Q1
2003 Conference Call
Good
morning, ladies and gentlemen. Thank you for joining us for our
conference call and webcast this morning.
As
usual, 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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Results
for the first quarter of 2003 are affected by the sodium hydrosulphite
acquisition which was completed at the end of last December.
Accordingly, our first quarter results this year are not directly
comparable with the first quarter last year. Our North American
business now includes three major products – sulphuric
acid, liquid SO2 and sodium hydrosulphite – all sulphur-based
products. Our business outside North America continues to be
conducted by BCT Chemtrade.
Overall,
Chemtrade had a good first quarter. Cash available for distribution
was $7.6 million, generated from revenue of $67.4 million and
EBITDA of $9.7 million. In the first quarter last year, distributable
cash was $6.3 million, revenue was $50 million, and EBITDA was
$7.2 million. Net earnings for the period were $4.7 million compared
with $4.1 million last year.
Perhaps
more relevant is a comparison to the fourth quarter of 2002.
As most of you know, prior to the SHS acquisition our North American
business had little seasonality. If you compared the $7.6 million
of distributable cash we generated in the first quarter of this
year to the $4.7 million of distributable cash generated in the
fourth quarter of last year, the positive effect of the SHS acquisition
is evident. As we have said, this acquisition has added significant
size and scale to the business, which will certainly assist us
in successfully navigating the usual challenges all businesses
face, and in delivering the cash distributions expected by our
unitholders.
The
North American and BCT businesses both exceeded expectations
in the first quarter. BCT Chemtrade, our international business,
generated revenue of $15.3 million, which was lower than the
same period last year. Although this reflects somewhat lower
volume than the previous year, 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.
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. Last year, gross profit was $8.3 million.
Our
markets have not really changed that much from the fourth quarter
of last year. We continue to benefit from a tight market and
firm prices for sulphuric acid. Limited supply in North America,
as well as internationally, remains the largest challenge. Our
first quarter was somewhat affected by our largest supplier’s
inability to supply the sulphuric acid volume anticipated. We
also built some inventory in preparation for second quarter maintenance
shutdowns. Availability of additional volume would have allowed
us to realize additional margin.
As
we mentioned on our last conference call, the liquid SO2 market
has been depressed due to over-supply. This situation continued
in the first quarter and is expected to continue throughout 2003.
Chemtrade avoided some of the effects of the over-supplied market
by supplying increased volumes to our SHS operations. We were
therefore able to realize on some of the originally planned synergies
of the SHS acquisition. As a result, gross margin for SO2 was
close to expectations for the period.
Obviously,
our key focus in the North American business in the first quarter
was the integration of the SHS acquisition with our existing
operations. I’m pleased to report that it has proceeded
very smoothly. To our customers, the acquisition has been seamless.
The
operations have now been migrated and integrated with Chemtrade’s
financial systems. Actual plant operations have been unaffected
and, in fact, in March, one of the acquired plants set a production
record. Greg Pimento, our Vice-President, Operations has relocated
to South Carolina and is now helping to instill the Chemtrade
focus on distributable cash into that organization. There have
been no surprises to-date and it is even clearer to us that this
is an operation where we can enhance and sustain its leadership
position in the industry.
Gross
profit for SHS was ahead of expectations in the first quarter,
reflecting strong sales to Canadian newsprint and U.S. coated
paper and textile customers, and the early effect of certain
cost reduction activities at the plants.
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The
bottom-line effect of all this was that distributable cash for
the first quarter was $7.6 million, or almost 47 cents per unit.
Accordingly, our first quarter results have let us pay out the
increased distribution rate we announced with the SHS acquisition
and still retain approximately three cents per unit.
Effective
with the January distribution, we increased the monthly distribution
by 10% to 11 cents per unit. Last week we also announced the
supplemental distribution of 11 cents per unit for the first
quarter, making the total distributions attributable to the first
quarter 44 cents per unit.
Although
there are a number of factors that will influence our business
this year, we believe that our current rate of distributions
is sustainable.
As
mentioned on the last call, there are some plant maintenance
shutdowns that will impact our business in the second quarter.
We have a planned turnaround at our Kidd Creek facility and one
of the SHS plants. Further, our key supplier, Inco, will take
a planned turnaround in May after 20 months of continuous operations.
In addition, the renewal date for the Inco labour contract also
falls within the second quarter.
The
acquisition of SHS adds three additional factors to Chemtrade.
First, there is an element of seasonality to SHS, with the second
half of the year generally stronger than the first half. Second,
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.
There is some indication that this industry is in better shape
this year than last. For example, January North American newsprint
rates were slightly higher than January 2002 but still significantly
below January 2001. Obviously, we need to wait to see how the
whole year actually turns out. Lastly, is an exposure to certain
raw material costs. One area that is putting pressure on the
business is higher prices for some key raw materials.
Although
we have only one quarter under our belt so far, we’re pleased
with the SHS acquisition and are confident of generating sufficient
cash to fulfill our intention of distributing $1.76 cash per
unit in 2003.
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To
summarize, our results for the first quarter were in line with
our expectations.
The
integration of SHS into our North American business has proceeded
smoothly, and we’re pleased with the quality of the operations
and our new employees. While there are some normal business pressures,
we’re confident that the acquisition will achieve its objectives
for the year.
North
American sulphur products had a good first quarter, although
some of the benefits of the tight sulphuric acid market were
offset to a certain extent by the current over-supply in the
SO2 market. Looking ahead, the second quarter will be impacted
by our own plant turnaround and Inco’s, but these are events
we plan for.
Our
international business performed well, despite the challenging
situation of obtaining additional supply.
While
we will face some challenges this year, the SHS acquisition has
added size and scale to the business. We will continue focusing
on excellent customer service, tight cost control and integrating
the SHS operations. We remain confident that the business will
generate the distributable cash necessary to maintain our current
distribution rate.
We
now would be pleased to answer questions.
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