Chemtrade Logistics Income Fund (CHEUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. And welcome to the Unitholder Meeting of Chemtrade Logistics Income Fund. It's 10:00 a.m. I'm going to call the meeting to order. My name is Lorie Waisberg. I am the Chair of the Chemtrade Board. Just a few words about this virtual meeting. As you know, we switched from our usual in-person format to a virtual meeting because of the physical distancing requirements caused by the COVID-19 pandemic. Staying home as much as possible, as recommended by our health officials is, of course, the right thing to do. And so our meeting will be conducted online. In his remarks, our CEO, Mark Davis, will comment on how Chemtrade is faring and how it, as an essential business, is continuing to provide critical chemicals to other essential services and businesses. Our management has kept the Board apprised of the COVID situation, and we have provided guidance and remain available to assist management in steering through the pandemic. I want to support the messages that Mark and other members of management have been conveying to our employees. We are a manufacturer of essential chemicals, which means that most of our employees must continue to physically report to work. We have implemented appropriate safety measures to protect our employees. Their efforts and dedication to their jobs allows us to continue to produce and provide needed products to our customers and communities. We thank all of our employees for their efforts and contributions in these unusual times. And now let's turn to the business. As this is our first virtual meeting, I will explain how voting and questions will work. If you have questions about a motion, you can submit it using the instant messaging service on the virtual interface. Only those voting online, that is to say registered shareholders and duly appointed proxy owners, can submit questions about the motions. If you're submitting a question about a motion, please indicate your name and who you represent and confirm that you are a registered unitholder or duly appointed proxy holder. We'll then read out and answer your question. So that is questions about motions. That's just for shareholders or their proxy holders. Anyone can ask questions relating to Chemtrade generally by clicking the square-shaped icon and typing in your questions. Questions not directly related to motions will be answered by Mark, Rohit or myself at the end of the formal meeting. So to review, shareholders and their proxies can ask questions about motions. Guests, shareholders and proxies can ask general questions, and those will be answered at the end of the meeting. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered unitholders and duly appointed proxy holders will be asked to vote on each business item and time will be provided to vote after the presentation of all business items. Voting on various matters that will be covered by this meeting is now open and will remain open for a limited period of time until the end of the formal part of the meeting. If you have properly registered and logged into the meeting, that is to say you're not attending as a guest, you will see a virtual interface requesting you to register your votes. And you can vote at any time until I close the voting at the end of the meeting. If you've got all that, I will now call the meeting to order. To expedite the formalities, I will move and second all motions. Joining this morning by conference will be Mark Davis, our Chief Executive Officer; Rohit Bhardwaj, our Chief Financial Officer, is also available; Susan Pare will be acting as secretary of the meeting; and other members of management are also online with us today. Louise Waltenbury, a representative of our transfer agent, Computershare Trust, who with the consent of the meeting will act as scrutineer to complete the votes of any polls taken at the meeting and to report thereon to me. Notice of this meeting and, for those who requested it, the management information circular were mailed to unitholders on March 31, 2020, and the transfer agent has provided us with proof of mailing, and I direct that a copy of such proof be annexed to the minutes of this meeting. Chemtrade issued a news release on April 21, 2020, to advise unitholders that the date of the meeting would be moved later by 1 day to today and that the format of the meeting was changed from in-person to virtual. Also we applied for and received court approval to hold a virtual meeting. I will dispense with the reading of the notice unless there is an objection. Copies of the meeting materials, including the management information circular, are available on the Chemtrade website and also on SEDAR. Scrutineer has advised that more than 23,150,266 units are present at this meeting, which fulfills the 25% quorum requirement. The meeting is, therefore, properly constituted for the transaction of business, and I direct that the scrutineer's final report on attendance be annexed to the minutes of this meeting. The first item of business is the election of trustees. Details about the proposed nominees are to be found on Page 12 of the information circular, with biographies beginning on Page 13. The nominees are attending the meeting online. David Gee is not standing for reelection this year and will be retiring from the Board immediately following this meeting. I would like to thank David for his many years of service to Chemtrade. He was one of the initial trustees when Chemtrade was formed in 2001 and has been an invaluable resource to the Board and the company. For many years, he chaired our Responsible Care Committee, which covers the critical areas of environmental, health and safety. And on behalf of the Board and management, I want to thank David and wish him well. I want to say just a couple of words about 2 new candidates. Emily Moore joined the Board in July 2019 and has replaced David Gee as Chair of our Responsible Care Committee. Emily is a professional engineer with many years of experience in both private and public sectors and currently serves as a Director of the Troost Institute for Leadership Education in Engineering at the University of Toronto. Also standing for election today is Daniella Dimitrov. Daniella has over 20 years experience in the mining and financial services sectors, ranging from operations to CFO to CEO. As no other nominations have been received, I now move and second to elect each of the following as trustee for the upcoming year: Mark Davis; Daniella Dimitrov; Lucio Di Clemente; Emily Moore; Katherine Rethy; and myself, Lorie Waisberg. I assume there are no questions because I haven't received any. So I will move to the next item of business, which is the appointment and remuneration of auditors. KPMG have been the auditors of the fund since its inception in July 2001. The Board has recommended that KPMG be appointed auditors for the ensuing year at remuneration to be set by the Board. The financial statements for the year 2019 and the auditor's report thereon have been made available to unitholders, and I do not propose to ask unitholders to approve them. No questions having been received, I move and second that KPMG be appointed auditors of the fund for the ensuing year at remuneration to be set by the Board. The next item of business is the amended deferred unit plan and the ratification of deferred units previously granted under it. Deferred units, as you know, are notional units. The deferred unit plan is how the Board members get compensated for serving on the Board. Rather than being paid in cash, we take at least 50% in deferred units. At current, we were taking 100% in deferred units. And in this way, we aim to align with our unitholders. The amendments to the plan that you are being asked to approve today are technical and are outlined on Pages 7 and 8 of the management information circular. We need unitholder approval of these changes because they might involve settling deferred units in real units issued from treasury. I don't see any questions, so I move and second that the amended deferred unit plan be approved and that the deferred units granted be ratified. Next item is the advisory vote on executive compensation, commonly known as say on pay. The management information circular contains a detailed description for you to review regarding our executive compensation program. Circular contains a letter from me as well as a letter from Katherine Rethy, the Chair of our Compensation and Governance Committee, explaining some of the significant changes this year. Unitholders weren't too pleased with us last year, and we made some changes. As noted in our letters, we changed the structure of the long-term incentive plan, enhanced our succession planning, including the hiring of a Chief Operating Officer, and took other actions that we thought were an appropriate response to unitholder concerns. We feel that your comments and our response to your concerns have improved the company. Having said that, just as management follows the principle of continuous improvements in operating our facilities, the Board will continue to look for ways to improve the compensation programs to ensure that they appropriately reward performance, enhance succession planning and ensure that Chemtrade is well positioned for the future. I don't see any questions, so I move and second the motion for an advisory vote on the executive compensation program. So if you haven't already voted, I'm going to pause for just a brief moment to let you do your voting right now. Remember, only registered shareholders and proxy holders who have properly logged in with their control numbers or username will be able to see the screen -- on the screen the motions being brought forth at this meeting. Please register your vote now by accessing the voting page and selecting either the for or withhold button as appropriate, next to each trustee's name, next to KPMG, the advisory vote on executive compensation and the amended deferred unit plan. [Voting]

Okay. We're going to close voting. Your voting page will now disappear, and your votes will be submitted. I have been advised by the scrutineers that the ballot and proxies deposited for the meeting have been voted in favor of the resolutions by the requisite majority. I would ask the scrutineer to compile the report regarding the results on all matters. The results will be published on SEDAR and in the news release in the next day or 2. And that's the formal part of the meeting. And I now move and second that the meeting terminate and now declare that the meeting has concluded. And at this point, I'm going to call on our CEO, Mr. Davis, to provide some comments on our business. Mark?

Thank you, Lorie, and good morning, ladies and gentlemen. In these truly unprecedented circumstances, I hope you are all safe and well, and we thank you for joining us today. Before I comment on the rest of this year and how Chemtrade is faring, I wanted to add my thank you to David Gee. As Lorie indicated, David was one of our original trustees, and his knowledge of the industry, advice and support throughout the years has been truly essential to us. And so thank you, David, and we will miss you. Now turning to the rest of the meeting. Chemtrade, as you may be aware, is classified as an essential business under U.S. state and Canadian provincial orders. Our employees' health and safety have been our highest priority as all of our operations have continued. We have implemented measures to ensure that our employees can continue their work safely and that we can continue to supply our customers. I'd like to start this call by thanking each member of our workforce for their dedication and performance during these trying times. Specifically, I want to acknowledge and thank them for their adherence to all of the safety precautions we put in place for continuing to watch out for each other and for their individual efforts in the communities where they live. Their efforts have truly been outstanding. As we became aware of the potential economic effects of COVID-19, we moved aggressively to position Chemtrade for this downturn. And after 13 years of maintaining a distribution rate of $0.10 per month, we reduced our monthly distribution by 50%. This increased our liquidity by about $55 million on an annual basis. In light of the current uncertain economic climate, we also negotiated an amended covenant package on our senior credit facility, which provides us with additional covenant room over the next 2 years. These amendments have now been filed on SEDAR. Since the chemical industry is an essential industry, our facilities have continued to operate. Our team has done an outstanding job throughout this pandemic, operating safely, overcoming obstacles and keeping our customers supplied. In our case, it's not a question of whether we are permitted to operate or whether there will be demand for our products, the question is how much will demand be affected by the shutdown or slowdown of much of the economy and how long will this state last. At the highest level, our 2 largest concerns caused by COVID are its effect on gasoline demand and the ability for Chemtrade and its customers to perform maintenance turnarounds safely during COVID. Other segments of our business, such as our products that help purify drinking water, are not suffering from reduced demand during this pandemic. In a typical recession, cheaper crude oil and hence cheaper gasoline prices at the pump somewhat mitigate the effect of the recession and therefore, the reduction in refinery utilization rates is not too significant. Clearly, this time it's different. With very few cars on the road, gasoline production is down substantially. It's very expensive for our major refinery customers to completely shut down. Therefore, although we expect refineries to run at historically low rates, we believe they will continue to operate. This downturn in refinery production affects our regen business. We believe that refineries will operate in the second quarter at rates approximately 35% lower than last year, which is essentially the lowest rate our refinery customers can operate without fully shutting down their facilities. We expect a slight improvement in Q3, and in Q4, which is a seasonally weaker quarter, to be about 15% lower than we had originally expected. The positive side is that as the economy regains its footing and people start driving more, we expect that refineries' production rates will increase, and with that, our regen earnings will improve. We believe this is a direct COVID-related downturn and it will remedied as the effect of the pandemic lessens. Our second-largest concern is the ability of Chemtrade and its customers to find the necessary contractors to provide required maintenance activities. We announced last month that we had postponed a major turnaround at our North Vancouver plant. Postponements are also happening at our other plants and at our customers' plants. Plant turnaround requires outside workers as well as a supply chain of parts and equipment. Until the COVID environment stabilizes, most of heavy industry has deferred what maintenance work they can. We are conducting whatever work we can to ensure that our operations can continue safely. However, we do have a concern that as turnarounds are delayed, reliability of our plants and our customers' plants could suffer. While I have highlighted the areas that are of most concern to us, it's important to remind you there are several portions of our business that fare quite well in a recession, including this pandemic. First is our water products, which are primarily used to treat drinking water. Not surprisingly, we have seen no reduction in demand as demand is not discretionary. This business continues to experience improved performance over its 2019 results. Second is sodium chlorate, which is used to bleach pulp. Bleached pulp is used to make paper, but also for tissue, diapers and similar uses. So while paper demand is down, as more people are working from home, demand from tissue and other applications is up. Overall, we expect somewhat lower demand, but it is relatively modest. In a typical recession, and this one is no different in this regard, the Canadian dollar tends to weaken against the U.S. dollar. This is beneficial to us as we have a significant U.S. presence and are also a net exporter to the U.S. For those interested, we provided additional details in our recent MD&A and conference call, which you could find on our website. On balance, we are in better shape than many. Our businesses continue to operate, and our products are key elements even in a restricted economy. Our largest negative financial effect is tied to less driving and gasoline demand. We believe that driving is an activity that will increase faster than many other normal-course activities. When that happens, our business will improve. In the meantime, we again thank all of our employees for their efforts. Please continue to remain safe and healthy, and we look forward to returning to a more normal life when that time is appropriate. Those conclude my comments. I am just taking a look to see if we received any questions that we should answer.

So Mark, we have one question from a Chemtrade shareholder who is not happy with the Computershare system for conducting a virtual meeting. And all I can say is we apologize. This is our first run at trying to run a virtual meeting. We hope that we don't have to do it again, frankly. But your comment will be passed along to Computershare and to our secretarial branch as well. Thanks for the comment. I don't see any other questions, Mark.

No, I do not either. We have received no further questions. We do thank you all for your continued interest, and look forward to seeing everybody, hopefully, live and in-person once this pandemic passes and business and life returns more to normal. Thank you for your time and attention.

Thank you, everyone.

This concludes the meeting. You may now disconnect.