Annual and Q4 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. We 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, 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.
As set out in our press release, we generated 48 cents per unit of Distributable Cash after Maintenance Capex in the fourth quarter while continuing our distribution rate of 30 cents a quarter. Clearly, it was a good quarter for Chemtrade.
During 2007 we implemented or continued a number of initiatives designed to strengthen and stabilize our business both operationally and financially. These actions positioned us to take advantage of the favourable market conditions for our products. Among these key initiatives were the continued investment of capital to enhance the long-term reliability and efficiency of our plants, and a number of actions to stabilize our SHS products.
Before looking at the latest results in detail, I would like to briefly recap 2007.
You may recall that entering 2007 we provided a few cautionary notes. We indicated that the second half of the year would have stronger results than the first half; certain raw material cost pressures could offset some of the benefit we sought to achieve from our 2006 initiatives; and that our International business was facing some competitive pressures. Essentially, this is how the year unfolded, the one notable exception being that our International business did much better than any of us anticipated.
We continued and will continue to improve the operating reliability of our plants, as this is a core component of our business strategy. Our upgrades started a little earlier than we had expected as our plans were accelerated by the effect of Hurricane Rita, which hit our Beaumont plant soon after we acquired it in 2005. Since then, we have continued to invest in our assets. We expect this attention to have benefits going forward and place us in a strong position to take advantage of the buoyant market for acid that evolved during the year and which I will comment on later.
Regarding our SHS products, some of the costs for the cessation of operations of our powder SHS plant were required to be booked in 2007. However, the repositioning of our SHS business, including the plant closure, the marketing arrangement with ZhongCheng, and the purchase of the Olin assets in May 2007, substantially stabilized these products’ earnings potential. We obtained new sources of product, eliminated our risk of manufacturing costs for powder SHS and similar to sulphur products also share the risk and benefits of movements in end market pricing on powder SHS.
Turning to our Pulp Chemicals business, it operated well throughout the year, although the benefit of higher selling prices for sodium chlorate were not enough to offset the increased cost of salt, a major production input, which we’ve mentioned earlier.
International had an excellent year, culminating with an exceptionally strong fourth quarter. This was a result of the very tight international market for sulphuric acid. This was a pleasant result because at the end of 2006 it looked as though increased competition in Europe would result in lower earnings from our International segment.
Turning now to the fourth quarter results, each of our operating groups produced strong performances. The key driver was the strength of the sulphuric acid market, which was a continuation of the trend we started to experience during the third quarter. The Sulphur Products & Performance Chemicals segment benefited from our ability to implement sulphuric acid price increases and from consistent volumes of SHS products. Higher revenues were offset to some extent by the stronger Canadian dollar, and earnings were restrained by higher costs for sulphur and by net zinc costs, which Rohit will explain in more detail. Operating issues at a few refinery customers also had a slight negative impact, as our regen sales were lower than they could have been if those refineries had operated well.
Pulp Chemicals’ plant operated well again in the fourth quarter, although the financial improvement over 2006 reflects to some extent the disruption to production in December 2006 caused by our then salt supplier declaring force majeure. Costs were higher due to increased cost of caustic soda and salt. Some of these higher costs are recoverable under our long-term supply contract with Canfor. The improved selling prices for chlorate help our non-Canfor sales, although the increases have not been enough to fully offset the higher input costs.
We believe that we performed well in 2007. Our initiatives strengthened and stabilized our business. Chemtrade generated distributable cash after maintenance capital expenditures of $1.47 per unit in 2007 excluding the costs to stop powder SHS production which had to be booked in the first half. Further, excluding the costs in the third quarter related to the senior management change and the strategic review, distributable cash was $1.54 per unit.
At the beginning of the year we indicated that 2007 distributable cash results should be substantially similar to 2006 and that we expected to generate more distributable cash in the second half of the year than the first. This is exactly what occurred. Distributable cash generated in 2007 comfortably covered our distribution payments of $1.20 per unit for the year.
The strategic initiatives we implemented over the past couple of years are paying off. The acquisitions that broadened our product and customer base and extended our geographic reach, the actions to stabilize our SHS products, and the investment of additional capital to improve operating reliability and efficiency, all played a role in delivering the solid results that were apparent in the second half of 2007. Challenges will always arise in our business, but the latest results demonstrate that we are well positioned to deal effectively with those issues.
Rohit will now review the financial results, after which I will have some remarks on our outlook for 2008.
Rohit Bhardwaj
Thank you, Mark and good morning everyone.
For the three months ended December 31, 2007, Distributable Cash after Maintenance Capital Expenditures was $16.1 million, or 48 cents per unit compared with $8.9 million, or 26 cents per unit in 2006. The fourth quarter of 2006 included $2.7 million of restructuring costs related to the Leeds plant closure, so excluding those costs, the comparable distributable cash for the fourth quarter 2006 was $11.6 million, or 35 cents per unit. So the fourth quarter this year was 13 cents per unit or more than 37 percent higher than last year, even after adding back the 2006 closure costs.
EBITDA for the fourth quarter of 2007 was $22.7 million compared with pre-Leeds EBITDA of $16.6 million in the fourth quarter of 2006. EBITDA for each year was generated from revenues of $144.6 million and $146.9 million respectively. The decline in revenue is misleading as it is related primarily, as we have noted on recent calls, to the adoption of the new CICA Handbook section on Financial Instruments that required us to record certain sales transactions in the International segment on a net margin basis. In reality, virtually all of our products actually generated increased revenues in this comparable time period and these increases more than offset the impact of the stronger Canadian dollar on our U.S. dollar denominated revenues.
For the full year 2007, excluding $2 million of Leeds shutdown costs incurred in the first half, Distributable Cash after Maintenance Capital Expenditures was $49.5 million, or $1.47 per unit, compared with $49.1 million, or $1.46 per unit in 2006, also pre-Leeds. Consolidated revenue for 2007 was $546.6 million versus $552.1 million in 2006 and EBITDA, before the Leeds costs in both years, was $71.4 million compared with $68.1 million. Again the revenue decline is the result of the accounting change mentioned above.
From a business operating perspective the year-over-year increase in EBITDA is better evidence of the strengthening of our businesses. In our segmented results the businesses in aggregate generated EBITDA in 2007 of $88.5 million, an improvement of $8.4 million over 2006 EBITDA of $80.1 million. (Both of these numbers exclude the Leeds shutdown costs). The difference between these results and our net EBITDA increase of $3.3 million is in the corporate cost section.
The corporate cost increases relative to 2006 were mainly due to costs associated with the Fund’s LTIP, a senior management change and to activities connected with the review of strategic alternatives. In aggregate these amounts equal $6.1 million.
Net earnings for the fourth quarter were $9.1 million, compared with $5.4 million in 2006, and for the full year, net earnings were $22.7 million compared with $18.8 million in 2006. These amounts exclude the restructuring charges in both years and the non-cash charge of $12.3 million in 2006 with respect to impairment in the value of property, plant and equipment used to manufacture powder SHS.
Turning now to the segmented results for the fourth quarter, the 2006 restructuring costs of $2.7 million were included in SPPC segmented results while there were no similar costs in 2007. My comments on SPPC 2007 performance relative to 2006 will exclude these costs.
SPPC generated revenue of $73.8 million and EBITDA of $12.9 million in the fourth quarter compared with $72.5 million and $13.3 million, respectively, in 2006. The higher revenue reflected higher prices for merchant acid and higher volumes of SHS. However, these were partially offset by the effect of the stronger Canadian dollar and lower volume resulting mainly from operating issues at a few refineries. From an EBITDA perspective, the benefit of higher acid prices was also offset by higher sulphur and net zinc costs. With respect to the zinc costs, although lower zinc costs are good, the period in which they decline is adversely affected. As you probably recall from previous calls, we offset our zinc costs with sales of by-product zinc oxide. There is typically a lag between the purchase of zinc and the sale of zinc oxide and when prices are falling, we absorb the decline in prices during the lag period.
Pulp Chemicals reported fourth quarter revenue of $14.6 million compared with $13.1 million in 2006, reflecting higher volumes and selling prices for sodium chlorate. The increase also reflects the disruption to production and sales that occurred in December 2006 due to our salt supplier declaring force majeure. EBITDA was $5.3 million compared with $4.3 million. The costs for salt throughout 2007 were higher than in 2006, which we expected following the change in supplier. We continue to look for ways to mitigate the impact.
International reported revenue of $56.1 million for the fourth quarter, which was $5.3 million lower than the fourth quarter of 2006. However, as I just mentioned, the decrease in revenue is due to the adoption of Section 3855 of the CICA Handbook. Revenue from international acid sales was up substantially on a per tonne basis as product was sold into a very robust acid market. Our ability to use our network of infrastructure and relationships enabled us to place a relatively low quantity of sulphuric acid at very high margins due to the tightness in the international sulphuric acid market. As a result, EBITDA for the quarter was $9.4 million compared with $3.5 million last year. Although we are, of course pleased with this result, we do not expect the magnitude of this quarter’s earnings to continue.
Corporate costs for the fourth quarter were $4.9 million compared with $4.6 million in 2006. However, gains and losses on our currency hedging program are included in corporate costs, and if we ignore these, fourth quarter corporate costs were actually $1.6 million higher than in 2006. Most of this was due to accruals for the LTIP and annual incentive compensation.
During the fourth quarter of 2007, there were no net foreign exchange gains as realized gains were offset by unrealized losses, whereas during the same quarter of 2006, there was a net foreign exchange loss of $1.3 million.
Total capital expenditures for the fourth quarter were $4.7 million in 2007 and $3.3 million in 2006. Of the spending in the fourth quarter this year, $2.8 million was for maintenance capital requirements, bringing total maintenance capex for 2007 to $6.9 million. Most of the non-maintenance capital expenses during the fourth quarter were related to the expansion of the Rotterdam terminal. The project appears to be on track and we expect it to be completed by the fall of 2008.
As we noted on our last call, the high demand for skilled labour and materials has led to increased costs for most capital projects of 25-30% and we expect, therefore, that our annual maintenance capex spending will be higher than the rate we had previously indicated. We have stated previously that we expected our maintenance capex to be about $7.5 - 8 million. Accordingly, we expect 2008 maintenance capex to be about $11 million. We expect these expenditures will continue to improve our plants’ reliability.
Finally, an update on foreign exchange. We continue to be in quite good shape. As you know, to manage the predictability of our cash flows, we entered into a series of foreign exchange contracts that hedge that portion of Chemtrade’s U.S. dollar based cash flow that is expected to be converted into Canadian dollars. As of December 31, 2007, substantially all of 2008 has been effectively hedged at approximately 83 cents.
We estimate that a one-cent change in the Canadian/U.S. dollar exchange rate impacts distributable cash after maintenance capital expenditures by less than $150,000 annually. Again, this is not an issue for us in 2008 as we are almost completely hedged, but affects our unhedged position post 2008.
Also, to remind you of the way we account for foreign exchange, our business segments already use a spot rate to record their transactions and so their results reflect the stronger Canadian dollar. We record the benefit of the hedge in the Corporate segment.
I’ll now hand the call back to Mark.
Mark Davis
Thank you, Rohit.
The second half of 2007 illustrated the capacity of Chemtrade to generate strong cash flows. Despite some non-recurring corporate costs and upward pressure on some raw material inputs, we generated Distributable Cash after Maintenance Capital Expenditure of 90 cents per unit, substantially more than the 57 cents we generated in the first half of the year.
We will continue to invest in improving the operating reliability of our plants. It is critical that we are able to take advantage of these buoyant market conditions and to do so we must be able to operate at maximum capacity. As Rohit noted, we expect, therefore, to increase our total capital spending in 2008, some of that being a reflection of the higher labour and material costs for the projects we anticipate. Due to our maintenance shutdowns and seasonality of some of our products we again anticipate that the first half of 2008 will generate less distributable cash than the second half of 2008.
Despite the higher capital spending, we expect to generate similar levels of distributable cash in 2008 as we did in 2007.
As we look ahead, we are confident we can maintain the momentum. We anticipate generally stable demand for most of our products, and robust demand for sulphuric acid.
As some of you may have seen or heard, the pricing for both sulphuric acid and sulphur have increased dramatically, and this upward trend is continuing. I think it is important to give you some input or perspective on these issues and how they affect Chemtrade.
There are really two factors at play in the acid market. First is the supply/demand characteristics of acid itself, and second is the price of sulphur. Due to the supply/demand tightening for acid, pricing has and continues to increase, and one industry publication has indicated that pricing for acid in the U.S. southeast has increased by over 50% in the past year. Most of this price increase has been driven by the lack of acid supply to service the growing demand for acid in fertilizers, metals leaching and bio-fuels. As we have previously discussed, acid is generally a regional market and the regional supply demand characteristics dictate pricing. While each region is different and, as you know we don’t generally sell into the fertilizer market, the pricing trend mentioned above is similar to what we are seeing in many of the regions we serve.
Very recently the somewhat different supply/demand characteristics for sulphur has led to the benchmark price for sulphur, which was about $60 per tonne for some time, to spike to over $250 per tonne. This will again lead to acid prices increasing not due to any change in the acid supply/demand balance but rather as producers seek to recover this increased input cost.
Our fourth quarter results show some of the benefit of the higher acid pricing we were starting to achieve before the sulphur price escalated. We believe that we will be able to maintain this increased margin due to the acid market’s own supply/demand balance throughout 2008, and that we will be able to obtain additional price increases to offset the increase in the sulphur input costs.
Industry experts seem to agree that the current high price environment for sulphuric acid will continue through 2008 and only moderate slightly in 2009. As most of you know, Chemtrade does not receive all the benefit from higher pricing due to our contracts which share benefits; however, the higher acid pricing environment is clearly a benefit to Chemtrade and one we anticipate will last throughout 2008 and well into 2009.
Thank you for your attention. Rohit and I would now be pleased to answer questions.
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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 key 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 are using a speakerphone before pressing any keys. One moment please for your first question. Your first question comes from James Leung of McKenzie Financial. Please proceed.
JAMES LEUNG: Good morning gentlemen. Congratulations for an excellent quarter.
MARK DAVIS: Thank you James.
JAMES LEUNG: Just wondering if you guys would like to -- would share some light on what's your view with respect to your current debt levels and now that you have a very comfortable cushion of distributable cash over distributions and it looks like you will may continue for 2008 at least. Any thoughts of whether you want to pay down your debt somewhat?
ROHIT BHARDWAJ: James, as you know, we have got some operating lines of credit on our balance sheet. We obviously have some term debt as well. So the logical thing is for us to keep chipping away at the operating lines because, you know, there is a benefit to us as we get our debt-to-EBITDA ratio to drop as we get some interest savings. If you remember from our credit agreement, our interest rate is driven by our debt-to-EBITDA ratio and as we drive back down we will get some reductions in interest costs and so also being in operating line then get down to the flexibilities they will need to grow back into it, we can always get some more borrowing capacity if we need it.
JAMES LEUNG: Thanks. Just next thing a question with respect to the way that some of the deltas or changes quarter-over-quarter of your EBITDA in your SPPC and International division, obviously both of them have seen big changes quarter-over-quarter. First on the international of – it looks you have increased your EBITDA by about $7 million and your topline in that division is about $12 million, can we sort of attribute to that difference -- the $12 million, the $7 million, that sort of the margin that you we were able to obtain because of the current tightness in the sulphur on the acid pricing?
ROHIT BHARDWAJ: Sorry. Is that third quarter versus fourth quarter, James?
JAMES LEUNG: Yeah just the quarter-over-quarter, you know, the $12 million revenue and $7 million in EBITDA.
ROHIT BHARDWAJ: Frankly, we actually haven't analyzed it that way, but I can tell you it wouldn't surprise me. We haven't analyzed it that way is what has happened in our quarter we try to indicate through our conference call script is from a very small quantity of supply that we had that didn't have a prearranged dedicated customer is we made out very well in today’s acid market. So, you know, I wouldn't be surprised if your numbers were correct, but I am not positive.
JAMES LEUNG: Okay. Just also on the SPPC specifically, there was a mention of some operating issues at a few of your customers. Can you sort of -- and also, Rohit, you mentioned still there is a lag between the zinc cost and the zinc oxide, there is a time lag between those two. Can you sort of quantify the impact of those two specifically in this quarter?
ROHIT BHARDWAJ: Yeah, I will quantify the zinc impact, so Q4 of 2007 with the Q4 of 2006, the net impact of zinc was about $1.5 million and to give you a perspective, 2006 LME for zinc started at about $0.85 a pound, went up to $2 a pound by the end of 2006 and then started a downward journey coming back down to about $1.05 by the end of 2007. So, if you think back to Q4 of last year, there was a very rapid increase in the fourth quarter and this year fourth quarter was rapidly declining. So that's why there was about $1.5 million impact. In terms of the customers on the refinery side, we had, you know, a couple of our refiners who had some operating issues, there is some impact there, but given the current merchant acid market, the impact is not as much as would be in a more, you know, going back to market conditions from a year ago. So, I would probably, you know, focus on the zinc side of things if you are looking for the differences.
JAMES LEUNG: Okay. Just also on -- just trying to attack this on the volume side, the difference differential -- or the uptake in volumes in international and the volumes down take in SPPC in the quarter-over-quarter, can you sort of help us in trying to understand the dynamics of those?
MARK DAVIS: Quarter-over-quarter analysis of SPPC is actually probably not that instructive to you, because if you remember we have some seasonality in that segment...
JAMES LEUNG: Okay.
MARK DAVIS: Both in ReGen business and sodium hydrosulfite businesses have their peak earnings in the third quarter. So I would suggest you to better analyze it Q4 versus Q4 then Q3 issue.
JAMES LEUNG: Yeah, sure. Just on your currency hedging and next for the update on 2008. What's your view or your strategy going forward for 2009 because I don't think that has been mentioned?
ROHIT BHARDWAJ: No, we have not currently hedged 2009. We are, I think as we mentioned in the past, we have continued to look for ways to get some more natural hedges on our business. We have been successful through 2007 to reduce our exposure to US dollar by natural hedging, that continues to be our focus. We will be looking at in the next few months how we can further increase that natural hedge and then to the extent we will probably have some expose position to the US dollar, then we will enter in some financial hedging, but I think it's going to be less than it has been in the past. So but we will do some hedging most likely into '09.
JAMES LEUNG: Thanks very much. I will queue up if I have anything further.
MARK DAVIS: Okay. Thanks James.
OPERATOR: Your next question comes from Chris Blake of Scotia Capital. Please proceed.
CHRIS BLAKE: Good morning gentlemen.
MARK DAVIS: Hi Chris.
ROHIT BHARDWAJ: Good morning.
CHRIS BLAKE: I have got a couple of extra questions here and couple of more already have answered, but I just want to touch back on the maintenance CAPEX and you mentioned you wanted to improve some of your reliability issues, could you give us a further color on what those kind of issues are, and secondly just how the maintenance CAPEX guidance you gave will be distributed for 2008 on a quarterly basis, is that more front-end loaded or back-end loaded? I want to know if that's going to continue at that level for 2009?
MARK DAVIS: Yeah. Obviously, the term around improving reliability and efficiency is a good generic language, is what we have been saying for the last couple of years is particularly on the ReGen plants that we have acquired in 2005, is every time we take a maintenance turnaround is actually we take extra time and spend extra money than traditionally was done to just improve the quality of the assets which will have obviously a reliability and efficiency payback. So, we have been doing that since we got these plans and we are going to continue. The big increase in the capital expenditure estimate is more due to the escalation of labor and material costs particularly in the US Gulf Coast region, which is where our big facilities are. So that I think it was either last quarter or the quarter before that we actually said that we anticipate coming back down to our about $8 million run rate once the market for labor and materials cools, we don't see that in 2008. I am not sure it's going to happen in '09, but 2010 actually is probably when it, you know -- certainly, the quick answer is '08 is our number, I don't think it's going to be substantially different in '09, hopefully it comes back down to lower rates in a less frothy market down there by 2010.
ROHIT BHARDWAJ: And on your question on the period, it won't be totally front-end loaded, but you can expect the first half to be a little heavier than the second half, but not to the extent where, you know, it will be a massive in one half versus the other half.
CHRIS BLAKE: Okay, very good. And just with respect to your guidance with respect to flat distributable cash year-over-year, could you give us a sense with respect to what type of pricing assumptions that you have built into your models to come up with that estimate in terms of acid and sodium chlorate increases?
MARK DAVIS: No, I don't think I am going to do that. The sodium chlorate is less of an issue, as you know, because 65% of it goes to Camfor, right. So it's basically fixed margin...
CHRIS BLAKE: Right.
MARK DAVIS: We definitely do have some sodium chlorate price increases built into our assumptions, which we feel quite comfortable on, but again it's for a small amount of volume. We actually – what's more instructive, I will suggest to you then acid price increases, which I would rather not tell you what's there, is actually that we think that the margins we can obtain will actually be similar or improved off fourth quarter because again, remember we are battling two or three things here as well, the supply-demand characteristics for pricing is good, is we risk share or give a bunch of that benefit to Inco for one and for second on the products that we have produced for sulphur that price is going up. So and I can tell you is that I would not give you our pricing forecast, but I can tell you that we think that the margins on acid that we enjoyed in Q4 ought to be continued or maybe expanded despite whatever happens in the marketplace.
CHRIS BLAKE: Okay. And with respect to – could you give us maybe little color with respect to whether it's higher than the average for 2007?
MARK DAVIS: Yes, it will be. But the problem, yeah, if you go back to what I said in the script and you have heard this before, is acid itself is a very regional market.
CHRIS BLAKE: Right.
MARK DAVIS: Right. So it's tough to generalize about pricing. We will see more -- we will see healthier margins for acid in '08 than we saw in '07. And we started to see healthier margins in the fourth quarter, but it should be even healthier in 2008.
ROHIT BHARDWAJ: And please, I guess, if you look at all of – if you look at 2008 versus 2007, just keep in mind that Mark’s comments on d-cash is after maintenance CAPEX, which we said is going to be up, you know, call it $4 million -- $3 million to $4 million. And the other thing is international segment, as you have now seen the annual results are really high and we do not anticipate that to continue in '08, which means that even to come in flat we are in the headwind of CAPEX and of International. So there will be a healthy increase in SPPC, but it gets whittled away by those two factors.
CHRIS BLAKE: Right. Now, actually -- my next question with respect to your international segment and much better than expected, with respect to your comments for this year, is it just a matter of you not able to buy some or this quarter, I guess, you benefit from that having specific customers, you were able to sell to the spot market, is that not going to be the case in 2008 or…
MARK DAVIS: That business actually is not organized to or not designed to actually follow that business model, right?
CHRIS BLAKE: Yeah, that's was what I was telling…
MARK DAVIS: Right. The business model is matched back-to-back contracts.
CHRIS BLAKE: That's why I was quite surprised to see that.
MARK DAVIS: But having said that is that there were some regions in the world where traditionally we have actually, over the last number of years, not been able to be an active participant. So we actually secured, as we said, small quantities of volume more than a year ago to actually give ourselves an inroad to those regions and by securing those small amounts of volume in an acid market that actually completely ran away from, I think, most people’s expectations as we made disproportionate profits under a small volume. So that's not something that actually is long-term sustainable nor something that we tried to create. We took these small positions to expand the business not actually for any other reason.
CHRIS BLAKE: Do you still have that small volume of acid available in '08?
MARK DAVIS: We should continue to benefit for some of that in 2008 and 2009 should revert to the mean.
CHRIS BLAKE: Okay. Very good. That's it from me. Thanks.
MARK DAVIS: Thanks.
OPERATOR: Your next question comes from Neema Ballou of Bloom Investment Counsel. Please proceed.
NEEMA BALLOU: Good morning Mark, Rohit.
MARK DAVIS: Hi Neema.
ROHIT BHARDWAJ: Hi Neema.
NEEMA BALLOU: Congratulations on another strong quarter. It's nice to see things going along without any hiccups.
MARK DAVIS: Well, let me tell you we enjoy it too.
NEEMA BALLOU: I know someone has already asked the question. Rohit, in terms of the debt though, forget about an immediate pay down, but what about refinancing in light of the current interest rate environment versus the penalties you pay on prepayment, have you guys been looking at that?
ROHIT BHARDWAJ: Well, I guess firstly, you know, our credit agreement matures in August 2009. So we have got, you know, I guess 18 months or 17 months to go, and also the interest rate environment right now, you are right, is good, the credit environment is not that good, which means that even though you can benefit from, you know, the lower interest rates, but keep in mind that our operating lines are already on floating rates, on 90-day floating rate, so we pick up the benefit there anyway. Our term debt was hedged out and we have hedged at pretty attractive levels. Now, I have to say that in today’s interest environment market rates are actually on the lower hedge rate, but not significantly…
NEEMA BALLOU: What was the hedge rate again?
ROHIT BHARDWAJ: Our hedge rate is…
MARK DAVIS: About 5%, right?
ROHIT BHARDWAJ: Yeah, less than 5%.
NEEMA BALLOU: No, that's very good.
ROHIT BHARDWAJ: So, we are not in bad shape, anyway, but the credit market is such that so you could pick up possibly something on the variable rate, but then you may end up paying a higher margin to the bank just because there's still a general tightness in the credit market. So, I think, you know, we will be – we always look at that – we always look at, you know, what's the right time, we don't want to let our credit agreement run to the last day by any means, because we do not want to be in that position. So, we will be -- our minds are already turned towards…
MARK DAVIS: By the way, there is no penalty for paying off early?
NEEMA BALLOU: Alright.
MARK DAVIS: So that to the extent that any of your bank friends are listening on this call and want to propose to us…
ROHIT BHARDWAJ: There is no penalty.
MARK DAVIS: A beneficial terms, we would be happy to look at it.
ROHIT BHARDWAJ: Yeah.
NEEMA BALLOU: So, then Mark in terms of, I mean, the cash is growing a little bit on the balance sheet, are there just plans for small incremental acquisitions along the line for the Rotterdam or Olin as they come up or are you just holding some cash for flexibility or CAPEX?
MARK DAVIS: Well, I guess the short answer is yes to all of that. The first thing as Rohit has mentioned before, is we don't mean to be sitting on as much of cash as we ended up with at the end of the year. We had a couple of big receivables come in like on the last day of the year, which is good news, right?
NEEMA BALLOU: Yeah.
MARK DAVIS: So, first thing we will do is, as Rohit said is we will pay down the line, this is only onto the extent that we can, and to the extent we are going to keep on looking for, you know, small tuck-ins and ways to actually enhance the business. So, I guess further to a question that was asked earlier is, I guess, I can refer one back to the press release we issued when we actually announced at the end of our strategic alternatives review, which, you know, to the extent we generate excess cash, we have a number of different purposes we can use it for and certainly everything we have talked about is, you know, fits into those purposes.
NEEMA BALLOU: Just sort of housekeeping again, the estimate for a total CAPEX for '08 to '09, is this a 10 million range?
ROHIT BHARDWAJ: Well, we said '08 is probably closer to $11 million and '09 is bit of a moving target because we don't know how the cost factors are going to play out. There's talk about the US economy is slowing down a little bit that may have an impact or may not, because this is a very region specific and industry specific. So, you know, if you want to try and model it out, yes, probably in that range, maybe a little bit less than, but then somewhat in that ballpark for '09 as well.
NEEMA BALLOU: And, the final question, I guess, you have already answered that international may benefit, obviously, you have cautioned that it is not going to be sustainable at the level shown in fourth quarter, then where will the increase in EBITDA come from if international is not sustainable? Is the Pulp segment going to show a little bit of that cost recovery, because the margins weren't as good for '07? Is it going to be more reliability and margin expansion on the sulphur product side?
MARK DAVIS: Pulp will be a little better. SPPC will be better for reliability, volume, acid pricing, SHS, market stability, I could keep going, ReGen, you know, so the big uptake you will see is in the SPPC segment for a myriad of reasons that I have mentioned.
NEEMA BALLOU: Okay. Thanks very much.
MARK DAVIS: Thank you.
OPERATOR: Ladies and gentlemen, if there are any additional questions at this time please press the star key followed by the one. As a reminder, if you are using a speakerphone please lift the handset before pressing any keys. Your next question comes from Arnold Whitman of Appaloosa Management. Please proceed.
ARNOLD WHITMAN: Hi guys, great quarter.
MARK DAVIS: Thank you.
ARNOLD WHITMAN: I was curious in terms of what sulphuric acid price were the range that you guys had going through this quarter? Was it closer to still the lower end that we saw about six months ago of around 50 or is it closer to 100? And where do you see that market going as we watch the sulphur markets around…
MARK DAVIS: Again, it's a very difficult question to answer because this a very, very regional market, right. And it depends on whether or not you have long-term customers or whether or not actually people are scrambling to pick up spot customers, right. So, you know, the pricing has gone up through the year and I guess what I would rather do is actually instead of telling you our pricing is, I could tell you that if you take one of these industry publications, they have indicated that pricing in the US, Southeast has gone up from the lowest of all the time -- it gone up…
ARNOLD WHITMAN: Well, they have – I think they are talking about something like…
MARK DAVIS: Guys that are buying spot volume have gone up by 50%.
ROHIT BHARDWAJ: Yeah from $80 to like $130.
MARK DAVIS: Alright. So, for the past year, it has gone up 50% from 80 to 130 and as I said earlier in our comments is we think pricing continues to strengthen partially due to sulphur input cost push on some of the guys on that volume that use as sulphur to produce it.
ARNOLD WHITMAN: Do you think that the Gulf Coast sulphur prices will continue to move up the way we have seen Vancouver improvised with some of the international prices as high as 600 buck sulphur?
MARK DAVIS: Yeah. Again, I usually say the experts are always wrong and the questions when they are wrong, but they are calling for another significant price increase in the second quarter and these things are basically, you know, quarter benchmarks. So, I think it will move up again in the second quarter. They are talking about sulphur, and as a generalization, they are talking about sulphur pricing moving back down probably in late '09, 2010 because there is more supply coming online in the sulphur market in that timeframe.
ARNOLD WHITMAN: Okay. And I guess with that increase, is there a reason why we shouldn't expect you guys to realize the majority of you stated 0.6 per each dollar move in sulphuric acid?
MARK DAVIS: No. There is no reason to assume that we won't get that.
ARNOLD WHITMAN: Okay. Alright. Thank you very much guys.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Bert Powell of BMO Capital Markets. Please proceed.
BERT POWELL: Thanks. Mark, I just wanted to revisit the chlorate merchant market in the Pulp business. Is there contracts limiting ability to put price increases through or that is just – that's the market rate at this point?
MARK DAVIS: You are talking about us specifically or the industry as a whole?
BERT POWELL: No. I am talking about you specifically. My understanding, the industry pricing actually is pretty good.
MARK DAVIS: Yeah, and we are increasing pricing as well. Your general statement about chlorate contracts, including ours, is very often they will actually have a price and you could adjust it quarterly, but sometimes no more than twice a year.
BERT POWELL: Okay. So as we roll through '08, there will be some ability to kind of move that up?
MARK DAVIS: That's right.
BERT POWELL: Perfect. Okay. And just on ZC, how has that been performing, I guess part A; and part B is have you expanded that, you know, your opportunities geographically and also by industry for that business?
MARK DAVIS: ZhongCheng has been performing very well for us, right, as I will tell you that the coordination between their logistics folks and our logistics folks has been extraordinary and customers have been supplied. . So, they performed very well under contract. We have expanded slightly in North America with the advent of their product to let us get some business - a little business we didn't or didn't have previously. Outside of North America, it has been – we haven't expanded as much as we had originally hoped, we might have an opportunity to primarily because the sodium hydrosulfite market in China has tightened substantially so that our partner could actually make more money keeping his product at home than actually providing it to us to try and access export markets.
BERT POWELL: Okay.
ROHIT BHARDWAJ: And I guess, Bert, from a cost perspective there have been some pressure, as you know from our contracts, you know, we have some exposure to their rising Chinese currency versus the US dollar...
BERT POWELL: Right.
ROHIT BHARDWAJ: And also the Chinese government eliminated the export VAT base that was given to all exporters back, you know, a few months ago.
BERT POWELL: Okay.
ROHIT BHARDWAJ: Those two factors had cost pressures obviously, we are, you know, getting through some traction, getting that passed on to customers.
BERT POWELL: Okay. But ZC self supplies on the costing, right?
MARK DAVIS: ZC essentially starts with a lump of coal and a tonne of sulphur and makes everything they need.
BERT POWELL: Okay. Perfect. Thank you very much.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Ateet Agrawal of CIBC World Markets. Please proceed.
ATEET AGRAWAL: Hi good morning.
MARK DAVIS: Good morning.
ATEET AGRAWAL: Just a couple of quick questions, I guess, if you could just remind us of the timings for the maintenance turnarounds for 2008 and I guess vis-à-vis those in 2007?
ROHIT BHARDWAJ: For 2007, if you remember, we took the big ReGen plants in Q1, which was a bit unusual. This year they are going to be spread out with one in Q1 and one starting towards the end of Q1, but more into Q2. So it will be a little bit more even than it was last year, but still very much in the first half. The difference being last year was really in the first quarter and the rest are spread out, you know, more evenly through the year, but the two you probably care about are in the first half.
ATEET AGRAWAL: Okay. Great and just, you know, if you could just help me understand on the international side like you talked about, you know, the small volume of these uncontracted, you know, volumes, which obviously view on high margins of that. So could you just help me understand what those, you know, what those small volumes are for, like which type of customers? You did not mentioned that, you know, it's not part of the model, but I just wanted to understand what happened?
MARK DAVIS: You know, all of the – it is no different from the rest of the business except for when we generally actually find a supplier of acid we turnaround and immediately find a buyer and lock the price on both sides. In this case we actually had a small amount of volume where we committed to buy it from a supplier one price and had not gone out and immediately locked into sale on the other side.
ATEET AGRAWAL: Okay.
MARK DAVIS: The same cost, same supplier base, same customers, it is just -- that's the only difference.
ATEET AGRAWAL: Okay. Great. And do you mind like tell us what percentage like volume is that? Like you said small, but how small are we looking at?
MARK DAVIS: Less than 10%.
ATEET AGRAWAL: Okay. Excellent. I guess that's it from me. Thank you very much.
MARK DAVIS: Thank you.
OPERATOR: Your next question is a follow-up question from James Leung of Mackenzie Financial. Please proceed.
JAMES LEUNG: I know that there is -- in the MD&A there is a section on income taxes with respect to the SIFT rules and I gather that nothing has substantially been changed since we last spoke on the subject during the last conference call, but I do think that there is a little small sort of amendment to that which was on December 20th, when there are technical amendments, how would that sort of apply to you at all if at all?
ROHIT BHARDWAJ: We don't really see there has been much difference. I think, you know, we always have to keep our income tax disclosure current. So, we don't, you know, think that there is going to be any material impact of those changes.
MARK DAVIS: If it will help James, we had the addition out of the suggestion of our auditors, which we never really considered as being very shattering.
JAMES LEUNG: Okay. And I know that you have – also congratulations also on settling the legal that the law suit with your neighbors. Just wondering if there is any more that you can actually say with respect to how that the contract -- the agreement between you two are being swayed for your – I think as you termed it – mutual benefit?
MARK DAVIS: There is nothing material financially in this settlement, financially it goes is the indemnities that were still in existence actually are in existence, their obligation to supply us product out of their ReGen plants are still in existence. There are really just some clarification and color around the outside and to encourage people to do what those contracts actually said that they should do. So, from a financial perspective actually, the minor revisions are just not material.
JAMES LEUNG: And my final question would be on -- I know that on the corporate side, you do have a sort of a corporate EBITDA line and that the number seems to be stabilized at a much somewhat higher rate compared to '06. Now, is that sort of -- can you sort of help us to sort of guide us towards how we should – is there someway to normalize this or is it stabilized at this level?
ROHIT BHARDWAJ: No, I think James, there are two factors that distort or affect that corporate SG&A and both are hard to normalize for, one is exchange, because the foreign exchange, gains and losses flow through there. So through 2008, you can expect based on how the currency moves every quarter an impact there. Secondly, we had out LTIP cost go through that line as well and that gets affected by the changes in our unit price. So I think there was, you know, some step changes that took place in '07 versus '06. Now, we don't think that they are going to be baked into the numbers. So I think, you know, if you back those things out, they are probably still in that $12 million to $13 million SG&A, you know, normal for a range and then those factors would go up or down in any given quarter. So, I don't think there is a real, you know, there's no real settling at a higher number as such.
JAMES LEUNG: Okay. Thanks very much.
MARK DAVIS: Thank you.
OPERATOR: Mr. Davis, there are no further questions at this time. Please continue.
MARK DAVIS (PRESIDENT AND CHIEF EXECUTIVE OFFICER): As usual, we would like to thank you all for joining us on the call today. We look forward to talking to you on our first quarter call, which will be Friday May 9th, which is the same day as our Annual Meeting. Again, thank you for your attention.
OPERATOR: Ladies and gentlemen, this concludes our conference call for today. Thank you for participating. You may now disconnect your lines.
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