Chemtrade Logistics' (CGIFF) CEO Mark Davis on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Chemtrade Logistics (CGIFF)

Chemtrade Logistics Income Fund (OTC:CGIFF) Q2 2014 Earnings Conference Call August 8, 2014 10:00 AM ET

Executives

Mark A. Davis – President and Chief Executive Officer

Rohit Bhardwaj – Vice President, Finance & Chief Financial Officer

Analysts

Jacob Bout – CIBC World Markets Inc.

Joel D. Jackson – BMO Capital Markets

Damir Gunja – TD Securities Inc.

Operator

Good morning and welcome to the Second Quarter Results Conference Call for Chemtrade Logistics Income Fund. Your host for today’s call is Mark Davis, President and CEO. Please be advised this call is being recorded. Please go ahead.

Mark A. Davis

Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining us for our conference call and webcast today. As usual, joining me today is our Rohit Bhardwaj, our Chief Financial Officer.

Before I commence to 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 www.sedar.com.

Please note that our comments on financial result on this call include the results of the Montreal business. Although, it has been disclosed as discontinued operation in our financial statements.

Chemtrade results for the second quarter of this year began to show the benefits of the general chemical acquisition that we completed in January. The integration of the new business continues to move ahead according to plan. And the second quarter results not of the same level of noise associated with the acquisition that distorted the first quarter results.

Looking at year-over-year comparisons, the significant increases in all of the financial metrics reflected a new business being included for the fourth quarter of this year whereas last year’s second quarter included only the legacy business. The new business is performing inline with our expectations and we’re pleased with contribution it’s making to our enhanced operations.

For the second quarter of 2014 we generated distributable cash after maintenance capital expenditures of $37.3 million, or $0.62 per unit, compared to $21.4 million or $0.51 per unit for the same period last year. Our maintenance CapEx was below our indicated annual run rate, which positively affected distributable cash during the quarter. However, the benefit was partially offset by some issues that adversely affected the legacy business. These issues that affected the legacy business are not expected to persist.

Business conditions we’re generally stable during the quarter and demand from most of our products was stable. One of the legacy issues I mentioned was that the contribution from our legacy sulphuric acid business was lower this quarter than in the comparable quarter last year. There are two reasons for this. First, the sulphuric acid volume we sold from our legacy business was lower this quarter than in the second quarter of last year, because one of our key suppliers took a shutdown during the second quarter of this year and also had an operating issue that resulted and them producing lower levels of acids this year and than last.

Second, there is an increase in the costs of the sulphur raw material that we consume for the acid we produce. While many of our acid contracts adjust from movements in sulphur pricing, the timing of increased sulphur costs and it’s linkage through our sulphuric acid contracts did not completely match. This led to some margin erosion during the quarter which we believe is only a timing issue, as increased sulphur costs make their way into the market. We remain confidence in our ability to pass through cost as we have in the past, but it does take sometime to adjust prices.

The second issue that adversely affected our legacy business’ contribution was operating issues at one of our plans where we produce liquid sulphur dioxide, while were able to make alternative arrangements to ensure that our customers were not disrupted, we incurred a additional cost of supply, which had a negative effect on our financial results. From an SPPC segment perspective, the financial effects of these items were more than offset by the inclusion of the acquired sulphuric acid business, but the segment would have generated even higher EBITDA, but for these specific issues.

As we have previously commented, over the past few years we've made significant capital investments in our sodium chlorate plant in British, Columbia, in order to make it the low cost facility. We have now completed those projects, the benefit of our improved cost position an operating rates will start to be see in future quarters.

As I mentioned, we’re pleased with the performance of the new business and the integration with our legacy business. The solid second quarter results demonstrate that the expanded scope and scale of our operations together with our business model provide a strong foundation for sustainable results.

Rohit will now provide you some additional details on the second quarter results.

Rohit Bhardwaj

Thanks, Mark. Good morning everyone. In general, our businesses performed well during the second quarter of 2014. As a reminder, comparisons of last year are distorted due to the acquisition as 2014 results includes General Chemicals results for the full-quarter where 2013 results are of course only for the legacy business.

Also during the second quarter of 2014 we announced the sale of our Montreal East facility to Suncor and therefore we classified the net assets of this business as held for sales on our balance sheet. We also showed its net earnings as discontinued operations on the income statement.

Revenue for the quarter was $318.1 million an increase of $100.6 million over 2013. The primary reason for the increase for the three months of revenue from General Chemical business. This was partially offset by lower revenues in the SPPC segment due to lower volumes of sulphuric acid.

For the three-months ended June 30, 2014, distributable cash after maintenance CapEx was $37.3 million or $0.62 per unit compared with $21.4 million or $0.51 per unit in 2013. Please note that the per unit amount is based on a weighted average number of units outstanding of $60.1 million units in the second quarter of this year versus $41.7 million units outstanding last year. Aggregate EBITDA for the second quarter of 2014 was $59.5 million compared with $36 million in the second quarter of 2013.

Turning to segmented results for the quarter, SPPC generated revenue of $151.2 million, and EBITDA of $34.1 million, compared with $134.7 million and $31.1 million respectively in 2013. The main reason for the increased revenue was the inclusion of the General Chemical’s business for the quarter, partially offset by some weakness in sulphuric acid, mainly due to lower volumes as one of our major suppliers of acid produced lower volumes in the second quarter of last year.

There was also some negative impact from higher sulphur costs, some of which have not yet in fully recovered to price increases. We also experienced significant operational issue at one of our plants that produced liquid sulphur dioxide and this negatively effected SPPC results. It should be noted that the 2013 numbers have been adjusted for the legacy businesses that are now part of water solutions and specialty chemicals, mainly our legacy water treatment business in western Canada, sulphide and our phosphorus pentasulphide operations.

WSSC our new segment reported second quarter revenues of $116.2 million compared with $33.9 million in 2013. EBITDA was $33.2 million compared with $9.2 million in 2013. In addition to the water treatment and specialty chemical businesses that we acquired, it also includes the businesses transferred from SPPC and our Pulp Chemicals business. The higher revenue in EBITDA generated in this segment is primarily due to the inclusion of three months of results from the acquired business.

International reported revenue of $50.7 million for the second quarter, compared with $49.0 million in Q2 of 2013. EBITDA for the quarter was $4.4 million, compared with $2.7 million last year. The higher level of EBITDA reflects strong condition for sulphuric acid in certain international markets. Maintenance CapEx in the second quarter was $7.3 million compared with $8.9 million in the second quarter of last year.

Although, we ramped up our level of spending during the second quarter and spent at double the rate of the first quarter, we were still significantly below our expected run rate. We will continue investing and improving the quality of our assets and still expect that maintenance CapEx for the 2014 year, will be approximately $55 million.

Excluding unrealized foreign exchange gains and losses, corporate costs during the first quarter of 2014 were $12.3 million, which was $5.4 million higher than the second quarter of 2013. The primary reason for the increased costs was higher LTIP expenses which were $2.6 million higher than the second quarter of 2013.

Additionally, corporate costs are higher due to the increased scale of the business. Finally, we also recorded some expenses related to the acquisition and some expenses related to the Montreal sale. These were offset by realized foreign exchange gains.

Our balance sheet at June 30, 2014 was in sound shape. At June 30, we had senior credit facilities of approximately $970 million, consisting of a term-loan of $570 million in a revolving credit facility of $400 million. Both of these facilities are due in January 2019.

At June 30, we had drawn $570 million of our term facility and had about $274 million of availability in our revolving facility. Obviously we retain significant liquidity on our credit facilities. We expect to steadily reduce our leverage, due to our ability to generate strong near-term cash flow in excess of the distribution we pay.

During the second quarter we issued a $126.5 million of convertible debentures and used the net proceeds to pay down senior debt. We also announced the sale of our Montreal facility to Suncor, the deal closed shortly after the end of the second quarter and we used the net proceeds to pay down senior debt. These initiatives further strengthen our balance sheet and provide additional financial flexibility.

I’ll now hand it back to Mark. Mark.

Mark A. Davis

Thanks, Rohit. The second quarter results provide a much clear picture of the solid contribution of our latest acquisition and what is done through scale and scope of Chemtrade’s operations. As I said, we’re pleased with the performance of the General Chemical business and integration with our Legacy business is progressing our planned. The financial benefit of the integration will increase as the year progresses, as certain of the integration activities take some time to implement and for the benefits to be realized.

Let me acquire General Chemical business we outlined how it fit with our business model. The acid business was an obvious fit due to its risk mitigating contracts. The specialty businesses fit the model due to their significant unique competitive advantages. The key to the water business fitting our model was the diversity of our earnings across broadly based manufacturing footprints.

Additionally, we like to tie in with our Legacy business, as one of the key raw materials used and making the main product in this segment, aluminum sulphate is sulphuric acid, which is of course one of our largest chemicals from our legacy portfolio.

Going forward a key focus on our integration efforts will be the linkage between our aluminum sulphate and sulphuric acid businesses. We believe the synergies we can achieve between our sulphuric acid business and the dispersed manufacturing footprint will ensure that we are the low costs producer of alum. This linkage should assure that both our alum customers and our sulphur products suppliers; continue receiving the value they have come to expect.

As the largest inorganic coagulant producer in the U.S., we expect to encounter some localized competition. However, the diversification of our locations and our leading market position and the key raw material, knew that this business will remain a long-term sustainable business for Chemtrade. We’ll continue to improve all our business by investing in our capital assets and our people. And we remain confidence that our portfolio of business model and strong balance sheet will continue supporting our ability to provide our unit holders with the growth and yield they have come to expect.

Operator that concludes our comments and Rohit and I’ll be please to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jacob Bout from CIBC. Please go ahead.

Jacob Bout – CIBC World Markets Inc.

Good morning.

Mark A. Davis

Good morning.

Rohit Bhardwaj

Hey Jacob.

Jacob Bout – CIBC World Markets Inc.

I may have missed it, but what was the hit to EBITDA’s results the one-time issues with your Legacy business in SPPC?

Rohit Bhardwaj

We didn’t really quantify it, but you can think of it in between $4 million to $5 million in the quarter.

Jacob Bout – CIBC World Markets Inc.

Okay. And then, the proceeds from the Montreal East, you said the pay down debt. So, that asset held for sale of $115 million, we can just assume going into Q3 that will come of senior debt?

Rohit Bhardwaj

Yes, it’s call it $110 million or so that kind of neighborhood.

Jacob Bout – CIBC World Markets Inc.

Okay. And then, just on the CapEx you talked about the run rate from maintenance CapEx of $55 million, could you talk about what you’re thinking it for 2015 and then maybe talk little bit about your non-maintenance CapEx?

Rohit Bhardwaj

Okay, so in 2014, we are reiterating the range. Now it is always a moving target in terms of when we close projects. So, we definitely sort won’t be at the high end of the range we’ve been seeing, if anything probably in the lower end. 2015 should look like the range is specified as 55 to 60. And at this moment we don’t have any really large non-maintenance CapEx that we’ve identified, having said that typically we look at that as we goes through our planning process and there are some interesting things that come up and we look at them, but right now we don’t have anything concrete that we've talked about.

Jacob Bout – CIBC World Markets Inc.

Okay. And maybe just lastly, any update on the corporate cliff [ph] in Sudbury. Any idea of what the reduction in volumes looks like in 2016?

Mark A. Davis

No. We continue to talk to them and they are giving us up-to-date information as they have, but there is no definitive numbers yet.

Jacob Bout – CIBC World Markets Inc.

Okay. All right thank you.

Mark A. Davis

Thanks.

Operator

Thank you. Your next question comes from Joel Jackson from BMO Capital Markets. Please go ahead.

Joel D. Jackson – BMO Capital Markets

Hi, good morning.

Mark A. Davis

Hi, Joel.

Rohit Bhardwaj

Hi, Joe.

Joel D. Jackson – BMO Capital Markets

The $45 million EBITDA hit you saw in the quarter in Q2, could you talk about how much of that you might get back in Q3 and then how much in Q4?

Rohit Bhardwaj

We should get, well I don’t know, call it 75% back in Q3 and the rest in Q4. I mean it’s obviously a slight moving target, but we should get most of it back next quarter and then the rest in final quarter.

Joel D. Jackson – BMO Capital Markets

Okay. And looking at seasonality of some of your base businesses and of course excluding much Montreal East. Where earnings double do you see in the second half of the year SPPC and WSSC versus where you seeing levels in Q2?

Mark A. Davis

It’s versus Q2, Q2 and Q3 are generally the higher quarters in the year. Right and its a little muck [ph] because we didn’t have the acquisition for the first month of the year, right. So Q2 and Q3 should be higher than Q1 and Q4.

Joel D. Jackson – BMO Capital Markets

Got. And okay…

Mark A. Davis

Sorry, but it’s not huge seasonality in this business, right. It’s big enough that you’ll see it, but it’s not peaks and valleys, right.

Joel D. Jackson – BMO Capital Markets

And could you give an update on, if you have had a chance to go and touch down some of the commercial synergies you might be able to call CGC and where you are maybe realizing that $10 million of financial synergies.

Mark A. Davis

We’re probably about 75%, let me rephrase it another way right, is we’re probably 75% through the actions needed to take to realize the synergies right, as the numbers will start roll in, in the next quarter and the fourth quarter, so probably fully enacted [ph] by the end of the first quarter of 2015.

Joel D. Jackson – BMO Capital Markets

And finally, you have talked about before not wanting to be – trying to get to down to two times leverage or below two times leverage as soon as possible, where are you on that considering we could see maybe a chlorate and chlor-Alkali planned up for [indiscernible] over the near-term?

Mark A. Davis

We never actually said we want to get down the two times as soon as possible, right. We said that that our cash flow – in our mind our ideal structure is about two times levered and we don’t mind going higher than that only we see cash flow necessarily to bring it back down to that level over a period of time.

Instead of answering your question that way, I’ll answer your question this way that actually said that when we find businesses that we think we understand that’s in our business model and are available in a proper valuation, is provided that we have enough room on our covenant packages and don’t unduly in leverage and aggregate as we’ll pursue that business, even if it comes available before we are actually down to a two times leverage basis.

Joel D. Jackson – BMO Capital Markets

Thank you very much.

Mark A. Davis

Thank you.

Rohit Bhardwaj

Thanks.

Operator

Thank you. (Operator Instructions) There are no further questions at – sorry Mr. Davis we do have one more question. Question comes from Damir Gunja from TD Securities. Please go ahead.

Damir Gunja – TD Securities Inc.

Hi, good morning.

Mark Davis

Hi, Damir.

Damir Gunja – TD Securities Inc.

I just wondering if you guys can elaborate a bit on the liquid So2 operating issue was it roll to the minor occurrence and is it something that you put behind you already?

Mark A. Davis

Well in the big scheme of things, it was minor as far as that operations goes it was significant and yes it is now operating at normal levels.

Damir Gunja – TD Securities Inc.

Okay, maybe a final one for me. On the asset tie into the alum business, just wondering how we should be thinking about the timing of potentially seeing some benefits there, as you figure out how you want to integrate that?

Mark A. Davis

Last half of next year. As mostly on the phone know is the acid business is a regional business with regional supply and demand characteristics and our alum business is a very localized business with its own supply and demand characteristics. So, as we optimize our system and seek synergies from that linkage is we want to make sure that we’re doing it properly and doing it in a ways that will promote long-term sustainable earnings not short-term wins. So we’re going to do it with a reasoned pace and it’s not a short-term gain, it’s a long-term gain here.

Damir Gunja – TD Securities Inc.

Okay. Thanks guys.

Mark A. Davis

Thanks.

Rohit Bhardwaj

Thank you.

Operator

Thank you. (Operator Instructions) There are no further question at this time. Please proceed Mr. Davis.

Mark A. Davis

We thank you all for your attention on a Friday morning in the summer. Let’s talk to you next quarter. Thanks very much.

Operator

Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.

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