Q3 2019 Earnings Call
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I would exclude decide on my comments this morning, better compared the actual operating performance.
Revenue for the good quarter roughly 19.
The $95.7 million decrease.
Do you do point $5 million 2018.
The decrease was primarily due to lower prices for caustic soda and hydrochloric acid and easy segment that more than offset higher failed in water products.
Well a three month ended.
So do you agree might be distributable cash of the maintenance Capex was $37.1 million or 44, defensible unit compared with 54 million.
Since the unit in 2018.
Aggregate EBITDA for the third quarter going he might be was $19 million compared with $88.8 million in that book Waterborne 18.
The ingredient EBITDA due to better Vulcan DSD segment.
The adoption of I ever 16 habit positive in back of $40 million.
Yes.
Well I left the DC Boston higher year over year results. This is more than offset by lower results and easy.
Excluding the effects of left for 16 EBITDA off the hook water was more than 2018 by $12.7 million.
Donegal segmented results for the quarter.
BBC generated revenue of $127.8 million compared with $129.6 million in 2018.
EBITDA for the quarter was $43.7 million, which was 21 point $500 higher than 20 pain.
Although steel volumes are generally lower than last year higher selling prices emergency adjusted combined with better operations resulted in significantly higher margin.
Well I have for 16 contributed $5.3 million to the improvement the majority of the <unk> EBITDA <unk> in the business itself.
I'd be recipe segment reported third quarter revenue of $1.14 million compared with $116.6 million in 2080.
EBITDA was $24.3 million.
The bulk of the buyer for 16 impact on $1.1 billion.
Compared with $24.1 billion generating 2018.
We didn't do to <unk> point $2 million Insourced recovery, we didnt really should that occurred in 2016.
As Mark said selling prices water products are more than offsetting higher raw material costs.
However, ongoing market weakness with some specialty chemicals more than offset the improved conditions the water products.
Oh, you see segment reported revenue of $145.4 million for the third quarter of 2019, which was $26.6 million, nor the San Diego Corny 18.
Although volume of caustic soda was essentially level did last year.
Continued weakness in selling price resulted in more revenue.
During the third quarter 2019 relative to the third quarter for anything costing glossy caught up in places like 21%, Lord and Hcl Netbacks, that's getting Chrysler afraid, we're 47% Laurie.
Sure It volumes were lower than last year to do due to reduced demand from but no.
From an EBITDA perspective, excluding the that went with human and dollar benefit from wire for 16 EBITDA for the third quarter for 19 was 21 point $600 nor in the same beautiful new 19. This was primarily due to lower selling prices for both caustic soda and Hcl.
Maintenance GAAP expenses in the third quarter were $19.7 million Big bet make moved up at the Green 19 to range between 80 million and $90 million.
Excluding unrealized foreign exchange gain corporate cost through the third quarter grew 19 were $20.8 million, including a positive I for 16 him back you in a thousand dollars compared with $14.7 million with third quarter Forney 18.
Good I'm going to begin with over 2018.
Increases due primarily to higher legal costs in 2019 and higher compensation the cool.
You maintain ample liquidity the U.S. dollar were $2.3 million Undrawn on our U.S. 850 million dollar facility.
Yeah in compliance with all our bank covenants in October we amended sudden films off our senior credit facility has been of extending the term.
The facility Nama Jordan, a Billboard 2024.
On a go were first we completed the issuance of 100 million dollar principal amount of six and a person convertible unsecured subordinated debentures.
The net proceeds of the offering were used to bid on senior debt.
I'm not that Mark Mark. Thanks for had let me start by saying that we're confirming the guidance we gave in may.
Located in August we now expect to be we now expect to be at the bottom end of that range.
For the year to date, excluding the litigation reserve, we generated $265.2 million you at all at $120.6 million distributable cash.
Due to lower caustic pricing, a slight seasonal weakness of some of our businesses and our usual capex profile.
Back to generate the lowest quarterly EBITDA and distributable cash of a year in Q4.
All of our key assumptions, our updated in Iran DNA.
But the key updated assumption is caustic pricing.
As caustic pricing, it's not that big driver for US we want to provide some additional color on this call.
Generally movements in the northeast Asia Caustic price index are reflected in price movements seen in our western Canadian markets.
In May our guidance assumption was that the northeast Asia Caustic index, what average U.S. $55 per ton higher than November 2018.
The November price, that's the direction for our realized pricing Q1 of 29 team.
Since then decreases in index led to a decrease in our realized pricing.
We reflected this in our August guidance, when we decreased our assumption for the northeast Asia spot index by U.S. $30 per ton and today further decrease that assumption by U.S. $10 per ton.
We're not ready to provide guidance for 2020 , but we'll do so in February about three months earlier than our guidance was given and 29 team.
However, we do wish to provides more information on potential caustic pricing as this is by far key variable.
Recall that our thesis was and continues to be the caustic demand will continue to grow while supply remains relatively static.
This should lead to increasing caustic demand caustic pricing for several years.
This is the thesis has accepted by all market experts.
What appears to be slowing down this anticipated price increase is the effect of the U.S., China trade battle and it's on predictability.
Generally speaking it appears that these tariffs have so far reduce caustic demand, while Asian chlorine demand has not yet been affected.
Yes. The tariffs continue the question is which chemical topic or chlorine is more impacted by an economic slowdown into Chinese economy.
To the extent the chlorine demand slows down in China caustic price should increase.
Obviously is a continuation of the tariff effect on the Chinese economy, and a resolution of these issues it's difficult to predict.
While the market experts do not forecast spot pricing, they do forecast Taiwan contract pricing.
This pricing is indicative of expectations for northeast Asia spot pricing.
Until very recently I H S. One of the market expert what's predicting that the Taiwan contract price for 2020 should address average U.S. $37 per ton higher and 2020 that in 2019.
Their latest revision is at 2020, Taiwan contract pricing should be essentially the same as 2090.
If this is also true for north Asia spot pricing than pricing and profitability for our caustic and 2020 should be close to 29 team.
However, prediction remains difficult since this model uses average annual pricing, whereas our prices are affected by quarterly variations.
So more data why attempted before I attempt to tie this altogether for you.
Recall that since the northeast Asia Index is thinly traded it can be quite volatile.
Index pricing appeared to have bottomed out in August of 2019 at U.S. $285 per ton.
Moved up by U.S. $20 per ton in October .
We believe that this pricing will continue to increase.
Finally, despite the recent weakness in northeast Asia spot prices, we remain bullish on caustic pricing.
For example, the index was U.S. $245 per ton higher as recently as 2018 before the U.S., China dispute really had an effect.
However, if caustic pricing during 2020 stays at last month's levels, we could face price headwinds of about us $30 per tonne relative to the index price we used for our 29 guidance.
We think the current pricing isn't aberration driven by the U.S., China trade Wars.
But longer term underlying supply demand characteristics remain positive.
And while we are experiencing some near term pain, we're still quite bullish on the future of caustic pricing and are you see business.
We thank you for your attention and operator or hit and I would not be please answer any questions.
Ladies and gentlemen, if he would like to ask a question. Please go ahead Im Press Star then the number one on your telephone keypad.
Again that Star then one to ask the question.
Your first question today comes from the line of Jacob bout CPC. Your line is open.
Hey, Jack up money.
The the industrial.
Demand for hydrochloric.
Maybe just talk a bit about split now.
Yeah.
Industrial and fracking.
So Jacob.
Doing more than half will far Hcl now in the general industrial.
Space, so, but we need to be maintained some flexibility of fracking go to come back good active displaced some to lean as opposed to disrupt the the stable investor market. We are trying to serve so that's really really right broken worrying about 37% off the protein molecule into Hcl.
So that you have ample flexibility should fracking come back.
So well see that answers your question and then how is pricing structure, just like a cost plus.
No I, probably don't know cost last it's based on market dynamics now. The other thing is as you said, we do those markets can be further away from our plan, so even though pricing maybe reasonably.
Strong, David Hi, fade factor to get the product to both markets.
Okay, and then the margin improvement that we saw in the W. So see.
You talked about the dynamic between pricing and raw material costs.
What does that dynamic.
Glenn what does your dynamic looks like going.
18 months, you expect pricing.
Increase or sort of raw materials have started to stabilize and actually in some cases are going or I could dropping now so the key to that business is going to be too I'd say maintain the pricing that we have while the raw materials.
Go down so I don't think there lot more there's been some there's some room and pricing as these contracts you know we go through a whole year of renewals of contracts, but after the bigger opportunity here is to maintain our pricing environment while.
<unk> costs are going down and to be clear is our margins are actually.
Returning to actually.
I think normal should be in our and are not there yet so we don't anticipate giving any on pricing as raw materials go down.
Hey, I expect to maintain it and hopefully continue to increase it because we have.
It is than our view that we have not been receiving a proper return on that business do you get back to historic margins.
We're going to move in that direction.
And then maybe just well run this segment any update on this sale to the case.
The vaccine.
As we said, we really won't comment on that until we have something to comment on.
Okay.
I'll leave it there. Thank you thanks thing.
Your next question comes from the line, if David Neumann a days or does your line is open.
Good morning gentleman.
[laughter] some can save valet, almost digital favor in almost and tightening up the markets in the small smaller catchment area and the improved pricing overall, but if you look at the silver pricing does look like this it's begun to rollover to certain agree on merchant assets. So I guess I guess, how long do you think it might be able to sustain the.
Current run rate of obviously good results here.
We we don't see that weakening or for the foreseeable future Ryan is although sulfur price is tending down right now is.
You know recall that a bunch of our product is not based on on burning sulfur and a number of our contracts in the areas, where sulfur is our raw material and you have pricing linked to us to changes in software pricing, so although price, although pricing might come down margins.
Okay, and the catchment area I think marquee said some of the some of the contribution margin and to further and.
Further our goal geographically was kind of marginal so do you think in the catchment areas that you're in now that you're servicing that you have the stronger Holden those those markets are a better read on those markets versus I guess, the you when you had more volume.
Yeah, I certainly think so it is again generically his years ago. When valet said they were going to reduce we always said that in the last 25% of what we take from valet is essentially no margin if it's not quite that way that's close enough.
So.
Say it reduced by 25% is you know, we probably wouldn't be talking about because we felt a reduced more which they did you know is what does that what's a knock on effect on the market and obviously the knock on effect has been a higher pricing and therefore as you as you say is the customers are more geographically products.
But.
And they're largely server to buy the product coming out of valet, so probably doing a better hold on those guys.
Okay, and then I noticed your we're rationalizing Samir region capacity, where why and I guess 8-K easier to get rid of a write off on it could there be recoveries are I assume there's a it's hard to because it always is fully used property sort of thing and any EBITDA that that is attached to what youre.
You're shutting down our.
Yeah is so as it isn't as a general statement, although region can move around is pretty its.
Merely a regional market.
And if you look at the U.S. regions, the only place that Theres really accessories and capacity was in the U.S. golf.
And they plant that we stopped producing region that was it was in Louisiana, and we have sufficient capacity at our Beaumont facility to assume that volume so.
It is we will not start region again up at Freeport, Although we do continue to make a merchant sulfuric acid, there and look for other opportunities on that plant. So.
The there is no loss of EBITDA from actually stopping region is is we believe in time, when we finish rationalizing everything there should be a slight uptick.
And that plant is as you said you kind of incinerated its sole purpose. So although we could make region and merchant there. We're currently making merchant there and we are taking a look actually on what else we might be able to do that side in terms of the write down below the specific assets that made that are used to process. We Dan. So since then.
Being used we took a write down so there's no impairment in the value of the businesses. This specific assets that we're no longer being used.
Excellent and as you look out for next year, guys. You had a pretty benign year I guess in terms of turnaround How's 2020 stocking up on the turnaround Frank I mean, I guess Scotch corlanor checking all the plants. So right now as we speak but maybe just some thoughts on what would the years shaping up.
Okay. Yeah. He has his wrenches pocket as it [laughter]. The Hum is is there. There is another couple of turnaround next year that'll that'll or that are primarily in SP PC segment.
That will.
I think like Illinois, and put it this way actually is the SPC segment could do even better next year, but it actually has a couple of significant turnarounds. If you remember there's that one every five years refineries take a major cracker outage and so we've got a one of them slotted for next year and and unfortunately.
Really I guess, it's in a market with a you know there's a good margins, who so we will have that big going around and I guess also the other one is in a in DC segment, we do have gone around in the knock Vancouver facility every two years and so that will be due in 2020, but again.
For for you see in particular, if you have enough time to do plan and going with reasonable inventories. The herd is not as much as unexpected outages.
Got it may be the different story, because there's not much we can do this in the west coast and basically not much when network then it's a standalone pan.
And when it wouldn't I assume the ASP PC ones, probably going to be in the front ended the year.
No that's actually in Q4, although there is kinda doing a another one in Q1 as well, but the bigger one will be Q4, okay and the fee for north there or the C is like.
Yeah, I think it's in Q2 Q2, Okay very good last one from me guys I'll hand over to someone else.
She is I know has right size or pulp inventories in the industry capacity has been laid up over your overall sodium chlorate. What is your read on the outlook for the pulp markets. It looks like it would be stabilize here and you know my might actually pick up in the 2020, any any thoughts and sodium chlorate.
I think your comments or your previous preload. Your question is right as I think the it looks to US is all the pulp markets have have stabilized.
And should continue to run in the normal course going forward is this suzano is obviously a great interest not just because of their their market size, but because they take our product.
And from our Brazil facility.
Ah so if they return to.
Their traditional operating rates is our Brazil facility continues to make its normal course, EBITDA if she's addo continues to.
I guess, what they call it is price shape the market yes.
If they throttled back there Eric crews plant is that could have an effect I could have a negative effect on us.
But as you started yet you're caught your question as it appears all of that markets stabilize now Kevin I mean above market has stabilized and inventories are finally started to come down but inventories globally still are.
Quite a bit higher than than what they should be but at least there now starting to come down excellent. Thanks, guys and great to see a gain some tim good traction here. Thanks, a lot it's very much.
[noise] and again, ladies and gentlemen, if he would like to ask a question. Please press Star then one all your telephone keypad.
Your next question comes from the line of Paulson linking of TD Securities. Your line is open.
Hi, good morning, guys.
Well. So you are in your prepared remarks you.
Gave us some really good color on caustic.
And pricing I was hoping you could provide some color maybe on your outlook for chlorine and hydrochloric.
Maybe relative to Q3, what you saw there and just for Q4 and maybe into early 2020.
So on Q4, we actually so we went through in hydrochloric because more coating tends to not be augmented with driver. So if you look at our Hcl, we reduced our outlook in our guidance. When we gave our assumption we took it down by $5 a common for the year, which if you do them obviously all the dominant Q4, so if you.
Ticket linearly that's $20 accounted for Q4 is that assumption is lower.
So if you look at our Axio for next year, we're not counting on a recovery in the Axio markets I. If fracking does you know a buyer so the upside and there's a potential upside, but we did start to see hcl pricing come down during the year. So when you look at 2020 versus 2019, if you maybe.
Thanks remain to be the RV may end up slightly lower because hcl pricing was still it was still another high into first quarter, but most of your was quite low. So we're not really counting on much recovery in the eight Seattle market.
Okay. That's very good color. Thank you and then I guess on chlorate as.
As you move towards free sort of a renewing contracts early next year.
What's your outlook on that side of things do you expect to put through price increases.
Well most of our contracts or have they have been renewed right. It is most of the chlorate industry renews the contract before the end of the calendar year end not not okay right and.
And we've seen pricing primarily stable.
Yeah, and as similar I guess to last year is is our pricing has been able to you know.
Certainly offset any electrical power increases.
So it is relatively stable pricing, we see going forward.
Again, which as you know in an industry operating at the utilization rate that it is.
It is in time, we think supply demand is going to work in our favor.
Okay. Thank you that's very helpful I'll turn it over there.
Your next question comes from the line Joel Jackson of BMO capital markets. Your line is open hi, good morning, I have a shorter term question and then a longer term so.
All right Mark what what's what's your corporate cost trend next year I got a lot of one off this year, what should look like next year.
So typically you know we be saved between 65 and $70 million is a reasonable run rate.
And that you know any any one off sitting in our legal we should worry about gave you know you're not expecting to do you know weve event in terms of a cash outflow. We basically have though at the end of Q3 have paid out you know all the settled claims I'd be have those X employee derivative actions outstanding but.
But for that everything is in bid out and so we're not expecting any unusual legal costs.
So about a 10 to 15 million dollar tailwind next year, that's all right.
Oh, yeah, probably that's in the ballpark, yeah, okay and longer term question.
So gentlemen, you stabilize the businesses.
Your past the legal issue that you inherited from GDP.
Steve I guess and like I said.
You could you historically had a history I you know buying a business every two or three year, leaving up and driving some synergy easily bring down doing it again every few years.
Sort of top few years, but what's next for this business are you still in sort of stabilization mode are you starting to look around for things are obviously selling on your specialty couple of especially business by what's an extra country.
Yeah.
How about two or three different things. One is is it maybe we're past the stabilization mode, but we're not passed optimization mode. Right is we still think but theres a number of improvements that actually we could bring to our existing our existing businesses and that.
I will be a a clear focus for us for 2020. So that's one secondly is.
With our current.
ER leverage is we're not going to be or in an aggressive growth mode until we reduce our leverage.
Either through a value added sales of our specialty business, which is one thing, but more importantly, and more within our control is actually an increase in a profit their EBITDA generation from our businesses, which is both optimization and a end market improvements for some of our key product.
So those are really I think one and two and then ill ask as as leverage comes down and operations continue to improve is our.
Overriding thesis has has never has not changed in that in our industry's size scale and diversity of earnings is important and we'd like to continue adding size scale and diversity, but we need to optimize first and reduced leverage first.
Can you maybe provide one or two or at least one.
Low hanging fruit for optimization that we can all understand.
Well the one we just talked about for example, as rationalizing region capacity in our Valmont plant and therefore, not having to incur the capex and and cost of running a region plan to treat port for one right.
That's you know like.
We did that need three maybe or something maybe I can really work on our supply chain side and I railcar fleet. These we've done a bunch of bid, but there's still more to do there.
You know so that's definitely one opportunity or that you're looking on we've improved our ability to produce ultrapure sulfuric acid, but we keep on running essentially six sigma.
Events on that on those different manufacturing facilities and every extra time ultrapure asset outages is a good value add for us I mean, there's a myriad of things, but theres two or three than we just gave you that are on the list.
Thank you [noise].
Thanks, Joel Thank you.
[noise] since your last question in queue for now comes from the line to Steve Hansen with Raymond James Your line is open.
Oh, Yeah, Hey, guys just a quick when your.
One of you, perhaps elaborate a little bit more on the current status of the challenges facing the specialty chemicals in your water treatment vision. You you suggested there's still in place, but we really had an update in a while it's to the status on that.
Yes, so if I didn't I believe the case your customer that moved off line for a while just just wanted to get an update there as to where we sit and what that the directional timeframe might be to fit to rectify those issues.
Yeah, I give you a three little Stephens for Air rights for first is actually on that.
On.
Casey L. is we are.
Actively searching for additional customers to sell out the extra volumes that we have while that one key pharmaceutical guy.
It is planning at buying at lower rates for this year and and probably into 2021. So yes. We so we see a significant improvement in the K CL business, but not until late 2021 or 2022.
There's a little bit of headwinds that we face this year and our pizza usfive or phosphorus penta sulfide business that is something hurdles I don't know that goes into automotive lubricants.
And again with the various trade wars around and the production of autos and where lubricants are being produced is we think thats a headwind. This year. We don't think it's a headwind next year, but again similar to other comments we've made is.
The various tariffs and trade wars do make it harder to predict but we don't think that should continue next year.
And finally, our Ah sodium nitrite business is that's a business that has been.
Fighting a low cost imports.
From the Indian market.
And we think that that market dynamic has stabilized we're not sure yet or the speed of a recovery in that business.
Okay very helpful. And then just just the last one then its have to ask it but just as you contemplate the idea of de leveraging going forward. If you thought about it all the idea of reducing the dividend in order to de lever more quickly.
No you don't need to but just whether or not that's even on the table or not would be worth understanding.
Yeah, No is right now, it's not our intention to actually read or reduce our distributions I I think what we've said before was that if our operations improve and our unit price doesn't reflect that improvement and.
We're paying out at a huge yield and not getting value for is we have to think about it as actually hopefully I'm responsible allocators off of your capital.
But.
We don't see actually reducing the distribution in order to de lever quicker.
Okay very helpful guys. Thanks appreciate it thanks.
[noise] and there are no further questions in queue at this time I turn the call back to the presenters for any closing remarks.
Hi, Thank you all for your attention and we look forward to talking to a heading into next quarter. Thank you.
[noise], ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.