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Q3 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 third quarter results and some other recent events, and we’ll then answer any questions you may have.
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To say the third quarter was eventful is something of an understatement. The quarter included our largest acquisition to date as well as a major challenge in the form of Hurricane Rita. The acquisition of Peak Sulfur and Peak Chemical was closed on August 2nd. The largest single asset we acquired at this time was a plant in Beaumont Texas. Towards the end of September with Hurricane Rita just off the Texas shore we proactively and safely shut down the plant and evacuated our employees. We’ll have more to say on Hurricane Rita and its effects shortly.
In addition to our acquisition, other positive news in the quarter was the strong performances of both Pulp Chemicals and International, again demonstrating the benefits of our strategy of increasing the scale and diversity of our earnings in order to deliver reliable and sustainable distributions.
In the third quarter Chemtrade generated distributable cash of $13.6 million, or 48 cents per weighted average unit and distributed 46 cents per unit. Of course, the quarter’s results reflect only two months of earnings from the Peak acquisitions, and were further reduced by the impact of losing 9 days production at Beaumont as a result of Hurricane Rita. Before looking at Chemtrade’s third quarter performance in more detail, I would like to review what we did in anticipation of the hurricane; how it affected the Beaumont operation; and where we stand now.
As soon as it became clear that Beaumont was in the direct path of the hurricane, our plant manager closed down operations in order to give employees adequate time to evacuate the area and otherwise prepare for the storm. This action was taken on Thursday, September 22. Rita reached landfall on Saturday, September 24 and by Monday the 26th our team was making plans to re-enter the area and begin damage assessment.
As we reported in our news releases and regular website updates, the Beaumont plant sustained minimal damage compared with some of the devastation that Hurricane Rita caused to other facilities. While the plant suffered some ancillary damage, we had no major equipment damage. Once power was restored, it took us about a week to obtain certain parts and make the required repairs.
By October 15 we were ready to restart the plant and began a controlled ramp-up to regular operations. Full operations were dependent on reliable delivery of raw material, such as sulphur, and the restoration of customers’ operations that needed product from us. By October 21 we were back to full production and most of our customers are now back to normal operations.
Hurricane Rita has two immediate cost impacts on Chemtrade. While still a preliminary view, we estimate that the cost of the property damage and repair will be less than $750,000 US. Secondly, we also lost 9 days of production in the quarter and will have further production losses in the fourth quarter. As previously mentioned in our press releases, Chemtrade carries business interruption insurance. Once the full extent of our losses is known, we will be submitting our claim under this policy. After our deductible of about $300,000 we expect to receive full compensation for these losses.
Possibly of more lasting effect, both Hurricanes Rita and Katrina have resulted in much higher natural gas and raw materials costs, which we will comment on later.
There are two final comments I would like to make on the Beaumont operations and the Peak acquisition in general. First, as you can appreciate, with the hurricane coming just seven weeks after we closed the acquisition, we were still integrating the operations and getting to know each other. I’m pleased to say the team came together exceptionally well in the crisis. The Beaumont employees are excellent, and did an outstanding job getting the plant safely restarted after their return to work.
On a broader note, except for the shutdown of the Beaumont plant as a result of Hurricane Rita, we essentially tracked the pro forma numbers that were contained in the prospectus.
Vic will have a few more comments to make shortly, but let me now move on to the review of all the businesses for the quarter.
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I’ll start with Sulphur Products & Performance Chemicals. Revenue and EBITDA were up over the third quarter last year, which reflected the two months contribution from the sulphuric acid and P2S5 products we acquired as part of the Peak acquisition. The contribution for these businesses was in line with our expectations, except, of course, for the impact of Rita.
As I mentioned, the disruption to oil and gas production in the Gulf Coast area caused by both Hurricanes Katrina and Rita resulted in higher natural gas and raw material pricing. This affects us two ways. First, it increases costs at our SHS facilities, particularly the larger facility in Leeds, South Carolina. I will address this point further in a minute. Secondly, it affects the costs we incur to process regen acid. Regarding our regen business, you will recall from our acquisition conference call that the key element of all the regen contracts is price adjustment mechanisms for changes in natural gas costs. This permits us to adjust our customer’s pricing to account for changes in gas costs. The change in pricing occurs in the following quarter. Accordingly, there is a lag effect until the pass-through of gas costs takes effect. So, in a quarter with increasing gas costs, margins contract in that quarter until the following quarter when the price adjustments will take effect.
As a general statement, every US$1 change in gas costs during a quarter affects the cost of processing regen acid in that quarter by about US$140,000 until the contracts adjust pricing in the following quarter. We experienced higher costs in the third quarter so our margins contracted but the price for regen services will contractually increase in the fourth quarter. We also expect further natural gas cost increases in the fourth quarter so we anticipate a margin compression in this quarter as well. The price adjustment for fourth quarter gas increases will be implemented in the first quarter of 2006. Once gas prices stabilize or decrease, our contracts will recoup this margin compression.
Our pre-acquisition Sulphur Products results were slightly lower than last year, primarily as a result of the Inco shutdown and start-up operating problems that extended into the first part of July.
With respect to Inco, as we have noted before, we expect to have increased acid volume from Inco in 2006 as it prepares to meet more stringent environmental regulations that take effect January 2007. As to any implications of the proposed Inco/Falconbridge merger, it is too early to determine what effects, if any, the merger will have on Chemtrade.
Results from our SHS products experienced the usual third quarter seasonal increase, with sales volumes of both powder and liquid product about the same as last year. Contribution was lower than last year due primarily to increasing raw material costs, principally caustic soda and, to a lesser extent, natural gas. As we have previously mentioned, our powder SHS sales prices were also lower than last year as a result of entering into agreements to secure our powder customer base. To give you an idea of the impact of these higher costs, at our Leeds plant, our caustic soda cost us an extra $1.3 million in the third quarter this year compared with the third quarter last year; and natural gas, which is not a pass through in this case, cost an extra $100,000.
With respect to caustic, we announced on our last call that we expected that our caustic prices would peak in the second quarter as a result of the new arrangements with our major supplier. We can report that, as expected, our 3Q pricing was lower than 2Q this year. Due to the hurricane effects, industry reports now imply a higher peak price for caustic than was formerly forecasted. At this stage it is still unclear the extent to which the hurricanes will force up pricing, but we expect our fourth quarter pricing will also be below 2Q 2005. However, prices for 2006 are still unclear.
One more comment on natural gas. Although we do not use as much natural gas in SHS as we do in regen, we have also been working to reduce this cost to our SHS business. We recently entered into an agreement with a provider of an alternative energy system for our South Carolina plant. This provider will build, own and operate a plant on our Leeds property that converts recycled materials into synthetic gas, thereby providing a replacement for natural gas we purchase. Depending on permitting, the plant is expected to be operational by the end of 2006. It is expected that once operational this facility will reduce our natural gas costs at Leeds by about $1 million when compared to 2005 natural gas pricing. If gas pricing is higher in 2006, the savings once this facility starts up could be even larger.
Turning now to Pulp Chemicals, Pulp had a very good quarter. The plant ran at full rates, setting production records. This reflects Canfor’s plants running at close to full capacity, and, as we noted in last quarter’s call, the full benefit of the ramp-up in sales to the new long-term third party customer we added earlier this year.
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International continued its strong performance. Earnings were almost double the same period last year, reflecting the first full quarter’s contribution from Kemmax, the sulphur removal business in Germany that we acquired earlier this year. The results also reflected some spot acid sales for the first time in a while, as the international market had a little more spot supply available than there has been in recent years.
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 all periods mentioned are calculated using the weighted average number of units outstanding during those periods. A total of 9,968,000 units were issued in August in connection with the financing of the Peak acquisition. The relevant weighted average number of units outstanding during the periods are detailed in the news release.
The Peak acquisition, which closed August 2nd, also means that the consolidated results are not directly comparable with the third quarter and first nine months of 2004.
Because various other aspects of the financing of the Peak acquisition had an impact on the third quarter results, I would like to briefly go over the transaction before reviewing the operating results.
The acquisition was financed by the issue of the 9,968,000 units I just mentioned for gross proceeds of $155 million, and by additional bank debt. The Fund entered into a new credit agreement for approximately $360 million of senior credit facilities to finance the acquisition and to refinance all of its then existing U.S. and Canadian dollar debt. Of the $360 million, approximately $180 million was in the form of a four-year term loan, $110 million of which was used to repay existing term debt and approximately $70 million of which was used to fund a portion of the Peak purchase price. A $150 million bridge term loan was used to fund the balance of the purchase price of the Peak acquisition, and was repaid effective with the closing of the equity offering. A $30 million revolving credit facility for operating purposes was also established.
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Moving on to a detailed review of the quarter, for the three months ended September 30, 2005, cash available for distribution was $13.6 million, or 48 cents per unit, generated from revenue of $125.8 million and EBITDA of $18.4 million. In the third quarter last year, distributable cash was $11.6 million, or 50 cents per unit, revenue was $90 million, and EBITDA was $12.8 million. For the first nine months of this year, EBITDA and distributable cash were $43.9 million and $33.6 million, or $1.33 per unit compared with $40.5 million and $33.5 million, or $1.46 per unit last year.
Net earnings for the third quarter this year were $3.2 million compared with $3.7 million last year. These results reflect two non-cash write downs which in aggregate amount to $3.5 million. A $2.9 million write down was recorded relating to the deferred financing charges attributable to the Fund’s debt under its previous credit agreement which was terminated when we arranged new financing for the Peak acquisition. Net earnings for the quarter also reflected a fixed asset write down of $0.5 million US for the estimated decline in value of the Beaumont facility as a result of Hurricane Rita.. As Mark mentioned, we expect that this write down reflects the majority of the repairs necessary. There may be a further charge in the fourth quarter if our actual costs exceed this write down but, at this point, we do not believe any additional amount would be material. Although we are insured for property damage, this amount falls under our deductible amount.
While on the subject of insurance, our business interruption policy covers losses in excess of approximately $300,000, and extends for one year. It will take some time to determine with certainty the amount of the loss and the expected recovery, but our preliminary estimate is that Rita adversely impacted EBITDA in the third quarter by approximately $0.5 million US. As this claim is still very preliminary, our third quarter results do not reflect any recovery for this future claim.
Returning now to the operating results for the third quarter, the principal reason for the increase in EBITDA and distributable cash over last year is the Peak acquisition at the beginning of August, offset partially by lower results from SHS operations resulting from the higher cost of caustic soda as described in previous reports, together with the impact of the extended Inco shutdown in the second quarter.
Distributions attributable to the third quarter were 45.66 cents per unit, up two-thirds of a cent from last year. The monthly distribution rate was increased from 11 cents per unit to 11-and-a-third cents per unit effective for the August distribution. The quarterly distribution of 12 cents per unit remains unchanged.
Looking at the segmented results, SPPC generated revenue of $65 million compared with $55.2 million last year, and EBITDA of $12 million compared with $8.8 million a year ago. The higher revenue reflected the additional revenues from the Refinery Services and Phosphorous Specialties businesses, partially offset by reduced acid volume as a result of the extended Inco shutdown that continued into July, and lower prices on powder SHS. The lower EBITDA from SPPC reflected these factors as well as the higher raw material costs, particularly caustic soda, in Performance Chemicals.
Pulp Chemicals reported revenue of $13.5 million compared with $13.1 million last year, and EBITDA of $5.8 million versus $5.6 million last year. These improvements reflected improved operating rates at Canfor, as well as the additional volume from our new third party customer.
International’s results for the quarter are not directly comparable with last year because of the acquisition of Kemmax, the sulphur removal business in Germany that closed on May 1. The contribution from this new business met our expectations. International revenue for the third quarter was $47.3 million compared with $21.6 million last year, and the increase is due primarily to Kemmax. EBITDA for the period was $2.6 million compared with $1.3 million last year. As Mark mentioned, although the global sulphuric acid market remains tight and volumes were lower than last year, we were able to make some spot sales during the quarter.
Capital expenditures for the third quarter were $1.4 million, which included $0.2 million spent on certain one-time housekeeping capital improvements associated with the Peak acquisition. As we noted at the time of the acquisition, these funds were part of the capital raised for the acquisition, so have not been deducted from distributable cash. Total maintenance capex for the fourth quarter is estimated at $1.8 million.
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Finally, an update on our U.S. dollar hedging program. As we have noted in earlier reports, because of our US operations and because BCT Chemtrade reports in US dollars, the Fund is exposed to fluctuations in the Canadian/US dollar exchange rate. With added US-based businesses following the Peak acquisition, at the Fund’s expected exchange rates in 2005, we estimate approximately 60% 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 September 30, 2005, approximately 89% of planned transfers for the remainder of 2005 and 68% of 2006 planned transfers have been effectively hedged.
I’ll now hand the call back to Mark.
Mark Davis
Thank you, Vic.
As you have heard, it was something of a roller coaster ride in the third quarter. Despite the challenges, however, we were able to generate distributable cash of 48 cents per unit, even after the impact of Hurricane Rita, which we estimate cost us about 2 cents per unit. Also recall that the results included only two months of the newly acquired operations.
Obviously, the fourth quarter will also be affected by the results of Hurricane Rita, as it will not reflect full production from Beaumont, nor full demand from our customers. There will be some raw material shortages and higher prices, as well as increased energy costs. However, with respect to the regen facilities, which are our largest natural gas consumers, our contracts are structured so that we recover those additional costs, albeit in the following quarter.
Looking further forward, it is not possible to forecast when supplies of raw materials and pricing will return to pre-hurricane levels. This makes it difficult for us to accurately forecast input costs, and thus earnings, for 2006.
In the longer term, we remain confident that our new businesses will make positive contributions to Chemtrade. They are good operations with a sound customer base, and as we quickly discovered, a skilled and dedicated workforce.
We expect the contribution from our new sulphuric acid and P2S5 assets will improve the overall results from SPPC, as will the on-going initiatives we are taking to improve costs and operating efficiencies.
The outlook for Pulp Chemicals and International remains positive.
Thank you for your attention. Vic and I would now be pleased to answer any questions you have.
OPERATOR: Our first question comes from Barbara Gray, with Blackmont Capital. Please go ahead.
BARBARA GRAY: Thank you. Good morning, guys.
MARK DAVIS (President and Chief Executive Officer, Chemtrade Logistics Income Fund): Hi.
BARBARA GRAY: I just have a couple of questions here. With respect to the U.S. gulf coast, can you give us some more detail as to who your customers are, what the status is, other operations and when they expect to be resumed and what's the percentage reduction in demand?
MARK DAVIS: Short, big-picture answer is we think they're all back up now. Our plant came back on the full rates October 21st. Obviously, that plant ran very little. It didn't run at all before October 15th, it started ramping up between the 15th and 21st. By the time we were up, a bunch of our customers went up in parallel with us, so you could assume that we're pretty much back to normal course by October 25, 22, in there somewhere.
BARBARA GRAY: Okay, and the cost to repair the plant at Beaumont, Texas, is that, you said about 700,000 U.S.?
MARK DAVIS: We said we think that's the max. So far, we've spent about 500 U.S. So we're into it about 500 U.S. We doubt it'll be as much as 750. That's our outside estimate.
BARBARA GRAY: Okay, you'll incur that cost in Q4?
MARK DAVIS: Yes.
BARBARA GRAY: Okay, and is the Falconbridge strike going on? I think that started at the beginning of this month?
MARK DAVIS: Yes, it is.
BARBARA GRAY: Okay, do you have any status there? Does that impact your operations?
MARK DAVIS: It impacts the access of SO2, which is obviously one of the products we both sell and need for our hydrosulphite business.
BARBARA GRAY: Okay, and just two more questions. One, the anti-dumping lawsuit, can you give us some more details who was the U.S. producer that's claiming and what's the status there?
MARK DAVIS: Yes, sorry, I'm just thinking about which part is supposed to be confidential and which isn't.
But the U.S. producer is a producer that's based in Texas; one U.S. producer that's asked the International Trade Commission to look into whether or not the Canadian producers are dumping SO2 into the U.S. It's still at the preliminary stage. They haven't even decided whether to go onto the formal investigation or not and that'll be decided some time before the end of November, whether or not a formal investigation will proceed.
BARBARA GRAY: And when was that initiated?
MARK DAVIS: I think September 29th, something like that.
BARBARA GRAY: Okay, and do you have any idea of what the magnitude could be of the potential liability as a cost or anything?
MARK DAVIS: We don't think actually that there's any merit in the action.
BARBARA GRAY: Okay, and then just last, actually it's on the same topic as lawsuits. The Marsulex lawsuit, can you give us an update there?
MARK DAVIS: I think as you know, we filed our statement of defence and counterclaim, they still have not actually replied.
BARBARA GRAY: When do they have to reply by?
MARK DAVIS: I think by mid-November, but in litigation matters, there's the formal timelines and there's the timelines that the lawyers let each other have. So we expect to get the response by mid to late November.
BARBARA GRAY: And how long do you think this lawsuit… I mean, are you guys willing to settle or are they willing to settle or do you think it's going to go in the courts for years?
MARK DAVIS: Well, we don't think we have anything to settle.
BARBARA GRAY: Okay, or them or whoever, do you think it's going to be a long-lasting lawsuit or do you think it's going to be resolved shortly?
MARK DAVIS: If it went through the trial, the dates that our lawyers are giving us that the trial probably doesn't take place until some time in 2008.
BARBARA GRAY: Okay. Okay, thank you.
MARK DAVIS: You're welcome.
OPERATOR: Thank you. Our next question comes from Chris Blake, with Scotia Capital. Please go ahead.
CHRIS BLAKE: Good morning, gentlemen.
MARK DAVIS: Good morning, Chris.
VICTOR WELLS (Vice-President, Finance, and Chief Financial Officer, Chemtrade Logistics Income Fund): Good morning, Chris.
CHRIS BLAKE: A couple more questions just relating back to the petition by the U.S. Department of Commerce. I was just wondering if you could, I don't know, provide I guess a little further colour as to i.e. how did the playing field change year over year because, correct me if I'm wrong, you've been selling SO2 for a number of years into this market without any concerns. I was just kind of wondering why you think this producer's now starting to complain, so to speak?
MARK DAVIS: Let me try this. One single company cannot actually successfully bring a dumping action to the U.S. It has to represent the industry. At least as far as public information is concerned, no other SO2 producer in the U.S. supported this guy's petition. From our information and the U.S. import statistics, the amount of SO2 going from Canada into the U.S. has not changed in any significant amount for the last, I don't know, five years.
So again, we think this thing just doesn't have any merit.
CHRIS BLAKE: Okay, and I just wanted to flip over to, I know you mentioned earlier in the call, Vic, with respect to the foreign exchange, you mentioned 68 per cent.
VICTOR WELLS: Yes.
CHRIS BLAKE: Planned transfers have been hedged. Could you tell us at what rate you were successful at?
VICTOR WELLS: Both are very close to 82, Chris. In 05, it was 82.0 and in 06, it's 82.8.
CHRIS BLAKE: And just on the BCT Chemtrade, obviously performance was nearly doubled or over double, actually, driven by the acquisition of Kemmex. Is this kind of a good rate to use in a quarterly basis in terms of EBITDA contribution or is there some seasonality in those numbers?
MARK DAVIS: They had a particularly good quarter, so if you're looking for a run rate, I think that's too high. I can't give you how high because frankly, I don't know yet. We just acquired them in May.
CHRIS BLAKE: Okay.
MARK DAVIS: But I'm not counting on that kind of quarterly run rate from them.
CHRIS BLAKE: How are their volumes or performance doing so far in Q4? Are they lower than your Q3 levels, or is it still too early?
MARK DAVIS: Chris, you know, we would actually never forecast our earnings.
CHRIS BLAKE: Okay.
MARK DAVIS: We haven't done that yet.
CHRIS BLAKE: Moving on to the cash in the balance sheet, I was just wondering if you could, it seems to be a significant decrease in working capital.
VICTOR WELLS: Chris, it's substantial, almost $19 million. In fact, 19 point something Canadian of that money is, I would say, almost restricted. It's held for the payment, the final payment on the acquisition of the shares under the call agreement for Sulphur.
CHRIS BLAKE: Okay.
VICTOR WELLS: Which will be, we have a call agreement, which we will exercise around Christmas time.
CHRIS BLAKE: Okay.
VICTOR WELLS: Yes, and so that the offset of that, of course, is in accruals.
CHRIS BLAKE: Okay. How much, excluding the accruals, would be left in the balance sheet? Roughly, what's that, about $20 million?
MARK DAVIS: Or 15 or something.
VICTOR WELLS: The amount on both sides is 15 U.S., 19 Canadian.
CHRIS BLAKE: Oh, okay. And just lastly, just going back to the Hurricane Rita impact, I just wondered if you could provide a little colour in terms of the customers. Did you lose any customers as a result of the extended shutdown at Beaumont?
MARK DAVIS: No. Everyone down there suffered through the hurricanes. Most of the customers that are served are, you know, local or in close proximity to the plant. If they were up for us, we help facilitate them get products shipped from either elsewhere or in our system or from coal producers and everything is pretty much back to normal now.
CHRIS BLAKE: Very good. Thanks, guys.
MARK DAVIS: Thanks.
OPERATOR: Our next question comes from Damir Gunja, with TD Securities. Please go ahead.
DAMIR GUNJA: Good morning.
MARK DAVIS: Good morning, Damir.
DAMIR GUNJA: Can you just remind us, I know you're going to be somewhat protected out in Q3 of 06, but I guess there was a cap sort of effectively in place until then and now you're potentially going to go through that depending on what happens to caustic between now and then?
MARK DAVIS: Yes, what it is, the way that contract works, it wasn't a cap, as I think as we have explained before. It is for the period from the third quarter of 05, so this third quarter through the third quarter of 06, what we negotiated was a discount from market price and in fourth quarter of 06 is when we start linking our price to natural gas. So the forecast at the time that we've negotiated the discount shows that Q2 of 05 should be our peak pricing because even if prices went up after that, the forecast for price increases were less in aggregate than a discount we received. And what I don't know now is because of actually the combination of Katrina and Rita is there's actually noise now in the market reports that the forecasted pricing might be higher than what they forecasted before these hurricanes hit. And if it is, it's possible I pay higher than Q2 prices if those increases outweigh the discount we received.
DAMIR GUNJA: Okay.
MARK DAVIS: Does that help at all?
OPERATOR: Thank you. Our next question will come from Horst Hueniken, with Westwind Partners. Please go ahead.
HORST HUENIKEN: Good morning.
MARK DAVIS: Good morning.
VICTOR WELLS: Good morning, Horst.
HORST HUENIKEN: Three questions. In regards to the Inco-Falconbridge merger, you mentioned you don't know the outcome, and I respect that. But can you perhaps just remind us the terms, expiry dates of the contracts that you have with those firms?
MARK DAVIS: Yes, the Inco contract goes through the end of 2008.
HORST HUENIKEN: All right.
MARK DAVIS: And the Falconbridge contract, I don't remember the month, but it goes until 2010.
HORST HUENIKEN: All right, so at least your existing business, it's safe to say, is safe until those periods, or those expiry dates.
MARK DAVIS: Correct.
HORST HUENIKEN: All right, fair enough. Reconstruction is going on in the gulf coast as a result of those two hurricanes, might that impact your volumes, do you think?
MARK DAVIS: I don't think they impact our run rate volumes after the third or fourth week of October.
HORST HUENIKEN: Okay.
MARK DAVIS: What I don't know yet is whether or not our refinery customers will actually run harder, longer to make up for decreased inventories and things like that. If they do, it's a benefit for us but we don't know yet whether or not they plan to.
HORST HUENIKEN: If they do, you would have the capacity to ramp up your own production?
MARK DAVIS: Yes.
HORST HUENIKEN: Okay. Third question: You mentioned in disclosure that Rita effectively cost you $0.02 in the third quarter. Just looking at the timing, that would suggest it's going to impact you $0.05, $0.06 in the fourth quarter, all else being constant. Is that a correct assessment? I'm just looking…
MARK DAVIS: If you assume that nine days cost us $0.02 and we were down for… Well, we started coming back up on the 15th back up relatively full on the 21st, right. So some multiplication of nine days times $0.02 is probably not a bad estimate. As we did say is we don't actually know yet what our full losses are.
HORST HUENIKEN: Right, yes.
MARK DAVIS: So if you take nine days at $0.02, for sure we weren't making anything for the first 15 days and the percentage of ramp up between the 15th and the 21st will actually shape more.
HORST HUENIKEN: Okay. Yes, I just want to make sure that the logic was straight.
MARK DAVIS: Yes.
HORST HUENIKEN: It sounds like that's fine.
MARK DAVIS: Yes, that's good logic.
HORST HUENIKEN: Vic, you had some financing costs that you basically wrote off. Can you tell us what rate you're amortizing that at?
VICTOR WELLS: It was over the term of the original loan, Horst, so that the original expired in May 08.
HORST HUENIKEN: Okay, all right.
VICTOR WELLS: So it's written off over that period.
HORST HUENIKEN: Okay, so I can do the math from there.
VICTOR WELLS: Yes.
HORST HUENIKEN: All right, that's it for me. Thank you.
VICTOR WELLS: Thank you.
MARK DAVIS: You're welcome.
OPERATOR: Thank you. Our next question comes from Lorraine Gloster, with MGI. Please go ahead.
LORRAINE GLOSTER: Yes, I wondered on the caustic soda, if you just assumed that you go back at least to the prices we had in Q2 even with your contracts, what would that mean for increased prices or increased costs in 2006?
MARK DAVIS: Yes. I'm sorry, Lorraine. I just don't know offhand. We do know that we paid 1.3 million more Q3, 05 versus Q3, 04, and we said that Q3 was less than Q2. So you've got to assume it's something more than 1.3 million, right?
LORRAINE GLOSTER: Okay, and just on the capex spend, did you say 1.8 million in Q4?
VICTOR WELLS: Yes.
LORRAINE GLOSTER: And that was all maintenance?
VICTOR WELLS: No, some of that will be the Hurricane Rita.
LORRAINE GLOSTER: Oh, okay, so that could be the 750 that you had in there?
VICTOR WELLS: Yes.
LORRAINE GLOSTER: Okay, so otherwise, your maintenance capex spend for 2006, you're looking for…
VICTOR WELLS: For 2006 or 2005?
LORRAINE GLOSTER: Yes, 2006.
MARK DAVIS: Well, what we said when we bought Peak is that we assumed there was a 3.3 million U.S. capex run rate.
LORRAINE GLOSTER: Yes.
MARK DAVIS: And we don't think our base business has changed any but for… actually but through the addition of Kemmex, right, which has 500,000 Euros a year capex. So frankly, we and you have to sit down and add that up and come up with a number.
LORRAINE GLOSTER: Okay, and let's see, on the corporate expense, that run rate went down and it looks like you had a gain in there.
VICTOR WELLS: Yes.
LORRAINE GLOSTER: Is that right? So now with that acquisition of Peak then, what do you think is your kind of quarterly run rate on the corporate side because I guess that number in the third quarter is probably not a good one to use?
VICTOR WELLS: No, it certainly has been helped, there's no doubt about that.
MARK DAVIS: It is helped by…
VICTOR WELLS: Right now, just under $1 million. So if you reverse that, you're probably not badly off.
MARK DAVIS: Yes.
LORRAINE GLOSTER: And that's okay even though you just had the two months of Peak in it?
VICTOR WELLS: Yes.
LORRAINE GLOSTER: Okay, so my last question is just when do you expect you'll start getting some of those cost synergies from Peak? I mean, obviously that's probably being put on the backburner with all the things that have been going down in Beaumont, but…
MARK DAVIS: No, actually, as we said on the acquisition conference call, we expect immediate or soon, and the other thing I said is, but for Rita, the results we realized out of the acquisition were pretty close to the numbers we had actually put in our prospectus, which includes the synergy numbers, right?
LORRAINE GLOSTER: So that's 4 million of synergies you expect that you'll have that really by the beginning of 2006 or is that…?
MARK DAVIS: Yes.
LORRAINE GLOSTER: That's right?
MARK DAVIS: Yes.
LORRAINE GLOSTER: Okay, great. That's it for me.
MARK DAVIS: Thanks.
OPERATOR: Thank you. Our next question comes from James Leung, with McKenzie Financial. Please go ahead.
JAMES LEUNG: Good morning, gentlemen.
VICTOR WELLS: Good morning, James.
MARK DAVIS: Hi, James.
JAMES LEUNG: Just a follow up on Damir's question on the caustic, the contract once the initial four months of the contracts have been completed and you're sort of linked to the prices of natural gas. Is that how it works?
MARK DAVIS: Yes.
JAMES LEUNG: And then, you previously indicated that once you're linked to natural gas, then you can possibly hedge those costs?
MARK DAVIS: Correct.
JAMES LEUNG: Right. Just on the guidance, you said that in Q4 probably an additional $0.04 for the impact of Rita, is that correct?
MARK DAVIS: Right.
JAMES LEUNG: So given that you had $0.02 in Q3 and $0.04 in Q4, would you still be confident to say that your first half versus the back half, the distributable cash on a per unit basis would be roughly equal or how do you see…? You know, traditionally, you provided some sort of guidance as to the first half and the back half of the year.
MARK DAVIS: What did I make for the first half?
JAMES LEUNG: Forty-eight plus 37, so 85 or 75?
MARK DAVIS: Eighty-five, I think.
JAMES LEUNG: Eighty-five?
MARK DAVIS: We made what, 48?
VICTOR WELLS: We made 48.
MARK DAVIS: Let me try this. I would expect that the back half should be stronger because the second quarter is always our big capital expenditure quarter and we also acquired Kemmex in May and Peak in August, right? Now, what I don't know is, if you take, you know, $0.04, $0.05 or $0.06 off of that earnings rate for the hurricanes, but we expect frankly to have our business interruption loss clarified to a fine enough degree that by the time we release our fourth quarter results, we'll have a good handle on how much of that is recoverable.
JAMES LEUNG: Okay, just two more items. The interest rate, the overall interest rate on your debt, what would they be currently?
VICTOR WELLS: Under the new agreement?
JAMES LEUNG: Yes.
VICTOR WELLS: On the U.S. debt, it's 5.35 per cent and on the Canadian dollar debt it's 4.72 per cent.
JAMES LEUNG: Okay, so on a weighted average, it will be slightly higher than 5 then?
VICTOR WELLS: Yes.
MARK DAVIS: Correct.
VICTOR WELLS: Just over 5. Those are the hedged rates.
JAMES LEUNG: Okay, and finally, just there's an item on your balance sheet as a future tax liability of 31.7 million. Can you sort of give us some colour as to what that is?
VICTOR WELLS: James, it represents the different basis for tax and accounting in connection with certain of the sulphur acquisitions. Certain of the costs are not deductible for tax purposes because we bought shares and so because they're deductible for accounting and not for tax, that creates a lot of tax liability.
JAMES LEUNG: So do you expect that tax to be paid at some future time?
VICTOR WELLS: James, I couldn't begin to prophesize that for you. I mean, it's the result of many things: acquisitions, tax structures, who knows.
MARK DAVIS: Any taxes that would arise out of that are not in the foreseeable future.
VICTOR WELLS: Certainly not in the immediate future, that's for sure. There's sufficient shield.
JAMES LEUNG: Okay, and finally, any sort of comments on recent federal action on possible actions on the income trust? Would you care to make a comment?
VICTOR WELLS: I'll give that one to you.
MARK DAVIS: This call is being recorded, right? Yes, we think that that actually the income trust model has been nothing but good for Canadian business and Canadian citizens. We think it provides access to capital that actually small and medium businesses didn't generally get access to. We think that it provides cash into the hands of our citizens and lets them make their investment decisions and we think it's a great corporate governance model because what you look at is not earnings gains but how much cash is actually generated by the company and the manner in which the federal government is considering looking at this issue is puzzling, to say the best, and there are other terms I won't actually use to say the worst. I think it's been a very good thing for Canada and Canadians.
We are certainly making strong representations to the federal government and encouraging those who share our views on the benefit of these things to do the same.
JAMES LEUNG: Thanks very much.
OPERATOR: Our next question is a follow-up question from Damir Gunja. Please go ahead with your question.
DAMIR GUNJA: Thanks. Obviously, a number of well-documented and discussed sort of negative potential catalysts for it. On the positive side, Mark, can you elaborate a little bit on the potential upswing from maybe more volumes from Inco and how that would evolve, or any other potentially positive levers that could happen in 06?
MARK DAVIS: Okay, and let me get two or three. One is, there is no doubt that Inco is going to start generating more product out of its Sudbury facility. Our estimate all along has been an extra 90,000 tonnes or so of sulphuric acid and we always said it was going to be late next year. We anticipate it's probably going to start coming in earlier than we originally anticipated, so there's definitely more volume coming out of Inco.
We talk about price pressures on our sodium hydrosulphite business. It doesn't mean actually we can't do anything about it, you know. We are obviously going to go out there and explain frankly the situation to our customers and are going to be aggressively seeking price increases where we can and these are unusual circumstances out there and some of these cost increases we will be able to pass through to our customers.
On the new asset front, we think these are well-run assets and a well-run business. However, we feel comfortable we're going to get the cost synergies that we indicated day one and we think that there is an optimization gain to be played between at least the merchant acid business that they had and we had, they'd actually be able to drive more money out of freight logistics synergies and things of that strength. Different sources.
And the final I think is that to the extent that the U.S. refinery industry does have to run harder longer to replace the gas pool, etc., all of these facilities, ours and our competitors, have access capacity and we handle generally the same customers and you have extra capacity, because I think you'll remember that the second and third quarters are always the highest level quarters are actually high gas demand quarters.
To the extent they wanted to run harder in the fourth or first quarter, that's nothing but incremental benefit to us.
DAMIR GUNJA: Thanks.
OPERATOR: Thank you. Our next question is a follow-up question from James Leung. Please go ahead.
JAMES LEUNG: Gentlemen, just a last question on just the top line. You had roughly 126 million in Q3 and with a little bit of interruption from Hurricane Rita. And also looking into Q4, would you expect that number to be higher, lower, or roughly the same? Given Rita, we'll continue to have a little bit of impact on.
MARK DAVIS: The short answer, James, actually, is we haven't looked at it. If you want to guess, that would be about the same because although Rita affects us, we didn't own the Peak businesses for the first month of the third quarter. On the other hand actually, as the third quarter is typically the strongest revenue month for sodium hydrosulphite, so frankly, we haven't looked at what the revenue for fourth quarter would be but I would guess it's got to be pretty similar.
JAMES LEUNG: Okay, thank you very much.
OPERATOR: Thank you. Ladies and gentlemen, if there are additional questions at this time, please press the * followed by the 1. As a reminder, if you are using speaker equipment, we do ask that you please lift your handset before pressing the numbers. One moment, please, for our next questions.
Management, at this time, we have no additional questions in the queue. If you have any remaining remarks, please make those at this time.
MARK DAVIS: We thank all of you for joining us. We encourage you to write to your MPs and express your views on a tax matter if you support us and I sincerely hope that next quarter's conference call is less eventful. Thanks very much.
VICTOR WELLS: Thank you.
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