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Edited Transcript of CHE.UN.TO earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 Chemtrade Logistics Income Fund Earnings Call

North York Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Chemtrade Logistics Income Fund earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark A. Davis

Chemtrade Logistics Income Fund - President, CEO & Trustee

* Rohit Bhardwaj

Chemtrade Logistics Income Fund - VP of Finance & CFO

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Conference Call Participants

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* David Francis Newman

Desjardins Securities Inc., Research Division - Analyst

* Jacob Jonathan Bout

CIBC Capital Markets, Research Division - MD of Institutional Equity Research

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* Paul Bilenki

TD Securities Equity Research - Associate

* Steven P. Hansen

Raymond James Ltd., Research Division - SVP

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Presentation

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Operator [1]

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Welcome to the Chemtrade Logistics Income Fund Third Quarter Results Webcast and Conference Call. I would now like to turn the conference over to Mr. Mark Davis, President and CEO.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [2]

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Thank you. Good morning, ladies and gentlemen. Thank you for joining us for our conference call and webcast today. As usual, joining me 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 sedar.com. One of the non-IFRS measures we'll refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude only noncash items such as unrealized foreign exchange gains and losses. For simplicity, we'll just refer to it as EBITDA as opposed to adjusted EBITDA, but both of these terms are fully defined in our MD&A.

Generally, we're pleased with our third quarter results. For the most part, our results reflect a continuation of the operating conditions we experienced in the second quarter and are in line with the guidance provided. While our chlor-alkali and certain specialty chemical businesses continue to be affected by the factors we described last quarter, for the most part, we believe these issues are transitory. I'll have more to say about that shortly.

In general, all of our plants operated well. We are continuing to see the benefits of the initiatives we took last year to strengthen our operations and adjust to changing market conditions. This is most evident in our Sulphur Products and Performance Chemicals or SPPC segment, which posted another quarter of strong results. As you know, last year, we made substantial adjustments to our operations and supply chain to address significant changes in the merchant acid market, particularly a structural change to address lower supply from our largest byproduct supplier. We now have more certainty about the quantity of material we obtain from them, Vale, and this has allowed us to avoid the high alternative sourcing, freight costs and excess railcars that we incurred during Vale's transition. Additionally, strong selling prices for sulphuric acid are offsetting the lower volumes available to us from Vale.

In our Water Solutions and Specialty Chemicals or WSSC segment, the story is much the same as last quarter. Contract renewal for water treatment products are being made at higher prices, more than offsetting raw material cost increases. As noted on our recent calls, there has been market pressure on some of our specialty chemicals. For example, potassium chloride and phosphorus pentasulfide. We believe these issues are temporary and the long-term fundamentals for most of our products are robust. Finally, our Electrochemicals or EC segment continued to maintain high operating rates. However, Northeast Asia caustic soda prices, which affect the pricing of our product, have not recovered at the rate the experts had predicted and we had hoped for.

Having said that, there has been some recent improvements in the Northeast Asia spot index. And as we said on the last call, the long-term outlook remains positive. I'll have a little more to say about that in my closing remarks.

Demand for hydrochloric acid or HCL from the fracking industry continued to be weak. However, the steps we have taken to diversify our customer base to include industrial end-use customers with more stable demand is working for us, albeit at lower margins than the more lucrative fracking industry. So in general, our businesses performed well in the first 3 quarters of the year, especially SPPC and our water chemicals business have gained strength throughout the year. It's almost a year now since caustic prices started weakening. But despite that, the long-term outlook is for higher prices. So we continue to be confident that results for EC will improve over time.

Rohit will now provide you with some additional details on third quarter results before I provide some further information on our outlook.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [3]

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Thanks, Mark. Good morning. As Mark indicated, our plants overall operated well in the third quarter of 2019, and results also reflect higher sulphuric acid prices and improved pricing for water products that more than offset higher input costs. Before I review the financial results for the third quarter, there are a couple of items to note. The application of IFRS 16 on leases at January 1, 2019 means that Chemtrade now recognizes depreciation and interest expense instead of operating lease expense for leases that were previously classified as operating leases. This results in an increase in EBITDA, but it does not affect distributable cash. Also, comparative information is not restated.

The third quarter last year included a $35 million litigation reserve that negatively affected both EBITDA and distributable cash. I will exclude this item in my comments this morning to better compare the actual operating performance of our businesses. Revenue for the third quarter of 2019 was $395.7 million, a decrease of $22.5 million from 2018. The decrease was primarily due to lower prices for caustic soda and hydrochloric acid in the EC segment that more than offset higher sales in water products. For the 3 months ended September 30, 2019, distributable cash after maintenance CapEx was $37.1 million or $0.40 per unit compared with $54 million or $0.58 per unit in 2018. Aggregate EBITDA for the third quarter of 2019 was $90 million compared with $88.8 million in the third quarter of 2018. The increase in EBITDA is due to better results in the SPPC segment. The adoption of IFRS '16 had a positive impact of $14 million on this year's results. While SPPC posted higher year-over-year results, this was more than offset by lower results in EC. Excluding the effects of IFRS '16, EBITDA for the third quarter was lower than 2018 by $12.7 million.

Turning to segmented results for the quarter. SPPC generated revenue of $127.8 million compared with $129.6 million in 2018. EBITDA for the quarter was $43.7 million, which was $21.5 million higher than 2018. Although sales volumes were generally lower than last year, higher selling prices for merchant sulphuric acid, combined with better operations, resulted in significantly higher margins. While IFRS 16 contributed $5.3 million of improvement, the majority of the increased EBITDA came from improvements in the business itself. Our WSSC segment reported third quarter revenue of $122.4 million compared with $116.6 million in 2018. EBITDA was $24.3 million, including the positive IFRS 16 impact of $1.1 million compared with $24.1 million generated in 2018, which included a $2.2 million insurance recovery relating to an issue that occurred in 2016. As Mark said, selling prices for water products are more than offsetting higher raw material costs. However, ongoing market weakness for some specialty chemicals more than offset the improved conditions for water products.

Our EC segment reported revenue of $145.4 million for the third quarter of 2019, which was $26.6 million lower than the same period of 2018. Although volume of caustic soda was essentially level with last year, continued weakness in selling price resulted in lower revenue. During the third quarter of 2019, as relative to the third quarter of 2018, caustic soda selling prices were 21% lower, and HCL netbacks, that's selling price less freight, were 47% lower. [So weight] volumes were lower than last year due to the reduced demand from pulp mills.

From an EBITDA perspective, excluding the $7.3 million benefit from IFRS 16, EBITDA for the third quarter of 2019 was $21.6 million lower than the same period of 2019. This was primarily due to lower selling prices for both caustic soda and HCL. Maintenance capital expenses in the third quarter were $19.7 million. We expect maintenance CapEx in 2019 to range between $80 million and $90 million. Excluding unrealized foreign exchange gains, corporate costs in the third quarter of 2019 were $20.8 million, including a positive IFRS 16 impact of $300,000 compared with $14.7 million in the third quarter of 2018, excluding the litigation reserve in 2018. The increase is due primarily to higher legal costs in 2019 and higher compensation accruals. We maintain ample liquidity with USD 202.3 million undrawn on our USD 850 million facility. We are in compliance with all our bank covenants. In October, we amended certain terms of our senior credit facility as well as extending the term. The facility now matures in October 2024. On October 1, we completed the issuance of $100 million principal amount of 6.5% convertible unsecured subordinated debentures. The net proceeds of the offering were used to pay down senior debt.

I'll now hand it back to Mark. Mark?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [4]

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Thanks, Rohit. Let me start by saying that we're confirming the guidance we gave in May, although as indicated in August, we now expect to be -- we now expect to be at the bottom end of that range. For the year-to-date, excluding the litigation reserve, we've generated $265.2 million of EBITDA and $120.6 million of distributable cash. Due to lower caustic pricing, a slight seasonal weakness of some of our businesses and our usual CapEx profile, we expect to generate the lowest quarterly EBITDA and distributable cash of the year in Q4. All of our key assumptions are updated in our MD&A, but the key updated assumption is caustic pricing. And since caustic pricing is such a big driver for us, we want to provide some additional color on this call.

Generally, movements in the Northeast Asia caustic price index are reflected in price movements seen in our Western Canadian markets. In May, our guidance assumption was that the Northeast Asia Caustic Index would average USD 55 per ton higher than November of 2018. The November price set the direction for our realized price in Q1 of 2019. Since then, decreases in the index led to a decrease in our realized pricing. We reflected this in our August guidance when we decreased our assumption for the Northeast Asia spot index by USD 30 per ton; and today, further decreased that assumption by USD 10 per ton. We are not ready to provide guidance for 2020, but we'll do so in February, about 3 months earlier than our guidance was given in 2019. However, we do wish to provide some more information on potential caustic pricing as this is, by far, a key variable. Recall that our thesis was and continues to be the caustic demand will continue to grow while supply remains relatively static. This should lead to increasing caustic demand -- caustic pricing for several years. This is the thesis that is accepted by all market experts. What appears to be slowing down this anticipated price increase is the effect of the U.S.-China trade battle and its unpredictability. Generally speaking, it appears that these tariffs have so far reduced caustic demand, while Asian chlorine demand has not yet been affected. If the tariffs continue, the question is which, chemical, caustic or chlorine, is more impacted by an economic slowdown in the Chinese economy. To the extent the chlorine demand slows down in China, caustic price should increase. Obviously, the continuation of the tariffs, the effect on the Chinese economy and a resolution of these issues is difficult to predict.

While the market experts do not forecast a spot pricing, they do forecast Taiwan contract pricing. This pricing is indicative of expectations for Northeast Asia spot pricing. Until very recently, IHS, one of the market experts, was predicting that the Taiwan contract price for 2020 should average USD 37 per ton higher in 2020 than in 2019. Their latest revision is that 2020 Taiwan contract pricing should be essentially the same as 2019. If this is also true for North Asia spot pricing, then pricing and profitability for our caustic in 2020 should be close to 2019. However, prediction remains difficult since this model uses average annual pricing, whereas our prices are affected by quarterly variations.

Some more data, while I attempt -- before I attempt to tie this all together for you. Recall that since the Northeast Asia Index is thinly traded, it can be quite volatile. Index pricing appeared to have bottomed out in August of 2019 at USD 285 per ton and moved up by USD 20 per ton in October. We believe that this pricing will continue to increase.

Finally, despite the recent weakness in Northeast Asia spot prices, we remain bullish on caustic pricing. For example, the index was USD 245 per ton higher as recently as 2018 before the U.S.-China dispute really had an effect. However, if caustic pricing during 2020 stays at last month's levels, we could face price headwinds of about USD 30 per ton relative to the index price we used for our 2019 guidance. We think that current pricing is an aberration driven by the U.S.-China trade wars, but longer term, underlying supply-demand characteristics remain positive. And while we are experiencing some near-term pain, we're still quite bullish on the future of caustic pricing and our EC business.

We thank you for your attention. And operator, Rohit and I would now be pleased to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Jacob Bout of CIBC.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [2]

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The industrial demand for hydrochloric, so maybe just talk a bit about your split now for your chlorine or raw chlorine going to industrial and then to the fracking.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [3]

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So Jacob, we are doing more than half of our HCL now in the general industrial space. So -- but we'll maintain some flexibility. If fracking were to come back, we would actually displace some chlorine as opposed to disrupt the stable industrial market we are trying to serve. So that's where we are right now converting about 37% of the chlorine molecule into HCL. So that gives us ample flexibility should fracking come back. So hopefully, that answers your question.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [4]

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And then how is pricing structured? Is it like a cost-plus? Or how should we think about that?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [5]

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No. We don't do cost-plus. It's based on market dynamics. Now the other thing is, as we said, we do -- those markets tend to be further away from our plants. So even though pricing may be reasonably strong, there is a high freight factor to get the product to those markets.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [6]

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And then the margin improvement that we saw in the WSSC, talk about the dynamic between pricing and raw material costs. What does that dynamic look like? What does the dynamic look like going out for the next 12 to 18 months, you expect pricing continue to increase?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [7]

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So raw materials have started to stabilize and actually, in some cases, are going -- are actually dropping now. So the key to that business is going to be to, I'd say, maintain the pricing that we have, while the raw materials go down. So I don't think there's a lot more -- there's some room in pricing as these contracts, which we go through all year of renewals of contracts. But actually, the bigger opportunity here is to maintain our pricing environment while raw material costs are going down.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [8]

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And to be clear, is our margins are actually returning to actually what we think normal should be and are not there yet. So we don't anticipate giving any on pricing as raw materials go down. We expect to maintain it and hopefully continue to increase it because we have -- it's in our view that we have not been receiving a proper return on that business.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [9]

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Do you get back to historic margins in the next 12 to 18 months?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [10]

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We're going to move in that direction.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [11]

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And then maybe just while we're in this segment, any update on the sale of the KCL [and the vaccine] business?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [12]

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As I said, we really won't comment on that until we have something to comment on.

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Operator [13]

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Your next question comes from the line of David Newman of Desjardins.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [14]

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Some could say Vale almost did you a favor in almost -- in tightening up the markets in the smaller catchment area and the improved pricing overall. But if you look at the sulfur pricing, it does look like it's begun to roll over to a certain degree on merchant acid. So I guess, how long do you think you might be able to sustain the current run rate of obviously good results here?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [15]

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We don't see that weakening for the foreseeable future, right? Although sulfur price is tending down right now is -- recall that a bunch of our product is not based on burning sulfur and a number of our contracts in the areas where sulfur is our raw material, you have pricing linked to changes in sulfur pricing. So although -- while pricing might come down, margins shouldn't.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [16]

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Okay. And in the catchment area, I think, Mark, you said some of the contribution margin, the further out you go geographically, was kind of marginal. So do you think in the catchment areas that you're in now that you're servicing that you have a stronger hold in those markets or a better read on those markets versus, I guess, the -- when you add more volume?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [17]

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Yes, I certainly think so. It is, again, generically, as years ago when Vale said they were going to reduce, we always said that the last 25% of what we take from Vale is essentially no margin. It's not quite that way, but it's close enough. So if they had reduced by 25%, we probably wouldn't be talking about this. Though they reduced more, which they did, is what's the knock-on effect on the market. And obviously, the knock-on effect has been higher pricing. And therefore, as you say, is the customers are more geographically proximate, and they're logically served by the product coming out of Vale, so we probably do have a better hold on those guys.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [18]

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Okay. And then I noticed you're re-rationalizing some of your regen capacity; where, why? And I guess, are you taking a bit of a write-off on it. Could there be recoveries? Or I assume there's -- it's hard because it obviously is sole-used property sort of thing; and any EBITDA that is attached to what you're shutting down?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [19]

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Yes. So as a general statement, although regen could move around, is it's pretty -- it's primarily a regional market. And if you look at the U.S. regions. The only place that there's really excess regen capacity was in the U.S. Gulf. And the plant that we stopped producing regen at was in Louisiana, and we have sufficient capacity at our Beaumont facility to assume that volume. So is -- we will not start regen again up at Shreveport, although we do continue to make merchant sulfuric acid there and look for other opportunities on that plant, so the -- there is no loss of EBITDA from actually stopping regen, is we believe, a time when we finished rationalizing everything, there should be a slight uptick. And that plant is, as you kind of insinuated, it's sole-purpose. So although we can make regen and merchant there, we're currently making merchants there. And we are taking a look actually on what else we might be able to do at that site.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [20]

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And in terms of the write-down, those are specific assets that made -- that we used to process regen. So since they are not being used, we took a write-down. So there's no impairment in the value of the business. It's just specific assets that will no longer be used.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [21]

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Excellent. And as you look out to next year, guys, you had a pretty benign year, I guess, in terms of turnarounds, how is 2020 stocking up on the turnaround front? I guess Scott's going around checking all the plants out right now as we speak, but maybe just some thoughts on what the year shaping out to be?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [22]

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He has his wrench in his pocket as he's going around. There is another couple of turnarounds next year that will -- that are primarily in the SPPC segment, that will -- I think I'll put it this way, actually, is the SPPC segment could do even better next year, but it actually has a couple of significant turnarounds.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [23]

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If you remember, that 1 every 5 years refineries take a major cracker outage, and so we've got one of them slotted for next year. And unfortunately, I guess, it's in a market where there's a good margin. So we will have that big turnaround. And I guess, also, the other one is in the EC segment. We do a turnaround in the North Vancouver facility every 2 years. And so that will be due in 2020. But again, for EC, in particular, if we have enough time to plan, and we go in with reasonable inventories, the hurt is not as much as unexpected outages. The regen may be a different story because there's not much we can do. This is in the West Coast. And there's really not much of a network where, it's a stand-alone plant.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [24]

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And I assume the SPPC one is probably going to be in the front end of the year?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [25]

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No, that's actually in Q4, although there is -- we are doing another one in Q1 as well, but the bigger one will be Q4.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [26]

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Okay. And the EC for North Van?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [27]

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The EC is like, yes, I think it's in Q2.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [28]

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Okay. Very good. Last one for me, guys, and I'll hand it over to someone else. Suzano has rightsized their pulp inventories and industry capacity has been laid up, overall sodium chlorate. What is your read on the outlook for the pulp market? Does it look like it's going to be stabilized here and it might actually pick up into 2020? Any thoughts on sodium chlorate?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [29]

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I think your comments or your prelude to your question is right, is I think it looks to us as though the pulp markets have stabilized and should continue to run in the normal course going forward. Is -- Suzano is obviously of great interest, not just because of their market size, but because they take our product from our Brazil facility. So if they return to their traditional operating rates, is our Brazil facility continues to make its normal course EBITDA. If Suzano continues to, I guess, what they call it as price shape the market, if they throttle back their Aracruz plant, that could have an effect on -- it could have a negative effect on us. But as you started your question. It appears, as though that, that market has stabilized now.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [30]

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Yes, I mean, the pulp market has stabilized, and inventories have finally started to come down, but inventories globally still are quite a bit higher than what they should be, but at least they are now starting to come down.

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Operator [31]

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(Operator Instructions) You next question comes from the line of Paul Bilenki of TD Security [TD Securities].

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Paul Bilenki, TD Securities Equity Research - Associate [32]

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So you -- in your prepared remarks, you gave some really good color on caustic and pricing. So I was hoping you could provide some color maybe on your outlook for chlorine and hydrochloric, maybe relative to Q3, what you saw there and just for Q4 and maybe into early 2020.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [33]

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So on Q4, we actually -- so we -- in hydrochloric, which is more -- chlorine tends to not be as much of a driver. So if you look at HCL, we reduced our outlook in our guidance when we gave our assumption, we took it down by $5 a ton for the year, which, if you do the -- obviously, all [that's coming is] Q4. So if you take it linearly, that's $20 a ton for Q4, if the assumption is lower. So if you look at our HCL, for next year, we are not counting on a recovery in the HCL markets. If fracking does surprise us to the upside then there's potential upside, but we did start to see HCL pricing come down during the year. So when you look at 2020 versus 2019, we may be -- things remain where they are, we may end up slightly lower because HCL pricing was still a little bit higher in the first quarter, but most of the year was quite low. So we are not really counting on much recovery in the HCL market.

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Paul Bilenki, TD Securities Equity Research - Associate [34]

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Okay. That's very good color. And then, I guess, on chlorate, as you move towards free sort of renewing contracts early next year, what's your outlook on that side of things? Do you expect to put through price increases?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [35]

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Most of our contracts have been renewed, right? Most of the chlorate industry renews the contract before the end of the calendar year-end, not year-end, right? And we've seen pricing primarily stable. And as similar, I guess, to last year, is our pricing has been able to certainly offset any electrical power increases. So it is relatively stable pricing we see going forward, again, which is in an industry operating at the utilization rate that it is, in time, we think supply-demand is going to work in our favor.

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Operator [36]

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Your next question comes from the line of Joel Jackson of BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [37]

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I have a shorter-term question and a longer term. So Rohit, Mark, what's your corporate costs trend next year. You've had a lot of one-offs this year, what should it look like next year?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [38]

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So typically, we say between $65 million and $70 million is a reasonable run rate.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [39]

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And that -- you don't have any one-offs or any more legal we should worry about that we should maybe...

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [40]

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No, we're not expecting to -- [where we ran] in terms of cash outflow, we basically have, at the end of Q3, have paid out all the settled claims. We have those ex employee derivative actions outstanding, but for that, everything has been paid out. And so we're not expecting any unusual legal costs.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [41]

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So about a $10 million to $15 million tailwind next year, does that sound right?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [42]

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Yes, probably, that's in the ballpark, yes.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [43]

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Okay. And longer-term question, so gentlemen, you stabilized the businesses. You're past the legal issue that you inherited from GCC, stabilizing everything, like I said. You've historically had a history of buying a business every 2 or 3 years, levering up and then driving some synergies, levering down, doing it again every few years. It's been a tough few years. But what's next for this business? Are you still in sort of stabilization mode? Are you starting to look around for things? You're obviously selling one of your specialty -- a couple of your specialty business. But what's next for Chemtrade?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [44]

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Yes. Let's talk about 2 or 3 different things. One is, maybe we're past stabilization mode, but we're not past optimization mode, right? We still think that there's a number of improvements that actually we could bring to our existing businesses. And that will be a clear focus for us for 2020. So that's one. Secondly is, with our current leverage is we are not going to be in an aggressive growth mode until we reduce our leverage either through a value-added sale of our specialty business, which is one thing, but more importantly and more within our control is actually an increase in the profit or EBITDA generation from our businesses, which is both optimization and market improvements for some of our key products. So those are really, I think, 1 and 2. And then as leverage comes down, and operations continue to improve, is our overriding thesis has never -- has not changed. In our industries, size, scale and diversity of earnings is important, and we'd like to continue adding size, scale and diversity, but we need to optimize first and reduce leverage first.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [45]

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Can you maybe provide 1 or 2 -- or at least one, low-hanging fruit for optimization that we could all understand?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [46]

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Well, the one we just talked about, for example, was rationalizing regen capacity in our Beaumont plant and therefore not having to incur the CapEx and costs of running a regen plant at Shreveport, for one, right? That's like, we did that 3 weeks ago or something like that.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [47]

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We need to work on our supply chain side and our railcar fleet, we've done a bunch of it, but there's still more to do there. So that's definitely one opportunity that we're working on.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [48]

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We've improved our ability to produce ultra-pure sulfuric acid, but we keep on running essentially 6 sigma events on those different manufacturing facilities and every extra ton of ultra pure acid out is a good value-add for us. I mean there's a myriad of things, but there's 2 or 3 that we just gave you that are on the list.

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Operator [49]

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And your last question in queue for now comes from the line of Steve Hansen of Raymond James.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [50]

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Just a quick one here. Could one of you perhaps elaborate a little bit more on the current status of the challenges facing the specialty chemicals in your water treatment division? You suggested there's still in place, but we haven't really had an update in a while as to the status on potassium pentasulfide and I believe the KCL customer that moved off-line for a while. I just wanted to get an update there as to where we sit and what the directional time frame might be to rectify those issues?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [51]

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Yes, I'll give you 3 little snippets for you, right? First is actually on that -- on KCL is, we are actively searching for additional customers to sell out the extra volume that we have, while that one key pharmaceutical guy is planning at buying at lower rates for this year and probably into 2021. So we see a significant improvement in the KCL business, but not until late 2021 or 2022. And there's a little bit of headwinds that we faced this year in our P2S5 or phosphorus pentasulfide business. That is something, for those that don't know that goes into automotive lubricants. And again, with the various trade wars around and the production of autos and where lubricants are being produced is, we think that's a headwind this year. We don't think it's a headwind next year. But again, similar to other comments we've made is the various tariffs and trade wars, do make it hard to predict, but we don't think that should continue next year. And finally, our sodium nitrate business is -- that's a business that has been fighting low-cost imports from the Indian market. And we think that, that market dynamic has stabilized. We are not sure yet, the speed of a recovery in that business.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [52]

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Okay, very helpful. And then just the last one, and I have to ask it. But just as you contemplate the idea of deleveraging going forward, have you thought about at all the idea of reducing the dividend in order to delever more quickly? I know you don't need to, but just whether or not that's even on the table or not would be worth understanding.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [53]

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Yes. No, right now, it's not our intention to actually reduce our distributions. I think what we've said before was that if our operations improve and our unit price doesn't reflect that improvement, and we're paying out at a huge yield and not getting value for it is, we have to think about it as actually, hopefully, responsible allocators of your capital. But we don't see actually reducing the distribution in order to delever quicker.

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Operator [54]

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And there are no further questions in queue at this time. I'll turn the call back to the presenters for any closing remarks.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [55]

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Thank you all for your attention, and we look forward to talking to you at the end of the next quarter.

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Operator [56]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.