Chemtrade Logistics Income Fund : Q1 2024 Results Conference Call (Script)

Chemtrade Logistics Income Fund

Q1 2024

May 16, 2024

8:30 AM

Operator: Good morning, ladies and gentlemen, and welcome to the Chemtrade Logistics Income Fund Q1 2024 conference call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question and answer session. If at any time during this call you require immediate assistance please press "*" "0" for the operator.

This call is being recorded on Thursday, May 16, 2024. I would now like to turn the conference over to Rohit Bhardwaj, Chief Financial Officer. Please go ahead.

Rohit Bhardwaj: Thank you. Good morning, and thank you for attending Chemtrade Logistics Income Funds earnings conference call for the first quarter of 2024. Joining me on this morning's call is Scott Rook, our President and CEO.

We will begin this call by providing a brief recap of the first quarter results we announced yesterday in addition to our updated 2024 guidance. Scott will then provide comments on the outlook for our key products and provide thoughts on various

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growth initiatives. Following our prepared remarks, we will open the lines for questions.

Please note that this call has an accompanying slide deck, which is available on our website, chemtradelogistics.com. Before proceeding, we would like to note that today's call will contain 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 from expectations. Further information identifying risks, uncertainties and assumptions and additional information on certain non-IFRS and other financial measures referred on this call can be found in the disclosure documents filed by Chemtrade with the securities regulatory authority available on sedarplus.com.

One of the measures that we will refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude noncash items such as unrealized foreign exchange gains and losses. While our accompanying presentation refers to Adjusted EBITDA, we'll refer to it simply as EBITDA in our remarks.

Beginning now with our first quarter results, which we believe demonstrate a strong start to 2024. While the financial results we generated this quarter were lower on a year-over-year basis, it is important to note that Q1 of 2023 marked a record Q1 for Chemtrade, making a direct comparison difficult.

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In Q1 of 2023, we benefited from several factors, including substantially higher realized caustic soda pricing than in Q1 of this year. That being said, the results we reported this quarter were ahead of our initial projections. This reflects the strong execution on the part of the entire Chemtrade team. Most of our businesses performed well.

The continued focus on reliability, productivity,

execution, and commercial excellence across our diversified portfolio continues to yield strong returns and support our operational and financial performance. EBITDA margins remain robust, and we continue to generate very strong cash flow that is well above our distributions. Our balance sheet remains well positioned to pursue accretive growth and other value creation opportunities.

Looking at the sulfur and water chemicals segment, which I will refer to as SWC moving forward, revenue was $230.6 million, reflecting a decrease of 12% year-over-year. EBITDA for the segment was $51.4 million, a decrease of 7% over last year.

Water chemicals were once again a standout performer this quarter with higher selling prices contributing to margin improvements. In merchant acid, we had lower volumes year-over- year, which can be attributed mainly to reduced byproduct supply. As a reminder, roughly half of our merchant acid is obtained under long-term contracts for metal smelters. Merchant

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acid selling prices were also lower, but the pricing impact was mitigated by our risk-shared contracts with the suppliers which allowed us to keep our margins relatively flat. Merchant acid remains a very resilient business for Chemtrade.

After a decline during COVID, regen acid has performed well. And looking ahead, the regen acid market remains a relatively stable business line for us. In sodium nitrite, the maintenance activity to assess process improvements discussed last quarter carried into the first quarter of '24. While these improvements did negatively impact overall volumes for sodium nitrite in Q1, the work is now complete and the improvements are starting to pay dividends and should benefit the long-term performance of the sodium nitride business for Chemtrade with increased reliability moving forward.

In the Electrochem or EC segment, revenue for the first quarter was $187.6 million, reflecting a decrease of 10% year- over-year. EBITDA for the period was $82.5 million, which declined 17% compared to Q1 of '23. This decline was almost entirely attributable to materially low caustic soda pricing on a year-over-year basis. In Q1 of 2023, our caustic soda pricing was based on an index of over USD 650 per ton, where in Q1 2024, the index was USD 300 per ton lower.

The partial offset to lower caustic soda pricing was improved netbacks for both hydrochloric acid and chlorine, which

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offset about 25% of the decline in caustic soda. But in recent quarters, chlorine pricing was a more meaningful contributor to performance than hydrochloric acid, this dynamic has now flipped and hydrochloric acid pricing now having a bigger impact than chlorine pricing.

Looking at corporate costs. Our corporate costs in Q1 were essentially flat on a year-over-year basis, which was in line with our expectations. Looking at the balance sheet, we ended Q1 in a very strong financial position with low financial leverage and significant financial flexibility.

At the end of our quarter, our net debt to adjusted EBITDA ratio was 1.9 times, which is up slightly from the end of '23, but an improvement from 2.2 at the end of Q1 '23. Based on our guidance, we expect this leverage ratio to remain at or below 2 time at the end of '24.

We have no debt maturities until September 2025. We also have significant undrawn capacity on our revolving credit facilities in addition to cash on hand. Given the significant improvements made to our balance sheet in recent years, we are now in a great position to be able to evaluate and pursue various potential value-enhancing initiatives.

Yesterday, we announced our Board's approval of the initiation of a Normal Course Issuer Bid. This will offer us another potential avenue to return capital to our unit holders.

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We're also looking at other opportunities to further optimize our capital structure, including retiring the convertible debentures that are maturing next year at the earliest opportunity.

We're also looking to supplement our organic growth initiatives with M&A should we identify an opportunity that fit strategically within our portfolio and has synergistic value. The acquisitions we would target would primarily be those with annual EBITDA in the $10 million to $50 million range. Any opportunities we try to pursue will be aligned with our commitment to balancing capital allocation across our 3 core pillars: investing in strategic growth, maintaining a strong balance sheet, and returning capital to our unitholders.

Moving to our 2024 guidance. We now expect that 2024 EBITDA to be at the higher end of our previously communicated guidance range of between $395 million and $435 million. This update reflects our strong start to the year and our continued confidence in our ability to deliver strong performance for the balance of 2024. We remain well positioned to again deliver one of the best years for EBITDA in Chemtrade's history.

I would like to reiterate a couple of points made during our last conference call that are still relevant when thinking about the trajectory of our earnings for 2024. We expect the second half of 2024 will be stronger than the first half of this

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year. This is primarily owing to the biannual turnaround at our North Vancouver facility, which we have just completed. We anticipate that the turnaround cost us roughly $15 million impact, and this will impact Q2 for EBITDA.

In addition, since the second quarter last year was the highest EBITDA quarter in Chemtrade's history, we can expect that EBITDA for Q2 2024 will be lower competitively speaking.

Again, this is primarily due to the higher caustic soda pricing that we benefited from last year and we have the biannual turnaround this year.

Note that our guidance does not consider the impact of the anticipated labor disruptions that the rail companies used to transport our products. The impact would depend on the length of the disruption and since it is unknown, we have not factored this into our guidance.

The assumptions underpinning our 2024 guidance are available in our disclosure documents. Please refer to these for additional information. I will now hand the call over to Scott to provide some commentary on our outlook. Scott?

Scott Rook: Thank you, Rohit, and hello to everyone who is joining us on this morning's conference call. We value both your continued interest and support of Chemtrade and are pleased to be sharing our strong first quarter results with you today.

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We believe we have established a strong foundation at Chemtrade in recent years. We have focused on improving both reliability and execution, and our first quarter results are reflective of these efforts. We anticipate this year will be another year of achievement and progress for Chemtrade, and we look forward to continuing to execute on the significant opportunities that lie ahead.

Looking across the key products in our portfolio, we continue to expect strength in a number of areas and relative stability in others. Starting in our SWC segment, we are expecting another strong year for our water chemicals business. Demand for these chemicals remains robust, and we are seeing good pricing as well. In addition, the investments that we have made in the water business, including capacity expansions for higher growth products, PAC and ACH continue to yield strong results.

While ALUM used to represent the bulk of earnings in our water business, we have grown our specialty water chemicals to be roughly 20% of the business. We are making additional investments in this business to drive growth in 2025 and beyond, which I will elaborate on shortly. In our sulfuric acid business, the outlook for regen remains strong with demand continuing to be solid, supported by vehicle driving activity and demand for gasoline alkylate.

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In merchant acid, we're expecting a year of relatively

normal performance. Our risk-sharing agreements are contributing to this stability. However, I would note that the merchant acid business had a fairly strong year last year, so we do expect some moderation this year. Our ultra-pure sulfuric acid business remains unchanged.

There is a continued strong outlook in the ultra-pure market, which is supported by new semiconductor manufacturing coming online in North America over the next several years. Under the CHIPS Act, the U.S. government has awarded over $23 billion in the first quarter of this year to support new construction of semiconductor fabs.

We have shared the various investments we are making to maintain our North American leadership position in ultra-pure acid, and I'll provide an update on those projects momentarily. Moving to our Electrochemicals business. We continue to see benefits from our advantaged cost position relative to overseas manufacturers.

Our facilities are cost competitive on a global scale, given our access to stable, low-cost renewable hydroelectric power, and we expect this to remain the case for years to come. This advantage is leading to export opportunities for some electrochemical products while also contributing to improved pricing and demand. For instance, our Brandon Manitoba sodium

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chlorate facility is both one of the largest and one of the lowest-cost sodium chlorate plants in the world.

We are anticipating our sodium chlorate volumes to be about 5% lower on a year-over-year basis this year. This is due to pulp mill closures in Western Canada, but we expect much of the volume impact to be offset by continued strong pricing.

In chlor-alkali, as Rohit mentioned, we recently completed the biennial maintenance turnaround at our North Vancouver facility. The turnaround was completed on schedule. The plant is now back to operating at normal levels. We currently estimate the impact to EBITDA from this plant turnaround will be roughly $15 million. We will confirm this impact when we report our Q2 results in August.

Underlying fundamentals on the chlorine side of the chlor- alkali process remained favorable. Pricing and demand for both chlorine and hydrochloric acid remains strong. The North American merchant chlorine market remains tight. Canadian rig counts remain well above the 5-year average, and we expect continued steady demand for hydrochloric acid.

The new LNG pipeline and export terminal is coming online in Western Canada. It is expected to drive additional Canadian natural gas production and further support hydrochloric acid demand and pricing over time. We expect continued strong chlorine and hydrochloric pricing for the balance of the year.

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