Q3
2003 Results Conference Call
Mark Davis
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 briefly review
the
third quarter results and then we’ll answer any questions
you may.
As noted in the news release, with the broadened
scope of our business we have changed names of our business segments
and added a new
one. What was formerly North America is now called Sulphur Products & Performance
Chemicals, or SPPC. This encompasses our removal services business
in North America, which handles sulphur-based products, and sodium
hydrosulphite, or SHS, which as you know was acquired at the end
of 2002.
Our International business and the Pulp Chemicals
business that we acquired from Canfor during the third quarter
are reported
separately. ___
Vic will go over the numbers in a few minutes,
but let me start by saying that we were pleased with the overall
results for the
quarter. They met our expectations, but more importantly, each
business segment met expectations, demonstrating some of the underlying
strengths of our business and our business model.
First, our SPPC
segment was required to deal with the ongoing strike at Inco for
two thirds of the quarter and also capitalize on the
seasonally strong third quarter demand for SHS. The Inco work stoppage
was not resolved until August 26, and then it took an additional
month or so to reach normal operations and inventory levels. As
a result, the volume of our sulphur products sales was less than
planned, but the results for the quarter met expectations.
This
was accomplished due to the nature of the contract we have with
Inco which mitigates the financial impact resulting from Chemtrade
purchasing sulphuric acid from alternative sources in order to
supply our customers. However, I also give a lot of credit to our
team who managed the operational issues extremely well by balancing
the needs of our customer base with the limited supply of product.
In fact, the tight supply presented some pricing opportunities
for us, which helped to offset the lower volumes and margins on
the liquid suphur dioxide business.
You will recall that when we
acquired the SHS business, we said there was a seasonality factor
and that the results for the second
half of the year were generally stronger than the first half. As
expected, sales volumes in the third quarter increased substantially
over those realized in the second quarter. As we noted in the news
release, the seasonal increase in sales volumes was not quite as
high as expected, due mainly to less than favourable bleaching
conditions at some newsprint mills and also a slowdown in textile
markets. Performance Chemicals also experienced some raw material
cost increases, including natural gas; however, savings in fixed
costs and other initiatives enabled the business to generate results
that were better than the second quarter but slightly below expectations
for the third quarter.
Overall, despite some operating challenges
for both Sulphur Products and Performance Chemicals, and because
capital expenditures in
the group were lower than expected, SPPC’s contribution to
distributable cash was in line with our expectations for the quarter
and for the year-to-date. ___
The Pulp Chemicals acquisition closed at the
end of August. This was an important expansion of our operations
that diversifies our
product base and earnings, and further improves the quality of
our earnings stream. We described the business thoroughly in our
conference call when we announced the acquisition, and that presentation
is still on our website, so I won’t spend a lot of time going
over that ground again.
However, it is worth repeating that the
Pulp chemicals business is a good fit with our business model.
The bulk of Pulp Chemical’s
earnings are generated from sales of sodium chlorate and we have
contractually mitigated a significant portion of the commodity
price and volume risks as follows:
- The acquisition was structured to include 10-year exclusive contracts
with Canfor, expanding Chemtrade’s existing long term contract
base by providing new long-term, stable, contractual earnings
streams. We expect to earn approximately 65% of the pro forma
Pulp Chemicals
EBITDA from the Canfor long-term contracts.
- Canfor will continue to purchase
about 70% of the sodium chlorate capacity at a price that will
be adjusted to reflect
changes in
approximately 95% of the variable manufacturing costs; further,
another 15% of the sodium chlorate capacity is sold to other
customers under long-term contracts.
- Chemtrade will toll process Canfor’s soap skimmings into
crude tall oil, or CTO, and Canfor will pay a fee to Chemtrade
to compensate for a complete recovery of the processing costs
plus a fixed dollar profit margin.
Clearly, from our unitholders’ perspective,
these contracts substantially mitigate a significant portion of
price and volume
risk on the Pulp Chemicals products.
I’m pleased to say the
integration of the business into Chemtrade has proceeded smoothly
and we remain confident Pulp Chemicals will
make a steady and important contribution to distributable cash. ___
To summarize, we had a busy and successful quarter.
- Chemtrade demonstrated the
ability of its businesses to deliver results even under trying
conditions;
- We capitalized on the expected
seasonality of the Performance Chemicals business; and
- We completed an accretive acquisition
that has expanded our product and customer base and further
improved the quality
of our earnings.
I’ll
now hand the call over to Vic, after which I will have a few
closing remarks.
Vic Wells
Thank you, Mark and good morning ladies
and gentlemen.
Before reviewing the results, I would like to
point out that the per unit amounts for distributable cash for
the latest
quarter and year-to-date are calculated
using the weighted average number of units outstanding during those
periods. A total of 5,860,000 units were issued in August in connection
with the
financing of the Pulp Chemicals acquisition, and the relevant
weighted average numbers
of units outstanding during the periods are detailed in the news release.
The per unit amounts may not, of course, be indicative
of annual performance. ___
For the three months ended September 30, 2003,
cash available for distribution was $10.5 million, or 57 cents
per unit, generated from revenue of $74.5
million and EBITDA of $13.3 million. In the third quarter last year, distributable
cash was $5.5 million, or 42 cents per unit, revenue was $52.2 million,
and EBITDA
was $6.9 million. Net earnings for the third quarter this year were $6.5
million
compared with $2.3 million last year. The principal reason for the significant
increase over last year is the year-end acquisition of the SHS assets.
The results also include one month’s contribution from Pulp Chemicals.
___
Our key financial objective is to provide reliable
and sustainable distributions. We pay regular monthly distributions
to our unitholders
and, after each
quarter is completed, we pay a supplemental distribution to complete that
quarter’s
cash distribution.
Chemtrade’s steady performance this year
has enabled the Fund to maintain monthly distributions at the level
we established
following the Performance Chemicals
acquisition, that is, 11 cents per unit, effective with the January distribution.
We also paid supplemental distributions of 11 cents per unit for the
first and second quarters. At the time of the Pulp Chemicals acquisition,
we
said we intended
to increase the supplemental distribution to 12 cents per unit, and we
did this effective with the third quarter supplemental. That distribution
will be paid
at the end of this month.
This takes the annual rate to $1.80 per unit.
Over the 2 years since the IPO, cash distributions have increased
by about 22%.
We have established a conservative distribution
policy, holding back some distributable cash so that we are able
to continue
to pay consistent
distributions
even in
the event of unforeseen interruptions to the normal course of business. ___
Looking briefly at the segmented results, SPPC
reported EBITDA of $10.4 million compared with $4.8 million last
year. The year over year increase
was primarily
due to the acquisition of the SHS business.
Comparing third quarter EBITDA
of $10.4 million to the second quarter results of $7.7 million,
two things become clear. First, our team did
an excellent
job of maintaining profitability through the work stoppage at our largest
supplier of sulphur products. Secondly, the effect of the third quarter
SHS seasonality
is reflected. I would also like to note that the quarter over quarter
results reflect the stronger contribution for third quarter SHS sales
despite the
fact that much of this business is generated in US dollars. Accordingly,
the increased
contribution would have been even greater if the Canadian-US dollar exchange
rate had remained at its second quarter level.
As Mark said, despite
the operational challenges resulting from the Inco work stoppage,
tough market conditions for some of our SHS customers,
and foreign
exchange effects, these results were in line with our expectations for
the quarter.
The international business reported EBITDA of
$1.1 million for the quarter, which was close to expectations.
Although volumes
were lower than anticipated,
margins
were better than expected.
Pulp Chemicals had only one month’s
contribution to the quarter, and reported EBITDA of $1.8 million. This
was in line with what we expected. ___
The Pulp Chemicals acquisition was financed
by proceeds from a new issue of units and increased bank debt.
The total cost of the purchase, including
costs,
is
estimated at $126 million.
The equity was issued on a bought deal basis
in the amount of $86.4 million for 5,860,000 units. With the
new issue, there are now approximately
22 million units
outstanding. ___
I’ll now hand the call back to Mark.
Mark
Davis
Thank you, Vic.
As you have seen, it was an interesting
quarter for Chemtrade, but as I said at the outset, one that demonstrated
the underlying
strength
of
our
business,
the capabilities of our people, and the effectiveness of our business
model.
The acquisition of Pulp Chemicals has added
scale and diversity of earnings to our operations. The integration
has gone smoothly
and we
believe Pulp
Chemicals will make a valuable contribution to earnings and distributable
cash for many
years.
Looking forward, we believe that the balance
of 2003 should be more consistent with the previous quarters of
2003 than with the
third quarter.
Our sulphur
product supply has now returned to normal. The seasonal performance
of SHS in the third
quarter versus the first half of the year should continue although
not to the extent seen in the third quarter due to lower volume, raw
material
cost
increases
and the continued increase in the value of the Canadian dollar. Of
course, the addition of Pulp Chemicals for the entire fourth quarter
will be
beneficial to
both earnings and distributable cash.
Finally, with the addition of
two new businesses since the end of last year, we decided it was
appropriate to strengthen our management team.
I’m pleased
to say that in September, Claudio D’Ambrosio joined Chemtrade
as Chief Operating Officer. Claudio has over 20 years of sales and
manufacturing experience in the chemical, plastics and biotech
industries in both Canada and
internationally, most recently as President and CEO of Ciba Specialty
Chemicals Canada Inc. We’re glad to have him aboard as we
move into the important phase of integrating our new businesses
and pursuing opportunities to continue
growing our cash distributions. ___
Thank you for your attention. Vic and I would
now be pleased to answer any questions you may have.
|
