Q4 and Annual 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 fourth quarter and full year 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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Before we look at the results in some detail, I would like to give a brief recap of 2006.
There were two dominant issues for Chemtrade in 2006. First was the ability of our plants to reliably produce our products, and second, the need to lower our exposure to high raw material costs. We made substantial advances on both of these issues during the year.
You may recall that our operations were significantly affected at the end of 2005 and the beginning of 2006 by the ancillary effects of Hurricane Rita. We also decided to improve our operating reliability, by spending the capital and taking additional downtime to do the upgrades. We performed substantial work in the first two quarters and saw improvements from these actions during the balance of the year. Improving reliability is not a one-time event and we remain committed to continually improving our ability to produce products at the lowest possible cost.
From a plant operating perspective Pulp Chemicals faced the key fourth quarter operational issue when our salt supplier declare Force Majeure. This situation is now past us and Rohit will have some financial details later.
With respect to exposure to raw materials, we closed our powder SHS plant in Leeds at the end of December. Although it is unfortunate that we closed a plant, we are pleased that our arrangement with ZhongCheng has eliminated our exposure to sodium formate, which, most of you know, had been significantly driving up our cost of production. Rohit will deal with the financial impacts of the shutdown, but I'm happy to say that our supply chain is fully loaded with ZC product and we have kept our customers supplied and informed.
Excluding our Leeds shutdown costs, in 2006 we earned $1.46 per unit of distributable cash from EBITDA of about $68.1 million. In the fourth quarter, again excluding the shutdown costs, we generated distributable cash of $11.6 million from EBITDA of $16.6 million.
Turning now to the fourth quarter results, two major events are included in our results. First, costs of $2.7 million associated with closing our powder SHS plant are included.
The second event was the production curtailment at our Pulp Chemicals operation in Prince George. As we announced on December 12, our historic salt supplier declared Force Majeure because of production and supply problems caused by severe weather and operating problems. The interruption to our operations was enough to reduce production by about 30%. Fortunately the issues were resolved before the end of December, but it’s impossible to make up for lost production. We also incurred some additional costs in the quarter as we loaded our supply chain with salt from our new supplier, a changeover that was already in the works when the disruption occurred.
Our other businesses performed well in the fourth quarter although we did have some operating issues at one of our regen plants. As I noted on our third quarter call, our two key regen plants, Beaumont and Shreveport, have benefited from the additional spending earlier in the year to improve their long-term reliability and efficiency, but I also said there was still room for improvement. There was a short reliability issue in the fourth quarter at one of the plants and we’ll continue to work on further improvements, but overall we’re pleased with the progress we have made improving the reliability at these facilities during the year.
Our International business posted good fourth quarter results, driven by a higher than expected level of spot sales into a tight acid market. This capped off a good year for our International group.
Our SHS products also did well, with volumes and pricing as we expected.
Rohit will review the financial results in detail, but let me make a couple of broad comments about the full year results.
All in all, 2006 was a year in which we faced a number of challenges but successfully implemented the initiatives necessary to strengthen our operations. We moved aggressively to overcome the effects of Hurricane Rita on our key regen assets, improved the regen plants for long-term reliability and efficiency, and transitioned our Pulp Chemicals business to a new key raw material supplier. We also dealt aggressively with our powder SHS asset, which was our most exposed to high raw material costs.
In spite of these challenges, distributable cash for the full year, before the fourth quarter Leeds restructuring charge, was $49.1 million, or $1.46 per unit. We achieved this result despite higher input costs and lower volumes for SHS; the additional downtime and spending we incurred on efficiency improvements at our Shreveport and Beaumont plants early in 2006 that affected distributable cash by approximately $1 million; and the fourth quarter impacts on Pulp Chemicals. These results demonstrate the ability of the business to react and withstand a number of challenges.
As previously announced, we have adjusted our distribution rate effective with our January distribution to provide more certainty in the sustainability of our distributions. I’ll have a little more to say about that later, but first, Rohit will review the financial results.
Just before I hand it over to Rohit, I will provide you with an update on CN. As you may have heard, CN, one of our major rail carriers is currently engaged in a labour dispute. We have evaluated service at our key sourcing sites and believe even though CN is on strike, provided that the strike is not too protracted in length, the financial impact on us should be minimal.
Rohit will now review the financial results.
Rohit Bhardwaj
Thank you, Mark and good morning ladies and gentlemen.
Before reviewing the results, note 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 fourth quarter of 2006 is the first quarter where the comparative amounts from 2005 include results from the acquisitions of Refinery Services and Phosphorous Specialties in August 2005, and the acquisition of Kemmax in the second quarter of 2005 and, therefore, results are directly comparable. The full year results, however, are not directly comparable.
Let me start by explaining the restructuring costs recorded in the fourth quarter. As you know, during the year we recorded a non-cash impairment in the value of assets used in the production of powder SHS of $12.3 million. Subsequent to that we announced that we would stop producing powder SHS at our Leeds facility. At that time, we had estimated that we would record costs of approximately $4 million to effect the cessation of production. We only recorded $2.7 million in the fourth quarter as accounting rules require certain costs to be only recorded when they are incurred. We thus expect to record approximately $1.5 million in future periods. I would also like to point out that out of the $2.7 million that we did record during the fourth quarter, $1.3 million is a long-term liability as it’s unlikely to be paid within the next year.
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For the three months ended December 31, 2006, including the $2.7 million of restructuring costs, cash available for distribution was $8.9 million, or 26 cents per unit. However, excluding those restructuring costs, fourth quarter distributable cash was $11.6 million, or 35 cents per unit compared with $9.7 million or 29 cents per unit in 2005. We achieved these results despite the unexpected production loss at Pulp Chemicals.
On this same pre-Leeds basis, EBITDA for the fourth quarter was $16.6 million compared with $15 million in 2005 generated from revenues of $146.9 million and $114.1 million respectively. While the fourth quarter of 2006 was the first period directly comparable with the prior corresponding period including the 2005 Peak and Kemmax acquisitions, I should remind you that Q4 2005 included the impact of Hurricane Rita.
For the full year, distributable cash excluding the Leeds shutdown was $49.1 million, or $1.46 per unit, compared with $43.2 million, or $1.58 per unit in 2005. Consolidated revenue for 2006 was $552.1 million versus $425.4 million in 2005 and EBITDA, before the Leeds costs, was $68.1 million compared with $58.9 million.
The principal reasons for the revenue increases over last year were the 2005 acquisitions and generally higher volumes of all product lines in International, offset by lower revenue from SHS products and by the effects of the stronger Canadian dollar.
Net earnings for the fourth quarter were $5.4 million, compared with $3.1 million in 2005, and for the full year, net earnings were $3.8 million compared with $13.2 million in 2005. The reduced earnings for the year reflects both the fourth quarter restructuring charges and the non-cash charge of $12.3 million with respect to impairment in the value of property, plant and equipment used to manufacture powder SHS. The 2005 results were negatively impacted by approximately $3 million as a result of Hurricane Rita.
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Turning now to the segmented results for the fourth quarter, the restructuring costs of $2.7 million were included in SPPC segmented results. My comments on SPPC performance relative to 2005 will exclude these costs.
SPPC generated revenue of $72.5 million and EBITDA of $13.3 million in the fourth quarter compared with $68.2 million and $8.7 million, respectively, in 2005. The major reason for this improvement over 2005 is that EBITDA in the fourth quarter of 2005 was unusually low due to the impact of Hurricane Rita. Also, as Mark mentioned, our SHS operations performed well with volumes of both powder and liquid showing improvements over 2005. These improvements were however partially offset due to reliability issues at one of our regen plants.
Increased raw material and freight costs continued to have a negative impact, but on a comparative basis the effect was somewhat muted as 2005 fourth quarter also had high costs for energy and raw materials.
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Pulp Chemicals reported fourth quarter revenue of $13.1 million compared with $13.9 million in 2005, and EBITDA was $4.3 million, compared with $5.9 million in 2005. The main reason for the decline was the disruption caused by the declaration of Force Majeure by our major salt supplier. However, in addition to this, we had a three-day maintenance shutdown in the latest quarter, whereas in 2005 there was a decision to forego the short turnaround. Higher costs for salt and electricity also had an impact on results.
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International reported revenue of $61.4 million for the fourth quarter compared with $32 million in 2005. Both periods included the Kemmax acquisition and the increase reflects generally higher volumes and prices for all product lines.
The increase in EDITDA from $2 million to $3.5 million is primarily because of the increase in margin related to the higher volumes.
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Corporate costs for the fourth quarter were $4.6 million compared with $1.5 million in 2005. The increase of $3.1 million is mainly due to foreign exchange. 2006 fourth quarter costs reflect a net foreign exchange loss of $1.3 million, whereas there was a net foreign exchange gain of $1.8 million in the same quarter of 2005. The exchange loss in the fourth quarter of 2006 is unrealized, as it’s a result of our revaluing all our future hedge positions. As you know, the Canadian dollar did weaken relative to the U.S. dollar during the fourth quarter of 2006.
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Total capital expenditures for the fourth quarter were $3.3 million in 2006 and $2.8 million in 2005. All of the spending in the latest period was maintenance capital compared with $1.9 million in 2005. The higher amount was primarily a result of timing of some projects that slipped into the fourth quarter.
For the full year, maintenance capex came in at $6.6 million. As we indicated on previous calls, we believe our annual spend going forward will be approximately $7.5 million.
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Finally, I would like to briefly recap the announcement we made in early January regarding the revised credit agreement and redemption of all outstanding Convertible Debentures.
The revised credit agreement increased the amount that can be borrowed under the Fund’s senior credit facilities by $50 million. Part of the increased facility was used to redeem the debentures, which took place on February 6. The total amount used, including principal, accrued and unpaid interest, was approximately $17 million.
As we noted in the news release announcing the redemption, the annual interest cost savings will amount to approximately $0.6 million.
The other item to note about the revised agreement is that it also increased the maximum allowable total debt to EBITDA ratio from 3:1 to 3.5:1. Although we were well within this limit allowed by the original agreement at year end, the increased limit gives us added financial flexibility.
Finally, before I hand the call back to Mark, I will update you on the status of our Hurricane Rita claim. We continue to dialogue with the insurer and have narrowed the discussion to a short list. We remain confident in the merits of our claim, but the complexity has increased the time period in which we expected to have received compensation. We are continuing to press this matter forward.
I’ll now hand the call back to Mark.
Mark Davis
Thank you, Rohit.
Looking back, 2006 was another busy year for Chemtrade. From a year that started with Hurricane Rita related issues, we worked to improve our operating reliability, eliminate the production most exposed to commodity raw material costs, integrate our new SHS and salt supplies into our supply chain, and ended the year dealing with the Force Majeure declared by a key raw material supplier.
We dealt with our operational issues by improving our reliability through focusing the right resources including additional capital on the job. We eliminated our raw material exposure by closing an operation that didn’t meet out financial return criteria while finding alternative means to supply our customers, reduce risk and improve our financial returns. These initiatives have strengthened and stabilized our business operationally, and financially.
Excluding the Leeds closure costs, 2006 distributable cash was $1.46 per unit. We continue to believe that our 2007 results should be substantially similar to these 2006 results.
The positive results from the initiatives that were completed in 2006 are being offset by our expectation of significantly higher costs for freight and salt, not all of which can be passed through to our customers. In the case of salt, which affects our Pulp operations, we estimate the net increase in cost, after recovering part of the higher costs from customers, will have a negative impact on Pulp EBITDA of approximately $1 to $2 million.
We also expect a reduction in our International earnings primarily due to competition in the European markets, although this business is looking a little stronger than we expected at the time of our December press release.
As usual, we will take our major maintenance shutdowns in the first half of the year. However, this year the shutdowns of our two largest regen plants are both concentrated in the first quarter to correspond with a once-every-four-year shutdown of a major customer. As a result, earnings and cash flow are expected to be weaker in the first half of 2007 than in 2006; similar to 2006, the second half of 2007 should deliver stronger earnings than the first half.
We announced in December that we were adopting a new annual distribution rate of $1.20 per unit. As I noted earlier, we generated distributable cash in 2006 of $1.46 per unit (excluding the shutdown costs). Our new distribution rate should result in a lower payout ratio and increase the security of our distributions.
One last comment before we answer questions. As you may have seen, Jim Leech, one our founding trustees, will be resigning in a month. Jim became a trustee prior to assuming his position with Teachers Private Capital, and his time commitments since then have grown substantially. We want to extend our tanks and appreciation to Jim for the time, effort and guidance he has provided for the last five years.
Thank you for your attention. Rohit and I would now be pleased to answer any questions you have.
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