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Q2 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 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.
Overall, our businesses achieved solid performances in the second quarter and positioned themselves well for future performance. Our plants operated well and demand for our products was strong pretty well across the board. In several instances we achieved both volume increases and price improvements. Operationally, these positive moves were partially offset by the negative impact of the higher salt costs in Pulp Chemicals. Additionally, compared to last year, our aggregate results were negatively affected by higher corporate costs, which we will explain shortly.
Our operating businesses generated almost $1 million more EBITDA in the second quarter of 2007 than the same quarter of 2006, or almost $1.5 million higher if you exclude the last $0.5 million we incurred with respect to the cessation of powder SHS production at the end of the year. The current strength of the business is evident as the improvement over last year was achieved despite increased salt costs in Pulp Chemicals and less than anticipated volume from our largest sulphur products supplier and a key regen account. Both of these customers incurred operating issues in the quarter which reduced the amount of product normally supplied to us.
We made further improvements to our SHS business during the quarter with the acquisition of Olin Corporation’s liquid SHS business. This deal closed on April 30, so two months operations are included in the second quarter results.
As we said at the time of the acquisition, the addition is a good strategic move for Chemtrade. It gives us a significantly larger customer base as well as the flexibility of supplying our customers from our own plant in Leeds, from Olin’s plants in Tennessee and Georgia or with imported powder SHS.
The other benefit of the Olin acquisition was that it complements the sales and marketing arrangement we have with ZhongCheng for powder SHS in the U.S. That arrangement is working well for us. In the second quarter powder volumes were higher than the second quarter last year, and costs were lower because they are based on purchases from ZhongCheng.
Putting these two initiatives together – the powder sales and marketing agreement and the expansion of the liquid business with the Olin purchase – we have positioned our whole SHS business to compete more effectively and to be more efficient. The business is now in much better shape than it was a year ago with a broader customer base and less exposure to manufacturing risk.
Pulp Chemical’s results reflect the impact of increased costs for salt. Higher volumes of sodium chlorate and improved pricing were not enough to offset the increases. As you know, we changed salt suppliers at year end, and we anticipated that this input cost would increase and have a negative impact of up to $2 million on our results this year. This is the way it is now transpiring, although we continue to look for ways to mitigate the impact.
From an operations standpoint, it was a successful first half of the year for Chemtrade. The major regen plant turnarounds were completed smoothly and those plants are operating with improved reliability. Input costs for some products continue to present challenges. However the strong demand for our products and resultant pricing environment coupled with our continued efficiency and reliability initiatives should be more than sufficient to mitigate the cost pressures.
Rohit will now review the financial results.
Rohit Bhardwaj
Thank you, Mark and good morning everyone.
For the three months ended June 30, 2007, cash available for distribution was $10.5 million, or 31 cents per unit compared with $12.6 million, or 37 cents per unit in 2006.
EBITDA for the second quarter was $16.3 million compared with $19 million in 2006 generated from revenues of $130.2 million and $134.6 million respectively. As Mark said, these results reflect improvements in the operating businesses, offset by increased corporate costs. The major corporate cost increases compared to last year are significantly higher accruals for LTIP (approximately $3.1 million). We also incurred the remainder of the costs associated with the Leeds closure (approximately $0.5 million). Combined, these costs negatively affected second quarter distributable cash by about 10 cents.
Net earnings for the quarter were $5.1 million compared with $4.9 million in 2006.
The principal reason for the decline in aggregate revenue over last year was the adoption of the new CICA Handbook section on Financial Instruments. This required us to record certain sales transactions in the International segment on a net margin basis. Revenues in SPPC increased principally due to higher volumes of SHS and strong merchant acid sales. SPPC also recorded comparatively higher revenue as a result of the Beaumont plant operating this year, whereas last year we took the maintenance shutdown in the second quarter. Pulp also recorded higher revenues in the quarter.
Turning to the segmented results, the last of the restructuring costs of $0.5 million were included in SPPC segmented results.
SPPC generated revenue of $78 million, $7.1 million above last year. EBITDA of $14.9 million was $1.8 million higher than the same period last year. As already noted, robust merchant acid prices and the availability of additional acid from our Beaumont regen plant this year were the major contributors to the improved results.
The other item that had an effect on our comparative results was the timing of our major regen plant turnarounds this year. As you know, we took maintenance shutdowns for both Beaumont and Shreveport in the first quarter this year to coincide with a prolonged shutdown by one of our major customers, whereas last year the Beaumont turnaround was taken in the second quarter. This year’s results, therefore, include normal production from both of these plants
Performance Chemicals benefited from the strategic initiatives taken to reposition the SHS business.
Powder SHS volumes were higher than 2006 and costs were lower, both a result of the sales and marketing arrangement with ZhongCheng. In the case of liquid SHS, the positive impact of the Olin business for two months of the quarter was more than offset by higher net costs for zinc.
As I noted on the last call, 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. Last year we had unusually favourable zinc oxide sales, which resulted in a very low net cost for zinc.
Pulp Chemicals reported second quarter revenue of $14.6 million compared with $12.9 million in 2006, and EBITDA was $4.4 million, compared with $5.3 million in 2006. Although volumes and prices were higher than last year, it was not enough to offset the impact of the higher salt costs. As we noted on our recent calls, we did not expect to be able to recover all of the increased costs from our customers, and estimated that the higher costs would impact Pulp Chemicals’ EBITDA by $1 to $2 million this year.
International reported revenue of $37.5 million for the second quarter compared with $50.7 million in 2006. As I just mentioned, the decrease is due to the adoption of section 3855 of the CICA Handbook. EBITDA of $1.8 million was similar to last year.
Corporate costs for the second quarter were $4.9 million compared with $1.2 million in 2006. The increase was mainly due to accruals for LTIP of $3.1 million. The accruals relate to both the 2006 transitional 18-month LTIP that was paid in July this year, and the 2006 and 2007 LTIPs that are not payable until 2009 and 2010 respectively. The accrual recorded with respect to these two plans in this quarter was affected by the increase in unit price as of June 30. The actual payouts however, will be based upon total shareholder return achieved over the three-year performance periods of each plan. The nature of this calculation makes it difficult to forecast the amount of LTIP expenses that will be recordable in any period as it depends on future distributions and unit price changes.
I’ll now hand the call back to Mark.
Mark Davis
Thank you, Rohit.
Operationally our results show improvement over last year. Even with the sizable increase in accrued corporate costs that Rohit described, our earnings for the quarter and first half of the year were only slightly lower than we expected. Excluding those costs the business results were actually better than we had anticipated.
The initiatives we have pursued – stronger customer relationships, plant reliability and increased stability of earnings – are paying off. As we have mentioned before, certain of our input costs are increasing; however, we believe that our initiatives and the market dynamics for our products will be sufficient to offset these cost pressures. As indicated in our previous releases we are now well positioned to deliver stronger distributable cash in the second half of the year than the first. We also believe that our businesses are now positioned to deliver earnings in the next twelve months that will be stronger than the twelve months just ended.
As we said in our news release, the process to identify and evaluate strategic alternatives available to Chemtrade is ongoing. It's an active process, but as we said, there can be no assurance that the review will result in any specific strategic or financial transaction.
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 Barbara Gray with Blackmont Capital. Please go ahead.
BARBARA GRAY: Thank you, good morning guys.
MARK DAVIS: Hi Barbara.
BARBARA GRAY: When you announced the strategic review four months ago what was the motivation behind that and has anything changed since then because you have made stronger customer relationships with the two agreements you’ve signed, and what is the timeframe for the strategic review?
MARK DAVIS: Well the impetus for the strategic review has always been the same. As everyone on the phone knows, with the government’s tax changes we felt it was incumbent on us to actually make sure we evaluated all possible ways of maximising unitholder value, so we are continuing to do that and we’ll come to resolution of that evaluation as promptly as we can. But that was the main driver, it is just making sure that the corporate structure that we’re currently operating in and the corporate environment or the environment we’re operating in remains beneficial to our unitholders.
BARBARA GRAY: And can you give us the percentage change year-over-year in terms of the price of zinc and also the price of salt?
ROHIT BHARDWAJ (Vice President Finance & Chief Financial Officer, Chemtrade Logistics Income Fund): Barbara, can you repeat the question?
BARBARA GRAY: In terms of the raw material costs increase.
ROHIT BHARDWAJ: Yes.
BARBARA GRAY: Can you give us the percentage change year-over-year for the price of zinc and the price of salt?
ROHIT BHARDWAJ: Okay, I’ll start with zinc. Zinc costs per se are not up that much in Q2 versus Q2 last year. The bigger factor that affects the comparative results is that last year we had a couple of really unusually high zinc oxide sales, and we actually mentioned in our conference call last year as well that we did not expect those to be repeated. So that’s why that comparison is unfavourable. If you look at it versus Q1, zinc is actually cheaper than it was in Q1 and so we’re actually doing better on that front.
In terms of salt, what we have said is that it’s going to affect us by roughly $2 million, between one and two, and probably at the higher end of that range as we mentioned last time. That’s going to be the impact in this year, and that impact is after we have already recovered Canfor’s proportionate share of that increase, so that’s the net increase.
MARK DAVIS: We don’t know the percentage increase. I think in rough terms actually it probably cost us twice as much and most of that is due to the fact that we used to get salt from Alberta, now we get salt from Chile.
BARBARA GRAY: Oh okay.
MARK DAVIS: So it’s basically transportation based.
BARBARA GRAY: And one last question; can you give us an update in terms of the Department of Justice investigation into the SHS plants?
MARK DAVIS: Sorry I don’t … the only Department of Justice investigation I know of is the one that dates back to the late 90s into the sulphuric acid industry.
BARBARA GRAY: No, because back in Rhodia, Department of Justice settled with Rhodia for….
MARK DAVIS: Oh okay. Yes.
BARBARA GRAY: Sulphuric acid plants.
MARK DAVIS: Sorry, sulphuric acid plants.
BARBARA GRAY: Yes.
MARK DAVIS: We continue to discuss with the EPA what actions, if any, are necessary for our plants and we’re having very productive discussions with them. I think as we said in the last call, we don’t see our capital exposure or fine exposure to be anywhere close to actually what the Rhodia element was. So we’re having ongoing discussion but really nothing that’s material to report.
BARBARA GRAY: Okay, is there a stated timeframe, an expected timeframe for a decision there?
MARK DAVIS: No.
BARBARA GRAY: Okay thank you.
MARK DAVIS: Thanks.
OPERATOR: Your next question comes from James Leung from Mackenzie Financial. Please go ahead.
JAMES LEUNG: Good morning guys.
MARK DAVIS: Hi James.
ROHIT BHARDWAJ: Good morning.
JAMES LEUNG: Just following up on Barbara’s question exploring the spread between zinc oxide and zinc. Maybe I’ll ask the question a little bit differently. Now, I noticed that you said zinc prices year-over-year were basically not that different but the spread between zinc oxide and zinc were actually, there’s a much more bigger difference. So what would be the difference on that spread to … what’s the impact of that to your EBITDA? Can you quantify that?
ROHIT BHARDWAJ: We typically don’t break them down by detail but if you want a rough idea it would be in the range of about a million dollars.
JAMES LEUNG: For this quarter?
ROHIT BHARDWAJ: Yes.
JAMES LEUNG: Because I know on the salt you gave a $1 to $2 million annual number but on zinc…
ROHIT BHARDWAJ: Yes but, James, don’t extrapolate that million dollars for the year.
JAMES LEUNG: Okay.
ROHIT BHARDWAJ: In Q2, the reason why it looks like its unfavourable is because last year we had the unusually high recoveries of zinc oxide, but that was only isolated to Q2 of last year.
MARK DAVIS: There was a one off pick-up last year of about a million bucks.
JAMES LEUNG: Okay, which wasn’t there this year.
ROHIT BHARDWAJ: It wasn’t there this year and we actually even said last year that it’s unlikely to recur.
JAMES LEUNG: But if I were to interpret your answer then this is much more difficult to quantify versus something like the salt in your pulp chemicals, because that’s something that you can probably extrapolate, but for this you cannot. Is that what you’re saying?
MARK DAVIS: Or maybe if you want another way, Q2 this year would be a more indicative earnings rate than Q2 last year for the SHS business. We never thought that the zinc oxide recovery we got in Q2 last year was a run rate or sustainable number. I think we said that in that conference call.
JAMES LEUNG: Okay.
MARK DAVIS: Does that help you?
JAMES LEUNG: Just on the two months of contribution from the Olin acquisition, did Olin make an EBITDA contribution that is positive for this quarter?
MARK DAVIS: Oh yes The Olin deal is doing as we thought it would do. Rohit’s comments were that the increased EBITDA is offset by the zinc difference.
JAMES LEUNG: Okay and just on the pricing for your merchant asset and volumes, can you shed some additional colour as to what sort of contribution they made to your bottom line or top line or both?
MARK DAVIS: Yes volume wouldn’t be drastically different year-to-year. Sales prices moved maybe. …
ROHIT BHARDWAJ: 10 percent.
MARK DAVIS: 10 percent?
ROHIT BHARDWAJ: 10 percent.
MARK DAVIS: Now of course, as you all know, if net back sales price moves 10 percent, actually Inco will get 6 percent of that, right?
ROHIT BHARDWAJ: Yes.
MARK DAVIS: So magnitude wise that’s what happening in the acid market.
JAMES LEUNG: Just on your LTIP, the way that your press release reads, this is really an accrual; that these haven’t really been paid yet so when would you have the final numbers and, generally, would they be expected to deviate from that number that was calculated and press released?
ROHIT BHARDWAJ: Yes. So James, first off we do have quite a bit of disclosure on this in our proxy circular but just to summarise it, there was a conditional plan that was started on January 1, 2006 that had an 18 month timeframe, so that actually did get calculated at the end of June or early in July, and that actually got paid out by the end of July. But the other two plans, which are 2006 and 2007 plans, those will not get, calculated in finality until… the first one will be at the end of 2008, and the next one will be end of 2009. And this is subject to change, you know, on an almost daily basis; not almost, actually on a daily basis depending on what’s happening with the unit price and the distribution rate. So roughly, half of that accrual is related to these two plans that are long term and you can now unfortunately expect this to fluctuate every quarter because we have to almost mark-to-market them. You know, I wouldn’t quite say that for the distribution element, but the unit price element of shareholder return has to be mark-to-market every quarter. We’d expect, unfortunately, serious fluctuation but the final determination doesn’t take place for, one and a half years in one case; it’s two and a half years in the other case.
JAMES LEUNG: Okay, and my final question would be on your CAPEX, is the $7 or $7.5 million for the year still good or are you …?
ROHIT BHARDWAJ: Yes, I already told you we spent roughly $3 million for the first six months and we’ve told you we’ll spend roughly 4, just over 4.4 in the back half. The number may slip around a little bit, more because of these projects and the timing of these project sometimes depend upon, actual conditions in the factories and what we do but it will be in that neighbourhood, maybe a little bit shy of that, but for now you can just assume that.
JAMES LEUNG: Thanks very much guys.
ROHIT BHARDWAJ: Thank you.
OPERATOR: Your next question comes from Nima Billou from Bloom Investment Council. Please go ahead.
NIMA BILLOU: Good morning gentlemen.
ROHIT BHARDWAJ: Hi.
NIMA BILLOU: Can we just run through some of the factors that are going to enable you to generate more distributable cash in the back half than in the first half? And then the second question that I have is there, because of the inability to recover I guess some of the increases in the input costs, is the pulp chemical EBITDA margin sort of set at a permanently lower level in terms of the low 40s or maybe high 30s as opposed to 42, 43 percent prior?
ROHIT BHARDWAJ: That’s a lot more than one question.
MARK DAVIS: But we’ll handle them for you.
NIMA BILLOU: All right.
MARK DAVIS: Back half versus front half, and I’ll look at Rohit as I answer this. There are three big hitters. One is the major regen turnarounds in the first half of the year not the second. Okay? Secondly the SHS business always has its strongest quarter by far in the third quarter. Thirdly, is the pulp turnaround is in the first half of the year versus the second half of the year. And then I think the last factor I’ll add actually is that there continues to be pressing momentum for our merchant acid product in particular, and some actually pricing additions on other products that don’t kick in until the last half of the year.
ROHIT BHARDWAJ: Yes, and if you look at Q2 we said call it $0.32 without restructuring and we’ve got $0.09 of LTIP accrual in there. Actually from a business point, it’s closer to $0.41 and, even though you can’t always annualize that stuff but in the back half last year we did $0.75, if you remove the restructuring costs. So we’re, pretty comfortable that based on what improvements you’re seeing in Q2 that we’ll be able to carry those improvements forward and keep flat to last year.
NIMA BILLOU: And do you think you can keep flat to last year without any of the noise like the $0.75?
MARK DAVIS: Yes.
ROHIT BHARDWAJ: Oh yes.
NIMA BILLOU: And on the pulp side, again just kind of wondering?
MARK DAVIS: Yes, I don’t think it’s necessarily a permanent reduction in margin. It takes time, but if you read some of the other public guys who are in the chlorate industry actually, price increases have been announced and pricing is moving up. Now what is stable is our recovery in our pricing and margin on the Canfor volume because that’s passed through, but we expect to be able to get price increases from our non-Canfor volume which over time will actually increase the margin versus where it was in Q2.
NIMA BILLOU: And on Canfor is that an immediate pass through or how long will that ….?
ROHIT BHARDWAJ: It’s a one quarter delay so this quarter’s costs get factored into next quarter’s price.
NIMA BILLOU: Okay so there will be a little bit of that recovery next quarter to help aid the consolidated margin for that segment.
ROHIT BHARDWAJ: No, because that’s from a cash flow perspective.. So, I gave you a cash flow answer not an accounting answer. So for accounting you won’t see that lag.
NIMA BILLOU: Final question then I’ll get back in the queue. SG&A. I just wanted to run through why that doubled again compared to the previous quarter. Is that all LTIP?
ROHIT BHARDWAJ: It’s all LTIP and there’s a little bit of noise in the exchange line. We booked about $400,000 lower exchange gains than last year same quarter.
NIMA BILLOU: Yes.
ROHIT BHARDWAJ: The $400,000 came from exchange differences and the rest is all LTIP. Other than that it’s not that much more.
NIMA BILLOU: No, there’s about 5 million. So 3.1 is LTIP, right? $400,000 is what you’re telling me on the FX, so there’s one and a half million in there.
ROHIT BHARDWAJ: Well what are you comparing what with what, Q2 versus Q2?
NIMA BILLOU: Q2 versus, yes, Q2 last year.
ROHIT BHARDWAJ: Okay let me….
NIMA BILLOU: 10.093 versus 5.5 so 4.5, sorry.
ROHIT BHARDWAJ: Yes I was talking in specific about the corporate SG&A but I don’t think the other SG&A,…. now we did look at the other SG&A but there is one other thing that we did this year that’s a little different . Within the businesses we created an SG&A category that captures some shared services for the businesses.
NIMA BILLOU: Okay.
ROHIT BHARDWAJ: All those costs used to be in the gross margin line but are now tracked and captured separately in the SG&A line.
NIMA BILLOU: Okay.
ROHIT BHARDWAJ: But I don’t think they are of that magnitude so the answers that I’ve given you are focused on corporate SG&A, not the business SG&A as such.
NIMA BILLOU: Yes if you would look at it in total it’s about 1 million unexplained because 3.1 is LTIP, 400 is add-ins; it’s a 4.5 million difference.
ROHIT BHARDWAJ: Okay so a good chunk of that would be just this - the way we are capturing these shared services for the businesses.
NIMA BILLOU: Okay listen, thanks for your candour. I’ll jump back in.
ROHIT BHARDWAJ: Yes thanks.
OPERATOR: Your next question comes from Gerry Hannochco from Genuity Capital Markets. Please go ahead.
GERRY HANNOCHCO: Oh hi there, I think James got most of the questions I was going to ask but just to be certain and clarify, so the $3.1 million on the LTIP about half of that is for the transitional ’06 and 1.6 in the quarter is an accrual for the full year ’06 and ’07 programs?
ROHIT BHARDWAJ: Roughly yes.
GERRY HANNOCHCO: Okay thanks guys.
MARK DAVIS: Thanks.
OPERATOR: Your next question comes from Greg Smith from Bertrand Capital. Please go ahead.
GREG SMITH: Hi guys.
ROHIT BHARDWAJ: Hi.
MARK DAVIS: Hi Greg.
GREG SMITH: I just wanted to ask another question on the LTIP and just understand that a little bit better. The range of costs that relate to the 2007 plan is 1 million to 7 million is that right?
MARK DAVIS: Yes.
GREG SMITH: And that would be paid out in 2010?
ROHIT BHARDWAJ: That is in 2010 and the range to be clear, is actually zero to seven because we if don’t achieve the minimum threshold then there is no payout; so there’s no guaranteed payout.
GREG SMITH: Right okay.
MARK DAVIS: I mean the quantum you’re seeing in this quarter, again for everyone’s perspective, is because the unit price ran up 20 percent in a very short period of time. So these are mark-to-market on June 30 unit prices.
GREG SMITH: Right, so essentially if you were to mark it today, we would see a good chunk of that 1.6?
MARK DAVIS: It would be less.
GREG SMITH: It would be reversed right?
MARK DAVIS: Right.
GREG SMITH: Okay and the 2007 plan, is the idea that there’s a new plan every year that is essentially a three year plan?
MARK DAVIS: Exactly.
GREG SMITH: Okay so we can think of the 1 to 7 million as the total cost of that plan as being kind of an annual type of range of payouts or zero to seven depending on how the performance goes.
MARK DAVIS: Yes I think that’s good.
ROHIT BHARDWAJ: Yes.
GREG SMITH: Great thanks guys.
MARK DAVIS: Thank you.
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’re using a speakerphone please lift the handset before pressing the keys.
Your next question is a follow-up question from Nima Billou from Bloom Investment Counsel. Please go ahead.
NIMA BILLOU: I know it’s only a small amount but just a question on the international business. Has there been any progress on that? I know there’s some difficult competitive situations but just trying to get an idea of whether or not you can restore some of the margin.
MARK DAVIS: Oh yes. The international business, I think if you compare this year to last year is virtually flat quarter-to quarter so the guys over there have done a very good job of finding opportunities and that business is actually performing above what we had anticipated for the year and we expect it to continue.
NIMA BILLOU: Would you, or could you almost extrapolate this quarter as a run rate for the year in terms of potential for that business?
ROHIT BHARDWAJ: Maybe not. I mean because of the nature of the business sometimes there’s the timing of transactions that happen so I wouldn’t try to extrapolate it but if you look at it last year I think on international business we generated about $9.2 million for the year EBITDA.
NIMA BILLOU: That’s right.
ROHIT BHARDWAJ: So right now we are tracking at.
MARK DAVIS: 3.1 or something.
ROHIT BHARDWAJ: 3.1.
NIMA BILLOU: Yes.
ROHIT BHARDWAJ: So, I don’t thing there would be an issue if you extrapolated the run rate for the year, rather than just Q2 and that probably would be more reflective.
NIMA BILLOU: Okay so it will be obviously lower than last year by a magnitude of 1 or 2 million, a couple million.
ROHIT BHARDWAJ: Yes that’s it.
NIMA BILLOU: The other question I had just with respect to hedging. You guys have hedged 50 percent out to ’08 in terms of US dollar exposure.
ROHIT BHARDWAJ: Actually 50 percent was what we had anticipated but we made some changes to the business that have reduced our exposure to the US dollar and so that 50 percent now is actually probably closer to, 80 percent of our needs, 70 to 80 percent of our needs for next year but up from 50 percent.
NIMA BILLOU: And when do you guys take a look at hedging again, in terms of ….?
ROHIT BHARDWAJ: We are looking at it all the time actually and you know we are looking at fine tuning. Obviously, if we can do things to increase our natural hedges, that’s our preferred route because that way we don’t have to worry as much about financial hedging but we do look at those two things together and see where the fallout is then we will be considering doing some financial hedging too in the short term.
NIMA BILLOU: And just to refresh what were the changes again to reduce that?
ROHIT BHARDWAJ: Well one of the big ones was our salt deal which unfortunately had repercussions in terms of profitability but on a natural hedging perspective the salt being bought now is all in US dollars.
NIMA BILLOU: Gotcha.
ROHIT BHARDWAJ: Previously it was Canadian.
NIMA BILLOU: Okay thanks very much.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Ateet Ajarwal with CIBC World Markets. Please go ahead.
ATEET AJARWAL: Good morning gentlemen, just a follow-up question on the international segment. I was wondering like the expectation for a lower year-over-year EBITDA, is it like the concerns regarding the competition are the same o ris anything else that happening in that sector?
MARK DAVIS: I think what we said actually after Rohit first mentioned it, there’s two things happening to the international sector that’s reflecting our views of this year. One actually was competition particularly within Europe for some of our businesses, and the second factor was that we had a long-term supply of relatively inexpensive product that we sold to a customer base. The company that was giving us that product increased their own production so they needed the product internally. So what we did is kept the customer base but had to supply a much higher priced product so it squeezed the margins and over time we have to readjust that customer base to getting used to paying a higher price to restore the margins. Those are the two things that have actually happened that led to our belief of lower profitability this year.
ATEET AJARWAL: Okay and just on the maintenance shutdowns so I understand, in addition to the two major plant shutdowns last quarter first mentioned I guess in the previous call, that there are some more shutdowns this quarter like pulp, and I believe some acid plants. So just wondering was there an impact of that?
ROHIT BHARDWAJ: On a comparative basis there was not much impact because Pulp, for example, we had a shutdown in Q2 but we had it last year as well in Q2 so really from a comparative basis there was no big impact other than the one big one we talked about.
ATEET AJARWAL: Okay thanks for that and I guess just on the Olin purchase price, looking at the initial press release when that announcement was made, it said a purchase price of US 7.3 million and I was looking through the Q2 MD&A and it says US 6.04 so I just wanted to make sure if I’m missing something.
ROHIT BHARDWAJ: No, I think you’re observant at picking that up. What happened was when we did the press release, clearly the deal was just done and it was based on some estimates of EBITDA and things got finalised and some adjustments were made and so what was said, is in our books now and is the right number.
ATEET AJARWAL: Okay. That’s great; that’s it from me. Thank you very much.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Damir Gunja from TD Newcrest. Please go ahead.
DAMIR GUNJA: Oh thanks, can you just update us on the Marsulex lawsuit claim and maybe what the next milestone would be sort of timing wise, if you have a sense of that?
MARK DAVIS: There’s actually not really much to update and I don’t know what the timing milestones are is, Yes I think in a typical litigation process at some point in time you exchange documents and schedule discoveries and that has not yet been done.
DAMIR GUNJA: Okay thanks.
MARK DAVIS: Thank you.
OPERATOR: Mr. Davis, there are no further questions at this time. Please continue.
MARK DAVIS: I’d like to thank you all for joining us today and Rohit and I will talk to you.
OPERATOR: Sorry for the interruption Mr. Davis, this is the operator.
MARK DAVIS: Yes.
OPERATOR: We do have a question on the line. Would you like to proceed?
MARK DAVIS: Sure we’ll have one more question.
OPERATOR: Oh perfect it’s a follow-up question from James Leung from Mackenzie Financial, please go ahead.
JAMES LEUNG: Just apologise for interrupting your closing comments guys.
ROHIT BHARDWAJ: No problem.
MARK DAVIS: Only for you James, you know that.
JAMES LEUNG: Thanks. Just on, just a quick question on your powder SHS business which - have you changed the business model of that segment? Rohit you said that your revenues actually went up and your costs went down. So on the spread basis, what would be the contribution of that change to your Q2?
ROHIT BHARDWAJ: Well, again we’re getting into a level of detail we typically don’t, but to give you a rough idea, it’s up about half a million bucks.
JAMES LEUNG: Okay.
ROHIT BHARDWAJ: It went up a half a million bucks.
JAMES LEUNG: Okay. Thanks. Proceed with your closing comments guys.
MARK DAVIS: Thank you James. Anyway, thank you all for joining us for this quarters conference call and Rohit and I will look forward to talking to you all again at the end of next quarter. Thank you.
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