Chemtrade Logistics Income 6 50 Convertible Unsecured Subordinated Debentures T.CHE.DB.F

Scotia comments on results

[incomedreamer11]

Well-Rounded Beat, But 2H Looks Softer than Expected

OUR TAKE: Mixed. We expect to see a mixed reaction to CHE’s latest print. While the 25% well-rounded Q2 EBITDA beat ($144M vs. $115M) is a welcome headline, looking under the hood suggests Q2 really pulled EBITDA away from the back half of ‘23. This is likely why we saw no change to the guide (last increased in June to >$450M). Full note to follow the call.

• EC EBITDA beat by 26% ($93M vs. $74M), reflecting higher selling prices for sodium chlorate, chlorine, and hydrochloric acid. These increases were partially offset by lower caustic soda pricing, as well as reduced volume for sodium chlorate. EU-based supply tightness continues, albeit less than before.
• SWC EBITDA beat by 19% ($73M vs. $61M), as higher Regen acid volume + higher selling prices of water solutions products more than offset lower merchant acid selling prices.
• Capex guide lowered to $70M to $100M (vs. $110M to $140M), given the pause in the KPCT Advanced Chemicals JV in Arizona.
• Leverage improved to 1.8x, from 2.2x q/q.
• LTM payout ratio of 22%.

Thoughts on the ‘23 guide. It’s always interesting to see a company have a huge beat, with no change in guidance for the year. Many times this will indicate perhaps a softer near-term outlook to offset. Post-Q1 EBITDA of $132M, CHE updated its guide to >$450M, which would imply quarterly EBITDA of $106M in Q2-Q4, all else equal (re: pricing, sales volume, turnarounds, FX, etc.). With Q2 EBITDA generation of $144M, the implied quarterly EBITDA now drops to $87M for Q3/Q4 (or ~$90M depending on treatment of Q2 FX gain), or an 18% decline in the outlook for 2H. This lines up with CHE commentary re: (1) a softer 2H outlook for sodium chlorate, as competition heats up to serve a weakening market for Western Canadian pulp production; and (2) chlor-alkali conditions in 2H are “likely to be weaker” than 1H. Therefore, while some may show exuberance re: the big headline beat, it seems more likely to us that we’ve simply seen some 2H EBITDA pulled forward into Q2 – time will tell.