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Q2 2011 Results Conference Call (Script)

Mark Davis

Good morning, ladies and gentlemen.  Thank you for joining us for our conference call and webcast today.

Joining me today is Rohit Bhardwaj, our Chief Financial Officer.

Before I commence the review, I would remind you that our presentation contains certain forward-looking statements that are based on current expectations, and are subject to a number of uncertainties and risks, and actual results may differ materially.  Further information identifying risks, uncertainties and assumptions, and additional information on certain non-IFRS measures referred to in this call can be found in the disclosure documents filed by Chemtrade with the securities regulatory authorities, available at

The second quarter was a very good quarter for Chemtrade, for two main reasons. First, our operations continued the strong performance we recorded in the first quarter of this year.  Secondly, we announced, financed and completed the acquisition of Marsulex, which extended the size, scale and scope of our already solid operational foundation.

I will begin with a few comments on the second quarter results, then Rohit will provide more detailed commentary. After we finish with our overview of these results I will bring you up to date on the Marsulex acquisition and integration.

As a reminder, the acquisition closed on June 24th. This means that the costs associated with the acquisition are reflected in our second quarter results.  In aggregate approximately $13.2 million of costs related to the Marsulex transaction (which we will refer to as “Acquisition Costs”) are reflected in our Corporate segment numbers. The details of these costs are set out in the public filings related to the transaction.  To give you a proper feel for the business results we will direct most of our comments and comparisons to business results that do not include the Acquisition Costs.

Turning now to our second quarter results, our businesses continued to perform well.  The markets and customers we serve continued to strengthen during the quarter.  In aggregate, excluding the Acquisition Costs, we generated distributable cash after maintenance capex of $14.2 million, or 45 cents per unit, compared to $8.8 million or 29 cents per unit in the second quarter of 2010.  Aggregate EBTIDA, excluding Acquisition Costs, increased by $5.3 million from the comparable period 2010 to reach $20.9 million, driven by revenue of $195.3 which was $57.9 higher than 2010. As a general statement, the improved results were driven by our SPPC segment, which enjoyed higher volumes and pricing for the majority of its products, and good operations from our facilities. SPPC generated EBITDA about $7.3 million higher than the same period last year.  Our Pulp Chemicals segment experienced strong demand but was adversely affected by some equipment related downtime, and our International segment continued to perform as expected.

I’ll have a few more comments on the Marsulex integration and our outlook for the year after Rohit reviews the quarter’s financials.

Rohit Bhardwaj

Thank you, Mark, and good morning everyone. As we noted on the first quarter call, all our financial numbers for 2011 and 2010 have been prepared in accordance with IFRS.

As Mark noted, the second quarter results this year reflect the continuing improvement in business conditions. Please also note that the results include all of the Acquisition Costs Mark referred to and only six days of contribution from the Marsulex assets.

For the three months ended June 30, 2011, distributable cash after maintenance capital expenditures, excluding Acquisition Costs was $14.2 million, or 45 cents per unit compared with $8.8 million or 29 cents per unit in 2010.  As mentioned, the Acquisition Costs were approximately $13.2 million or 42 cents per unit.

Aggregate EBITDA for the second quarter of 2011, including the Acquisition Costs was $7.7 million.  On an aggregate basis, the significantly higher results generated in SPPC due to improved business conditions and a full quarter’s contribution from Beaumont this year were more than offset by the Acquisition Costs.  However, excluding the Acquisition Costs, EBITDA was $20.9 million compared with $15.6 million in the second quarter of 2010. This improvement was due to generally improved performance from our SPPC segment.  Revenue was $195.3 million, an increase of approximately $60 million over 2010.  The revenue increase was mainly due to higher prices and volume for sulphuric acid and sulphur in SPPC and International.

Turning to the segmented results for the quarter, SPPC generated revenue of $104.6 million and EBITDA of $20.6 million compared with $82 million and $13.2 million, respectively, in 2010.  The main reasons for the increase in revenue were higher prices and volume for sulphuric acid and sulphur. The higher EBITDA relative to the second quarter last year was due to these improved conditions but also reflected the positive impact of the Beaumont plant being online for the full quarter this year and only for part of the second quarter last year.  The Beaumont plant continues to run well.

Pulp Chemicals reported second quarter revenue of $13 million compared with $11.2 million in 2010, reflecting higher volumes of sodium chlorate. This revenue improvement was more than offset by higher electricity and higher maintenance costs related to some operational issues which have now been rectified.  The segment generated EBITDA of $3.4 million compared with $4 million in 2010.   As we noted on our last call, we expect some continuing volume constraints as we implement the capital improvement program we previously announced.  Once the three year program is completed, the facility will be among the lowest cost producers of sodium chlorate.

International reported revenue of $77.7 million for the second quarter, compared with $44.3 million in 2010.  This reflected higher prices for sulphuric acid and sulphur.  Higher costs for these products offset the revenue gains, and EBITDA for the quarter was $3.9 million, which is more indicative of normal course business for International.

Maintenance capital expenditures in the second quarter were $4 million compared with $3.2 million in 2010.   For the first half of this year, maintenance capital expenditures amounted to approximately $5.6 million.  As we have previously mentioned, we anticipate 2011 maintenance capex, including spending at the newly acquired sites, to be approximately $30 million.

Excluding unrealized foreign exchange gains and losses, Corporate costs during the second quarter of 2011 were $20.1 million, which was $14.8 million higher than the second quarter of 2010.  The main reason for the increase was Acquisition Costs of approximately $13.2 million related to the Marsulex acquisition.  In addition, LTIP accruals were $1.4 million higher than a year ago.

Our balance sheet at June 30, 2011 reflects the senior credit facilities that comprised part of the financing of the Marsulex acquisition. At the end of the second quarter our term debt stood at $362 million and we have a revolving credit facility of $80 million.  Our operating lines of credit were undrawn.

I’ll now hand the call back to Mark.

Mark Davis

Thank you, Rohit. Turning now to the Marsulex transaction:

The Marsulex acquisition closed on June 24.  As we noted on our last call, integration planning had been going on for some time and those plans were put into action shortly after the transaction was announced.  The planning and integration has certainly been assisted by our extensive knowledge of the business, similarities between the businesses and the employees who are now part of the Chemtrade team.  I’m pleased to say that the integration is going very smoothly, which is a credit to all involved.  There is still more to be done, but we’re well on track.

At the time we announced the acquisition, we said we expected to realize hard annualized cost synergies of $10 million over the next 18 months.  We moved quickly on a number of these initiatives.  Although it’s only been about a month since the acquisition closed, we have already implemented many of the actions necessary to achieve a substantial portion of that target.

We continue to fully integrate the businesses and target additional long term synergies that will strengthen and benefit Chemtrade in the future.  We remain very pleased with the assets we have acquired, the people who are now part of the Chemtrade team, and the increased opportunities this broader platform provides us.

As you saw from our news release on July 1, we sold the petcoke business a week after the acquisition closed.  The business was not a good fit with our business model of long-term, risk-sharing agreements. We found a strategic buyer who can provide better value to petcoke customers and better opportunities for the employees in that business. As noted in our financial statements we received US$25.5 million for the business, which will be adjusted for working capital over the next several months.  We used the majority of the proceeds that were received to pay down debt.  This is not reflected in our quarter end balance sheet as the repayment was not made until July. We believe that the sale of this business will not have a material effect on the pro forma EBITDA of Chemtrade that was included in the transaction prospectus.

As Rohit indicated, the second quarter results reflect only 6 days of earnings from our new assets. Obviously, our third quarter results will reflect a full quarter’s contribution from the acquisition, so you will begin to see the full impact when we report in early November.

Looking ahead, demand levels for our products, particularly acid, remain firm and we are benefiting from increased pricing. Although we are seeing increased costs for certain raw materials, particularly sulphur, and despite the risk/reward sharing aspects of some of our contracts, we expect current business conditions to positively impact our future results.  As I said, the Marsulex integration is progressing well and we are starting to realize the synergies we identified.

While our businesses continue to post solid operating results, it is also true that the overall economic climate is uncertain and volatile.  Chemtrade has succeeded in the past in uncertain or difficult times, due in a large part to our business model of risk sharing or mitigating contracts.  The new businesses we have acquired fit that business model perfectly.  Although we continue to see strength in demand levels and pricing for our products, we are also well prepared to weather an economic downturn should it come.  Our increased size, scale and scope of products and services supported by numerous risk-shared or fee-based agreements provide a tremendous platform from which to achieve continued growth.

The nature of our business model, which is well complemented by our new assets, combined with our strong balance sheet, is more than sufficient to sustain our current distribution rate going forward.

Rohit and I would like to thank you for your attention and we would now be pleased to answer any questions you have.

MARK DAVIS (President and Chief Executive Officer, Chemtrade Logistics Inc.): Thank you for your attention, and we’d now be pleased to answer any questions you may have. Operator?

OPERATOR: Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press the * followed by the 1 on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be polled in the order they are received. Please ensure you lift the handset if you are using a speakerphone before pressing any keys.

Our first question comes from Jacob Bout from CIBC. Please go ahead.

JACOB BOUT: Good morning.

MARK DAVIS: Good morning.

ROHIT BHARDWAJ (Vice-President, Finance, and Chief Financial Officer, Chemtrade Logistics Inc.): Good morning.

JACOB BOUT: Just on the synergies, so you know, you talked about upside from your 10 million. You know, potentially how much could that be? Could that be double, and you know, how long would it take you to realize that? When are you going to start to get a firmer handle on this?

MARK DAVIS: You know, that’s a lot harder to quantify. The $10 million number we’ve used is more easily quantified because it’s a cost-side synergy. The other synergies are revenue, commercial, general business, general business synergies. So we expect them to be material enough to show up, but they are going to be down the road a little bit and extremely difficult at this time still to quantify. We’ve only owned the business for a month.

JACOB BOUT: Okay. And then just broad strokes as far as the incremental piece of business that Marsulex brings, should we be looking at this as essentially, you know, $55 million a year in EBITDA and then basically tack on whatever synergies we expect?

MARK DAVIS: Yes, I think that’s what was indicated in the materials publicly filed. So that’s probably a pretty good rough estimation.

JACOB BOUT: Okay. So on Marsulex, are there going to be any additional costs over the next couple of quarters, or is 13.2 million basically it?

MARK DAVIS: There might still be some professional fees and things like that running through. We think we’ve accrued for all of them, but…

ROHIT BHARDWAJ: It shouldn’t be anything too material, Jacob. We have covered most of it.

JACOB BOUT: Just turning to the Pulp Chemical division, you mentioned there were some equipment issues or operational issues. Can you just expand on that a little bit and, you know, how long were the shutdowns?

MARK DAVIS: Yes, we had an issue in one of the cell lines that took us offline for about a week.

ROHIT BHARDWAJ: A week, yes.

MARK DAVIS: Right. So that shows about a week. And it’s back up and operating now.

JACOB BOUT: Okay. And when’s the last time you did like a maintenance turnaround or…?

MARK DAVIS: You do them every year.


MARK DAVIS: So this is not like a petrochemical business where every three or four years you take a major turnaround. Every year it happens.

JACOB BOUT: Okay. But you didn’t do any work at that time?

MARK DAVIS: This was an extra week’s shutdown that wasn’t planned and would not be ordinary course.

JACOB BOUT: Then maybe if you can talk a little bit about your outlook for sulphuric acid markets.

MARK DAVIS: Yes. So far, actually, all we continue to see is good firmness in both demand and any supply that comes onstream seems to be absorbed quite well. And we don’t see prices skyrocketing up, but they continue to be firm and continue to trend upward.

JACOB BOUT: Okay. I’ll leave it there. Thank you very much.

MARK DAVIS: Okay. Thank you.

OPERATOR: Our next question comes from Bert Powell from BMO Capital Markets. Please go ahead.

BERT POWELL: Good morning.

ROHIT BHARDWAJ: Good morning, Bert.

MARK DAVIS: Good morning.

BERT POWELL: I just want to pick up on the price and volume side of things. Both contributed in the quarter. I’m just wondering if you can give us a sense as to, you know, which contributed more. Was it more volume or was it more pricing? I’m just trying to get a sense of where the, you know, the relative magnitudes are.

ROHIT BHARDWAJ: I think, Bert, the biggest sales increase is actually in the International segment.

BERT POWELL: No, no. Actually, sorry, sorry. I should have been more specific. I meant in SPPC.

ROHIT BHARDWAJ: In SPPC, our volume is a fairly big contributor on the revenue side.


MARK DAVIS: Remember that Q verse Q, in particular on volume, we have a full quarter of Beaumont.

BERT POWELL: Right. I guess I’m trying to isolate out what is in market demand from, you know, company-specific issues and price. I’m just trying to figure out going forward, you know, what’s the rate of change.

MARK DAVIS: The biggest reason for our uptick I would say, actually, is our volume because Beaumont is a full quarter, and I think as I indicated to Jacob, pricing. Pricing is firm and trending upward, but it’s not trending upward by magnitudes.

BERT POWELL: Okay. When you look out across, I mean, most of, you know, in terms of the remarketed stuff, it’s into the industrial heartland. Are there any areas that are of noted strength, or is it fairly broad based? I’m just trying to get a little bit of colour in terms of what you’re seeing.

MARK DAVIS: Yes, you know, we look at it all the time. It’s a very widely used chemical, as you know.


MARK DAVIS: And it seems to be across the board.


MARK DAVIS: I’ll say it’s similar to pricing. Actually, demand from our customer base, which is general industry, seems to be continuing to strengthen and improve. Again, this is not magnitude step changes, but it seems to be continued firmness and continued strength.

BERT POWELL: Okay. Mark, I’m wondering if you could just give us a bit of an update on, you know, how things are going on, you know, on the SHS side and the regen side and, to the extent it’s relevant, the phosphorus pentasulphide side. You know, there’s a lot of things in SPPC. I just want to get a sense outside of, you know, the big nuts what’s going on.

MARK DAVIS: Right. And so on the regen side, as all you guys know, it’s all driven by refinery operating rates. And then each person, each company that services the regen industry is associated with different refineries, so you care about refineries’ specific operating rates too, right?


MARK DAVIS: Again, as a general statement, the refineries actually have been doing pretty well over the last couple of quarters. So demand has been good, and our customer base has been good. And with Beaumont operating, it’s obviously helped us quite a bit. The refineries are not running like they were, you know, before the boom time a couple of years ago, but they’re running pretty well. So that’s a pretty solid demand story, right?


MARK DAVIS: On the sodium hydrosulfite side we saw some weakness in the second quarter. The drop-off was, I don’t know, a few per cent, let’s say, right? So I’m not sure it’s indicative of anything, other than it could be. So that industry, as you know, which is tied to the newsprint industry primarily, although it does serve other industries, suffered a little bit of degradation in the second quarter. We’re not sure if that’s systemic or just a quarter-by-quarter thing.

BERT POWELL: Fair enough.

MARK DAVIS: And phosphorus pentasulfide has actually been a really nice story for us. As you may recall, that goes into automotive lubricants as something called ZDDP, which is a long chemical name that I won’t even pronounce for you.


MARK DAVIS: And our major customers have actually been experiencing demand growth, so we’ve been getting demand full, and that’s been a really nice business for us for most of this year.


ROHIT BHARDWAJ: And Bert, on the SHS, as we had previously mentioned, even though the volumes have been declining we’re able to maintain margin, given the nature of that business model with the cost for powder SHS being variable.


ROHIT BHARDWAJ: And also, even though the demand is going down, the pricing seems to still hold in there, so we’re able to recover some through pricing. So we’re not really feeling the hurt in our numbers from that declining market.

BERT POWELL: Right, okay, got it. And then just on the pulp side of things, you know, my sense is there’s two things going on there: one is the operational issues this quarter; but overall, as you, I guess, retrofit to accommodate the dirtier salt, if I recall correctly. And Rohit, I think in your remarks, you said that’s going to go on for a number of quarters, or years in fact. Can you help us separate out what was the impact from, you know, specifically being down a week this quarter versus what is the impact from, you know, having a dirtier supply of salt, if I’ve got that right?

MARK DAVIS: Well, it’s the impact of actually doing the capital improvements to permit it. So you had a volume constraint, right?


MARK DAVIS: So we’re probably off 10 per cent due to volume for the capital projects.


MARK DAVIS: And you can do the math quicker than I can on what one week out of, let’s call it 48, because we have other down time, right? You know, I mean…

BERT POWELL: Okay. So basically it’s reduced levels until that capital spend to the tune of 10 per cent.

MARK DAVIS: That’s right. That’s a good ballpark figure.

BERT POWELL: Okay. And is Canfor still, you know, taking 60 per cent of that, or 70 per cent of that production, or is that switched up in the merchant markets at all?

MARK DAVIS: No, Canfor’s still pulling, same basis.

BERT POWELL: Okay. So the unrecoverable electricity costs in the quarter were simply related to the merchant side?

MARK DAVIS: That’s right.

BERT POWELL: Okay. Okay. And then just lastly, Rohit, capex, you know, for this year, 30 million or, you know, plus or minus?


BERT POWELL: And then 2012 still kind of looks for that to be in the…

ROHIT BHARDWAJ: In the same ballpark. I think we’ve actually said this year in our numbers we only have six months of Marsulex sites. Next year we’ll have the full Marsulex sites, so we’re probably closer to 35 million on the maintenance capex side.

BERT POWELL: Okay. And I thought, maybe I’ve got this wrong, but I thought there were some other initiatives as well. So total capital spend for 2012 I thought was going to move closer to 45.

ROHIT BHARDWAJ: Yes, total, you’re right. The total capex will be higher. I was referring to maintenance capex of roughly 35, but you’re right that…

MARK DAVIS: The other main project is the one that’s linked to our ultrapure acid expansion.

BERT POWELL: Right, okay.

MARK DAVIS: But that’s where the other, you know, 10 or 12 million comes from over, spread over this year but predominantly next.

BERT POWELL: Okay. That’s perfect. Thank you very much.

MARK DAVIS: Thank you.

ROHIT BHARDWAJ: Okay, thank you.

OPERATOR: Ladies and gentlemen, if there are any additional questions at this time, please press the * followed by the 1. As a reminder, if you are using a speakerphone, please lift the handset before pressing the keys.

There are no further questions at this time. Please continue.

MARK DAVIS: Good. Thank you all for your attention. I’m sure you’ll all return to your screens now and see what’s happening in the markets today. Thank you, Operator.

OPERATOR: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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