Q1 2007 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.
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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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As we mentioned last year we expected that the first quarter of 2007 would be our weakest quarter of the year. Generally we take our major maintenance shutdowns over the first half of the calendar year. However, this year we concentrated the shutdowns of our two largest regen plants in the first quarter to correspond with a once-every-four-year shutdown of a major customer. We also said previously that there would be some additional costs in completing the transfer from the manufacturing of powder SHS to purchasing it under our new ZhongCheng contract.
For the first quarter we generated EBITDA of $11.3 million and distributable cash of 20 cents per unit. Excluding the $2 million of costs associated with the Leeds restructuring costs and related inventory revaluation, we generated distributable cash of $8.6 million, or 26 cents per unit from EBITDA of $13.3 million and revenue of $144 million.
As a general statement, the demand and sales for all our products was strong. However, the strength of these sales was not fully reflected in our results due to certain cost related issues that Rohit will detail later.
There were two major non-ordinary course issues that are reflected in our results and I’d like to take a minute to take you through them.
First, the repositioning of our SHS business reduced EBITDA by about $2 million. This includes the $1.5 million of restructuring costs we anticipated in our year end MD&A, but also includes a $500,000 inventory write-down charge. We are required to revalue our inventory of manufactured powder SHS to reflect the lower cost of the product we now acquire from ZhongCheng.
The second non-ordinary course issue concerns Hurricane Rita. We are pleased to report that we have settled our Hurricane Rita insurance claim. We recovered about $900,000 and this is reflected in our results.
As I’ve said, most of our products performed as expected. We are seeing robust demand not only for our regen services but also for merchant and ultra pure acid, sodium chlorate and stable demand for SHS. These dynamics contribute to our belief that we are well positioned to deliver our results this year.
On an individual segment basis, our SPPC segment is affected by most of the elements I mentioned previously, and Rohit will detail the ordinary course events within that segment. Pulp’s results reflect its increased costs, primarily salt, but also certain additional costs as the new salt supply was integrated into the system. For the balance of the year these costs should be somewhat lower than those reflected in the first quarter. The International segment performed better than we had expected due to the availability of spot supply in a very tight market.
Before I hand the call over to Rohit, I would like to comment briefly on the announcement we made on April 30 regarding our purchase of Olin Corporation’s liquid SHS customer contracts in the U.S. This was a good strategic move for Chemtrade for a number of reasons.
- First, it broadens our customer base and further solidifies our SHS business;
- Second, it gives us flexibility in sourcing product. We can source product from our own plant in Leeds, South Carolina, from Olin’s plants, which are under contract to produce product for us, or from ZhongCheng.
- It means that Chemtrade, through the ZhongCheng arrangement and this new Olin agreement, has expanded its total SHS business at minimal cost. And finally,
- On an EBITDA basis, we expect to earn a return in excess of 20% on the capital invested.
Now that our first quarter is behind us, we believe we are well positioned for the year. Our new powder SHS and salt suppliers are now in place and the costs associated with these transfers are largely finished. We have finished our two major plant turnarounds and expect our plants to operate with improved reliability. Additionally, we have been able to expand our business at minimal costs through the addition of new SHS customers.
Rohit will now review the financial results.
Rohit Bhardwaj
Thank you, Mark and good morning ladies and gentlemen.
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Let me start by explaining the restructuring costs and inventory revaluation costs recorded in the first quarter. As you know, we stopped producing powder SHS at our Leeds facility in December 2006. In the fourth quarter we recorded $2.7 million for severance and other costs required to effect the cessation of production. We said at the time that we expected to record approximately $1.5 million of additional costs in future periods as accounting rules require certain costs to be only recorded when they are incurred, and hence the charge in the first quarter. Additionally the accounting rules required us to revalue our inventory at the lower cost of the ZC purchased material, which adversely affected results by another $500,000. I would also like to point out that of the total $4.2 million that we have now recorded, $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 March 31, 2007, including the $2 million of restructuring and associated inventory revaluation costs, cash available for distribution was $6.6 million, or 20 cents per unit. However, excluding those costs, first quarter distributable cash was $8.6 million, or 26 cents per unit compared with $11.6 million or 35 cents per unit in 2006.
On this same pre-Leeds basis, EBITDA for the first quarter was $13 million compared with $15.7 million in 2006 generated from revenues of $128.7 million and $121.9 million respectively.
The principal reasons for the revenue increase over last year were generally higher volumes and prices for sulphuric acid in our North American Sulphur Products business and in International, offset by lower revenue from our regen operations because of the maintenance shutdowns of both Beaumont and Shreveport in the first quarter this year, as well as the prolonged shutdown of a major customer. Last year only Shreveport took its turnaround in the first quarter, although Beaumont did have some operating problems that affected production.
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Looking at the segmented results, the restructuring and inventory revaluation costs of $2 million were included in SPPC segmented results. Therefore, my comments on SPPC performance relative to 2006 will exclude these costs.
SPPC generated revenue of $72.9 million and EBITDA of $9.5 million in the first quarter compared with $68.3 million and $11.5 million, respectively, in 2006. There are a number of issues that led to these results. This segment was positively affected by additional volume and robust pricing on our merchant acid and ultra pure products, the benefits of which were tempered by the addition of a second major maintenance shutdown in the first quarter and the downtime taken by a major customer. The first quarter of 2007 also benefited from lower product costs for acid pursuant to provisions of a contract with a sulphur products’ supplier.
Also, during the first quarter of 2006, powder SHS costs were relatively low as that was the last quarter in which we obtained low cost sodium formate, a key raw material used to manufacture powder SHS. On a comparative basis, this difference in SHS costs negatively impacted the first quarter of 2007 by approximately $0.5 million.
Despite similar volumes and prices from Performance Chemicals, margins declined. Margins were negatively impacted by higher zinc costs in the first quarter of 2007 relative to the first quarter of 2006. The production of liquid SHS uses zinc and generates zinc oxide. Consequently, we have a natural hedge for the price of zinc as we buy zinc and then sell zinc oxide based on the London Metal Exchange (LME) pricing. Despite a rapid decline in the price of zinc during the first quarter of 2007, average zinc prices were almost double the levels experienced during the first quarter of 2006 and this adversely affected SHS results by approximately $0.9 million. This declining trend also had a negative impact on our results, as our zinc oxide sales pricing tends to lag zinc purchases by approximately two months and therefore in a rapidly falling market our zinc oxide sales revenues are out of step with our zinc purchases. This resulted in an additional cost of approximately $0.6 million, which would have been avoided under more stable market conditions.
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Pulp Chemicals reported first quarter revenue of $14 million compared with $13.3 million in 2006, and EBITDA was $4.8 million, compared with $5.5 million in 2006. The decrease in the first quarter 2007 net earnings and EBITDA is primarily the result of an increase in costs for salt, both for the new supply and during the transition, not all of which could be recovered from customers. A portion of these costs are not expected to continue since they relate to finalizing the transition of salt suppliers.
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International reported revenue of $41.7 million for the first quarter compared with $40.4 million in 2006. The increase reflects generally higher volumes and prices for sulphuric acid. Increased competition in European markets, which we anticipated and referred to in our last two conference calls, resulted in EBITDA of $1.4 million, down from $1.7 million last year.
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Corporate costs for the first quarter were $2.6 million compared with $3 million in 2006. The decrease of $400,000 is mainly due to receipt of the net insurance proceeds of $0.9 million from our Hurricane Rita claim. This was a long and complex process, and the amount we received was in line with our expectations. This was partially offset by a decrease in foreign exchange gains recorded and an increase in certain corporate costs.
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Finally, although we did cover it in our year-end results call, 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.
I’ll now hand the call back to Mark.
Mark Davis
Thank you, Rohit.
The first quarter came in slightly lower than we expected primarily due to the zinc cost issues that Rohit described. The decision to take turnarounds in the first quarter at both of our major regen plants had an unusual impact on the quarter’s results, but we decided on this course to correspond with a major customer’s maintenance shutdown. As you know, during last year we spent additional capital on both Beaumont and Shreveport to improve operating reliability and now that we have completed this year’s shutdowns as well, we look forward to improved operating reliability as we move into the important summer season.
The substantial changes we have made in our SHS business are a positive development for Chemtrade. With an expanded customer base and flexibility of supply, our full attention is on providing excellent customer service.
Some of these positive achievements will be offset by higher costs in some parts of our business, but overall, Chemtrade is in good shape. As previously indicated, we expect to deliver stronger distributable cash in the second half of the year than the first and we are still confident of delivering 2007 results that are similar to that achieved in 2006.
Finally, a brief comment on the review of strategic alternatives that is currently underway. There is very little I can add, except to say that the board of trustees, management, and our financial advisors are working through the process. At this stage, we are unable to say whether any specific strategic or financial transaction will result.
Before I hand the call back to the operator for the Q&A, I would like to remind you about our annual meeting which will take place this morning at 10 a.m. at the TSX Broadcast & Conference Centre. I hope some of you will be able to join us.
Thank you for your attention. Rohit and I would now be pleased to answer any questions you have.
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