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Chemtrade Logistics Income Fund
Symbol CHE
Shares Issued 92,596,006
Close 2019-05-08 C$ 8.15
Recent Sedar Documents

Chemtrade loses $29.3-million in Q1

2019-05-08 21:06 ET - News Release

Mr. Mark Davis reports

CHEMTRADE LOGISTICS INCOME FUND REPORTS FIRST QUARTER 2019 RESULTS

Chemtrade Logistics Income Fund has released results for the three months ended March 31, 2019. The financial statements and management's discussion and analysis will be available on Chemtrade's website and on SEDAR.

The first quarter results include the application of international financial reporting standard 16 at Jan. 1, 2019. In relation to leases that were previously classified as operating leases, Chemtrade now recognizes depreciation and interest expense, instead of operating lease expense. This results in an increase in net earnings before any deduction for net finance costs, taxes, depreciation and amortization (EBITDA), but it does not affect distributable cash after maintenance capital expenditures. Also, comparative information is not restated.

The first quarter results also include an increase of $40.0-million in the reserve for legal proceedings established in 2018 to cover the costs of resolving the civil actions commenced against General Chemical entities related to the antitrust matter inherited with Chemtrade's acquisition of General Chemical in 2014. Further details are in the reserve for legal proceedings section herein. The increase is reflected in both EBITDA and distributable cash after maintenance capital expenditures for the quarter. The majority of the litigation has now been settled, with only certain derivative actions outstanding.

Revenue for the first quarter of 2019 was $385.3-million, an increase of $3.8-million from 2018. This increase was primarily due to higher selling prices for sulphuric acid in the sulphur products and performance chemicals (SPPC) segment, and higher selling prices for certain water chemical products in the water solutions and specialty chemicals (WSSC) segment, partially offset by lower prices and lower volumes for caustic soda in the electrochemicals (EC) segment.

Net loss for the first quarter of 2019 was $29.3-million, compared with net earnings of $6.9-million in 2018. The decrease was primarily due to the litigation reserve booked in the first quarter of 2019, and higher net finance costs due to a loss from the change in the fair value of convertible debentures, partially offset by higher income tax recoveries during the first quarter of 2019 compared with the first quarter of 2018.

Excluding the litigation reserve, net earnings before any deduction for net finance costs, taxes, depreciation and amortization, excluding other non-cash charges, such as gains and losses on the disposal and writedown of assets, and unrealized foreign exchange gains and losses (adjusted EBITDA) (1) for the first quarter of 2019 were $84.0-million compared with $72.0-million in the first quarter of 2018. The increase in adjusted EBITDA is mainly attributable to the adoption of IFRS 16, which amounted to $14.6-million, offset by lower adjusted EBITDA in the EC and corporate segments.

Cash flows used in operating activities were $53.5-million compared with cash flows from operating activities of $35.0-million during the first quarter of 2018. Adjusted cash flow from operating activities (1) was $11.5-million compared with $54.1-million generated during the first quarter of 2018. Distributable cash after maintenance capital expenditures (1) (excluding the litigation reserve) for the first quarter of 2019 was $42.5-million or 46 cents per unit compared with $44.2-million or 48 cents per unit in 2018.

Chemtrade president and chief executive officer Mark Davis said: "Our SPPC segment benefited from higher selling prices for sulphuric acid and improved efficiencies as we are starting to benefit from the restructuring of the business following a significant reduction in the product we receive from our largest byproduct supplier. Higher selling prices for alum in our WSSC segment began to have a positive impact as contracts were renewed at those higher rates and increased raw material costs were recovered. As expected, our EC segment was affected by lower prices in the quarter for caustic soda, but this was partially offset by higher prices for hydrochloric acid and chlorine."

In the first quarter of 2019, SPPC generated revenue of $131.1-million compared with $122.6-million in 2018. Adjusted EBITDA for the quarter was $37.5-million, which was $16.3-million higher than 2018, including the positive impact of IFRS 16 of $5.2-million. The main reason for the year-over-year increases was higher selling prices for sulphuric acid, which more than offset the effect of lower volumes and higher freight costs.

The WSSC segment reported first quarter revenue of $105.4-million compared with $98.9-million in 2018. Adjusted EBITDA was $18.1-million, including the positive IFRS 16 impact of $1.5-million, compared with $18.8-million generated in 2018. Higher selling prices for water products offset higher raw material and freight costs. The positive impact of improved performance of water products was more than offset by lower results for specialty chemicals.

The EC segment reported revenue of $148.8-million for the first quarter of 2019, which was $11.2-million lower than the same period of 2018. This was primarily due to a decrease in selling prices for caustic soda, partially offset by higher selling prices for chlorine and hydrochloric acid (HCl). Although chlor-alkali production levels during the first quarter of 2019 were similar to the first quarter of 2018, sales volumes during the first quarter of 2019 were lower than 2018. During the first quarter of 2018, a larger quantity of caustic soda was purchased to meet supply obligations. Adjusted EBITDA for the first quarter of 2019, including the $7.5-million benefit from IFRS 16, was $1.1-million lower than the same period of 2018. This was primarily due to the lower caustic soda pricing and reduced demand for HCl in 2019.

Corporate costs, excluding unrealized foreign exchange gains and the litigation reserve, for the first quarter of 2019, were $19.7-million, including a positive IFRS 16 impact of $400,000, compared with $17.4-million in the first quarter of 2018. The first quarter of 2019 includes foreign exchange losses of $1.1-million compared with a gain of $1.6-million in 2018.

During the first quarter, Chemtrade completed the redemption of Series V of the Electrochem debentures.

Mr. Davis said: "In general, our businesses started the year well, with marked improvements in SPPC and in the water treatment chemicals business of WSSC, and we expect these trends to continue. While our EC segment was adversely affected by the near-term weakness in caustic soda pricing and HCl demand, we expect the segment to improve going forward. We remain positive about the mid- and long-term prospects for caustic soda, and we also expect that demand for HCl will improve as the year unfolds."

Reserve for legal proceedings

At the time of acquisition of General Chemical in 2014, it was a subject of an investigation by the U.S. Department of Justice concerning alleged anti-competitive conduct in the water treatment chemical industry. Chemtrade obtained an indemnity from the vendors of General Chemical for twice the amount of estimated costs and damages related to the investigation and related lawsuits, based on expert legal advice received.

Commencing October, 2015, a number of civil lawsuits were filed, culminating in two class action lawsuits, related civil actions and a few derivative actions. As the legal actions advanced and settlement negotiations ensued, Chemtrade obtained assessments on a continuing basis from its experts of the costs necessary to resolve the anti-trust matter. Based upon settlements achieved and updated assessments of future potential exposure, Chemtrade recorded a reserve as follows:

  • $65-million in the second quarter of 2018;
  • $35-million in the third quarter of 2018;
  • $40-million in the first quarter of 2019.

From a settlement perspective, in November, 2018, Chemtrade settled the main class action lawsuit for $51-million (U.S.) and the net proceeds of the disputed indemnity. This settlement has received final court approval. Subsequent to the end of the first quarter 2019, additional settlements were negotiated. Now all of the lawsuits, including all class action lawsuits, and all civil lawsuits arising directly out of the anti-competitive actions in the water business, have been settled. The class action lawsuit, which was settled in 2019, remains subject to preliminary and final court approval. Some derivative actions remain outstanding.

Chemtrade believes that the reserve is sufficient, but the outcome and timing of the remaining actions are uncertain.

Distributions

Distributions declared in the first quarter totalled 30 cents per unit, composed of monthly distributions of 10 cents per unit.

2019 financial outlook

Chemtrade believes the increased complexity of its business has made it more difficult for stakeholders to understand the key drivers, risks and opportunities inherent in the business. To provide stakeholders with improved visibility, Chemtrade will be providing annual guidance.

Chemtrade's 2019 adjusted EBITDA guidance excludes the litigation reserve but includes the effect of the adoption of IFRS 16 on leases. Chemtrade expects its 2019 adjusted EBITDA to range between $335.0-million and $375.0-million, which includes a lease benefit of between $55.0-million and $60.0-million. IFRS 16 will not have an impact on distributable cash after maintenance capital expenditures.

For 2019, Chemtrade also expects:

  1. Maintenance capital expenditures to range between $80.0-million and $90.0-million;
  2. Cash interest (excluding the impact of IFRS 16) to range between $70.0-million and $75.0-million;
  3. Cash taxes to range between $5.0-million and $10.0-million.

About Chemtrade Logistics Income Fund

Chemtrade operates a diversified business, providing industrial chemicals and services to customers in North America and around the world. Chemtrade is one of North America's largest suppliers of sulphuric acid, spent acid processing services, inorganic coagulants for water treatment, sodium chlorate, sodium nitrite, sodium hydrosulphite and phosphorus pentasulphide. Chemtrade is a leading regional supplier of sulphur, chlor-alkali products, liquid sulphur dioxide, potassium chloride and zinc oxide. Additionally, Chemtrade provides industrial services, such as processing byproducts and waste streams.

(1) A non-international financial reporting standard measure.

A conference call to review the first quarter 2019 results will be webcast live on the Chemtrade Logistics website on May 9, 2019, at 8:30 a.m. ET.

We seek Safe Harbor.

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