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
first quarter
results and then we’ll answer any questions you may have.
As you know, in the third quarter last year
we changed the names of our business segments to reflect our broadened
operations. Those
segments remain our North American business segmented into Sulphur
Products & Performance Chemicals, or SPPC, and Pulp Chemicals;
and BCT Chemtrade, which handles our international sulphur products
business.
Effective with the first quarter this year,
we started segmenting our corporate costs separately from SPPC.
Accordingly, we have
now added a fourth segment – Corporate – which includes
typical corporate costs such as information technology, interest,
and finance activities that cannot be directly allocated to an
operating segment.
___
I’m pleased to report that we started 2004 on a sound note.
Our overall distributable cash results for the first quarter were
slightly ahead of expectations, reflecting sound performance from
our businesses and lower than expected capital expenditures in
this quarter. The lower capital expenditures is merely a timing
issue, so, from our perspective our first quarter results were
as we had anticipated.
Since Pulp Chemicals was acquired at the end
of August last year, the consolidated results are not comparable
with the first quarter
of 2003; however, comparing the first quarter with the fourth quarter
of last year which did include Pulp Chemicals for the full period,
the key metrics of distributable cash and EBITDA both showed improvement.
Vic will go over the numbers in more detail,
but let me start by saying that the increased diversity and scope
of our operations,
which has been a major focus since our IPO, had a positive effect
on our first quarter results. While each operating segment performed
well, slightly below plan results for one segment were offset by
better than plan performances from other parts of the business,
with the overall result that we came in ahead of plan and ahead
of last quarter.
___
SPPC exceeded expectations for the first quarter.
Sulphuric acid sales volumes were ahead of expectations, and we
also benefited
from favourable product cost.
Our sodium hydrosulphite products met our expectations
and were ahead of the same period last year. We met our anticipated
sales
volumes despite a continuing softness in demand from newsprint
customers. On the positive side, March saw an increase in demand
from paper customers and our textile demand base appears to have
stabilized.
In January we implemented some organizational
changes at SPPC that are designed to broaden our customer programs,
improve integration
of production and marketing activities, and generally realize synergies
and improve efficiencies from our broader business. The changes,
which include some new hires, have gone smoothly and we believe
they will further strengthen the long term sustainability of our
earnings.
Finally, the Leeds plant is now undergoing its
annual 3-week maintenance shutdown. As this shutdown is our single
largest capital expenditure
this year, the below plan capital spending in the first quarter
should be caught up in the second quarter.
___
Pulp Chemicals made another solid contribution
in the first quarter. Although the results were ahead of the fourth
quarter last year,
they were slightly below our expectations. The first quarter results
reflected lower than expected sales of sodium chlorate in the period.
Sales were below expectations to Canfor in January primarily due
to weather related problems at their mills. Sales to Canfor for
the balance of the quarter met expectations. The crude tall oil
operation operated on plan for the quarter.
The integration of Pulp Chemicals into Chemtrade
has proceeded smoothly. We are fully staffed and have identified
a number of
additional areas where we believe this business can be improved.
___
Finally, BCT Chemtrade’s results were consistent with the
first quarter last year. The international acid market remains
tight and spot volumes remain difficult to obtain.
___ To summarize, it was a good first quarter for
2004. Our businesses are performing well, although we are constantly
pursuing initiatives
that will translate into increased efficiencies, higher sales,
and ultimately, improved distributable cash. Based on our first
quarter and the outlook for 2004, we remain confident we will meet
our operating objectives and our planned distribution target for
2004 of $1.80 per unit.
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 the first quarter last year 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. The relevant weighted
average numbers of units outstanding during the periods are detailed
in the news release.
___
For the three months ended March 31, 2004, cash
available for distribution was $12.3 million, or 54 cents per unit,
generated from revenue
of $80.9 million and EBITDA of $15.1 million. In the first quarter
last year, distributable cash was $7.6 million, or 47 cents per
unit, revenue was $67.4 million, and EBITDA was $9.7 million.
Net earnings for the first quarter this year
were $7.0 million compared with $4.7 million last year.
The principal reason for the increase over last
year is the acquisition of Pulp Chemicals at the end of August
2003.
___
As we have said before, the key measure of our
financial performance is cash distributions to unitholders. Following
the acquisition
of Pulp Chemicals we maintained our monthly distribution rate of
$.11 per unit, but increased the supplemental distribution to 12
cents per unit effective with the third quarter last year.
Distributions attributable to the first quarter
therefore are 45 cents per unit, including the supplemental distribution
that was
declared yesterday and will be paid on April 30 to unitholders
of record on April 28.
We have continued our conservative distribution
policy, holding back some distributable cash to ensure the reliability
of our indicated
distribution rate.
As I just mentioned, although cash available
for distribution in the first quarter was 54 cents per unit, distributions
attributable
to the first quarter were only 45 cents per unit. This means that
our first quarter payout ratio was approximately 83%.
___
Looking at the segmented results, SPPC generated
EBITDA of $11.6 million in the first quarter compared with $10.8
million last year.
All major products areas of SPPC achieved higher earnings this
quarter than the same period in 2003.
Pulp Chemicals reported EBITDA of $5.1 million
for the quarter, which was its second full reporting period as
part of Chemtrade.
While there is no comparison with the same period last year, Pulp
Chemical’s results were approximately half a million dollars
ahead of the fourth quarter of 2003. Although this was slightly
below expectations due largely, as Mark said, to weather issues
affecting Canfor’s mills in January, we were pleased with
the performance of this business and the fact that it is smoothly
integrating into Chemtrade.
BCT Chemtrade’s results were essentially level with last
year, reporting EBITDA of $1.4 million compared with $1.3 million
last year.
As Mark mentioned in his opening remarks, we
have added a fourth, non-operating, segment – Corporate, which provides centralized
services such as treasury, finance, information systems, human
resources and risk management. For the first quarter, corporate
costs were $3 million compared with $2.3 million last year. These
costs reflect the larger scope of the business including such things
as increased IT and risk management costs.
___
Let me turn for a minute to our capital structure.
We are very pleased to announce that we have extended the maturity
date of
our bank debt and fixed our interest rate for the next four years.
Our old bank deal required a repayment of principal in May 2005.
Consistent with our previous refinancing actions, we wanted to
strike a new financing deal at least one year prior to maturity
date. In early March, we finalized our new bank deal, which ensures
that the earliest maturity date is now March 2008.
We also entered into a four-year interest rate
swap which currently results in an all-in interest rate of less
than 5%. Further to
my earlier comments on a conservative distribution policy, we believe
this extension of the term of our debt and fixing our interest
rate is consistent with Chemtrade’s desire to operate in
a conservative financially prudent manner.
___
Finally, a comment on foreign exchange. As we
mentioned on the last call, after reviewing our 2004 cash flow
budgets, we entered
into hedge agreements to lock in an exchange rate for a portion
of our expected U.S. dollar cash flow we receive. We have now locked
in almost 90% of our anticipated cash needs at a rate essentially
equal the exchange rate assumed in our Plan.
___
I’ll now hand the call back to Mark.
Mark
Davis
Thank you, Vic.
We were pleased with our start
to 2004, and believe we can continue to make improvements to
the business that will increase distributable
cash. As I mentioned, the reorganization at SPPC will facilitate
our pursuit of operational excellence and will enhance the
bottom line.
During the first quarter we also completed a
relatively minor purchase of SO2 customer contracts and assets.
Although not
significant
in terms of size, this acquisition is a step forward in realizing
the synergistic opportunities we outlined when we acquired
the Performance Chemicals business and the accompanying SO2 demand.
During the second quarter we have a 3-week maintenance
shutdown at Leeds and also a shorter shutdown in May at Pulp Chemicals.
Each shutdown will not only affect earnings in the quarter,
but is also accompanied by increased capital expenditures.
Accordingly,
as we indicated in our year-end report, we expect that the
second quarter should represent our lowest distributable
cash
quarter
for the year.
Looking forward, we remain confident on our
ability to deliver on our promises. The outlook for most of our
products is
favourable, and we will continue searching for ways to
improve our operations
and enhance our business and distributable cash.
___
Thank you. Vic and I would now be pleased to
answer any questions you may have.
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