Q2 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 second 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.
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Chemtrade generated distributable cash of $12.6 million, or 37 cents per weighted average unit in the second quarter. Revenue and EBITDA were $134.6 million and $19 million respectively. As with the first quarter, all of our operating groups reported higher revenue than last year, although again, other than our Pulp Chemicals group, this was the result of the acquisitions of the Refinery Services, Phosphorous Specialties and Kemmax assets last year.
There were a number of pleasing aspects to the quarter. The time, attention and capital we are spending to improve our operations are starting to have a positive impact. For example, regen demand was very strong in the quarter. After spending the capital to improve the reliability of the Shreveport plant in the first quarter and the Beaumont in April of this quarter, we were able to benefit from this robust demand. Secondly, our Pulp Chemicals business continues to capitalize on its opportunities. Finally, even our operations that are facing cost or volume pressures have made operational improvements. We continue to face challenges but are pursuing the initiatives necessary to ensure our long-term performance.
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I will take you through a couple of important themes and then Rohit will discuss the financial performance in more detail.
As previously indicated, the first half of the year is when we incur our major maintenance turnarounds at Shreveport, Beaumont, Leeds and Pulp Chemicals. During our last call we said that in addition to regular maintenance, we had identified a number of opportunities where additional, unplanned work would improve the long-term reliability and efficiencies of both the Shreveport and Beaumont plants.
Last quarter we indicated that the extra capital costs and down time cost us about $1.5 million. The extra costs in the second quarter due to the extended Beaumont plant shutdown were about $700,000 of foregone distributable cash. About $300,000 of that amount was additional capital expenditures, and the balance a combination of extra expense incurred on the turnarounds, and lost volume. We will continue our efforts to improve the reliability of these plants over the years, but have taken a very good first step.
The decision to improve our plants’ reliability is already starting to show a return. We were able to benefit from strong regen demand in the second quarter, especially during the end of the quarter when Beaumont was fully back on line. In fact, despite the longer than planned turn around at Beaumont, our regen volume was 10% higher than we anticipated.
As well as our own key plants running better, our customers also seem to have worked through their own operational issues that plagued some of their plants after the hurricanes. Demand for regen acid has increased nicely with the smoother operations and the beginning of the peak gasoline production season. For example, the customer we referred to on the last call whose volume was down 15% in the first quarter was up by over 10% in the second quarter.
We expect the strong demand we had for regen in the quarter to continue in the third quarter. Looking further forward we are also starting to see announcements of US refinery expansions and the effect of MTBE phase out both of which will contribute to increased regen demand. For example Motiva has announced that it will double the capacity of its Port Arthur, Texas plant by 2010.
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We are facing a different set of facts in our SHS products. The major demand for these products is the newsprint industry, which has been under duress for the last number of years. U.S. newsprint production is estimated to have declined by over 5% this year. Understandably, this is having a proportionate effect on our volumes. This is also our business that has faced the most significant cost pressures. While certain raw material costs appear to be moving down – caustic and natural gas – other key inputs such as sodium formate and zinc remain a concern. We continue to fight the volume and cost pressures and look for ways to further stabilize this business.
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 remarks.
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 second quarter and first half year results for 2005.
For the three months ended June 30, 2006, cash available for distribution was $12.6 million, or 37 cents per unit, generated from revenue of $134.6 million and EBITDA of $19 million. In the second quarter of 2005, distributable cash was $8.7 million, or 37 cents per unit, revenue was $104.7 million, and EBITDA was $12.1 million. Net earnings for the second quarter of 2006 were $4.9 million, compared with $2.7 million last year.
For the first half of this year, distributable cash was $24.2 million, or 72 cents per unit compared with $20 million, or 85 cents per unit last year.
The principal reasons for the increases 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 $13.1 million in the second quarter compared with $8.2 million last year. The major reasons for the increase were the contributions from Refinery Services and Phosphorous Specialties acquisitions, which were partially offset by reduced SHS revenues and increased input and freight costs.
As Mark mentioned, our regen demand was very strong and our operations were much more stable than in the first quarter. The product that continues to face the most pressure is SHS. The decreased demand for newsprint, a major user of SHS, has had an impact on our revenues. Our volumes were about 10% lower in the second quarter than last year, primarily as a result of the shutdown of Abitibi’s Stephenville mill that we have discussed previously but also due to reduced newsprint demand and some volume lost to competition.
Turning to costs, a topic which we have been discussing for about a year now, although caustic soda prices have begun to come down the cost of caustic along with sodium formate remains high.
The impact of these higher costs is significant. The combined cost of caustic and formate in the second quarter was approximately $1 million higher than the same period last year, and approximately $2 million higher for the year to date. Performance Chemicals has also been adversely affected by high zinc costs. However, in this quarter we were able to realize some very favourable sales revenues on the sales of the zinc oxide produced. It may be difficult for us to sustain this favourable realization.
Although we have effectively controlled other operating costs, the combined effect of reduced demand and higher input costs has negatively impacted this business.
Sulphur Products volumes were lower than expected in the quarter. Acid volumes were lower than anticipated as a result of Inco delaying the increase in the capture of SO2 emissions until June, and liquid SO2 volumes were off as a consequence of production issues at both the Inco and Falconbridge smelters. This maintenance turnaround at Inco’s Sudbury smelter will occur in the third quarter and will have an adverse impact on our third quarter acid volumes.
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Pulp Chemicals had another strong quarter, posting revenue of $12.9 million compared with $12.6 million in 2005, and EBITDA of $5.3 million for the quarter, compared with $4.7 million last year. Our Prince George facility continues to operate at close to full capacity, reflecting strong demand from Canfor, Pulp Chemicals’ largest customer, and solid sales to our third party customers as well.
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International posted higher revenue of $50.8 million compared to $45.7 million in the same period last year, primarily reflecting the Kemmax acquisition in May last year, as there was an extra month’s contribution in the second quarter this year. The stronger Canadian dollar, however, had a negative impact on EBITDA, which was $1.8 million for the second quarter compared with $1.9 million a year ago.
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Corporate costs for the second quarter were $1.2 million compared with $2.7 million last year. The decrease in cost was due to the inclusion of realized foreign exchange gains of $0.8 million and unrealized foreign exchange gains of $1.8 million in the quarter. These gains more than offset the increase in other corporate costs, which are up due to the increased scale of the business following the 2005 Acquisitions. It’s also important to note that although, unrealized gains benefit EBITDA, they are excluded for the purposes of computing distributable cash.
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Maintenance capital expenditures for the 2nd quarter were $1.5 million and $1.3 million for 2005. Maintenance capital expenditure for the first six months of 2006 was $2.9 million compared with $1.4 million for the first six months of 2005.The increase in maintenance capital spending reflects the additional capital requirements related to the 2005 Acquisitions.
Total maintenance capital expenditures for the balance of 2006 are estimated at $4.4 million. Of this total, $3.4 million is planned for SPPC, $0.6 million for International and $0.4 million for Pulp Chemicals.
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. At the Fund’s hedged 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 June 30, 2006, substantially all planned transfers for the remainder of 2006 and 2007 have been effectively hedged at $0.8327 and $0.8305, respectively.
I’ll now hand the call back to Mark.
Mark Davis
Thank you, Rohit.
As you have heard, the second quarter presented similar challenges to those of the first quarter. However, despite this, we have generated sufficient distributable cash to satisfy our distributions for both the quarter and the year to date. We intend to improve our generation of distributable cash as we move forward and return to a relationship between the distributable cash we generate and the amount we pay out that is more consistent with our 5 year history as an income trust than the recent relationship.
We were pleased that towards the end of the second quarter we began to see the real earnings potential of our regen assets. The combination of the refineries running hard and the additional reliability we’ve now built into our two largest plants should serve us well in the future although we must continually work to improve all of our plants.
Looking forward, we expect the second half of the year to benefit from fewer maintenance costs, improved operating reliability and the seasonality of our regen acid. We also expect strong demand for our regen services and sodium chlorate products, but expect the seasonal increase in demand for our SHS products to be somewhat weaker than usual. Demand for all our other products is expected to be generally firm for the remainder of the year.
From a cost perspective, we continue to expect the cost of caustic soda to trend lower; however, we expect ongoing cost pressures on sodium formate, zinc, freight, and potentially, salt.
Although we have hedged substantially all of our net US $ denominated cash inflows through 2007, if the Canadian dollar continues to trade above 83 cents, it could have a negative impact on our business in 2008 and forward. Currently, approximately 60% of our distributable cash is generated in U.S. dollars.
Overall, we still expect to generate more distributable cash in the second half of the year than in the first half.
Thank you for your attention. Rohit and I would now be pleased to answer any questions you have.
OPERATOR: Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press the star, followed by the one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be polled in the order they are received. Please ensure you lift the handset if you’re using a speakerphone before pressing any keys.
Your first question comes from James Leung from Mackenzie Financial. Please go ahead.
JAMES LEUNG: Good morning gentlemen.
MARK DAVIS: Hi James.
JAMES LEUNG: Just looking at your maintenance CAPEX for the first half as a whole, I believe it’s about 2.9 million. Would you expect the maintenance CAPEX for the back half of the year to be roughly the same as this -- of -- at the same level?
ROHIT BHARDWAJ: Actually within North America it would be somewhat similar. In the International segment we actually didn’t have a lot of expenses in the first half and although there is timing issues so we do expect some to be incurred in the back half of the year and same with our Pulp segment as well. So on the whole, it may be somewhat higher than the first half but shouldn’t be too much higher.
JAMES LEUNG: Well let’s say if I used 6 million or 6.5 would that be a…?
ROHIT BHARDWAJ: Maybe up slightly higher than that but in the ballpark.
JAMES LEUNG: Yes, okay. Just on your International division the Kemmax, now if -- can you just sort of give us some sense of the seasonality of the business, whether, you know, summer months are, you know, better than winter months or if there is some other sort of pattern that we should be aware of?
MARK DAVIS: There’s not drastic seasonality in our business. Essentially, if you want to think of that business as a tight supply chain between consumers of sulfur and producers of sulfur. So it’s very similar to what we do in North America; although actually more sulfur might be produced in the high gasoline periods, the consumers don’t necessarily have the same seasonality. So you won’t see wild fluctuations.
JAMES LEUNG: Okay. Thanks very much.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Bert Powell from BMO Capital Markets. Please go ahead.
BERT POWELL: Thanks. I’ll have to get used to that BMO Capital Markets. Rohit, just a clarification on the CAPEX side, you had said 4.4 in the second half, did I hear that right?
ROHIT BHARDWAJ: Yes, 4.4 and some of that would actually be pre-funded as part of the Peak acquisitions so 4.4 is a good number but some of it you may not see as impacting distributable cash.
BERT POWELL: Okay. So, yes, because when you did the Peak I thought there was kind of an incremental 3 to 4 million in kind of maintenance CAPEX that would get added to the base which would bring us closer to, you know, I’d been thinking about it at 7.5.
ROHIT BHARDWAJ: Yes, and that’s probably a good number in the go-forward. This year as you know we had some higher expenses to do with our EH&S kind of spending as well. Some of them would fall into expense type items but some of them will be part of the pre-funded class as well.
BERT POWELL: Okay. So what will actually show up in terms of calculating distributable cash in the second half?
ROHIT BHARDWAJ: It will be something less than 4.4.
BERT POWELL: So closer to 3.5?
ROHIT BHARDWAJ: Something in between the two numbers, 3.5 and 4.4.
BERT POWELL: Okay. And how many days was Beaumont down this quarter in total?
MARK DAVIS: I’m going to say two weeks.
ROHIT BHARDWAJ: It’s about two weeks, yes.
BERT POWELL: Two weeks, okay. And just, Mark, in terms of what’s going on in the environment for sulfur pricing and I know last call we talked about, you know, pricing might be a little bit weaker but increased volume from Inco which now looks like it’s going to be a little bit delayed, can you just give us some -- what your current thinking is on that in terms of the net impact on your business?
MARK DAVIS: Yes, I guess actually, you know, I don’t feel as strongly, or put it the other way is, my concern about sulfur pricing being weak is a little less so today than it was at the end of last quarter.
BERT POWELL: Okay.
MARK DAVIS: So I think at the end -- and I think in our last quarter call I thought I said that I thought that weaker pricing would potentially be offset by the Inco volume, I think we’re still kind of in that head space.
BERT POWELL: Okay. So still kind of flattish.
MARK DAVIS: Yes, I think that’s a good assumption.
BERT POWELL: Okay. And this fourth quarter I think this is when you go to natural gas based pricing with PPG right?
MARK DAVIS: Correct.
BERT POWELL: Now just in terms of that mechanism, the deal I think you have now, and correct me if I’m wrong, is you get a little discount to market.
MARK DAVIS: Right.
BERT POWELL: And so when you transition in the fourth quarter to the natural gas based pricing, does that - is it that discount then everything is priced off of movements in natural gas or does the price change and then -- can you just help us understand if there’s any impact in that transition?
MARK DAVIS: Yes, once you get to the fourth quarter it’s forget discounts to market.
BERT POWELL: Right, okay.
MARK DAVIS: It’s just a formula based on natural gas pricing.
BERT POWELL: And that’s at the end of the fourth quarter?
MARK DAVIS: For -- the end of the third quarter. So it’s effectively our fourth quarter pricing for caustic is set by gas prices.
BERT POWELL: Is set by gas prices, okay. So whatever the price of gas is for this quarter, at the end of this quarter that will be the baseline for price movements going forward?
MARK DAVIS: It’s not so much price movements, it’s gas price times X will be the price of caustic.
BERT POWELL: Hmmm, right, okay, yes, yes.
MARK DAVIS: (Inaudible) kind of high.
BERT POWELL: Okay. But it will be gas price movements right? So if gas goes up drop that baseline.
MARK DAVIS: Correct.
BERT POWELL: Okay. So should we look for a step up in costs in the quarter relative to that -- for that transition?
MARK DAVIS: Well we think you’re going to see a step down in costs.
BERT POWELL: Okay.
MARK DAVIS: What we’ve publicly said before and frankly now I’m going to actually go by memory, is we had said before that a gas price of about $10, would give you the price of caustic in I think it was the second quarter of ’05.
BERT POWELL: Uh-huh.
MARK DAVIS: The second quarter of ’05 pricing was almost 400 bucks.
BERT POWELL: For a short-term or long-term?
MARK DAVIS: Short-term but now you’re really stretching my memory.
BERT POWELL: Okay.
MARK DAVIS: Okay. So, yes, we publicly said that about 10 bucks was about $400 a tonne for caustic.
BERT POWELL: Right. And can you tell us what the multiplier is on the price of gas?
MARK DAVIS: No, because I’m not that smart.
BERT POWELL: Okay. That’s it for me for now. Thanks.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Barbara Gray from Blackmont Capital. Please go ahead.
BARBARA GRAY: Thank you. Good morning guys I just have a couple of questions. The Inco contract expires at the end of ’08, is the present contract attractive to Inco or to a buyer at Inco in your opinion?
MARK DAVIS: We believe it is because we have guaranteed removal services, we’ve been doing it for 70 years that the customer base and the infrastructure that delivers Inco a good value for their product.
BARBARA GRAY: Okay. So if Inco got taken over you think that they would renew the contract after ’08?
MARK DAVIS: We believe so.
BARBARA GRAY: Okay. And with respect to the supply contract inputs, sodium formate, zinc, salt and freight, what type of contracts do you have, if you have any, and what’s the expiry of their contracts?
MARK DAVIS: Well they’re four different products and I think as a general statement today they’re all commodities that are purchased as typical commodity chemicals are generally on annual contracts and generally with meet or release clauses and generally on a requirement basis.
BARBARA GRAY: Okay. And can you give us sort of the changing prices year-over-year for sodium formate and zinc and salt?
MARK DAVIS: Salt actually isn’t really a 2006 issue. As we’ve said before, our current salt supplier might be exiting at the end of ’06. So salt -- differences in salt pricing wouldn’t actually really affect us until ’07 and as you remember, 65 percent of that more or less flows through to Canfor under our contract.
Sodium formate, I think what we’ve said before in the fourth quarter is that we’re expecting pricing to increase, we didn’t expect it actually to double by this point in time and actually it has increased by, you know, a percentage of, you know, 15, 20 percent but…
BARBARA GRAY: Year-over-year or since Q4?
MARK DAVIS: Since Q4, which again if you remember was actually a high quarter because that was following the shutdown of a bunch of suppliers, so the market is still settling in.
BARBARA GRAY: So on a year-over-year basis what would sodium formate be up?
MARK DAVIS: A year-over-year basis, well yes it was up.
ROHIT BHARDWAJ: Caustic and formate up about a million bucks.
BARBARA GRAY: No, I realize that just because caustic is coming down so I’m trying to isolate what that (inaudible).
ROHIT BHARDWAJ: Yes, well only for about 80 percent of that will be -- roughly 80 percent of that increase would have been formate, but the percentage, it is a high percentage, it’s more in the ballpark of 70 percent or so year-over-year.
BARBARA GRAY: Up 70 percent year-over-year?
ROHIT BHARDWAJ: Yes.
BARBARA GRAY: And what’s the industry forecast for sodium formate and what’s driving it? Is it going to eventually come down or…?
MARK DAVIS: There really is no industry forecast for formate, it’s a byproduct of another process. So as demands for pentolithoral goes up or down there’s more or less byproduct and that’s what drives the supply and demand dynamics.
BARBARA GRAY: Okay. And with respect to the salt contract, what sort of progress on the negotiations with the current supplier and have you lined up any other supplier in case there’s a problem?
MARK DAVIS: Yes, again, as we’ve said before is we’re still talking to the existing supplier and we have alternative supply lined up to the extent that we need it.
BARBARA GRAY: Great. And just one last thing, the updates with respect to Marsulex’s lawsuit?
MARK DAVIS: No relevant update.
BARBARA GRAY: Thank you.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Lorraine Gloster from MGI Securities. Please go ahead.
LORRAINE GLOSTER: Yes, I wondered if you can say how much of the 2.5 million pre-funded capital additions you expect to spend in 2006.
MARK DAVIS: Well actually let me turn your question around for you Lorraine if I can, right, is we pre-funded $1 million, right.
LORRAINE GLOSTER: Yes.
MARK DAVIS: And then we said we think its going to be another 2.5, another 1.5. So of the 2.5 we said we’re going to spend a million was pre-funded and the 1.5 was not, okay.
LORRAINE GLOSTER: But on a cash flow basis…
MARK DAVIS: On a cash flow basis is we’re probably going to spend 2 of the 2.5 between the acquisition in the end of ’06. I’m looking at Rohit as I’m saying it.
ROHIT BHARDWAJ: Yes, the fact that two years from let’s say July of 2005 we’ve spent it so in that ballpark but some of these projects as you can imagine Lorraine do tend to move around a little bit.
LORRAINE GLOSTER: Sure.
ROHIT BHARDWAJ: But that number is still a pretty good number in terms of trying to pinpoint it to the end of the year. That’s in the ballpark maybe we’re off 200, 300,000 bucks but it’s in that ballpark.
LORRAINE GLOSTER: Okay. But how much -- how much of it did you spend in 2005?
MARK DAVIS: Oh the bid was a couple hundred thousand bucks.
ROHIT BHARDWAJ: Yes, it’s, oh yes.
LORRAINE GLOSTER: Okay. All right. And looking at the Beaumont plant now, is it operating as well as you’d like it to or you still think, you know, once you spend some more money on it you’ll get additional reliability or capacity out of it?
MARK DAVIS: Again, it’s two different questions. Both Beaumont and Freeport are running very well right now, but to actually make your operations long-term reliable you have to go from a reactive maintenance program to a predictive maintenance program. So we fixed what we think -- we fixed what we saw, but we expect actually to have some -- find other things as we go, right, and we’ll fix them as we find them.
LORRAINE GLOSTER: Sure. So the money you’re spending we shouldn’t expect to see a bump up in Beaumont or Freeport from there except it’s just that they’ll last longer hopefully?
MARK DAVIS: Well they’ll last longer and aggregate through-put should go up on an annual basis because in time you’ll have less interruptions.
LORRAINE GLOSTER: Okay. All right, so you would expect maybe some volume increases maybe in 2007 versus 2006.
MARK DAVIS: Yes.
LORRAINE GLOSTER: Of those actions.
MARK DAVIS: Yes.
LORRAINE GLOSTER: Great. And just on the caustic soda and the natural gas, when you had done that contract initially I think your strategy was you said to hedge the natural gas portion of that, what is your strategy now?
MARK DAVIS: Our strategy now is we don’t think we have to hedge it because we think we’re pretty much naturally hedged with the way our regen contracts work which passes through natural gas costs. So if you look at Chemtrade in aggregate as our exposure to movement and natural gas price is not a big percentage of our earnings because the regen contracts pass through those movements. So we think we’re actually well enough naturally hedged and aren’t going out to hedge the caustic contract.
LORRAINE GLOSTER: Great. So we shouldn’t look for any hedges there?
MARK DAVIS: Correct.
LORRAINE GLOSTER: And just talking about the SHS, you did mention that besides some of the industry pressures that there was some volume loss of competition. Was that on the powder side or was on the liquid side?
MARK DAVIS: Powder.
LORRAINE GLOSTER: Powder?
MARK DAVIS: Primarily -- sorry, primarily powder. I mean, there’s always customers that swap to and fro between different producers, right?
LORRAINE GLOSTER: Yes.
MARK DAVIS: But powder primarily.
LORRAINE GLOSTER: Thank you.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Horst Hueniken from Westwind Partners. Please go ahead.
HORST HUENIKEN: Good morning.
MARK DAVIS: Hi Horst.
HORST HUENIKEN: I got a question for Rohit, I noticed that your EBITDA in the latest quarter is up 1.6 million relative to the previous quarter in your SPPC division. I’m wondering how much of that was the improvement in the acid regeneration business and how much of that might be other factors.
ROHIT BHARDWAJ: Well I guess to be -- first to be clear the regen obviously was not in Q2 of last year but maybe around – was that your question or…?
HORST HUENIKEN: Well, yes, I’m just trying to -- whether the improvement is entirely attributed to the inclusion of the acid regeneration business because…
ROHIT BHARDWAJ: I think not to forget P2S5, or phosphorous specialties, but between the two that’s where most of the -- actually all of the increase would be from there. There’d be actually some pressure on the other side on a couple of the other businesses, I think Mark mentioned some stuff -- some items on the general acid and the general, you know, softness in the market. So it’s safe to say that all of the improvements were acquisitions related.
HORST HUENIKEN: Because sometimes you get a situation where you might see a $1.6 million improvement and that’s because you improved say 3 million and then you had an actual drop in the other part of the business and that’s what I’m trying to get at.
ROHIT BHARDWAJ: I think, you know, we don’t really dissect the information in that level of detail because, I mean, I guess to be clear is when we acquired the Peak businesses there was a lot of rationalization done in terms of where to supply customers from and a bunch of other things. So it’s not that, you can’t really with that degree of precision dissect out the acquisition effect, so I don’t think we’d like to get into that level of detail.
MARK DAVIS: I don’t think -- I mean, another point you can make Horst actually is second quarter again as we have a bunch of maintenance turnarounds, right.
HORST HUENIKEN: Fair enough.
MARK DAVIS: So that if you’re looking quarter versus quarter is I suspect we would actually have made less from our sodium hydrosulfite product in the second quarter than the first because that’s our major turnaround for the second quarter.
HORST HUENIKEN: Understood. Great, that’s helpful. One of the areas that you’re battling is the rising price of zinc. Have you been able to improve your efficiency of processing that zinc at all?
MARK DAVIS: Yes, we’ve been able to do two things. Number one is we actually have improved our efficiency and, you know, you’re talking -- you’re talking small increments here but every increment helps, right?
HORST HUENIKEN: Right.
MARK DAVIS: The bigger thing we’ve done to offset rising prices of zinc is actually we’ve done a better job of making a better quality and finding better customers for the zinc oxide that comes out of the process. So if you go back a couple of years actually, what we always said was one of our opportunities is getting better return from zinc oxide. And we really started driving that last year and have been doing a really successful job this year of driving it.
HORST HUENIKEN: Yes, we’ve been assuming that your efficiency is about 85 percent, is that a reasonable number?
MARK DAVIS: You’re asking two guys that can’t answer that question.
HORST HUENIKEN: Fair enough. Final question, can you update us on the insurance claim? In the first quarter conference call you mentioned that the claim would be filed likely in June and I’m just wondering where that stands now.
ROHIT BHARDWAJ: Yes, and we did file the claim in June, it was the end of June actually, so it’s still very early. It’s being reviewed by the insurance company but it’s still early in the game and so we haven’t really got anything concrete to update in terms of where we think the claim is going to end up and what there is to recover. But its now -- it’s in the hands of the insurance company and we hope to start a dialogue pretty soon.
HORST HUENIKEN: Have they given you any sense of timing?
ROHIT BHARDWAJ: No, at this stage they have not given us, unfortunately, a sense of timing but we hope to continue dialogue or to start dialogue pretty soon and we’d be pushing it obviously from our side.
HORST HUENIKEN: Okay, that’s helpful. Thank you very much that’s all for me.
ROHIT BHARDWAJ: Thank you.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Bert Powell from BMO Capital Markets. Please go ahead.
MARK DAVIS: Bert you’ve already asked your questions.
BERT POWELL: I just have a couple more, they’re quick ones.
MARK DAVIS: Okay.
BERT POWELL: Rohit you talked about, I mean, the zinc oxide you’re doing a better job but you sort of indicated that perhaps the conditions that helped you this quarter mightn’t be sustainable going forward. Can you just maybe -- help us understand what the -- what you think the magnitude of the unsustainable benefit was this quarter?
ROHIT BHARDWAJ: Okay, firstly your comment is true that we don’t -- we had some invariable zinc oxide recovery in this quarter, both from a perspective of, you know, the percentage that we recovered which should be sustainable but the customer base that we’re able to sell to is where we have some concerns. But we really wouldn’t want to break it out into that, you know, into that kind of -- and we’re still hopeful in doing a good job recovering it, but we just want to caution people that it may not be quite as successful as Q2 so I don’t think we have a definite thing in mind here.
BERT POWELL: Okay. And Mark you talked about SHS declines in the first half of the year and even this quarter, are you -- is your expectation now I guess the Abitibi factored in, that that should be fairly flat line or do you still expect some kind of low single digit attrition over the balance of the year?
MARK DAVIS: I probably -- I still expect low single digit attrition.
BERT POWELL: Okay. And Inco turnaround, when do they shut down and for how long?
MARK DAVIS: They’re actually in the process of starting back up right now.
BERT POWELL: Okay.
MARK DAVIS: So, you know, basically July 1 or something like that is when they went down and they’re through their turnaround and they’re coming back on line now.
BERT POWELL: So they’re down for the month of July?
MARK DAVIS: I think probably three weeks.
BERT POWELL: Okay. And last question I know this is always a sensitive issue, but have you guys considered, you know, separating, you know, sulfur products and performance chemicals out, you know, into separate reportable divisions? You know, the SHS business is significantly different than the Peak businesses and just so to help us have a better understanding and be able to forecast those businesses separately, the co-mingling makes it rather difficult. So I just want to throw that out there. Not expecting you to go, “Gee, that’s a great idea” but just wanted to get your thoughts on that.
ROHIT BHARDWAJ: I mean, obviously we already look at, you know, to make sure that our reporting segments and operating segments are consistent with the Handbook. But I think to your point the SHS business is the largest consumer of SO2 that it’s part of the sulphur products business so obviously there’s a lot of intercompany type transactions that take this as well. So I think even though the customer base may be different, there is a lot of intermingling of the actual business itself. So I think at this stage we’re very comfortable with the way we report our operating segments and reporting segments in line. But it is something we think about so thanks for the question.
BERT POWELL: We -- just to go on, all right, it would be nice to have Peak separately.
MARK DAVIS: But it’s not run as a separate business. Again, if you remember the Peak acquisition is about half the volume is regen and about half is merchant acid.
BERT POWELL: Yes.
MARK DAVIS: That merchant asset is the same stuff as Inco makes.
BERT POWELL: Yep. No, I understand that Mark.
MARK DAVIS: And so I can tell you that, you know, I guess we said at the last call is that but for the extra million and a half in maintenance CAPEX so we told you guys about last quarter is we continue to believe that the assets are performing as we expected when we bought them.
BERT POWELL: Okay. Perfect, thanks.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Damir Gunja from TD. Please go ahead.
DAMIR GUNJA: Oh thanks. I think just about everything has been asked. Just maybe on the SHS business, Mark can you give us a sense of how diversified your customer base is there, I mean, you know, what would the top 10 be like? Is there one guy or one mill in particular that would be a big lump of that business?
MARK DAVIS: Well, yes, let me try this way. I don’t have the facts in front of me so it will be rough, right. I want to say something like 75 percent of the volume is sold into the pulp and paper industry broadly defined. The majority -- and okay, and of the balance is, you know, split it between something called kaolin clay which actually goes into the paper industry as well, and the textile industry. You take a big lump of stuff, which I said was pulp and paper and the majority of that, maybe two thirds of that, is actually going into newsprint. And again, don’t hold me to these numbers, these are directional numbers.
If you looked actually into the North American newsprint market you’ll find that very few companies hold very big shares in the US newsprint market. And since you know that we’re the largest producer of sodium hydrosulfite in North America, you can keep on extrapolating and say, guess what, Abitibi is very important customer to us; big newsprint guy. Kruger is a very important customer to us, right? So basically, we supply all of the major newsprint guys and the bigger they are in newsprint to North America, the more important they are to our customer base.
DAMIR GUNJA: Thank you.
MARK DAVIS: Yes.
OPERATOR: Ladies and gentlemen if there are any additional questions at this time please press the star, followed by the one. As a reminder if you are using a speaker phone, please lift the handset before pressing the keys.
Gentlemen, there are no further questions at this time.
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