Canexus's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Canexus Corp (CXUSF)
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Canexus Corporation (OTCPK:CXUSF) Q1 2013 Earnings Call May 9, 2013 9:00 AM ET

Executives

Gary L. Kubera – President and Chief Executive Officer

Richard T. McLellan – Chief Financial Officer

Analysts

Jacob Bout – CIBC World Markets

Paul D'Amico – TD Securities

Alexandra M. Syrnyk – BMO Capital Markets

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Canexus Corporation Q1 2013 Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, May 9, 2013, at 9 am Eastern Time.

I will now turn the conference over to Gary Kubera, President and CEO. Please go ahead.

Gary L. Kubera

Thank you, Operator. Good morning everybody and welcome to the Canexus first quarter conference call. In just a moment, I’m going to turn over the call to Rich and let him review both the first quarter and the revised guidance that we put out in our press release last night and then I’ll come back to you and talk about some of the details what we’re seeing in our markets, status of our businesses and ongoing projects. Of course at end we’ll be happy to take your question.

So I’ll turn it over to Rich, right now.

Richard T. McLellan

Thanks, Gary. Just a remainder there is a presentation that goes along with this conference on our website and so I will be referring to that and we start on slide two. Cash operating profit for the first quarter was $30.3 million. Chlorate and pulp market fundamentals are sound and we had some plants, operating challenges on the chlorate side of business in the first quarter and 4000 metric tonnes of production those are now result. Caustic soda prices softened driven by Asian market dynamics that Gary is going to speak in more detail about here in a minute.

That said, we’ve seen signs of cycle bottom and recovery emerging in Q2. And then with respect to our NATO business, the manifest side of the business is currently on the ramp-up curve and we expect capacity increases to pick up dramatically in the second half of the year.

Moving on to slide three, we have revised our full-year guidance for operating cash flow down by $20 million to a range of $135 to $145 million. Two-thirds of that adjustment is due to weaker MECU pricing mainly caustic soda. Chlor-alkali price cycle is expected to improve during second half of the year. Current caustic prices, we believe are unsustainable for Asian producers which are primary competitor on the West Coast in the Pacific Northwest region and North America. Some volatility is also possible in acid markets in particular as we go through the second quarter here.

The balance of the guidance adjustment is split between plant outages. So, I have mentioned the chlorate plant outage in Q1 and then we have some challenges on our annual turnaround at our chlor-alkali plant at North Vancouver. So plant outages account for roughly half of the remaining, third of the down revision to guidance, and then delays in the startup our NATO manifest business or the balance.

With respect to the manifest business, again, as I mentioned a minute ago, projects are expected to be completed by the end of the second quarter at which point you should see ramp-up to capacity on the diluted crude oil side of the business which is about 30,000 barrels a day of capacity and then, of course, we’re working diligently on the start-up of our unit train project. The balance of our business being so employed in Brazil, fundamentals are good, and our expectations for the full year continue to be on track. Gary?

Gary L. Kubera

Okay. Thanks, Rich. Let met start the business update by giving you a insight into where we are with our unit train terminal project at NATO. We remain on track for a start-up in the third quarter, for those of you that have the presentation, you can see both pictures for the pipe going in and the large tanks that we are putting in, and staging areas for the unit train operation. We are broadly underway with our construction and in general, that project is moving ahead broadly in line with the timeframe that we have expected.

On page five, we have talked from the beginning that this project will have capacity of approximately two unit trains every three days. In addition to the relationship we have with MEG, we continue to make good progress on other contracts. We’d hoped to have some that we might be able to announce here at the quarterly results, but those as we’re learning, take a little time to get done. So we’re not quite ready with those.

But the discussions that we do have underway that we expect to be completed, would, if completed, exceed the capacity that we have in the first phase. We have always been preparing for expandability and we have discussed and we stand ready to expand the project as some of these contracts are finalized, number one, to meet the collective commitments that would result in the finalized contracts. But number two, to have additional capacity for earlier stage discussions that are currently underway. So we remain very bullish on the possibility for this business and specifically the unit train project.

I’ll talk a couple of minutes about the Manifest business as Rich indicated some of the new capacity projects have been slower to come to fruition and we would like and then we expected. Some of that is due to incorporating some earnings from earlier activities that somewhat changed the configuration and give us a more efficient robust set of capabilities. So we’ve delayed for longer term safety and efficiency benefits.

What I will mention and you can see on the graph here is that we continue to ramp up our revenue side. The resultant cash flows are bit delayed from expectations in part because we were prepared organizationally in staffing that handle the higher volume. So our relative staffing to current throughput is a bit high, but also we are still working through some inefficiencies, some winner activities things with coupled eight times are now improving and other inefficiencies that will ramp down as we continue to build our capability at the site.

Once we get through the budget completions in the second quarter, we really set the stage for quick and rapid ramp up of throughput through the site. We also, as you all know, in addition to the rail product, but our chlor-alkali products through there. We have expanded that capacity also, so that once we get through spring breakup, we are well positioned to move significant quantities of assets through the site as well as at the state levels of caustic soda that we currently put through the site.

I’ll turn now to the page seven in the chlor-alkali market. As we alluded in our year-end report, we did see somewhat unexpected drops in caustic prices at Asia last year and early into this year. We told you at that time, we expected a bounce-up bottom here in the first and really second quarter. We have seen that, but the increase has been a bit slower than we would have expected and in part resulted in our belief that we had to reduce guidance.

We continue to believe that Asian PVC production is under pressure, both volume and margins, both of those should be good longer-term for caustic pricing. I’ll remind you that like in North America, chlor-alkali is very tightly linked to PVC production. So if the PVC side is pressured either from margin or volumes, they most likely weigh for those producers in Asia to offset that is with increased caustic soda prices.

And we’re seeing modest month-by-month increases, our contracts with customers tend to be either quarterly or monthly priced. The monthly priced contracts are now starting to move up in pricing modestly, coming off the bottom. The quarterly contracts we believe will bottom in the second quarter and then see increases later in the year.

We have always expected a caustic decrease in our budgeting for the second half for the year, but the decrease was more significant and sooner than we expected. So right now, we think that the caustic prices that result in the second half for the year will be about at the levels that we originally budgeted. So the negative drain to our performance we think will be isolated to the first half for the year.

We talked for a moment on page eight about the acid market and what’s going there in our activity specifically. Now that we’ve come out of our plan maintenance turnaround in our unplanned delays and startup, we do have our first of two acid plants commission. We’re still working out a few bugs and moving towards full capacity but that acid plant is now operating. So it will begin to contribute to our results a little bit in the second quarter, but more significantly late in the year.

We do expect a bit better oil and gas market in the second quarter, certainly versus last year if we have a reasonable spring breakup period, which we’re currently in. And then we expect the second quarter to start up before the end of the year and be available and start contributing in 2014.

We show up here also the end-users for HCL, certainly oil well acidizing is a big part of our target market, but we are looking at other segments and do supply other segment such as the food area, steel and certainly related to water treatment and some of those areas. So again, it’s a diverse market. We think we’re well positioned, we made the investment in (inaudible) car fleets and things like that. So our sales team has done a good job of preparing for this ramp up.

As I said, we’re disappointed to have to adjust guidance. We want to make sure you understand what our thinking is in our view of performance. We remain very optimistic about the end of this year and going into next year. We got a lot of work to do at the terminal operation, but we believe we have the resources in place to deliver on the improvements for our Manifest business and the start-up of our pipeline activity.

Market conditions continue to support the activities that we have a leadership position in and so we’ll provide ongoing updates to you as either contracts get finalized or as significant events occur.

So, with those comments, I’ll pause and see if you have any questions that we can answer.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Our first question comes from Jacob Bout from CIBC. Please go ahead.

Jacob Bout – CIBC World Markets

Hi, good morning.

Gary L. Kubera

Hey, Jacob.

Jacob Bout – CIBC World Markets

I wanted to dig into this guidance you’ve given for 2013. So, on the chlor-alkali side, how much of the (inaudible) to me what roughly two-thirds of this $20 million guidance adjustment? So, I guess first question here, how much of that is related to hydrochloric versus caustic?

Gary L. Kubera

The vast majority of that is caustic pricing.

Jacob Bout – CIBC World Markets

Caustic pricing, okay.

Gary L. Kubera

Yeah. Acid volumes Jacob would be marginally lower and prices are marginally lower, but it’s primarily caustic and the chlorine story.

Jacob Bout – CIBC World Markets

Okay.

Unidentified Company Representative

And we did Jacob I just tell you we did have price increase announcements in the market for the second quarter on chlorine specifically those attempts one successful whether the industry is in a position to look at mid year chlorine price increase little early to tell, but at least there was some intent on the industry to get prices up.

Jacob Bout – CIBC World Markets

So structurally then how are you looking at the West Coast cost of market is this structured throughout in your mind or?

Unidentified Company Representative

No, I don’t think structurally flat. We’ve always talked about been in a region where we certainly have a bit of a fleet buffer to product coming in from other areas. We’ve always competed since shutdown there Fort Saskatchewan plants six or seven years ago we always competed with Asian imports. We have see Asian prices track relatively well with U.S. Gulf Coast so we a little bit surprised by the timing in the magnitude of this, but we believe its working its way out. Generally, Asian producers PVC are under margin pressure, they’ve never made high margins they run it relatively low operating rates and with the U.S. Gulf Coast really the low cost region the world to make PVC we think that there is a lot of incentive for them to increase caustic prices to deal with there in part of margin problems. So U.S. Gulf Coast caustic producers have raised or announced prices for mid-year. Any regional attempt to push prices up should help the global market overall. So, I don’t know what your thoughts are on of what model, but I think it’s the market we lived and I think we know and we don’t see that changing dramatically.

Jacob Bout – CIBC World Markets

But at this point, I should look out for the remainder of the year, we’re going to see a gap between U.S. Gulf Coast and Asia pricing for the remainder of the year.

Gary L. Kubera

We still project that there will a gap, if that gap were to close by Asian prices going up, that’s upside to our current projections. But given the rate at which caustic prices in Asia come up to bottom, we don’t think it’s prudent to be that optimistic.

Jacob Bout – CIBC World Markets

So, at this point this cash operating profit of tenant change is basically what we should expect in a quarterly basis for the remainder of the year?

Gary L. Kubera

Sorry, Jacob, you broke up there. Can you say that one more time?

Jacob Bout – CIBC World Markets

The tenant change million of cash operating profit for the chlor-alkali business, we should be at similar levels on a quarterly basis for the remainder of the year?

Gary L. Kubera

I think you should see the chlor-alkali business actually improve as we go through the balance of the year with the exception of Q2 of course because that’s when we take our annual shutdown and then, of course, we have the additional delay in start-up due to equipment building. So, you’re going to see a stronger second half of the year than the first half of the year by a fair margin, and that again is in part due to plant uptime and also having our asset burner, Kemron; in the second quarter here that really benefitting mostly the second of the year.

Jacob Bout – CIBC World Markets

And the unplanned outages, is that primarily on the North Vancouver plant or is anything on the chlor-alkali plant?

Gary L. Kubera

No, that was recently in the chlor-alkali plant as we started up our plant from our maintenance turnaround. We found an issue with a release system and it put us down for about eight days, longer than we have expected.

Jacob Bout – CIBC World Markets

Maybe just one last one here, on the Bruderheim, any update here as far as other customers what – when we’re going to see some deals announcement?

Gary L. Kubera

As I said in my comments, we evoke that something for you even with this quarterly announcement. Some of these are not formal multi-party agreements, but they involve different parties. And we believe we are in near final stages on several agreements that are fairly close to be ready to sign. We just have to get them over the line.

Jacob Bout – CIBC World Markets

Okay. Thank you.

Operator

Our next question is from Paul D'Amico from TD Securities. Please go ahead.

Paul D'Amico – TD Securities

I joined the call late, so my I apologize if you already covered this. I’ll get the details later then. But I just want to get some visibility on the NATO. So, if I’m looking at in terms of fee per barrel in terms of using 550 barrels per cart, that 550 that’s whether I’m talking about or whether you’re about the split between DBCO or other hydrocarbon, is that correct so far?

Gary L. Kubera

Yeah. It’s in that range.

Paul D'Amico – TD Securities

So, I mean, the future barrel then is pretty flat. I’m just curious if you’re able, or if you have done it already in the first ten minutes of the call, whether or not you actually gave any outlook on the fee per barrel, and secondly with respect to the volume in terms of the ramp up there?

Gary L. Kubera

We do not specifically talk about fee per barrel. We traditionally done is talk about kind of the overall expected cash flow from the overall business. We will have by the third quarter in our Manifest side of the business about 30,000 barrels per day of capacity when we get our unit train operations up, that will be in the order of 60,000 barrels per day of capacity at the initial phase and if we expand that with some of the these contracts coming together, that would take us over a 100,000 barrels per day of capacity in the unit train side.

Paul D'Amico – TD Securities

Okay. I appreciate that Gary. If we can just back a bit, so do you think Q3 2013 as an example in terms of the capacity of 30,000 barrels per day? Are you able to give any sort of outlook with respect to what’s your utilization rate or what kind of volume you throughput – you think you will be having?

Gary L. Kubera

We should have volume at our capacity levels or near to it as the capacity ramps up. So if it answers your question. Right now, we are running our Manifest business at what we deem today as full capacity. Some of that has some capacity discounts as we work out our efficiency improvements, but the 30,000 barrels per day, two-thirds of that is already contracted under multi-year and as the new capacity comes on, we have a number of customers ready to commit to throughout there.

Richard T. McLellan

I think, Paul, if you would assume about 25,000 barrels a day for the second half of the year, that wouldn’t be too far up.

Paul D'Amico – TD Securities

And Rich, just to sort of go through little further then, in terms of understanding things like given that we see now the – there’s been operating loss at least for the comparable period that you guys shown for (inaudible). Did you see in the opening comments whether or not you expect to – when do you expect to be profitable in that excluding the unit train inclusion? What I’m trying to get at is whether or not the Manifest business actually was on track to go through a scale level that was going to be profitable on its own, or is unit train sort of substitute for that?

Richard T. McLellan

No, we addressed that earlier, I’ll quickly reiterate it. What we said was, we are staffed to run at the 30,000 barrels per day on our Manifest. There are two issues that affected our profitability.

We have ramp-up revenue, but cash flow is lagging partly because we are staffed for higher production levels and partly because we had some start-up inefficiencies that are being worked out now that will be improving in the second half of the year. The other point I would comment to in our presented economics, we have eliminated some of our inner-company activities and we have made investments at Bruderheim to throughput acid and caustic, and if we didn’t put it through our own system, we’d be paying fees to somebody else to do it. So we believe we need to add that back as you look at the overall business unit.

Gary L. Kubera

And Paul, I’ll just draw your attention to the conference call presentation that’s on our website, there are some specific revenue and cash operating profit contributions outlined by quarter for the Manifest business and that’s on slide six.

Paul D'Amico – TD Securities

Got it. Okay, appreciate it. Sorry for making you repeat yourself. I did miss the first ten minutes. Thanks guys.

Operator

Our next question comes from Alex Syrnyk from BMO Capital Markets. Please go ahead.

Alexandra M. Syrnyk – BMO Capital Markets

Thanks, good morning. So just starting off on NATO, when you are thinking about that expansion, I believe there is mentioned in the release here that you could look at pending the – you get these contracts settled, you could look at ramping that expected capacity up on the unit train in mid-2014. Would that be a ramp-up to the 100,000 plus barrels per day, or would it be something a little bit slower than that or more gradual?

Gary L. Kubera

Well, actually the ramp-up from a capacity point of view could be done relatively quickly. The limiting factor to getting that full capacity utilization is not just our ability to receive pipeline quantities and low product, it’s also our connectivity to more than just one pipeline.

Alexandra M. Syrnyk – BMO Capital Markets

Right.

Gary L. Kubera

So, we would expect, if that expanded project goes forward, to start to realize the full benefits of the potential some time in the second quarter to mid-year 2014.

Alexandra M. Syrnyk – BMO Capital Markets

Okay. And how does the condensate kind of back haul options fit into that plan?

Gary L. Kubera

Well, condensate, whether it’s just pure condensate receiving or back haul, is something that we still believe we will do. It has, it is really taking a second priority to getting the diluted bitumen unit train capabilities up and running. We have some customers that are interested in condensate as a secondary activity either as a backhaul, but also as a direct receiving of condensate, as we said before our pipeline system is has a condensate pipeline in it, things like the unit train track, the loading racks are free pipes to handle condensate at least at some level, but we would need further investment in tanks and completing the loading systems to handle condensate, so it’s really just a matter prioritization to things going on right now.

Unidentified Company Representative

Alex I will just add that on the condensate side we recently expanded our capacity on the Manifest side of the business, so we can add about 15,000 barrels a day and we actually have some customers bringing dealt it into the site and backhauling – in the same truck back to their facilities.

Alexandra M. Syrnyk – BMO Capital Markets

Okay. Okay and in terms of some of the truck wait time as here on the Manifest side, how do you – what are you current working on to resolve that or streamline that process. What kind of…?

Unidentified Company Representative

There is a number of activities there. Some of that is equipment related, some of it is business process related and some of that is ensuring that customers are meeting their commitments when trucks arise and the equipment that’s on the trucks things like that. So as our volume has ramped up, we’ve been identifying and fixing issues that affect that.


We’ve been changing policies at the site and we’ve been upgrading or modifying equipment to make sure that those aren’t driven by the delays. We also, I think, in some cases, had taken volume commitments that we in turn ended up not being quite ready for some of these projects have gotten delayed. So our team has increased their experience. We’ve broken down each one of these areas that could affect it and we’re seeing quite noticeable improvements in those areas. So it’s not one magic forward, it’s a series of activities that are being addressed.

Alexandra M. Syrnyk – BMO Capital Markets

Okay, great. And then just back over to the caustic side, so you’ve seen, I mean, you’ve seen Asian prices come up a bit here. How much more do you, I mean, what’s the magnitude of the increase that you’re really looking for – that’s embedded in that guidance, revised guidance?

Gary L. Kubera

We would expect coming off the second quarter lows, we would see somewhere in the neighborhood of $30 per ton price increases, which Asian prices today seem to be in about the range that would support that. It’s a little bit early to tell but we’re not looking for a $100 per ton price increases, which is kind of where it came off from the peak pricing, but we’re not calling for no improvement at all.

Alexandra M. Syrnyk – BMO Capital Markets

Okay. Okay, great. I’ll turn it over. Thanks, guys.

Gary L. Kubera

Thank you, Alex.

Operator

(Operator Instructions) We have a follow-up question from Jacob Bout from CIBC. Please go ahead.

Jacob Bout – CIBC World Markets

Hi, just switching over to the chlorate side, the volumes are down, and I guess, results are down from last year at this point. Maybe just talk a little bit about what some of the drivers for that?

Gary L. Kubera

The main drivers just timing Jacob I would say we have some export business and some other business that is going to come into the balance of the year. So from an overall sales volume perspective we would be – we would expect to be very close to targets for the whole year, but something get to short fall from what we thought we would see in Q1. So the little bit of volume that we are behind on we should make up for the most part.

Jacob Bout – CIBC World Markets

Because if you take and look at one of your competitors results for the quarter, they were actually showing a nice improvement year-on-year is there any market share issues that should be worried about here?

Unidentified Company Representative

No, I don’t believe so sometimes it comes to the mix of customers when they choose to take outages, as Rich indicated, we had commitment some business that didn’t started beginning of the year, so I don’t know have any market circumstance.

Jacob Bout – CIBC World Markets

Okay. and then may be just final question here on just the ramp up here of the pipeline, so you made the comment about potentially expanding in mid 2014. Maybe just you know notionally, what type of feedback are you looking at and how do you think about go no go decision on this especially if differentials we are starting to close.

Unidentified Company Representative

Well, as we’ve discussed the agreements that we’re in discussion will be multi-year volume commitment type contracts much of the base investment, we make in this business is infrastructure, we said the pipeline has added capacity beyond the first phase. The unit train with some modifications can be readily expanded. We’re putting in expandable loading racks. So we’ve been thinking about expandability in this project as we’ve been doing it. And we’re talking to people that collectively, if agreements get signed, would exceed the capacity of the first base as we now have it defined.

So if that were the case, we would expect to quickly approve the expanded version of the project, which would not only be able to – allow us to meet the multi-year commitments we would enter, but then give us some capacity to continue to market to customers that we’re in discussions with that, are earlier stages or for expandability of existing customers. So the project as it kind of is – the first phase was originally envisioned, was normally about six railcars per week or six unit trains per week. We think we can do a little better there and with incremental capacity on a car or unit train basis less than the original investment, almost or more than double that.

Jacob Bout – CIBC World Markets

So the $190 million in CapEx, what is the incremental cost going from the seven to 13 unit trains per week?

Gary L. Kubera

Well, the incremental cost is some infrastructure additional track, loading facilities, more automation stuff at the site. So it’s a combination of some additional infrastructure and basic things like automation and loading.

Jacob Bout – CIBC World Markets

In the incremental cost.

Unidentified Company Representative

About $65 million Jacob from $125 to $190.

Jacob Bout – CIBC World Markets

All right, thank you very much.

Unidentified Company Representative

Thanks.

Operator

We have a follow up question from Alex Syrnyk from BMO Capital Markets. Please go ahead.

Alexandra M. Syrnyk – BMO Capital Markets

Thanks. Just only if you could, may be provide some of the major items that you got through on the Phase I unit train expansion in terms of construction progress. And then may be what are the kind of big outstanding items are you continue to work through.

Unidentified Company Representative

Sure, Alex generally the pipeline is in the ground, in the month of May will – there doing things like hydro testing and just all the integrity and initial commissioning, we are constructing the tie endpoints to the net terminal metering stations, pumping stations things like that on sites, we are in construction of the large storage tanks, two storage tanks that are part of Phase I, those tanks to put it in perspective our seven of steel to build up were clarified so there well underway we’ve finish putting in the filings, which will support the pipeline entry points and loading racks things like that. The rail that have been graded and prepare the rail itself will be going in and that’s pretty quick over the next month to six weeks. So really the construction is at a good stage, getting everything completed, tied in and commissioned is really the critical part as we get into the month of late June and July.

Alexandra M. Syrnyk – BMO Capital Markets

Okay, great. Thanks for that.

Operator

There are no further questions at this time. Please continue.

Unidentified Company Representative

Okay. Well, thank you everybody for joining us and we will continue to update you as we make progress in these various areas. Thanks.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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