Chemtrade 2003 AGM

Mark Davis
President & CEO

Good morning, ladies and gentlemen. I'm pleased to be here today to report to unitholders following our first full year of operations. Traditionally, the purpose of management's presentation at the annual meeting is to review the past year's operations and financial results. Vic and I will do that, but as you know, Chemtrade is now a significantly different organization than it was last year, so we also want to spend some time describing Chemtrade's expanded business.

At the time of our 2001 IPO, we said that our key objective was to deliver reliable and sustainable distributions. We also said we would aggressively seek opportunities to increase distributions to unitholders.

We believe that it is essential for our business to seek growth opportunities, both organic and through acquisitions. Adding scale and diversity of earnings is very important to sustaining and, of course, growing cash distributions. Therefore, at the same time that we were optimizing the returns from our existing businesses, we were also actively looking for growth opportunities.

We've been pleased with our track record so far.

Also, on December 30, 2002 we completed our first acquisition - the North American sodium hydrosulphite, or SHS, operations of Clariant International. The addition of the SHS operations, which is a great strategic fit with our existing business, significantly expanded the scope of our operations.

Vic will talk further about 2002 results but let me make some general comments. Our North American and international businesses both faced uncertain economic conditions and a wide range of product supply issues. Despite these challenges both businesses managed to deliver results that met our expectations and enabled us to increase distributions.

Our business model is intended to mitigate the effects of commodity prices on a large portion of our business and enable us to deliver the stable results expected of an income trust. Chemtrade's 2002 achievements demonstrate the ability of our people to deliver results and the effectiveness of our business model in dampening the effects of an uneven economic environment. Further, we have been following a conservative cash distribution policy that provides a cushion to support reliable cash distributions even if the results of a specific quarter are adversely affected by market conditions. All of these factors provide a solid foundation for growth and unitholder distributions.

The financial success during 2002 led to a strong unit price, which facilitated the SHS acquisition. As I said earlier, adding scale and diversity of earnings is very important to sustaining and growing cash distributions, and thereby satisfying stakeholders' expectations. Scale and diversity of earnings are also important for mitigating the pressures all businesses face at some time. However, not all growth activities should be pursued.

It is imperative that any growth opportunities should meet a strict set of criteria, including the following.

It has to build off existing core competencies;
It has to have stable sustainable earnings;
It has to have minimal sustenance/maintenance capital expenditure requirements; and
Ideally, it has to have future growth potential.

The acquisition of the SHS operations not only met these criteria but is also a great strategic fit with our removal services business and has significantly expanded the scale and scope of our North American operations.

We now market, and either remove or produce four major products - sulphuric acid, liquid sulphur dioxide, sodium hydrosulphite and elemental sulphur. We are the largest independent provider of removal services for sulphur by-products in North America and now the largest producer of SHS.

The SHS acquisition was the culmination of a successful first year of operations for Chemtrade. Our total assets increased by about 50% to $293 million compared to the end of 2001. From our unitholders' perspective, a more important measure is distributable cash. As Vic will illustrate in a few minutes, the acquisition has enabled us to increase distributable cash and cash distributions to unitholders.

A key focus of our operations so far this year has been the integration of the SHS operations into Chemtrade, and I'm pleased to report that it has gone very smoothly. It has been seamless for customers, and we are starting to see the benefits from the acquisition.

You may recall that our fourth quarter last year was adversely affected by an oversupply of SO2, which has continued into 2003.

We believed at the time we did the SHS transaction that there were synergies we could realize. This proved to be the case in the first quarter this year when we were able to offset, to some extent, an oversupply situation in the SO2 market by supplying more product to the SHS operations.

We are continuing to fine-tune the operation, and believe we will identify further opportunities for synergies and cost reductions. I'll elaborate further on the SHS operations and how they fit with our other North American operations is a few minutes, but before that, Vic will review Chemtrade's financial performance.

Vic Wells
VP Finance & CFO

Thank you, Mark and good morning ladies and gentlemen.

Because Chemtrade started operations in July 2001, year over year comparisons of financial results are not meaningful.

However, in our IPO marketing materials, we did indicate expected annual EBITDA of $25.6 million and distributable cash of $19.2 million, or approximately $1.47 per unit, so I will use those as the benchmark against which to compare our 2002 results.

Our actual results for 2002 were well ahead of the IPO estimates. EBITDA was $26.3 million and, more importantly, distributable cash was $21.9 million. The results met our expectations overall, although both our operating segments, North America and International, experienced uneven business conditions during the year. North America was affected by substantial pressure on SO2 volumes and margins, but the negative effects of this were offset by good results from BCT Chemtrade.

Distributions per unit attributable to 2002 were $1.58, a substantial increase over the expected rate of $1.47. For 2002, these numbers exclude the units issued on December 30th as part of the SHS acquisition.

The first increase took the annual rate to $1.52, and the second raised it to $1.60.

We were pleased to be able to make these distributions while still retaining at the end of 2002 almost $3 million earned but not distributed since the IPO. This holdback is equivalent to approximately 20 cents per unit.

Following the SHS acquisition, we indicated our intention to increase distributions again to an annual rate of $1.76 per unit. Our distribution policy is to raise the rate only when we believe it is sustainable, and we believe the current rate is sustainable.

In terms of financing the acquisition, it was paid for from the proceeds of a new issue of units, convertible debentures and increased bank debt. The total cost of the purchase, including costs, was approximately $106 million.

The issue of the new units and the convertible debentures was done on a bought deal basis for an aggregate of $82 million, consisting of $41 million of units issued at $13.50 per unit and $41 million of convertible debentures. The debentures carry an interest rate of 10% and are convertible into fully paid trust units at a conversion price of $14.50 per trust unit.

The balance of the purchase price, approximately $24 million, was financed by an increase in our bank facility. This is a non-amortizing term debt maturing on May 31, 2005.

We continue to focus on maintaining the conservative leverage ratios expected of an income trust. The strength of our balance sheet provides sufficient room to pursue incremental growth opportunities as they arise.

The SHS acquisition also substantially changed the financial picture you will see from Chemtrade this year, and this was obvious when we announced our first quarter results in April.

Revenue for the period was $67.4 million compared with $50 million last year, EDITDA was $9.7 million versus $7.2 million last year, and distributable cash was $7.6 million compared with $6.3 million.

The North American and International businesses both exceeded expectations in the first quarter. Our expanded North America business generated revenue of $52.1 million in the first quarter, compared with $31.5 million last year without the SHS acquisition. Gross profit was $12.6 million, which exceeded our expectations.

BCT Chemtrade, our international business, generated revenue of $15.3 million, which was lower than the same period last year. This reflects somewhat lower volume than the previous year; however, gross profit was $2.7 million, which was slightly ahead of last year. The ability of BCT to maintain gross profit on the lower sales base reflects the better margins it was able to earn in an environment of very restricted product supply.

The markets conditions for our sulphur products business in North America and internationally remain essentially unchanged from the fourth quarter last year. We benefited from the tight market and firm prices for sulphuric acid, although limited supply remains a challenge.

The liquid SO2 market continues to be over-supplied, and we see this lasting throughout 2003. As Mark mentioned earlier, we were able to avoid some of the effects of this by supplying increased volumes to our SHS operations.

The SHS operations performed well in the first quarter, posting gross profit that was ahead of expectations. This reflected strong sales to Canadian newsprint and US coated paper and textile customers and the early effect of cost reduction activities at the plants.

The distributable cash of $7.6 million that we earned in the first quarter allowed us to pay monthly distributions of 11 cents per unit in January, February and March, and a supplemental distribution of 11 cents, making the total distributions attributable to the quarter 44 cents per unit. In fact, we generated 47 cents during the quarter, so 3 cents have been held back to ensure stable payouts going forward. This is consistent with our expectation of paying total distributions this year of $1.76 per unit.

We believe this rate is sustainable, although there are a number of new factors influencing our business this year, and some challenges for us to meet.

Keep in mind that there is seasonality to the SHS operation, with the second half of the year generally stronger than the first. In addition, the primary SHS market is the pulp and paper market. We have assumed that this industry will run at the same utilization rate in 2003 as it did in 2002.

To the extent that utilization rates increase over a poor 2002, this should be beneficial to the business. Another factor is that the production of SHS exposes the operation to certain raw material costs. One area that is putting pressure on the business is higher prices for some key raw materials.

As we mentioned in the annual report and in our first quarter results news release, planned maintenance shutdowns at two of our plants and a planned turnaround at our major supplier will have an impact on second quarter results.

Our largest producer, Inco, is negotiating a new contract with its union. It is expected that the contract proposal will come to a vote this Friday, May 30. At this point we have no information concerning the likelihood of a strike, limiting product supply.

The final factor that has emerged is the stronger Canadian dollar. While there will be a negative impact on our results, there are a number of mitigating factors.

First, a number of our contracts are risk-sharing, which means that reduced US dollar earnings from those contracts are shared with producers.

Secondly, we already have significant US dollar expenses including the majority of our capital expenditures and our third party debt and interest payments. These natural hedges should help to mitigate the effects of the stronger Canadian dollar.

We remain confident we will still be able to make the expected distributions of $1.76 per unit this year.

I'll now turn the podium back to Mark.

Mark Davis
President & CEO

As you saw from Vic's presentation, the SHS acquisition has already made a significant difference to our financial performance.

I would like to take a few minutes now to tell you a little more about the SHS operations and how they fit with our other North American operations.

The SHS operations are an excellent strategic fit with our removal services. By way of background, our producers typically convert SO2 gas into either sulphuric acid or liquid sulphur dioxide.

One of our strategies for growth is to increase the sales value of our commercial by-products by upgrading them to higher value products. Further, our producing customers want to increase the amount of higher value sulphur by-products they produce. The SHS acquisition fulfilled both of these goals.

Strategically then, the SHS operations permit us to use the SO2 we obtain from our producer customers to produce a higher value sulphur product, namely SHS. Although the SHS operations were already our largest SO2 customer, we now have the ability to supply more SO2 to them.

This significant demand base for SO2 is also good news for our existing principal suppliers of SO2 who would like to increase the volumes of SO2 they produce and sell. The simple fact is that SO2, being a higher value by-product than sulphuric acid, provides a better margin for our producer customers, and for Chemtrade.

Chemtrade is now the largest North American producer of SHS and one of the largest producers in the world.

SHS is used extensively as a bleaching agent in the pulp and paper and textile industries.

We are the clear market leader in North America, with a market share more than double that of our nearest competitor. In addition, the top three producers have an 85% share, creating a disciplined North American SHS market. Finally, Chemtrade is the only North American producer of powder SHS and, accordingly, is the only producer able to offer product in either powder or liquid form.

The majority of our SHS sales are to the pulp and paper industry, where it is used primarily for bleaching mechanical pulps and decolorizing recycled pulps used in newsprint production. The remainder is sold to the textile industry for bleaching indigo and vat dyes. We are the sole supplier to most of our customers and have long-term customer relationships.

Let's start with scale. We are the market leader with plants strategically located near our customer base. The three primary production facilities consist of two owned production plants, in Leeds, South Carolina and Kalama, Washington and a long-term tolling arrangement in Trois-Rivieres, Quebec. Customers are also accessed through regional dissolving or blending arrangements. The production facilities are top quality and incorporate state-of-the-art processes. In fact, the liquid plants at Leeds and Trois-Rivieres are very new, both being built within the last 3 years.

Because of its size, the operations carry significant purchasing power, enabling us to negotiate attractive purchase prices for raw materials, solidifying our low cost position.

Next is relationships. The operations have serviced the pulp and paper and textile industries for decades. Over that time we have developed long term customer relationships based on the quality of our products and an experienced, technically trained work force.

For example, our SHS operations have ongoing relationships with customers such as Abitibi, Kruger, SP Newsprint and Georgia Pacific for terms ranging from 15 to 25 years. The majority of production volume is covered under long-term agreements, with approximately 50% of volume under contract into 2005.

Chemtrade's reputation has been built on providing value-added services to our customers. Our producer customers have relied on our critical services for 70 years. Our SHS customers also have a long-term reliance on the business as a sole supplier of a critical product.

The SHS acquisition allows us to add further value to our producer customers and reliability to the SHS customers.

That describes the operational side of our business; now let me explain our business model, and goals.

The stable cash flow and distributions we have been able to generate is a direct result of the nature of the contracts we have with producers, and the diverse end-use customer base to which we market by-products.

Our strategy with producers is based on the premise that the less we can differentiate our product or service to our end-use customers, the more we push the risks of product price and volume fluctuations back to the producer.

Accordingly, our contracts with producers are structured to manage commodity price and volume risk and transportation costs.

The majority of our 2002 gross margin was derived from these long-term contracts that mitigate but do not eliminate commodity risk. The balance came from products that we can differentiate in the market.

We also expect the SHS business to produce stable, sustainable earnings. SHS is a product that can be differentiated in the market based on formulations, performance and form (i.e., powder or liquid).

Pricing for SHS has been relatively stable for a number of years, although there have been some recent signs of an upward movement in price. Cash earnings are more affected by changes in raw materials cost than changes in pricing. As mentioned, the business does have significant purchasing power and some natural process hedges.

More importantly, we believe that the business model can be made even more suitable to an income trust over the next several years. We intend to restructure our raw material purchase contracts and some sales contracts to reduce the impact of price volatility and enhance stability. Of course, since SO2 is the largest raw material cost component, we already have some ability to ensure stable pricing. We are confident that product differentiation and our ability to apply our business model will ensure the SHS operations are a long-term stable contributor to distributable cash.

As I said earlier, we have a set of criteria that any growth opportunity must meet, and the SHS acquisition met them. I also said that to deliver consistent and growing distributions to unitholders we have to continue to expand our business.

We believe there are other opportunities to expand our business and we are quite active in reviewing these potentials.

To summarize,

Our first full year of operations was successful, with unitholders benefiting from increasing distributions and a firm unit price.
We successfully completed the acquisition of a new operation that was immediately accretive to unitholders and provided synergies that reinforce the strength of our broadened operations.
The added size and scale of our operations will help to mitigate the normal pressures that impact any business.
We will continue to look for further opportunities to expand our business and increase distributions to unitholders.

We measure our success by the value we deliver to our unitholders. Our focus has been on maintaining and then growing the actual cash distributions paid to unitholders. This will continue to be our focus as we work to strengthen the business.