Good morning, ladies and gentlemen, and welcome to the Chemtrade Logistics Income Fund Q2 2024 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August fifteenth, two thousand and twenty-four. I would now like to turn the conference over to Rohit Bhardwaj, Chief Executive... Chief Financial Officer of Chemtrade. Please go ahead.
Thank you, operator. Good morning, and thank you for attending Chemtrade Logistics Income Fund's earnings conference call for the second quarter of 2024. With me on today's call is Scott Rook, President and CEO of Chemtrade. I will begin this morning's call by providing a brief overview of the second quarter results we published yesterday, as well as the announced increase to our 2024 guidance. I will then hand the call over to Scott, who will provide an update on the outlook for our key products, organic growth, and our organic growth projects. Following our prepared remarks, we will open the line for analyst Q&A. This call has an accompanying slide deck, which is available on our website, chemtradelogistics.com. Before proceeding, please note that today's call will contain certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties.
Actual results may differ materially from expectations. Further information identifying risks, uncertainties and assumptions, and additional information on certain non-IFRS and other financial measures referred to in this call can be found in the disclosure documents filed by Chemtrade with the Securities Regulatory Authority available on sedarplus.ca One of the measures that we will refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude non-cash items such as unrealized foreign exchange gains and losses. While our accompanying presentation refers to adjusted EBITDA, we will refer to it simply as EBITDA in our remarks. The second quarter of 2024 was another strong quarter for Chemtrade. The results we reported yesterday exceeded our internal expectations and reflected ardent organization-wide execution with good performance across most business lines.
The strategic enhancements we have made across Chemtrade continue to bear fruit and have clearly contributed to a step change in our earnings and cash flow as compared to pre-COVID levels. When looking at our second quarter results on a year-over-year basis, it is important to take note of a few factors. First, Q2 of 2023 included roughly CAD 12 million of revenue from the P2S5 business that we sold in Q4 of last year. Second, we undertook the biennial maintenance turnaround at our North Vancouver chlor-alkali facility this quarter, which had a negative impact on revenue of roughly CAD 10.5 million and an EBITDA of CAD 17.9 million. And third, Q2 of 2023 was an all-time record quarter for EBITDA, making this a particularly challenging quarter to compare year over year.
However, after adjusting for the impact of the P2S5 business and the North Vancouver turnaround, our revenue was similar to Q2 2023. Our EBITDA, excluding the impact of the North Vancouver turnaround, decreased by CAD 11.2 million, or 7.8% compared to the said record quarter last year. Increased corporate costs accounted for a little over half of this decline, and improved margins for several of our products helped mitigate the impact of reduced revenues for other products. We once again delivered a very healthy cash flow that was well above the level of our distributions and the end of the quarter in a strong financial position.
The positive results we have delivered in the first half of this year, in addition to our outlook for the remainder of this year, supports the increase to our full year guidance that we announced last night, and I will expand upon shortly. Looking at the sulfur and water chemical segment, which I will refer to as SWC moving forward, revenue excluding the contribution from the P2S5 business in the prior year period, was similar on a year-over-year basis, while EBITDA increased by CAD 5 million or 7% year-over-year. Water chemicals remains a particularly strong performer in SWC and was the most significant contributor to the year-over-year increase in EBITDA, as higher selling prices have led to improved margins for these products.
This ongoing success in water chemicals stems in part from the small but high-return investments we have made in this business in recent years, as well as our team's steadfast focus on commercial excellence. Higher Regen acid volumes were also a positive contributor to SWC EBITDA growth in the quarter, and that business line continues to be a relatively stable and dependable performer for us. A partial offset to EBITDA growth in SWC included sodium nitrite, where operations are still being stabilized after the lengthy process improvements made earlier this year. We also had lower realized selling prices for Regen acid and merchant acid in the quarter.
Recall, however, that the pricing impact on merchants specifically is mitigated by our risk-shared contracts with our suppliers, which helped us keep our merchant acid margins fairly stable year-over-year and makes this another resilient product in our portfolio. Turning now to the electrochemical or EC segment. Excluding the impact of the North Vancouver maintenance turnaround, EC revenue increased by $2 million or 1% year-over-year, while EC EBITDA decreased by $10.3 million or 11% year-over-year. The primary factor that led to this decline in EBITDA was significantly lower realized caustic soda prices compared to the prior year. For context, in Q2 2023, our caustic soda pricing was based on an index of roughly $480 per ton, while in Q2, the index was roughly $365 per ton.
However, about half of this pricing decline in caustic soda was offset by improved pricing for HCl and, to a lesser extent, chlorine, and our overall MECU net backs down about CAD 110 year-over-year. Higher sales volumes and selling prices for sodium chlorate also helped mitigate the declines in EC EBITDA in Q2, as the sodium chlorate business, while not without its demand challenges, continues to be a steady and strong cash flow generator in our product portfolio. Turning to corporate costs. Our corporate costs in Q2 increased by CAD 5.9 million year-over-year to CAD 28.2 million. This increase affected higher long-term incentive plan costs, higher short-term incentive compensation costs, realized FX losses in the current quarter compared to realized FX gains in the prior year, and to a lesser extent, higher legal and other costs. Moving to our capital allocation.
We remain disciplined in our approach to capital allocation, balancing our excess cash flow across our three key pillars of investing in strategic high-return growth opportunities, maintaining a strong balance sheet, and returning capital to our unit holders. When the opportunity is available and makes strategic sense, we also believe in taking action to optimize our capital structure. During the second quarter, we acted on each of these fronts. We ended the quarter with our balance sheet in a strong position. Over the past year, we have reduced our net debt by more than 4%, and we have significant available liquidity between our revolving credit facilities and cash on hand.
We exited the quarter with a net debt to EBITDA ratio of approximately 2 times, and we continue to expect, based on our updated guidance, that our leverage ratio will be close to 2 at the end of 2024. We also took steps to further optimize our capital structure during the quarter by executing a substantial issuer bid for all of our outstanding 8.5% debentures due September 30, 2025. This SIB expired on July 31, and we were successful in repurchasing 33% of these debentures. Following this SIB, we have now reduced the principal of convertible debentures on our balance sheet by 23% since the end of 2022. Chemtrade also approved a normal course issuer bid during the quarter, under which we will be able to repurchase a portion of our units using our excess cash flow.
While we are precluded from acting on this NCIB during the period that the SIB was active, we anticipate making use of this NCIB during the remainder of the 12 months that it is available. We have recently seen several industry M&A transactions completed at valuations that further support our view that Chemtrade units are trading at a significant and unwarranted discount to their fair value, making this NCIB an attractive use of our funds. Meanwhile, we continue to pay a very attractive monthly distribution of CAD 0.055 per unit, which equates to a yield of approximately 7%. Our payout ratio for the last 12 months is only 35%, highlighting the sustainability of this attractive distribution. Finally, we continue to prudently invest in strategic high-return growth opportunities, including CAD 17.7 million of growth capital in the second quarter.
These investments will help generate additional growth and unitholder value in the years to come. As we have discussed previously, we may also look to supplement our organic growth initiatives with strategic tuck-in acquisitions if these acquisitions are deemed synergistic to Chemtrade's existing business and accretive to unitholder value. Looking at guidance, given Chemtrade's strong financial performance for the first half of the year and the momentum that we have seen carry into the third quarter of 2024, we have raised our expectations for the full year 2024 EBITDA. We now expect EBITDA this year to be between CAD 430 million and CAD 460 million, which at the midpoint is a 7% increase from the midpoint of our previous guidance.
Notably, achieving this updated guidance would make 2024 the second highest ever EBITDA year on record for Chemtrade, trailing only our record results in 2023. The latest guidance increase should reinforce to investors and analysts that the earnings and cash flow generation of our business has undertaken a significant step change from pre-COVID levels. The assumptions underpinning our updated 2024 guidance are available in our disclosure documents. Please refer to these documents for additional information. I will now hand the call over to Scott to add additional commentary on our outlook. Scott?
Thank you, Rohit, and thank you to everyone who's on the call. As Rohit just detailed, we have had a strong quarter, and we continue to build on our track record of consistent, solid performance. We hope that it continues to be clear that the underlying improvements in our business are sustainable, and we have a team of dedicated, hardworking employees who are committed to making Chemtrade a company to be proud of. The step changes undertaken in recent years reflect a combination of various broader macro factors and their impact on our product portfolios. But more importantly, it reflects our commitment to continuous improvement and the significant underlying strategic enhancements made across our business, including safety, productivity, reliability, pricing and margin optimization, customer experience, and supply chain resilience. Chemtrade has a diversified and resilient portfolio of products.
We have a strong balance sheet that's capable of supporting growth and other strategic priorities. With these two strengths, we believe that the outlook remains bright for Chemtrade as we enter the second half of this year. Given the defensive nature of many of our products and the long-term tailwinds benefiting others, we remain confident about our outlook, regardless of the broader macroeconomic backdrop.... Looking now specifically at our SWC segment. Our water chemicals business remains a standout performer and is on a positive growth trajectory. We believe this is due to the ongoing low-cost, high-return financial investments made in this area. Longer-term macro factors, like growing demand due to population growth and increasing regulations around water treatment, are also having a positive influence.
At the same time, we cannot forget that it, it's an incredibly defensive business, as many of the chemicals are used in essential processes for drinking water. Our Regen acid business also continues to perform very well and is similarly defensive. Regen is used in gasoline alkylate production, and so even in an economic downturn, it typically remains quite strong as driving activity tends to remain stable. As mentioned earlier in the call, our merchant acid business also has processes in place to limit downside risk, namely the risk-sharing agreements, which mitigate the impact of any potential pricing and input cost movements. This helps us protect margins and smooth out the volatility that we might otherwise see. As you saw in our second quarter results, our risk-sharing agreements are helping to dampen the year-over-year impact on EBITDA.
I would reiterate that the merchant acid business had a notably strong year in 2023, and we continue to expect a more normalized performance in the second half of this year. Finally, we remain very positive about our UltraPure acid business, as Chemtrade is the top North American supplier for semiconductor manufacturing. New semiconductor fabs and expansions at existing fabs continue to progress. The U.S. government continues to award new CHIPS Act funding to support those investments, and we are awaiting the results from our applications. This will ultimately lead to significant growth and demand for UltraPure acid in North America over the coming years, and as the market leader supplying this industry, we are positioned at the forefront. Switching over now to products in our electrochemical segment. Across EC, we continue to benefit from access to stable, low-cost, and renewable hydroelectric power.
The majority of the variable production cost for electrochemicals is energy, so having this access provides us with an advantage versus producers outside of North America. In recent years, we've seen an increasing volatile energy market overseas, while our Canadian hydroelectric power costs have only seen modest increases. Demand for caustic soda and chlorine remains stable. HCl demand is strong, driven by increased fracking in Western Canada due to increased demand for LNG. Caustic soda pricing in Asia is expected to continue its upward trajectory. Chlorine and hydrochloric prices are projected to remain strong. At our sodium chlorate business, we have continued to see pulp mill curtailments, particularly in Western Canada. However, we've seen pricing improve on a year-over-year basis, and we expect this to continue through the second half of this year.
Earlier this year, the primary customer of our Prince George chlorate facility announced a production curtailment that will significantly impact the volume of chlorate they require. As a result, we've made the difficult decision to cease sodium chlorate production at our Prince George plant and convert that facility into a sodium chlorate dissolving operation. The change in operation is expected to be completed this September. The remaining chlorate volumes required by our primary customer will be supplied by our Brandon facility, but again, we will be dissolving the chlorate, we'll continue to dissolve chlorate at our Prince George facility, even though it'll be produced in Brandon. We expect to see costs related to the cessation of sodium chlorate in our third quarter results, which estimated costs reflected in our updated guidance.
Given the optimizations that we expect to make, we do not believe the financial impact of this closure will be material to Chemtrade. I would like to extend my sincere appreciation and gratitude to all the affected employees. This is not a decision that we made lightly and is in no way reflective of the great effort of these employees put into their work on a daily basis. In our chlor-alkali business, the biennial maintenance turnaround at our North Vancouver facility was very well executed. It was conducted without any injuries and was on schedule, on budget, and was quickly returned to normal operations following the completion of the work. Scheduled maintenance helps ensure the reliability of this plant moving forward, which allows us to capitalize on the strong fundamentals that continue to benefit both hydrochloric acid and chlorine.
For the full year, we now expect our MECU net backs to be CAD 95 per ton lower than compared to last year. This reflects continued strength in our pricing for chlorine and hydrochloric acid in the second half of this year, helping to mitigate the full year impact of lower caustic soda pricing. As you may have seen, we've been engaging with the Vancouver Fraser Port Authority to extend the lease agreement for this facility. To support this conversation, we've been engaging with the community, First Nations, and all levels of government to raise awareness of the critical role our facility plays in supporting safe drinking water for millions of Canadians. It currently produces over 40% of all available liquid chlorine in Canada. On a regional level, our facility produces over 70% of the liquid chlorine used to treat drinking water in British Columbia and Alberta.
Our facility has been operating safely since 1957... and we continue to invest and look for ways to improve reliability, safety, and reduce any potential risk for the surrounding community. We are encouraged by the feedback we have received, which has been overwhelmingly supportive and positive. In recent months, we've seen the Northeast Asia caustic soda index pricing begin an upward trajectory. Both Taiwan contract pricing and commentary from industry consultants suggest that pricing has moved through past trough levels and could see further improvements over the remainder of this year and into 2025. As a result, we're optimistic that the earnings contribution from caustic soda could increase in future quarters.
Our updated guidance assumes a realized caustic soda price in 2024, based on an average Northeast Asia index price of $385 per ton, compared to $455 per ton last year or this year. We should also note that we now have moved past the most difficult year-over-year comparable period for caustic soda pricing. This means that realized caustic soda pricing could transition from being a headwind in the first half of this year to potentially contributing to a year-over-year growth in the second half of 2024. Switching over to our growth projects. To drive additional incremental growth in our business in 2025 and beyond, we continue to prudently invest in strategic opportunities. We believe that these investments will further strengthen our existing market position while also generating attractive returns on investment.
To support these projects, we expect to spend between CAD 70 million and CAD 100 million of growth CapEx this year. This estimate includes over CAD 37 million dollars spent in the first half of this year. The largest of our current organic growth projects, the expansion of our ultrapure acid facility at our Cairo, Ohio plant. This project is approaching completion. Once completed, the production from this facility will increase by approximately 60%. The upgraded product quality will be capable to supply the next generation semiconductors, further supporting Chemtrade's position as the leading North America acid supplier. We expect to provide samples of the new product to our customers for product validation shortly. Similarly, the continuous quality upgrades at our other ultrapure acid facilities continues to progress well. As we have previously shared, we're also completing a number of small projects in our water chemicals business.
This includes additional capacity expansions in PAC and ACH, similar to those that we completed in 2022 and 2023. It also includes a new specialty water chemical line at our Augusta, Georgia plant. As already mentioned, this is an area in which we continue to see good, sustainable growth with high returns on investment. While the investments we're making in water chemicals are not individually material, they're having a very positive combined impact on our business. As we continue to progress on these and other growth opportunities, we'll continue to provide more updates. To conclude, I would like to again thank you for your interest and support for Chemtrade. We hope that we continue to successfully execute quarter after quarter. We are further bolstering your confidence in the quality of our business, its long-term, sustainable cash flow generation, and its underlying value.
Our diversified product portfolio is different than many other North American companies, offering an attractive combination of defensiveness and growth. We continue to look for ways to meet and exceed our stakeholder expectations, which we know includes delivering on our ESG goals and commitments. We're in a strong financial position. I can tell you that our team is built differently. We have an unwavering commitment to excellence, a relentless dedication to quality and customer service, and acute focus on making Chemtrade better every single day. With that, operator, please open the call for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. To ask a question, you may press star, followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star followed by the number two. One moment, please, for your first question. Your first question comes from the line of Ben Isaacson with Scotiabank. Please go ahead.
Good morning, this is actually Victor jumping on for Ben. Congrats on another beat and raise on your end. I guess our question is: We've seen the water business post solid margins. Can you perhaps expand a little bit 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? Thank you.
So, let me address that. So the drivers for our growth in water business, I'll start and say, from an operational standpoint, we have focused on reliably running our assets better, and so we have seen continued improvements in the underlying performance of those assets for the last two to three years, and so that continues to pay benefit for us. We have also focused on pricing optimization and aggressively pushing prices in the marketplace, and so that has had an impact on us. We have also added capacity at some of our more specialty materials. We've been adding capacity since 2022, and so the capacity expansions are having an impact as well. So when you put all of that together, better operations, better pricing support.
I will say this year, this year we are seeing a little moderation in raw materials, and so that's that is having an impact as well. But all those factors together, I think are what's behind our improved results in water.
On the question on the energy costs in Europe, that, I'm assuming that you didn't mean that in the context of water, because that's not a factor. But in terms of electrochemical segment, we think, you know, the pricing in North America never fully priced in the very high energy costs that were experienced in Europe. So I think right now, we are, you know, already have the pricing is now pricing in the moderation that's already occurred. Keeping in mind that even though energy costs in Europe have moderated from their peaks in 2022, they still remain elevated compared to pre-war levels. So, you know, we don't -- that's already priced in, into our assumptions here.
Yeah. On that, I think if you look at, let's say, you know, our competition with caustic soda, particularly with our plant in Vancouver, our competition there is caustic soda that comes over from Asia. And so the underlying, let's say, the floor of material, the floor for pricing for that material is gonna be tied to energy. And I think the energy costs in Asia are higher because energy costs around the world have typically been higher over the past couple of years. And I think that's gonna continue to be the case.
Makes sense on both water and EC. Thanks, guys.
Welcome.
Your next question comes from the line of Joel Jackson with BMO Capital Markets. Please go ahead.
Good morning, everyone. This is Anthony Taglieri on for Joel Jackson. Maybe I'll just start with a question on your guidance. Obviously, Canadian rail strike is out of Chemtrade's hands, but how might your guidance change with a strike that goes on for maybe a week, two weeks, a month?
Okay, so what the high point of our guidance definitely does not assume any rail strike. I'd say the midpoint of our guidance assumes disruptions leading up to a potential strike. So even if there's no strike, there tends to be some disruptions leading up to a potential strike. So our midpoint contemplates, you know, those disruptions because rails start putting embargoes on shipments. And I think our bottom end of the range, you know, would absorb some strike levels, but it's really hard to see the full impact until we know if there's going to be a strike, and secondly, how long that strike is gonna be.
Great. Yeah, that makes sense. And I guess, just a second question. Maybe comment on your decision to, you know, buy back the September 25 converts. Obviously, you had a one-third uptake, despite the large premium offered, and maybe talk about what this might imply to you for how convert owners, you know, value Chemtrade units.
Yeah, that's a good point there. A good question there, I should say. So yeah, we want the reason we want to buy it is because they're getting, you know, close to their hard call time, which is it was October first, and they will have one year to maturity. They're 8.5% coupon, so they're, you know, fairly expensive piece of paper. And of course, their conversion price was 7.35, so they could, you know, be potentially dilutive, so we thought it made sense. So if you think about it, the 1.30 premium we offered represents a parity value of about 9.55 on the units, which we are somewhat trading at that right now, and we're in the market buying back units at those levels.
So it just really was, you know, a way of trying to reduce the amount of debentures that might get converted and might potentially convert into units and be dilutive. Now, the feedback we got from certain debenture holders is that they actually like the Chemtrade story, and it's a convenient way for them to convert and hold the equity as opposed to tendering to our price, which is a very fair price. So we don't -- we think this was a good outcome for us. We think we took out some of the people who wanted to exit, and the remaining ones will, you know, convert and be good long-term equity holders for Chemtrade.
Great. Thanks so much.
Your next question comes from the line of Jacob Bout with CIBC. Please go ahead.
Good morning.
Morning.
A question on the cessation of this sodium chlorate production at Prince George. Maybe just walk us through. So you said there, you know, not a meaningful charge associated with this change, but interested in, you know, does this reduce your overall cost base for producing chlorate? Because we would presume that Brandon is lower cost. And is there any impact on 2025 chlorate volumes? Because it sounds like it's gonna be lower year-on-year.
Yeah. First, let me say that, yeah, so we were producing chlorate at our Prince George facility, also producing chlorate at our Brandon facility. Brandon, as a reminder, it's the largest chlorate facility in the world, and so we had capacity there. So we had room to move chlorate production from Prince George over to Brandon. And so that was the decision that we made. And so there are lower costs associated with moving chlorate production from Prince George into Brandon. However, our primary customer at our Prince George facility takes chlorate not in a, well, let's say, it takes chlorate that's dissolved in water.
So what we made the decision to do is take move that production to Brandon. There's cost savings associated. We'll move chlorate from there back to Prince George. We'll dissolve it and then supply our customer in a way that'll be the exact same way that they've continued to get material from us. That customer, though, had made a curtailment for part of their pulp mill production. And so, yes, we have continued to see pulp mill curtailments across Canada. We hope we're getting to the end of that. Not sure about that. But yeah, we'll have somewhat less volume I would expect next year, but also a lower total production cost as we consolidate production into Brandon.
Yeah, Jacob, if you look at our assumptions in the guidance, we have said that our sodium chlorate volume assumption for 2024 is roughly 257,000 tons. Last year, we did 283, and first half of this year, we did about 140. So when you do the math there, you will see that have to be baked in lower volume. And you know, so we think that we will be, you know, somewhat off the 257 that we'll achieve this year. But as Scott said, some of the curtailment is already in the first half, so it, it'll be, should be, it'll be somewhat lower, but not, not significantly lower than, than what we have for the full year.
Yeah. And then somewhat offset by the-
Yes
... you know, by the consolidation of production.
Okay, that, that's helpful. And then maybe just going back to the question on the, you know, the strong margins in the SWC segment. You know, there was basically, what, a 317 basis point improvement in margins year-over-year in the quarter. Maybe just kind of walk us through what the buckets would be like. You know, would water products be the majority of that?
Yes. Water would be the majority, because within the acid, there's some puts and takes, but water is the primary contributor.
Okay. Okay. And then maybe if I can just sneak in another one here, just on the rail. Have you made any preparations for a rail strike? And how long can they be out before you feel an impact? And then I'm assuming, you know, North Van is probably the biggest immediate impact, but how long before you start, you know, feeling the impact of Brandon and some of your other plants?
So we'll say, look, the market, our customers, the entire industry has been talking about a potential strike for at least 60-90 days. This is not, this was not a new surprise. So even in the second quarter, I think across Canada, we were seeing customers raise the inventory levels and stockpiling some material in anticipation of this. So I think that has definitely been happening. But look, we won't speculate on, there'd be, there's no reason for us to speculate on how long this strike is going to last, even if it's going to go into effect. Based on what we've seen, the strike could start on August 22nd.
We'll see if that's going to happen. But we won't speculate on how long that's going to last. We are beginning to see that we're beginning to see an impact even as of today, that TIH materials are not moving, but that is being discussed at, let's say, take chlorine for drinking water. That is, that was being discussed yesterday, both, we can share at the highest levels of U.S. and Canadian government yesterday, and, say, highest levels at the office of the Prime Minister in Canada and at U.S., because chlorine goes into drinking water.
And so, we think, and I think it's fairly obvious that if there's any essential material, chlorine for drinking water would be considered essential.
So, Jacob, if you look at our guidance, initially, we had said that the back half of the year is going to be stronger than the first half. But if you look at our revised guidance now, you will see although we update, our first half was very strong. Some of it was this extra inventory buildup in Q2 for our customers. So we'd already assumed, regardless of a strike, that some of that would get unwound as inventories go back to normal, either because a strike happens or because a strike doesn't happen and customers don't need that level of inventory. So some of that was baked into our numbers, but again, it's hard for us, you know, we don't recall ever having both rail companies go on strike at the same time.
So this would bring the Canadian economy to a grinding halt, and so we're hopeful that, that this will not be a long, disruption.
Okay. That's helpful. Thank you very much.
Your next question comes from the line of Steve Hansen with Raymond James. Please go ahead.
... Oh, yes. Good morning, guys. Thanks for the time. I echo your comments. The strike is short-lived, if at all, but we'll see. On the Cairo expansion completion, it's coming up here quickly. I think the bulk of the contribution will really start in 2025. But can you just remind us what kind of incremental contribution you all are expecting there relative to the capital spend, and how the pricing dynamic might have changed or have been changing, in recent periods here, as that market continues to stay pretty tight?
So I think initially we had said we are targeting a 25% return. Then I think when we gave some revised estimates earlier this year, we said that we'd like to hold off on giving kind of the expected margins until the project is complete. We are, you know, having commercial talks and other talks. We'd rather wait for, you know, maybe till the next quarter to give you a little bit more color as to what we expect the margin contribution to be. But you're right, it'll start ramping up in 2025, so, you know, we will expect margins to ramp up during 2025. So 2025 may not hit a full year return, but it'll start ramping up.
But we will be producing acid in the second half of this year, and so we're very excited about that. We're going to plan a ribbon-cutting ceremony, a very successful project. Again, we'll start acid production second half of this year, and we'll begin the process of sampling and approving this for the high-end new chips that are there. But what will come, I think, significantly faster will be approval for existing chip production, and then the new small nano chips will be, that's gonna be—that approval process will be happening in 2025.
Okay. Just, just to clarify then, it sounds like this isn't the type of facility you just move from 0% to 95% rates over a couple of weeks. You're gonna slowly and gradually-
So we will-
Step up the production as demand.
But in terms of acid production, we think, look, we're, we're—we'll be, without getting into... We'll, we'll be—we can run that, that facility full of acid, you know, pretty much from when we, when we start out. And then we can—there are different applications that, that we'll move that into in terms of, that, that have different quality requirements.
Yeah. So there's, I mean, not all acid is equal, so we will be producing acid, but for the real high-end margin stuff, that's what Scott was talking about, that it takes a bit more time qualifying for that. So that will, you know, start ramping up in 2025.
Okay, appreciate that. I guess we'll get an update again here later this year. Just switching gears, quickly back to the water side and some of the pricing dynamics there. I mean, how far and how aggressively have you pushed price? Just trying to get a sense of whether the margins are ultimately sustainable into next year, excluding any puts and takes around raw material costs, et cetera. I'm just thinking pricing specifically. Is that something you continue to expect pricing dynamics will hold and perhaps even increase next year? How do you feel about that?
So look, I think the thing with water, we are seeing. I think the market is seeing more mature pricing in the market. However, that being said, you know, a significant portion of our business goes to city bids, and those city bids are annual prices, and where we have raw material concerns, or we take the raw material risk. So that's always there. However,
Yeah, I think just to add one thing. I mean, our pricing team is definitely got a long-term view of the market, so you know, they would not be too opportunistic in pushing something that will reverse shortly. So I think they do take a holistic, long-term view to the market and price where they think that it is, you know, sustainable.
I think as we look at that-
Okay.
Yeah, I mean, we feel good. We feel very good about the direction of the water business. You know, we're not gonna give any specific numbers for 2025, but we feel very good about the direction of the business as we look out certainly for the next several years.
Just one... And then I'll squeeze one last one. It's just, Rohit, I think you mentioned the rest of the transactions, or maybe Scott, I apologize, on the buyback and how you think about the undervalued nature of the stock relative to some of these transactions. I mean, where do you ultimately see that fair value is? Or how many -- can you give us some sort of directional sense for how undervalued you think you are and how you think the buyback will roll out here through balances this year and into next year?
So I think what I'll give you is that we are trading at about 5x EBITDA. Historically, we have been, you know, in the 6x-8x EBITDA. If you look at some of the transactions that are taking place in the market, like there's one big water competitor, and that we've been told, is 10x+. We've also seen a transaction in the, in the sulfuric acid space that was in the 7s, kind of directionally. So you can kind of triangulate that and see where you think our valuation should be, but we think there's a significant undervalue. So we are, you know, in the market on the NCIB. We, we were not allowed to do it during the SIB.
So as soon as the SIB was lifted, we had an automated share purchase plan that kicked in on August first, and so we've been buying every day since then. And we fully intend to continue doing that because, you know, it is the—when we do our own DCFs, I mean, this is a project and a initiative that probably delivers us return better than almost anything else we can do.
Right. Appreciate it. Thanks.
... Your next question comes from the line of Gary Ho with Desjardins Capital Markets. Please go ahead.
Thanks. Good morning. Just wanted a quick update on the Arizona ultrapure asset, kind of project, how things are progressing there, and also any comment on the progress on getting funding from the CHIPS Act, any visibility on that, that'd be great.
Sure, Gary, I'll say. So, we have not heard back a final answer from the U.S. government on the CHIPS Act. Our partner and I have, and Chemtrade, we have been, we've done a lot of work in putting together that application. There has been. There's been a lot of back and forth with the government, and we're kind of waiting to hear that. As I shared last quarter, the key for that facility in Arizona would be a clear vision of how that facility could ramp up to the volumes that we had projected, which would be 100,000 tons of acid. The fabs have delayed many of their expansion plans.
And so as we even as we look at it, we, we no longer see the, the need for, for that much volume in, let's say, in and we don't think the market's going to need that much material in the next 2-3 years. But we're, we're very closely looking at that, and then, and then talking with the fabs and trying to understand the rate that they're going to bring on their expansions and the acid that's going to go along with that. And then we're, we're trying to match supply, so that, that, that would come together, and there wouldn't be, you know, that. We, we wouldn't build a 100,000-ton, and then that, that could take 7 or 8 years to fill that out.
Got it. Okay. And then my next question, just on the North Van lease extension discussion. Sounds like you've been pretty proactive in some public government relationship building. Can you elaborate on any early feedback, and when can we hear something kind of more definitive on the lease extension?
So yes, we have been, we've had an effort that's been ongoing for more than a year, and we have targeted our communications and our interactions with the local community, with First Nations there, and then municipal and federal officials, and there have been a wide number of meetings over a year. Feedback has been very positive from by a great majority of those meetings, and so we're very optimistic based on that feedback. And so although I can't give you... Well, I'm not gonna say, "Here, here's a date," can't do that. I will say that the feedback has been positive.
I think and so feedback has been positive, and the goal, we're hoping that we could come back at some point in time and say that, "Here's a lease extension," but we can't give a date on that. But we'll just say that is work in progress right now.
Okay, perfect. And then just one last question, maybe higher level. Can you just refresh us on your capital allocation ranking? We've seen you kind of announce the convertible kind of SIB, execute on NCIB, the divvy increase. I think also in kind of recent quarters, you've talked about strategic acquisitions, and also you have the Kanto JV in the background. Maybe just help us think, think through each one of those and what the pecking order. And also, maybe just, on the last question on the NCIB, is you're thinking that you'll repurchase stock, to the tune of how much, the forced converts, will come back, so essentially no, no, no dilution on your side?
Okay, so I'll take part of it, and then maybe Scott will step in at the for some of, some of it. So our allocation strategy is, as you said, you know, the dividend is very important. Maintaining a healthy balance sheet is important. Returning capital in other ways, like the NCIB. So yes, we don't want to give you an exact number we want to buy, but, you know, our thinking was that, one, it was undervalued. Two, if there is a conversion event, which we would, you know, definitely sop up those units. So you can expect us to continue to be buying. In terms of leverage, you know, we have said in the past, we think our long-term target is about two and a half times for strategic opportunities.
We could, you know, lever up a little bit higher. We have a lot of liquidity. Right now, we've got over $400 million undrawn on our revolver, so we have, you know, capacity to do things. So those are kind of the priorities, and I'll let Scott add anything he wants.
Yeah, sure. So, just, you know, Gary, I guess, with the prioritization and roughly the general direction for returns, I think that we feel that we can, that some of the best use of the capital that we're generating would be the NCIB and buying back units, buying as well as the SIB and the NCIB, and so returning that capital to shareholders, I would say we feel that's gonna be very high return. Next for us would be organic growth projects, and that's across Ultrapure, across water. We continue to look at other projects and so high returns, and so we're, we look at that.
We are open and looking and thinking about moderate acquisitions. Typically, we would, I think we would exhaust the majority of our organic growth, and then if we still have capital left over, we would, we would consider that in terms of moderate acquisitions, and there's always other ways that we look at in terms of returning capital to our shareholders.
Any moderate acquisition would definitely be synergistic and strategic fit to our business, so we would be, you know, thinking of it very cautiously.
Exactly.
Okay, perfect. Thanks for the detailed answers.
Your next question comes from the line of Zachary Evershed with National Bank Financial. Please go ahead.
Morning, everyone. Congrats on the quarter.
Thank you.
Thanks, Zach.
You did mention the customer stockpiling inventory ahead of the rail strike, and that the unwinding or the destocking thereafter is baked into your numbers. Can you give us an idea of how much of a pull forward that might have created in Q2 results?
Yeah, no, you know what? We don't want to go too far down that path. You can, you know, look at some of our volumes that we've disclosed and triangulate from there, but, you know, we don't want to get too specific on quarterly stuff. But it's... I wouldn't say it's overly material, but it is a meaningful number.
Gotcha, thanks. And then, how much of the current and expected strength in electrochemicals can you attribute to disruptions of competitor supply versus, strategic actions to keep supply fairly restricted?
Yeah, I would say very little would be, I think, our view. Very little of the benefit that we've seen in EC would have anything to do with competitive supply. Yeah, the disruptions, let's say, from some of our competitors are in the U.S. Gulf Coast, and so there's not, we don't see that much, let's say, interaction between the U.S. Gulf Coast because our market segment, where we primarily sell to, is Northwest Canada. And so our competition there tends to come over by ship from Asia.
Great.
So really not, yeah, not that much of an impact by the supply disruptions from the recent weather events.
Thank you very much. I'll turn it over.
Thank you. There are no further questions at this time. I would like to turn us back to Scott Rook, President and CEO, for closing remarks.
Well, so thank you, everyone. Thanks, everyone, for joining the call. We're proud of the second quarter and look forward to delivering continued strong results for the second half of this year. Thank you, and have a great day.
Thank you, presenters, and ladies and gentlemen, this concludes today's conference call. Thank you all for participating.