppliers.
So, so far, no surprises.
Operator
Our next question will come from Dmitry Silversteyn of Longbow.
Dmitry Silversteyn - Longbow Research LLC
A couple of questions, the shipping rates have been answered. But can you talk about what your capacity is going to be like once you're done with the mercury transformation.
You've shut down 1 plant, you're in the process of shutting down or converting the production in the other . I heard your capacity at just under 2,000 short tons.
Is that sort of the right number to look at?
Joseph D. Rupp
I think it's higher. It ends up 2,050 when the capacity comes out.
We can't give you the exact number on that, but our capacity is actually coming down 160,000 tons.
John E. Fischer
Which is about 7%.
Dmitry Silversteyn - Longbow Research LLC
Okay, so it will be down to about 2.05 then from about 2.2.
Joseph D. Rupp
[indiscernible] can validate that for you.
Dmitry Silversteyn - Longbow Research LLC
Okay, that's fine. That's great.
Even with that 7% of capacity coming out, you're still looking at a fairly low utilization rate in the fourth quarter, so that's based off of new capacity? That needs -- coming each was way that you were talking about?
Joseph D. Rupp
Yes.
Dmitry Silversteyn - Longbow Research LLC
Okay, just wanted to confirm. And Winchester, it sounds like things are getting significantly better there, especially with the benefits of the centerfire relocations starting to flow through.
You talked about doing in the fourth quarter, twice or better than twice the earnings they did in the quarter last year which was only -- which is only only $0.5 million, if I remember correctly. So are you still looking at sort of low single-digit type of profitability in terms of millions of dollars for that business in the fourth quarter?
John E. Fischer
Less than $5 million, yes.
Dmitry Silversteyn - Longbow Research LLC
Yes, yes.
Joseph D. Rupp
I think the key point we're trying to make is we've crossed over the line to where the plant is up an operating and we're starting to see the savings and that will continue to increase as we move through next year.
Dmitry Silversteyn - Longbow Research LLC
Got it. Okay, that's helpful.
And then finally, on the chlorine and the sodium hydroxide pricing, you gave us ECU netback, which includes our transportation cost. But if you just look at the caustic price, did it continue to -- can you tell us what your average was for the quarter?
Joseph D. Rupp
We don't separate it out, but we will tell you, we're forecasting caustic pricing to increase as a part of the ECU movement in the fourth quarter.
Dmitry Silversteyn - Longbow Research LLC
By about $40, I think, you mentioned?
Joseph D. Rupp
The $40 is an estimate of what the market will realize. And there will be some timing lag and discount to that as we work that $40 market price realization through our system.
Operator
And our next question will come from Gregg Goodnight of UBS.
Gregg A. Goodnight - UBS Investment Bank, Research Division
Dimitry did a great job in asking all my questions So I appreciate that. only question I have remaining was, with Augusta down, are you going to recapture some of that volume's been moving that demand to other plants?
And it seems to me that if you do that, you would actually get some improvement in operating rates overall. I was surprised to hear a mid-70s number for your expected operating rates in 4Q.
John E. Fischer
Well, the fourth quarter number's influenced by outages, customer demand and just the typical seasonal change that we see. Obviously, as we've taken capacity out of our system, we would expect to see, as we move into the periods, the quarters where we have the peak demands, to have higher utilization rates.
We will not, just because we've shut down operations at Augusta, we will still continue to serve customers. We're converting that Augusta operation to a terminal.
We will still produce bleach there. And we will, to the extent necessary, bring product in from other manufacturing locations to serve other product requirements in the geography.
Gregg A. Goodnight - UBS Investment Bank, Research Division
Okay. Concerning the 4 shutdowns you mentioned in total, what percentage of your capacity will be unavailable as a result of the shutdowns in the fourth quarter?
Joseph D. Rupp
Approximately 3%.
Operator
Our next question will come from Richard O'Reilly of Revere Associates --
Richard O'Reilly
Joe, in your opening comments, you made a statement about generating EBITDA of $400 million or more than $400 million sometime in the future. And it looks like you're going to do about $350 million or so this year.
What's your assumptions behind that jump there? K.A.
Steel as part of it, but what else are you looking at?
Joseph D. Rupp
K.A. Steel, the achievement of the lower cost structure at our Winchester operations, which will significantly improve as we go next year, and the benefits of the bleach investments that we have made this year, all 3 of that those plants will be operating, Richard, next year.
So we're really confident that this -- -- we're moving in that direction.
Richard O'Reilly
Okay, and K.A. Steel is what?
Still $30 million a year contribution. ?
John E. Fischer
Low 30s with EBITDA, and as you close, we've announced with synergies are $7 million to $10 million next year.
Richard O'Reilly
Okay, fine. Okay.
Plus $7 million to $10 million, okay.
Operator
And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr.
Joe Rupp for his closing comments.
Joseph D. Rupp
We'd like to thank you for joining us this morning, and we'll look forward to speaking with you in January when we announce the results of 2011. Thank you.
Operator
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.