Q3 2009 Results Conference Call
Mark Davis
Good morning, 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.
Before I commence the review, I would remind you that our presentation contains certain 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.
For today’s call we’re going to adopt the same approach as last quarter. Most of our comments will compare the third quarter results to the second quarter this year. A year ago we were enjoying the benefits of historically high commodity pricing and a vastly different economic climate leading to record distributable cash for the third quarter of 2008. We believe it’s more instructive to look at how we’re progressing this year under the current economic conditions.
I am pleased to say that Chemtrade delivered another quarter of strong results despite the lingering effects of the recession. Distributable cash for the third quarter was 38 cents per unit. As usual, we distributed 30 cents during the quarter in accordance with the distribution rate we established in 2007. Year to date, we have generated $1.04 of distributable cash, comfortably in excess of the 90 cents we paid out so far this year. Our third quarter distributable cash is a 5% improvement over the second quarter, and more than 22% higher than the first quarter this year.
From an overview perspective, demand for most of our products was about 10% higher in the third quarter than the second. This is still substantially below 2008 demand levels but again seems to support our view that demand and the economy have stabilized. Demand for our largest product by volume, sulphuric acid, improved in the third quarter. There continue to be signs that this market is improving and that the worst may be over. Industry publications have started indicating a firming of pricing. Additionally, some smelters that had previously reduced production rates, at least partially due to concerns for weak acid demand, have now resumed normal operations.
Turning to Chemtrade’s business, our plants operated well during the quarter, and our employees continue executing the right initiatives to deliver earnings and improve our business.
Also significant this quarter was the ongoing work stoppage at Vale Inco, our largest sulphur products supplier. Vale Inco has not produced sulphuric acid since early May. The lack of supply in the second quarter was expected as part of their normal turn around. The continued lack of supply due to the strike is not normal course business; however, our team has done an outstanding job utilizing alternative supply arrangements that have kept our customers supplied and unaffected by the Vale work stoppage.
With respect to third quarter results, SPPC achieved significantly better results in the third quarter than the second quarter despite the Vale Inco strike. As I said, our plants all operated well and we are benefiting from our investment in efficiency and reliability. Our SPPC segment serves a wide variety of industries from semiconductors and oil refineries to pulp and paper. This diversification has served us well as certain industry sectors have experienced a quicker return to normal demand levels than others.
Our International and Pulp segments also performed well in the quarter.
In summary, we were pleased to post another quarter in which Chemtrade generated distributable cash in excess of our distribution rate despite a lower level of economic activity. The third quarter generally supports our belief that demand has now stabilized, and we continue to actively manage our business to deliver results.
Rohit will now have some additional quantitative comments about the quarter.
Rohit Bhardwaj
Thank you, Mark and good morning everyone. As Mark noted, the most meaningful assessment of business performance is to compare the third quarter with the second. Therefore, for the most part, I will refer to changes from the second quarter this year, although the financial statements and MD&A, of course, have the full year-over-year comparisons.
For the three months ended September 30, 2009, distributable cash after maintenance capital expenditures was $11.6 million, or 38 cents per unit. This compares favourably with $11 million, or 36 cents per unit generated in the second quarter, and $9.6 million, or 31 cents per unit generated in the first quarter during the worst part of the economic downturn. The main reason for the increase over the second quarter was improved results in our SPPC segment.
EBITDA for the third quarter of 2009 was $21.5 million compared with $17.5 million in the second quarter of this year. The increase is due primarily to the higher results in SPPC. The third quarter results include an LTIP expense of $3.8 million compared with only $2.2 million in the second quarter.
Revenue for the third quarter of $127 million was relatively unchanged from the $124.6 million generated in the second quarter this year.
Net earnings for the quarter were $19.5 million compared with $13.6 million in the second quarter this year.
Turning to the segmented results for the quarter, SPPC generated revenue of $77.7 million, similar to the second quarter, but EBITDA of $21.3 million was $6.1 million higher than the $15.2 million earned in the second quarter. EBITDA for the second and third quarters also included insurance recoveries relating the 2008 Beaumont. While second quarter EBITDA included insurance recoveries of $2.3 million, the third quarter included $3.8 million. Therefore, if this is taken into account, 3rd quarter EBITDA improved by approximately $4.6 million from Q2 levels. The improvement was mainly due to higher volumes for most product lines as well as to lower distribution and operating costs.
Pulp Chemicals reported third quarter revenue of $13.8 million compared with $13.2 million in the second quarter. EBITDA was $4.5 million, which was similar to the level earned in the second quarter.
International reported revenue of $35.5 million for the third quarter compared with $33.5 million in the second quarter. EBITDA was $3.2 million in the third quarter compared with $4.9 million in the second quarter. The current level of earnings is consistent with our previous comments that International earnings were expected to start moderating through 2009
Maintenance capital expenditures in the third quarter were $4.7 million compared with $3.8 million in the second quarter. We still expect that our maintenance capital expenditures for 2009 will be higher than the level of maintenance capex in 2008 and closer to overall 2008 capex levels.
Ignoring unrealized foreign exchange losses, Corporate costs of $7.3 million during the third quarter of 2009 were similar to the second quarter of this year. Compared to the same period last year corporate costs were approximately $8.5 million higher. Most of this increase was driven by the difference in unit price year over year, which meant an accrual of $3.8 million related to LTIP this quarter compared with the net reversal of $2.2 million last year. Additionally, there were unrealized losses on our natural gas swaps of $0.4 million versus unrealized gains of $3.1 million last year. The impact of these two items was partially offset by higher realized foreign exchange gains of $0.9 million.
Turning to our balance sheet and liquidity, we remain in sound shape. We had nothing outstanding on our operating line of credit at the end of the third quarter. This left us with more than US$ 65 million room on our line of credit. Our Net Debt:EBITDA for the purposes of our credit agreement remained below 2:1 and our term debt does not mature until August 2011.
I’ll now hand the call back to Mark.
Mark Davis
While economic conditions remain difficult we continue to find ways to deliver earnings and strengthen our business. As we noted, demand for our products appears to have stabilized, albeit at lower levels than 2008.
Looking ahead, it is unclear exactly when Vale Inco will resume production. Regardless of that timing, we will continue to ensure that our customers receive their product and work with Vale Inco so that whenever the smelter is restarted we can resume business as usual.
Our business remains resilient and we continue to work on improving, strengthening and expanding our reach. For example, we have recently added new acid marketing agreements with by-product producers which could add as much as 10% additional acid volume. This is just one recent validation that our business continues to provide value to those we serve, and it again demonstrates how we remain focused on improving our business and positioning ourselves for the future.
As we near the end of 2009 we wanted to comment again about the SIFT tax that will apply to many income trusts commencing in 2011. In our third quarter 2007 release we said that Chemtrade was uniquely positioned so that the effect of this new tax would not be significant. Chemtrade receives a large portion of its earnings from non-Canadian sources or in the form of dividends. Accordingly, in 2011 we believe that the new SIFT tax will apply to less than one-third of the Fund’s income, resulting in an effective tax rate of less than 10%. Based on current legislation and subject to continued access to capital necessary for further growth, the Fund believes that the income trust structure remains desirable and has no current intention to cease being an income trust even after 2010. We will continue to monitor our tax structure and will adopt the business and legal structure that maximizes value for our Unitholders.
In conclusion, we continue to believe that the nature of our business model as demonstrated by the strength of our businesses even in times of low demand and price volatility, together with our strong balance sheet and ample liquidity, are more than sufficient to sustain our current distribution rate.
We look forward to answering any questions you may have.
OPERATOR: Thank you. We will now begin the question-and-answer session. As a reminder if you have a question, please press the * followed by the 1 on your touchtone phone. If you would like to withdraw your question, press the * followed by the 2. If you’re using speaker equipment, you will need to lift the handset before making a selection.
Our first question comes from Nima Billou from Bloom Investment Counsel. Go ahead, please.
NIMA BILLOU: Good morning.
MARK DAVIS (President & Chief Executive Officer, Chemtrade Logistics Income Fund): Good morning.
ROHIT BHARDWAJ (Vice President, Finance & Chief Financial Officer, Chemtrade Logistics Income Fund): Good morning.
NIMA BILLOU: I just wanted to revisit your decision with respect to not converting. Is it again not just the fact that you have this low effective tax rate, it’s because you want to avoid the legal and other costs associated with conversion?
MARK DAVIS: Well, I guess two or three things. One is the effective tax rate is low. Secondly is there’s costs of obviously legal and tax of converting. But third is, at least from our look, is most of the other companies that have converted have also converted while buying tax loss vehicles going forward. And if you compare I think the quantum of tax losses we would want to buy to shelter income for a long period versus the 10-per-cent effective tax rate, it’s hard to justify the expenditure.
NIMA BILLOU: Okay. Switching gears, with respect to capex, I mean it’s somewhat encouraging and also discouraging that it’s crept up so high. Can you explain, it’s almost running $20 million for the year. Several years ago it was around $12 or $13 million. Is it just more significant investment with respect to ensuring the reliability of assets or I just wanted to know what’s behind that drive in the creep in capex?
ROHIT BHARDWAJ: Yes, I mean it’s mainly the latter comment that you had, which is to improve our reliability. So you know as we have more manufacturing plants as part of our business, we are definitely trying to ensure that we have better up time and the plants are well positioned for the long run. And that’s the main reason.
MARK DAVIS: We probably have another couple of years at this rate, and then it should actually start to go back down again. I mean, a more full answer than Rohit’s is it improves reliability, but we’re improving, we’re actually replacing a bunch of major equipment at a bunch of our plants.
NIMA BILLOU: Okay.
MARK DAVIS: And once that’s done, it should come back down.
NIMA BILLOU: So it wasn’t necessarily a surprise, it’s just a question of timing that these major pieces needed replacement?
MARK DAVIS: Yes. And it’s also a conscious decision. We could continue to operate the plans with cruddy equipment and take the downtime, resulting in loss of production, and the effects of unplanned downtime on our customers or employees. Instead, we’ve actually chosen to proactively replace these things.
NIMA BILLOU: Better to pre-empt it I guess, obviously.
MARK DAVIS: That’s right.
NIMA BILLOU: Okay. And you snuck in a little acquisition there post the quarter. Can you just describe the business of Alliance Chemicals and if you can disclose any cash flows because just the purchase price was disclosed.
MARK DAVIS: Yes. It’s an acquisition of more SO2 capacity. So it fits in with our SHS business, in particular the business that… it was another small acquisition when we acquired the Olin business. I think that was two years ago now, right? So that SO2 physical asset fits together with the business we had previously acquired.
On a cash flow basis, it’s a nice little pick up for us. It’s definitely, relative to the purchase price, it’s a nice pick up. It’s not millions of dollars, right?
NIMA BILLOU: Hmm-mmm. And now this business, the SHS, that’s not volumes associated with declining newsprint. Is it in a growth area at least?
MARK DAVIS: SHS is, as you know, primarily into newsprint. SO2 used… SHS has the largest use for it, but SO2 has other uses as well, and this actually expands our supply base down into the U.S. south where we weren’t before.
NIMA BILLOU: Okay. Thanks very much.
MARK DAVIS: Thank you.
OPERATOR: Thank you, and our next question comes from the line of Benoit Laprade, with Scotia Capital. Go ahead, please.
BENOIT LAPRADE: Thank you. Good morning. Rohit, just one question. I’m not sure how much you can say or talk about, but I just wanted to see if there was any new development with your business interruption claim with your insurers?
ROHIT BHARDWAJ: Yes. So as you know, we finalized the property damage claim, which is good to get behind that. But on the business interruption, there’s ongoing activity, which is getting to a more advanced stage now that we’ve got property damage out of the way. But I can’t really give you any colour on how much we expect to recover. As you know we got, or as you probably know, we got $2.5 million in Q2, which was just an interim payment.
BENOIT LAPRADE: Hmm-mmm.
ROHIT BHARDWAJ: And so we are hopeful that we get this resolved in the coming few months. But it’s hard to comment on dollars at this stage. It’s still early.
MARK DAVIS: It’s hopeful we receive some more compensation in Q4. It’s more likely before the end of Q1.
ROHIT BHARDWAJ: Yes.
MARK DAVIS: That it’ll be finally resolved.
ROHIT BHARDWAJ: Yes, yes, I think that’s a fair comment. Before Q1, end of Q1. I hate to say for sure, but as for sure as I can be today.
BENOIT LAPRADE: Yes, but there’s still some potential money coming there?
ROHIT BHARDWAJ: Oh, yes.
BENOIT LAPRADE: Great. Thank you.
OPERATOR: Thank you. Ladies and gentlemen, if there are any additional questions, please press the * followed by the 1 at this time. As a reminder, if you’re using speaker equipment, you’ll need to lift the handset before making a selection.
One moment, please. Mr. Davis, I show no further questions at this time. Please continue. Pardon me, our next question comes from the line of Damir Gunja with TD Newcrest. Go ahead, please.
DAMIR GUNJA: Thanks, good morning.
MARK DAVIS: Good morning.
DAMIR GUNJA: I was wondering, could you just elaborate a little bit on the 10 per cent possibly new sulphuric acid volumes? Is there a geographic area or anything you can elaborate on there?
MARK DAVIS: Yes, we’ve entered into a... I guess frankly two five-year agreements with a by-product producer who just prefers that we don’t mention his name at this stage, right? And the volume is, I’m trying to remember, to be honest. I think it’s basically one-third North American, two-thirds Europe. So we pick up another, I don’t know, 100,000 tonnes in North America and a couple 100,000 tonnes or 150,000 tonnes out of Europe.
DAMIR GUNJA: And are these new facilities or is this business you took from somebody else?
MARK DAVIS: No, this is business that we either took from somebody else or actually the smelters themselves decided that they didn’t want to keep marketing it, and they turned it over to us.
DAMIR GUNJA: Okay. That’s great. Thanks.
MARK DAVIS: Thank you.
OPERATOR: Thank you. And Mr. Davis, I show no further questions at this time. Please continue.
MARK DAVIS: Okay. Thank you everyone for joining us, and we look forward to talking with you at the end of our next quarter. Thank you.
OPERATOR: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.
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