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

Good morning, ladies and gentlemen, and welcome to Chemtrade Logistics Income Fund Third Quarter 2025 Conference Call. [Operator Instructions] I would now like to turn the conference call over to Rohit Bhardwaj, Chief Financial Officer. Please go ahead.

Hello, and welcome to Chemtrade Logistics Income Fund's earnings conference call and webcast for the third quarter of 2025. Joining me today is Scott Rook, our President and Chief Executive Officer. We appreciate your continued interest and participation. Please note that this call has an accompanying slide deck, which we may reference during our prepared remarks and Q&A. This slide deck is available on our website, chemtradelogistics.com. On today's call, we will first give you a recap of our third quarter '25 financial results, our record adjusted EBITDA, including business segment performance, financial position, and updated full year 2025 guidance. I will then hand the call back to Scott, who will discuss updates on the outlook for our key products and growth initiatives. We will then open the call to analysts for Q&A. Before proceeding, note that this call will contain certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Actual results may differ materially from expectations. Further information identifying risks, uncertainties and assumptions, and additional information on certain non-IFRS and other financial measures referred to today can be found in the disclosure documents filed by Chemtrade with the securities regulatory authority available on sedarplus.com. One of the measures that we will refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude noncash items, such as unrealized foreign exchange gains and losses. While our slide deck and other disclosure documents refer to adjusted EBITDA, we will simply refer to it as EBITDA in our prepared remarks. Looking at our overall results. The third quarter of 2025 was a continuation of the strong performance we have been delivering for a number of quarters. It marks the highest quarterly EBITDA in Chemtrade's history, alongside double-digit year-over-year growth in revenue and distributable cash. This is thanks in large part to the continued focus and execution of our dedicated employees, operational excellence, and our diversified product mix. Third quarter revenue increased by 12%, while EBITDA increased by 10% due to contributions from both segments. Foreign exchange was also a modest tailwind, excluding which revenue and EBITDA increased by 12% and 9%, respectively, year-over-year. Distributable cash after maintenance CapEx increased by approximately 18%, primarily due to higher EBITDA; and distributable cash after maintenance CapEx on a per unit basis increased 24% year-over-year. Turning now to the segment's performance. Excluding the impact of foreign exchange, the Sulphur and Water Chemicals segment or SWC's revenue, grew by 19%, driven primarily by higher prices and volumes for merchant acid, water products, and regen acid. SWC's EBITDA increased by 17%, after excluding the impact of foreign exchange, largely due to the same factors that contributed to revenue growth, which more than offset higher input costs. Turning to the Electrochemicals, or EC segment. Excluding the impact of foreign exchange, EC revenue was 2% higher, while EC EBITDA was 12% higher year-over-year, largely due to higher prices of caustic soda and chlorate, as well as higher volumes for chlorate, partially offset as expected by lower prices for chlorine. On an ECU basis, netbacks decreased by approximately $50, mainly due to lower netbacks for chlorine, partially offset by higher netbacks for caustic soda. Corporate costs for the third quarter were higher year-over-year, at $34.7 million versus $24.1 million in Q3 '24. The year-over- increase is primarily due to higher short-and long-term incentive compensation, as well as higher foreign exchange. Legal costs were also higher year-over-year, with a significant amount of the increase attributable to the acquisition of Polytec. This performance was broadly in line with our expectations. Looking at our capital allocation and financial position, we remain disciplined in our balanced approach. Chemtrade generated $78 million of distributable cash in Q3, up 18% year-over-year, comfortably covering the monthly distributions, with a sustainable payout ratio of 25% in the third quarter and 32% on a trailing 12-month basis. In Q3, we repurchased approximately 1 million units under the NCIB initiated in August 2025, bringing the total for 2025 to 7.1 million units. Unit repurchase remain an important portion of Chemtrade's capital allocation strategy. Alongside the investments in strategic growth and the return of capital to unitholders, Chemtrade continues to maintain a strong balance sheet and significant financial flexibility. We exited the quarter with net debt-to-EBITDA of 1.8x, well below our target and with ample liquidity of approximately USD 484 million. During and subsequent to the third quarter, we continued the optimization of our balance sheet by reducing the potential equity dilution inherent in convertible debentures by approximately 90%. We only have approximately $28 million of convertible debentures after these initiatives. These transactions were financed through a credit facility in conjunction with the proceeds of an offering of $250 million of long tenure unsecured notes, with a coupon of 5.75% that mature in 2032. Adding to the senior unsecured notes, Chemtrade issued in 2024 and earlier this year, the new series of unsecured notes enhances our fixed income investment profile while optimizing our capital structure and effectively lowering our capital costs. After the end of the quarter, we extended the maturity of our senior credit facility by 2 years to October 2030. Looking now at our guidance. Although global trade tensions were prevalent through '25 and still persist, Chemtrade's business has shown resilience and continues to deliver strong results, with market conditions for its products remaining favorable. This outlook, along with our focus on operational and commercial excellence, allows us to raise our adjusted EBITDA guidance for 2025. We now anticipate that 2025 will be a record adjusted EBITDA year surpassing 2023, when we generated adjusted EBITDA of $502.6 million. Alongside the updated EBITDA guidance, we have also updated several of our assumptions for the remainder of 2025. While you will find the full range of assumptions in our disclosure documents, we highlight that for 2025, we now expect North American MECU sales volumes of 173,000 versus 177,000 prior, net year-over-year MECU netback increase of CAD 70 versus CAD 60 prior and sodium chlorate volumes of 272,000 tonnes versus 270,000 prior. I will now hand the call over to Scott, to provide additional detail on the outlook for Chemtrade moving forward.

Thank you, Rohit, and thank you to all of our listeners for joining the call. As Rohit highlighted, Chemtrade delivered a record adjusted EBITDA in Q3, and we're on track to deliver the highest ever adjusted EBITDA for the full year 2025. This performance is well aligned with Chemtrade's Vision 2030, where we outlined a clear framework for sustainable growth, targeting 5% to 10% annual growth in EBITDA and distributable cash. We aim to achieve mid-cycle EBITDA of between $550 million and $600 million by 2030. While recognizing the significant achievements since introducing the Vision 2030 framework earlier this year, Chemtrade intends to provide an update to the strategic outlook once it has more clarity on the North America trade and CUSMA negotiations. As all of the products that Chemtrade exports to the U.S. from Canada are CUSMA compliant to-date, we have not seen material direct impact from incremental tariffs. We continue to closely monitor the fluid North America trade developments and will reassess in the event of any material changes. However, we are optimistic that we'll be able to work with our customers and suppliers to manage any additional costs, should they come to bear. Looking at the remainder of 2025, we are positive on the outlook for the SWC segment. We are seeing stability underpinned by consistent end market demand, particularly in water and regen acid. In Water Chemicals, demand remains strong across municipal and industrial customers due to largely nondiscretionary nature of these products. PAC and ACH experienced higher volume and pricing in the third quarter, as our investments in these products continue to bear fruit. Alum pricing was also a positive in Q3, and more than offset higher raw material costs. As we have discussed in prior calls, although raw material costs could pressure margins in the short term, we have been successful in resetting price and normalizing margins through contract renewals. On the acquisition front, integration of the Thatcher Group is progressing very well, further reinforcing our position as a leading supplier of coagulants in North America. During the third quarter, we announced the acquisition of Polytec for USD 150 million, representing an attractive acquisition multiple of approximately 6.5x expected annual EBITDA. We are looking forward to adding Polytec's turnkey water treatment solutions to Chemtrade's footprint. The closing of this transaction has been delayed due to the U.S. government shutdown, which has affected regulatory approvals. We expect to close the transaction shortly after resumption of the U.S. government activities. In light of the Polytec acquisition, we are reviewing our reporting segments, and it's likely that Water Solutions will become a separate reporting segment starting in 2026. Turning to our sulfuric acid businesses. For regen acid, the demand outlook remains steady, supported by elevated U.S. refining rates. This business has historically demonstrated resilience even in periods of economic softness. Merchant acid, while more cyclical given its wide industrial use, continues at a broadly steady pace and is further supported by risk-sharing agreements with our suppliers and customers. Chemtrade's continued focus on operational excellence and reliability allows us to respond to dynamic market conditions. Finally, our Ultrapure Acid business remains a long-term growth vector as structural demand for North America semiconductor production capacity continues to increase. Our Cairo, Ohio plant is our first large ultrapure acid project to capitalize on the expansion of advanced chip manufacturing in North America. The facility continues to advance with progressive product quality improvements and a line of sight to commercial ramp-up. We believe that ultrapure acid will be an important contributor to Chemtrade's growth and Vision 2030 targets. Within our Electrochemicals segment, we continue to progress through the rezoning process at the North Vancouver chlor-alkali facility. We submitted the rezoning application to the District of North Vancouver in late Q3, and hosted a community information meeting shortly thereafter. We anticipate the formal review process to continue during Q4. We'll keep the market informed as developments progress. Our performance in the EC segment was positive and reflective of the investments and operational excellence we've implemented at all of our facilities over the last few years. Both the higher volume and prices for sodium chlorate and higher prices for caustic soda supported Q3 results, despite the expected softness in chlorine price that is likely to continue. Industry forecast and contract pricing in Taiwan, point to a flat to moderately improving caustic soda price into 2026. For the remainder of this year, our pricing will reflect an index level of roughly USD 435 per tonne, which is up USD 50 per tonne compared to 2024. For added context, every USD 50 per tonne change in caustic soda pricing equates to approximately $14 million of incremental annual EBITDA, holding everything else equal. As Rohit highlighted earlier, we expect sodium chlorate volumes to be in line with last year, that combined with price increases implemented earlier this year have contributed to sodium chlorate remaining a strong cash flow generator for Chemtrade. Overall, while market conditions remain dynamic across the electrochemicals portfolio, the supportive outlook for caustic soda pricing, paired with fracking tide HCL demand, have offset pressures in other products. We believe this segment is well positioned for the remainder of this year. We continue to invest during Q3 and subsequent to quarter end and organic growth projects, as well as M&A with the announcement of the Polytec acquisition. As discussed in prior updates, our 2025 organic growth investments are primarily directed towards strategic projects in the water chemicals and ultra-pure acid business lines. These initiatives are well aligned with the secular demand growth and are expected to be cumulative in earnings over time. In our Water Chemicals business, we're expanding the capacity for products, and we are seeing strong demand. While many of these projects are modest in scale individually, they collectively represent meaningful earnings potential. A notable example is our new specialty water chemical line in Augusta, Georgia, where we expect construction to ramp up in early Q1, with production startup to follow. In Ultrapure Acid, our Cairo, Ohio expansion and upgrade continue to advance as we progress through certification with major customers. Commercial ramp-up is expected during 2026. We continue to see this as a high-impact project aligned with the ongoing North America onshoring of semiconductor manufacturing. Overall, our growth investments are grounded in strong market fundamentals, clear visibility to returns, and a focused approach to capital deployment. Before concluding, thank you once again, for your continued support and interest in Chemtrade. Our strong Q3 results build on several quarters of industry-leading performance that highlight the consistency and strength of our execution alongside continued demand for our products and services. Our disciplined approach to capital allocation, our strong balance sheet, and our robust cash flow generation position Chemtrade to drive long-term sustained growth in EBITDA, distributable cash and unitholder value. With that, we would now be happy to open the line for questions._

[Operator Instructions] Your first question is from Nikolai Goroupitch from CIBC Capital Markets.

So margins in the SWC segment were quite healthy even with sulfur costs going up. It looks like pricing was strong, as you mentioned. Can you maybe share a bit more about how those price increases unfolded? Were they mostly cost pass-throughs or new contracts? Or was there more to it? And as sulfur prices continue to climb, how do you see SWC margins shaping up in Q4?

Yes, sure. I'll take that. So as you said, sulfur prices went up in -- particularly in Q3. That has an impact on the business. We saw our margins increase primarily in what we call as the Merchant Acid segment and then -- but we also saw strength in the regen business. With the merchant acid business, we benefit as sulfur goes up, our team is able to pass through prices. Prices in the Merchant Acid segment range from spot deals all the way to quarterly prices. But we were able to -- our team was able to pass through those price increases quickly. We also benefited in Q3 by having strong reliability. We did see the market saw outages from our competitors in production. And so we saw an increase in volume, which we were able to meet. And it was really the increase in volume, coupled with the pricing that led to a very strong Q3. As we understand, our competitors -- and it was more than one -- have solved their operational issues. We don't know for sure. But what I'm hearing is that they are back online, and so Q4 may not be or may be a little softer from a volume standpoint. But that was one reason for the strong Q3, was merchant. We also are continuing to see just very healthy strong demand in the regen business. So it looks like U.S. refineries are running strong. There's strong demand there. We've got good reliability, and so we would expect that to continue.

Nikolai, maybe I can just add a couple of things. Because when you look at our SWC segment, sulfur is actually an input cost. So typically, you'd expect it to be a headwind when it goes up. And that is true in our water business, because there we see input costs going up, but we were -- our team was successful in offsetting that with pricing initiatives. So we were able to pass those through. And if you look at our merchant acid business, we get a significant portion as byproduct acids, which doesn't require sulfur to be produced. It's a byproduct. So when sulfur goes up, we are able to offset it in the business that we make it, but we get some benefit in the business where it's a byproduct. So all those things combined with the operational issues that our competitors faced, contributed to this performance.

It seems sodium chlorate performed well this quarter as well. But with pulp mills facing fiber challenges and soft pricing, do you anticipate a slowdown in demand for sodium chlorate going forward?

Yes. So we see a very modest decline in sodium chlorate demand, maybe -- our estimates are down maybe 1%, 1.5% on an annual basis. But yes, I mean, that's what we're expecting. Sometimes it's a little better than that. Sometimes it's a little worse, but we are anticipating a very modest impact. Canada has announced some initiatives to support the Canadian pulp and paper industry. So we're hopeful that those will have a positive impact on the industry going forward.

Your next question is from Joel Jackson from BMO Capital Markets.

So I only hear positive commentary from you in general, puts and takes of positive commentary. If I take your $503 million, at least $503 million guidance for the full year, that means you're expecting contraction in the fourth quarter after getting double-digit EBITDA growth in the first 3 quarters. Which businesses are most likely to contract in the fourth quarter?

So Joel, at Chemtrade -- as you know, you've been following us for a long time -- we see stronger Q2s and Q3s, and we see weaker Q4s and Q1s.

Sorry, Scott, to interrupt. I'm talking about year-over-year because you've got -- sorry to interrupt. Of course, you get seasonally lower in Q4. Like if I believe your guidance, I believe that your business is about to go from double-digit EBITDA growth for the first 3 quarters to decent contraction in the fourth quarter year-over-year. So which business is most likely to contract year-over-year in the fourth quarter?

The business will see some contraction in chlorine that we've talked about. And I think that's what -- we'll see contraction there. And then on a year-over-year, that's probably the biggest place that we would see. So in the EC segment with chlorine, chlorine products.

That would be the only part of the business that contract year-over-year is chlorine.

So maybe I'll just give you -- Joel, maybe I'll give you one data point that might help. So if you look at our Q3 results, we've said that on a year-to-date basis, netbacks -- MECU netbacks went up. But in Q3, they actually declined by $50. So we've seen chlorine backing off through the year, and it kind of crossed over in Q3 to pulling the entire MECU down. And so that is expected to continue in Q4. So that will be the biggest area, as Scott said, of decline. But you can see it kind of in the numbers in Q3. Q3 was very strong in merchant and regen and a few other places that offset it.

Sorry. So chlorine would be the only part of the business you would expect to contract year-over-year in the fourth quarter?

In terms of anything meaningful, could -- there might be a little bit here and there, but that's the meaningful one.

That's the only thing I think that's going to be -- that would be noticeable.