Q2 2005 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 second quarter results and we’ll then answer any questions you may have.
During the second quarter, Chemtrade generated $8.7 million of distributable cash or 37 cents per unit, or about $1 million less than the same period last year.
Traditionally, we generate the lowest amount of distributable cash in the second quarter due to the annual shutdowns of our SHS plant in Leeds, and our sodium chlorate plant in Prince George. This year, when compared to last year, our results were also impacted by another shutdown in the second quarter – the Inco maintenance shutdown, which they didn’t take last year.
The impact of the Leeds and Inco shutdowns impacted the results of SPPC, while the Prince George shutdown effect is reflected in our Pulp Chemicals segment. As detailed later in Vic’s comments, but for the Inco shutdown this year and the incurrence of a particular capital project in the second quarter that we had budgeted later in the year, our distributable cash results this year would be essentially the same as those achieved last year. This performance was achieved despite the continued increase in caustic soda prices that I’ll comment on in a minute.
Obviously, we were prepared for the Inco shutdown, and on our last conference call we mentioned that we purposely sold less sulphuric acid in the first quarter than we could have as we built inventory in advance of the shutdown. However, when comparing year over year, even with the inventory build-up, we had less product to sell this year compared to last. Additionally, part of the volume shortfall was due to the Inco shutdown lasting longer than planned. In fact, Inco’s start-up operating problems continued into the first part of July.
As we’ve commented before, we expect to have increased acid volume from Inco in 2006 as it prepares to meet more stringent environmental regulations taking effect January 2007.
However, in absolute dollars terms the greater impact on the second quarter came from the significantly higher cost of caustic soda that continued to squeeze margins at Performance Chemicals. Our cost for caustic soda was about $1.5 million higher in Q2 this year vs. last year.
Two positive notes -- one on sales and the other on costs. Our SHS sales volumes remain strong. Sales volume for both powder and liquid SHS were in line with our expectations – in fact, powder sales were higher than the same period a year ago.
Now costs. On our last call, we gave a fairly detailed review of the outlook for caustic prices. Our expectations were that the rate of price increases would slow in the second and third quarters, stabilize by the end of the year, and then decrease in 2006 and 2007.
The latest view on the product cost cycle is that increases, while much more modest than recent increases, will continue until the second quarter of 2006, and then start to decrease in the second and third quarters of 2006. By 2007, the projections are that the price of caustic soda will be significantly less than it will be in 2006.
When we acquired the Performance Chemicals business at the end of 2002 we stated that it was our intention to find ways to mitigate the effect of the cyclicality of caustic soda prices. One of the methods we employed was to have certain customers buy and supply their own caustic. While this was partly effective, it did not provide the protection we were seeking.
I’m pleased to advise that we have made arrangements to enter into a long-term agreement with our major supplier of caustic soda. This agreement will provide protection from price increases over the next year, and moving forward should allow us to reduce the cyclical impact of this raw material input.
Despite the expected higher caustic prices in Q3 and Q4, we believe that our new agreement will mean that the price we paid in Q2 should be the peak price faced by Chemtrade.
Essentially, the agreement disconnects our caustic price from the supply/demand characteristics of the chlor-alkali cycle, and instead, links it to changes in natural gas pricing, which is the major raw material input for caustic production. Natural gas prices can be readily hedged, and we will enter into appropriate hedges to stabilize this input cost.
The fact that our sales volume is holding, and that we have contained future caustic soda price increases is very good news for the business.
We are, of course, continuing our efforts to improve efficiencies and reduce the use of caustic, and manage other costs as well, not just in Performance Chemicals, but also throughout the organization.
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Pulp Chemicals had a strong quarter, reporting higher results than last year, but slightly lower than the first quarter because of the Prince George plant shutdown. The improvement over last year reflected Canfor’s plants operating at close to full capacity, and the early benefits of sales to the new long-term third party customer we noted on our last call. Sales to this customer were being phased in during the second quarter, so we expect to see increasing benefits of the new relationship during the rest of the year.
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Finally, BCT Chemtrade had another good quarter. International sulphuric acid markets remain tight, but higher prices enabled BCT to maintain margins. In addition, we had two months contribution from our new sulphur removal business that we acquired in early May. That business is performing in line with our expectations, and the integration into our International group has been smooth.
I’ll now hand the call over to Vic for a review of the financial results for the quarter and year-to-date.
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. The relevant weighted average numbers of units outstanding during the periods are detailed in the news release.
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For the three months ended June 30, 2005, cash available for distribution was $8.7 million, or 37 cents per unit, generated from revenue of $104.7 million and EBITDA of $12.1 million. In the second quarter last year, distributable cash was $9.6 million, or 41 cents per unit, revenue was $90 million, and EBITDA was $12.7 million.
Net earnings for the second quarter this year were $2.8 million compared with $3.5 million last year.
For the first half of this year, distributable cash was $20 million, or 85 cents per unit compared with $21.9 million, or 96 cents per unit last year.
The principal reason for the year over year decline in distributable cash is lower earnings in SPPC resulting from the higher cost of caustic soda as described by Mark, together with the extended Inco shutdown in the second quarter. In addition to these market and operational factors, we also accelerated some $250,000 of capital spending in International that had originally been scheduled for the third quarter.
If this capital spending had not been brought forward, and if the Inco shutdown had not lasted longer than originally planned, we estimate distributable cash for the quarter would have been about $1million higher, bringing it more in line with last year’s distributable cash.
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Looking at the segmented results, SPPC generated revenue of $46.4 million compared with $50.8 million last year, and EBITDA of $8.2 million compared with $9.8 million a year ago. The lower revenue reflected reduced acid volumes because of the extended Inco shutdown, and the stronger Canadian dollar, which reduces the value of our US-based sales when converted into Canadian dollars. Similar to last quarter, the volume of our year-over-year sales of SHS are actually a little ahead of our 2004 sales. The lower EBITDA from SPPC reflected these factors as well as the higher raw material costs in Performance Chemicals.
Pulp Chemicals reported revenue of $12.6 million compared with $12 million last year, and EBITDA of $4.7 million versus $4.4 million last year. These improvements reflected the higher operating rates at Canfor this year, as well as the additional volume from our new third party customer. Please note that references to Pulp EBITDA for the second quarters of 2005 and 2004 in our press release of $12.6 million and $12.0 million are actually revenue numbers. The correct EBITDA numbers are $4.7 million and $4.4 million.
BCT Chemtrade’s results for the quarter are not comparable with last year because of the acquisition of the sulphur removal business in Germany that closed on May 1. The contribution from this new business met our expectations. As Mark mentioned, the global sulphuric acid market remains tight and volumes were lower than last year. However, prices are higher and BCT was able to achieve comparable margins.
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Finally, an update on our U.S. dollar hedging program. As we have noted in earlier reports, at the Fund’s expected exchange rates in 2005, we estimate approximately 40% of both EBITDA and distributable cash are generated in U.S. dollars. To manage the predictability of our cash flows, we have entered into a series of foreign exchange contracts that hedge that portion of Chemtrade’s U.S. dollar based cash flow that is expected to be converted into Canadian dollars. As of June 30, 2005, approximately 90% of planned transfers for the remainder of 2005 and 30% of 2006 planned transfers have been effectively hedged.
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I’ll now hand the call back to Mark.
Mark Davis
Thank you, Vic.
As you have heard, both Pulp Chemicals and International performed better in the second quarter this year than the same period last year. Due to shutdowns at Leeds and Inco, and continued escalation of caustic pricing it was a tough quarter for our sulphur products and performance chemicals businesses. However, those shutdowns are now behind us, our SHS volume continues to track historical numbers, and we reached a significant agreement with our major caustic soda supplier.
For the balance of the year we should see the benefits of our caustic agreement and the normal seasonal pickup in Performance Chemicals; Pulp Chemicals should be running at full rates; and we should also see the full contribution of our newly acquired operations in Germany.
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Thank you. Vic and I would now be pleased to answer any questions you have.
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