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

Hello, and welcome to the Annual General Meeting of the Unitholders of Chemtrade Logistics Income Fund. Please note that today's meeting is being recorded. If you participate in today's meeting and disclose personal information, you will be deemed to consent to the recording, transfer and use of same. If you disclose personal information of another person in today's meeting, you will be deemed to represent and warrant to Computershare and Chemtrade Logistics Income Fund that you first attained all required consents for the disclosure, recording, transfer and use of such personal information from all appropriate persons before your disclosure. [Operator Instructions] It is now my pleasure to turn today's meeting over to the Chair of the Board of Trustees of Chemtrade Logistics Income Fund, Mr. Lorie Waisberg. Mr. Waisberg, the floor is yours.

Thank you, and good morning, ladies and gentlemen. Welcome to the Annual Meeting of Unitholders of Chemtrade Logistics Income Fund. It's a little after 10, so I'm going to call a meeting to order. My name is Lorie Waisberg. I'm the Chair of the Chemtrade Board. Following the formal portion of our meeting this morning, Scott Rook, our Chief Executive Officer, will have some remarks about our business. At the time of planning this meeting, it was difficult to predict if public gatherings would be possible today, so we're once again holding a virtual meeting. I will start by explaining some of the technical aspects. You will have either logged on to the meeting as a unitholder by using the invite code provided by Computershare, or you will have logged on as a guest. Unitholders who have logged on with their invite code may ask questions and vote. The guests will not be able to vote, but will still be able to ask questions. In order to submit a question about a motion, please indicate your name, which entity you represent, if any, and confirm that you are a unitholder or duly appointed proxy holder. We will then read out and answer the question. Anyone may submit a question related to Chemtrade generally by clicking on the button marked Q&A and typing in your question. These questions will be answered by Scott, Rohit or 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 our CFO, Rohit, at the contact number listed on every news release. For the purposes of voting today, 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 for a limited amount of time until the end of the formal part of the meeting. If you've logged in as a voting unitholder using the invite code 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 formal meeting -- or until I close the voting. I will now call a meeting to order. And to expedite the formal part of the meeting, I will move all motions. Joining me this morning by teleconference is my fellow trustee, Doug Muzyka; Scott Rook, the Chief Executive Officer; Rohit Bhardwaj, our Chief Financial Officer, is also available online to answer questions. Ben Burford will be acting as Secretary, other members of management and the 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 complete 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, 2022, and the transfer agent has provided proof of mailing, and I direct a copy of such proof to be annexed to the minutes of this meeting. Copies of the meeting materials, including management information circular, are available on the Chemtrade website and on SEDAR. The scrutineer has advised me that more than 26,109,712 units are represented at this meeting, which fulfills the quorum requirements of the fund's declaration of trust of having at least 2 unitholders present in person or by proxy, representing at least 25% of the outstanding units. The meeting is now properly constituted for the transaction of business, and I direct that the scrutineers' final report on attendance be annexed to the minutes of this meeting. Today, we will be voting on the items of business set out in the agenda, the first item being the election of directors. Details of both the proposed nominees are found on Page 16 of the circular, with biographies beginning on Page 17. The nominees are attending the meeting online. You will have noted that I'm not standing for reelection this year. I've been on the Board since Chemtrade was formed in 2001 and have decided it's time for me to retire. Doug Muzyka, who has been with Chemtrade since 2018, will be taking over as Chair. We also have a new nominee standing for election today, Luc Doyon, whose biography includes extensive manufacturing experience from his career in the industrial gases industry. No other nominations have been received, and therefore, I now nominate each of the following to serve as trustee for the upcoming year. Daniella Dimitrov, Luc Doyon, Lucio Di Clemente, Emily Moore, Douglas Muzyka, Katherine Rethy and Scott Rook. Second item is the appointment and remuneration of auditors for the current year. KPMG have been the auditors of funds since its inception in July 2001. The Board has recommended that KPMG be appointed the auditors for the ensuing year at remuneration to be set by the Board. The financial statements for 2021 and the auditor's report thereon have been made available to unitholders, and it is not proposed to ask for unitholder approval. Final item of business is to take an advisory vote on executive compensation, known as Say on Pay. The management information circular contains a detailed description for you to review regarding Chemtrade's executive compensation program. Last year, you expressed your disapproval of our executive compensation program, and we've made numerous improvements to our program in response. The letter from Lucio Di Clemente, the Chair of our Compensation and Corporate Governance Committee, summarizes those changes starting at Page 24 of the management information circular. We also reached out and spoke with many of our unitholders to obtain feedback. We believe that this year's executive compensation program deserves your support. I now put forth a motion to approve each of these items and invite any questions on any of these resolutions. Incidentally, we'll be taking general questions at the end of the meeting. So for the moment, please limit your questions to these specific resolutions. Rohit, are there any questions pertaining to the items being voted on?

No, there are no questions, Lorie.

So if you haven't already voted, I'm going to pause for just a couple of seconds here to give everybody the opportunity to vote on all items. [Voting]

All unitholders who have logged in with the invite code they received from Computershare should be able to see on the screen the motions that have been brought forth. Please register your vote by accessing the voting page and selecting either for or withhold, as appropriate.

Lorie, sorry to interrupt you, but there's a bit of a delay. I do see a question that has come in, if I can just post that.

Sure.

So it says that it appears from the proxy materials provided that several proposed members of the Board have very limited personal holdings. As an investor, I'm worried that these wealthy people do not see the company as investment worthy of their investment. Is there something they know that we do not know?

Very good question. So we have a requirement that trustees must hold at least 3x the annual retainer. So hold units equal to 3x the annual retainer. That's roughly $450,000 worth of Chemtrade units. That can be satisfied either with units held of right or by deferred units. We have a deferred unit plan. And under our deferred unit plan, trustees are required to allocate not less than 50% of the remuneration to the acquisition of deferred units. So I think you'll see that, most -- except for very recent appointees, most of our trustees have very substantial investment in Chemtrade. I have an investment of over $1.5 million in Chemtrade, for instance. And that represents a substantial portion of my net worth. And so I think I've always had the interest of unitholders in mind. So I'm not sure what information our questioner has that causes him to think there aren't substantial investments. We believe, and our compensation consultant has confirmed this, that our trustee requirement of investment is in line with other public companies. And it's entirely appropriate to include deferred units in that calculation. Any other questions, Rohit?

No.

So I think I'm going to declare that the opportunity to vote is now closed. Your voting page will disappear. Your votes will automatically be submitted. I've been advised by the scrutineers that based on proxies deposited for the meeting, each of the trustees nominated for election have been elected. KPMG has been reappointed as auditor. And a majority of the units represented at this meeting have been voted in favor of the advisory vote on executive compensation. I would ask the scrutineer to compile a report regarding the results of voting 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 at the notice of meeting have been dealt with, I declare the formal part of the meeting terminated. Our new Chair, Doug Muzyka, would like to say a few words before we hear from our CEO.

Good morning, everyone. I am Doug Muzyka, and I thank you for giving me the opportunity to be here with you today. I'd just like to take a few minutes to thank Lorie for his service and let everyone know how excited I am to become the next Chair of the Board of Chemtrade. I've had the great pleasure to work closely with Lorie over the last 4 years, benefiting from his guidance, wisdom and superb leadership. We will miss Lorie, but know that he leaves Chemtrade in a good place poised for future growth and prosperity. Chemtrade truly does have a bright future, and I'm looking forward to leading Chemtrade into this next chapter. I'll now turn the call back over to Scott Rook, Chemtrade's Chief Executive Officer, to review the business, after which there will be an opportunity for questions. Thank you.

Good morning, ladies and gentlemen. I am Scott Rook, Chief Executive Officer of Chemtrade, and I would like to thank all of you for joining us today. I would also like to thank all of our dedicated employees who have persevered during the difficult and dynamic operating environment in recent years. Without your dedication and support, our success would not be possible. Before proceeding, I would 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 and other financial measures referred to in this call can be found in the disclosure documents filed by Chemtrade with the securities regulatory authorities available on SEDAR. One of the measures that we will 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, although our accompanying presentation will refer to adjusted EBITDA, we will just refer to it as EBITDA in our remarks as opposed to adjusted EBITDA. Non-IFRS and other financial measures are fully defined in our MD&A. To begin, I would like to acknowledge and congratulate Mr. Lorie Waisberg, on his retirement as Chairman of the Board of Trustees of Chemtrade at this annual meeting, a retirement that is certainly well earned after having served 21 years on our Board. Mr. Waisberg has been a value trustee of the fund since 2001 initial public offering and has held the role of Chair of the Board since 2009 and has served as a member of the Audit, Compensation and Corporate Governance and Responsible Care Committees. He has been an instrumental part of building Chemtrade into the industrial chemical leader it is today. We would like to formally thank Mr. Waisberg for his more than 2 decades of valuable counsel and contributions to Chemtrade Logistics Income Fund and wish him the best in all future endeavors. We would also like to welcome Mr. Douglas Muzyka, who you just heard from. Doug was previously a Board trustee to the role of Chair of the Board. Doug had a distinguished career at DuPont with extensive experience in the chemical industry as well as in manufacturing, human resources, governance and risk management. We are excited for the future of Chemtrade under Doug's tutelage. Switching over to financial results. I won't go through our 2021 full year financials in detail, but I would like to briefly highlight our performance for the year. For the year ended December 31, 2021, we earned EBITDA of $280.4 million, which is $15.1 million higher than in 2020, due to higher EBITDA for the electrochemical and SPPC segments and the recovery of $17.7 million from the NATO lawsuit settlement. The higher earnings were partially offset by lower EBITDA for the WSSC segment and the $17.5 million impact of the stronger Canadian dollar. Our results also included $14.2 million relating to the potassium chloride and vaccine adjuvants business that we sold in November 2021. For the year, Chemtrade generated $84.1 million of distributable cash, comfortably above our distributions declared during the year. While we also took several positive steps to improve our balance sheet, as outlined on the next slide. The most material development on this front was the sale of our potassium chloride and vaccine adjuvants business in November 2021 for net proceeds of $182.7 million. Using the proceeds from the sale, we reduced our senior debt and leverage by 0.7x. We also completed a $70 million equity offering earlier in the year. With the proceeds from this offering, we also used for deleveraging. Additionally, Chemtrade extended the maturity on our credit facility by 2 years to December 2026. And in December 2021, we completed a successful offering of a new series of convertible debentures that mature in August 2027, allowing further redemption of our 2023 debentures and leaving Chemtrade with no outstanding debt maturities until 2024. We also announced last month that we have launched a process to sell our North Vancouver real estate through a sale-leaseback transaction, which has the potential to provide additional financial flexibility and significant liquidity for investments in organic growth while also helping to further reduce our debt level. Turning to our business outlook. While the operating environment remains dynamic, we see 3 primary sources of growth for Chemtrade for 2022 over the medium term. First, we expect growth from ongoing broad-based rebound from COVID lows being seen in industrial end markets, which is supportive of increased demand and pricing for many of the products within our portfolio such as sulfuric acid and chlor-alkali chemicals. Secondly, Chemtrade has a number of organic growth projects that are either already underway or in the advanced planning stages, which are anticipated to be meaningful contributors to increase profitability over time. We will discuss some of Chemtrade's more notable organic growth projects in a minute. Thirdly, we continue to focus on driving operational improvements throughout our facilities and across the organization, including continuing to execute on productivity and reliability initiatives that we first launched in 2020 as we reinforce a culture of continuous improvement. Through identifying projects that drive improved operational efficiency and effectiveness, implementing best practices across the business and leveraging technology to improve performance, we are targeting to achieve $10 million in incremental cost savings each year. Beginning with sulfuric acid, merchant acid -- our merchant sulfuric acid continues to rebound on improved industrial activity. Regen acid has also rebounded nicely as the rate of North American driving continues to normalize and refinery utilization rates have increased. And ultra pure acid demand remains robust and increasing, which I will expand upon shortly. Additionally, we are optimistic that recent sharp increases in sulfur prices will translate into higher pricing for sulfuric acid over time. Near term, we expect the elevated sulfur prices to pressure margins for our water treatment chemicals as it takes time to pass on these higher raw material costs to our customers. But we expect to pass on these additional costs as contracts are renewed, and we remain confident in the long-term outlook for water treatment chemicals, which is characterized by stable but growing demand. Meanwhile, trends remain very positive across our chlor-alkali Product portfolio. Caustic soda prices remain well above levels seen a year ago and are near historical highs. Chlorine markets, which have benefited from tight industry supply and improving industrial and construction demand and hydrochloric acid demand and pricing have benefited from improvements in rig counts due to increased fracking activity. The strength in chlorine and hydrochloric acid are particularly notable as strong demand for these products allows our North Vancouver chlor-alkali plant to run at high operating rates and fully capture the benefits of higher caustic soda prices, a key source of earnings upside for our company. Additionally, with recent supply dislocations that have resulted from geopolitical conflicts, we believe the market for these chemicals could remain strong for at least the next 12 to 18 months, while we also remain very bullish on the longer-term outlook for chlor-alkali. The other product in our EC segment is sodium chlorate. Sodium chlorate markets remained under pressure from ongoing softness in demand for office paper. We are focused on renewing contracts at higher prices, and we remain hopeful that sodium chlorate will see a demand rebound as individuals return to the office. We would also remind our shareholders that our production facility in Brandon, Manitoba has the lowest production cost in the industry. As a result of the continued strong dynamics we are seeing in our product portfolio and our robust first quarter results announced, we have revised our EBITDA guidance for this year upwards by $35 million. For a more fulsome discussion on our recent results, our outlook and our revised '22 guidance, please refer to our first quarter MD&A published yesterday and available on our website and/or the replay of our first quarter conference call held earlier today and also accessible through our website. Looking now at Chemtrade's organic growth projects. We believe that there are attractive opportunities available for organic growth across many of our key products. The single largest opportunity that we see currently for organic growth is for the ultra pure sulfuric acid that we sell to the semiconductor industry. Demand from this industry for ultra pure acid is projected to increase by 2 to 3x over the next 5 years, largely owing to the onshoring of semiconductor production in North America. As a North American leader in ultra pure acid and to capture this anticipated growth in demand, Chemtrade announced a $50 million investment into our Cairo, Ohio production facility, which is progressing well and will support a 60% increase in capacity at this facility, including enhancing the quality of our asset produced. This project is expected to deliver a very attractive return on investment with the project expected to be completed by the end of 2023. We also continue to evaluate additional organic growth or additional projects to help capture even more of this anticipated growth. We expect to have more positive news to deliver soon. A second attractive organic opportunity is the monetization of green hydrogen. Chemtrade already produces green hydrogen through our sodium chlorate and chlor-alkali manufacturing processes, which use renewable hydroelectric power. Green hydrogen is expected to become a more significant energy source in a low-carbon future, and Chemtrade continues to make strong headway on its projects. We have been developing projects to allow us to fully monetize the hydrogen streams at our Prince George BC and Brandon, Manitoba facilities. And we expect construction of the Prince George site to begin later this year, with production anticipated to begin next year. The Brandon opportunity is expected to be even more significant, given the scale of the facility and the byproduct hydrogen it produces. And we expect to be able to share additional details of this project before long. We also see good opportunities for growth in water chemicals. Increasing regulations for water treatment in general population growth support heightened demand for our coagulants over time. Chemtrade sees opportunities to expand capacity for certain of our high-growth water chemicals, including PAC and ACH. Moreover, we believe that there may be opportunities to expand into new specialized products should do and so be economically attractive. Finally, in addition to organic growth projects I outlined, Chemtrade continues to evaluate additional smaller organic growth projects across the organization that we expect to drive additional growth. Alongside these projects, we continue to strive for ongoing operational improvements, as previously discussed. Finally, I'd like to make a few comments on our environmental, social and governance issues which we take very seriously at Chemtrade. While we remain in the early stages of our ES&G journey, we are striving to take a leadership position on this front as we believe in being good stewards for all stakeholders including the communities in which we operate. Summarized on this slide are 5 of our key company initiatives, which are all targeted for 2025, and we announced in March of this year. These targets span across environmental, social and governance, and we believe that they are consistent with our goal to lead in this area. First, regarding greenhouse gas emissions. We are targeting a 50% reduction in our Scope 1 emissions. Second, we will ensure that 85% of our electricity is from hydro or other renewable energy sources. Third, 20% reductions are targeted in industrial waste through reuse and process efficiencies. Fourth, we are targeting a 50% reduction of workplace injuries. And finally, to improve workplace diversity, we will achieve and maintain at least 30% women and 50% designated groups defined as women, visible minorities, indigenous and/or disabled individuals in management positions and on the Board by the 2024 Shareholder Meeting. To conclude, our business results are very strong this year, and we believe they will continue in the coming years. We have some tremendous organic growth opportunities with ultra pure acid, hydrogen and water products. Our focus on reliability and productivity will continue across our organization. We will drive improvements in our leverage ratio even with our spending on growth. Finally, with our new ES&G long-term targets, Chemtrade will be a leading corporate example in the chemical industry. We would like to thank you for your continued support and for your attendance today, and would welcome any questions you may have at this time. Thank you.

Thank you, Scott. If questions have been sent in, I would ask Rohit to read them, and we'll try to answer them.

Yes, Lorie. Lorie, I just refreshed my screen, and there are no further questions that have been raised.

If there are no further questions, I would like to thank everyone for attending the meeting today. And the call is concluded. Thank you very much.

This concluded the meeting. You may now disconnect. and have a pleasant day.