Olin Corp reported a sharp decline in earnings at the company’s Winchester segment due to reduced commercial demand and higher-commodity material costs. Olin officials no longer see Winchester’s results improving in 2018, but also assured analysts the company has no plans to sell the business.

First quarter 2018 segment earnings were $12.0 million compared to $25.1 million in the first quarter 2017.

The decrease in segment earnings was primarily due to higher-commodity and other material costs, a less favorable product mix and lower selling prices. Year-over-year commodity and other material costs increased $7.0 million.

Sales rose 5.1 percent to $170.9 million as higher military sales offset weakness in commercial sales.

John Fischer, Olin’s president and CEO, said on a call with analysts, “The lower level of commercial ammunition demand has resulted in pressure on commercial ammunition selling prices, in spite of higher-commodity costs and other material costs.”

Fischer noted that commercial sales makes up about two-thirds of Winchester’s mix.

The CEO added that over the last 12 months, commodity and other material costs have increased approximately $18 million. Fischer added, “Through the first quarter of 2018, our efforts to recover the higher-commodity metal prices through selling price increases have not been successful. In addition to the higher-commodity cost headwinds, our product mix in the first quarter of this year was less favorable than the first quarter of 2017.”

In the Q&A session on the call, Olin officials were also asked if they were considering divesting the Winchester business given challenges in the firearms segment, including the bankruptcy of Remington Outdoor and Vista Outdoor’s decision to sell the company’s firearms unit.

Fischer responded that Remington appears to be close to exiting bankruptcy and Vista Outdoor officials were optimistic that the company’s ammunition segment would soon stabilize. But Fischer said Olin is often asked whether a Winchester spinoff makes sense, and he said management continues to believe any spinoff would depend on the value fetched in a sale.

Said Fischer, “We are always faced with the fact that we’ve owned the business since 1892. It has an extremely low tax basis, essentially equal to its working capital. So, any straight sale for cash would have to have a pretty generous multiple on it. And if you look at similar properties to that today in the marketplace, you’re not going to get that. That also impacts your ability to do any kind of tax-free spin. And I would say, again, if you looked at comparables today, you would spin it off. It would trade worse than it’s trading in Olin today.

“So, we’re aware of the issue. We’ve been focused on it. I’ve been looking at it for 15 years, and it really just becomes a value question. That said, even with its weaker results, it’s a significant cash generator for Olin, and I would say, it is a business we understand. It is a business that we can continue to work hard at improving.”

Companywide, Olin, which also owns the chemical products businesses, reported net income rose to $20.9 million, or 12 cents per share, from $13.4 million, or 8 cents a year ago. Adjusted EBITDA improved 9.0 percent to $240.3 million and exceeded expectations due to stronger pricing in both the Chlor Alkali Products and Vinyls and the Epoxy businesses.

Sales climbed 9.1 percent to $1.71 billion.

Despite the weaker expectations for Winchester, Olin reiterated the company’s full year 2018 forecast for adjusted EBITDA of $1.25 billion, with upside opportunities and downside risks of approximately 5 percent. Both the Chlor Alkali Products and Vinyls and Epoxy earnings are expected to continue “improve significantly” in the year. Added Fischer, “With the favorable pricing forecasts, we believe that there is more upside opportunity than downside risk.”

Photo courtesy Winchester