Chemtrade Logistics Income Fund : Q2 2023 Results Conference Call (Script)

Chemtrade Logistics

Q2 2023

August 15, 2023

10:00 AM

Operator: Welcome to the Chemtrade Logistics Income Fund Q2 2023 Conference and Webcast. For the first part of this call, all participants will be in listen-only mode, so there's no need to mute your individual lines. And afterwards, there will be a question-and-answer session. I'm now pleased to present Rohit Bhardwaj. Please begin your meeting.

Rohit Bhardwaj, Chief Financial Officer:

Thank you, Mark. Good morning and thank you for attending Chemtrade Logistics Income Fund Earnings Conference Call for the second quarter of '23. With me on today's call is Scott Rook, President and CEO of Chemtrade. I will begin this morning's call by discussing our second quarter results and the current 2023 guidance. I will then hand the call over to Scott to provide more color on our outlook for the balance of this year and beyond. We will then open the call for analyst Q&A. Please note that this call has an accompanying presentation available on our website, chemtradelogistics.com.

Before proceeding, please note that our presentation contains certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Actual results may differ materially. Further information identifying risks, uncertainties and assumptions, and additional information on certain non-IFRS and other financial measures referred to in this call can be found in the disclosure documents filed by Chemtrade with the securities regulatory authorities available on sedarplus.ca. One of the measures that we refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude noncash items, such as unrealized foreign exchange gains and losses. Although our accompanying presentation will refer to adjusted EBITDA, we will refer to it as simply EBITDA in our remarks. Non-IFRS and other financial measures are fully defined in our MD&A.

The second quarter of 2023 continued to build on our recent track record of strong performance. EBITDA for the period was $144.2 million, which is our best quarter ever. The strong results

reflect ongoing strength across many of our key products as well as increased focus we have placed on an operational reliability and productivity in recent years. Some areas of particular strength this quarter included sodium chlorate, Water Solutions products, and regen acid, each of which we will provide more commentary on shortly.

In Q2 '23, our consolidated revenue increased by 5%, while EBITDA increased by 76% and distributable cash increased by 268% compared to the prior year period. However, when comparing our

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Q2 results year-over-year, it is important to note that the prior year period was affected by two unique items. First, we had our biannual maintenance turnaround at North Vancouver, which we previously quantified as having a negative impact on EBITDA of approximately $17.1 million. Second, we also had approximately $3.9 million of costs in Q2 '22, related to the decision to close our Beauharnois sodium chlorate facility. Additionally, results for Q2 '23 benefited from a weaker Canadian dollar relative to the U.S. dollar, resulting in an $8.6 million benefit to EBITDA. Therefore, more than half of the improvement in EBITDA was due to significantly better performance across a few product lines and the balance due to the items I just mentioned.

Net of these items I just mentioned, revenue for the quarter was $12.6 million lower than Q2 '22. Higher pricing for Water Solutions products and sodium chlorate as well as higher sales volumes of Regen acid in the SWC segment were not enough to fully offset lower selling prices for merchant acid in the SWC segment and lower sales volumes of sodium chlorate in the EC segment. Again, net of the above-mentioned items, EBITDA for the period was $32.9 million higher than Q2 '22. This was attributed to higher gross profit for sodium chlorate, water solutions products, and Regen acid.

In addition, while caustic soda pricing has come down from its '22 highs as previously communicated, this impact has been more than offset by continued strength in chlorine and hydrochloric acid. We believe this is noteworthy as some investors continue to view Chemtrade as a caustic-driven story even though we are delivering record results while realizing softer caustic soda pricing. On a year- over-year basis, realized MECU netbacks are up $45 while realized caustic soda pricing has declined during that period. In what is a challenging market for many chemical companies, the strength of our diversified portfolio is coming through.

Given our record first half results and improved visibility for the second half of the year, in June, we announced an increase to our full year '23 guidance to have EBITDA greater than $450 million, another record for Chemtrade. We remain confident in this outlook. It takes into account recent declines in the Northeast Asia spot price for caustic soda and we'll speak more to this guidance momentarily.

At the conclusion of the second quarter, our balance sheet remains strong. The net debt-to- EBITDA ratio stood at 1.8 times compared to 2.2 at the end of '22. Our distribution of $0.05 per month provides a very attractive return for unitholders, representing a distribution yield of approximately 7% based on yesterday's closing unit price. And the distribution remains well covered by our cash flows with the payout ratio on the last 12-month basis of only 22%. In our future capital allocation plans, we remain dedicated to the 3 essential pillars: maintaining the strength of our balance sheet, providing returns to unitholders, and investing in growth to generate long-term value for our unit holders. We expect our year- end leverage to be below 2.2 times.

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Moving to our segmental performance. In Q2 '23, the Sulfur and Water Chemicals or SWC segment generated revenue of $280.3 million, an increase of 4% over the second quarter of '22. EBITDA for the quarter was $73.2 million, an increase of 34% over the second quarter of '22. The weaker Canadian dollar had a positive impact of $12 million on revenues and $3 million on EBITDA. Adjusting for foreign exchange, revenue declined by less than 1% and EBITDA increased by 29%.

Revenue benefited from higher pricing for Water Solutions products and higher volumes of regen acid but was offset by lower merchant asset selling prices, primarily due to lower sulfur costs. However, the lower merchant acid pricing had a limited impact on EBITDA. The increase in EBITDA was driven by higher selling prices and improved margins for our Water Solutions products. Pricing for these products has caught up with raw material costs, as we have previously discussed. We also realized higher regen acid sales volumes, reflecting strong refinery demand following our customers' turnaround activity in Q1.

Our Electrochemical or EC segment generated revenue of $189.7 million in Q2, an increase of 7% year-over-year. EBITDA was also up 84% year-over-year to $93.3 million. As I previously noted, the biennial maintenance turnaround at North Vancouver last year, and the expense related to the Beauharnois plant closure had a combined negative impact of $21 million on EBITDA in Q2 '22. In addition, the EC segment benefited from a weaker Canadian dollar that improved EBITDA by $6.3 million in Q2 '23. After adjusting for these items, EBITDA for the EC segment still increased by 21% year-over-year.

The strong results for the quarter were achieved even though caustic soda prices were lower. In fact, despite the lower price of caustic soda, unrealized MECU netbacks were still up by $45 year-over- year. Realized net back for these 2 products was significantly above the prior year quarter and more than offset weaker caustic soda prices. Chlorine continued to benefit from favorable market dynamics compared to recent years, including reduced industrial supply, while HCl continued to benefit from improved North American fracking activity.

The EC segment has also benefited from significantly higher selling prices for sodium chlorate compared to the prior year period. This was due to price increases implemented earlier in the year, reflecting tighter North American industry supply and a global shift in operating rates caused by the higher overseas energy costs. Improved margins for sodium chlorate accounted for approximately 80% of the improvement in gross profit for the second quarter of '23 relative to the second quarter '22.

Our Brazil business also continued to perform well in Q2 supported by strong results from chlorate, chlorine, and HCL. As a result, the Brazil business is on track for a record year in '23.

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Looking now at our corporate costs. Our corporate costs for Q2 '23 were $22.3 million, $1.5 million lower than the prior year period. The decline is attributed to lower long-term incentive plan costs of $2 million year-over-year and $1.4 million of higher realized foreign exchange gains year-over-year. This was partially offset by higher short-term incentive compensation costs of $0.5 million year-over- year. Overall, these corporate costs were broadly in line with expectations.

Switching over now to our balance sheet. We continued to reduce our financial leverage and strengthen our balance sheet in Q2. Our net debt-to-EBITDA ratio at the end of the period decreased to

1.8 times from 2.2 at the end of '22. This improvement reflects the strong EBITDA growth and related cash flow generation we have realized. Reflecting our updated growth capital expenditure guidance for '23, we now expect net debt to EBITDA to remain below 2.2 times for the balance of the year.

During the second quarter, we redeemed the full principal amount of the debentures that were set to mature in May '24. This reflects our strategy to reduce debentures as a proportion of our capital structure moving forward. We have reduced the outstanding principal amount of debentures on our balance sheet by 18% since '22 year end. We funded this recent redemption through a combination of a debenture issuance we completed in Q1, our revolving credit facilities, and cash on hand.

Chemtrade ended the period with USD $358.1 million undrawn on our revolving credit facilities in addition to CAD $34.3 million of cash on hand. Our net debt maturity is not until September '25. The company remains well positioned with significant financial flexibility moving forward.

Turning now to our guidance. Yesterday, we reiterated the '23 guidance that we provided in June, which calls for '23 EBITDA of greater than $450 million. If we're able to achieve this result, Chemtrade's '23 EBITDA would surpass the previous record earnings set in '22 by more than $19 million. The biggest factors that have led to this guidance increase are the robust results we generated through the first half of '23 and improved visibility for our performance for the balance of the year.

We have updated the assumptions that underlie the updated '23 guidance in our disclosure documents, including for MECU and sodium chlorate sales volumes, MECU pricing and caustic soda pricing. I would like to reinforce again that we expect to generate record EBITDA this year despite lower cost caustic soda pricing, which is reflected in our updated assumptions.

Overall, 2023 is shaping up to be another great year for Chemtrade. Our portfolio has remained resilient, and we continue to generate strong results. We believe the defensive nature of our portfolio positions us well for any potential upcoming economic weakness and we have a strong balance sheet in place that positions us with significant financial flexibility moving forward. Meanwhile, we continue to return capital to our unitholders through our $0.05 per month distribution, which we believe is very

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sustainable and highlighted by an implied payout ratio in '23 of over 30% or lower based on our updated guidance. I will now turn the call over to Scott, who will provide more commentary on our outlook. Scott?

Scott Rook, President and Chief Executive Officer:

Thank you, Rohit, and good morning, everyone. It's great to be with you all today. As Rohit just highlighted, we had another very strong quarter. I'm really pleased with how this year is looking, and I want to take a minute to thank all Chemtrade employees. I'm extremely proud of the Chemtrade team. Their focus and execution have helped drive the impressive results we have generated in the first half of this year. Across all levels of the organization, our employees have been executing at a very high level. So, thank you for all the hard work.

Our results have also been supported by several favorable global macro trends that we expect to continue for the coming years. We have spoken to these dynamics before, but I'd like to spend a couple of minutes discussing Chemtrade's advantaged position in three areas of our business.

First, our Electrochemicals business is benefiting from elevated energy costs overseas. Chemtrade's access to regulated renewable hydroelectric energy puts us in an enviable position relative to competitors and higher energy cost regions. We've seen improving pricing across chlorate, chlorine, and hydrochloric acid, as well as improved North American demand for chlorate in HCL because of this dynamic.

Second, as the top North American supplier of ultra-pure acid to the semiconductor industry, we are well positioned to capitalize on the incredible demand growth for ultra-pure acid anticipated over the next five years. The semiconductor industry is focused on building production in North America, and this will result in the 2 to 3x growth in ultra-pure demand and an upgrading of ultrapure quality in North America. We have previously announced two projects to further strengthen our market position in North America and capitalize on this opportunity, which I will provide an update on shortly.

Third, Chemtrade is the top supplier of water chemicals to municipal drinking water plants in North America. Increasing regulations and population growth are supporting increased demand for the coagulants we produce. We also continue to evaluate and pursue opportunities to capitalize on higher growth areas of the water chemicals market as well, such as PAC and ACH. None of these market trends are short-term in nature. Rather, we believe they'll support organic growth at Chemtrade over the medium and long term. And we, as an organization, are ensuring that we take the necessary actions to take advantage of these trends in a capital responsible manner.

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