Release Date: August 15, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Chemtrade Logistics Income Fund (CGIFF, Financial) exceeded internal expectations for Q2 2024, reflecting strong organization-wide execution.
- The company announced an increase in its 2024 guidance, projecting EBITDA between $430 million and $460 million.
- The sulfur and water chemicals segment (SWC) saw a year-over-year EBITDA increase of $5 million or 7%, driven by higher selling prices and improved margins.
- Chemtrade Logistics Income Fund (CGIFF) ended the quarter in a strong financial position, with a net debt to EBITDA ratio of approximately two times.
- The company continues to invest in strategic high-return growth opportunities, including $17.7 million of growth capital in Q2 2024.
Negative Points
- The North Vancouver chlor-alkali facility's biannual maintenance turnaround negatively impacted revenue by $10.5 million and EBITDA by $17.9 million.
- Q2 2023 was an all-time record quarter for EBITDA, making year-over-year comparisons challenging.
- Corporate costs increased by $5.9 million year-over-year to $28.2 million, driven by higher incentive plan costs, FX losses, and legal expenses.
- The electro chemicals segment (EC) saw a year-over-year EBITDA decrease of $10.3 million or 11%, primarily due to significantly lower realized caustic soda prices.
- The cessation of sodium chlorate production at the Prince George facility will result in some cost-related impacts in Q3 2024.
Q & A Highlights
Q: We've seen the water business post solid margins. Can you expand on the drivers? Have you seen a decrease in raw material prices? Is it to do with the timing of the contracts? And do you expect a headwind if energy prices moderate in Europe?
A: The drivers for our growth in the water business include better operational performance, pricing optimization, and capacity expansions. We have also seen some moderation in raw material costs this year. Regarding energy prices in Europe, our pricing in North America already factors in the moderation of energy costs, which remain elevated compared to pre-2022 levels.
Q: How might your guidance change with a potential Canadian rail strike?
A: The high point of our guidance does not assume any rail strike. The midpoint assumes some disruptions leading up to a potential strike, and the bottom end of the range would absorb some strike levels. The full impact is hard to determine until we know if and how long a strike will last.
Q: Can you comment on your decision to buy back the September 2025 converts and what this implies about how convert owners value Chemtrade units?
A: We offered a premium to reduce the amount of debentures that might convert into units and dilute our equity. Some debenture holders prefer to convert and hold equity, indicating they believe in Chemtrade's long-term value. This outcome reduces potential dilution and aligns with our capital allocation strategy.
Q: Regarding the cessation of sodium chlorate production at Prince George, does this reduce your overall cost base? Is there any impact on 2025 volumes?
A: Moving production to our Brandon facility will lower costs. The primary customer at Prince George has curtailed production, leading to lower volumes next year. However, consolidating production into Brandon will offset some of the volume reduction with cost savings.
Q: Can you elaborate on the strong margins in the SWC segment and the impact of the rail strike on your operations?
A: Water products are the primary contributor to the margin improvement. Regarding the rail strike, customers have been stockpiling inventory, which has already impacted Q2 results. We are seeing some disruptions, but essential materials like chlorine for drinking water are being prioritized in discussions with government authorities.
Q: What kind of incremental contribution are you expecting from the Kearl expansion, and how have pricing dynamics changed?
A: Initially, we targeted a 25% return. We will provide more details on expected margins once the project is complete. The facility will start producing acid in the second half of this year, with significant ramp-up expected in 2025.
Q: Can you update us on the Arizona ultra-pure acid project and the progress on CHIPS Act funding?
A: We are awaiting final feedback on CHIPS Act funding. The market does not currently need the projected volume, so we are closely monitoring fab expansions to match supply with demand. The project timeline will adjust accordingly.
Q: Can you provide more details on the North Van lease extension discussions and any early feedback?
A: We have been proactive in engaging with the local community, First Nations, and government officials. Feedback has been overwhelmingly positive, and we are optimistic about securing a lease extension, although we cannot provide a specific date yet.
Q: Can you refresh us on your capital allocation strategy, including the NCIB and potential acquisitions?
A: Our strategy prioritizes maintaining a healthy balance sheet, returning capital to shareholders through dividends and buybacks, and investing in high-return organic growth projects. We are also open to strategic acquisitions that are synergistic and accretive to unitholder value.
Q: How much of the current and expected strength in electro chemicals can you attribute to disruptions of competitor supply versus strategic actions?
A: Very little of the benefit in electro chemicals is due to competitor supply disruptions. Our market primarily competes with imports from Asia, and recent weather events in the US Gulf Coast have had minimal impact on our operations.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
