Q4
2002 Conference Call
Good
morning, ladies and gentlemen. Thank you for joining us for our
conference call and webcast this morning.
lso
joining me today is Vic Wells, Vice President Finance and Chief
Financial Officer. Vic and I will answer any questions you may
have following my brief remarks.
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Our
presentation today will be in two parts. First, I’ll review
the fourth quarter and full year results. I’ll then review
what was a key event of our fourth quarter – the acquisition
of Clariant’s sodium hydrosulphite business in December,
and the related new issue of units and convertible debentures
that financed the acquisition.
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The
fourth quarter results were a little lower than expected, due
to a number of factors in our North American business, including
supply issues from our major supplier, and certain costs incurred
in exchange for a contract extension. BCT met our expectations
in the fourth quarter.
Nonetheless,
it was still a good period, generating distributable cash of
$4.8 million from revenue of $53.4 million. You will recall that
our third quarter exceeded our expectations, so the second half
of 2002 was in line with what we expected.
In
comparing the fourth quarter with the same period in 2001, it
is important to remember that Q4 2001 was particularly strong
due to spot sales from BCT and a good North American performance.
A year later, the market has tightened and BCT was not able to
make as many spot sales as in 2001, and North American results
were lower due to the factors I just talked about.
Turning
now to the full year results, 2002 was, as you know, our first
full year of operations. We’re pleased to say the results
met our expectations for distributable cash generated, and we
were also able to end the year on a positive note with the completion
of our first acquisition.
For
the year, cash available for distribution was $21.9 million,
or $1.68 per unit based on the number of units outstanding before
the new issue on December 30th. These distributions were generated
from revenue of $207.1 million and EBITDA of $26.3 million.
The
key measurement of performance for unitholders, of course, is
distributions. Total distributions attributable to 2002 were
$1.58 per unit, but perhaps, even more important is the increase
in annual rate we were able to implement during the past year.
At the time of the IPO we indicated an expected annual distribution
rate of $1.47 per unit. We increased this rate twice in 2002,
first to $1.52 per unit and later to $1.60 per unit. Following
the SHS acquisition we indicated an expected annual distribution
rate of $1.76 per unit. This is a rate we believe is sustainable.
Before
reviewing the SHS acquisition, let me finish this financial review
with a few comments on 2003.
First,
the SHS business increases the seasonality of Chemtrade’s
earnings. SHS sales tend to be stronger in the second half of
the year, so we expect to have lower earnings in the first half
of 2003 than in the second half.
We
also face some challenges in 2003. Certain of our suppliers will
take turnarounds in 2003 that they did not take in 2002. Further,
due to oversupply in the SO2 market, margins will be depressed
in 2003 compared to last year.
Having
said that, we continue to expect that the business will generate
the distributable cash necessary to enable us to pay the $1.76
per unit distributions we have indicated.
I
will now move on to the SHS business.
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I
know many of you are now familiar with the SHS acquisition and
the financing from our December conference call and presentation
that’s on the website. However, because it was an important
event that closed at year-end and reshapes our business for 2003,
I would like to briefly review the key strategic and financial
benefits of the SHS acquisition.
The
SHS business is a great strategic fit with our removal services
business.
As
you know, the commercial by-products generated by our removal
services customers are typically sulphuric acid or liquid sulphur
dioxide, or SO2.
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 fulfills both of these goals.
The
acquisition permits us to use the SO2 we obtain from our producer
customers to produce a higher value sulphur product, namely SHS.
Although the SHS business was already our largest SO2 customer,
we now have the ability to supply more SO2 into this business.
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.
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The
acquisition makes Chemtrade the largest North American producer
of SHS and one of the largest producers in the world. Let me
give you a little more background on the business.
SHS
is used extensively as a bleaching agent in the pulp and paper
and textile industries.
Chemtrade
is the clear market leader in North America, with a market share
of more than double that of its nearest competitor. 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,
with the remainder to the textile industry. We are the sole supplier
to most of our customers and have excellent long-term customer
relationships.
The
business has three primary production facilities consisting of
two owned production plants, in Leeds, South Carolina and Kalama,
Washington and a long-term tolling arrangement in Trois-Rivieres,
Quebec. The business also accesses customers 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.
The
business has serviced the pulp and paper and textile industries
for decades. Over that time it has developed long-term customer
relationships based on the quality of its products and an experienced,
technically trained work force.
For
example, our SHS business has ongoing relationships with customers
such as Abitibi, Kruger, SP Newsprint and Georgia Pacific for
terms ranging from 15 to 25 years.
The
majority of the business’s production is covered under
long-term agreements, with approximately 50% of volume under
contract into 2005.
It
has only been about six weeks since we took over the operations,
but I’m pleased to report that the transition has gone
very smoothly and we’re excited to have the SHS operations
as part of our business.
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In
terms of financing for 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 and $41 million of convertible
debentures. The debentures carry an interest rate of 10% and
are convertible into fully paid units of the Fund at a conversion
price of $14.50 per 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.
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The
SHS acquisition, of course, has substantially changed the financial
picture you will see from Chemtrade in 2003.
In
terms of distributions, since our IPO, we have attempted to establish
a conservative, stable and sustainable distribution policy. Accordingly,
we intend to continue our policy of monthly distributions of
approximately 75% of our intended aggregate quarterly distribution
and declare quarterly supplemental payments.
Effective
with the January 2003 distribution, we increased the monthly
distribution from $0.10 per unit to $0.11, or a 10% increase.
Consistent
with our policy we expect to declare a $0.11 per unit supplemental
distribution in April following the March quarter end.
Annualized,
this means that our distribution rate has increased from $1.60
per unit to $1.76, or an accretion of 10%.
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To
summarize, we were pleased with our first full year of operations,
and were particularly pleased to conclude it with our first accretive
acquisition and a successful new issue of units and debentures.
We
continue to believe there are further opportunities to expand
our business. However, as we have said from the outset, our key
objective is to deliver reliable and sustainable cash distributions.
We intend to proceed very similarly to the manner we acted immediately
following the IPO. Now, like then, our organization is focused
on optimizing the businesses we currently run. We are actively
integrating the SHS business and ensuring that the Chemtrade
focus and attention to the generation of distributable cash is
quickly adopted by our new work force.
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