Q3 2008 Results Conference Call
Mark Davis
Good afternoon, ladies and gentlemen. Thank you for joining us for our conference call and webcast today.
Joining me today is Rohit Bhardwaj, our Chief Financial Officer. We will review the third 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, and additional information on certain non-GAAP measures referred to in this call can be found in the disclosure documents filed by the Fund with the securities regulatory authorities, available at www.sedar.com.
Chemtrade had an exceptional quarter. Strong North American and international prices for sulphuric acid and sulphur were again the main drivers, but our SHS business was also ahead of last year, and Pulp Chemicals results were steady.
Distributable Cash after Maintenance Capex in the third quarter was 89 cents per unit, more than double last year’s 42 cents per unit. Our distribution rate was steady at 30 cents per unit for the quarter. All of our businesses contributed. For the first 9 months of 2008, we’ve generated distributable cash of $2.14 per unit and paid out 90 cents. Or, in other words, we’ve generated seven quarters of distributions in the first three quarters of 2008.
We are certainly cognizant of the rapidly changing global economic and financial conditions, but remain confident in our ability to continue strengthening the business and generating good results. I will have more to say on our outlook at the end of this call but first, a brief review of the third quarter.
We were pleased with the outstanding financial results we achieved this quarter, particularly since the Beaumont plant was off-line for the last five weeks of the quarter.
It was another good quarter for all of our businesses, particularly our SPPC and International segments. While our ability to capitalize on the strong market for sulphuric acid and international sulphur was the key factor, we’re also pleased with the underlying soundness of our other businesses.
Our SHS business generated higher sales that were enough to offset further rises in raw material costs, particularly liquid sulphur dioxide and caustic soda. Although there continues to be weakness in some SHS markets particularly newsprint, the actions we took a year or so ago to restructure our powder business have shielded us from much of this negative effect.
Pulp Chemicals had a third quarter very similar to the second. Volumes were down slightly over last year, but EBITDA was steady due to cost saving initiatives.
Let me give you an update on the Beaumont plant. As you know, the plant was shut down following an explosion in the furnace on August 21. Our immediate concern was for the two employees who were injured in the explosion. Both have now been released from the hospital and their condition is improving, but it will be a long recovery for them. Our thoughts continue to be with them and their families.
As noted in our last press release, we expect the Beaumont repair will take the balance of this year and the plant should be back on line for 2009. We have insurance coverage for both property damage and business interruption but we have not reflected any potential recovery in our third quarter results.
Before handing the call over to Rohit, I want to comment briefly on the settlement reached with the U.S. Environmental Protection Agency (EPA) whereby new emission limitations will be established at each of our five sulphuric acid manufacturing facilities.
The agreement with Chemtrade arises from a broader EPA initiative regarding the U.S. domestic sulphuric acid manufacturing industry which we have talked about in previous calls. Chemtrade’s plants will meet these stricter limits by various agreed dates ranging from December 2009 to December 2012. We anticipate that these actions will cost approximately US$6 million in respect of four facilities, most of which will be spent on our Riverton, Wyoming facility to meet the December 2012 timeline required by the EPA settlement.
Certain additional funds will be expended in respect of Chemtrade’s Cairo facility, but those costs will be paid for by Marsulex Inc. pursuant to an indemnity agreement between the two companies.
We are very pleased with the results of our dialogue with the EPA. The technical improvements we have agreed to make to our plants will further lessen the environmental impact of our operations. Our largest expenditure will enhance our ability at our Riverton, Wyoming facility to store and handle the by-product resulting from improved emissions control and provide Chemtrade with the opportunity to further develop a positive commercial contribution from marketing this product in a manner similar to our other plant locations.
I’ll now hand the call over to Rohit.
Rohit Bhardwaj
Thank you, Mark and good afternoon everyone.
As expected, the supply/demand characteristics for sulphuric acid continued to drive increased pricing and margins in the third quarter.
For the three months ended September 30, 2008, Distributable Cash after Maintenance Capital Expenditures was $30 million, or 89 cents per unit compared with $14.3 million or 42 cents per unit in 2007.
EBITDA for the third quarter of 2008 was $38.2 million compared with $19.4 million in the third quarter of 2007. Revenue was $394 million, an increase of $251 million over 2007. Most of the Fund’s products generated higher revenues year-over-year, but it was the significantly higher prices for sulphuric acid and sulphur that once again accounted for the majority of the increase. We achieved these results despite the impact of losing the last five weeks of production at the Beaumont plant.
Net earnings for the third quarter were $19.5 million, compared with $7.0 million in 2007.
Turning to the segmented results for the quarter, SPPC generated revenue of $164.6 million and EBITDA of $26.2 million compared with $84.6 million and $16.8 million, respectively, in 2007. The higher revenue reflected higher prices for merchant acid and sulphur.
The higher EBITDA was due primarily to improved margins on sulphuric acid, although the contribution from the SHS business was also higher than last year, despite higher input costs, particularly for caustic soda and sulphur-related materials. The higher prices for sulphuric acid more than offset the higher costs of sulphur and the impact of the incident at the Beaumont plant. As noted in the second quarter, the higher selling prices for acid reflects both the robust demand in the market and our success in recovering higher sulphur input costs, in the form of sulphur surcharges.
Pulp Chemicals reported third quarter revenue of $14 million compared with $14.8 million in 2007. However, EBITDA was $5.0 million, which was the same as last year. This was a result of lower costs this year due mainly to lower costs for salt, which were high last year as we transitioned to a new supplier. As well, certain logistics initiatives we implemented this year have resulted in lower costs.
International reported revenue of $215.4 million for the third quarter, compared with $43.8 million in 2007 and EBITDA for the quarter was $9.4 million, up significantly from the $2.3 million last year.
These improvements were a result of significantly higher prices and higher volume of sulphuric acid, and significantly higher prices for sulphur. Also, small volumes of uncommitted acid resulted in high margins. Finally, during the volatile market conditions prevalent in 2008, we have been able to better leverage our market knowledge and logistics infrastructure to significantly add value to suppliers and customers thereby improving our margins.
Corporate costs were $2.3 million lower in the third quarter of 2008 compared to 2007, mainly due to lower LTIP and incentive compensation accruals, totalling $2.3 million. I will mention two other factors that affect the comparison of quarter-over-quarter costs. Firstly, the third quarter of 2007 included $1.4 million of costs related to the conclusion of the strategic review process and a senior management change, whereas, the third quarter of 2008 includes approximately $0.5 million of costs related to the Beaumont incident. Secondly, the third quarter of 2008 was negatively impacted by higher unrealized losses on foreign exchange, partially offset by higher unrealized gains on natural gas swaps. The net negative impact of these two unrealized items was $0.7 million.
Maintenance capital expenditure in the third quarter was $3.1 million compared with $1.1 million in 2007. This rate of spending is in line with our earlier announcements and reflects both the escalation of costs for most capital projects due to high demand for skilled labour and materials, as well as additional projects we have identified to upgrade our plants for the long term. Maintenance capex for the nine months stood at $8.4 million, and we now expect spending for the full year to come in at approximately $20 million. This does not include costs to repair the damage caused by the incident at Beaumont facility which will be covered by insurance.
Before I hand the call back to Mark, there are a few other items I want to mention.
During the quarter we sold vacant land at our site in Leeds, South Carolina, resulting in a gain on disposal of about $0.3 million and generated cash inflow of $2.7 million.
We also made some changes to our long-term debt during the quarter. We converted our Canadian dollar denominated term debt into U.S. dollar term debt, and $25.2 million of our outstanding Canadian dollar lines of credit into U.S. dollar lines of credit. As at September 30, 2008, the Fund has term debt of US$153.1 million and has utilized operating lines of credit of US$25.3 million. The rationale behind this conversion is to have a better matching of the currencies of assets and liabilities on the balance sheet. This also reduces our net U.S. dollar denominated cash inflows as the entire interest expense will now be in U.S. dollars.
Due to the debt conversion, we collapsed our swap arrangements on our Canadian dollar denominated term debt and also entered into new swap arrangements with our principal banker in order to fix interest rates until 2010. These swap arrangements covered the entire amount of the converted U.S. dollar term debt and a portion of our converted operating lines of credit.
Finally, on September 23 we commenced a normal course issuer bid. At the end of September we had purchased almost 200,000 units at an average cost of $10.91 per unit. Since this is an automatic purchase plan, we bought units throughout the month of October at the then prevailing market prices.
I’ll now hand the call back to Mark.
Mark Davis
Thank you, Rohit.
An outstanding third quarter built upon the good results achieved during our first two quarters has resulted in an excellent year-to-date for Chemtrade. For the first nine months of 2008, we have generated Distributable Cash after Maintenance Capex of $2.14 per unit and paid out 90 cents per unit in distributions to our unitholders. Looking ahead 12 months to the end of September next year, we expect to generate distributable cash in excess of $2.00 per unit. This will enable us to continue building and improving our businesses while maintaining our distribution rate.
Clearly, these are very volatile times, and notwithstanding our strong performance this year, we know that Chemtrade is not immune from these effects. However, our business model makes us confident that we can achieve the guidance we have given. Let me explain in a little more detail.
Chemtrade’s business model and our ongoing initiatives are designed to deliver long-term sustainable cash flow even during times of fluctuations in commodity pricing. The three key components of this business model are:
- long term risk sharing contracts that mitigate the effect of typical commodity fluctuations;
- diversity of end use customers and industries; and
- geographic and product diversity.
These structural underpinnings are the basis of our business and need to be understood in connection with changes in the markets we serve. Let me briefly explain some of the contractual protections we enjoy. For example, fluctuations in natural gas input costs are contractually passed on to our regen customers. Another example is our Vale Inco agreement which shares the benefits/risks of price changes on sulphuric acid between Vale and Chemtrade. Much of our business is contractually structured including the Vale Inco agreement and regen agreements I’ve just mentioned, the ZhongCheng agreement for SHS and the Canfor agreement for sodium chlorate. These contracts help stabilize our earnings despite potentially significant changes to the market prices of the commodities we market or purchase. This underpinning to our business model is the foundation of our belief that we can generate cash flow sufficient to continue improving our business and sustain our $1.20 per unit distribution rate over the long term despite the peaks and valleys of commodity pricing.
Turning now to our outlook for the next 12 months, both our International and SPPC segments have contributed to the significant earnings growth this year. As we’ve said before, we expect that our International earnings should return to historic rates after this year. Our core businesses and earnings are focused in North America, and the outlook for these core markets remains positive for Chemtrade despite the current economic volatility.
In our SPPC group, the key driver has, and will continue to be, the growing margins on our merchant acid business. Many of you know that we obtain approximately 70% of our merchant sulphuric acid under a long-term risk sharing contract with Vale Inco. Chemtrade has been increasing its profitability even though Vale receives most of the benefit from increasing pricing. As we've explained before, the acid business is regional, and pricing is set by regional supply/demand characteristics. Our acid margins increased in the third quarter as old contracts were renegotiated at today’s pricing and this margin expansion should continue again in the fourth quarter. Our decisions earlier this year to maintain our long term customer relationships instead of pursuing short term spot opportunities are paying off as the current pricing environment in our core geographies – the U.S. Midwest and Northeast, and Canadian east – are expected to continue throughout 2009. These long term customers value the certainty and logistics of supply that Chemtrade provides.
Once Beaumont is repaired – a process which is under way and covered by insurance – our regen business should return to its normal level of profitability. As we said, we expect Beaumont to be back on line in 2009 and to start contributing at that time.
Moving on to Pulp Chemicals, this business continues to contribute, and the pricing of chlorate appears to be firm. As mentioned, the sodium chlorate market dynamics need to be considered in the context of our contracts. The majority of our pricing is set by contract with Canfor and varies with input costs, not the market price of chlorate. Accordingly, while about 25% of our chlorate volume is sold at prices determined by the market, the vast majority of our earnings are determined under the Canfor contracts which move with input costs, not the market price of chlorate.
Finally, turning to our International business. Most of the pricing volatility we've seen has been on international sulphur and, recently, downward pressure on international, or seaborne, acid. As we've said for some time, our international business model is based on matched contracts, not on taking significant positions on product. Although we've benefitted from high pricing this year on a small portion of our volume, we've never counted on this run rate continuing. Thus, the International business should revert to the norm – i.e., pre-2008 run rate as we've been saying. This might be in the fourth quarter or in 2009, but we’ve said and we know it will come. That's the business model and we're comfortable with the long-term sustainability of our business model.
For all of those reasons, we’re confident Chemtrade will continue to perform well not just for the next 12 months but over the long term.
Thank you for your attention. Rohit and I would now be pleased to answer any questions you have.
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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 you request. Your questions will be polled in the order they are received. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. One moment, please, for your first question. Your first question comes from Barbara Gray of Blackmont Capital. Please go ahead.
BARBARA GRAY: Thank you. Good morning, guys.
MARK DAVIS: Hi, Barbara.
BARBARA GRAY: Good results there. Couple of questions, first on the SPPC division, your revenue was $11 million higher than a year ago. How much is that due to the SHS volume acquired from Olin?
ROHIT BHARDWAJ: The SHS volume from Olin is not significant part of that addition in revenues.
BARBARA GRAY: Okay.
MARK DAVIS: Big driver was the increase in acid pricing.
BARBARA GRAY: Okay, and can you give us the year-over-year change in the prices for the acid?
ROHIT BHARDWAJ: Year-over-year change is probably in the magnitude of 20% or so.
BARBARA GRAY: So is it SHS?
ROHIT BHARDWAJ: No, I heard on sulphuric acid, sorry. You were questioning SHS or acid?
BARBARA GRAY: Yes.
ROHIT BHARDWAJ: Oh SHS...
MARK DAVIS: I think it is probably fair to say year-over-year is pretty much flat.
ROHIT BHARDWAJ: Yes.
MARK DAVIS: The revenue increase that you are seeing is primarily being driven by the increased acid prices.
BARBARA GRAY: Okay. Thank you. And the second question, so the ’08 maintenance CapEx, could we assume $10 million as a reasonable forecast, you said their prices are about 25% or 35% higher?
MARK DAVIS: We are still working through our ‘08 plan, but from what we have seen, I think that’s probably a fair assessment.
BARBARA GRAY: Okay and on the pulp side, what’s the year-over-year change in the price of sodium chlorate?
ROHIT BHARDWAJ: The year-over-year change would be in the neighborhood of about 10% to 12%.
BARBARA GRAY: And the price increase on salt costs?
ROHIT BHARDWAJ: That’s a lot higher. I think last year we even gave some indications, we said maybe in the magnitude of about 70% to 80%.
BARBARA GRAY: Okay, and one last question. In the strategic review you said that you would increase debt leverage if you made a strategic acquisition, have you talked with your creditors, your covenant right now is 3.5 times, could you get bridge financing to cover that or…?
MARK DAVIS: This is not frankly something that’s imminent If we think actually there is value for our company, our unitholders acquiring an asset that requires additional leverage, we will actually seek that at that time.
BARBARA GRAY: Okay. And you said in the comments that you would consider reducing or restricting the distributions, have you made that changes to your credit agreements?
MARK DAVIS: To reduce distributions would not actually be required on our credit agreement.
BARBARA GRAY: Okay, okay. Thank you very much.
MARK DAVIS: Thank you.
OPERATOR: The next question comes from Lorraine Gloster of MGI Securities. Please go ahead.
LORRAINE GLOSTER: Hi, Yes. I was wondering if you can comment on the peak assets if they were operating now in the quarter in the way that you had hoped they would be when you acquired them, are they meeting EBITDA expectations now?
MARK DAVIS: Yes, I will give you the short and the long answer. In the quarter yes, the operated the way we thought, and the assets are earning the money we thought they would, but a longer answer is; I think I have given this probably every quarter -- is that, we will continue to spend the money necessary to upgrade those assets and make sure that they actually run with increased reliability and efficiency. Last quarter, actually, they ran very well. I think as we said in other calls is the assets seem to have suffered from a little bit of benign neglect and every turnaround they actually – we actually make sure that they get better.
LORRAINE GLOSTER: Is that increase in the CapEx that were at – is that increase CapEx really for these big assets; spending more money on them?
MARK DAVIS: We are spending more money on them than we intended. But the big increase in the CapEx that we are indicating going forward really is being driven by how hot the market is for both skilled labor and materials.
LORRAINE GLOSTER: Okay. And just in terms of how turnaround for 2008, obviously they were hit in the first half significantly this year. What are your expectations for turnarounds in 2008?
ROHIT BHARDWAJ: Well, we are still finalizing the timing offered but it’s fair to say that again the bulk of them will be in the first half, whether they are re-skewed towards Q1 or not, we have not yet determined that. But there is a chance that we may again have two big regen plants turnarounds in Q1. Again, it's predicated on customer turnaround, but the timing itself (indiscernible) but it is safe to view in those –in the first half.
LORRAINE GLOSTER: Are they going to the same length as they were this year or they are going to be…?
ROHIT BHARDWAJ: Yeah, they should be, we didn’t have any really enormously long turnarounds in ‘07 and ‘08 should be no different, but they should be similar.
LORRAINE GLOSTER: Okay. So there – was there anything in that first half in terms of turnarounds, I guess taking out the regen and maybe looking at the Inco, was there anything in that first half that had abnormally long turnarounds, or is that typical for full year?
MARK DAVIS: Not that we are remembering right now, as we said was that one of our big base load customers did their major turnaround that comes every four years in the first half.
LORRAINE GLOSTER: Yeah.
MARK DAVIS: So there is a little knock on effect on that, but as far as plan physical turnaround times, there is nothing untoward there.
LORRAINE GLOSTER: So in terms of 2008, the only positive would be that when your regen customer is not taking the four year down time?
ROHIT BHARDWAJ: Well that one is not, but I think one of the customer this year was not as significant, but they are taking long turnaround. So on balance it should be – we should be operating at higher levels than last year, but I wouldn’t suggest it would be significantly higher, but it should be higher.
LORRAINE GLOSTER: Okay, I just want to see – can you just give us an update on your discussions with US Department of Justice on -- I guess the five plants?
MARK DAVIS: We continued to actually cooperate with them and actually dialogue with them, and there has been no resolution yet, but view is actually the cost of what the eventual resolution, the detail will be, it's no different than what we had said before.
LORRAINE GLOSTER: Okay. That’s great. Thank you.
MARK DAVIS: Thank you.
OPERATOR: Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by one. As a reminder if you are using a speaker phone please lift the handset before pressing the keys. Your next question comes from Nima Billoufrom Bloom Investment Company. Please go ahead.
NIMA BILLOUFROM: Good morning, Mark and Rohit.
MARK DAVIS: Good morning.
ROHIT BHARDWAJ: Hi, Nima. Good morning.
NIMA BILLOUFROM: Just a quick question, I know it’s – you are not planning on doing it immediately, but I guess why the – on the acquisition side willing to undertake leverage and sort of subordinate the distributions. With larger the most recent larger acquisition you’ve gone a bit off track and happened to spend – would it be more smaller acquisitions along the line of Olin with quick payback, like what sort of large acquisitions could be on that – I think, you see is adding significant volume for shareholders?
MARK DAVIS: Yeah, again if you go back to that again, I think the same thesis we have had since 2001 and that in the industry in which we participate, in the chemical industry which is that the general statement; a capital intensive industry is that size and scale actually has a whole bunch of benefit. So we are actually not saying, we are going to leverage up actually and go on a wild shopping spree. But actually if we do find something that actually that we think is actually great strategic value to us, and if there is a limit on our ability to actually finance that in the manner we traditionally have is that we think that the value for that asset strategic acquisition and how ways changing our structure a little bit as we look at.
NIMA BILLOUFROM: Do you see opportunities on the horizon, I mean in terms of some of your competitors exiting in the North American market and is this what is prompted that disclosure, like do you see people shedding assets on North American basis?
MARK DAVIS: Yeah, I think the chemical industry if you look at its history has a history of actually of people – congregating assets and then actually people taking them back apart.
NIMA BILLOUFROM: Okay.
MARK DAVIS: Okay, so this is I guess more of a statement as that we are really going to continue trying to do that what we think is best to create value which is actually give ourselves the ability to continue that size of the scale more or so than we think that ABC Company is shedding assets tomorrow.
NIMA BILLOUFROM: Got you. Now with respect to debt pay down, would you not even with sort of the modest excess cash generated after CapEx. Would you not consider a share buyback with the units yielding 14%?
MARK DAVIS: Yeah, we are not – and we can not hurry it to actually pay down our debt quite frankly – it’s we have no covenant issues right, you know the debt-to-EBITDA ratio actually gets a whole lot better when you make more money.
NIMA BILLOUFROM: Yeah.
MARK DAVIS: As apposed not so paying down debt, it’s just really thing one of the things we would like to do, but we like to do – much frankly more than dealers is actually to figure out how to spend money to improve and grow our businesses.
NIMA BILLOUFROM: Got you. So you mean by (indiscernible) at this time, it doesn’t (multiple speakers) rate?
MARK DAVIS: It’s a potential, but it’s – but we think it’s better value right now.
NIMA BILLOUFROM: Okay. And the final question, I guess, next quarter the corporate cost burden should diminished, right, like another 1.5 million would be added back because that was cost of the strategic review and that was 1 million (multiple speakers)?
ROHIT BHARDWAJ: Yeah, I think, you know, it was 1.4 we said between severance.
NIMA BILLOUFROM: Severance.
ROHIT BHARDWAJ: Severance and the strategic review, yeah, Q4 we don’t expect – we should be back to a more normal run rate.
NIMA BILLOUFROM: Great. Okay. Thanks very much.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from James Leung from Mackenzie Financial Corporation. Please go ahead.
JAMES LEUNG: Good morning gentlemen. Good quarter.
MARK DAVIS: Thank you.
ROHIT BHARDWAJ: Thank you.
JAMES LEUNG: Just, I realized that the sulphur prices have been quite high this last quarter, and can you just sort of help us try to understand how that relates to your cost and revenue, and how – and net -- net how about that actually sort of impacts your SPPC division?
MARK DAVIS: Yeah, let’s try – I will start by giving you a follow up, Rohit can follow up, alright is, you start I think with a general proposition that we sell about 1 million tonnes of acid in North America into the merchant acid market, okay. About 650,000 of those tonnes we sourced from Inco which actually had nothing to do with that sulphur pricing. Okay?
JAMES LEUNG: Okay.
MARK DAVIS: The other 350 comes out of our regen plants primarily where one of the raw materials inputs is sulphur.
JAMES LEUNG: Okay.
MARK DAVIS: All right so, to the – you know, we’ve always said that in our view we prefer lower sulphur prices than higher sulphur prices for the reasons I just outlined and having said that is to the extent that actually people are making sulphuric acid by burning sulphur primarily out of the regen and some more plants like that is people out there trying to recoup the costs of the increased sulphur pricing and right now the pricing for sulphuric acid seems to be outpacing the increase costs that were all incurring on sulphur. The markets are not directly – they are not identically related, but there is some kind of knock-on effects.
ROHIT BHARDWAJ: And James, one thing that might be useful to keep in mind is that typically for one tonne of acid we use about a third of a tonne of sulphur. So to relate the two in your mind you can think of, you know, if sulphur goes up 10 bucks a tonne, so well as acid goes up at least 3.50 per tonne you are still breaking even and current dynamics of that acid is actually far outpacing sulphur increases at that pace.
JAMES LEUNG: Okay, and the volume – on the volume side what would be relationship between those two in terms of sourcing. I think, I just want to clarify what Mark had said, just prior to your response?
ROHIT BHARDWAJ: Mark said roughly 350,000 tonnes were produced were based on sulphur and we use roughly a third of that, we call it a 120,000 tonnes of sulphur we do use sulphur in a few of the other products as well. But it’s not as significant as compared to the sulphur and the acid business. So it is a rough perspective 120,000 tonnes in the acid business manufacturing a little bit more in some of other business.
JAMES LEUNG: Okay. So net-net, you know, they are both ones – they are both 1 – 3 times, the other one is 1/3rd. So net-net there is essentially mutual, is that what you are saying?
ROHIT BHARDWAJ: Slightly – may be I have not explained that properly. So we make the – in our production plan we produced about 350.000 tonnes of acid. In that production we consume a third of that quantity of sulphur which means we consume 120,000 tonnes of sulphur, that’s the equation to think about.
JAMES LEUNG: Okay.
MARK DAVIS: Also that the price on a 120,000 tonnes of sulphur, okay, gets spread over effectively 1 millions tonnes of acid, right because we make some and we get some that’s not related to sulphur pricing.
JAMES LEUNG: Alright.
MARK DAVIS: Alright, does that help?
JAMES LEUNG: Yeah, that helps a lot.
MARK DAVIS: Okay.
JAMES LEUNG: Just on some of the other aspects of your business, just on pulp. Can you sort of give us, you know, you mentioned the some of the price between sodium chlorate and also being offset by higher input costs mainly salt. Now you going to have some price increases that you have announced. Now does that essentially also again covers your salt prices or how is that relationship, how is that?
MARK DAVIS: It doesn’t – again, I remember two things the first is 65% of the stuff we make in pulp chemicals the salt cost is passed through to Canfor. So we are dealing with the 35% of the material that Canfor does not purchase, okay, and salt cost increased really at the end, beginning of this year and last year since that time the sodium chlorate market itself actually has tightened and a number of the sodium chlorate producers have increased the price have announced price increases, actually there is a lot of round going on right now. So the price increases that we currently got and even the one that announced actually will grind into our extra salt costs on that 35%, but we are unlikely to have a completely – to ever completely recoup all those.
ROHIT BHARDWAJ: And for ‘07, we had told you earlier in the year that we expect – we expect that deficiency to be between $1 and $2 million for the year, and we still expect that ‘07 will come in at that, probably at the higher end of that range.
JAMES LEUNG: Just also – just again on the CapEx side, you alluded to sort of a longer term, sort of normalized rate of maybe $8 million a year?
MARK DAVIS: Yes.
JAMES LEUNG: And that ‘07 or ‘08 will be somewhat higher than that, I didn’t catch that with that initial number did you actually indicated a number?
ROHIT BHARDWAJ: Yeah, I think Barbara asked that question and she asked if $10 million was a fair characterization for CapEx for ’08 and they add up...
JAMES LEUNG: Okay, alright.
ROHIT BHARDWAJ: Yeah, that’s probably closer to $8 million.
JAMES LEUNG: With that sort of - by inference, what you say that that’s you probably wouldn’t undertake that kind of a – sort of a number if your underlying business hasn’t sort of pulling -- improved to a level where you feel confident enough that this number is sort of is – can be somewhat justifiable?
MARK DAVIS: I think two things is one is we feel comfortable that in your terminology it’s justifiable, but frankly, secondly is we have already said that we will spend the CapEx necessary to maintain our assets or improve our assets because actually we think that this is a long-term sustainable cash flow business and that means you have to take care of your assets, right, so you know, quite frankly it’s the escalation and the cost of the projects that we would typically do probably have some relation to actually how hot the economy has been which is driving some of the other pricing that we are actually getting on our earning stream. So there probably is a relation there, but even if there wasn’t, if the CapEx expenditure was higher and we felt it was necessary to maintain our assets, we would do it.
ROHIT BHARDWAJ: And part of that differential is coming from the escalations, but a part of it is we do have some improvement projects. I wouldn’t call them growth projects but improvement opportunities within our plans and some of those differences it comes from there as well. So it is something you look at, you know, pretty thoughtfully there is something that you got to do. There is something that actually makes sense because they improve the plant, and so we obviously do both of those.
JAMES LEUNG: Check my final question, just on the tax guidance that you gave out on, you know, less than 10% beyond 2011. How low can – how long do you think you can sort of hold that tax rate or is that just, well, how is the stability of that?
ROHIT BHARDWAJ: Well, I – first thing I think we need to be clear to what we are saying. We are saying that as far as the Fund itself, the tax rate imposed on the Fund, which is the new tax coming in 2011, there we don’t see an issue for the long haul being below 10% because the way we are – along the company, you know, restructuring we may do in terms of just moving a few entities around. We feel that given that the income streams coming to the Fund are in the form of foreign income or in the form of, you know, inter corporate dividend, we can continue to keep that at below 10%.
MARK DAVIS: On the assumption that the government doesn’t change the legislation.
ROHIT BHARDWAJ: Sure, of course, yeah, that's based on today’s facts and circumstances and, you know, and as I said we have to do a couple of things internally or in that structure to make it all happen, but we don’t see any issue with that being there for the long haul.
JAMES LEUNG: Thanks very much.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Ateet Agarwal from CIBC World Markets. Please go ahead.
ATEET AGARWAL: Hi, good morning gentlemen, couple of quick questions. One on the international segment, I was wondering if you could provide us some color or some details on, I guess, you know, I mean some of the issues that were discussed in the past, for example, I guess competition in Europe, or I think that you are seeing in terms of maybe signing up new contracts for the next year? So any color that would be helpful.
MARK DAVIS: Sure, as I think that our European team has actually performed this year better than what we had anticipated when we first gave the guidance that we talked, there are going to be weaker results internationally, you know, ’07 and ‘06. So I think that, you know, we did see increased competition, we did see some issues and actually the team over there has done a pretty good job of actually counteracting a bunch of those things and figuring out how to actually deliver, frankly more money than we had expected this year. So I would say, you want a general statement over the past, I am looking forward is we feel more comfortable with that business going forward than we did at the end of last year, we first talked about the potential weaknesses.
ATEET AGARWAL: And anything like specifically on contract size like guide us, I mean or is it…
MARK DAVIS: Well, you know, one of the things that we announced three to four months ago – I am forgetting now is the expansion of our Rotterdam terminal for example.
ATEET AGARWAL: Sure.
MARK DAVIS: And we expanded that against getting a long term contract which actually is now earning more earnings, but actually is long term stable earnings. So that would be the big single contractual addition to what was going on previously.
ATEET AGARWAL: Okay, thanks for that. And just a couple of, I guess line items here. Like I was looking the SG&A cost and there have been, you know, up significantly two days. So I was just wondering if you could talk about that a bit and maybe, you know, what do you expect going forward?
ROHIT BHARDWAJ: You are talking about the overall G&A cost?
ATEET AGARWAL: Yeah, excluding of course any restructuring charges in the past?
MARK DAVIS: G&A or SG&A?
ROHIT BHARDWAJ: Sorry, are you talking about SG&A?
ATEET AGARWAL: Yeah, SG&A.
ROHIT BHARDWAJ: I am sorry okay SG&A cost. I think as we mentioned and a couple of unusual things one in this quarter was $1.4 million as we mentioned regarding the management change and the cost for the strategic- review process, so both of those are not going to recur in Q4.
ATEET AGARWAL: Right.
ROHIT BHARDWAJ: And then if you look back at Q2, we have the LTIP costs that again were quite high, and on a normal run rate basis, it shouldn’t be that high. So overall I think, you know, you should factor those into your model and you should come back with, you know, an estimate for the year. If you take those out, we should end up similar to last year. So there isn’t really an escalation other costs happening.
ATEET AGARWAL: Okay, okay, and you mentioned, I was so wondering, is that was there any accrual in this quarter, was it accelerating?
ROHIT BHARDWAJ: No, it was – you know, what happens is unit prices went down, but there are a couple of factors in that calculation, all together one extra quarter of accruals to be done, the net results was, there was really no big impact to Q3 results.
ATEET AGARWAL: Okay, and one last question. Just on the interest expense, I mean I was trying to understand this thing, so you said like what we are seeing effective interest rates, well obviously, reduced quarter-over-quarter and not year-over-year, but and as well as, you know, you kind of pay down a little bit. So I was just wondering why the interest expense was higher quarter-over-quarter if…?
ROHIT BHARDWAJ: There are a couple of things, one you got to keep in mind that we did do the Olin acquisition and therefore increased our debt load for that. We also have to do that we used our operating lines of credit that are not swapped out at the favorable interest rate, so you pay a higher rate on the extent you use the operating lines.
ATEET AGARWAL: Okay.
ROHIT BHARDWAJ: You also have this accounting change where there is a bit of accretion costs built into that as well, so there was about $200,000 of accretion costs and that was the new financial instrument handbook section we put into place effect January 1. So there is a little bit of that non-cash interest expense there as well.
ATEET AGARWAL: Okay. That’s helpful, that’s if 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: Well, thank you. Just on the follow up on sodium chlorate.
MARK DAVIS: Damir, can you speak a little bit.
DAMIR GUNJA: I just want to follow-up on the sodium chlorate. I guess Canexus has supply coming on towards the end of this year early next year. I just want to make sure, is there a transportation differential there or will that sort of incremental supply impact you guys?
MARK DAVIS: Yeah, there are a couple of things going on there, I mean quick line again is we don’t take all factors, okay, more detailed explanation as that comes on in Manitoba, which is a long way from our customer base, and you have to read Canexus’s material again. My recollection is that they have given some pretty good indication that when their capacity comes down that they are likely also to take some capacity off, either one of their Alberta plants or a Quebec plant. So there is transportation difference for our customer base and I am not sure if you read Canexus' information that they are indicating its increase in capacity as opposed to more capacity in a lower power cost jurisdiction and exchange for setting down a higher cost place.
DAMIR GUNJA: Right, okay. Great.
OPERATOR: Mr. Davis, there are no further questions at this time. Please continue.
MARK DAVIS, (PRESIDENT AND CHIEF EXECUTIVE OFFICER): As usual, Rohit and I, thank you all for joining us, and we will talk to you next quarter. Thanks very much.
OPERATOR: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.
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