Q3 2004 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 third quarter results and then we’ll answer any questions you may have.
___
I’m pleased to report that distributable cash for the third quarter met our expectations. Overall, our results for the quarter were substantially ahead of the second quarter, which you will recall, included maintenance shutdowns at our plants in Leeds and Prince George.
Other factors contributing to the improvement were a return to the normal level of sales of sodium chlorate to Canfor, the expected seasonal pickup in volumes of SHS sales -- although powder SHS is still being affected by Chinese competition -- and better than expected results from BCT Chemtrade.
Distributable cash generated in the third quarter was 50 cents per unit, bringing distributable cash for the nine months to $1.46 per unit. This is slightly ahead of our expectations for the year-to-date.
Vic will go over the numbers in more detail in a few minutes, but first let me briefly review the operations for the quarter.
___
Sulphur Products & Performance Chemicals came in a little below expectations.
Performance Chemicals, as expected, recorded sales volumes for SHS that were substantially better than Q2 as we hit the peak seasonal period.
Volumes of liquid SHS continued to exceed expectations in the third period. Although powder SHS sales remained under pressure from Chinese exporters, the Chinese producers are now facing higher freight and raw material costs and power interruptions. We also understand that some capacity expansions have been postponed. As mentioned last quarter, we’re working on a number of initiatives to protect our customer base and improve the cost competitiveness of our powder SHS business.
Some unexpected downtime due to equipment problems, all of which have now been fixed, affected powder production at Leeds, South Carolina and liquid production at Kalama, Washington. Higher caustic soda costs also had some negative impact in the quarter.
Sulphur Products’ results for the quarter were in line with expectations although they were impacted slightly by a short scheduled maintenance shutdown of the Cairo plant, which produces liquid SO2.
Importantly, we are pleased to advise that during the quarter we successfully renegotiated and extended our services agreement with Falconbridge.
The agreement deals with the removal, marketing and distribution of liquid SO2 produced at Falconbridge’s Kidd Creek smelter. The previous contract was due to expire at the end of 2005 at which time ownership of the conversion plant was to be transferred from Chemtrade to Falconbridge for a nominal sum.
The contract has now been extended into 2010 and we have transferred the plant to Falconbridge. As Vic will detail, this asset transfer results in a non-cash book write-off that has no impact on distributable cash. Of more interest is the fact that we expect the new extended agreement will generate approximately the same earnings going forward as we earned in 2004 under the old agreement.
This was an important, and mutually beneficial achievement for both Falconbridge and Chemtrade. Falconbridge knows it can rely on Chemtrade’s removal, marketing and distribution services to enable it to continue to meet environmental standards critical to its operations, and also to maximize the value of by-product sales.
The new long-term contract underscores the value of Chemtrade’s services and also reinforces our base of reliable and sustainable cash flow.
___
Pulp Chemicals’ results came in ahead of expectations for the quarter. Sodium chlorate volumes were strong reflecting a return to normal volumes to Canfor, as well as additional sales to third party customers, which resulted in the plant running at full capacity.
The strength of the quarter was enhanced as Canfor delayed a maintenance shutdown from Q3 to Q4. We continue to take steps to ensure that we can sell all of the product that we can produce.
___
Finally, BCT Chemtrade’s results also came in ahead of plan, as the international market remains robust. Supply is still tight, however, which means it’s difficult to obtain spot volumes to generate additional sales.
___
Overall, we were pleased with the results for the quarter. Distributable cash came in on plan; we renegotiated a long-term contract with one of our important sulphur products producers; sodium chlorate volumes to Canfor returned to normal and we obtained spot sales, and our North American SHS sales volumes continued to be strong.
I’ll now hand the call over to Vic for his financial review, after which I’ll have a few concluding remarks.
Vic Wells
Thank you, Mark and good morning ladies and gentlemen.
Before reviewing the results, please note that the per unit amounts for distributable cash for all periods mentioned are calculated using the weighted average number of units outstanding during those periods. A total of 5,860,000 units were issued in August 2003 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.
The Pulp Chemicals acquisition also means the consolidated results are not comparable with the third quarter and first nine months of 2003.
___
For the three months ended September 30, 2004, cash available for distribution was $11.6 million, or 50 cents per unit, generated from revenue of $90 million and EBITDA of $12.8 million. In the third quarter last year, distributable cash was $10.5 million, or 57 cents per unit, revenue was $74.5 million, and EBITDA was $13.3 million.
Net earnings for the third quarter this year were $4.2 million compared with $6.5 million last year. This includes a $1.7 million non-cash write-off associated with the transfer of the Kidd Creek facility to Falconbridge. The future income tax benefit related to the disposal was half a million dollars. The write-off does not affect distributable cash.
For the first nine months of this year, distributable cash was $33.5 million, or $1.46 per unit compared with $24.6 million, or $1.46 per unit last year.
In total, consolidated financial results for the third quarter of 2004 met expectations. As Mark noted, the results reflected strong volumes of sodium chlorate sales by Pulp Chemicals, the seasonal increase in SHS sales, and another solid performance from International. These were offset to some extent by a short planned maintenance shutdown of the Cairo plant and some unexpected downtime at Leeds and Kalama.
Capital expenditures were $1 million in the third quarter of which $0.7 million was related to maintenance capital and $300,000 was related to the anode replacement program at Pulp Chemicals. Sustaining capital expenditures for the balance of 2004 are expected to be approximately $700,000.
___
We maintained our steady distributions during the third quarter, paying monthly distributions of 11 cents per unit. Including the 12 cents per unit supplemental distribution that was declared yesterday, total distributions attributable to the third quarter were 45 cents per unit.
Cash distributions attributable to the year-to-date, therefore, are $1.35 cents per unit. As I mentioned, distributable cash per unit for the year-to-date was $1.46 per unit. This represents a payout ratio of approximately 93% for the first nine months of the year.
___
Looking at the segmented results for the third quarter, SPPC generated EBITDA of $10.5 million before the non-cash book loss of $1.7 million on the transfer of the Kidd Creek facility to Falconbridge.
The results were about $700,000 ahead of the second quarter this year. The improvement reflects the return to normal operations after the maintenance shutdown at Leeds, and the seasonal pick up in SHS sales.
Pulp Chemicals reported EBITDA of $5.6 million, which exceeded expectations. There is no direct comparison with last year, of course, but the $1.2 million difference between this quarter’s results and those of the second quarter are attributable to a return to the expected level of sales of sodium chlorate to Canfor, bolstered by additional sales to third parties, and to the maintenance shutdown and associated capital spending that was taken in the second quarter.
The results were also better than anticipated because Canfor delayed a planned shutdown from Q3 until Q4.
BCT Chemtrade, our international business, reported EBITDA of $1.3 million for the third quarter, compared with last year’s $1.1 million.
Corporate Services, the non-operating segment we added this year, reported costs of $2.9 million for the third quarter, which was comparable to the first two quarters this year.
___
Finally, I would like to comment briefly on the impact of the stronger Canadian dollar on Chemtrade, and actions we have taken to manage it.
Prior to the Pulp Chemicals acquisition, approximately 60% of the Fund’s EBITDA was generated in US dollars. With the inclusion of Pulp Chemicals, this has declined to approximately 50%.
We do have some natural hedges such as US dollar bank interest, certain capital expenditures and transportation costs that mitigate the impact. However, we have now adopted a policy of hedging a portion of the US dollars generated which must be converted to Canadian dollars. We roll these hedges forward for an 18-month period.
For example, we have now entered into a number of contracts that lock in 100% of our expected cross-border flows for 2004 at a rate essentially equal to the exchange rate assumed in our 2004 Plan.
We have also hedged approximately 45% of our expected 2005 cross-border cash flows, and we will continue to increase our hedged position throughout the year.
___
Thank you, and I’ll now hand the call back to Mark.
Mark Davis
Thank you, Vic.
In summary, the results for the quarter met our expectations, and we’re slightly ahead of where we expected to be for the year to date. The positive effect on our results of the scope and diversity of our business continues to be apparent, despite the strength of the Canadian dollar.
We expect results for the second half of 2004 to be similar to the first half of the year. We expect the fourth quarter results will not be as strong as the third quarter for a number of reasons, including lower seasonal demand for SHS and maintenance shutdowns adversely affecting Pulp Chemicals.
We expect the acid market to remain tight, and the SO2 market continues to be stable.
Our liquid SHS products are expected to continue to perform well, although we are experiencing raw material cost increases, particularly for caustic soda. We recorded some improvement in powder SHS sales in the third quarter, however we expect the international market to remain competitive and we are pressing ahead with our strategy to adapt to these conditions.
Results from our international business are expected to remain stable.
Finally, we remain confident that cash available for distribution will be sufficient to meet our indicated distribution target of $1.80 per unit for 2004.
___
Thank you. Vic and I would now be pleased to answer any questions you may have.
|
