Q4 2013 Algoma Central Corp Earnings Conference Call

ALC.TO - Algoma Central Corp
Q4 2013 Algoma Central Corp Earnings Conference Call
Feb 19, 2014 / 04:00PM GMT 

==============================
Corporate Participants
==============================
   *  Peter Winkley
      Algoma Central Corporation - VP, Finance & CFO
   *  Greg Wight
      Algoma Central Corporation - President & CEO

==============================
Conference Call Participants
==============================
   *  Blake Pelham
      Raymond James Limited - Analyst

==============================
Presentation
------------------------------
Operator   [1]
------------------------------
 Good morning. My name is Beth and I will be your conference operator. At this time, I would like to welcome everyone to the Algoma Central Corporation fourth quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions).

 I will now turn the call over to Peter Winkley, Vice President Finance and CFO. You may begin your conference.

------------------------------
 Peter Winkley,  Algoma Central Corporation - VP, Finance & CFO   [2]
------------------------------
 Thank you, Beth, and good morning, everyone. Welcome to the Algoma Central Corporation's fiscal 2013 year-end and fourth quarter investor conference call. As Beth said, my name is Peter Winkley, and I am the VP Finance and Chief Financial Officer of Algoma.

 Hopefully, by now, you have seen our news release that was sent out at the end of the day yesterday. We expect to make our full annual SEDAR filings early next week, but in the meantime, thank you for joining us to get an overview of our 2013 financial results.

 We are broadcasting this event courtesy of CNW and you will find a PowerPoint presentation on our profile page at the CNW website that will highlight the details that we will be discussing on this conference call. Copies of these slides will also be available following this call on our website.

 Joining me this morning on the call is Greg Wight, President and CEO of Algoma. This morning I will take you through the financial highlights for the quarter, following which I will turn the call over to Greg for his perspective on the events in the quarter and the outlook for the business. We will then open it up to questions.

 Before we begin, I should remind you that our comments today may contain forward-looking statements that are subject to risks and uncertainty that could cause actual events to vary materially. Some of these risks are disclosed in the Management Discussion and Analysis portion of the Company's Annual Report and in the 22 (sic) Annual Information Form -- sorry; the 2012 Annual Information Form filed with the relevant security regulators. Also, as otherwise noted, all amounts are in Canadian dollars. I encourage you to review our 2013 filings next week for further details.

 To begin with, I'm going to take you through the financial highlights for the quarter and for the year to date, and touch upon a couple of operational highlights. We have some notable achievements during the first quarter 2013, which Greg will touch on further in a few minutes.

 That said, we are disappointed with our financial results. The construction and agriculture sections remained challenging, although by the end of the year we were beginning to see positive impact from record grain harvest in Western Canada. Winter weather struck early and hard throughout the Great Lakes region, affecting not only vessel operating conditions and productivity during November/December, but also the performance of railways in their movement of grain to Thunder Bay for transshipment onto vessels.

 As expected, the end of the Canadian Wheat Board single trading desk had an impact on grain shipping activity throughout the year, and we did see more seasonality in grain shipments than experienced in recent years. We were encouraged that customer demand for grain shipments strengthened considerably during the fall, following the record Canadian harvest.

 Consolidated revenues for the year was CAD491.5 million compared to CAD527.9 million in 2012. The decrease in revenue for the year all occurred prior to the fourth quarter and revenues for Q4 were CAD148.9 million this year compared to CAD148.7 million last year.

 There are some specific segment differences that I will cover in a moment. Segment earnings after tax for fiscal 2013 were CAD46.1 million compared to CAD59.8 million for 2012. The decrease was due to domestic dry bulk. As a reminder, segment earnings, net of tax, reflect operating earnings attributable to our business segments on an after-tax basis, and is before considering foreign-exchange gains or losses as well as interest income and expense, none of which is allocated to our business segments.

 Our general and administration expenses are down for the prior year, and I will remind you that 2012 G&A expenses included the impact of arbitration costs incurred in connection with our tanker contract cancellation. All G&A costs are fully allocated to our business segments, and so they are reflected in the business segments that we will be discussing.

 During the fourth quarter, we collected amounts owed to us related to the cancellation in 2010 of three ocean tanker construction contracts, and the interest on this refund of CAD3.8 million is included in interest income for the quarter. Also, during the fourth quarter, we concluded a tax dispute related to the valuation of some northern Ontario land sold in 1997. Settlement of this issue resulted in a tax cost of CAD4.6 million and there was also interest income and interest expense of approximately CAD2 million each. These amounts roughly offset, although both the interest income and interest expense lines are grossed up to reflect this transaction.

 Finally, the deterioration in the Canadian dollar over the course of 2013 has generally resulted in foreign-exchange gains, where last year we were experiencing losses as a result of Canadian dollar strength.

 Net earnings for the year were CAD41.9 million compared to CAD42.2 million in 2012 and earnings per share were CAD1.08 for both years. For the fourth quarter, net earnings and earnings per share were CAD22.8 million and CAD0.59 compared to CAD24.3 million and CAD0.62 last year.

 I will now turn to the results from our business units. Domestic dry bulk revenues for fiscal 2013 were CAD323 million compared to CAD375.6 million for 2012. For the fourth quarter, revenues were CAD102.6 million compared to CAD112.4 million in 2012.

 Tonnage carried was 9.1% lower for 2013, particularly due to increases in the agriculture and construction sectors. It was particularly acute in the agriculture sector, where the loss of single trading desk status for the Wheat Board and the emergence of new competitors in the market had a profound effect on grain movements.

 In particular, we saw much lower movement of grains to the St. Lawrence through most of 2013 compared to what we would have seen in prior periods. This change, combined with some vessel incidents early in the year, resulted in 7.8% fewer operating days than in 2012.

 Revenue from the agricultural sector for Q4 was lower in 2013 than the prior year, in part due to delays farmers faced getting their crops shipped by rail to Thunder Bay. The domestic dry bulk segment after-tax operating earnings were CAD14.9 million for the year compared to CAD32.4 million reported for 2012, and for the quarter were CAD14.6 million compared to CAD21.5 million last year. The drop is attributable to the lower revenues.

 Our product tanker segment continued its strong performance in the fourth quarter. Revenues for product tankers for the year were CAD100.6 million, and the highest level ever compared to CAD87.2 million in 2012. The fourth quarter, which was also a record, accounts for CAD29.2 million of these revenues compared to CAD22.3 million in 2012. Strong demand year-round resulted in more chartering of capacity which drives revenues, but on which we earn a small margin.

 As a result of these strong revenues, segment earnings after-tax were CAD3.1 million for the quarter and CAD13.7 million for the year, up from CAD2 million and CAD9.3 million reported in 2012. Segment earnings for the fourth quarter were lower than might be expected on the strong revenues, principally because of the chartering, but also because regulatory dry dockings required were done during the last quarter of the year.

 I would also like to remind you that the 2012 results for the year reflect arbitration-related legal fees that weren't repeated this year.

 Turning to the results of ocean shipping, our share of pool revenues for the third quarter was CAD15.9 million, and for the year, CAD64.1 million, compared to CAD12.9 million and CAD67.7 million for the same period in 2012. The decrease for the two periods reflects the sale late in 2012 of one of our 50%-owned vessels and a dry docking late in the fourth quarter 2012 of one of our wholly-owned vessels.

 While the sale of the 50%-owned vessel impacted our share of pool revenues, and our earnings from joint arrangements, it did not impact the revenues we reported in our consolidated results as those come from our 100%-owned ships.

 Consolidated revenues reported for the fourth quarter, therefore, rose from CAD6.7 million last year to CAD9.8 million for 2013. And that is because of a vessel that we had in dry docking in the fourth quarter last year.

 In addition, we had our other wholly-owned vessel in dry docking earlier in the year in 2012, and so our reported revenues for the full fiscal year in 2013 rose by nearly 10% to CAD39.5 million. And this was as a result of the additional operating days in 2013.

 After-tax earnings for the segment were CAD15.3 million for 2013 compared to CAD15 million last year. For the fourth quarter, these amounts were CAD3.4 million and CAD3.6 million, respectively.

 Fourth-quarter earnings for 2012 included a gain on the sale of the retired ship, which offset the loss of earnings from having our ship in dry dock. Excluding the impact of that gain from 2012 results, and segment earnings for ocean shipping were ahead of last year.

 Revenue from our real estate segment, Algoma Central Properties, was CAD28.3 million for the year compared to CAD29.2 million in 2012. And after-tax earnings were CAD2.2 million for 2013 compared to CAD3.1 million last year.

 Our Sault Ste. Marie hotel delivered disappointing results all year as the hotel market in that city has been very weak. Improved results from Station Mall and from some improved leases compared to the same period last year helped results overall, but did not offset the impact on the hotel.

 That summarizes the highlights on the income statement. I will now turn to major items affecting cash flow.

 Cash flow from operations for the year was CAD105.2 million compared to CAD100.1 million in 2012. Although EBITDA was lower for 2013 compared to 2012, this was more than offset by a CAD32 million improvement in net working capital, which reflects a reduction in accounts receivable and the timing of an installment payment on our next Equinox Class vessel, which was included in accounts payable at year-end this year.

 Including this installment payment, for the year we invested CAD51.9 million in capital assets, primarily related to vessel construction. At the end of the fourth quarter, as I mentioned previously, we collected nearly CAD42 million of outstanding installments from the canceled tanker project, including the interest.

 As a result, at the end of the year, we had cash of CAD216 million and net working capital of CAD234 million. This is more than adequate to cover our Equinox Class construction costs as well as any other commitments.

 Our funded pension plans had a very strong year this year, recording actuarial gains of CAD25.7 million on extremely strong investment returns and discount rates that are beginning to return to levels closer to long-term norms. By year-end, our two funded pension plans were actually in surplus.

 Our shareholders' equity at year-end was CAD561 million, or CAD14.42 per share. In January, our Board of Directors declared a CAD0.07 dividend per share payable on March 3 to shareholders of record on March 17. That covers the operating and financial highlights for the fourth quarter and I will now turn it over to Greg Wight, our CEO.

------------------------------
 Greg Wight,  Algoma Central Corporation - President & CEO   [3]
------------------------------
 Thank you, Peter. The trend of significant compliments and the ongoing evolution of our one vision, one purpose, one team strategic focus continued throughout 2013. Unfortunately, these accomplishments were somewhat overshadowed by the disappointing financial results that Peter has just reviewed.

 That being said, the obvious highlight of 2013 was the arrival of the Algoma Equinox in Canada in late November. 20 Algoma crew members began the long journey from Nantong Mingde shipyard in China on October 1, with the vessel arriving at Port Cartier, Quebec, on November 30, for the loading of its first cargo. The Algoma Equinox is the first in a series of eight vessels being built at Nantong Mingde shipyard.

 The series consists of four gearless bulk carriers and four self-unloading bulk carriers. Algoma will own six of the series, consisting of two gearless bulk carriers and the four unloading self vessels. CWB, Inc., formerly the Canadian Wheat Board, will own the other two gearless vessels, which will be operated and managed by Algoma.

 The Equinox Class represents the next generation of Great Lakes St. Lawrence waterway bulk cargo vessels. Algoma's CAD300 million investment in the six Equinox Class vessels demonstrates the Corporation's commitment to operating in a sustainable manner.

 These vessels have been designed to optimize fuel efficiency and operating performance, thus minimizing their environmental impact. A 45% improvement in energy efficiency over Algoma's current fleet average is expected, resulting from the use of a modern, efficient, tier 2 compliant main engine, significantly increased cargo capacity, and an advanced hull form that produces resistance through the water.

 In addition, a fully integrated IMO-approved exhaust gas scrubber will remove 97% of all sulfur oxide from shipboard emissions. The use of exhaust gas scrubbers represents the first application of an IMO-approved integrated scrubber on the Great Lakes St. Lawrence waterway.

 We expect the second Equinox Class gearless bulker, the Algoma Harvester, to arrive in Canada late in the second quarter with the two CWB, Inc. vessels to arrive later in 2014. The four Equinox Class self-unloaders will follow throughout 2015.

 We are, however, disappointed that the delivery schedule for the Equinox Class vessels has slipped considerably from original expectations. We continue to work with the shipyard to accelerate the remaining delivery dates as much as possible.

 Offsetting this disappointment is the fact that the quality and workmanship of the shipyard is very good. Our decision to develop an innovative and advanced vessel has taken more time than what might have been achieved with a lesser design. That said, we firmly believe we have made the right decision for Algoma, our customers, and the environment.

 We are also very pleased that arbitration process related to the cancellation of contracts to build three product tankers in China reached a successful conclusion in December 2013. These shipbuilding contracts contain provisions that permitted cancellation under certain conditions. These conditions were met in 2010 and, accordingly, Algoma issued notices of rescission to the shipyard seeking to cancel the contracts.

 The matter was taken to arbitration by the shipyard and hearings were conducted before a tribunal in London in September 2012. The arbitration tribunal found in favor of Algoma in all matters in April 2013. Following this decision, the shipyard sought to appeal, and in November the UK commercial court rejected the shipboard's application.

 On December 27, the shipyard returned CAD37.9 million in installments advanced by Algoma together with interest in the amount of CAD3.8 million.

 I am also pleased to note that for 2013, the total shareholder return, which includes share appreciation and dividends, for Algoma Central Corporation shareholders, was 20%. By comparison, the S&P TSX composite total return index increased by 13% for the same period. This follows total shareholder returns of 41% for 2012 and 11% for 2011. And, over the ten-year period ended December 31, 2013, the total shareholder returns for the Corporation's common shares grew at a compound rate of 11%.

 Our outlook for 2014 includes an optimistic view for Canadian grain exports following the record Canadian crop harvested in 2013. The North American steel industry also looks to continue current performance levels with persistent strong demand for steel products such as automobiles in North America.

 Finally, we expect shipments of construction materials, such as aggregate products and cement, to continue their recovery from the recession of 2009 and expect the movement of road control [stow] to be strong due to the extreme winter weather conditions currently being experienced. In addition, we are very excited about the arrival in 2014 of more Equinox Class vessels and are looking forward to realizing the significant operating efficiencies these vessels will deliver.

 In closing, I would like to remind you that the annual meeting of shareholders will be held in Saint Catherine's on May 2, 2014. We invite you to attend and look forward to seeing you at that time. I will now turn it over to the conference operator for the question and answer session.



==============================
Questions and Answers
------------------------------
Operator   [1]
------------------------------
 (Operator Instructions) Blake Pelham, Raymond James Limited.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [2]
------------------------------
 So, one question I have is tanker outlook for 2014. Do you expect it to remain as strong as it has been for 2013?

------------------------------
 Greg Wight,  Algoma Central Corporation - President & CEO   [3]
------------------------------
 Yes, we do. We see 2014 as strong as 2013, maybe even stronger.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [4]
------------------------------
 Okay. What is your outlook for the start of the 2014 shipping season, given the amount of ice on the Great Lakes, et cetera?

------------------------------
 Greg Wight,  Algoma Central Corporation - President & CEO   [5]
------------------------------
 We are concerned about the start of the season and the impact the accumulation of ice will have on vessel transits through late March, early April.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [6]
------------------------------
 So does that mean like kind of slower off the block or --?

------------------------------
 Greg Wight,  Algoma Central Corporation - President & CEO   [7]
------------------------------
 It would be slower off the block and maybe fewer ships coming out to beat themselves up in the ice.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [8]
------------------------------
 Okay. Now, the tax issue, is that -- sorry, and I didn't quite catch the comment on that. But are all tax issues now -- back tax issues now settled?

------------------------------
 Peter Winkley,  Algoma Central Corporation - VP, Finance & CFO   [9]
------------------------------
 Yes. That was really the only one. It was a [CRA] value dispute that arose related to the sale of about 800,000 acres back in 1997, and it has been ongoing through the objection and appeals process now since -- well, I guess for a dozen years. So that was really the only matter. It had been disclosed in our annual notes as an open item in prior years, but the opportunity arose this year to settle the thing and stop spending legal fees on it. So we chose to go there.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [10]
------------------------------
 Okay. So it has been settled and we -- and the Company paid CAD4.6 million in interest. Is that what I understand or --?

------------------------------
 Peter Winkley,  Algoma Central Corporation - VP, Finance & CFO   [11]
------------------------------
 What we had done is we had actually paid an installment towards the tax amount back in 2002. So from a cash perspective, we are actually getting back about CAD5 million. The tax cost was CAD4.6 million, but the way the tax reassessment process works is we had an interest cost up until the time that we paid the installment, and then we earned interest income from that date on the amount that we paid that was in excess of what we had ultimately paid in taxes.

 So those two amounts just happened to be a little over CAD2 million each. They really offset. So the net impact from a P&L standpoint is primarily the tax provision. As I said, we will actually get cash back because we had placed that on deposit with CRA.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [12]
------------------------------
 Okay. So you are looking at tax back in the roughly CAD5 million.

------------------------------
 Peter Winkley,  Algoma Central Corporation - VP, Finance & CFO   [13]
------------------------------
 Yes.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [14]
------------------------------
 Okay. Is there a way that you could quantify the impact of the weather on Q4 in terms of the early winter extreme temperatures, et cetera? Did it stop you from actually shipping product?

------------------------------
 Peter Winkley,  Algoma Central Corporation - VP, Finance & CFO   [15]
------------------------------
 The answer to that probably, there is too many moving pieces to quantify it exactly. Certainly, the weather was a partial contributor to grain not getting to Thunder Bay. It wasn't the biggest aspect of that. The lack of railcar capacity was a bigger issue there than weather.

 As far as our ship movements were concerned, certainly December, particularly, the buildup of ice occurring earlier than would normally be the case would have slowed us down. And, in some cases, that is a cost our customers bear. In other cases, it is a cost that we bear.

 So there is a number of moving parts. It would be very difficult to tease out exactly what could be directly attributed to weather.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [16]
------------------------------
 Okay. And are we anticipating lake levels to be higher? And will that be beneficial to Algoma in the 2014 season?

------------------------------
 Greg Wight,  Algoma Central Corporation - President & CEO   [17]
------------------------------
 Well, certainly, because of the ice cover throughout the Lakes, virtually all the lakes but Lake Ontario are fully ice covered, that will -- should lead to improved water levels in 2014, less evaporation during the winter and more precipitation into the water. So we fully expect water levels to be improved. I mean, that is obviously one impact of the weather.

 The other impact of the extreme weather is just the usage of salt around the Great Lakes has been very high. And, in fact, a lot of places are running out. So we will be quite busy resupplying the salt depots.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [18]
------------------------------
 And just to make sure I understand on the new ships, we are expecting three this year and the remaining four in 2015.

------------------------------
 Peter Winkley,  Algoma Central Corporation - VP, Finance & CFO   [19]
------------------------------
 Correct.

------------------------------
 Blake Pelham,  Raymond James Limited - Analyst   [20]
------------------------------
 Okay. Well, that's great. Thank you, gentlemen.

------------------------------
Operator   [21]
------------------------------
 (Operator Instructions) No further questions at this time. Turn the call back to Mr. Winkley.

------------------------------
 Greg Wight,  Algoma Central Corporation - President & CEO   [22]
------------------------------
 This is Greg. Thank you for joining us today. Should you have any further questions, please do not hesitate to give Peter or myself a call. Thank you.

------------------------------
Operator   [23]
------------------------------
 This concludes today's conference call. You may now disconnect.






------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------