The key objective for broadening our sources of earnings and distributable cash is to improve the reliability and sustainability of distributions to unitholders. We have consistently generated distributable cash in excess of our distributions despite a strike at our largest supplier of sulphur products, competitive pressure from imported products, increasing raw material costs and a rising Canadian dollar.
During 2004 we took further steps to strengthen our businesses, with particular focus on our Performance Chemicals products. These initiatives and others we are pursuing have solidified the sustainability of our businesses.
Highlights of the Year
- Generated distributable cash of $1.87 per unit while distributing $1.80 to our unitholders.
- Increased distributable cash by 23.5% from $34.9 million in 2003 to $43.1 million in 2004.
- Secured long-term contracts with the majority of our powder SHS customers in Canada and the U.S..
- Strengthened the foundation of our business through improved operational efficiencies and pursuit of organizational excellence.
Distributable Cash
Total distributions attributable to 2004 were $1.80 per unit. Every year since the 2001 IPO, including 2004, we have generated distributable cash in excess of distributions paid to unitholders. We have retained this excess to assist us in maintaining a stable distribution rate even if there is a temporary business downturn in a segment of our operations or we incur expenses pursuing growth initiatives.
2004 Financial Results
Cash available for distribution for the year ended December 31, 2004 was $43.1 million, or $1.87 per unit (2003: $34.9 million, or $1.92 per unit). This was generated from revenue of $346.4 million (2003: $290.6 million) and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $52.6 million (2003: $44.5 million). Further detailed discussion of the Fund’s financial performance can be found in Management’s Discussion & Analysis, including the number of units used in calculating the per unit amounts.
Two significant factors affected our 2004 results. We benefitted from a full year of earnings from Pulp Chemicals which was acquired in August 2003. However, these additional earnings were partially offset by reduced earnings from our Performance Chemicals products due to increases in raw material costs and pricing pressure on our powder SHS business. Other factors contributing to our results included a strong year from Sulphur Products, especially sulphuric acid, and a solid performance from our International business.
Strengthening Our Competitive Position
During the first quarter of 2004 we became concerned about potential competition from powder SHS imported from China. Our response was to focus on retaining our customer base and reducing our cost structure. We made significant progress on both fronts.
By year end, more than 85% of our U.S. and Canadian powder SHS volume was under contract, and more than 60% of that volume extended to the end of 2006 or beyond. Most importantly, our largest customer is under contract until 2008 for all of their sites in North America. Finally, the strength of our customer relationships is evident from the fact that our 2004 total SHS volumes were essentially the same as 2003.
Although we also successfully reduced many costs in the business, the cost of caustic soda, a key raw material, increased substantially in the fourth quarter of 2004 and we anticipate that it will continue to increase in 2005. Caustic soda is an important input in the SHS manufacturing process. Caustic soda prices tend to be cyclical and are currently being pushed higher by a slight reduction in production capacity, high natural gas prices and high industrial demand. Although we expect the price will cycle down again, we do not anticipate this will happen in 2005.
We continue to search for ways to reduce our exposure to caustic soda, including reducing usage, negotiating better supply contracts and encouraging certain customers to provide their own caustic soda if they can purchase it more cheaply. Approximately 10% of our SHS customers have adopted this last practice.
People
Once again our people demonstrated their ability to adapt to rapidly changing market conditions and to find innovative solutions to complex problems. Innovative thinking and successful execution are necessary elements to maintaining excellent customer relationships and finding methods of increasing our productivity. Our Chemtrade Team performed excellently on both of these broad fronts and will do so again in 2005.
This level of creativity and dedication is evident throughout Chemtrade and is a key ingredient of our continuing success. I thank all of our employees for their contribution.
I am also thankful for the involvement, guidance and counsel of our Board of Trustees.
Conclusion
Some of the challenges we faced in 2004 will continue into 2005, but we believe that we are pursuing the correct strategies and tactics to strengthen our business. Although we expect distributable cash generated in 2005 will be less than that generated in 2004, we also believe that our current annual distribution rate of $1.80 per unit is sustainable.
We are also continuing to seek new acquisitions that will further broaden our earnings base and grow distributions. Our criteria for that have not changed – they must be within our core competencies and they must be accretive for unitholders. We believe there are businesses that would be excellent strategic additions to Chemtrade, but we will not overpay.
Looking beyond 2005, we believe that the challenges we are currently facing will have lessened. We will continue to implement additional efficiencies in our operations and caustic soda should have passed its peak pricing. Further, we will also be marketing additional sulphuric acid volume from Inco as they comply with environmental regulations to capture more SO2 gas, and we anticipate stronger earnings from Pulp Chemicals.
Mark Davis
President and Chief Executive Officer
March 3, 2005
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