2015 Annual Meeting - Chemtrade Logistics Inc.

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Mark Davis
Good morning, ladies and gentlemen.
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I’m pleased that you can join us today.
[Refer to disclaimer slide]
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This morning I would like to review the strategies Chemtrade has followed since our
inception, and how the General Chemical acquisition has been such a good fit. After
Rohit discusses some of 2014 and Q1 financial results, I will comment on some of the
other benefits we are now seeing from our enhanced size.
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Since our inception we have pursued our four strategies of:
1.
Growth
2.
Operational excellence
3.
Financial prudence; and
4.
Business model fit
Growth – making our business stronger by adding size, scale and diversity of earnings
Operational Excellence - making our business more sustainable by continually improving
our processes, assets and people
Financial prudence - maintaining our balance sheet strength, which permits the pursuit
of growth, and operational initiatives.
Business Model - adherence to our business model of mitigating earnings risk, providing
the foundation of stable earnings upon which we can build.
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Judged against each of these strategies, 2014 was a milestone year for Chemtrade.
Our legacy businesses continued to perform and improve,
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and the General Chemical acquisition, which closed in January of 2014, fits with each
initiative.
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Growth
The General Chemical acquisition almost doubled the size and scale of our business.
While it extended certain of our core products, the acquisition also added significant
diversity to our earnings. We greatly enhanced our water solutions footprint as well as
adding new products, markets and customers.
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Operational Excellence
We continue to focus on making all of our businesses better. The acquisition has let us
pursue and develop additional best practices and procedures, and create functional
centres of excellence. Our increased base of employees also facilitates career and
personal developmental opportunities which are important for future sustainability.
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Financial Prudence
At the time of the acquisition we raised both equity and debt financing. Since that time
we raised further equity to reduce leverage. Recently, we extended the term of our bank
financing. All of these steps ensure that we retain our balance sheet strength and
flexibility even after an acquisition like General Chemical.
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Business Model
Finally, as we said at the time of the acquisition, General Chemical fit very well within
our risk mitigating business model. This growth, consisting of certain contractual
earnings, multiple plants, diversity of customers and niche products with unique barriers
to entry, fits well with our risk-mitigating business model.
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Our financial results since the acquisition are indicative of the benefits of our size, scale
and diversity of earnings. For those interested in our 2015 first quarter results, we
encourage you to listen to the webcast of this morning’s conference call accessible
through our website.
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Business conditions for Chemtrade were generally stable in 2014 and our businesses
performed well.
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In 2014 we generated Distributable cash after maintenance capital expenditures of
$126.6 million. On a per unit basis we generated $2.10 per unit despite having
approximately 20 million more units outstanding in 2014 relative to 2013.
Our distributable cash substantially exceeded our annual distributions of $1.20 per unit.
Excluding acquisition costs that were incurred early in the year, Distributable cash would
have been $142.9 million, or $2.37 per unit.
These results include annual maintenance capex spending of $44 million, which is close
to the forecasted annual run rate we expect going forward.
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As you can see from this slide, the General Chemical acquisition resulted in a step change
in the size of Chemtrade, with our combined business generating EBITDA of $221.2
million, an increase of 70% over 2013.
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While the acquisition was the primary driver of our operating results in 2014, we
completed a number of other initiatives during the year that enhanced the long-term
strength of Chemtrade.
1.
We completed a significant investment in our sodium chlorate plant in British
Columbia. This plant is now a low-cost producer, and the financial benefits are being
realized.
1.
We also sold our Montreal East business to Suncor in July for approximately $120
million. The net proceeds of the sale were used to reduce debt and strengthen our
balance sheet.
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To summarize, 2014 was a very successful year for Chemtrade. We completed our most
significant acquisition to date and integrated our businesses. In doing so, we realized the
synergies we anticipated at the time of the acquisition.
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The “new” Chemtrade is producing the enhanced earnings we expected. This larger,
stronger, more diversified business is well-positioned to generate long-term sustainable
earnings and to produce long-term positive results for our unitholders.
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We also have a team of talented employees who are driven and determined to bring
value to the organization. Our ability to sustain earnings and acquire and integrate new
businesses is due to the commitment of our employees to deliver excellence every day.
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Now Rohit will briefly review Chemtrade’s financial performance for 2014 and Q1 2015.
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Thank you, Mark and good morning everyone.
In general, our businesses performed well in 2014. Comparisons with 2013 are
significantly affected due to the acquisition.
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2014 results include results of the acquired business from January 24, 2014 forward,
whereas 2013 results are, of course, for only the legacy business. Also, in July 2014, we
closed the sale of our Montreal East business to Suncor and its net earnings are shown
as discontinued operations on the income statement. For the purposes of this
presentation we have included Montreal results in our comments.
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Distributable cash after maintenance capital expenditures for 2014 was $126.6 million,
or $2.10 per unit, compared with $75.5 million, or $1.81 per unit in 2013.
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Consolidated revenue for 2014 was $1.2 billion, compared with $836.1 million generated
in 2013. The increase of approximately $394 million was due primarily to the General
Chemical acquisition.
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EBITDA for 2014 was $221.2 million compared with $129.9 million in the previous year.
This increase reflected the new business, partially offset by higher acquisition costs in
2014.
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Turning to the segmented results for the year, SPPC generated revenue of $611 million
compared with $522 million in 2013. The main reason for the increase in revenue was
the inclusion of revenues from the acquired business. This was partially offset by the
inclusion of the Montreal East business for all of 2013 compared with only six months in
2014.
EBITDA for 2014 was $152 million, compared with $131 million in 2013.
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WSSC reported revenue of $418 million compared with $126 million in 2013 and EBITDA
of $118 million, compared with $34 million in 2013. The higher results are due to the
inclusion of the acquired business.
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International reported revenue of $201 million for the year, compared with $187 million
in 2013. This increase was due mainly to higher volumes of sulphuric acid and higher
prices of sulphur in international markets. EBITDA for the year was $17 million
compared with $11 million in 2013.
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Maintenance capital expenditures in 2014 amounted to approximately $44 million.
During the year, as we integrated the General Chemical business, we concluded that we
can reliably operate the combined business with a lower level of aggregate sustenance
capital than we had built into our models at the time of the acquisition.
In 2015, we expect maintenance capex to be approximately $50 million.
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As Mark mentioned, we took several initiatives during the year that strengthened our
balance sheet, and that were consistent with our strategy of financial prudence. Our
balance sheet structure changed on January 24 with the closing of the acquisition, which
was financed through a combination of a $345.2 million underwritten equity offering
and syndicated senior secured credit facilities of US$1 billion.
Subsequent to the acquisition, we concluded a few initiatives to strengthen our balance
sheet and reduce our leverage from the higher than typical levels we incurred to finance
the acquisition.
We issued subordinated, convertible debentures with net proceeds of $120.8 million in
June, 2014. In July, 2014, we sold our Montreal facility to Suncor for approximately
$120.4 million. Finally, during the fourth quarter of 2014, we raised an additional $115.1
million with an issuance of 5.4 million trust units. In all these cases, we used virtually all
the net proceeds to pay down senior debt.
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In March, 2015, we amended our senior, secured credit facility by adding an additional
year of term and achieved a slight reduction in interest rates. Our senior facility now
matures in January 2020. Our next debt maturity is in March, 2017 for a series of
debentures that has roughly $31 million outstanding.
We also negotiated a number of other enhancements, including favourable interest rate
adjustments on our senior debt as we lower our leverage ratio. Since the acquisition in
2014, our borrowing costs have dropped from 300 bps over LIBOR to 225 bps over LIBOR.
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At March 31, 2015 we had drawn down about US$501.7 million on our senior credit
facility. Our term loan is fully drawn but we maintain about US$408.9 million of undrawn
capacity on our US$500 million revolving credit facility, which provides us with ample
liquidity.
Our credit facility also has an accordion feature of $150 million.
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Yesterday we released our first quarter 2015 results, which again demonstrated the
impact of the increased scale of Chemtrade. In addition to three extra weeks of
contribution in the first quarter this year, we also benefitted from the strong US dollar.
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Our businesses generally performed well, with sulphuric acid showing particular
strength. Our water treatment business was a bit weaker due to competitive pressures,
but we are taking initiatives to strengthen our leadership position in the industry.
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Distributable cash after maintenance capex was $41.7 million or 61 cents per unit
compared with $14.3 million or 26 cents per unit in 2014.
Revenue for the first quarter was $326 million, an increase of $59.9 million over 2014.
Aggregate Adjusted EBITDA was $58.1 million compared with $23.8 million in the first
quarter of 2014. As mentioned the first quarter of 2014 included significant acquisition
related costs. Other than that, the main reasons for the improved results were the
inclusion of results for the full quarter in 2015 versus just over 2 months in 2014 and the
benefit of the stronger US dollar in 2015. Finally, it’s important to note that maintenance
capital expenditures in both the first quarter of 2015 and the first quarter of 2014 were
below our annual expected run rates.
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I’ll now hand it back to Mark.
Mark Davis
I wanted to conclude with a couple more comments about the benefits of growth.
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We talked before about how size, scale and diversity of earnings improve the
predictability and sustainability of earnings.
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We also mentioned the benefit of size from the perspective of attracting better
resources and the ability to build centres of excellence that cross product boundaries.
There is another opportunity that size, scale and diversity brings, …
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and that is the potential for organic growth. The addition of new businesses and product
lines simply creates more opportunities to seek and find prospects for organic growth.
While no single opportunity we have found to date is material, each opportunity makes
one of our existing businesses better and more sustainable.
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Furthermore, in aggregate, successful execution of all of the initiatives we are currently
pursuing will have a noticeably positive impact on Chemtrade.
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We also like how these opportunities fit into our risk mitigating business model. Since
no single opportunity is a step change increase in earnings, it makes sense that none of
them requires a significant capital expenditure. In fact, in aggregate, we expect these
organic projects to cost no more than $10-15 million per year for the next three or four
years. Accordingly, while a capital cost overrun, or the business opportunity being less
than we thought it would be, might adversely affect that one project, it would not have a
material adverse effect on the company as a whole. On the other hand, if each of these
opportunities comes to fruition as we envision them, then in aggregate they would make
a noticeable contribution to earnings and the long-term sustainability of our business.
Let me tell you about three of these opportunities, each of which is well advanced.
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1. Water Solutions Business - At the time we acquired General Chemical in January 2014,
we indicated that we would look for opportunities to expand the footprint of our water
solutions business. This business has a number of different products, but it is primarily
focused on aluminum sulphate, an inorganic coagulant. Two other products in particular
make sense to us --polyaluminum chloride or PACl, and aluminum chlorohydrate or ACH,
which are also inorganic coagulants. The addition of these new products is a logical
extension to our existing product portfolio and permits us to tailor our offering to what
best suits a particular customer. Adding these chemicals allows us to further customize
solutions for our customers, and therefore continue to grow this business.
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In January of this year, we announced the acquisition of a PACl manufacturing facility in
Edmonton, Alberta. We also built a PACl plant at our East St. Louis facility that will be
starting up in June/next month. Additionally, we believe the PACl market requires a
further three to four plants, and we plan to construct these within the next two to three
years at our existing sites.
We are also investigating construction of ACH plants. We can again leverage our existing
extensive plant network to expand ACH into geographically appropriate regions.
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2. The second opportunity is part of our overall efforts to grow in the pharmaceutical
specialty chemical space. We produce high purity caustic pellets in our Midlothian, TX
facility to serve this market both domestically and offshore. .
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This small, niche product falls within our WSSC reporting segment and Chemtrade is the
only North American producer of this pharmaceutical grade material. We are investing
in a 50% production capacity increase to support demand growth, primarily driven by its
use as a buffer in insulin production and other pharma applications around the world.
This project is scheduled to be completed by this time next year (Q2 2016). The new line
already has volume commitments that represent over 1/3 of the total additional
capacity. The operational risk in this project is quite small as we are merely adding a
third line identical to the two lines we already have in production.
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3. Finally, I also want to talk about a small but profitable product line that we do not
often mention. We produce aluminum hydroxide gel adjuvants in our facility in Berkeley
Heights, NJ. Adjuvants are additives to medical vaccines that enhance their
effectiveness.
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Our adjuvants are currently used in animal vaccines and blood protein separation
applications. Once a vaccine specifies a particular adjuvant, it is generally locked into
that vaccine for the length of the product life. This market has very precise quality
standards of production; for that reason we have recently turned down business or lost
volume due to our existing plant’s inability to meet these increasingly stringent
requirements.
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Having said that, our customers recognize that our products provide superior
performance versus our competitors’ in many applications, and would like to source
more from us.
Accordingly, we are currently building a new state-of-the-art adjuvants plant to replace
the old plant. Although it is a new plant, again, we will be able to fit this into the $10-15
million annual growth capex mentioned above.
Once the plant is operational we expect to capture new customers and volume in our
traditional markets. The markets served from the new facility are growing at a CAGR in
excess of 9% per annum. This is another project where the individual capital required to
access this opportunity is not significant but provides an opportunity to grow and sustain
our earnings within an acceptable risk profile.
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As you can see, we have a number of organic growth opportunities that were not
present several years ago. We like that each of these extends our business in markets
and/or products that we already manufacture. The diversity of these opportunities and
the relatively nominal capital needed to pursue them also appeal to our financially
prudent operating methodology.
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So, in summary, the last year or so has been very productive for Chemtrade and its
stakeholders. The business has continued to grow and strengthen and we continue to
position ourselves to realize on future opportunities, whether internally generated or
not.
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Thank you for your attention. We would now be pleased to answer questions.
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