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

Good morning. Welcome to the Annual and Special Meeting of Unitholders of Chemtrade Logistics Income Fund. It's 10:00 a.m., so I will call the meeting to order. My name is Lorie Waisberg, and I am the chair of the Chemtrade Board. This meeting commenced on May 11, 2021, but because we did not have a quorum we adjourned the meeting to today. According to Chemtrade's Declaration of Trust, today's meeting may proceed without a minimum quorum. We're holding this meeting in a virtual format due to the pandemic. We know that this format is less satisfactory than a physical meeting and expect to be able to resume traditional meetings next year. Chemtrade has now been operating for over a year with our COVID safety protocols in place. As an essential business, we have been providing critical chemicals to our customers continuously throughout this period. We have our dedicated employees to thank for this, and I would like to extend on behalf of myself and the other Board members, our great appreciation to our employees. Scott Rook, who took over as our CEO on March 1, will have some remarks about our business shortly. But first -- let's turn to the business of the meeting and how the technology works. In order to ask questions about the motions to be considered today and to vote on them unitholders should have logged into the meeting using the user name provided by Computershare. If you have logged in as a guest, you will not be able to vote at the meeting unless you exit the meeting and log back in using the user name you receive from Computershare when registering to attend the meeting. If you are submitting a question about a motion, please indicate your name, which entity you represent, if any, and confirm that you are a registered unitholder or a duly appointed proxy holder. We will then read out and answer the question. Anyone may submit a question relating to Chemtrade generally by clicking on the squarish shaped icon and typing in your question. These questions will be asked -- answered by Scott, Rohit and myself at the end of the formal meeting. In addition, I remind you that you're always welcome to get in touch with me at any time via e-mail at [email protected] or with Rohit at the contact information listed in every news release. For the purposes of today's meeting, voting on all matters will be conducted by electronic ballot. Voting on the various matters that will be covered by this meeting is now open and will remain open until the formal part of the meeting concludes. If you have logged in as a voting unitholder using the user name provided by Computershare, you will see a virtual interface requesting you to register your votes. You may vote at any time until I close the voting. I now call the meeting to order. And to expedite the formal part of the meeting, I will move all motions. Joining me this morning by teleconference is Scott Rook, the Chief Executive Officer of Chemtrade; Rohit Bhardwaj, our Chief Financial Officer, is also available to answer questions. Susan Pare will be acting as Secretary of the meeting and other members of management and our Board are also online with us today. Also online is Louise Waltenbury, a representative of our transfer agent, Computershare Trust Company of Canada, who with the consent of the meeting will act as Scrutineer to compute the votes of any polls taken at this meeting and to report the results to me. Notice of this meeting and for those who requested it, the management information circular were initially mailed to unitholders on March 31, 2021 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. Copies of the meeting materials, including the management information circular are available on the Chemtrade website and on SEDAR. For this adjourned meeting of unitholders, the unitholders present form a quorum. Therefore, the meeting is 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. Today, we'll be voting on the items of business set out in the agenda with the first item being the election of trustees. Details of both the proposed nominees are found on Page 14 of the circular with biographies beginning on Page 15. The nominees are attending the meeting online. Of the 7 nominees, 2 are new from last year, one being Scott Rook, our CEO, who joined the Board on March 1, when our former CEO, Mark Davis, stepped out. The other new nominee is Doug Muzyka, who has been attending our meetings and sharing his vast chemical experience with us since 2018. He lives in the U.S. and therefore, could only officially join our Board once the residency requirements and our declaration of trust would change. These are being voted on today as well. No other nominations have been received, so I will now nominate each of the following to serve as trustee for the upcoming year. Daniella Dimitrov, Lucio Di Clemente, Emily Moore, Douglas Muzyka, Katherine Rethy; Scott Rook and myself, Lorie Waisberg. The second item of business is the appointment and remuneration of auditors for the current year. KPMG has been the auditors of the fund since its inception in July 2001. The Board has recommended that KPMG be appointed as auditors for the ensuing year at remuneration to be set by the Board. The financial statements for the year 2020 and the auditor's report thereon, have been made available to unitholders, and it is not proposed to ask for unitholders to approve them at this meeting. Next item of business is to approve the amendments to the declaration of trust, which is referred to as the 2020 declaration of trust in the circular. The amendments of the declaration of trust that you're being asked to approve today are outlined on Page 6 of the information circular. And the entire declaration with the changes shown in blackline is attached to the back of the circular, so you can read the actual text. The changes address 4 topics. Number one, it enables non-resident Canadians to act as trustees, so long as the majority of the Board are resident Canadians. Number two, it permits virtual board, committee and unitholder meetings. Three, it allows electronic signatures and delivery of documents. And number four, it clarifies certain meeting procedures to enable the previously mentioned changes that's 1 through 3 and in accordance with best practices. Finally, each year, we take an advisory vote on executive compensation known as say on pay. The management information circular contains a detailed description for your review regarding Chemtrade's executive compensation program. Also, the circular contains a letter from me as well as a letter from Katherine Rethy, the Chair of our Compensation and Corporate Governance Committee explaining some of the highlights this year. I now put forth a motion to approve each of these items of business and invite any questions on any of these resolutions. I would ask you to defer your general questions until a conclusion of Scott Rook's presentation. If you haven't already voted, I'm going to pause for a moment to allow you to vote on these items of business. All unitholders who have logged in with the user name they received from Computershare should be able to see on the screen the motions being dealt with at this meeting. Please register your vote by accessing the voting page and selecting either for or withhold, as appropriate, next to each trustees name and next to KPMG and selecting either for or against as appropriate on the advisory vote on executive compensation and the amended declaration of trust. I am pausing to let you vote. [Voting]

At this time, I am closing the voting. Your voting page will disappear. And your votes will be automatically submitted. I've been advised by the Scrutineer that based on proxies deposited for the meeting, each of the trustees nominated for election have been elected. KPMG has been reappointed as auditor. The majority of the units represented in this meeting have been voted in favor of the amended declaration of trust. And the advisory vote on executive compensation did not obtain a majority. I would ask the Scrutineer to complete the report regarding the results on all matters, and the results will be published on SEDAR and by news release in the next day or 2. Now that the formal items of business set out in the notice of meeting has been dealt with. I declare the meeting to be terminated. Scott Rook will now provide some comments on our business, following which we will hold a general question-and-answer session. Scott?

Thank you, Lorie. Good morning, everyone, and thank you for joining us today. Let me start by saying, I am [Technical Difficulty] I look forward to hopefully hosting this event in person next year. Given the virtual format of the AGM similar to last year, we have elected to forgo the financial recap of 2020. However, Rohit Bhardwaj, our Chief Financial Officer, will be available to participate in the questions-and-answer portion of the AGM after my comments. So some of my comments will be regarding Chemtrade's outlook. I refer you to our forward-looking statements contained in our MD&A posted on SEDAR. Before I share my long-term outlook for the business, I wanted to take the opportunity to thank all the Chemtrade employees for their hard work and dedication during 2020. I am sure you are all aware that Chemtrade is considered an essential business and our manufacturing plants continued to operate throughout 2020. Chemtrade's ability to navigate through these uncertain times is largely due to our committed workers who exhibit the strength, courage and values that Chemtrade embodies. Additionally, I would like to thank the Pandemic Steering Committee who are working diligently to ensure we have the right policies and procedures in place to keep our people safe. Turning now to our long-term outlook. Due to the economic uncertainty that we face from COVID-19, we are still not able to predict the key elements necessary to provide meaningful guidance. As Rohit mentioned, first quarter of 2021 presented challenges for our business on a number of fronts. COVID-19 continued to have an impact on our SPPC and EC businesses. Additionally, the Gulf Coast weather impacted not only several of our locations, but also several of our customers and raw material suppliers. Finally, we've quantified our sensitivity to the U.S. Canadian exchange rate, and this is a factor when comparing 2021 with 2020. As we look ahead, we see improved performance, particularly in the second half of 2021, and we see continued strengthening in 2022, particularly in the SPPC and electric chem businesses. Chemtrade is well positioned to benefit from a resurgence in demand across many products as we move closer towards a post COVID recovery. As mentioned, our earnings are impacted by the Canadian exchange rate, however, the impact is reduced at the cash level. In the next few years, our strategy will be to deliver earnings growth, driven by 3 factors. They are: number one, market recovery from COVID-19; number two, organic growth coming from ultra pure, water and hydrogen; and number three, operational efficiencies through productivity and reliability initiatives. In addition to delivering solid earnings growth, we will also be a leading example for corporate ES&G, that's environmental, social and governance responsibility. I'll now share my outlook for each of the businesses starting with the Water Solutions segment. We expect to have another good year with stable and similar to 2020 and largely unaffected by COVID-19. We are, however, seeing significant increases in the cost of raw materials, particularly sulfuric acid due to rising cost of sulfur. In the short term, spikes in raw materials can result in reduced margins as it takes some time to pass these on to customers. We are confident in our ability to eventually pass these on to customers. Typically, once raw material stabilize and sufficient time has lapsed to pass these on to customers, margins expand as we saw during 2020 after the last set of raw material increases. Despite short-term headwinds, this is an attractive segment for us, and there are some long-term organic growth opportunities driven by tighter government regulations and population growth that are creating a need for specialized products such as PAC, ACH and our ferric chemistries. In the SPPC business, regen and merchant sulfuric acid, will depend on higher North American refinery utilization and industrial activity. The stay-at-home orders in parts of the U.S. and Canada at the start of 2021 and combined with the Gulf Coast freeze in February had a negative impact on the North American refining industry. As COVID-19 restrictions continue to be eased, we expect full year refinery rates to be higher this year than in 2020. In April of this year, U.S. highway traffic data climbed above the prepandemic levels for the first time since the start of the pandemic. We expect this to continue as COVID-19 vaccinations are increasingly administered in the U.S. and Canada. Merchant sulfuric acid is also expected to improve with higher demand for metals, fertilizer and other industrial output. However, for now, we anticipate 2021 volumes will be similar to 2020 levels. We expect that the significant spike in the cost of sulfur will be offset by higher selling prices for sulfuric acid. Our ultra pure sulfuric acid business that mainly supplies the semiconductor industry is our largest organic growth opportunity over the next 5 years. At the beginning of the year, we lost share at one of our large end use customers. However, our team has been working to regain the lost business. I can report we have recovered part of our share with the large customer. We have another customer who have significantly increased their volume, and we have gained a few smaller customers. Last quarter, I shared, we would recoup our business in 18 to 24 months, and we are now on pace to be on the short side of that. We have also invested in capital upgrades to ensure we continue to meet the stringent quality requirements of the industry. The long-term fundamentals for the semiconductor industry are strong. With leading foundry and integrated manufacturers recently announcing U.S. expansion plans. The U.S. administration is focused on supporting the domestic chip manufacturing industry. We think there are strong fundamentals for this business with the current U.S. demand for ultra pure sulfuric acid exceeding North American domestic capacity. Our investments to upgrade our quality, our capacity and our resources will enable us to continue our North American market leadership position. Shifting now to the electrochemicals business and our chlor-alkali product line. As you know, caustic soda is a key improvement driver for us. We are starting to see a shift in sentiment on caustic soda pricing as market analysts are bullish on mid- to long-term growth in caustic demand driven by aluminum for automobile production and infrastructure projects and caustic demand for lithium production. There is minimal new supply slated to come online globally. We have seen the Northeast Asia spot price for caustic increase as a result of these factors, and we believe this trend will continue for the foreseeable future. Industry experts agree spot prices should increase and reduce the gap with the Taiwan contract prices. So we believe the trough is behind us and the market fundamentals will continue to improve over the next several years. Our North Vancouver plant is expected to operate at a higher level in 2021 than 2020 when we had our biennial maintenance turnaround. However, the plant's operating rates have been constrained by lower demand for hydrochloric acid and chlorine. Demand for HCL has begun to improve as oil pricing has recovered, resulting in additional franking activity, particularly in Western Canada. We also anticipate improvement in demand for chlorine, driven by strong demand for PVC and bleach in addition to capacity rationalization in the United States. As oil prices increase, we anticipate increased fracking activity across North America, resulting in more HCL demand. Sodium chlorate demand in North America will continue to be affected by the extent school closures and people working from home during the pandemic reduces paper demand, leading to lower demand for pulp production. As schools and offices reopen, demand for sodium chlorate should recover, but likely not back to historic levels. Given our current customer mix, we expect our sales volume in 2021 to be similar to last year. We also expect realized selling prices in 2021 to be lower than in 2020 due to the impact of the stronger Canadian dollar relative to the U.S. dollar. Our Electrochem team is also exploring a number of exciting organic growth opportunities in the hydrogen market. Our EC sites produce hydrogen as a coproduct. All of these sites also use hydroelectric power, so we are actually generating green hydrogen. In Q1, we announced a deal for one of our small chlorate plants in Prince George, BC that requires no capital investment from Chemtrade and will start to have significant returns for us in 5 years. The big opportunity for our hydrogen is that our branded Manitoba facility that is about 5x the size of our Prince George facility. We are investigating ways to develop that hydrogen stream into commercially marketable green hydrogen. The third factor, which will help us grow our earnings and improve our performance is productivity and reliability. In 2019, we launched an initiative to use Lean 6 Sigma tools across all of our businesses and functions to find efficiencies and improve our reliability. Each of the teams have a pipeline of active projects underway and together we are targeting to deliver more than $10 million each year from this initiative, which will help us offset inflation and other business headwinds. Turning now to our plans on ES&G, environmental, social and governance criteria are a set of standards for our company's operations that many investors today are requesting to see. Environmental criteria, consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates. Governance deals with the company's leadership, executive pay, audits, internal controls and shareholder rights. Prior to 2019, Chemtrade primarily used the Responsible Care code to manage and disclose ESG performance. In 2019, we committed to managing and disclosing our ESG priorities in alignment with the task force on climate-related financial disclosures. The annual information form or AIF, we issued in March 2020 was therefore, structured around our ESG governance, strategy, risk management, metrics and targets. In 2020, we determined which Sustainability Accounting Standard Board, or SASB metrics for the chemical industry are material to Chemtrade by using a Five-Factor test developed by the Sustainability Accounting Standards Board. In 2020, Chemtrade began measuring our performance across the company in several categories, including environmental criteria, greenhouse gas emissions, industrial and hazardous waste, and energy management. For social criteria this year, we are measuring employee engagement and diversity, and we are determining our diversity and inclusion strategy. We will be issuing long-term goals next year after we assess our performance this year, and we'll be considering material ESG factors more explicitly in our business strategies. Chemtrade is early in our ESG journey. However, we are doing quite well in several areas, including 96% of our electricity usage at our 17 largest sites comes from renewable hydroelectric power. Second, sale of hydrogen to hydro energy will reduce our carbon dioxide equivalent with CO2 emissions by 10% of our total CO2 emissions. That's equivalent to the emissions from our North Vancouver site, our largest Canadian site, and will contribute to over $5 million in margin annually by the year 2028. Next in 2020 employee -- our employee injury frequency excluding of COVID, was at a 7-year low. In conclusion, we will deliver growth in earnings driven by 3 factors: the market recovery and the post COVID-19 world, organic growth coming from ultra pure, our water business and hydrogen, and third, our operational efficiencies through productivity and reliability. In addition to earnings growth, we plan to be a leading corporate example in ES&G. It is an honor to be a new CEO of Chemtrade. I believe we are well positioned for future success and welcome your continued support. Thank you, and we will now be pleased to answer questions.

Thanks, Scott. If there are questions, would you communicate them by pressing the button. Rohit, do you see any questions?

No, Lorie. I don't see any questions.

Let's leave it for another minute. Well, there being no questions, I'd like to thank you for attending today's annual meeting. And we look forward to seeing you in person next year. The meeting is concluded. Thanks very much.

This concludes the meeting. You may now disconnect.