Q4 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 fourth quarter and full year 2004 results and then we’ll answer any questions you may have.
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Despite a challenging 2004, Chemtrade continued its history of generating distributable cash for the full year in excess of total distributions paid to unitholders.
For the full year we generated distributable cash of $43.1 million, or $1.87 per unit, and declared distributions of $41.8 million, or $1.80 per unit. Every year since our 2001 IPO, including 2004, we have generated distributable cash in excess of the distributions paid to unitholders. We have retained this excess to assist us in maintaining a stable distribution rate even if there is a temporary business downturn in a segment of our operations or we incur expenses pursuing growth activities.
During the year we also made substantial progress towards solidifying the sustainability of our SHS products, which I’ll comment on later.
As we noted on the last call, we expected the fourth quarter to be somewhat softer than the third quarter due to seasonality, raw material price increases and competitive pressures on powder SHS. The fourth quarter results reflect these factors and also include certain costs incurred in pursuit of potential growth activities.
Vic will go over the numbers in detail in a few minutes, but first let me briefly review the operations for the fourth quarter and add some comments on the year as a whole.
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Sulphur Products & Performance Chemicals results continued to be affected by margin pressures on our SHS products. Raw material prices have increased and our powder product has also incurred pricing pressure from the competitive threat of Chinese material. Our objective this year was to combat these pressures by securing our customer base and reducing costs. I’m pleased to report solid progress on both fronts.
As we have previously explained, due to the short life span of liquid SHS, the customers in close proximity to our liquid plants do not generally receive competitive offers from import suppliers.
With respect to powder SHS (which is the main target of imports) more than 85% of our US and Canadian volume is now under contract. Further, more than 60% of this contracted volume extends to or past the end of 2006. Most importantly, our largest customer is under contract for the next four years for all of their sites including their Alabama site.
We’re continuing to work on reaching similar arrangements with our other SHS customers. This success, together with improvements in our cost structure make us confident of the long-term sustainability of the earnings from this product group.
It’s important to see through the noise surrounding this product and not to lose sight of the fact that we have very solid customer relationships. That is borne out by the fact that our 2004 SHS volumes are essentially the same as 2003.
As indicated, we intended to successfully defend our customer base and have done so, albeit at reduced margins.
We have also successfully reduced costs and improved our competitive position and will continue to make this a focal point for 2005. Unfortunately, last quarter we also noted that rising caustic soda prices were beginning to impact margins. This pricing trend continued in the fourth quarter, and we expect it will affect our results in 2005. I’ll have more to say on that shortly.
Our sulphur products, especially acid, had a strong year, although SO2 volumes were down in the fourth quarter as a result of a shutdown at the St. Anne N.B. mill, which adversely affected results. While this shutdown had an effect on the fourth quarter we have already replaced the acid volume and are rationalizing our SO2 market.
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Pulp Chemicals’ results for the fourth quarter were ahead of the same period in 2003, even though the volume taken by Canfor was a little below expectations because of a Canfor maintenance shutdown that lasted longer than originally scheduled, and operating problems at their sites.
With one full financial year now under our belt, we’re pleased with the Pulp Chemicals acquisition. At the time of the acquisition we expected Canfor to take at least 60% of the output of the Prince George plant, and that’s exactly what has occurred. However, due to the size of this customer, positive or negative changes to its operating rates have a noticeable impact. Canfor’s second and fourth quarter operating difficulties are evident in those quarters’ results.
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Finally, BCT Chemtrade had another solid quarter to cap off a good year. Supply remained tight during the year, which prevented the group from obtaining further volume and taking advantage of higher spot prices. Increased volumes and reduced operating costs resulted in earnings that were ahead of 2003.
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To summarize, while the fourth quarter results were below our expectations, we solidified a number of key long-term agreements with our powder SHS customers, which was one of our critical operating objectives for the year.
We maintained SHS volume for the year, and although margins were reduced as a result of competitive pricing pressure and rising caustic costs, we believe our strengthened customer relationships and improved cost structure have enhanced the long-term viability of the business.
Our Sulphur Products, Pulp Chemicals and International businesses continue to perform well.
Finally, we continue to actively pursue opportunities to expand Chemtrade’s business and enhance distributable cash.
I’ll now hand the call over to Vic for his financial review, after which I’ll have some remarks about the outlook for 2005.
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 number of units outstanding during the periods are detailed in the news release.
The Pulp Chemicals acquisition also means the consolidated results for 2004 are not directly comparable with the results for 2003.
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For the three months ended December 31, 2004, cash available for distribution was $9.7 million, or 41 cents per unit, generated from revenue of $85.6 million and EBITDA of $12.1 million. In the fourth quarter of 2003, distributable cash was $10.3 million, or 47 cents per unit, revenue was $80.7 million, and EBITDA was $12.3 million.
Net earnings for the fourth quarter of 2004 were $3.5 million compared with $4.2 million last year.
For the full year 2004, distributable cash was $43.1 million, or $1.87 per unit. As noted earlier, these results are not directly comparable with 2003 because of the Pulp Chemicals acquisition in August 2003.
In total, consolidated financial results for 2004 were below the expectations we had at the beginning of the year, primarily because of the competitive price pressures on our powder SHS business that emerged in the second quarter, and raw material cost increases later in the year. As Mark noted, although SHS volumes were steady year over year, gross margins were adversely affected as we reduced prices to meet the competition.
All of our other products from Sulphur Products, Pulp Chemicals and International met our expectations for the year.
Sustaining capital expenditures for the year were $2.6 million, which was consistent with last year.
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We maintained our steady distributions throughout the year, paying monthly distributions of 11 cents per unit, and quarterly supplemental distributions of 12 cents per unit, bringing total distributions for the year to $1.80 per unit. As Mark mentioned, distributable cash exceeded distributions declared, enabling us to maintain our distributions and continue to expand our holdback for unexpected impacts on our regular business operations and pursue growth opportunities.
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Looking at the segmented results for the fourth quarter, SPPC generated EBITDA of $8.5 million, reflecting SHS raw material cost increases and price pressures on powder SHS.
For the full year, EBITDA was $38.6 million, down from $43.2 million in 2003 with most of this being attributable to the reduced earnings from SHS due to raw material increases and pricing pressure on powder SHS.
Pulp Chemicals reported EBITDA of $5 million for the fourth quarter. Although this was ahead of the $4.6 million in the fourth quarter of 2003, it was a little below expectations because of lower than expected sales to Canfor during the period.
BCT Chemtrade, our international business, reported EBITDA of $1.5 million for the fourth quarter, compared with $1 million in 2003, and for the full year reported $5.7 million compared with $4.9 million in 2003.
Corporate Services reported costs of $2.9 million for the fourth quarter. This included expenditures of approximately half a million dollars spent primarily on professional advisors in connection with acquisition activities that Mark mentioned earlier.
What’s worth noting is that excluding those costs, Corporate Services would have been substantially lower than the fourth quarter of 2003. This demonstrates the success we’re having in managing these costs.
For the full year, corporate costs were $11.8 million compared with $10 million in 2003, the increase reflecting the increased scope of the business following the Pulp acquisition and certain credit losses as well as the acquisition activity costs I just mentioned.
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Finally, an update on our actions to manage the stronger Canadian dollar.
Prior to the Pulp Chemicals acquisition, approximately 60% of the Fund’s EBITDA and distributable cash was generated in US dollars. With the inclusion of Pulp Chemicals, this declined to approximately 50% in 2004, and at the Fund’s expected exchange rates in 2005, we estimate approximately 40% of both EBITDA and distributable cash will be generated in US dollars.
As we have mentioned before, we do have some natural hedges such as US dollar bank interest, certain capital expenditures and transportation costs that mitigate the impact. However, we also have a policy of hedging a portion of the US dollars generated that must be converted to Canadian dollars. We roll these hedges forward for an 18-month period.
At December 31, 2004, approximately 64% of planned transfers for 2005 and 20% of 2006 planned transfers had been hedged.
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Thank you, and I’ll now hand the call back to Mark.
Mark Davis
Thank you, Vic.
To summarize, the fourth quarter typified the year in many ways – sound results from Sulphur Products, Pulp Chemicals and our International business were offset by lower than expected results from Performance Chemicals, primarily because of the price competition on powder SHS and higher costs for caustic soda.
We believe that the pricing pressure on powder SHS has now stabilized, although we expect to continue facing increases in raw material costs, particularly caustic soda. However, we are taking very decisive actions to deal with competition and cost issues. Let me explain.
First, on the Chinese competitive issue, as I mentioned earlier, we have a significant portion of our total SHS business under contract, including a newly signed four year contract with our largest customer. We also expect to enter into additional multi-year contracts over the next few months.
Although our focus on customer retention meant that we gave up some margin in the short term, we have also successfully reduced our own cost structure to gain back some of that margin. I should add that this focus on costs extends to all our products, not just SHS.
Of more immediate concern to us is the increasing cost of caustic soda, an important input to the SHS process. Caustic soda is a product that goes through price cycles, and right now prices are being driven higher by a number of factors including a slight reduction in production capacity, high natural gas prices and high industry demand from a stronger North American economy.
These factors will change and some new capacity has also been announced although it won’t come on stream in 2005. The chlor-alkali cycle will turn and caustic soda prices will decrease. The question is when.
Industry experts seem to agree that 2005 should be the high water mark for caustic pricing. In the meantime, we’re looking at a variety of ways to reduce the impact of the higher costs, including reducing caustic use and working with certain customers to provide their own caustic, particularly if they are larger users of caustic than we are.
Right now about 10% of our SHS volume is produced for customers who deliver their own caustic to us.
It may take a while longer yet, but we will continue to cope with these transitory competitive and cost issues and emerge with a stronger SHS business with more long-term customer relationships and improved operating efficiencies.
Looking past 2005 to 2006 and beyond, we believe the challenges we are currently facing will have lessened. Caustic pricing should be past its peak and we will also have increased sulphuric acid volume as a result of Inco complying with environmental regulations requiring it to capture additional SO2 gas.
Finally, as you have noted from our comments on corporate costs, we continue to actively look for growth opportunities. Our criteria for that have not changed – they must be within our core competencies, and they must be accretive for unitholders.
Although we expect that distributable cash for 2005 will be less than that generated in 2004, we believe that our current annual distribution rate of $1.80 is sustainable.
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Thank you. Vic and I would now be pleased to answer any questions you may have.
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