Q4
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 review the fourth quarter
and full year results and then we’ll answer any questions
you may.
As you will recall from the third quarter conference
call, our business in North America is now segmented between Sulphur
Products & Performance
Chemicals, or SPPC, and Pulp Chemicals. SPPC encompasses our removal
services business in North America, which handles sulphur-based
products, and our sodium hydrosulphite, or Performance Chemicals
operations. Pulp Chemicals is our sodium chlorate and toll oil
business.
Our international business is conducted by BCT
Chemtrade and is reported separately.
___
2003 was our second full year of operations,
and let me start by saying that it was a great year for Chemtrade.
The year started with the addition of the Performance
Chemicals operations, which we acquired from Clariant at the very
end of
2002. Then, at the end of August, we completed the acquisition
of the Pulp Chemicals business from Canfor. Both operations were
successfully integrated into Chemtrade.
The addition of these businesses
has expanded and diversified our sources of earnings and distributable
cash, thereby enhancing the
reliability and sustainability of our distributions to unitholders.
Most importantly, it also enabled us to increase distributions
to unitholders, from $1.58 per unit in 2002, to an annualized rate
$1.80 per unit by the end of 2003. That’s a 14% increase,
and an increase of more than 22% since our IPO in July 2001.
These
increases were possible because, despite a number of challenges,
our performance for the year came in close to our expectations.
A three-month labour dispute at our largest sulphur products supplier,
raw material cost increases that impacted our Performance Chemicals
business, and of course, the stronger Canadian dollar, all had
a negative impact on our results.
However, despite these issues,
our broader earnings base, our business model that mitigates the
financial impact of typical commodity
effects, and our attention to cost control and incremental growth,
enabled us to increase distributions while adhering to our conservative
distribution policy.
Vic will go over the numbers for the quarter
and the year in a few minutes, but first I have a few comments
about the fourth quarter.
Overall, SPPC performed slightly below
our expectations and below our third quarter results. Sulphuric
acid margins were adversely
affected by supply chain costs attributable to integrating Inco
product following the labour disruption, and higher sulphur costs.
However, liquid SO2 margins were better than expected as a result
of lower product costs.
Sales volumes for SHS were significantly
stronger than expected in the fourth quarter, more than making
up for the slightly lower
than expected volumes in the third quarter.
You will recall that
the SHS business experienced certain raw material cost increases
during the year, including sodium formate, and natural
gas. These input costs stabilized in the fourth quarter, particularly
sodium formate, after our suppliers’ operating difficulties
were resolved.
We recently announced a price increase of about
5 %, effective January 1, which will partially recover some of
those higher costs.
This follows our earlier price increase announced in May of 2003.
___
The fourth quarter represented a full quarter
of contribution from Pulp Chemicals and results were right on target.
I’m pleased to report that the integration of the business
into Chemtrade proceeded smoothly and is now virtually complete
and we remain confident Pulp Chemicals will make a steady and important
contribution to distributable cash.
___
Finally, our international business, BCT Chemtrade,
generated EBITDA for the fourth quarter that was in line with expectations.
This was achieved on lower than expected volumes, but margins were
better.
The financial statements and notes forming part
of the news release indicate that we have written off the costs
associated
with our
leased Tampa, Florida, terminal facility.
Since the IPO, this
facility was used to store and supply sulphuric acid to U.S.
Gulf coast customers; however, with little excess
supply available in the international market now and in the
foreseeable future, the Tampa facility is no longer needed as a
part of our
ongoing operations. Accordingly, we decided to write off the
remaining lease costs against our 2003 earnings. The write-off
affects net
earnings, but not distributable cash.
___
To summarize, we had a good fourth quarter,
capping off a busy and successful year. It was also a year that
tested us with unexpected disruptions to our operations, and challenges,
such as cost pressures and foreign exchange rates that are on-going
aspects of any business, but ones that must be properly managed
to maintain optimum financial performance. I think our team handled
the challenges of 2003 very well, and the proof was in the increased
level of distributions we paid, which is, after all, our key financial
objective.
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.
I would also like to point out that when comparing
the fourth quarter and annual results for 2003 and 2002, the terminal
exit cost of $1.3
million
has been
excluded, except for references to net earnings.
___
For the three months ended December 31, 2003,
cash available for distribution was $10.3 million, or 47 cents
per unit, generated from revenue of $80.7 million and EBITDA of
$13.6 million. In the fourth quarter last year, distributable cash
was $4.8 million, or 36 cents per unit, revenue was $53.4 million,
and EBITDA was $5.7 million.
The principal reasons for the significant
increase over last year is the acquisition of the SHS assets
immediately before the 2002
year-end, and the Pulp Chemicals acquisition at the end of August
2003.
Net earnings for the fourth quarter this year
were $4.2 million compared with $3.9 million last year. The latest
earnings
are
after the non-cash charge of $1.3 million for the Tampa terminal
exit
that Mark mentioned earlier.
For the full year, cash available
for distribution was $34.9 million, or $1.92 per unit compared
with $21.9 million, or
$1.68 per unit
in 2002. Revenue for 2003 was $290.6 million compared with
$207 million for 2002, and EBITDA was $45.8 million compared
with
$26.3 million the previous year.
___
As Mark mentioned, Chemtrade’s performance
this year 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
as well as supplemental distributions of 11 cents per unit for
the first and second quarters.
Following the Pulp Chemicals acquisition,
we increased the supplemental distribution to 12 cents per unit,
effective with the third quarter
supplemental. The supplemental distribution of 12 cents per unit
for the fourth quarter has been declared and will be paid on
February 27.
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.
As I just mentioned, cash
available for distribution in 2003 was $1.92 per unit, whereas
distributions attributable to
2003 were
$1.78 per unit, a payout ratio of just under 93%.
___
Looking briefly at the segmented results, SPPC
reported EBITDA of $8 million in the fourth quarter compared with
$4.4 million last year. The year over year increase was primarily
due to the acquisition of the SHS assets.
For the full year, EBITDA
was $34.5 million compared with $19.6 million in 2002. This was
slightly below our overall expectations
for the year, reflecting lower than expected demand for SO2 and
lower margins for SHS primarily as a result of the stronger Canadian
dollar.
BCT Chemtrade reported EBITDA of $4.9 million
for the year, which met expectations although lower than the $6.7
million recorded
in 2002. However, the 2002 results benefited from strong spot
sales during the year, and those conditions simply were not present
in
2003.
For its first full quarter of contribution,
Pulp Chemicals reported EBITDA of $4.6 million, which met expectations.
___
Finally, a brief comment on the impact of foreign
exchange on Chemtrade. The Fund’s U.S. operating subsidiaries
and BCT Chemtrade report in U.S. dollars. Prior to the Pulp Chemicals
acquisition, approximately 60% of both the Fund’s EBITDA
and distributable cash were generated in U.S. dollars. With the
inclusion of Pulp Chemicals, this will decline to approximately
46%.
As we have explained in the past, we do have
some natural hedges such as bank interest and transportation costs
that mitigate the
impact.
After reviewing our 2004 cash flow budgets,
we decided to partially hedge our U.S. dollar cash flows and entered
in to
a number of
contracts that lock in an exchange rate for a portion of the
U.S. dollar cash flow we receive.
We had previously indicated
that a 2 cent change is the US/Canada exchange rate had about
a $400,000 effect on distributable
cash. With the hedges we now have in place, a 2 cent change
(if constant
throughout the year) would only affect distributable cash by
$300,000.
___
I’ll now hand the call back to Mark.
Mark
Davis
Thank you, Vic.
We believe it was a great year
for Chemtrade, albeit a challenging one in some areas of our operations.
The financial results achieved
in face of these challenges
demonstrated the strength of our larger and more diversified business, the effectiveness
of our business model to mitigate the adverse effects of commodity volume and
price risk, and very importantly, the capabilities of our people.
Our key financial
objective is to deliver reliable, sustainable and growing distributions
to unitholders. By increasing our scale and diversifying our earnings we have
decreased overall business risks by being less exposed to a downturn in any
one customer sector or product.
Our two acquisitions – Performance Chemicals
and Pulp Chemicals – were
undertaken as part of that strategy, and we’re particularly pleased that
they have already effectively contributed to achieving our goal of increasing
returns to unitholders.
We’re also pleased that the market has recognized
the value of Chemtrade and that the total return enjoyed by our unitholders ranks
among the top performing
business trusts. ___
Looking forward, the businesses are performing
well and we will be concentrating on fine-tuning the integration
of the new businesses and realizing the synergies from the best
utilization of the considerable resources we now have.
The outlook
for our products remains favourable. The acid market remains
tight both in North America and internationally, and the
SO2 market seems to have stabilized. Our pulp and paper customers
are predicting a better year in 2004 , which should benefit our
SHS and sodium chlorate products.
If the Canadian dollar continues
to strengthen there will be a negative impact, but as Vic pointed
out, we have partially hedged
cash flow from our U.S. operations, and the addition of the Pulp
Chemicals business reduces the percentage of the distributable
cash that Chemtrade generates in U.S. dollars.
Finally, we expect
less seasonal differentiation between the first and second half
of the year 2004 than we anticipated in 2003. However,
similar to 2003 we expect the second quarter to represent our
lowest distributable cash earnings as we incur several maintenance
shutdowns
in that quarter and therefore incur a disproportionate share
of capital expoenditires for the year.
We look forward to continuing
to deliver on our commitments to our unitholders.
___
Thank you for your attention. Vic and I would
now be pleased to answer any questions you may have.
___
Operator: Your first question comes from Damir
Gunja, from TD Securities. Please go ahead.
Question: Good morning.
Just a couple of things. Vic, I was wondering if you could elaborate
on the FX hedging, sort of what rate you’re
in, and perhaps how much you’ve got locked in?
Vic Wells (Vice
President Finance and Chief Financial Officer): Damir, we put our
plan out at 75 cents, I’m going to go with
that rate, that’s the rate we use. We’ve hedged 100
percent of our cash flows for the first and second quarter, 75
percent for the third and 50 percent of the fourth at this time
at an average rate just ahead of 75 cents, between 75 and 76 cents.
Question: Okay, great. On the labour front, I know you have no impact from
what’s going on at Falconbridge, but do you know
off hand when the Kidd Creek facility encounters labour negotiations?
Mark
Davis (President and Chief Financial Officer): We’re
looking at each other and trying to remember, but the short answer
is, not soon, but I can’t tell you what the date is.
Question: Okay. And, just two final things, the capex looked a little bit
low this year, I don’t know if that’s just
a kind of one-off type thing? And secondly, any update on the acquisition
front, I imagine you’re still actively looking, any particular
geographic areas, or industries?
Mark Davis: Yeah, I’ll give
you a couple things. Capex looks a little low, but partially, or
a large portion of that, was actually
due to the US dollar effect, so that most of the major projects
we had anticipated doing in 2003 got done, but we benefited from
the stronger Canadian/US dollar exchange rate. The only big thing
we didn’t do is, there’s a potential regulatory requirement
in our Rotterdam facility that we actually plan to do every year,
once the regulators figure out what needs to be done, but they
keep on not knowing what needs to be done, so that’s the
only thing. It’s just they got deferred. So, short answer
is, lower than we had planned, primarily due to the benefit of
the US dollar.
As far as other transactions, and what we’re
looking at, I think most of you know we’re always looking
for sensible ways to grow our business, so long as it’s in
businesses that we know fits our business model, which seeks to
mitigate against
commodity effect. We would like to find other businesses that continue
to diversify us, either away from sulfur-based products, which
the Pulp Chemicals deal did, or away from the pulp and paper industry,
which is now our primary customer if you define pulp and paper
broadly, because obviously we serve a bunch of different niches.
So, we continue to look, but there’s nothing that today is
imminent, and we also wouldn’t mind, frankly, letting the
organization have time to properly integrate the businesses we’ve
already acquired and realize any synergies and best practices we
can from what we currently have.Operator: The next question comes
from Chris Blake, from Scotia Capital. Please go ahead.
Question: Good morning gentlemen. A quick question with respect to the supply
chain cost that you incurred during the quarter with
getting back to the Inco product. Could you elaborate a little
further on those costs, or maybe quantify them in terms of the
split between the higher sulfur costs, and the labour disruption?
Mark
Davis: What really happened is that as Inco came back on-stream
they came back with a vengeance. They had obviously done all the
maintenance they needed before the strike, so when they started
it back up again they produced lots of sulfuric acid, but what
happened is that a bunch of the material that we had actually bought,
and had in the system to mitigate our customers running short of
product, needed to get moved through the system rather quickly,
and to do that there was some price cutting, some illogical freight
movements, and things of that nature, which is what I just term
generically as logistics cost, supply chain costs. The other thing
that’s happened is sulfur has continued to actually increase
in value, and although that doesn’t affect the cost of most
of our product, because most of our product comes out of Inco,
it does effect the cost of the acid that we get from our own production
facilities in Ohio, and from our long-term contract with the regen
facility in Ohio. So, put all that together and that’s the
extra cost we’re talking about.
Question: And, how much in
terms of millions of dollars if, could you quantify the two costs,
how much it cost you in the quarter?
Mark Davis: A little over a
million bucks.
Question: Okay. And, capital expenditures this
year. Does your purchase of Rhodia customer contracts have any
effect?
Do you have
any guidance with respect to your maintenance capex this year?
Mark
Davis: Yeah, our MD&A is going to be out in the next,
I’m looking at Vic as I’m saying it, our MD&A is
going to be out soon, and actually, I’d prefer actually to
just wait so it’s properly disclosed, but there is an estimate
in the MD&A that actually has our 2004 Capex estimate.
Question: Okay.
Mark Davis: Okay? It is disclosed in the MD&A,
which will be out shortly.
Question: Will that be within the week
or so?
Mark Davis: Within the two weeks.
Question: Okay.
Perfect, thanks guys.
Mark Davis: Okay, thank you.
Operator: Mr. Davis,
there are no further questions at this time, please continue.
Mark
Davis: Thank you everyone for joining us once again, and we look
forward to talking to you next quarter.
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