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Q3 2015 Results Conference Call (Script)

Mark Davis

Good morning, ladies and gentlemen.  Thank you for joining us for our conference call and webcast today.

As usual, 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-IFRS measures referred to in this call can be found in the disclosure documents filed by Chemtrade with the securities regulatory authorities, available at

One of the non-IFRS measures that we will refer to in this call is Adjusted EBITDA, which is EBITDA modified to exclude only non-cash items such as unrealized foreign exchange gains and losses.  For simplicity, we will just refer to it as EBITDA as opposed to Adjusted EBITDA.  Both these terms are fully defined in our MD&A.

Business conditions in the third quarter were similar to the conditions we experienced in the first half of the year.  As we will discuss further, both of our material reporting segments posted better results than last year.  The combination of businesses within these segments continues to deliver relatively stable earnings.  For example, within our Sulphur Products and Specialty Chemicals (or SPPC) segment, regenerated sulphuric acid, which serves refineries producing gasoline, and ultra pure acid, which is used primarily in the electronics industry, both benefitted from significantly higher volumes in the third quarter.  These strong performances more than offset some weakness experienced by a few of our other products, underscoring again how the diversity of our product portfolio is a key factor in enabling Chemtrade to deliver consistent operating and financial results.  In aggregate, Chemtrade had a solid third quarter and continued to benefit from the strength of the U.S. dollar.

During the third quarter of 2015, we generated EBITDA of $68.5 million, which is an improvement of $6.3 million over the third quarter of last year.  Distributable cash after maintenance capital expenditures was $45.1 million, or 65-cents per unit, compared with $50.6 million or 83-cents per unit for the same period last year.

The EBITDA comparisons year-over-year are relatively straightforward as EBITDA for 2014 excludes earnings from our Montreal East business which we sold during the third quarter of 2014.  The distributable cash comparisons are not as clean, as 2014 includes $9.9 million from the sold Montreal East business, and there were more units outstanding this year than last.  In any event, the 65-cents per unit of distributable cash generated this quarter of course exceeds the 30-cents of distributions made during the quarter.

Turning to the first nine months of the year, EBITDA was $185.3 million and our distributable cash after maintenance capex was $125.6 million or $1.82 per unit, which is more than double our distributions to unitholders.

Rohit will now provide you with some additional details on the third quarter financial results.

Rohit Bhardwaj

Thank you, Mark and good morning everyone.

In general, conditions during the third quarter of 2015 continued to be similar to the first part of the year with most of our businesses performing well.  During the second quarter of 2014, we announced the sale of our Montreal East business to Suncor.  For the purposes of this call, 2014 results, other than distributable cash, do not include results from the Montreal East business.  Distributable cash in the third quarter of 2014 included $9.9 million with respect to this business.

Revenue for the third quarter of 2015 was $364.4 million, an increase of $50.5 million over 2014.  The primary reason for the increase in revenue was the positive impact of the stronger U.S. dollar on U.S. dollar denominated revenues.

For the three months ended September 30, 2015, distributable cash after maintenance capital expenditures was $45.1 million, or 65-cents per unit compared with $50.6 million or 83-cents per unit in 2014.  Additionally, maintenance capex was $4.8 million higher in the third quarter this year compared with the same period last year.  Finally, the per unit amount is based on a weighted average number of units outstanding of 69.0 million units in the third quarter this year, versus 61.2 million units outstanding last year.

Aggregate EBITDA from continuing operations for the third quarter of 2015 was $68.5 million, compared with $62.2 million in the third quarter of 2014.

Turning to segmented results for the quarter, SPPC generated revenue of $172.4 million and EBITDA of $38.6 million compared with $148.6 million and $38.3 million, respectively, in 2014.  The main reason for the increased revenue was the positive impact of the stronger U.S. dollar in the third quarter of 2015.  The positive impact of the stronger U.S. dollar on this segment’s EBITDA was approximately $5.4 million.  This benefit was substantially offset by increased supply cost for sulphuric acid in the quarter, as our major acid supplier took its planned maintenance outage reducing our supply from this source.  Results were also negatively affected by the payment of contingent consideration, or an-earn out amount, related to a previous small acquisition.  The balance of this earn out will not be material in any future quarter.

Our Water Solutions and Specialty Chemicals (or WSSC) segment reported third quarter revenue of $132.3 million compared with $113.0 million in 2014.  EBITDA was $33.7 million compared with $33.0 million in 2014.  Relative to the third quarter of 2014, EBITDA during the third quarter of 2015 benefited by $4.4 million as a result of the stronger U.S. dollar.  However, this benefit was largely offset by lower margins for aluminum sulphate, or alum.  As previously mentioned, although market conditions for alum seem to have stabilized, margins are lower than 2014 but similar to the levels we have been experiencing this year.

Our International segment reported revenue of $59.7 million for the third quarter, compared with $52.4 million in the third quarter of last year.  The higher level of revenue reflects the impact of the stronger U.S. dollar.  EBITDA for the quarter was $3.2 million, compared with $4.3 million last year, when we had a strong quarter.

Maintenance capital expenditures in the third quarter were $12.6 million, which was about $4.8 million higher than the third quarter last year and approximates our normal run rate.  For the first nine months of 2015, our maintenance capital expenditures have been $24.5 million, which is below our expected annual run rate, but we still expect our 2015 maintenance capex to be in the range of $45.0 to $50.0 million.

Excluding unrealized foreign exchange gains and losses, Corporate costs during the third quarter of 2015 were $7.0 million, which was $6.4 million lower than the third quarter of 2014.  The reduction was driven by the release of a provision of $4.1 million with respect to a lawsuit related to the Marsulex acquisition.  Additionally, LTIP costs during the quarter were $3.4 million lower than the third quarter of 2014.

Our balance sheet at September 30, 2015 was in sound shape.  At the end of the third quarter, we had US$432.0 million of term debt that was outstanding.  We had also drawn Canadian $35.8 million on our US$500.0 million revolving facility.  We therefore have significant undrawn capacity on our credit facilities.  Shortly after the end of the quarter, as is our practice, we amended our credit facility by extending the maturity to October 2020.

I’ll now hand the call back to Mark.

Mark Davis

Thank you, Rohit.

So, in summary, we are pleased with the performance of our businesses during the first nine months of the year.  Finally, we want to give a little colour about our fourth quarter,

While our business is not hugely seasonal, we do have some seasonal differences driven primarily by refinery gasoline production and our water treatment chemicals.  Both of these products are stronger in the second and third quarters.  Accordingly, our first and fourth quarters are generally weaker than the mid-year quarters.  Although we do not give forward guidance, this year the difference between our third and fourth quarters is expected to be larger than usual.  The main difference is that one of our largest regen customers is taking a once-every-five-year major turnaround.  Essentially, this means that this refinery and our associated regen plant will be off-line for at least two months of the fourth quarter.  Industrial activity and thus economic demand for our products remains essentially the same as we projected it at the beginning of the year.  However, the refinery 5-year turnaround means that the typical seasonal difference between the third and fourth quarters will be larger than usual this year.

To put some of this in perspective, we want to reiterate what we have said in the past.  While our business is not immune to the effects of typical commodity chemical risks, these risks are well mitigated.  In addition to our numerous risk sharing contracts with business partners, we are well diversified.  This diversification is in the end-markets we serve, the many different products we sell, and the number of plants we operate.

We remain confident that our business model is robust and will continue to generate strong cash flows.  We will continue to invest in our business to ensure it remains reliable and where possible, grow organically.

Thank you for your attention.  Rohit and I would now be pleased to answer questions.

Operator (Joanna): Thank you. Ladies and gentlemen, we will now begin the question and answer session.  Should you have a question, please press * followed by 1 on your touchtone phone.  You will hear a 3 tone prompt acknowledging your request and your questions will be polled in the order they are received.  Should you wish to decline from the polling process, please press the * followed by the 2.  If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Joel Jackson from BMO Capital Markets. Please go ahead

Joel:  Hi, good morning

Mark & Rohit:  Good morning Joel

Joel:  Can you give us an idea now that you’ve re-segmented for the last year and half, what is the relative step down in earnings in Q4 versus Q3 on a normal year for both WSSC and SPPC, just order of magnitude, please?

Mark: Well in aggregate, our fourth quarter is probably down about $10 million EBITDA versus third quarter.

Rohit:  If you look at last year’s step down, it’s probably a pretty normal kind of step down.

Joel:  Ok, that’s helpful.  And then do you know of any other large turnarounds at any of the other regen customers coming up in the next few quarters?

Mark:  No. Again, we have a number of plants serving lots of different refineries and they all take turnarounds. This five year major one is an anomaly

Joel:   You had some commentary that alum margins were a little weak. Can we maybe get a little bit of colour on that, and I’m not exactly sure about how alum bid season works in the States, but maybe just some colour on where you are in bid-season, when the next pricing happens, and if some of this weakness would be expected to persist for the next little while?

Mark:  I think what we said Joel here and in the last quarterly call, too, is that we think that the alum business has stabilized. The lower margins that we’ve been experiencing this year were basically in place by the middle of the year and the business has stabilized. The way the bid season works is the bids are all through the year. This isn’t like some products where you have year-end bidding season.  So, we expect that the margins and earnings we’ve been achieving for the last quarter or two is what’s going to be continue.

Joel:  Ok. And finally in International, sales have been rising year over year a lot all year and then the margins have been contracting. So, can you talk about that trend and what will happen in ’16? Do you think sales will continue to rise while margins compress or do you think margins will start to go down? Thanks

Rohit:  So firstly, I think that revenues in the International segment, to remind you, are generally US dollar denominated. So that activity typically happens in US dollars.  So one reason why revenues are higher is just a straight exchange impact.  And in that business, also to remind you, typically when revenues are high, margin percentages get contracted because typically there’s a matching of the sales and cost of sales.  So sales go up, costs go up and percentage margin drops, but EBITDA stays pretty steady. In the past we’ve said that the normal run rate for the business is $10-12 million.

So this quarter was actually right in line with that. I think last year Q3 was exceptionally strong. So looking forward on revenue, we actually don’t spend too much time worrying about what revenue levels are in that business. We’re focused on EBITDA so that kind of $10-12 million EBITDA is still pretty good for 2016.

Joel:  Ok, I’ll pass the baton. Thank you

Rohit: Thanks

Operator (Joanna): Thank you.  Your next question Steve Hanson of Raymond James. Please go ahead

Steve: Good Morning guys. Just to clarify, you might have mentioned I apologize, but you referred to in the SPPC that one of your acid suppliers had gone down during the quarter and it resulted in some increased costs. Can you just clarify or not whether that has been rectified or if that’s still going to continue for the balance?

Mark:  That’s been rectified. This is their once every 18 months major turnaround. So it’s done and it doesn’t happen again in 2016.

Steve: Ok, great. And just one quickly on the clarification for the contingent acquisition payment, are you guys able to quantify the size of that specifically, or is it less than disclosed?

Rohit:  One thing we can tell you is that if you look at the two things that affected SPPC this quarter, the supply and that payment, from an aggregate perspective, as you know the Corporate segment had a gain of about $4 million.  So in aggregate we think those two things cancel each other out. So, the headline number for this quarter is actually a pretty good proxy for the run rate.

Steve:  Ok, that’s actually quite helpful.  And just one more on the balance; again, because the LTIP has been creating a little bit of noise lately. Is there some way we should think about the LTIP cost on a go forward basis?

Rohit:  So, what we’ve said is in a normal kind of year that expense should be $5-7 million.  In any given quarter, I think if you want to look at it like…so in Q3 there was actually a reversal of previous accruals because our unit price dropped over Q3. So, it has kind of hard to model. We do give lots of disclosure in our proxy circular but you end up having to run Monte Carlo simulations and all that kind of stuff. So, it is kind of hard to model at any given quarter, so maybe you want to think of it more on an annual kind of basis.

Steve:  Ok, very good. Thanks guys. I’ll pass the baton as well.

Rohit:  Thank you

Operator (Joanna):  Thank you. Ladies and gentlemen as a reminder, should you have any questions, please press the * followed by the 1. Thank you.  Your next question is a follow up from Joel Jackson from BMO Capital Markets, please go ahead

Joel: The demand is a little low today on the call, so I had to come back.  Mark, I think you talked before that, and I don’t want to put words in your mouth, but tell me if you agree that the next step change in the share price of Chemtrade will probably be a very attractive M&A deal, if you can execute. Can you talk about that, what you see in the pipe line, and timing on that versus where your leverage is, kind of the mid 2’s, sort of the tradeoffs of where you are in that thought process?

Mark:  I could try. I never said by the way, you guys say the next step change in share price is based on an acquisition. I say the next step change in earnings is based on an acquisition. You can make your own valuation judgments.  The theory for Chemtrade has always been that size, scale and diversity of earnings are necessary and are good for the business, good for our shareholders and good for employees. So, we’re always looking to add size, scale and diversity of earnings.

There’s always things for sale in the chemical industry; many of which do not fit our business model of seeking to build and things that we understand that aren’t viably cyclical.  Having said all that, from an internal operational perspective, we have integrated the General Chemical acquisition. Our debt levels are down from where they were after we did General. And for the right opportunity, we’re capable both financially and operationally to acquire and integrate something that fits all of our other criteria.  So, we always hope to do it and I hope to be able to announce something but it will come when it comes, and we’re always ready to execute.

Joel: Ok, thank you

Operator (Joanna): Thank you. Your next question comes from Cihon Gunkay from GMP Securities.  Please go ahead

Cihon: Hi guys, this is Cihon here calling on behalf of Anoop.

Rohit:  Good Morning

Cihon: I think most of my questions have been answered but I just wanted to follow up on the step change between Q3 and Q4.  I know you mentioned that the typically EBITDA drop is about $10 million, but in the case of the 2 month shut down of the regen customer, what kind of additional impact you think that might have on that $10 million regular step change between Q3 and Q4 on EBITDA?

Mark: For a bunch of competitive reasons, we really don’t want to quantify but what I can tell you is this; if you look at the SPPC segment, in the third quarter we made about $40 million in EBITDA and we wouldn’t bother actually mentioning the refinery shut down if it wasn’t material.  So, materiality will be at least 10% for us.

Rohit: And that’s material for any given quarter.  On an annual basis, it’s not that material but for any given quarter, it’s material.

Cihon:  Great! Ok, thanks for the colour there and that’s all that I had.

Mark & Rohit:  Thank you

Operator (Joanna): Thank you. Your next question is from Steve Hansen, Raymond James.  Please go ahead

Steve: Sorry, but I couldn’t help but follow up on the acquisition question. You certainly described sort of your conditions as debt coming down, integrated well on General Chemical. That stuff is just great.  I’m just trying to get a sense of how full the pipeline of opportunities might be that you’re seeing and whether there are some that might even be half attractive out there, or is it still in an environment in the context of a relatively low interest rate environment still; a lot of low cost money chasing deals. I’m just trying to get a sense of the competiveness of that pipeline and how many opportunities are you looking at?

Mark: The chemical industry always has opportunities, so we’re always looking at stuff.  What has been true I think, over the last year – year and a half or so is that the medium multiple paid for chemical assets if probably an 8.5x multiple on EBITDA. Most of the purchasers have actually been strategic and after strategic buyer synergies, multiples have been about 7 ¼.  So without actually trying to project what happens to US finance costs, or high yield debt and all that stuff, I think what that tells us that the things that we are most likely to successfully acquire and integrate on an accretive basis, are businesses that we can synergize or realize synergies from either back office, products or somewhere.  That goes back to why it’s more likely that we acquire things that we have knowledge of and we’re comfortable handling because the ability to get synergies out of the acquisition I think is important

Steve:  Ok, that’s actually quite helpful. Thanks guys, appreciate it.

Operator (Joanna):  Thank you. There are no further questions at this time.  You may proceed.

Mark: Thank you. I guess Steve and Joel have given us back the baton; for that we thank you all for your attention and we’ll talk to you all at the end of next quarter

Operator (Joanna): Ladies and gentlemen, this concludes today’s conference call. We thank you for participating and we ask that you please disconnect your lines

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