Peak Acquisition Conference Call
Mark Davis
Good afternoon, ladies and gentlemen. Thank you for joining us on our conference call and webcast today.
With me is Vic Wells, Vice President, Finance and Chief Financial Officer. Vic and I will answer any questions you have after our remarks.
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Since our IPO four years ago, Chemtrade has pursued a four-pronged strategy for delivering reliable and sustainable distributions to unitholders. Those strategic thrusts are:
- A business model that mitigates commodity risk;
- A focus on ensuring sustainable earnings;
- Financial prudence; and
- Increased size and scale leading to diversity and growing distributions.
Obviously, it is this last one that we want to talk about today.
The acquisition of the Peak Sulphur and Peak Chemical businesses that we announced today is the largest of the three material acquisitions we have completed since our IPO. It too, meets the same objectives we have set for all our acquisitions, which are to diversify our sources of earnings, add scope and scale to our business, and, of course, increase distributable cash.
Our three other acquisitions – the purchases of Performance Chemicals at the end of 2002, Pulp Chemicals in August 2003, and the German removal services business on May 1 this year – all met these objectives, and have been successfully integrated into our operations.
Let me tell you some more about our new businesses and why they are good strategic fits for Chemtrade. Vic will then go over the financials and how we are financing the transaction.
As indicated in the news release, we are acquiring two businesses – Peak Sulphur and Peak Chemical – for a total cost, including all related transaction costs, of approximately $220 million Canadian. Vic will provide additional financial details later but on an aggregate basis the purchase price represents a multiple of about 7 times annualized 6 month pro forma EBITDA.
We believe that we have acquired quality stable businesses where a large portion of the earnings is generated by contracts that pass through changes in the cost of the major raw material. We expect that these businesses will not only continue to contribute earnings at this rate, but that results will improve as we move forward.
The Sulphur business, which is by far the larger of the two, processes various types of sulphuric acid – including regenerated sulphuric acid (or “regen”), merchant, and ultra pure – from its four plants in Beaumont, Texas; Shreveport, Louisiana; Riverton, Wyoming; and Tulsa, Oklahoma.
As we have mentioned with respect to our original business, sulphuric acid is one of the most widely used chemicals in the world and is a key input in many different industries.
The foundation of the Sulphur business is the regen/spent acid operations. In most chemical processes where sulphuric acid is used, it is totally consumed. In other processes, however, the acid is only partially consumed and becomes “spent” acid. Spent acid is sent to regeneration facilities where it is then processed into merchant grade sulphuric acid. Sulphur’s regen business is based on long-term contracts and forms the foundation of its earnings.
The Chemical business in one of only two North American producers of phosphorous pentasulphide, or P2S5, which is a performance chemical used primarily as a strategic ingredient in the lubricating oil and grease additive markets for the automotive industry.
Before describing the operations and the assets we are acquiring, let me add a few comments why we believe this acquisition fits with our growth strategy and business model.
- Both Sulphur and Chemical produce, sell and distribute industrial chemicals, which is consistent with our core competencies. In fact, the majority of the acquired business is based on sulphuric acid, a chemical that is already a significant part of our portfolio of products.
- The Peak businesses diversify our end use markets. Most of the earnings are derived from the refinery and automotive lubricant industries, which reduces our reliance on the pulp and paper industry.
- We significantly diversify our product offering. Chemical’s earnings are solely derived from products that we do not currently market.
- Sulphur incrementally expands our existing merchant and ultra pure acid businesses.
- The acquisition improves the quality of our earnings. The majority of Sulphur’s earnings are derived from 2 to 5 year term Regen or Spent contracts that adjust pricing to changes in certain input costs, particularly natural gas, the key raw material input.
- Business model fit. Both businesses have characteristics which tend to mitigate traditional chemical commodity cyclicality, Sulphur contractually and Chemical due to industry structure.
Let me now describe the businesses in a bit more detail.
Peak Sulphur
As I noted, the Sulphur business produces regen, merchant, and ultra pure acid, but it generates most of its earnings by processing spent acid for refineries and chemical operations. The balance of its earnings is derived from sales of merchant acid to pulp mills and other industries, and from ultra pure acid sales to the electronics industry.
Oil refineries are the largest producers of spent acid. The sulphuric acid is used by refineries in the production of alkylate, which is an octane enhancer. The spent acid generated in the refining process is sent to a regen plant for reprocessing.
Sulphur has a significant market share of the regen acid business in the U.S. Gulf Coast area; it is the only regen facility in the U.S. Rocky Mountain district, and it is one of only five producers of ultra pure sulphuric acid in North America.
The regen market represents a very attractive opportunity for Chemtrade. According to industry reports, the overall U.S. regen market is expected to grow a from 2004 to 2008 as refinery alkylate production increases, with the most significant increase in demand being in the Gulf Coast area, where Sulphur’s two main plants are located.
Sulphur’s regen business and the quality of its contracts were a key to this transaction.
About half of Sulphur’s total capacity is used to service regen accounts, and the majority of this volume is secured by medium to long-term contracts.
Over 75% of the regen volume is under contract until the end of 2006, and over 70% until or past the end of 2007. Approximately another 11% is supplied by truck where Sulphur’s plants are the logical geographic facility, making it difficult for more remote regen plants to compete. Accordingly, over 80% of regen volume is very secure through the end of 2007.
The key element of all Sulfur’s regen contracts is price adjustments for changes in input costs. At a minimum, the customer’s price is adjusted for changes in the price of natural gas, which is the main raw material. Many of the contracts are also adjusted annually for changes in labour costs.
Each of the plants has a secure base load customer, which enables the plants to also be cost competitive suppliers into the merchant acid market. Obviously, as a result of our long history in marketing merchant sulphuric acid this is a business we are very familiar with, and the acquisition lets us expand into new geography.
Three of Sulphur’s four plants – Riverton, Tulsa and Shreveport – are relatively remote geographic locations, and are thus somewhat protected from competition in the merchant acid market. Typically, there are few regional competitors and these Sulphur plants have significant logistical advantages. Many of Sulphur’s customers are served by truck, which creates further competitive advantages.
Finally, Sulphur also participates in the ultra pure acid market. Ultra pure acid is sold into the electronics industry. Chemtrade also participates in this market with production from its Ohio plant. Together the businesses become a significant supplier of ultra pure acid. The market is relatively stable, with fluctuations based on changes in demand primarily in the U.S. semi-conductor industry.
Peak Chemical
The Chemical business is one of only two North American producers of P2S5 and has a market share of about 25%. P2S5 is a performance chemical which, when combined with zinc oxide, produces a chemical that is a very effective engine wear and corrosion inhibitor.
Although there are some applications for P2S5 other than the automotive market, such as agriculture and mining, the bulk of P2S5 sales are to the automotive lubricants industry. Virtually all of Chemical’s sales are into this lubricants industry.
Chemical has two major customers who dominate the lubricant market. Pricing of P2S5 tends to track changes in the price of elemental phosphorous, the main raw material, which represents approximately 65% of total cost.
Not surprisingly, in a two-player market with common raw material costs, price of P2S5 has tracked changes in that raw material. Volume has also been consistent as customers are inclined to support both of the suppliers.
The P2S5 plant is located in Lawrence, Kansas and shares a site with Astaris, which is also the business’s competitor. Astaris is a joint venture between FMC and Solutia. When FMC and Solutia formed the joint venture, the U.S. FTC required FMC to sell its P2S5 facility, and Peak purchased it in 2000.
Chemical leases the land under a 99-year lease that includes the supply of water, steam, electricity and gas essentially at cost. Chemical receives its phosphorous by pipeline from Astaris at a price that adjusts with Astaris’ actual costs of producing phosphorous. There is an FTC order governing how Astaris must deal with Chemical.
The production assets for both Sulphur and Chemical are in good shape. The sulphur plants typically take shutdowns of 10 days every 12 – 18 months and preventative maintenance programs allow for uptime to be more than 95%. At the P2S5 plant, all three reactors have been replaced since 2002, and there is a rebuilt spare reactor on site.
Maintenance capital expenditures for all these plants are estimated at approximately US$3.3 million per year.
I’ll now hand the call over to Vic to discuss the financial matters.
Vic Wells
Thank you, Mark.
From a financial aspect, the Peak acquisition is positive for Chemtrade and our unitholders. Let me start by telling you how we have financed this transaction so my references to prospectus numbers will be more understandable.
We expect total acquisition costs of approximately $220 million Canadian, which includes $166.75 million US in purchase price and all related transaction costs. To close the transaction, we arranged for a new $360 million credit facility under which we borrowed $330 million, i.e., $220 to fully pay for the acquisition and related costs and another $110 to refinance our existing term debt.
The borrowings are under a new bank agreement co-led by TD Securities and Scotia Capital. At the same time, we also entered into a $155 million bought deal for 9,968,000 units underwritten by TD Securities and Scotia Capital. The net proceeds of the bought deal will be used to reduce the debt incurred on closing the acquisition of Peak.
Following this debt repayment, we expect the Chemtrade will have a pro forma debt to EBITDA ratio of about 2:1. More details will be available from our prospectus, which we expect will be filed on SEDAR tomorrow, regarding this new lending facility, but the key terms are that it is a 4-year facility that increases our term debt by $70 million at more favourable terms and greater flexibility than our current arrangements.
Turning now to the Businesses.
In 2004, total net sales for the Sulphur and Chemical businesses were approximately US$69 million US compared with US$47 million in 2003. EBITDA for the combined businesses in 2004, excluding a non-cash book loss of $1.6 million was US$15.8 million compared with US$10.9 million in 2003.
For the six months ended June 30, 2005 net sales were approximately US$37.3 million versus US$33.4 million for the same period in 2004. Most of the increase came from improvements in the Sulfur business. Over the same 6-month period EBITDA in 2005 was US $9.8 million, an increase of over 30% versus 2004 EBITDA.
On an EBITDA margin percentage basis, EBITDA for this 6-month period improved from about 22% in 2004 to about 26% in 2005. Again, the major improvement came from the Sulfur business.
The principal reasons for the increase in revenue and EBITDA were an increase in pricing on certain regen contracts and a shift in volume from lower margin merchant acid production to higher margin regen sales.
As Mark mentioned, the majority of the sales and earnings are generated by Sulphur’s regen/spent acid business. Over the first 6 months of 2005, Sulphur generated over 70% of total net sales, and over 85% of EBITDA.
On a pro forma basis for the first 6 months of 2005, the combined business, that is Chemtrade and the two Peak businesses, would have produced EBITDA of $40.2 million, and distributable cash of $30.8 million, or $0.92 cents per unit on a basic basis. This compares with EBITDA of $25.5 million and distributable cash of $20 million, or 85 cents per unit, that Chemtrade actually generated.
In addition to maintenance capital expenditures of approximately $3.3 million US per year, we have also raised an additional $1 million to pre-fund certain one-time "housekeeping" capital improvements that we plan to undertake.
As indicated, the entire Peak business is located in the US. We intend to hedge approximately 80% of our anticipated cross border cash flows from the Peak business for the next 3 years. We expect that the exchange rates will be very close to matching the exchange rate realized on the purchase price, thus significantly reducing any currency risk from acquiring this US business.
Further, in calculating distributable cash for Peak we have reduced pro forma distributable cash by using the 3-year forward exchange rate. We believe this is the most conservative approach. We have not yet put the hedges into place but will do so within the next several days.
Even after this negative forex adjustment, which accounts for about one cent per unit of distributable cash, the pro forma distributable cash of 92 cents per unit is an 8% increase in distributable cash per unit. I’ll now hand the call back to Mark.
Mark Davis
Thanks, Vic.
As we announced in our press release, we intend to increase our distributions by $0.04 per unit effective with our August distribution. This is the same approach we have taken in our previous acquisitions, i.e., an increase following an acquisition and then running the new business while we consider whether a further increase to a higher level is sustainable.
Based on this approach, we believe that even after the increase in distributions that our payout ratio will return to more historical level than where it has been for the first 6 months this year.
The increase in distributions will be implemented by increasing our monthly distributions from $0.11 per unit to $0.1133 per unit. Our regular 12 cents per unit quarterly supplemental distribution remains unchanged.
To summarize, we are very excited about this transaction. It meets all of our key acquisition criteria:
- It is within our core industrial chemical competencies.
- It diversifies our earnings;
- It adds scope and scale to the business; and
- It increases distributable cash
The acquisition also fits from a business model perspective. Both businesses contain characteristics that mitigate certain fluctuations typically encountered by commodities. Sulphur's mitigation is contractual (especially in the regen segment), logistical (i.e., remote markets), and product differentiation (the parts per trillion ultra pure product). Chemical’s stability is enhanced by the very consolidated industry structure in which it operates.
Lastly, but most importantly, the transaction is immediately accretive to our unitholders.
Thank you for your attention. Vic and I would now be pleased to answer any questions you have.
OPERATOR: Your first question comes from Damir Gunja, from TD Newcrest. Please go ahead with your question.
DAMIR GUNJA: Oh, good afternoon. To the extent that you can, perhaps Mark, can you elaborate a bit on the non-compete agreement referred to in the press release?
MARK DAVIS (President and Chief Executive Officer, Chemtrade Logistics Income Fund): Yes, as a number of you are probably familiar, there were some mutual non-competes when Chemtrade originally was IPO’ed out of Marsulex. We’re obviously well aware of what our legal obligations are and Chemtrade has actually always abided by our legal obligations.
We have received advice from our legal advisors that the non-competition agreement itself is likely unenforceable, and further, that most of these regen plants don't compete against cross geographies. So it’s hard to actually see where it could be a dispute, even if the agreement was enforceable.
DAMIR GUNJA: Thanks very much.
OPERATOR: Your next question comes from James Leung, from McKenzie Financial. Please go ahead with your question.
JAMES LEUNG: Good afternoon, gentlemen. Just a question on why the management of Peak is selling at this point? Could you sort of elaborate on that?
MARK DAVIS: Yes, sure. The management of Peak are a bunch of, I would say, old chemical industry people who have associated before with private equity funds and built chemical businesses.
There’s another large private equity group in the U.S. that bought a business substantially larger than Peak that wanted the corporate staff to leave Peak to go run this new acquisition that they bought. So it was just time for these guys to monetize and move on to actually a bigger platform.
JAMES LEUNG: Okay. You’re providing six months EBITDA and revenue numbers. Now if you were to look back 12 months as opposed to six months, would those numbers be roughly twice as large as the numbers that you’ve provided, or is this business somewhat more seasonal?
MARK DAVIS: The business is seasonal, but not with that question. The second and third quarters are generally the strongest, so you get a strong quarter each six-month period.
It’s difficult to look back in this business, as you’ll see from the financials in the prospectus, because they acquired businesses basically in each year.
So the reason we’ve used the six-month numbers, as we said, is that they have acquired businesses and the increase in revenue and earnings, again as we said, is driven by a shift to more regen volumes and some pricing changes that have been driven through these regen contracts that are multi-year contracts.
JAMES LEUNG: Okay. Would this business be sensitive to weather, what I mean is more adverse type of weather with some of this being in the gulf coast? Let’s say we have a whole bunch of, a number of hurricanes. Would this be meaningful in terms of performance of this business?
MARK DAVIS: It hasn’t been, historically. I mean, obviously if a hurricane or tornado hits a plant directly, that would be a problem. But you know, for the most part, these plants generate their earnings by servicing the U.S. refinery industry and the U.S. refinery industry has been subject to weather patterns before and they seem to do a pretty good job of bundling themselves down, weathering the storm and then cranking back up again.
JAMES LEUNG: Okay. You’ve addressed the capex, and this obviously being a U.S. business, what would be your incremental taxes that you have to pay on an annual basis?
MARK DAVIS: They are nominal.
VICTOR WELLS (Vice-President, Finance, and Chief Financial Officer, Chemtrade Logistics Income Fund): Very nominal.
MARK DAVIS: Less than a couple of hundred thousand?
VICTOR WELLS: Yes.
MARK DAVIS: Something less that a couple of hundred thousand a year.
JAMES LEUNG: Okay. So you’re saying what… based on what I’m seeing, on an annual basis, the EBITDA would have increased by roughly 24 million Canadian, based on these exchange rates? Is that roughly correct? EBITDA.
MARK DAVIS: Yes, and let me do it another way, if I can. That is, we’re comfortable with the first six-month run rate is a good run rate for the business.
JAMES LEUNG: Okay. And your capex would have increased by about 4 million Canadian.
MARK DAVIS: Right.
OPERATOR: Your next question comes from Barbara Gray, from First Associates. Please go ahead with your question.
BARBARA GRAY: Thank you. Hi, guys.
MARK DAVIS: Hi, Barbara.
BARBARA GRAY: The Peak group, why did you guys not buy the Southern Lime operations?
MARK DAVIS: We weren't interested in it.
BARBARA GRAY: Okay, and they didn't want to sell that? It sort of seems like the orphaned part of their three businesses and you bought two of the three.
MARK DAVIS: They are likely talking to a more logical industry player than we would be for the lime business.
BARBARA GRAY: Okay. And I believe Merit's one of the big private equity holders, is that correct?
MARK DAVIS: Yes.
BARBARA GRAY: Did they have an option to take Chemtrade stock or did they just want cash? Or what was… because what we saw with BFI is the IFI took the BFI stock.
MARK DAVIS: We didn’t really discuss that with Merit.
BARBARA GRAY: Okay. And with respect to the results last year, I didn't get it clearly. Vic went over it quickly. Are you going to put out financials before the prospectus tomorrow? What were the numbers year in terms of revenue and EBITDA again?
VICTOR WELLS: Total sales in 2004, Barbara, were U.S. 69 million compared with U.S. 47 in 2003.
BARBARA GRAY: And how much of that growth was acquisition?
MARK DAVIS: A substantial portion.
BARBARA GRAY: Was there any organic growth?
VICTOR WELLS: Barbara, I don't know.
BARBARA GRAY: And my question was would it be in pricing going up or volume going up?
MARK DAVIS: It’s hard to analyze the business year-over-year because of the acquisition growth that they did.
BARBARA GRAY: Okay, and then ’03, the EBITDA was at 10.9, is that correct?
VICTOR WELLS: Yes, that’s right.
BARBARA GRAY: And then 15.8?
VICTOR WELLS: That’s correct.
BARBARA GRAY: Okay. So the EBITDA margin was pretty much unchanged. It just went down slightly. Okay, thank you very much.
MARK DAVIS: Thanks.
VICTOR WELLS: Okay, Barb.
OPERATOR: Your next question comes from Bill Procter, from MacKenzie Financial. Please go ahead with your question.
BILL PROCTER: Yes, hi guys.
MARK DAVIS: Hi, Bill.
BILL PROCTER: Yes, some of them have been answered, but just for clarification, the EBITDA goes up by 24 million Canadian; but then you get another $5 million from synergy that takes you up to 29, is that correct?
MARK DAVIS: Yes.
BILL PROCTER: And the second question is, like what sort of comfort level do we get, Mark, from the fact that – and granted, there’s been some acquisitions included here – but the numbers have sort of doubled over the last two years and we’re buying it at the doubled number. So what sort of comfort level can we get that these new numbers, the higher numbers, are definitely sustainable? And then is there any growth from those numbers, ex the synergies that you’re looking at?
MARK DAVIS: Right, I think it goes like this, Bill. If you just ignore the acquisitions, in our view, the real step change in earnings, and again, you’ll see it in the prospectus when it comes out, is they’ve been able to attract additional regen volume and actually get higher pricing on the regen contracts which are all, you know, two?- to five?-year contracts.
So you know, we went through it kind of quickly, but you know, when you go through it more slowly, something like 80 per cent of the regen volume, which is the key driver of the increased profitability, is in our view, very secure business, at least through the end of 2007.
The other thing that probably flew by because we're throwing a lot of information at everybody is that the demand in the regen market is supposed to increase between 2004 and 2008 and increase most significantly in the Gulf Ccoast area where these guys are located.
So I think what we believe is actually if you assume that they had this volume all the time, we’ve seen an increase in the pricing level that you get for these products, a belief that the volume is secure and a tie between pricing and their major raw material costs being natural gas.
So, I mean, that’s a long-winded answer to say we do believe they’re sustainable and believe that we’ve kicked sufficient tires to convince ourselves of that.
BILL PROCTER: And what’s the ability to increase volumes going forward?
MARK DAVIS: The main increase in volume is, you run these plants basically full out and you either sell, for all intents and purposes, regen services to the refineries, or merchant acid. So the aggregate volume really won’t change much and you know, we’ll try and tweak the plants, but you’re not going to actually step change volume. What you’re going to try to do is continue to swing more of your volumes to servicing refineries where there’s a better margin, and less of your volume towards serving the merchant acid business and I think that’s obtainable as the regen market demand increases over time.
BILL PROCTER: Okay. And just a couple of other clarifications on financials, if I may. What’s the rate on the debt now? Is there a rate that we can relate to on the debt financing for now?
VICTOR WELLS: We’ve used four and a half.
BILL PROCTER: Four and a half? Okay. And what was the balance sheet of this company? Like, what would the working capital look like and what would the fixed assets look like?
MARK DAVIS: Vic is turning pages. I’ll give you working capital while he flips pages. Working capital on an aggregate basis, if you add them together, is something like 5.6 million U.S.
And on the fixed asset side…
VICTOR WELLS: About 190 million.
BILL PROCTER: One hundred and ninety million. And that’s the number on their books?
VICTOR WELLS: Oh, no. I’m sorry, I thought that you meant going the whole… I thought you meant the whole consolidated picture, Bill.
BILL PROCTER: Sorry, no. Like what you’re purchasing.
VICTOR WELLS: Oh.
BILL PROCTER: Like if you’re paying roughly, there’s 220 Canadian, what are you getting? You’re getting working capital and fixed assets, presumably a lot of good will, but…
MARK DAVIS: That’s right.
VICTOR WELLS: That’s right, 75. Bill, for one thing, I do want to say that these numbers are not final yet. I’m sure you understand that. 75 million.
BILL PROCTER: Seventy-five million is goodwill?
VICTOR WELLS: No, no. It’s fixed.
BILL PROCTER: Oh, 75 million is fixed. It that U.S.?
VICTOR WELLS: No, that’s Canadian.
BILL PROCTER: Seventy-five million Canadian and then 6 or 7 or 8 working capital, Canadian?
VICTOR WELLS: Right. That’s a good number, yes.
MARK DAVIS: And virtually no intangibles. We probably have some contract intangibles.
VICTOR WELLS: Oh, yes. No, there are. There’ll be significant allocations of intangibles.
BILL PROCTER: On the purchase, right?
MARK DAVIS: Right.
VICTOR WELLS: Yes.
BILL PROCTER: Okay. Okay, that’s good. Thanks, guys.
MARK DAVIS: Thanks, Bill.
VICTOR WELLS: Okay, Bill.
OPERATOR: Your next question is a follow-up question from Barbara Gray, from First Associates. Please go ahead with your question.
BARBARA GRAY: Thanks. I just have a few more questions. Guys, what’s the market share of Peak Sulphur with respect to sulphuric acid?
MARK DAVIS: Well, there is no good data on that.
BARBARA GRAY: Okay. Are they one of the dominant players or…?
MARK DAVIS: There are only five or six players in the regen business in North America.
BARBARA GRAY: Okay.
MARK DAVIS: And so they’re one of those. In the merchant acid businesses, they would be small.
BARBARA GRAY: Okay. And with respect… is there dependence on any key customers? Is there any customer accounting for more than 10 or 20 per cent of the business?
MARK DAVIS: I think there’s one. I think there’s one customer over 10 per cent and he top ten customers represent a large proportion of the regen volume which drives a lot of the earnings; but as we said, these are long-term contracts and big customers.
So it’s probably the top six or seven regen guys will probably account for 75 per cent of the regen volume, which is about half of the acid volume.
BARBARA GRAY: Okay, and is there a commodity price exposure?
MARK DAVIS: I mean, it depends where. And again, in regen sales, your price moves with your major raw material input.
BARBARA GRAY: Um-hmm.
MARK DAVIS: In merchant acid, there’s obviously commodity price risk. In the chemical business actually, there’s commodity price risk, but it’s a two-player game and you both have the same costs of the major raw material.
BARBARA GRAY: Okay, and there’s a 100-per-cent flow-through on the regen side?
MARK DAVIS: On most contracts.
BARBARA GRAY: Okay. And the contracts, you said they’re fixed in duration, is that correct?
MARK DAVIS: Sorry, on which?
VICTOR WELLS: Fixed.
BARBARA GRAY: They’re fixed?
MARK DAVIS: Yes.
BARBARA GRAY: Okay. For how long?
MARK DAVIS: Two to five years.
BARBARA GRAY: And are they fixed both in terms of pricing and volumes?
MARK DAVIS: Those are usually requirements contracts, so there is no take-or-pay connotation. If they need spent acid processed, we would have the contract to process it.
BARBARA GRAY: Okay. And you said there’s about 5 million in synergies. Can you sort of state what it is and what the timing is for that?
MARK DAVIS: A bunch of it immediately and the rest of it soon. And the biggest thing you’ll see when you get the prospectus is there is over 1.1 million of management fees that used to be paid up to the private equity guys.
BARBARA GRAY: Okay, and the current president, I guess, Mr. Ferrall, is he staying or going?
MARK DAVIS: No, he is going.
BARBARA GRAY: Okay. Are you going to hire any more? Are you going to get any more management depth?
MARK DAVIS: We’re probably looking for more managerial depth at the Chemtrade level and that person will have additional responsibilities for part of this business.
BARBARA GRAY: Okay. And just one last question. What’s the quality of the assets in terms of will they need upgrading in five years or 10 years or is that 3.3 million going to be okay for the next 10 years?
MARK DAVIS: We think the 3.3 is good with the exception of we also made the comment that we’ve actually raised an extra $1 million as part of this financing to do what we would consider $1 million worth of housecleaning capital projects around the plants. Nothing substantial, but we’d like to bring a couple of the areas up to what we consider to be Chemtrade standards, but it’s only a $1 million.
BARBARA GRAY: Okay. And are there any environmental liabilities, or is that disclosed in the prospectus?
MARK DAVIS: That’s disclosed in our prospectus, but these are chemical plants that we believe we’re getting good indemnity as part of the acquisition.
BARBARA GRAY: Okay, great. Thank you.
MARK DAVIS: Thanks.
OPERATOR: Your next question comes from Gary Hannochko, fromGenuity Capital Markets. Please go ahead with your question.
GERRY HANNOCHKO: Oh, thank you. I just wanted to follow up on the question regarding some of the staff. Are you essentially keeping everybody except some of the people that are affiliated with the private equity sponsor and just running the operations from there or is it going to be more of a, you know, Chemtrade people going down there to assume operations?
MARK DAVIS: No, by and large, we’re keeping everyone that actually is needed to run the business. The guys that we aren’t keeping are what I would call basically corporate overhead staff and we intend to do most of that from Toronto.
GERRY HANNOCHKO: Okay. And just with the synergies, excluding the $1.1 million of management fees, that’s still a reasonably large amount to, you know, to kind of increase the EBITDA with. Is that coming from, you know, product savings or is it coming from operational efficiencies?
MARK DAVIS: The vast majority are coming from hard synergy savings that are outlined in our prospectus. In addition to the management fee paid up, there are things like bank fees and other professional fees that these guys won’t have to pay any more.
VICTOR WELLS: Insurance.
MARK DAVIS: Insurance savings. As I said, a couple of the guys that were corporate staff, their salaries and wages were part of the EBITDA of these businesses, in addition to that management fee that was paid up.
GERRY HANNOCHKO: Okay.
MARK DAVIS: So these are, in our view, these are all hard synergies, which is why I said immediately or soon.
GERRY HANNOCHKO: Okay. So it’s not, you know, we hope that we’ll be able to operate a little more efficiently?
MARK DAVIS: As you know, Gerry, we’re never yet counted on those and don't plan to start.
GERRY HANNOCHKO: Okay. Great, thanks very much.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Lorraine Gloster, from MGI Securities. Please go ahead with your question.
LORRAINE GLOSTER: Yes, did you assume any debt with the acquisition or is…?
MARK DAVIS: No.
LORRAINE GLOSTER: … is this debt free?
MARK DAVIS: Debt free.
LORRAINE GLOSTER: Okay. And on the terms of the contracts, can you split out the EBITDA? Like how much of that regen business would actually just be fees versus risk sharing?
MARK DAVIS: On the regen side, Lorraine, is virtually all of it, you know, has prices that adjust to raw material costs. I mean, frankly I can’t think of any that doesn’t.
It’s hard to do on an EBITDA basis because again, the same plant makes regen acid that makes merchant acid, so you get into allocation games about where the costs go. What we’re comfortable with saying is that the majority of earnings are driven out of the regen business. We’re not comfortable actually trying to put percentages on it.
LORRAINE GLOSTER: Okay. Outside the regen business, is any of that other businesses, would you term that as risk sharing? I mean, obviously it sounds like you have protection because of your geographic strength, but are there any contracts that you actually have risk sharing outside the regen?
MARK DAVIS: No. The mitigation from normal commodity fluctuations, as you said, some of it is logistical, geographics and truck, and of course the other part of it, as we say, is the chemical business, which is a two-player game in North America.
LORRAINE GLOSTER: And on the attracting additional regen volumes by Peak, was that just from increased market demand or did any of the players fall out down there in the Gulf, or what would be the main driver for the increase in demand for regen?
MARK DAVIS: Primarily just increased demand. There’s only been, to our knowledge, there’s only one regen plant that’s recently closed and that was a plant owned by Gentech, but that was in the state of Delaware, which is, you know, not geographically convenient for refineries in the Gulf Coast.
LORRAINE GLOSTER: Okay. That’s it. Thank you.
MARK DAVIS: Thanks, Lorraine.
OPERATOR: Your next question comes from Barbara Smith, from Bloom Investment Counsel. Please go ahead with your question.
BARBARA SMITH: Hi, Mark. Could you clarify on your seven-times EBITDA, did you include your synergies in on that?
MARK DAVIS: Yes, we did.
BARBARA SMITH: All right, that’s it.
MARK DAVIS: Thanks, Barbara.
OPERATOR: Ladies and gentlemen, if there are any additional questions at this time, please press the * followed by the 1. As a reminder, if you are using a speakerphone, please lift the handset before pressing the keys.
Your next question comes from Michael Brown, from Enterprise Capital Management. Please go ahead with your question.
MICHAEL BROWN: With your new credit facility and the ability to manage your cash needs through that and the better interest rate, why wouldn’t you work on boosting your monthly distributions? You probably get capitalized at a higher number and make it back up that way.
MARK DAVIS: Let me interpret your question. Our target’s always been, you know, about two times debt to EBITDA and you’re suggesting maybe we should run higher than that and pay out…
MICHAEL BROWN: No, no, no. I’m asking why you’re doing to the quarterly distributions that are a top up.
MARK DAVIS: Oh, okay.
MICHAEL BROWN: Like if you would, and you’ve answered before that you’re doing it to help manage your capital, your working capital needs, I guess.
MARK DAVIS: Yes.
MICHAEL BROWN: You have a better debt structure here, right now. You would probably gain back immediately in your capitalization if you would move to getting those distributions out on a monthly basis instead of on a quarterly basis.
MARK DAVIS: That is something, actually, that we’ve asked before and we always have looked at it…
MICHAEL BROWN: You always push people off.
MARK DAVIS: We actually believe the cash is a good working capital tool, but your comment is fair. We are a larger size and we will take another look at it.
MICHAEL BROWN: And you would do the equity issue at $17-$18 instead of at $15.55 if you have a better management of your distributions.
MARK DAVIS: Well, then it sounds like I know who to talk to, to issue $18 units.
No, I appreciate your comment. You know, the distribution policy is actually set by our board of trustees. It is something that they look at on a regular basis. But I do understand your point and we will probably revisit what to do going forward.
MICHAEL BROWN: Okay, thanks.
MARK DAVIS: Thank you.
OPERATOR: Mr. Davis, there are no further questions at this time. Please continue.
MARK DAVIS: Thank you. We’d like to thank you all for your time and your continued support. We are very….
VICTOR WELLS: On a short notice.
MARK DAVIS: We are very excited about this acquisition. We apologize for the short notice, but we think it’s a very good acquisition for Chemtrade and we look forward to talking to you in our next quarter. Thank you.
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