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Edited Transcript of CHE.UN.TO earnings conference call or presentation 14-Aug-19 1:30pm GMT

Q2 2019 Chemtrade Logistics Income Fund Earnings Call

North York Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Chemtrade Logistics Income Fund earnings conference call or presentation Wednesday, August 14, 2019 at 1:30:00pm 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

* Endri Leno

National Bank Financial, Inc., Research Division - Associate

* 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

* Nelson Ng

RBC Capital Markets, LLC, Research Division - Analyst

* Steven P. Hansen

Raymond James Ltd., Research Division - SVP

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Presentation

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Operator [1]

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Good morning. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Chemtrade Logistics Income Fund Q2 2019 Results Webcast and Conference Call. (Operator Instructions)

Mr. Mark Davis, President and CEO, you may begin your conference.

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

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Thank you. Good morning. Thank you for joining us for our conference call and webcast today. And as usual, joining me is Rohit Bhardwaj, our Chief Financial Officer.

Before I commence the review, I'd like to 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 the corporate -- by Chemtrade with the securities regulatory authorities available at sedar.com. One of the non-IFRS measure that we'll refer to on 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. Both of these terms are fully defined in our MD&A.

As a general statement, our second quarter results reflect strong operations from all of Chemtrade's plants and traction on the initiatives we implemented last year.

Before I provide an overview of the businesses, and Rohit provides more details, I wanted to comment on the results of a portfolio review that we recently undertook. As you would've seen from our financial statements, 2 of our specialty chemical products, namely potassium chloride, or KCl; and vaccine adjuvants, are designated as assets held for sale. We acquired these businesses as part of the General Chemical acquisition, and since that time, have invested further in their growth. We believe that we've now built a stronger platform and that a business with more exposure and competencies in these end markets than Chemtrade can generate more value than we can. As you know, our core business is industrial chemicals, and the key to profitability is a business model that minimizes costs and standardizes its products. These specialty chemicals are not a natural fit with that business model. In order to optimally monetize these assets, we needed to make some investments to improve their operations. Now that, that is done, it's the right time to divest these businesses. And we've retained BMO Capital Markets as a financial adviser to assist in this process. Assuming that we are successful in this endeavor, we intend to use the sale proceeds to pay down our senior debt, thus, improving our balance sheet flexibility and allowing us to pursue organic and other growth opportunities in our core businesses. For perspective, these products generated roughly USD 14 million of EBITDA for the 12 months ended June 30, 2019. There are, of course, no assurances that we will be successful in this endeavor. We will not comment further until we either have a successful sale or have determined that the value of retaining these businesses exceeds any value offered. Our decision to sell these businesses means that these assets will be classified as assets held for sale. This results in other accounting consequences that Rohit will explain shortly.

Turning now to second quarter operating performance, Sulphur Products & Performance Chemicals, or SPPC, posted another quarter of strong results. The initiatives we took last year to adjust our operations to structural changes in the merchant sulfuric acid market continues to bear fruit. Selling prices for sulfuric acid remains strong, and this has helped offset the lower volumes available to us as a result of Vale's structural change to their operations. Our plants operated well, and this year we knew the approximate quantity of material we would obtain from Vale. This allowed us to avoid high alternative sourcing and freight costs that were previously incurred.

In our Water Solutions and Specialty Chemicals, or WSSC segment, contract renewals for water treatment products, as expected, are being made at higher prices, more than offsetting raw material cost increases. However, in the second quarter, this improvement in our water business was more than offset by weakness in some of our other specialty chemical products. As we have previously mentioned, we expected lower demand for KCl in 2019 as a key customer was rebalancing inordinately high inventory levels. We also had lower demand for another specialty chemicals product, although we believe that's transient and demand will be higher for the balance of the year. We did have lower pricing and demand for sodium nitrite due to competition from an overseas supplier and a decline in earnings from this chemical has led us to take a goodwill impairment, as Rohit will discuss.

Finally, our Electrochemicals, or EC segment, maintained high operating rates, but Northeast Asia caustic soda prices, which affect the pricing of our product, continued to disappoint. Demand for hydrochloric acid from fracking industry continued to be sluggish, but high seasonal demand for chlorine meant that there was little impact on our ability to produce caustic. Even though selling HCL into the fracking market is lucrative, we took steps to diversify our customer base and switch supply into a more stable industrial end use, albeit at lower selling prices. Also, these new markets are geographically further away from our plant, so they result in lower netbacks. That is to say, freight adjusted net sales price. Keeping in mind that our main chlor-alkali product is caustic soda, the ability to operate our North Vancouver facility at high rates is more important than chasing a volatile fracking market for HCL.

So in general, our businesses performed well for the first half of the year. Both SPPC and Water continue to gain strength, and although there continues to be some pricing pressure on caustic, the long-term outlook for higher prices has not changed. So we continue to be confident of better times for EC.

Rohit will now provide you with some additional details on the second quarter before I'll provide some further information on our path forward. Rohit?

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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, all our plants operated well in the second quarter of 2019, and results also reflected higher sulfuric acid prices and improved pricing for water products that more than offset higher input costs.

Before I review the financial results for the second quarter, there are a few items to note. The 2 specialty chemicals businesses that we decided to sell have been reclassified in the second quarter financial statements as assets and liabilities held for sale. Although from a balance sheet perspective, these assets are disclosed separately. From an income statement perspective, income generated by these assets will continue to be reported as part of the WSSC segment. While the aggregate cash flows of all the specialty businesses supported their carrying cost, once we decided to sell KCl and adjuvants, the expected cash flow of the remaining specialty business was not sufficient to support the book value. Accordingly, we wrote off the goodwill associated with these products. This resulted in a noncash charge of USD 50 million or CAD 66 million. Since it's a noncash charge, it does not affect EBITDA nor distributable cash. The application of IFRS 16 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 increasing EBITDA, but it does not affect distributable cash. Also, comparative information is not restated.

Second quarter of last year included 2 items that affected distributable cash and our EBITDA. The $65 million reserve for legal proceedings negatively affected both EBITDA and distributable cash. We also incurred a premium to repay the Canexus senior notes, and a small loan outstanding on our Fort McMurray plant. I will exclude these items in my comments this morning to better compare the actual operating performances of our business. Revenue from operations for the second quarter of 2019 was $396.7 million, a decrease of $8.5 million from 2018. The decrease was primarily due to lower prices for caustic soda in the EC segment.

For the 3 months ended June 30, 2019, distributable cash after maintenance CapEx was $41 million or $0.44 per unit compared with $33.6 million or $0.36 per unit in 2018, after the exclusions mentioned. Aggregate EBITDA from operations for the second quarter of 2019 was $91.3 million compared with $70.5 million in the second quarter of 2018. The increase in EBITDA is due to better results in the SPPC segment and due to the adoption of IFRS 16, which had a positive impact of $13.6 million.

Turning to segmented results for the quarter. SPPC generated revenue of $126.4 million compared to $128.5 million in 2018. EBITDA for the quarter was $45.3 million, which was $19.6 million higher than 2018. Of this $19.6 million increase, about $12 million is attributable to improved business results. The balance includes the positive impact of IFRS 16 of $5.5 million and a claim settlement of $2.6 million. The main reason for the year-over-year increases was better operations and higher selling prices for merchant sulfuric acid, which more than offset the effect of lower sales volume, primarily from Vale.

As Mark noted, a combination of better operations and more predictable byproduct supply resulted in more optimal supply/demand balancing and reduced costs, such as alternate sourcing and illogical freight. We also had fewer maintenance turnarounds in the second quarter of 2019 relative to 2018. Our WSSC segment reported second quarter revenue of $115.5 million compared with $112.4 million in 2018. EBITDA was $20.9 million, including the positive IFRS 16 impact of $1 million compared with $22.4 million generated in 2018. As Mark said, selling prices for water products are more than offsetting higher raw material costs. However, the positive impact of improved performance of water products was more than offset by lower volumes for specialty chemicals. Our EC segment reported revenue of $154.8 million for the second quarter of 2019, which was $9.6 million lower than the same period of 2018. Although volumes were higher than last year when the North Vancouver plant had an extended maintenance outage, continued weakness in selling prices for caustic soda more than offset the benefit of higher volumes. Chlorate volumes were lower due to reduced demand from pulp mills.

From an EBITDA perspective, including the $6.7 million benefit from IFRS 16, EBITDA for the second quarter of 2019 was $5.5 million higher than the same period of 2018. This was primarily due to higher volumes of caustic soda and reduced costs compared to 2018, which included the cost to repair the piping issue at the North Vancouver plant. However, the higher volumes and reduced costs were not enough to offset the lower caustic prices. We also realized lower netbacks for HCL as Mark explained.

Maintenance CapEx for the second quarter was $17.2 million. We expect maintenance CapEx in 2019 to range between $80 million and $90 million. Excluding unrealized foreign exchange gains, corporate costs in the second quarter of 2019 were $21.3 million, including a positive IFRS impact of $400,000 compared with $18.5 million in the second quarter of 2018, excluding the litigation reserve recorded in 2018. The second quarter 2019 includes a foreign exchange loss of $2.8 million compared with a loss of $3.8 million in 2018. The lower FX loss this year was offset by higher legal costs and higher incentive compensation accruals. We maintain ample liquidity with USD 190 million undrawn on our USD 850 million credit facility and are in compliance with all our bank covenants.

I'll now hand the call back to Mark.

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

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Thanks, Rohit. Overall, we're pleased with our second quarter performance. The initiatives we took to improve our operations led to significant improvements in the SPPC segment. Results from EC were based on solid business actions despite the downward movement in commodity pricing.

Finally, our Water business has also improved and is gaining traction. As you would have seen from our MD&A, we changed some of the assumptions underpinning our 2019 EBITDA guidance. Our new assumptions led to a lower expectation of 2019 EBITDA, but we still believe that 2019 EBITDA will be within the range previously communicated, albeit at the lower end. The key assumption change is our expected pricing for caustic soda. We've lowered our 2019 expected annual price by USD 30. Since our third quarter pricing is mostly set, this assumption is really based on a modest improvement in Q4 pricing. At the beginning of August, pricing for export volumes out of Asia has continued to be quite volatile, increasing one week and falling the next. For Chemtrade, the pricing at the end of August or early September will set the direction for our Q4 pricing.

As a reminder, caustic soda pricing during the third quarter of 2018 was relatively high. The current weakness affecting our results only started significantly affecting us in the fourth quarter of 2018. Between caustic soda and HCL, our guidance assumes pricing headwinds of roughly $25 million for the second half of 2019 relative to 2018, although we do expect some of this to be offset by stronger results in SPPC. The ongoing weakness in spot caustic soda pricing exported from Northeast Asia was unexpected by us and by the industry experts. The best analysis is that this near-term pricing weakness is the result of the U.S.-China trade tensions and tariffs. For example, we know that Chinese alumina production is down, which is a consumer of caustic. It also seems that demand for the chlorine chain in China has not weakened. Both of these create excess caustic supply, thus constraining pricing. It's believed that the current Chinese ECU prices are close to the floor of cash costs in Asia. Despite this near-term weakness, the long-term view on caustic soda pricing is still bullish. Once we are past the current weakness, the forecast calls for price increases every year for the next 4 years and to remain elevated through 2025, which is now 2 years longer than the previous forecast. The forecast now has lower peak pricing than former forecasts, but that peak pricing is still significantly higher than current pricing levels. We've tried to provide some specific color on our views on the caustic soda market and the MD&A contains the other assumptions underlying our guidance. At a high level, most of our businesses are posting improved results and the long-term market dynamics for the product that holds the most leverage remains robust despite near-term weakness.

Thank you for your attention, and operator, Rohit and I will 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) Our first question comes from Joel Jackson, BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [2]

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A few questions. Maybe I'll just start high level, so you said this is the first time you've ever commented on guidance for two-parter here. So when you say at the low end of the range, do you mean the low end or in the lower half or the lower third? And on the third quarter, for full EBITDA, adjusted EBITDA, would we -- would you expect similar, worse or better performance relative to Q2 or to Q3 of last year? Maybe you can give us a bit of color.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [3]

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So when we talk about the lower range, as you -- look, the midpoint is probably the lower 25% of the range. It's not the bottom of the range. But if we say the middle of range, it's 50% top 25% and bottom would be bottom 25%. As far as third quarter goes is, we really don't give quarterly guidance, but I did say this in the call and that, again, our biggest variable is really caustic soda pricing. And what we said in the call was that the current pricing weakness for caustic really didn't affect our results significantly until Q4 last year. So you would expect that actually Q3 this year versus Q3 last year should be down in EC segment.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [4]

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Yes. And if you look at the back half of the year, even at the midpoint of our guidance we'll be similar to the back half of last year. So given that we've said we expect in the lower part of our guidance, you should expect the half 2 this year to be weaker than half 2 last year, and Mark said primarily driven -- I think we quantified the amount of headwinds we expect in pricing...

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [5]

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Is $25 million.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [6]

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Is $25 million in the back half of the year. So we'll offset some of that, but we shouldn't be surprised to see half 2 weaker than half 2 last year.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [7]

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Okay. That was very helpful. So my next question is on the legal reserve for the alum cases or claims, it looks like you paid out some more cash on that. Can you give us an update of -- I know the reserve is the 140, how much cash now has been paid out through end of June or to today? And then what are your -- what the probability is that reserve would have to go up again?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [8]

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So on the first part of your question, I think, we've still got about CAD 50 million or so to pay out on it. If we assume that the entire amount of the reserve is paid out. During the quarter, we paid about $20 million or so of the reserve.

And Joel, your second part of your question, whether we expect the reserve to change, we currently don't -- we're still very comfortable with the reserve that we have.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [9]

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And just my last question. So in selling the KCl -- looking to sell the KCl and vaccine adjuvant business, looks like you're maybe expecting to get about 10x multiple on that in the market. Maybe comment on that. And then, does this speak to -- over the past several years, you've had some growth businesses that you've sort of been looking into, which was KCl, hydrated KCl surrey and some of the higher-value water treatment products. Does this sort of signal a shift? Or maybe the shift has already happened that maybe these kind of growth products is not what your strategy will be going forward?

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

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We won't comment, obviously, on actually expected valuations. Our statements stand for themselves. What I will say is that the rationale for selling these businesses is the rationale that we gave in the call script is that you need a different business model for specialty chemicals than for industrial chemicals. And we've always tried to remain true to actually our business model. And in this case, we picked up some products and a bigger acquisition that didn't fit the business model.

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Operator [11]

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Our next question comes from Jacob Bout from CIBC.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [12]

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The 2019 guidance, does that exclude the USD 14 million EBITDA from the potassium chloride in the vaccine business?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [13]

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No. So even though from a balance sheet perspective, these are classified as assets held for sale, from a P&L perspective they remain part of the WSSC segment until a sale is closed. So we don't expect -- given where we are sitting today, we don't really expect any material loss of earnings due to a potential sale of these 2 businesses in 2019.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [14]

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Okay. And have you hired an adviser and the process has already started? Or how far down the track are you?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [15]

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Mark said we've hired BMO Capital Markets.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [16]

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Okay. And under the -- how often do you do a strategic review like this?

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

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We strategically review our assets, frankly, all the time, all right? As many of you or some of you have actually heard is because we're relatively simple people. And then what I mean by that is actually is we're trying to create value for our stakeholders. And if there's businesses that the value is higher to somebody else than it is to our current stakeholders, we'll attempt to monetize that. Having said that is -- we think the best value for most of our businesses is to stay where they are.

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [18]

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Yes. In this case, as Mark, I think, alluded to, these assets needed some investment to really get them to realize their potential. So which is why we took a couple of years to invest in these businesses and to get their plans to be in better shape, and therefore, now seems like the time to execute and monetize them.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [19]

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Okay. Maybe talk a bit about your thoughts on the dividend. We're in double-digit yields. Clearly, market has not been paying for this. How are you approaching that?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [20]

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Again, as we have said for a number of times is, we don't see any problem with sustaining our dividend and we plan to actually keep paying it is, I've said before too, that I think that our unit price has been in the penalty box for a number of self-inflicted wounds. And if much of the business performs as we believe it should, and as we think our unit price will actually recover, we'll no longer be paying double-digit yields, but we see no reason to change our dividend policy right now.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [21]

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Okay. The last question is just on the margin improvements in the WSSC business. What type of ramp are you expecting there?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [22]

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So there's 2 things. One is, the remaining spec chem businesses that are there, we think there's some improvement opportunity there. And on the water, we -- as prices are now starting to outpace raw materials, we expect that margins will continue to improve. But again, you're looking at -- you're not looking at very high increases from where we are starting to see now, but we expect that should continue for a couple of years, at least.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [23]

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The biggest margin increase that's possible in the water business, again, is one of these difficult things to actually read because it would be based on a sharp drop in the aluminum source -- pricing of the aluminum source. And I say it's difficult because, again, the aluminum -- the aluminum source, actually it gets all tied up into worldwide tariffs and things like that. So we continue -- we believe we can continue to grow those margins at a reasonable pace. If the aluminum input cost dropped suddenly, for the same reason when we were locked into these annual contracts municipalities, that would be a significant benefit, but it's hard for, I think, us or anyone to predict if or when that would happen.

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Operator [24]

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Our next question comes from Nelson Ng from RBC Capital Markets.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [25]

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My first question relates to the sales process. So I guess you chose 2 facilities to move forward with. If that process goes well, are there kind of other specialty chemical assets that I guess you are sitting on the fence on that would -- that then you would look to sell? Or -- yes, could you just comment on that first?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [26]

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These are the most (inaudible) of the specialties we have with the exception of maybe our ultra pure business, which fits so tightly with the rest of it that -- and as a growth opportunity for us, right? So these are the 2 -- these are the 2 things that most likely -- that don't belong, if anything doesn't belong, right, is -- and they sell into the pharma industry, which we have nothing else that sells into the pharma industry. All of our other products actually sell into general industry or industrial purposes, and therefore, as we've said, we think actually that the best value for those businesses is where they are.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [27]

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Okay. Got it. And then moving on to the EC segment. Could you talk about the reduced demand from pulp mills in terms of the chlorate product? Is that a seasonal item? Or is it just due to a gradual slowdown that you're seeing?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [28]

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So there's I -- there's 2 or 3 things going on in that product, right? One is, actually, there's been a 2 or 3 minor pulp mill shutdowns during the year, which probably reduced North American demand by 1% or 2%. So that's one thing. Secondly is, there's been a number of mills that have taken some increased downtime because demand for their market pulp has actually been a little soft. So the 1% or 2% is probably systemic. The other stuff is probably a this-year item. Counterbalancing that somewhat is actually -- the volume actually works pretty nicely, if you do the math, is Superior or ERCO has announced that it's actually shutting it's Saskatoon facility by the end of the year, which removes 40,000 tons of chlorate from the market, which is probably about 2% of the market. So that's what's going on there.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [29]

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Okay. Yes, I was just about to ask about the Saskatoon facility. So from your Brandon facility, how should we think about its service radius in terms of, like, obviously, it gets service in Saskatchewan, but how should we think about what radius is that you can cost effectively provide products, yes?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [30]

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So North America and actually exports, too. And the chlorate business is different than some of the other ones we talk about is, no matter where your plant is located in North America, is actually -- is you're able to competitively compete anywhere you want in North America. And as you say, especially out of Brandon, which is a low-cost plant, but your big general statement is 60% of North American chlorate supply is in Canada and 60% of the demand is in the U.S. So it's really a North American market. Secondly, as we've talked about before is, again, as a general statement, North America is actually a low-power cost jurisdiction. So you're actually able to make chlorate in North America and export it competitively into Asia -- Southeast Asia and around the world, actually, at a competitive base. So Brandon is competitive not just in America in whole, but actually outside North America as well, as are a number of our competitors' plants.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [31]

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So just to confirm, are you exporting any of the Brandon product out or...

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [32]

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Part of the volume we produce in North America, it goes for export.

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Operator [33]

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And our next question comes from David Newman, Desjardins.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [34]

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If you look at the -- sort of the Northeast caustic soda prices, they're at an 8-year low overall. So if you sort of extrapolate it into 4Q, and you didn't get the little bit of lift in Q4 that you're kind of talking about and certainly softness in the end markets as well, do you think that you could still meet the bottom end of your guidance, if it kind of maintain at current levels? Or would you have to give a haircut to be a little bit below the guidance range?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [35]

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So right now what we are counting on is about a USD 20 pickup in the index, which, from week-to-week that's a fluctuation that's quite possible. So -- but even at that point, you're looking at that -- maybe that's $1.5 million impact in Q4. So we aren't too concerned about kind of -- we expect to get that lift, but even if we don't, that's not going to be a material impact.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [36]

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So let me just reiterate then, Rohit. So what you're saying is if we stay at current levels, it could be like $1.5 million impact in Q4. Is that correct?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [37]

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Yes. Yes. Yes. That's right.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [38]

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Very good. That's actually a lot less material than I would would've thought. And your cash cost curve, I know you guys don't provide this information, but the Northeast Asian producers are talking about being at the cash cost curve. So in North Van, maybe kind of look on the same basis, what is your cash cost curve there? In other words, what do you have to be at caustic? I know there's a lot of working parts of chlorine and HCL, et cetera, but what is your sort of cash cost curve there that you -- or maybe just a few thoughts.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [39]

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Well, if you do it another way, is actually that -- right now, we're actually at, as we said, low caustic prices, low hydrochloride prices and you see the EC segments report, right, of earnings. And the majority of that is...

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

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Let me take -- we take half of that -- even if we take half of that coming from North Vancouver, that's still a hefty number. Keeping in mind that the Northeast Asia stuff has to travel. Even if you use about USD 80 a ton for freight costs and then the distributors have to make their margin. So even if we said our cost curve is the same, which it isn't, we have a better cost curve. We've still got that cushion over the Northeast Asia stuff.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [41]

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We're a long way into positive profitability.

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

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Yes. Yes.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [43]

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Okay. That makes sense.

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

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Yes. And if you just -- and just a reminder for everyone. Key raw material cost actually is electrical power. Electrical power in BC versus electrical power in Asia, as a general statement, is a good place to be, right?

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [45]

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Right. Makes sense. And what about -- your conversion rate now in your hydrochloric acid, what are you guys running at? I think it's a little bit lower than, obviously, more chlorine, obviously, right now, with the chorine markets being a little more robust?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [46]

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Yes. So we've said it's about 37%. And frankly, we're -- getting less, we'll start getting less sensitive to that because when the fracking industry is going hard, then picking up extra conversion into HCL to feed the fracking market generates a lot more money. We've diversified our base now to a more industrial base. So while it's an upgrade to chlorine, the sensitivity to a 1% change in conversion is not going to be as much as it was last year when fracking industry was going really strong.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [47]

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Okay. And last one for me, guys. Just in terms of strategic initiatives, I mean, you've obviously got your KCl and the vaccines on the market. And just kind of further to a question earlier, would you look at Brazil as being a potential carve out? Because it seems like it's -- it could be sold relatively easily? Or is that something you consider still to be core?

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

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Look, is it -- we like the business model. It fits perfectly with the rest of the business. And I don't want to sound trite, but I did actually say it, I'll say it one more time, actually, is if anything we could do actually to create value for our shareholders, we're open to, right? Is we think the likelihood is -- actually the best value is retaining the assets that we have?

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Operator [49]

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Our next question comes from Steve Hansen from Raymond James.

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

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Just a single one for me. I apologize if I missed it, but, Mark, you had referenced a sodium nitrate hiccup in the quarter around some demand side, I believe. And I just wanted to clarify why you think that's a single quarter phenomenon and not any longer?

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

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Yes. No, actually, it's -- I didn't mean to blur it, if I did, is sodium nitrite, I think, is an ongoing issue for us -- is a volume issue for the quarter would be phosphorus pentasulfide, P2S5.

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

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Okay. Helpful. And just to follow-up on Dave's question, I think, earlier around the customer switch decision in operating North Van. Am I understanding it correctly, just -- I just want to clarify is, the decision to switch and move away from the more volatile fracking market is really just to benefit the operational stability. Is that the -- so you are taking lower netbacks, it sounds like with the switch. So you gain on the other side, if I understand it?

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

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Yes. But another way of saying it, if you look at MECU profitability, okay, what's key for us is continuing to be able to make and sell caustic, all right? So taking lower margins on HCL facilitates us being able to produce is actually a good trade.

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Operator [54]

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(Operator Instructions) Our next question comes from Endri Leno from National Bank.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [55]

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Just a couple of questions for me. First, on the sodium nitrate, is it related to the impairment at all on the antidumping hearing? Or is that the ruling that expired in January?

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Rohit Bhardwaj, Chemtrade Logistics Income Fund - VP of Finance & CFO [56]

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No. So it's -- the antidumping was against China and Germany, and we -- that's going -- so that's been renewed for another period of time, so that's not an issue. But the impairment is to do with sodium nitrite and what's happened with sodium nitrite is there's been another -- some other overseas supplier that's not covered by the tariffs. That has been -- they have excess capacity that they're feeding into the market. And we don't believe that they are dumping, but they are really impacting our ability to get -- to keep market share and pricing. So that's been -- over the last couple of years, I was never very -- once it was -- in the context of the spec chem business was not a huge component, which is why we didn't really talk a lot about it. But now that we've pulled the other 2 aside, it becomes a little bit more meaningful in the context of spec chem, although for the overall business, it's still not a material product.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [57]

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Okay. Great. And last one for me is that the shutdown at Georgia Pacific that you had previously discussed, is it possible to quantify what impact it had in the quarter for chlorate? And how do you see it for the rest of 2019?

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [58]

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Yes. I don't remember the exact quarter numbers. But I mean, is if you -- our assumption, as you know, for chlorate in our guidance going forward has been reduced by 10,000 tons for the year, right? So a large portion of that will be attributable to -- actually to Georgia Pacific shutdown. I mean, it's not all of it, but a large part of it.

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Operator [59]

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And that does conclude the questions in the queue at this time. I'll turn the call back to the presenters for closing comments.

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Mark A. Davis, Chemtrade Logistics Income Fund - President, CEO & Trustee [60]

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Good. Well, we thank you all for your time and attention, and we'll speak to you again at the third quarter call. Thank you.

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Operator [61]

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Thank you very much for joining us today, ladies and gentlemen. This concludes our call, and you may now disconnect.