Q2
2003 Results 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.
___
Our results for the second quarter and the first
half of the year are, of course, affected by the SHS acquisition
that was completed
at the end of December. Accordingly, our results are not directly
comparable with the same periods last year.
As we noted on the last
call and at our annual meeting at the end of May, there were a
number of events we knew would impact the
second quarter, including plant turnarounds and a couple of other
factors that were less clear at the time but which we thought could
present challenges.
I’ll have a bit more to say on each of
those in a moment, but the key point is that despite both the expected
and unexpected
events, Chemtrade’s results for the second quarter met our
expectations and we maintained our distribution rate.
___
Cash available for distribution was $6.5 million,
generated from revenue of $68 million and EBITDA of $9.2 million.
In the second
quarter last year, distributable cash was $5.4 million, revenue
was $51.4 million, and EBITDA was $6.5 million. Net earnings for
the second quarter this year were $3.3 million compared with $1.6
million last year. The principal reason for the increase over last
year is the year end acquisition of the SHS assets.
In total, consolidated
financial results for the second quarter of 2003 met expectations.
Results were affected by planned maintenance
shutdowns at our SHS plant in South Carolina, and at the Inco smelter
in Sudbury, Ontario, which reduced available product at both of
these facilities. Financial results were also affected by a stronger
Canadian dollar.
An unplanned, ongoing labour disruption at the
Inco operation in Sudbury, our major supplier of sulphuric acid,
affected operations
but not financial results in the second quarter.
Starting with BCT
Chemtrade, which carries on our international business. BCT had
a good quarter. In the second quarter BCT generated
EBITDA of $1.6 million, which exceeded expectations.
BCT’s
sales volumes of sulphuric acid exceeded expectations for the second
quarter although year-to-date volumes were slightly
less than expectations. However, EBITDA exceeded expectations in
both the second quarter and for the first six months of 2003 as
a result of improved margins. The tight market for sulphuric acid
in the international market place allowed BCT to realize profitable
spot sales in the second quarter.
Turning to North America, the
business generated $7.7 million of EBITDA in the second quarter
of 2003, which was close to expectations.
Operationally the second
quarter was very challenging in North America, partly as a result
of general market conditions and the
planned plant turnarounds, but mostly because of the shutdown of
Inco’s Sudbury smelter as the result of a strike.
As we mentioned
earlier in the year, the planned maintenance shutdowns at our plant
in South Carolina and the Inco Sudbury smelter occurred
in the second quarter. The shutdown of the SHS plant in Leeds,
South Carolina went smoothly. The facility is now back in production
running hard in preparation for the high demand third quarter.
The
larger operational issue is the continuing shutdown of the Inco
Sudbury smelter. Following Inco’s May maintenance shutdown,
the smelter did not start up due to a labour strike, which began
May 31. The strike has required us to obtain product from multiple
sources, revisit supply lines and work even closer with our end-use
customers to match supply and demand.
Despite the labour disruption,
the contribution from sulphur products in the second quarter of
2003 was close to expectations. Chemtrade
was able to supply the majority of its customer base from inventory
and alternative sources during June. As the market for spot purchases
of acid is very tight, both in North America and internationally,
spot purchases were made at an increased cost, however, the majority
of the cost increases have been recovered from customers.
Commencing
in July 2003, Inco is contractually required to mitigate the financial
impact resulting from Chemtrade purchasing sulphuric
acid from alternative sources in order to supply its customer base.
At this stage, we have no indication of how
long the strike will last. We are continuing to find alternative
sources for acid, and
as I said, so far we have been able to satisfy most of our customers.
The
outlook for the sulphuric acid markets both internationally and
in North America continues to be tight. The disruption of supply
from Inco as a result of the labour dispute will continue to create
operational challenges for Chemtrade as we strive to meet the needs
of our customers. Although Inco is contractually committed to mitigate
the financial impact resulting from Chemtrade purchasing product
in the market to meet our customer needs, we cannot be sure that
the necessary supply of product will be available. We continue
our efforts to balance the needs of our end-use customers while
minimizing the financial impact of our actions on Inco.
Results
for SO2 were less than expected during both the second quarter
and the first six months of 2003. Sales volumes were affected
by the maintenance shutdown of the SHS plant, which is a significant
customer for SO2. Although Chemtrade’s supply of SO2 from
Inco has been affected by the Inco labour disruption, there is
SO2 available in the spot market and Chemtrade has been able to
supply its customers satisfactorily.
Overall, even with the strike,
sulphur products met expectations for the quarter, so we were
pleased with the performance.
SHS products, which was purchased
in December 2002, generated less than expected earnings in the
second quarter of 2003. Sales
volumes
for powder SHS were less than expected primarily due to high
quality chips processed by Canadian mills that require less
SHS to bleach.
In addition, the planned two-week maintenance shutdown at the
Leeds, South Carolina plant reduced production resulting in
higher fixed
costs per unit in the quarter. Since earnings are generated
in U.S. dollars, foreign exchange also had an adverse effect, which
I will discuss later.
You will recall that there is a seasonal
factor to the SHS operations with the second half traditionally
stronger than
the first as
SHS usage increases. Both Chemtrade and a major competitor
have announced
and are implementing price increases of about 7%. Most of
the increase is necessary to offset raw material price increases,
which we discussed
on our last call. For the most part, the market has accepted
the price increase. In addition to the successful price increase,
we
also acquired new customer contracts during the quarter that
will add volume for the second half of this year and in the
future.
We continue to be pleased with the contribution
from the SHS assets and look forward to its increased contribution
during
its seasonally
stronger second half of the year. ___
As mentioned, the stronger Canadian dollar also
had an impact on the second quarter results. At the Fund’s
2003 expected exchange rate, approximately 60% of both EBITDA and
distributable cash are
generated in U.S. dollars.
The increase in the value of the Canadian
dollar has resulted in a reduction of our U.S. generated earnings
when translated into
Canadian dollars. Since most of these earnings are derived from
U.S. dollar costs and U.S. dollar sales, there is little ability
to hedge these earnings.
We have reviewed our expected cash flows
for the balance of 2003. While there was a negative impact on our
results, there are a number
of natural hedges in our operations that help to mitigate the effects
of the stronger Canadian dollar.
Chemtrade’s U.S. $ denominated
debt and capital expenditures continue to hedge a portion of the
U.S. dollars cash flow. At this
point, Chemtrade has not hedged the exposure resulting from the
planned transfer of U.S. dollars to Canada, as the exposure is
not expected to be significant. Also, a number of our contracts
are risk-sharing, which means that reduced US dollar earnings from
those contracts are shared with producers.
In our previous MD&A
we indicated that a one-cent change in the Canada-US dollar exchange
rate would have a $300,000 effect
on Chemtrade, which could be further mitigated by our risk-sharing
agreements. We’re pleased to report that upon further analysis
that the effect is only $200,000 versus the $300,000 previously
indicated. ___
As we predicted, Chemtrade faced a number of
challenges in the second quarter. Despite this, we generated $6.5
million in distributable
cash, or 40 cents per unit. Distributions attributable to the quarter,
including the supplemental distribution, were 44 cents per unit.
We have been able to find alternative supplies of acid and maintain
relationships with our end-use customers, and the SHS operations
have added some new contracts and increased pricing.
Chemtrade has
always followed a conservative distribution policy, holding back
some distributable cash so that we would be able to
continue to pay consistent distributions even in the event of unforeseen
interruptions to normal course business. Because of this, and because
the business performed quite well even under difficult conditions,
we are able to maintain the distribution rate we established at
the end of last year.
Furthermore, we expect the business will continue
to support this rate of distribution. In addition to the holdback,
which has not
been fully utilized, Inco’s contractual obligations are now
in effect and the SHS operations will have a seasonally stronger
second half.
In summary, it was a tough quarter operationally.
Our team did an excellent job of taking the actions necessary to
minimize
the
impact of external factors.
Our conservative distribution policy
is paying off by providing a cushion during the difficult times.
This, together with the
underlying strength of our North American and international
businesses give
us confidence that we will maintain our distribution rate.
Thank
you, and we would be pleased to answer questions.
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