Q2 2008 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 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, 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 second quarter. Together with the very strong first quarter we reported, this has resulted in our first half of 2008 being well ahead of the first half last year.
Distributable Cash after Maintenance Capex in the second quarter was 72 cents per unit, more than double last year’s 31 cents per unit. Our distribution rate was 30 cents per unit for the quarter. Clearly, it was another very good quarter for Chemtrade.
All of our business groups reported higher EBITDA in the second quarter, but once again, the driving force behind the solid increase was our ability to capitalize on the continuing strong market for sulphuric acid. Despite significantly increased sulphur costs and the risk sharing nature of our contracts, both our SPPC and International segments achieved substantial gains when compared to last year or even when compared to the previous quarter. The positive impact of these market conditions was reflected in the results of our Sulphur Products and Performance Chemicals and International segments.
I’ll have some further comments on our updated outlook for the acid and sulphur markets and how they will impact Chemtrade after Rohit reviews the financials in detail. Before I hand the call over to him, I want to comment briefly on our other key products.
Our SHS business generated higher sales than last year, largely as a result of higher selling prices. The increase in prices was not enough to fully offset rising raw material costs. We have seen some reduction in volume as newsprint production falls and some producers are targeting a lower brightness point to reduce costs. However, due to our outsourced powder SHS production agreement most of our costs are variable. Thus, the reduction in volume did not have a material impact on our results.
Pulp Chemicals had a steady quarter and continues to enjoy a solid relationship with our major customer Canfor.
The second quarter results were again evidence that Chemtrade’s businesses are well positioned to reliably deliver products and services to our customers. We continue to take steps to strengthen the core of our business to ensure that we remain positioned to deliver long-term sustainable earnings and react promptly to market forces.
I will have the usual comments about the future outlook following Rohit’s comments.
Rohit Bhardwaj
Thank you, Mark and good morning everyone.
In the first quarter we said the unprecedented conditions in the sulphuric acid market would continue for some time, and that they would have a significant impact on our results. That certainly proved to be the case in the second quarter.
For the three months ended June 30, 2008, Distributable Cash after Maintenance Capital Expenditures was $24.1 million, or 72 cents per unit compared with $10.5 million, or 31 cents per unit in 2007.
EBITDA for the second quarter of 2008 was $29.8 million compared with $16.3 million in the second quarter of 2007. Revenue was $274.3 million, an increase of $144 million over 2007. The drivers were much the same as the first quarter. Most of the Fund’s products generated higher revenues, however it was the significantly higher prices for sulphuric acid and sulphur that accounted for the majority of the increase. The increase in per unit revenue and margin more than offset the impact of the stronger Canadian dollar on our U.S. dollar denominated revenues.
Net earnings for the second quarter were $13.8 million, compared with $5.0 million in 2007.
Turning to the segmented results for the quarter, SPPC generated revenue of $127 million and EBITDA of $23.9 million compared with $78 million and $14.9 million, respectively, in 2007. The higher revenue reflected higher prices for merchant acid and sulphur, as well as higher sales of SHS, including a full quarter of sales to customers acquired through the Olin asset acquisition, compared with two months last year. These were partially offset by the effect of the stronger Canadian dollar.
The higher EBITDA was due primarily to improved margins on sulphuric acid and sulphur. The second quarter of 2008 was negatively impacted by extremely high sulphur costs and because part of a maintenance turnaround at our largest regen plant fell in the second quarter, whereas last year it was in the first quarter. These negatives were more than offset by higher selling prices for acid, which reflects the robust demand in the market and our success in recovering higher sulphur input costs, in the form of sulphur surcharges. The SHS business was negatively impacted by higher input costs, particularly caustic soda and sulphur-related materials. These negatives were almost fully offset by higher realized selling prices for SHS products and from the weaker U.S. dollar with respect to product costs for powder SHS.
Pulp Chemicals reported second quarter revenue of $14.4 million compared with $14.6 million in 2007. EBITDA was $5.0 million compared with $4.4 million. Costs were lower this year due mainly to lower costs for salt, which were high last year as we transitioned to a new supplier, whereas in the current year, the implementation of certain logistics initiatives resulted in lower costs.
International reported revenue of $132.9 million for the second quarter, compared with $37.5 million in 2007 and EBITDA for the quarter was $8.8 million, up significantly from the $1.8 million earned last year.
These improvements were a result of significantly higher prices and higher volume of sulphuric acid, and significantly higher margins on some spot sales of sulphur. Also, small volumes of uncommitted acid resulted in high margin. Finally, during the volatile market conditions prevalent in 2008, we were able to better leverage our market knowledge and logistics infrastructure to significantly add value to suppliers and customers and thereby improve our margins.
Corporate costs increased relative to 2007 were mainly due to unrealized losses on natural gas and foreign exchange hedges totaling $1.9 million. In 2007, the second quarter included a unrealized foreign exchange gain of $0.8 million. Additionally, realized foreign exchange gains in the second quarter of 2008 were $0.8 million lower than the same quarter of last year. Finally, LTIP and incentive compensation accruals were $1.2 million lower than last year, when there was an accrual made for the 2006 transitional LTIP.
Maintenance capital expenditures in the second quarter were $3.2 million compared with $1.5 million in 2007.
As we noted on previous calls, the high demand for skilled labour and materials continues to lead to an escalation of costs for most capital projects. We have also identified additional capital expenditure projects that will upgrade our plants for the long-term. Accordingly, maintenance capital expenditure for the remainder of 2008 is expected to be higher than previously indicated and we expect second half spending to exceed first half. For the full year we expect maintenance capex to be approximately $15.0 million.
________________________________________________________________________
Mark will have some further comments on planned capital expenditure and operational reliability and I’ll now hand the call back to him.
Mark Davis
Thank you, Rohit.
The second quarter results continued the trend we started seeing in the third quarter of last year. The successful execution of our ongoing initiatives to strengthen our business, improve our operations and capitalize on market opportunities led to a very successful second quarter this year and strong results over the 12 month period just ended.
We continue to see very good opportunities for Chemtrade. Our intiatives are focussed not just on maximizing short-term profitability but also ensuring that Chemtrade’s earnings are sustainable. Accordingly, while we aggressively seek to increase sales pricing and margin where possible we also want to ensure that we align with our strategic customers, enter into new strategic supply agreements (like the Vale agreement we announced last quarter) and also invest in upgrading the quality of our capital assets.
Our asset base has done a great job in contributing to our recent results as a result of our last several years of capital investment but we can do even better. We previously indicated that the cost of materials and labour would lead to an increase in our capital expenditures. We now believe that over the next couple of years we should and will spend even above the rate previously indicated to upgrade our plants for the long term. We have started to identify a number of capital projects that will replace and upgrade certain key equipment. We will provide more details as our plans are solidified but, in short, the capital projects we have in mind will improve the reliability of our operations thus increasing our output above 2008 levels. This reliability and access to additional product are the foundation ensuring the long-term sustainability of our earnings stream.
Turning now to the markets for our key products, the actions we’ve pursued enabled us to realize significant benefits from the buoyant market dynamics for most of our products, particularly sulphuric acid.
The same factors we discussed last quarter are continuing. The supply/demand characteristics for sulphuric acid continue to drive increased pricing and, as we indicated in our last call, increased margins.
A reduction of North American acid supply over the last number of years and a substantial increase in demand has led to material increases in the price of acid. Worldwide demand from the fertilizer, metals and biofuels industries continue to be strong. We see no signs that these factors are changing.
The tight supply/demand situation has led to substantial price increases for both acid and sulphur. Based on industry publications, acid pricing in the U.S. Gulf was about $80 a tonne a year ago. Last quarter that price was listed at about $270 for spot sales while now the indication is that it has increased to about $420. Similarly the acid price in the industrial U.S. south was about $70 per tonne a year ago, about $200 last quarter and has increased to over $250 for new spot sales.
As a reminder, pricing for acid can vary region by region based on the region’s supply/demand balance or our contract positions, but these pricing indications are consistent with our previous statements about the strength of the acid market, and our recent success in the market.
In our last call we outlined how Chemtrade’s contractual structure, regional markets, minimal spot volume and the increased cost of raw material sulphur all reduced the benefit of increases in sales price although the positive impact can clearly be seen in our results. (By the way, sulphur pricing which was about $60 a year ago and $450 per tonne last quarter has increased again to about $615 for this quarter.)
Taking the market dynamics together with Chemtrade’s business structure, our results demonstrate that we have been able to expand our margins on the acid we market for each of the last three quarters. While our margins have expanded materially they have not expanded at the same rate as the price of acid itself since we needed to cover the increased input cost of sulphur, and our risk sharing agreements pass on some of the pricing benefits to the suppliers of the product.
We expect that over time our average prices will continue to climb and margins continue to expand.
Taking all this together, as stated in our MD&A, a $1 per tonne price increase would positively affect our EBITDA by between $0.5 million and $0.6 million taking our contractual sharing into account. The benefit would be decreased by the amount of sulphur input costs that we aren’t able to recover under our sulphur surcharge plan.
Having said all that, this strong acid market has and will continue to be a strong benefit for Chemtrade. We expect the market to remain buoyant through, at least, all of 2008 and 2009. We mentioned that our capex spend will increase and that the recent run rate of the International business may in time revert to a lower level. Despite these factors, we expect that the next 12 months will generate substantially similar distributable cash after maintenance capital expenditures as we generated in the 12 months ended June 30.
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 are using a speakerphone before pressing any key. One moment please, for your first question. First question comes from James Leung of MacKenzie Financial. Please go ahead.
JAMES LEUNG: Good morning gentlemen. Congratulations on an excellent quarter.
MARK DAVIS: Thank you.
ROHIT BHARDWAJ: Good morning.
JAMES LEUNG: Just a question on your guidance for CapEx. Now the $15 million, I think, you said was the maintenance portion of your CapEx, correct?
ROHIT BHARDWAJ: That’s right.
JAMES LEUNG: And this just pertains to ’08 or is ’09? Have you been thinking about what your -- is that 15 sort of a run-rate now or…
MARK DAVIS: We actually think that the run-rate for ’09 will actually be higher than the run-rate for ’10 and that’s when we – you know, we are not focusing on the blurred line between maintenance and CapEx that will give us increased capacity primarily due to increased reliability. So James, as having sort of 15 as this year’s run-rate, we expect it to be higher next year, but we ought to get some more product out of the CapEx we spend.
JAMES LEUNG: Okay. Just on your comments in respect to margin, which you said is going to be increasing; is that respect to just the acid or the SPPC and the international division or your Company overall?
MARK DAVIS: I think it’s fair to say the Company overall as acid pricing is moving up, sodium chlorate pricing is moving up, and I'm not sure yet about SHS pricing, it is a combination of pricing will move up, the questions is whether the costs move up by the same extent as our pricing. But for our major products; you know, sulphuric acid and sodium chlorate is, both those margins should increase.
JAMES LEUNG: Yeah, I guess, your comments is also – is the – because year-over-year your EBITDA margins, correct me if I'm wrong here, that Q2 this year versus Q2 last year, your EBIT margin is actually lower, but you're -- what you are saying is that from now going forward these EBIT margins should be higher?
ROHIT BHARDWAJ: James, I think, maybe we need to get some clarification on when we say margin versus when you say margin. You are calculating the margin as a percentage of sales. We typically, when we talk about margins, are more talking about margin per tonne of product as apposed to percentage of sales because given our risk mitigating contracts and our international business putting things as a percentage of sales, doesn’t really always accurately capture what the business is actually. So, we always talk about tonne. We don’t give you the tonnage information, that’s hard for you to know that, but when we say margins are expanding, we are definitely meaning it per tonne as apposed to percentage of sales.
JAMES LEUNG: Just on your volumes in the international division, because I think in the MD&A or the press release you mentioned that even a small volume can result in incremental – huge increases in margins and also profits, so quarter-over-quarter has the volumes increased significantly?
ROHIT BHARDWAJ: I think again we should be clear on that comment, because when we say volume we are not just saying that any volume gives that higher margin. I think what we've been very specific in saying is we have some uncommitted volume which means we've locked up the supply side and we haven’t placed that volume yet. That kind of uncommitted small volume can give us higher margin. But in general actually just getting more volume doesn’t necessarily get us much higher margin. So our volume is more of in the international business and acid, but that – you know, just a sheer number is not what’s driving it, it’s the percentage of uncommitted volume that drives us the margin.
MARK DAVIS: And just a reminder; we said last call that the international business had caught 10% of its volume actually that we actually agreed to contract for a while ago as a reentry into markets we hadn’t been into for a while. So if you actually have contracted that in a rising price market as the same volume a rising price market will deliver increased earnings every quarter until that contract runs out or those contracts run out.
JAMES LEUNG: And would those volumes in the near foreseeable future; do you see that continuing?
MARK DAVIS: Well, that’s why we keep on highlighting the fact that in time those – you know, we believe the international – the run-rate that the international segment has shown for the first six months this year is not a long-term run-rate and it will come back down to close to what it was in prior and previous years.
JAMES LEUNG: Okay. A couple of financial questions then I will queue up again. Just on the – your LTIP accruals, which you -- I think your last quarter you said that for the remaining three quarters of this year it’ll be $5.5 million; now you're saying for the last remaining two quarters it’ll be $4 million, so $1.5 million was the LTIP for Q2 accrual?
ROHIT BHARDWAJ: No actually we don’t -- I mean, it came in frankly higher than that but not significantly off from there. So I think when our initial estimate was, you know, it was close but I think there still $4 million versus $5.5 million is not that much off from a run-rate basis. So I think you can, you know, for your model you can assume $4 million for the back half and you can assume Q2 was a bit higher than the $1.5 million.
JAMES LEUNG: Okay. And this is my final question for now with the – just any sort of thought given to your distribution policy in light of these results?
MARK DAVIS: You know, we consider distribution policy all the time, but to date we're content to, I guess, repeat what we said before is that, we think we have an appropriate distribution rate today and we think that we have some good and productive uses for any excess cash as opposed to an increase in the distribution rate. So for the time being we think we’re paying now the appropriate rate.
JAMES LEUNG: Thanks very much guys.
MARK DAVIS: Thank you.
ROHIT BHARDWAJ: Thank you.
OPERATOR: Your next question comes from Bert Powell of BMO Capital Markets. Please go ahead.
BERT POWELL: Great. Thanks. Mark, just in terms of guidance; when you talk about – you have got $10 million to go for CapEx for the balance of this year and you are indicating that the $15 million for this year likely to be higher next year. When we think about that, should we be thinking about $5 million as kind of a good quarterly number with perhaps some increases in Q3 and Q4 next year in terms of how you're giving your guidance out for, you know, distributable cash being at similar levels for next 12 months forward?
MARK DAVIS: I think that’s probably a good enough assessment today is, you know, I know we went through the speech relatively quickly is what we had is, we have a number of projects we have identified that we are still scoping out so the timing and when they fall in various quarters is still kind of up in the air, but I think your assumed run-rate, you know, is probably is good as we can guide you to at this rate.
ROHIT BHARDWAJ: Yeah, but I wouldn’t probably – you know, if you are using that sort of 5 as an average per quarter, I wouldn’t use that for Q3 and Q4 too much, but…
BERT POWELL: Okay.
ROHIT BHARDWAJ: (Multiple speakers) have to drive that number quite a bit higher then.
BERT POWELL: Okay. So the part of this – if I am interpreting your comments correctly is, this is going to give you increased output. So, you know, what – when you – if you kind of still break that number down further, what is the normal maintenance capital number post these output enhancing expenditures?
MARK DAVIS: We are trying to figure out where – in today – and if you…
BERT POWELL: Yeah, I know there’s a pricing problem.
MARK DAVIS: Yeah, I must say, if you assume that today’s labor and material costs hold, okay, is I think 15 is a better number than what we have said before.
BERT POWELL: Okay.
MARK DAVIS: If it reverts to 2006 material and labor’s pricing, then it comes down by a chunk.
BERT POWELL: Okay. And then just back to G&A for sec. In the quarter, you know, there's kind of $2 million in the hedging, but we have got some LTIP expense to go for the balance of the year. So net net is $14 million, a good number for the remainder of the year in a G&A line?
ROHIT BHARDWAJ: That’s not far off. I think the one, the couple of moving parts would be what happens in natural gas, because gas has come down quite a bit from the quarter end, so our margin for unrealized mark-to-market losses may reverse themselves…
BERT POWELL: Right, okay.
ROHIT BHARDWAJ: So -- but that’s, you know, if you want to – that’s probably close enough.
BERT POWELL: Okay. And then, you know, just back to the sulphuric acid pricing. You know, the spot market versus what you guys get under, you know, some of your contractual arrangements, I think, Mark, you’ve indicated the industrial segment was kind of 200 per tonne in Q2. Can you give us a sense as to what – where you are on realized pricing relative to, you know, what’s generally quoted, you know, and plan to sell in the market relative to what you are realizing. And I know you said in the past, you know, out at there to kind of bring your customers that you are in this for the long haul. Just to try to give us a sense of what – I guess, the question really is, what’s the continued leverage for you on the pricing for sulphuric acid? Can you continue to work that up even if sulphuric acid pricing starts to come down a little bit just on your existing contracts?
MARK DAVIS: I think the answer to that is, yes, right. But, you know, with the huge caveat as I always make of actually region, right, is if you ignore – if you assume that the spot numbers we gave you as we said actually are indicative, right, of direction, right…
BERT POWELL: Yeah.
MARK DAVIS: Okay. Is the numbers I give you said that the US Gulf went from about 80 bucks to 420 while the industrial southeast went from 70 to 250…
BERT POWELL: Yeah.
MARK DAVIS: And, you know, we don’t really play that much in the Tampa spot price, we do play in the US Gulf, but actually as you come back up closer to Canada and the byproduct markets, that’s a whole different region, whole different regional supply-demand economics, front.
BERT POWELL: Yeah.
MARK DAVIS: So, that’s a long-winded answer to say is, we believe actually that there continues to be and will be for sometime the ability for us actually to improve pricing and margins actually in all of our regions, is I think, I said actually at the last quarter that I think the magnitude of the pricing and margin increases will be less, okay, I might have been wrong…
BERT POWELL: Yeah.
MARK DAVIS: But at some point I'm going to be right.
BERT POWELL: Yeah.
MARK DAVIS: So we think we still have leverage to increase pricing in margin, but I do think the trend ought to start to slow down.
BERT POWELL: Right. So if I think about the SPPC business with the remarketing asset and the regen asset, you know, that business is going to have less volatility around your movement in sulphuric acid prices relative to, you know, some of the tactical stuff you might be doing on the international side, correct?
MARK DAVIS: I think that’s correct.
BERT POWELL: Okay. And on the international side, just in terms of timing, the committed stuff where you are, you know, open in the spot market with that. When does that – when in terms of the volume you got contracted, when does that run out, like is that sort of tail off for your Q3 and it’s going by Q4 kind of thing?
MARK DAVIS: It kind of depends a little bit frankly on when the suppliers – you know, they have to – suppliers themselves have some flexibility on when they have to give us that volume within certain frames…
BERT POWELL: Right.
MARK DAVIS: So, you know, I would say it’s – 2008 should be fine rest of the year whether or not it spills over into 2009 is we’re not sure yet.
BERT POWELL: Okay. So the contracted visibility is pretty strong through to the end of ’08 on that.
MARK DAVIS: Yes.
BERT POWELL: Okay. And then just a last question on the merchant sodium chlorate stuff. Sodium chlorate pricing is still strong is my understanding and I think in the past you’ve talked about the ability to, you know, start moving pricing up as contract limits allow; is that still the case?
MARK DAVIS: Yes.
BERT POWELL: So look for continued improvement there?
MARK DAVIS: Yes.
ROHIT BHARDWAJ: Honestly, Bert, keeping in mind that two-thirds of it or so is…
BERT POWELL: Yeah. No, I'm just thinking of the merchant stuff, the stuff as the non (inaudible) stuff.
ROHIT BHARDWAJ: Yeah.
BERT POWELL: Yeah, perfect. Okay. Thank you.
MARK DAVIS: I know that between you and James, I think we've answered all the questions by now, right?
BERT POWELL: Yeah.
MARK DAVIS: Thanks, Bert.
OPERATOR: Your next question comes from James Keller of Thermopolis Partners. Please go ahead.
JAMES KELLER: Hey, good morning guys. Great quarter.
MARK DAVIS: Thank you.
JAMES KELLER: Just have one quick question here. Based on the capital program, you guys are, you know, paying out about 8.5% dividend yield now; could you just give us an idea of the targets, the return targets on your capital programs that you see this year and may be next year?
MARK DAVIS: Yeah. And the – sorry, I'm just trying to think how to formulate the answer, right, is; some of the capital projects actually are necessary projects that you must do either for environmental compliance purposes or actually for a long-term sustaining operation, and actually part of that spend, we will actually obtain increased volume, okay. So, you know, any project that we would actually look at spending capital just to create incremental earnings is, we’re probably at 15% or 20% of IRR project, right. But most of the projects we’re talking about are driven more by operating, reliability, and sustainability and has the added benefit of providing additional up time. (phon).
JAMES KELLER: Okay, great. Thanks guys.
OPERATOR: Next question comes from Chris Damas of BCMI. Please go ahead.
CHRIS DAMAS: Yes, I have two questions. One of them is the international sales seem to match exactly the European segmented sales; is that – I'm a little confused, because I thought you bought a trading operation in Argentina.
MARK DAVIS: That would be a coincidence if they match, right.
ROHIT BHARDWAJ: Well, and I think the Argentinean business base, we have at this stage invested in the form of a convertible notes but we do not consolidate their results. All we're doing is picking up the interest income from them, so it really doesn’t play to our revenue numbers.
CHRIS DAMAS: So that’s a coincidence. How much of international would be in Europe?
ROHIT BHARDWAJ: Okay. I think where we segment some of our results is, we look at it based upon the location of customers and not necessarily that we are shipping it to. So a lot of the international sales will be segmented into Europe because that’s where they originate from.
CHRIS DAMAS: Right.
ROHIT BHARDWAJ: So we don’t really split up as to exactly which country they're going into. So I would say, you know, that difference is – primarily all the international sales will be European sales.
CHRIS DAMAS: So the plants could be in Latin America and the owners in Europe?
ROHIT BHARDWAJ: That’s right. Maybe a shipping to -- the ship to plants could be all over the world and they are, but generally the contractual relationships are in Europe.
CHRIS DAMAS: The other question which that leads into is Mosaic, the fertilizer Company was, on their call, they were a little bit negative on sulphur. They said, they thought it would decline quite a bit by the end of ’08, so I'm little confused with your guidance; does that mean you don’t sell much of the fertilizer market or is there…
MARK DAVIS: Well, I guess, there’s two issues; one is actually sulphur pricing and the other is actually acid pricing.
CHRIS DAMAS: You bet. So how would…
MARK DAVIS: Right, okay. And, you know, sulphur pricing is, I guess, the industry projections we have seen actually show no indication of it declining this year or even actually – I think it’s – I think they're going (for declines in the first or second quarter of 2010, not even next year.
CHRIS DAMAS: And that’s elemental, sulphur?
MARK DAVIS: That’s right and...
CHRIS DAMAS: H2SO4?
MARK DAVIS: I'm sorry?
CHRIS DAMAS: What about sulphuric acid?
MARK DAVIS: And sulphuric acid is the same thing. Again, we are continuing to see price strength and increase in pricing, and see no indication actually of pricing coming down. So as, you know, in any of these things Mosaic may indeed be right, but that’s certainly not when we’re seeing or experiencing.
CHRIS DAMAS: You lock in the sulphur cost when you lock in a sulphuric acid supply contract?
MARK DAVIS: No, it’s -- most of the sulphur that we purchased for consumption as a raw material cost, okay, is -- or I shall say all of sulphur we purchase as a raw material cost, in our North American business and our North American acid sales contracts by and large are 100% almost have now been restructured to include a sulphur surcharge that will move as sulphur pricing moves up and down…
CHRIS DAMAS: Right, right.
MARK DAVIS: Right. So it’s been institutionalized, because frankly our customers understand that what happened in the sulphur market has actually not been seen before, right. So although no one is happy about it as they have been accepting actually as a sulphur surcharge.
CHRIS DAMAS: I understand. It’s like a $3 to $1 ratio between sulphur and sulphuric acid.
ROHIT BHARDWAJ: Basically it takes a tonne of – from 1 tonne of sulphur you get 3 tonnes of acid; you can look at it that way. So if sulphur goes up a dollar, acid has to go up $0.33 to breakeven.
CHRIS DAMAS: Right. And just one on last one. Since a lot of the revenue increase was in Europe, almost $100 million, those contracts would not have that kind of class. I mean, there would be a lag between sulphuric acid price and the sulphur?
ROHIT BHARDWAJ: We don’t really make anything there, so we wouldn’t there be tying any sulphur surcharges. There is more a question of matching that’s supplied on a customer and fixing prices on both ends. So…
MARK DAVIS: Right. We are marketing byproduct smelter acid in the international segment.
CHRIS DAMAS: What do you mean you don’t make anything on it? You make that…
ROHIT BHARDWAJ: We don’t produce any acid there.
CHRIS DAMAS: Right. So you make a fee for broker basically?
MARK DAVIS: Right.
CHRIS DAMAS: Okay. Thanks a lot.
MARK DAVIS: Thank you.
OPERATOR: Your next question comes from Bert Powell of BMO Capital Markets. Please go ahead.
BERT POWELL: I just wanted to follow up on, you know, with the excess cash that you guys are generating in, you know, expected over the balance of this year and next, you know, the balance is going to look better and better. Mark, I'm wondering if you're willing to share with us some thoughts in terms of use of that cash.
MARK DAVIS: Sure. As usual as I don’t have anything definitive to say, but I think as everybody knows is Chemtrade has always tried to grow its business and increase in both size and scale, I think that benefits our shareholders, our employees, and our stakeholders. Over the last numbers of years between a battered down unit price and a pretty hot private equity market in the old days is we weren’t able to actually continue bulking up our business. So we continue to see actually opportunities where proper acquisition or venture, or capital expenditure will actually increase both size, scale, and strength of our business and we’re back trying to figure out which is always we can deliver on and which is also be beneficial for us. So that continues to be a goal for us.
BERT POWELL: Okay. And, you know, you stuck your toe in the water with Argentina; how is that looking so far, is that an area where you think you’d want to take your interest up to, I think, your max is just under half?
MARK DAVIS: Yeah. So far that business has been performing above our expectations. And, you know, we -- the transaction, as you know, was structured in a way that actually, as you say, get our toe in on those, get comfortable with the country, the country risk; the Company and the Company risk and so far everything we've seen actually is just very positive and, you know, we haven’t taken up or decided to take up our additional interests yet, but if things continue actually is we’re going to be very pleased with the fact that we stuck our toe in.
BERT POWELL: Okay, perfect. Thanks Mark. That’s all I have.
ROHIT BHARDWAJ: Thank you.
OPERATOR: Next question comes from James Keller of Thermopolis Partners. Please go ahead.
JAMES KELLER: Hi guys. One more quick one.
ROHIT BHARDWAJ: Sure.
JAMES KELLER: Are there any more additional products or revenue streams coming out of this CapEx program or is it simply just additional increases in current product line?
MARK DAVIS: Increase in current product line with the exception that there's a product that we don’t talk a lot about which is called sodium bisulfite, and one of the capital expenditures we’re going to have to make at some point in time for environmental reasons will result with additional sodium bisulfite being produced, which depending on the regions and the markets at the time, could be an additional revenue and earning stream, but that’s a few years out.
JAMES KELLER: Okay, good.
MARK DAVIS: Thanks.
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 key.
Gentlemen, there are no further questions at this time. Please continue.
MARK DAVIS (President and Chief Executive Officer): As usual, Rohit and I would like to thank you all for your attention and we look forward to talking to you again after the third quarter. Thank you very much.
OPERATOR: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating, please disconnect your line.
|
