Third
Quarter 2001 Conference Call
Good
morning, ladies and gentlemen. Thank you for joining us on the
first conference call for Chemtrade Logistics Income Fund.
Also
joining me today is Vic Wells, Vice President, Finance and Chief
Financial Officer. Vic and I will answer questions you may have
following my brief remarks.
I
know there are quite a few people on the call today who we had
the pleasure of meeting during the IPO road show. I believe there
are also many unitholders listening in who we haven't yet had
a chance to meet. I'm pleased all of you are with us today, and
I thank you for your support during these first few months of
our new life as a standalone business.
Because
this is our first call, and because many of you will not have
heard our description of the business apart from what was in
the prospectus, I would like to take the first few minutes this
morning to describe Chemtrade as simply as I can. I'll be using
essentially the same language as we used in the roadshow, so
I hope those of you who have heard it before will bear with me.
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Chemtrade
is one of the world's largest independent providers of by-product
removal services. Let me explain what this means.
Very
simply, we operate in the middle ground between certain industries
that produce large volumes of useable by-products that must be
removed and marketed, and industries where those by-products
are valued core ingredients of their operations. Essentially,
Chemtrade moves the by-products from producers to users, and
along the way provides services that are critical and valuable.
.
Our
business model starts with the critical services we provide
to producers of chemical by-products, principally base metal
smelters and oil refineries. These producers generate by-products
as a result of their primary processing activities and they must
be removed to meet environmental regulations and to avoid production
interruptions.
For
example, smelters like Inco automatically produce sulphur dioxide
gas during the smelting process. Most of this emission, which
is a cause of acid rain, must be captured and converted into
a by-product that can be handled, removed and marketed. Typically,
sulphur dioxide gas is converted into sulphuric acid or liquid
sulphur dioxide which are the two principal products we handle.
We
obtain our product from approximately 40 producers with whom
we have long-term unique contracts that enable us to mitigate
commodity price and volume risk. I will explain these contracts
in a minute.
Using
our extensive logistical network, we market and distribute
the by-products to over 370 customers in a variety of industries
and geographic markets. These by-products are valuable base chemicals
for their operations.
This diversity
of customers reduces market risk from any one customer
or industry, and enables us to maximize margins for specialized
services.
In
North America our removal business operates in eastern Canada
and the United States. Our business outside North America is
conducted by our subsidiary, BCT Chemtrade, which obtains by-products
from oil refineries, smelters and other industrial facilities
in northern Europe, South America and the Far East.
The
stability of our cash flow and earnings is derived from our contracting
strategy with producers and the diversity of our end-use customers.
With respect to producers, our strategy is based on the premise
that the less we can differentiate our product or service, the
more commodity risk we push back on the producer. Our contracts
with producers are structured to manage commodity price and volume
risk and transportation costs.
We
do this in three ways. First, we have fee-based contracts which
entitle us to a fee regardless of the commodity price or volume.
Secondly,
we have matched contracts, where product supply is matched to
pre-arranged sales to realize a fixed margin, thereby negating
price risk.
Finally,
we have risk-shared arrangements under which Chemtrade shares
the risk of changes in product prices and transportation costs
with the producer. The producer generally picks up 60% of the
variance, thereby greatly reducing the impact on us and stabilizing
earnings.
The
majority of Chemtrade's business is covered by these fee-based,
matched or risk-shared contracts. In fact, in 2000, approximately
85% of the company's gross margin was derived from these contracts.
The
other element in our relationships with producers is the term
of the contracts. In the case of sulphuric acid and liquid SO2,
(the largest volume products we handle and the largest contributors
to earnings), contracts are typically for 10 years or longer.
As
a result of our long-term relationships with producers, we are
able to obtain large volumes of product at competitive prices
from a relatively small number of producers, and through careful
risk management, are able to partially insulate ourselves from
product price, transportation and volume fluctuations.
At
the other end of the chain, we have established a diverse customer
base. Our logistics network services over 370 end-use customers
in a wide variety of industries and geographic locations.
We
target profitable markets which generally mean customers that
require relatively small quantities of chemicals, enhanced products,
or special services. By targeting a diverse market we are able
to maximize the value we receive for the by-products and dampen
the effect on Chemtrade of an economic downturn by any particular
customer or industry.
This
business model may sound simple enough - a logistics network
that binds together producers and customers. However, like most
simple propositions, successful execution requires special skills,
reliable service and strong customer relationships, all of which
Chemtrade has developed over seven decades in the business.
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Again,
I apologize to those of you who have heard all that before, but
I think it is important that we're all aware of our business
model as we look at the results for our first reporting period.
As
you have seen in the news release, the results cover slightly
less than a full quarter - from July 18 when the IPO was completed,
until September 30.
Chemtrade's
operations for the period were pretty much in line with expectations.
The only unexpected event was the interruption of production
at our liquid sulphur dioxide facility at Timmins resulting from
a furnace run-out at the Falconbridge Kidd Creek smelter in August.
However, the impact of that was offset by strong results from
the rest of our business, in particular, BCT Chemtrade.
There
has also been a general firming of prices for sulphuric acid
and sulphur dioxide, and this helped our performance as well.
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This
performance resulted in EBITDA of about $5.6 million for this
stub period. After deductions for interest, capital expenditures
and other below-EBITDA items, the business generated cash available
for distribution over the period of approximately $4.4 million.
On
October 19 we announced the supplemental cash distribution of
$0.084 per unit for the period ended September 30, bringing to
$0.31 per unit the distributions for the period. If the total
distributions attributable to this period were annualized, we're
looking at a distribution rate of approximately $1.50 per unit
per annum.
We
have also announced the October and November monthly distributions,
each of $0.09 per unit. Let me take this opportunity to confirm
our distribution policy. We will pay monthly distributions to
unitholders of record on the last business day of each month.
The regular monthly distributions, which will be paid within
30 days of each month end, are expected to be approximately $0.09
per unit which is anticipated to be 75% of the distributable
cash earned during the month.
After
the end of each fiscal quarter, i.e., March, June, September
and December, the regular payments will be supplemented to reflect
the amount of distributable cash available to the Fund for the
quarter. The supplemental distributions will be payable to unitholders
of record on the last business day of the month in which it is
declared. The supplemental distribution for the December quarter
is expected to be paid by the end of February, following completion
of the Fund's annual audit.
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Finally,
this morning, I want to say a few words about the outlook for
the business. I understand that with so much uncertainty around
about the economy, this is a question every business is being
asked.
I'll
start on the most positive note. In the prospectus we outlined
our strategies for increasing profitability and distributable
cash flow for unitholders. Our first strategy was to expand the
group of producers to which we provide removal services, and
I am pleased to report today that we have done that.
We
recently reached a 10 year agreement to provide removal services
for the Irving Oil refinery in Saint John, New Brunswick. Under
the agreement, Chemtrade guarantees removal and sale of all excess
sulphuric acid produced by the refinery's new sulphuric acid
regeneration unit. The contract is expected to generate revenue
in excess of $30 million over its 10-year term, and it became
effective with the recent start-up of the new facility. We also
extended our sulphur removal agreement with Irving for a similar
term.
This
new agreement and the extension of an existing one, demonstrate
the potential to grow the business through new relationships
as well as by expanding our services with existing customers.
They also contain the features we want in our agreements with
producers - they are long-term, 10 years; and are structured
to minimize commodity risks.
I
should also comment on Inco's press release of September 7th.
Some of you will recall that we anticipated marketing increased
Inco product as environmental regulations tightened. Inco's press
release contained their proposal to the Ministry of Environment
to meet more stringent standards by 2006. Chemtrade will market
the increased output under our exclusive agreement.
With
respect to the economic downturn that is now clearly evident,
we have canvassed our major customers and they don't foresee
any major reduction in the amount of product Chemtrade handles.
This is encouraging, but not totally unexpected when you look
at the nature of the industries we service - smelters and oil
refineries. While there may be an impact on, for example, metal
prices and crude prices, there's generally a certain volume that
each smelter and each refinery is going to process, and the variations
are not so great that they will have any material effect on the
volume of by-product to be removed.
So
at the supply end of the chain, we expect it will be pretty much
business as usual.
As
far as end customers are concerned, there could be some impact
there, but remember we intentionally have a very diverse base
of end customers, and we don't foresee any across-the-board impact
on our distribution business.
And
as we noted earlier, there has been a general improvement in
sulphuric acid and liquid SO2 prices, so this should help offset
any temporary weakness in demand levels.
Overall,
we certainly do not think we're immune from the effects of the
economic decline. Nevertheless, we believe that the nature of
the services we provide for our producers combined with the protective
nature of our contracts and diversity of end-customers will permit
us to maintain the stable earnings we have delivered for many
years. We will also continue pursuing initiatives, including
cost reduction activities, that will bolster the stability of
our earnings.
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I
would like to thank all of you once again for joining us today
on our inaugural call, and we would now be pleased to answer
any questions you may have.
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