Q1 2006 Results Conference Call
Mark Davis
Good morning, ladies and gentlemen. Thank you for joining us for our conference call and webcast this morning.
Joining me today is Rohit Bhardwaj, our Chief Financial Officer. Rohit and I will review the first quarter results, after which we’ll answer any questions you may have.
Before I commence the review, I would remind you that our presentation contains forward-looking statements that are based on current expectations, and are subject to a number of uncertainties and risks, and actual results may differ materially. Further information identifying risks, uncertainties and assumptions can be found in the disclosure documents filed by the Fund with the securities regulatory authorities, available at www.sedar.com or on the Fund’s website.
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Chemtrade generated distributable cash of $11.6 million, or 35 cents per weighted average unit in the first quarter. Revenue and EBITDA were $121.9 million and $15.7 million respectively. All of our operating groups reported higher revenue and EBITDA than last year, although other than our Pulp Chemicals group, this was the result of the acquisitions of the Refinery Services, Phosphorous Specialties and Kemmax assets last year.
As a general statement, our first quarter results were adversely affected by certain operating issues, which we’ll discuss shortly, and by the continued cost pressures on our SHS products that we outlined in our February call. Since late 2005, the major issue facing us has been the historically high cost of energy and raw materials and their impact on our SHS products. As we indicated in February, our view was that pricing levels would remain high for the first two quarters of 2006 and then begin to move downward in the latter half of the year. This is still our view, and we’ll have a few more details during the call.
The first quarter operational issues I mentioned are really two fold. First, although the regen business and the industries we serve, largely returned to normal after last year’s hurricanes, there are some effects still working their way through the business cycle. Some customers and our Beaumont plant experienced first quarter operating difficulties as they struggled to line out their operations following the quick shutdown/restart due to the hurricane.
Although our customers, and our Beaumont plant, generally ran at full rates, the plants experienced some difficulties in maintaining those rates. In fact, one major customer’s regen demand was about 15% lower than either of us expected as the customer struggled with a number of minor interruptions in its process. Our customers’ struggles, combined with our own operating issues at Beaumont, meant that we processed less regen acid and produced less merchant acid than we had intended. We expect that these issues will decrease as Beaumont takes its major maintenance shutdown in the second quarter and the customers take their own Q1 or Q2 shutdowns in preparation for the heavy summer gasoline season.
Secondly, with respect to our other facilities, we indicated on our last call that our Shreveport and Beaumont plants were scheduled for maintenance shutdowns in the first half of 2006. The Shreveport shutdown was in the first quarter. The shutdown lasted longer and cost more than we expected. When the plant was shut down, we determined that certain additional, unplanned work would be beneficial to the long-term reliability and efficiency of this facility. The additional downtime and spending on the Shreveport plant and the Beaumont operating issues adversely affected distributable cash in Q1 by over $1 million.
As we said when we purchased these assets, we expected to spend about $1 million on certain one-time items. During the first quarter shutdown at Shreveport and the second quarter shutdown at Beaumont, we decided to increase the length of the shutdowns to conduct additional work, which will enhance the reliability of these plants. We estimate that the extra capital cost associated with this work was about $0.7 million, $0.2 million of which was spent in Q1. We still expect the sustenance capex for these assets to be about US$3.3 million as we originally thought, but the one-time capex expenditures to bring these plants up to our standards and increase reliability will be closer to $2.5 million than the $1 million we had originally thought and pre-funded as part of the acquisition.
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Pulp Chemicals had another strong quarter, reporting increases in revenue and EBITDA compared with the same period last year. The continuing strong performance from our operations in Prince George reflects Canfor’s plants running at full capacity, and sustained sales to our third party customer.
As we mentioned last time, our Pulp Chemicals salt supplier indicated that it could not currently agree to extend the prevailing agreement beyond the existing term of December 31, 2006. We continue to dialogue with this supplier and pursue other alternatives to ensure that our operations will not be affected regardless of our existing supplier’s actions.
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International also posted improved results over last year. This reflected the Kemmax acquisition in May last year. As we have noted in the past, the international market is a supply driven market and right now there seems to be more acid available for our International business to handle.
I’ll now hand the call over to Rohit for a more detailed review of the financial results for the quarter, after which I’ll have some concluding comments.
Rohit Bhardwaj
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. The relevant numbers are detailed in the news release.
The Peak acquisition, which closed August 2, 2005, also means that the consolidated results are not directly comparable with the first quarter results for 2005.
For the three months ended March 31, 2006, cash available for distribution was $11.6 million, or 35 cents per unit, generated from revenue of $121.9 million and EBITDA of $15.7 million. In the first quarter of 2005, distributable cash was $11.3 million, or 48 cents per unit, revenue was $80.9 million, and EBITDA was $13.4 million. Net earnings for the first quarter of 2006 were $3.8 million, compared with $4.2 million last year.
The principal reasons for the increase over last year were the acquisitions of the Refinery Services and Phosphorous Specialties businesses.
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Looking at the segmented results, SPPC generated EBITDA of $11.5 million in the first quarter compared with $9.5 million last year. The major reasons for the increase were the Refinery Services and Phosphorous Specialties assets, offset by the continued impact of high costs and some volume pressure on our SHS products; the effect on our regen business of a planned maintenance shutdown at our Shreveport plant which lasted longer than planned; as well as by lingering effects of Hurricane Rita on the operations of some of our customers and our Beaumont plant.
With respect to SHS, input costs for formate, natural gas and caustic soda were over $1 million higher than the first quarter last year. It appears as though caustic soda prices may have peaked and have started to slowly decrease. Natural gas pricing is also down, but this remains a relatively volatile market. We continue to expect some further increases in formate costs in Q2 as we were still using old sources of product in Q1.
Some of the impact of the higher costs was offset by the price increase we announced in December, but as we said on the last call, the price increases are not sufficient to recover all of the increased costs.
With respect to our regen business, and merchant acid produced at Shreveport and Beaumont, we incurred some additional costs and downtime in the first quarter that Mark has already referred to. Additionally, regarding input costs for the regen business, although gas prices were lower for part of the first quarter than the high points reached in the fourth quarter, we were not able to realize this fully as Shreveport was taking its annual maintenance turnaround, and due to certain operational upsets at Beaumont our fuel utilization was higher than normal.
Pulp Chemicals reported 1st quarter revenue of $13.3 million compared with $11.4 million in 2005, and EBITDA of $5.5 million for the quarter, compared with $5.2 million last year. The improved results reflected high operating rates by Canfor’s plants and sales to our third party customer that we added in the second quarter last year. You may recall that Canfor purchases over 60% of our output under a 10-year contract that adjusts Canfor’s price for changes in key raw materials such as power and salt.
International reported revenue for the 1st quarter of $40.4 million compared with $22.4 million in 2005, and EBITDA of $1.7 million compared with $1.4 million last year, primarily reflecting the Kemmax acquisition in May 2005.
Corporate costs for the first quarter were $3.0 million compared with $2.6 million last year. The increase in cost is due to the increased scope of the business following our acquisitions in August of last year.
Maintenance capital expenditures for the 1st quarter were $1.4 million and $0.2 million for 2005. The increase in maintenance capital spending reflects the additional capital requirements related to the 2005 Acquisitions. As part of the 2005 Acquisitions, the Fund pre-funded capital additions of approximately $1 million. We now believe that the amount of pre-funding was too low, and an amount of approximately $2.5 million to be invested in the two years following the acquisitions would have been a more reasonable level of pre-funding. Some of these additional expenditures are related to improving the reliability of these recently acquired assets. Consequently, our level of capital expenditures in 2006 is likely to be higher than previously estimated.
Finally, an update on our U.S. dollar hedging program. As we have noted in earlier reports, because our US and International operations reports in US dollars, the Fund is exposed to fluctuations in the Canadian/US dollar exchange rate. The Peak acquisition added another US-based business. At the Fund’s expected exchange rates in 2006, 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 March 31, 2006, approximately 72% of planned transfers for 2006 and 68% of 2007 planned transfers had been effectively hedged at $0.8318 and $0.8305, respectively.
I’ll now hand the call back to Mark.
Mark Davis
Thank you, Rohit.
As I said on our last call, we continue to believe in the long-term strength of our businesses. The regen business will be a long-term positive addition to our business portfolio. Although earnings will be impacted in the first half of this year by the planned maintenance shutdowns at our two largest plants and our additional spending to enhance reliability, the contractual nature of this business improves the quality of our earnings.
We continue to expect to generate more distributable cash in the second half of the year than the first. During the first half of the year we conduct the major maintenance programs at our largest facilities, as does our largest sulphur products supplier. We expect the second half of the year to benefit from fewer maintenance costs, improved operational reliability, the seasonality of our regen acid and SHS products, and the anticipated reduction in certain raw material costs as the year progresses. For the balance of 2006, we expect strong demand for our regen services, somewhat weaker demand for our merchant acid, and generally firm demand for our other products.
Our major sulphur products supplier is currently negotiating a new labour contract to replace the one that expires on May 31, 2006. We expect an agreement to be reached; however, if this is not the case, our supply of sulphur products could be negatively impacted.
Based on these factors, commencing in the second half of 2006 we expect to generate distributable cash at an annualized rate of over $1.50 per unit.
Although we have hedged a substantial portion of our net U.S. dollar denominated cash inflows through 2007, if the recent strengthening of the Canadian dollar relative to the U.S. dollar continues, it will eventually have a negative impact on distributable cash. Currently, approximately 60% of our distributable cash is generated in U.S. dollars.
For all these reasons we continue to see our business reporting stronger results in the second half of the year than the first.
Thank you for your attention. Rohit and I would now be pleased to answer any questions you have.
OPERATOR: Your first question comes from Barbara Gray from Blackmont Capital. Please go ahead.
BARBARA GRAY: Thank you. Good morning, guys.
MARK DAVIS (Chief Executive Officer): Hi, Barbara.
BARBARA GRAY: A couple of questions here. Can you tell us what the EBITDA contribution was from the Peak acquisition in Q1 of this year?
MARK DAVIS: You know, Barbara, we don't actually segment our results.
BARBARA GRAY: Okay. In terms of the EBITDA impact of Beaumont and Shreveport and your customers being down, you said that's... Is that a million dollars all combined?
MARK DAVIS: That's right.
BARBARA GRAY: And when do you think this will be resolved?
MARK DAVIS: We think, actually, that we're going to be past our reliability issues in the second quarter. That's when Beaumont takes its turnaround, and we expect our customers to be done by the second quarter as well, because everyone's preparing for the high gas season, which is primarily the summer.
BARBARA GRAY: Okay. And maintenance capex, what's the new forecast for this year?
ROHIT BHARDWAJ (Chief Financial Officer): It's 6.7.
BARBARA GRAY: For the total year or for the remainder of the year?
ROHIT BHARDWAJ: That's for the balance of the year.
BARBARA GRAY: Okay. And with your COGS, I mean, the price of natural gas is down 75 percent since it peaked in December. The price of caustic soda is down 16 percent. When do you expect to see this impact your numbers?
MARK DAVIS: Probably third quarter.
BARBARA GRAY: And one last question. With your debt covenants -- your debt-to-EBITDA right now, based on our calculations, is about 2.7 times. Your covenant's 3.0 times. Do you have any flexibility with your creditors? Because we saw Connors, twice they’ve been able to get their covenants raised because of temporary issues--
[overlapping speakers]
ROHIT BHARDWAJ: Sorry, Barbara, it's Rohit.
BARBARA GRAY: Yes.
ROHIT BHARDWAJ: I'm not sure. You may want to look at your calculations, because at the end of March, we actually showed it at 2.4, so I'm not sure where that 2.7--
BARBARA GRAY: Based on trailing 12-months EBITDA.
ROHIT BHARDWAJ: Yes, it is, but there are some--... If you look at our credit agreement that's on SEDAR, there is a bit of an adjustment for a stub--
[overlapping speakers]
MARK DAVIS: Yes, and in any event, we don't see any covenant issues, and our banks, actually, are quite happy to work with us if there were, but we don't foresee any.
BARBARA GRAY: Okay. So if you did get down to where you'd be close to your covenants, the banks would be able to give you a step-up provision, you believe?
MARK DAVIS: I believe so. I mean, our history, as you know, Barbara, of dealing with our credit agreements and our bankers is that we always approach people way before there's issues, both on extending terms and on any other issues there may be.
BARBARA GRAY: Right. So have you approached them?
MARK DAVIS: No, we don't need to.
BARBARA GRAY: Okay. Thank you.
MARK DAVIS: Thanks.
OPERATOR: Your next question comes from Bert Powell from BMO Nesbitt Burns. Please go ahead.
BERT POWELL: Thanks. Mark, can you just maybe give us a little bit more detail on caustic pricing? I know things have moved around since, I guess, you put some numbers out for the expectations in December. I think you were kind of expecting, post-hurricane, kind of 475 per short tonne, and kind of getting down to low 300s, as an exit rate for the year. If you can just give us a sense as to what's going on, in terms of the stuff that you're actually purchasing, and what you've had to churn through in inventory.
And I know, on sodium formate, kind of part two of the question, you’ve never been that specific on pricing, but just want to make sure that what we're seeing in terms of that impact is really kind of just the flow-through on a year]over]year comparison, because of Celanese, or are we actually seeing a little bit of a step-up in the pricing and the market over what you experienced in the fourth quarter?
MARK DAVIS: Sure. Caustic first -- I think most of you will know, we basically buy caustic off market price until the end of this year, and the way our contract works is basically, we're a quarter in arrears to market price. But caustic prices started to move down, it looks like it's moving down about $25, Q2 versus Q1, for us, based on what the market intelligence says. Market intelligence still seems to say that, by the end of the calendar year, the below-$300 number is right. It still actually shows that pricing should be down about $125 from the end of 2006 to the end of 2007. So I don't think anything has changed on our views since the last conference call.
BERT POWELL: Okay.
MARK DAVIS: With regard to formate, we benefited in the first quarter from additional low-cost Celanese product as they're phasing out their operations, but... so we expect to pay more, I guess, in the second quarter and for the balance of the year, but probably no more than we paid in the fourth quarter of last year, as Celanese was offline then, and the market was still kind of settling out. So we don't really foresee costs for the balance of this year being higher than we were hit with in the fourth quarter, although formate costs are likely going to be higher than they were in the first quarter.
BERT POWELL: Okay. All right. And just in terms of the volume for the SHS business, you're down, year]over]year. I'm wondering if you could give us a little bit of a sense as to how much down, and what your outlook is for that, in terms of, I guess, volume and pricing for the remainder of this year.
MARK DAVIS: Yes, I mean, we're probably down 5, 6 percent, and that's probably not a bad run]rate for going forward. We lost some to competition, but the biggest thing we lost is actually our Abitibi volume at Stephenville, which has closed down its newsprint plant. So, you know, we think that that's probably not a bad run]rate.
BERT POWELL: Okay. Last question, and I'll get off. Mark, just in terms of volume upticks from your sulphur guys, how is that looking, in terms of this year? There was some expectation that we should see some bump in volumes that you have to go there.
MARK DAVIS: Sorry, volume impact from where?
BERT POWELL: On your sulphur products suppliers. Inco.
MARK DAVIS: Oh, yes. No, it is... Same deal with Inco is, we think... we think the last half of the year should be 15 percent higher volume than actually what we got last year, as they move to comply. And there is also more acid, we said, actually, in the International market, right? So...
BERT POWELL: Okay.
MARK DAVIS: So, anyway... So, you know, 10, 15 percent extra Inco acid. We do actually say, in our Outlook section, that there does appear to be a little bit of weakness in merchant acid pricing, so that, you know, you shouldn't just extrapolate new volume times the same margin, because there might actually be a little bit of weakening of pricing towards the end of the year. But again, we split 60 percent of that with Inco, if you remember our contract there.
BERT POWELL: Yes. What's contributing to the price weakness in the merchant asset market? Is it just supply-and-demand? Or...?
MARK DAVIS: It's just supply-and-demand, yes. If you read all the news reports, people like Noranda increasing its throughput at the [inaudible] and the Horne, as they increase metals output, they actually create more acid.
BERT POWELL: Okay. So is the net effect expected to be neutral? Like, the volume... the price decrease is just offset by the volume uptick?
MARK DAVIS: I mean, I hope it's still positive. I'm just telling you, don't count on--
BERT POWELL: Yes, I know, fair enough.
MARK DAVIS: ... [inaudible] volume times same margin.
BERT POWELL: Okay, perfect. Thank you very much.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Horst Hueniken from Westwind Partners. Please go ahead.
HORST HUENIKEN: Good morning, gentlemen.
MARK DAVIS: Hi, Horst.
HORST HUENIKEN: I want to start off with SHS. We saw a 6 percent price increase. I'm wondering if that's stuck, and whether there's any prospect of it going even higher.
MARK DAVIS: The majority of it did stick. I don't think there's a prospect of it going higher. Our customers work pretty well with us, actually, to be honest, to help us deal with a much higher than 6 percent increase in input costs, and as we're saying here, but for formate, most of those input costs should start to trend down. So I think we're probably where we are.
HORST HUENIKEN: Okay, fair enough. I do notice, on page 7 of your release, that the revenues related to SHS have decreased in the face of a price increase. So, obviously, volume is ticking down. Could you just explain why that's happening? Is that solely because of maintenance shutdowns? Or are there some loss of customer contracts?
MARK DAVIS: Well, I mean, I guess there's two major reasons. One is, as we said, our SHS volume has decreased, really, for two reasons. One is some competition, but the biggest thing, actually, is the contraction of the newsprint industry that you guys have all been reading about and living through with us.
HORST HUENIKEN: Yes.
MARK DAVIS: And the second reason is, really, the reliability issues of our two big plants that we got in the Peak acquisition -- Shreveport and Beaumont. There are operational issues, so they were not producing as much acid, either regen or merchant, as we anticipated, which also affected revenues.
HORST HUENIKEN: Okay.
MARK DAVIS: And I guess, probably the final thing, although, frankly, I don't have it quantified, is... I'm not sure, actually, where we pick up our hedging, so some of that [inaudible] also is reflected in the movement in the Canadian-U.S. dollar.
ROHIT BHARDWAJ: Yes, I think, the way we state our results is that the sales and margin lines are using close to a spot rate in the quarter, and we pick up the benefit of the hedge through SG&A.
HORST HUENIKEN: Okay, fair enough.
MARK DAVIS: Those are the three big reasons.
HORST HUENIKEN: Yes. I'll do some number-crunching on that. Thanks.
MARK DAVIS: Thank you.
HORST HUENIKEN: And the next question I have -- I don't know if you are able to elaborate, but you began to talk about the negotiations going on with the Sulphur Products, that if you don't get a contract by May 31, it could be a negative impact. Are you able to quantify how negative an impact it would be? Presumably, you've got other options--
MARK DAVIS: Well, it's not our negotiations, obviously. It's Inco's. And if you remember, three years ago, we lived through a -- I'm trying to remember -- I think it was a 2-month or 3]month Inco strike, and it actually did not adversely affect our earnings at that time, because we were able to scurry around and get other product and do a bunch of things, if you go back and check our results then.
HORST HUENIKEN: Yes.
MARK DAVIS: Now, you know, every situation is different, and the other thing that we actually said at the time is that our Inco contract says for the first 28 days, that Inco can declare force majeure on us. If the strike goes past that, then the contract starts to affect us and actually starts to mitigate some of the hurt. So we could have a 28-day hurt, if Inco did go on strike.
HORST HUENIKEN: Okay, fair enough. In regards to--... I'm not sure if you're able to comment on this, but I find it curious. On the one hand, in your Pulp Chemicals division, you're performing very well, and this is happening at a time when Superior Plus is struggling, particularly relating to their sodium chlorate demand. I just find that to be inconsistent. Are you able to offer any insight into this glaring difference?
MARK DAVIS: Sure. I mean, first of all, I'm not sure, actually, if Canexus is getting hurt, either, but you guys follow Canexus -- that's not my business.
Where we are, actually, is... I mean, our core customers are the Canfor pulp and paper mills located in Prince George, British Columbia, and those pulp and paper mills are actually not high-cost producers. So they're actually running hard, they're not being shut down, and we have, as you know, an exclusive contract to supply them with product for the next, well, until 2013.
So, what we actually have, then, is a great base-load customer that actually is not being affected by the operating difficulties of the rest of the pulp industry.
And then, the extra amount of product that we have to sell, in the chlorate world, is actually not a lot. It's about 20,000 tonnes out of a, I don't know, a 1.7]million-tonne North American chlorate market. So we're able to successfully market all of our materials.
So, one thing is, we're associated with customers that we believe are going to stay and continue to purchase product.
Second differentiation is, to the extent we have changes in our main raw material costs, which is one of the other things that’s happening in the chlorate producers industry, is we're able to adjust the price that Canfor pays for changes in those key raw material costs, which, again, is different from the industry.
And the third thing I'll just give you is, our plant, like most of the others, actually, produces in Canada, and therefore, actually does produce in Canadian costs, but all of our customers are also in Canada. So our revenues and costs are in the same currency.
HORST HUENIKEN: Got it. Well, that's very enlightening. Thanks.
MARK DAVIS: Thank you.
HORST HUENIKEN: Well, the interest rate on the new Letter of Credit, are you able to tell us what you managed to get?
ROHIT BHARDWAJ: On the new credit agreement?
HORST HUENIKEN: Yes.
ROHIT BHARDWAJ: That is posted on SEDAR.
HORST HUENIKEN: Oh, I'm sorry.
ROHIT BHARDWAJ: We posted it in August of 2005. There is a mechanism that adjusts the interest rate based on the covenants, and the debt-to-EBITDA ratio. So if you want to take a look at that, and if you still have questions, you can give me a shout.
HORST HUENIKEN: Okay, that's fine. And final question -- any update on the lawsuit, or are the wheels of the legal system turning very slowly?
MARK DAVIS: The wheels of the Canadian legal system continue to turn slowly. There's really no news to update you on.
HORST HUENIKEN: Okay. Thank you.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Gerry Hannochko from Genuity Capital Markets. Please go ahead.
GERRY HANNOCHKO: Thank you. Good morning. I've just got a quick follow-up question on the SHS side, and in terms of the revenues and volumes that you're seeing. What's your outlook for that, given kind of the cost structure, the newsprint and pulp industry in North America, the rising energy prices? Do you see that volumes will be flat or slightly declining, over the next couple of years?
MARK DAVIS: Yes, I think that's probably fair, Gerry. I mean, we always talk about newsprint with SHS, okay? We do sell the majority of it into the newsprint industry. We also sell it to the textile industry, the kaolin clay industry, value-added papers industry, so there's a bunch of slices. But if you assume that, actually, the base-load of our product goes into the newsprint industry, as that industry continues to contract in North America, it is something, actually, that we're going to have to figure out how to deal with, and how to actually make the most money on a product that goes into a contracting industry.
GERRY HANNOCHKO: Are there any other homes for that product that you can place it, if you're seeing newsprint contraction?
MARK DAVIS: Well, we're certainly going to look, and as I think we've said on other calls, things like recycled fibre and de-inking of recycled paper -- and the use of both of those is growing in North America -- are both really good homes for sodium hydrosulphite.
The question is whether or not that volume would ever be sufficient to offset a quick decrease in newsprint and newsprint production. So that's kind of the offset, and you can make your own determination whether or not you think the offset is sufficient or not.
GERRY HANNOCHKO: Okay, great. Thanks, Mark.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Lorraine Gloster from MGI Securities. Please go ahead.
LORRAINE GLOSTER: Yes. I was wondering, on the Shreveport facility, was that finished in Q1? Or does that turnaround go over into Q2?
MARK DAVIS: The turnaround was finished in Q1. There might be some minor capital that spilled into Q2, but nothing material.
LORRAINE GLOSTER: And Beaumont -- that turnaround starts in Q2?
MARK DAVIS: Yes. Beaumont, just to be clear with everyone, Beaumont had operational issues in Q1, so we didn't make as much product. The costs for the Beaumont turnaround are primarily Q2.
LORRAINE GLOSTER: Is the million-dollar negative impact from those turnarounds and operational issues for those two facilities, is that a good number to use in Q2, or do you think it will increase, because the Beaumont plant is a bigger plant?
MARK DAVIS: That's probably a good number.
LORRAINE GLOSTER: Okay. And I just want to be clear here, on the capex, because you have $6.7 million maintenance capex for the balance of the year. And then you mentioned about $2.5 million being spent on Peak over 2 years. So is it $2.5 million, and then you mentioned $700,000 being spent on the 2 facilities. So I guess my question is, is the amount that's being spent on Peak, is that included in your maintenance capex? Or is that considered growth? Where do you stick that, in the capital?
ROHIT BHARDWAJ: Lorraine, it's Rohit. On the $2.5 million, we've said that's actually going to be spent over 2 years, from the date of the acquisition. So some of that is in the $6.7 million, but some is going to go into 2007 as well.
LORRAINE GLOSTER: But it would all go into the maintenance capex?
MARK DAVIS: Right.
ROHIT BHARDWAJ: Yes.
MARK DAVIS: The only funds that we don't count into that [inaudible] is actually the money that we've pre-funded.
LORRAINE GLOSTER: Okay. All right. So, you had a million... the million was already pre-funded?
MARK DAVIS: Right.
LORRAINE GLOSTER: You think 2.5... so it's a 1.5 increase.
MARK DAVIS: Right.
ROHIT BHARDWAJ: Correct.
LORRAINE GLOSTER: Okay. So 1.5 million increase. And then, I'm not sure -- you had mentioned about $700,000, of which $200,000 was already spent in Q1. So what is--... how does $700,000 work into the increase ... Is that how much is going to be spent in 2006, of the 1.5 million increase?
MARK DAVIS: Yes, I think that's directionally right.
LORRAINE GLOSTER: Okay. So an increase of 1.5 million over the 2 years, and 700,000 of that being in 2006?
ROHIT BHARDWAJ: Well, there may be a little bit more than that. $700,000 will be in Q1 and Q2.
LORRAINE GLOSTER: Yes.
ROHIT BHARDWAJ: And maybe it's a little--... there may be some more in the back half of the year as well.
LORRAINE GLOSTER: If I take the 6.7 maintenance capex for the balance of the year, and I have... I think your maintenance capex, I think, was around 1.4 in the first quarter. Does that sound right?
MARK DAVIS: Yes.
LORRAINE GLOSTER: Okay. So then you get 8.1 million for the year.
ROHIT BHARDWAJ: Yes.
LORRAINE GLOSTER: And that means that that second quarter has got to be a big number. I have over 3 million, up from 1.4.
MARK DAVIS: It's a big number. I can't tell you--
[overlapping speakers]
LORRAINE GLOSTER: Yes.
MARK DAVIS: ... [inaudible] or not, but... I don't remember.
LORRAINE GLOSTER: Yes. But if it's 8 million for the year--
[overlapping speakers]
MARK DAVIS: You would--... If you took the 6.7, you'll find there's--... you'll find there's more than... more than $500,000 of our extra costs--
LORRAINE GLOSTER: Yes.
MARK DAVIS: [inaudible] ... 6.7.
LORRAINE GLOSTER: Yes. And I guess, Q2 has got to be the peak, because that's when you're doing your Beaumont and--
ROHIT BHARDWAJ: That sounds right, yes.
LORRAINE GLOSTER: Okay. And then, the other ones would just be... In the second half, you have it going down. You did mention, in the second half, that you expect that the available cash flow would be in excess of $1.50.
MARK DAVIS: Right.
LORRAINE GLOSTER: So my question to you is, what kind of maintenance capex are you using in that second half, to get to that number?
MARK DAVIS: I mean, frankly, I don't have it handy. I'm not sure we break it out. The big maintenance turnarounds are in the first half of the year, and the extra costs in the latter half of the year are primarily to improve certain environmental, health, and safety aspects of the acquired plants, that we want to bring up to higher standards, to Chemtrade standards.
LORRAINE GLOSTER: Okay. So that's not all going to be taken in the second quarter, then, with the turnaround at Beaumont. That's going to be spread, and you'll do some in the second half as well.
MARK DAVIS: That's correct.
LORRAINE GLOSTER: Okay.
MARK DAVIS: Okay?
LORRAINE GLOSTER: All right. And I just want to--... Yes, I guess that's about it. Except on... just on the SHS, not to beat this horse any more, but if... You said $1 million was the impact on the first quarter, and I guess, caustic soda is going down, but it looks like the sodium formate may increase a little bit. But do you expect any significant changes in the second quarter?
MARK DAVIS: The second quarter... Let me just answer this [inaudible], is we expect significant changes for the third quarter.
LORRAINE GLOSTER: Yes.
MARK DAVIS: The issue with the second quarter is, that's when we take our major shutdown in that business as well.
LORRAINE GLOSTER: Okay.
MARK DAVIS: So that you don't necessarily benefit or get harmed, frankly, that hard on raw material costs because you're offline.
LORRAINE GLOSTER: Is that--... would you have taken that, the maintenance one, the same time last year?
MARK DAVIS: Yes.
LORRAINE GLOSTER: Okay. So, year over year, the impact could be similar to what we saw in Q1.
MARK DAVIS: I'm honestly not sure, is what I can tell you.
LORRAINE GLOSTER: Yes.
MARK DAVIS: The third quarter every year is seasonally the SHS high point.
LORRAINE GLOSTER: Okay.
MARK DAVIS: And that's why you always take your turnarounds in the second quarter, to get ready the third.
LORRAINE GLOSTER: Okay, terrific. And my--... sorry, on the 5]6 percent decrease, was that the volumes on SHS?
MARK DAVIS: Yes.
LORRAINE GLOSTER: And was that liquid, powder, or is that the combination of both?
MARK DAVIS: Combination.
LORRAINE GLOSTER: I'm assuming, then, that most of the volume decrease is probably on the powder side. Is that fair to say?
MARK DAVIS: No, it was split. I would say it's probably fair to say, actually, that most of the permanent volume loss was on the powder side. The liquid side, again, if you remember, we talked about this a long time ago--
LORRAINE GLOSTER: Yes.
MARK DAVIS: ... and it also depends on dirty or clean chips, and how much SHS is required to actually bleach the product, right? So some of that is actually the operational conditions of what the mills themselves are bleaching. But the shutdown permanent volume loss is probably more on the powder side.
LORRAINE GLOSTER: Okay. Thank you.
MARK DAVIS: Thanks.
OPERATOR: Your next question comes from Richard Linhart from Opus Capital. Please go ahead.
RICHARD LINHART: Hey, good morning.
MARK DAVIS: Hi, Richard.
RICHARD LINHART: Just a quick question related to the Beaumont facility shutdown. Do you have an expectation for the period of time of that shutdown?
MARK DAVIS: Yes, it's primarily finished right now, Beaumont, yes.
ROHIT BHARDWAJ: It started at the beginning of the second quarter, around early April, and so it's done now.
MARK DAVIS: That's why, Richard, we're pretty sure when we actually say we took some extra time and spent some extra capital, because that shutdown's been completed.
RICHARD LINHART: Right. So it was roughly, what, 40 days or so? Thirty to 40 days?
MARK DAVIS: No, no, it's not that long.
ROHIT BHARDWAJ: It was about 12 days.
MARK DAVIS: I would call it 2 weeks.
ROHIT BHARDWAJ: Two weeks, yes.
RICHARD LINHART: Got it. Thank you.
MARK DAVIS: Thanks.
OPERATOR: Your next question comes from Damir Gunja from TD Newcrest.
DAMIR GUNJA: Just looking for an update on the business interruption insurance, I guess, from last year. Any sense of timing, or sort of new quantification? And maybe, secondly, is that baked into your distributable cash flow outlook for the balance of the year?
MARK DAVIS: Yes, two answers. We're still, frankly, crossing T's and dotting I's and haven't submitted the claim yet. We expect to submit the claim by mid-June. Quantum remains about the same, and it is not baked into our forecast for distributable cash.
DAMIR GUNJA: Thanks.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Bert Powell from BMO Nesbitt Burns. Please go ahead.
BERT POWELL: Thanks. Mark, just on Peak, with the shutdowns, and the calculation for, you know, natural gas pricing at the end of last quarter is what's set for this quarter, should we expect, for going into Q2, that we would see better margins there because of that?
MARK DAVIS: I'm just thinking. It depends on, actually, what Q2 gas pricing turns out to be.
BERT POWELL: Right.
MARK DAVIS: Q1 gas pricing will set--... Q1 actual gas price will set the price that we charge our customers for Q2, and then, what the actual gas price is in Q2 will determine what your margins are, plus, of course, plus or minus the Beaumont turnaround fudge factor, if you missed some of the low-cost gas or not. So I don't know what the margins will be yet, until I know at the end of the quarter what gas price was.
BERT POWELL: Right, but you would use a weighted average price for Q1, right, to set the price that you'd be taking in--
MARK DAVIS: That's the price our customers charge, but whether or not margins contract or expand depends on my cost of gas that I'm actually using.
BERT POWELL: Right.
MARK DAVIS: So you're right. I know what my price is. I just don't know what my costs are yet.
BERT POWELL: Okay. Do you have a number for us, in terms of what the actual weighted--... if you factored all in what the cost was for what you--... or what the price was, for natural gas in the first quarter?
MARK DAVIS: No, I don't, but, you know, it's probably about $7.00. I don't have a hard price, but if you go back and take a look at the Henry Hub postings, and average them, is, I think, much to all of our surprise, I think it probably averages about $7.00, $7.50.
BERT POWELL: Okay. And this--... Inco was supposed to do a shutdown in the first half of this year, correct?
MARK DAVIS: Right.
BERT POWELL: And when does that happen?
MARK DAVIS: It's right at the end of the second quarter.
BERT POWELL: End of second quarter. Then that's down two quarters?
MARK DAVIS: I don't know. I think so.
BERT POWELL: Okay. Okay, great, thanks.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Barbara Gray from Blackmont Capital. Please go ahead.
BARBARA GRAY: Thank you. I'm just looking at your Corporate costs here, and it looks like they were $3 million in the quarter, which is double the amount from Q4 '05. Can you explain that? And is that a rate we should use for going forward?
ROHIT BHARDWAJ: Yes. I think, when you compare it to Q4, that's the quarter in which we started applying a mark]to]market approach to our hedges. So that number was distorted with that effect. So, really, a better comparison is the Q1 of last year, and it was $2.6 million.
BARBARA GRAY: Right.
ROHIT BHARDWAJ: It's up about $400,000 from that run]rate, and this is a more realistic run]rate for this year.
BARBARA GRAY: And are there any legal costs in that $400,000?
ROHIT BHARDWAJ: Well, there's some legal costs, but I'm not sure if you mean relating to the Marsulex--
BARBARA GRAY: The Marsulex lawsuit?
ROHIT BHARDWAJ: No.
MARK DAVIS: Nothing significant.
BARBARA GRAY: Okay. So 2.6 is more the rate we should use, going forward?
MARK DAVIS: No, no, no, no.
ROHIT BHARDWAJ: The $3 million is closer to the mark.
BARBARA GRAY: But that incorporates the hedging.
ROHIT BHARDWAJ: Yes, but what happens is that there will be--... It's Q4 that had the unusual mark]to]market adjustment. Q1 is a more normal amount of exchange through that line, and that will continue through the year, because every quarter, we do have a mark]to]market adjustment taking place for our hedges.
BARBARA GRAY: Okay. Thank you.
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're using a speakerphone, please lift the handset before pressing the keys. Mr. Davis, there are no further questions at this time. Please continue.
MARK DAVIS: We'd like to thank everybody for your attention. Our AGM, for those who haven't noted it, will be on May 26th, and we look forward to either seeing or talking to you folks then, or at our next conference call. Thank you for your time.
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