Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chemtrade Logistics Income Fund Q2 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Thank you. Rohit Bhardwaj, Chief Financial Officer, you may begin your conference.
Thanks, Rob. Good morning, everyone, and thank you for attending our Q2 earnings conference call. Joining me today on the call is Scott Rook, our President and Chief Executive Officer. Please note that this call has an accompanying presentation available on our website. Q2 of 2022 was another strong quarter for Chemtrade. We continue to capitalize on favorable market conditions across most of our product portfolio. The operational initiatives that we have undertaken in recent years are helping drive our performance. We are also enthusiastic about our organic growth projects, which we feel bode well for the future. To begin today's call, I will first walk you through our Q2 results and the drivers of our strong performance. I will then highlight the latest increase to our guidance for this year that we announced yesterday.
Following that, Scott will outline the ongoing positive market dynamics that we are seeing across our business. Scott will also provide an update on our exciting organic growth projects. He will then conclude by highlighting several aspects that we believe make Chemtrade an attractive long-term investment, including our defensive positioning for a potential economic downturn. Following our prepared remarks, we will open the call for analyst Q&A. Before proceeding, I would like to remind you that our presentation contains certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties, and actual results may differ materially. 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 authorities available on sedar.com.
One of the measures that we will refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude only non-cash items such as unrealized foreign exchange gains and losses. For simplicity, although our accompanying presentation will refer to adjusted EBITDA, we will just refer to it as EBITDA in our remarks as opposed to adjusted EBITDA. Non-IFRS and other financial measures are fully defined in our MD&A. Starting with our consolidated results for the Q2 of 2022, we delivered strong year-over-year improvement across our key financial metrics. This included a 32% increase in revenue, a 25% increase in EBITDA, and a 22% increase in distributable cash. Notably, this growth was realized despite the sale of our specialty chemicals business in Q4 2021, which contributed CAD 4.5 million of EBITDA in Q2 of last year.
In addition, we had CAD 21 million of headwinds from the combined impact of the biennial maintenance turnaround of our North Vancouver chlor-alkali plant this quarter and costs relating to the decision to close our Beauharnois, Quebec, sodium chloride facility. The Q2 revenue and EBITDA in both business segments increased compared to Q2 of 2021. This increase reflects the improved pricing and demand environment for many of our key products, strong operational execution across the business, and our ongoing focus on productivity and efficiency. Chlor-alkali chemical fundamentals in particular have been very strong and have had a significant contribution to our performance. Our payout ratio and leverage metrics also improved during the quarter. This reflects the growth in EBITDA, strong cash generation, and the numerous proactive steps we have taken to strengthen our financial position.
Our 5-cent per month distribution remains well covered, with a payout ratio of 60% this quarter and 47% on a trailing twelve-month basis. Our leverage ratio ending the quarter was 3.2, down from 6.1 a year ago. Moving to our segmented performance in the sulfur and water chemicals or SWC segment, we generated revenue of CAD 269.5 million during the Q2, an increase of CAD 55.7 million over the same quarter of 2021. EBITDA for the quarter was CAD 54.8 million, an increase of CAD 0.8 million compared to the Q2 of 2021. Adjusting for the specialty chem business sold in Q4 of 2021, EBITDA increased by CAD 5.3 million relative to the last period.
The increase in SWC revenue is attributed to higher selling prices that we achieved for merchant sulfuric acid, regen acid, and our water solutions products. The higher selling prices for our sulfur-based products reflect strong end market demand, tight industry supply, and higher sulfur prices. In the sulfuric acid product lines, we have been able to pass through the higher sulfur costs as they are realized. However, in our water chemicals business that relies mainly on annual one-year fixed price contracts, our ability to pass through cost increases is typically lagged by about six months on average.
We've done a good job of keeping pace with the increase over the last year, but there was another significant increase for sulfur during the Q2. given the magnitude of the increase in the Q2, we have taken a more proactive approach to negotiating with our customers to pass through those elevated raw material costs. We think we will be able to catch up faster than we have in previous quarters. We are also starting to see sulfur costs decline in the Q3, and as costs come down in the water business, we typically see a benefit. Turning to our electrochemical or EC segment. This segment had a really strong quarter. Revenue of $176.9 million was up $53.4 million year-over-year, and EBITDA of $50.7 million was up $27 million year-over-year.
This was despite the negative impact of approximately CAD 21 million related to the biennial maintenance turnaround at the North Vancouver plant in the Q2, and costs related to the plant closure of our Beauharnois, Quebec facility. The higher revenue and EBITDA are attributed to higher selling prices that we achieved for each of our three chlor-alkali products, Caustic Soda, Chlorine, and Hydrochloric Acid. Our realized MECU net backs during Q2 were up approximately CAD 1,000 year-over-year, with 55% of the increase coming from stronger Caustic Soda pricing and the remaining from higher Chlorine prices and to a lesser extent, higher Hydrochloric Acid pricing. We continue to benefit from strong chlor-alkali market dynamics with Chlorine and Hydrochloric Acid demand, enabling us to run our North Vancouver facility at high operating rates and capitalize on the strong Caustic Soda pricing in the market.
As I previously mentioned, this quarter we completed the maintenance turnaround at our North Vancouver facility. I'm happy to say the turnaround was well executed, but it did result in the plant being offline for about three weeks, resulting in an approximately CAD 17 million impact to EBITDA. Despite the impact of the turnaround, we still delivered exceptional growth in the EC segment this quarter. Our Brazil business also delivered strong results on a year-over-year basis during the Q2, as demand from our key customer was higher, and in general, market fundamentals were strong. Sodium chlorate volumes were lower compared to a year ago, with ongoing softness related to decreased end-user demand for office paper. We are working to mitigate the impact of these declines as contracts come up for renewal.
We have also outlined the steps we are taking to improve our cost structure in sodium chlorate, which Scott will reiterate shortly. Overall, it has been a truly extraordinary quarter for EC segment, and we believe that favorable market conditions will continue over the medium to long term. Turning to corporate costs. Our corporate costs for Q2 of 2022 were CAD 23.8 million, CAD 11.2 million higher than the same period of 2021. The main drivers of the year-over-year increase were threefold. First, our incentive and LTIP costs were higher by CAD 4.6 million. Second, we recognized the foreign exchange loss of CAD 400,000 in this quarter compared to a gain of CAD 4.1 million in Q2 last year.
Finally, we recognized a gain of CAD 1 million for government support programs in Q2 of last year. Our operating costs are relatively consistent with the prior period, reflecting our ongoing focus on efficiency to try and offset the impact of higher inflation. Moving to our balance sheet. As I previously mentioned, our leverage ratios and liquidity continue to improve. This is due to the higher EBITDA from both our business segments as well as the initiatives we undertook to strengthen our balance sheet. This includes the recent sale of an idled sulfuric acid plant in Augusta, Georgia, during the Q2 for cash proceeds of $10 million. At the end of the Q2, we had approximately $248 million available on our senior credit facility, and we have no debt maturities until May 2024.
We recently amended certain terms of our credit facility to accommodate one of our growth projects on which Scott will elaborate later. The steps we have taken to strengthen our balance sheet have been effective, and we intend to take additional steps to further improve our leverage and liquidity and to provide us with the flexibility to pursue economically attractive growth projects. We are continuing to evaluate the potential sale and leaseback of our North Vancouver real estate, but we do not have any further updates for you on that process at this time. Turning to our guidance. Yesterday, we announced a substantial increase to our 2022 EBITDA guidance. We are now expecting EBITDA of CAD 360 - 380 million this year versus our prior guidance of CAD 300 - 330 million.
This increase to our guidance reflects the strong results we have delivered in the H1 of the year and the ongoing strength in market fundamentals for most of our key products, including the chlor-alkali segments. We now forecast that the average Northeast Asia spot price of caustic soda, which will be a key determinant for our realized price in 2022, will be $640 per ton. This is $350 per ton higher than in 2021 and $65 per ton higher than our previous estimate. Recall that every $50 per ton change in pricing translates into approximately $10 million of incremental EBITDA for Chemtrade. The remainder of our key guidance assumptions are set out in the slide deck in our MD&A. Our revised EBITDA guidance indicates a record year for Chemtrade.
The midpoint of 2022 Adjusted EBITDA guidance is CAD 370 million, a 121.5 million dollar improvement over 2021 after adjusting for the sale of the specialty chem business, which was roughly CAD 14.2 million last year, and the NATO] lawsuit settlement last year of roughly CAD 17.7 million. This is also despite the combined CAD 21 million impact of the North Vancouver turnaround and closure of the Quebec facility. For some additional context, year to date, we generated CAD 189.6 million in EBITDA compared to CAD 120.6 million in 2021, which reflects a CAD 69 million improvement in the H1 of the year. It validates the sometimes difficult strategic decisions we have taken across the business in recent years.
It also illustrates our focus on maximizing the value of our existing assets through our productivity and reliability initiatives. In addition, I would be remiss if I did not mention our employees across Chemtrade who continually drive our company forward. Without them, none of these results would be possible. I will now hand this call over to Scott, who will walk you through some of the reasons why we believe Chemtrade's future remains bright.
Thank you, Rohit, and good morning, everyone. Thank you for joining us on today's call. I'm looking forward to discussing the continued strong momentum that we are delivering across our business lines and the initiatives that we're undertaking to ensure this momentum continues for years to come. This includes a continued emphasis on reliability and productivity across our facilities to increase our production rates, enhance safety, limit plant downtime, and maximize margins. Starting with our sulfur products, market fundamentals remain strong for all three forms of Sulfuric Acid that Chemtrade produces. Regen Acid, used in the production of gasoline, has rebounded from 2022, supported by relatively high refinery utilization rates. We, however, continue to closely monitor potential impacts on driving activity from high gasoline prices.
While this could have an impact on refinery utilization rates, and therefore demand for our Regen Acid, we would expect any impact to be very minor, in the range of low single-digit % decline from current strong demand levels. For UltraPure Acid, we continue to be able to sell as much as we can produce. Demand remains very strong from the semiconductor industry. In the short term, we've been focusing on better reliability and increasing our production at our current facilities to capture this strong demand, and we now have two projects underway to add capacity over the next few years. These projects in Cairo, Ohio, and Arizona will ensure we maintain our leadership position in North America for UltraPure Acid. I will elaborate more on these growth projects shortly. The supply-demand balance in the Merchant Acid market remains tight. Merchant Acid has widespread industrial uses.
As a result, pricing and demand continued to be strong during the Q2. Moving on to our water treatment chemicals. Elevated sulfur prices remained a headwind in the Q2, with raw material prices still roughly double where they were last year. However, we have had success in the proactive negotiations we have held with our customers to pass through these price increases. It will still take time to fully pass through these higher input costs, but we are making good strides in this area, and we are confident that we'll be past this headwind in short order. In the Q3, we're also seeing sulfur prices decline from their recent peaks. If sulfur continues to decline, that should provide a nice lift to the water chemicals business.
Demand for water chemicals continues to grow steadily, and we continue to position Chemtrade for this growing demand through various small organic growth projects, especially for PAC and ACH, where demand is growing roughly 5% annually. Turning to the outlook for our EC segment, I'm pleased to say that we expect this to be a record year for the segment and by a pretty significant margin. Based on Q2 Northeast Asia spot prices for caustic soda, we also expect the Q3 to be a record quarter for this business. Caustic soda prices have come down from the recent highs in the Q2, but remain elevated relative to the pricing we've seen in recent years. Northeast Asia spot index pricing in July was $585 per metric ton, compared to $350 per metric ton one year ago.
Industry consultants expect near-term pricing of caustic soda to remain supported by strong demand for aluminum and dislocations in the supply of aluminum in Eastern Europe stemming from the Russia-Ukraine war. We maintain a bullish outlook for caustic soda, supported by continued demand growth for aluminum as well as for lithium-ion batteries and limited new capacity announced. One would expect that higher chlor-alkali pricing would be required before additional capacity is added to fulfill anticipated global demand growth in the coming years. Given Chemtrade's exposure to caustic soda prices, we stand to benefit should prices remain elevated, as is evident in our results this quarter. We also continue to generate robust margins in chlorine, taking advantage of current market tightness. We have seen strong pricing and demand for chlorine following industry capacity rationalizations that took place last year, and with industrial and construction demand having rebounded.
It remains our expectation that pricing for chlorine will remain strong through the balance of this year and into 2023. The hydrochloric acid market is slowly becoming more favorable in terms of both volume and price. This is resulting from higher fracking activity in North America, as seen in higher rig counts, which are now above the five-year average. North American rig count was 950 in July of 2022, compared to 606 on average in 2021, and 522 in 2020. We expect this trend to continue to improve as geopolitical conflicts drive increased exports of LNG from North America to Europe, resulting in higher fracking activity. As a reminder, caustic soda and chlorine are co-products in that we can upgrade chlorine to hydrochloric acid.
Thus, strong fundamentals for chlorine and hydrochloric acid allow us to fully capture the benefits of higher caustic soda pricing. Recently, fundamentals for all three of these chemicals have been strong, resulting in record results for our chlor-alkali business. Finally, moving on to sodium chlorate. Market demand for chlorate remains subdued owing to softness in demand for office paper. However, with a broader return to the office, we have begun to see a modest pickup in demand. We are also optimistic that industry operating rates are poised to improve as a result of two factors. First, capacity rationalizations that are taking place in the industry. Second, with the ongoing conflict in Ukraine, there's potential for increased export volumes from North America to Europe, where electricity prices are highly elevated.
Recall that on last quarter's conference call, we announced that we will be closing our Beauharnois facility by the end of this year, which will lead to an improved cost structure for our Sodium Chlorate business moving forward. Despite the current challenges facing this business, it remains a strong earnings and cash flow generator for Chemtrade. With that, I will now discuss two UltraPure Acid projects that we have announced to drive incremental organic growth in the coming years and generate additional value for our unitholders. As you have heard us discuss in past quarters, the largest single opportunity for organic growth that we see over the medium term is capturing the significant anticipated growth for UltraPure Acid. Demand for UltraPure Acid is expected to significantly increase over the next five years as the US industry is committed to becoming self-reliant for microchip manufacturing.
Several large semiconductor manufacturers have announced plans to increase semiconductor production in North America. A few weeks ago, we announced an exciting joint arrangement with Kanto Group to capture more of this market demand. This growth arrangement, which will be called KPCT Advanced Chemicals, brings together Kanto Group's technology, which is currently being used by the leading semiconductor producers in Asia, with Chemtrade's North America industry experience. The new plant will be built in Casa Grande, Arizona. Chemtrade will own 49% of the joint arrangement, and the preliminary cost of the plant is expected to be between $175 million and $250 million. Chemtrade expects to achieve an IRR on this investment of at least 20%. We're continuing to make progress on our expansion project in Cairo, Ohio, and remain on schedule for a 2024 start-up.
We now expect the capital cost for this project to be closer to $50 million. The combined total capacity for the two plants will be 130,000 metric tons of UltraPure Acid once both projects are completed. Our hydrogen project at Prince George, Sodium Chlorate facility also continues to progress well and remains on schedule for a 2023 start-up. We are continuing to evaluate options for a hydrogen project at our Brandon, Manitoba, Sodium Chlorate facility, which produces a larger volume of byproduct hydrogen. Hydrogen is expected to be a significant energy source in a low carbon future. Chemtrade already produces the most desired form of hydrogen, being green hydrogen, given our manufacturing processes use hydroelectric power. In addition to ultrapure and hydrogen, we continue to undertake a few smaller organic growth projects across our water business.
This includes several projects to expand capacity of our higher growth PAC and ACH products, which see demand growth of more than 5% a year. These projects remain on track to be completed this year and will contribute to results next year. With the recent concerns expressed by economists of an economic slowdown or recession, I want to take this opportunity to review our defensive attributes. We continue to see robust market conditions across our business at this time and maintain a positive outlook. If a downturn were to occur, we believe we are well positioned defensively. In the SWC segment, our water treatment chemicals are non-discretionary products. We believe this segment's earnings would remain largely unaffected by a recession, and if raw materials decline, earnings should improve.
Similarly, we would expect our Regen and UltraPure Acid business to see a limited impact from an economic downturn. Regen demand is tied to refinery utilization rates, which typically remain stable in recessions as the number of miles driven tends to remain steady. UltraPure demand, meanwhile, is expected to be supported over the coming years by expansions in the semiconductor industry. The primary area of our SWC segment where we would expect to see an impact in a recession is Merchant Sulfuric Acid, which is widely used in many industries and is thus affected by a general recession. However, as previously mentioned, the North America industry is currently tight because of global supply dislocations, which could dampen the impact of any economic weakness. In our EC segment, the impact on Chlor-alkali from a recession would be determined by the relative demand difference between co-products, caustic soda and Chlorine.
If a recession were to impact chlorine's demand by a greater extent than caustic, we could in fact see a benefit in this business, and vice versa. If caustic demand falls more than chlorine, there would be a negative impact. Finally, as discussed, demand for sodium chlorate is already subdued, and we would therefore expect any impact on demand for chlorate in a recession from current levels to be limited. As a result of these factors, while we are by no means immune to recessions, we believe we are well-positioned should one occur. Finally, I wanted to highlight that Chemtrade published our latest sustainability report during the Q2, and I would encourage you all to visit our website to review the document.
We believe that the steps we are taking across the spectrum of environmental, social, and governance will position Chemtrade as an ESG leader in the chemical industry. We look forward to providing increased visibility into our ESG performance moving forward. To conclude, we believe that we continue to demonstrate the power of our business and our strategy, one that's characterized by a unique and compelling combination of stability and growth. Chemtrade is a well-diversified business that is well-positioned for current and future growth. However, never losing sight of what is important to our investors, we also remained focused on prudent capital allocation, balancing investing in growth with maintaining a strengthened balance sheet, and continuing to return capital to unitholders through our distribution. We will also continue to take the necessary steps to transform Chemtrade into an ESG leader as well.
With that, we'll now open the call for Q&A, and Rohit and I would be happy to address any questions you may have at this time.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Ben Isaacson from Scotiabank. Your line is open.
Thank you very much and good morning.
Thank you.
Congrats on the great progress that we're seeing. I just have two questions. First question is on the distribution. Payout ratio is now sub 50% on an LTM basis. Outlook looks pretty good. Is there the possibility that you'll start to revisit that distribution and, you know, not go back to where you were, but, you know, maybe give some increases each year going forward and just kind of reset expectations with the market in terms of that distribution growth?
Yeah, I'll answer that. I would say that our distribution policy is set by our board. We would be evaluating options such as using the excess cash that we generate. We could, you know, increase our distributions to shareholders, or if we find that we have good organic growth projects, we could use that money to continue to build our pipeline of growth projects. We will evaluate those options, you know, as we go forward quarter by quarter.
Mm-hmm.
make the best decisions that we think are in the long-term interest of shareholders.
That's great. Just final question from me. Sulfur prices have come down really hard, really quickly. I was hoping you could just kind of walk us through in the SW segment what are the different moving pieces in terms of that sulfur price crash and how it impacts that part of the business in terms of the lag and the magnitude for various business lines within the SWC segment?
Okay. On the merchant sulfuric acid side, you know, the industry is well-positioned to, you know, absorb ups and downs in sulfur, and it's done in a pretty real-time basis. We don't, you know, expect as if sulfur's coming down for any. We won't get any margin expansion, just like we didn't take any margin contraction when sulfur went up. There may be some marginal benefits, but nothing significant. The water business is where, you know, we have lags, and on average it takes, you know, six months or so to catch up. As raw materials come down, we actually stand to benefit because typically, you know, when costs are coming down, producers are not rushing to drop pricing.
If you look historically, 18 months to two years after raw materials have stabilized and come down, margins tend to stay elevated and then, you know, then things change. I think, you know, we were still playing catch up in Q2 because as you know, Q2 spiked. With Q3 sulfur coming down and potentially going down further, we hope to see margin expansions into 2023 and, you know, maybe into 2024 as well.
Just on top of that, how is your inventory in terms of sulfur? I mean, do you have a lot of high-cost sulfur to work through?
No, we can't, you know, we tend not to carry a lot of inventory. In fact, sulfur has been, you know, was very tight. If anything, we, you know, had very little inventory.
Just final point from me is, you said that you're being more proactive in terms of trying to renegotiate those contracts. Does the sulfur price crash make that moot now? I mean, you're going in with a bit of a weaker hand. You know, you were talking about higher sulfur costs, but now that's kind of gone away. How does that impact your proactive approach?
Our customers and our teams know that we have been playing catch up with sulfur, you know, for well over, let's say, 18 months or so. Our teams will pass through price increases. Sulfur jumps up again, and that has repeated itself numerous times with these very high sulfur prices. There are increases that I would say the market is expecting, and those will continue to go up. Now, our team will continue to emphasize those.
The point I think that we wanna make is that in the water business, going back historically, has tended to do pretty well once sulfur prices start to fall off. We expect that. I think that's a reasonable outlook, and we're gonna push hard to ensure that happens.
Great. Thanks.
If I can just add one thing.
Yeah.
I'll add just one comment. Even though sulfur has come down in Q3, it's still elevated compared to where it was from historic levels. You know, I think there'll still be, you know, we're still putting pressure to increase prices because even at this level, it's higher than it was at the start of the year, for example. There are some contracts that still need to get higher pricing.
Thanks so much.
Our next question comes from the line of Nelson Ng from RBC Capital Markets. Your line is open.
Great. Thanks, and congrats on a strong quarter.
Thank you.
My first question relates to the UltraPure Acid. Can you remind us what your market share is today? With the Cairo expansion and the JV greenfield development with Kanto, like, are you expected to grow your market share over the next few years? Or will demand be growing so much that your market share might be flat or even decline?
Our market share, what we have shared, the market share in terms of production in North America has been 80% or a little bit higher for Chemtrade over the past year. The market has been growing rapidly and so although we have been targeting to increase our production over the past 18 months through increases, let's say, in operating better, we have not added capacity. With the capacity expansions, we have Cairo, Ohio, and we have the joint venture. As the market has grown, the market has turned to imports. Longer term.
What I'll say is we will target, and we are targeting to continue to be the market leader. That's about as specific as I'll get. We will be the market leader for UltraPure. Bringing on the capacity that we said, 130,000 tons, that will meet most of the market growth demands, we think, for the next 2-3 years.
Okay. That makes sense. In terms of the 130,000, what percentage increase of production does that mean for you guys?
Well, we have not shared our production capacity. We have not shared specific capacity, so therefore, I won't comment on a percent increase. We'll just say that we'll continue to say that the new capacity we're bringing on is 130.
Okay. That meets the demand growth for the next 2-3 years.
Yes.
is your view? Okay.
Yes. That's our view.
Okay, great. Then just moving on to the EC segment. Obviously, caustic prices are kinda. They were quite high. It looks like it peaked in Q2, and it's come down a bit in Q3. Given the lag in realized pricing, would you expect the EC segment's EBITDA to also kinda peak in Q3 this year?
Keeping in mind Q2, we had the turnaround for North Vancouver, you know, which we won't have in Q3. At this stage, yeah, we think that based on kind of forecast, the current levels of pricing will probably, you know, be around for a while. You're right, I think, you know, we don't expect at this stage that it goes back to the 650+ pricing that we saw that was used for Q3.
Okay, thanks. Just one last question. Sorry, Scott, you were gonna say something?
Yeah, no, I was just gonna say, with that in mind, though, to answer your question, Q3 would be reasonable to say that would be a record quarter as far as this year.
Okay, that's great. Just one last question on taxes. Your corporate structure has been relatively tax efficient. Do you see any impact from Biden's 15% corporate minimum tax? Are you guys not large enough for that tax to be applicable?
Yeah, no, we don't see that as having an impact on us. I mean, we are subject to the BEAT Tax, but you know, that's not as significant.
Okay, great. Thank you.
Your next question comes from the line of Steve Hansen from Raymond James. Your line is open.
Yeah. Good morning, guys. Thanks for the question. I'm just curious if you could perhaps elaborate on your decision to take on a partner with the new UltraPure project. It does strike me as a reasoned way to balance the capital outlay, but just curious as to how that partner development process evolved and where it came from and why take on a partner when you've got such a strong position already. Thanks.
The rationale for taking on a partner is this. I would say that the smallest chips production in the world takes place in Asia. Therefore, the smaller the chip, the higher the purity of the acid it requires. With the smallest chips being produced in Asia, that also corresponds, we think, with the highest quality UltraPure acid produced in the world. If you look at chip production in North America over the past 10-15 years, the size of the chip and the technology of the chips is a little more older technology than what takes place in Asia.
With the expansions that are coming to the U.S., the expansions and the fabs are going to be looking for smaller and smaller chips. I think the fabs were interested in, let's say, new technology. As we looked at that, we felt that there was a lot of strength, let's say, in partnering with someone in Asia that has a long history of supplying some of the chip producers in Asia. Then it's putting together their downstream technology and our presence in North America, our infrastructure, our knowledge of the market and all that.
From a balance sheet perspective as well, I think there were a lot of advantages for us from a balance sheet.
Okay. That's great. That's helpful. I'm just thinking back to the North Van facility again. I know the turnaround's just been completed, and it sounds like went to plan. Can you just remind us whether or not there's gonna be any additional requirements for turnarounds in the next year, and how we should think about that into the estimates?
Yes. No,
Yeah, no. I think we do.
Yeah. Yes. Go ahead.
I was gonna say, you know, that turnaround is every once every two years, and so we don't, you know, next one will be scheduled for 2024.
Okay, great. Just lastly is just as you think about the leverage profile, which continues to improve here, down to 3.2, I think, on the period. You know, where do you view that as sort of normalizing out and the target range maybe perhaps, Rohit, just as you think about balancing, you know, some of your capital outlays with even the distribution question earlier on the call. Thanks.
I think our target is to be below three times. We also balance that, you know, in any period with what organic growth opportunities we have. As Scott mentioned, you know, this expansion is a 20% return on capital, which is very attractive. We do balance, you know, leverage versus opportunities on growth. I think the key discretionary item was already brought up, which was distribution, which as Scott said is a board decision. You know, I don't think there'd be any rush to increase that because, you know, we have Chemtrade is changing into organic growth business, and there's a lot of attractive organic growth.
you know, we are mindful that we've got to keep an eye on leverage too, and that was one of the things that Scott mentioned as one of the reasons we took on a partner as well. but the target, our long-term target is to be below three times.
Okay. Very helpful, guys. Thanks.
Your next question comes from the line of Andrew Wong from National Bank. Your line is open.
Yeah. Good morning. Thanks for taking my questions and congrats on the good quarter.
Thank you.
The first question I wanted to ask is a little bit on the UltraPure. Scott, you mentioned that with the added capacity, you'll be able to meet the demand for the next two or three years. Does that imply that as you're meeting demand, the market will continue to be tight, as it is now? Would there be any interest or anything you're hearing that you or perhaps other players that might increase in capacity?
We have not heard of anyone adding capacity in North America. We are keeping a very close eye on that. What I will say is that capacity is very tight right now, and we can sell every pound, every kg that we can produce. We are very focused on improving our reliability and our throughput at our plants so that we can meet the demand of our customers.
I think I can just add one thing to that. You may have noticed that in our revised guidance, our maintenance CapEx number was increased. One of the key reasons for that is to ensure we have even better reliability in the UltraPure business because as Scott said, you know, we can sell every pound there is and more so.
Okay. Thank you. That would have been my other question, Rohit. A good answer as well. Thank you for the UltraPure, and I don't know, to the extent obviously that you can share, has all of the increased capacity been placed or are you still going through those negotiations?
Yeah. We won't comment on that at this time.
Yeah. I think the point though is, you know, the market is very tight, so we are not worried about-
Yes
You know, what's gonna happen, but we just can't give you any specifics.
The last question, I mean, again there on the UltraPure, in terms of financing these initiatives, I know you mentioned some cash from your operations. I mean, any other sources you to highlight? I mean, do you have enough capacity, for example, on your credit facility or you need to take more, or any kind of color you can give there?
Sure. Yeah, we're generating a lot of excess cash flow. We expect that to continue for a period of time. Also, you know, it's not like we've got to write a check for it today. You know, it is spread out over time. Yes, to answer your question, we have ample room on the facility. We've got undrawn, you know, roughly $250 million plus all this excess cash. Yeah, you know, we're not concerned about our ability to finance it.
Great. Thank you. That's it for me.
Thank you.
Your next question comes from the line of Gary Ho from Desjardins. Your line is open.
Hi. Good morning. Congrats on a good quarter. The question will be on sodium chlorate. You said in Brazil you experienced strong fundamentals and strong demand from your key customer. Does it mean that the paper market in Brazil has improved? What about the North American market? Where do you see the demand is compared to the pre-pandemic level?
We have seen the market has seen a total drop-off in demand. What I've shared before is of at least 10% a total decline in the market, primarily coming from a reduction in office paper. With COVID closing schools and offices, office paper has declined. I think roughly 40% or so. That's being one of the major uses of chlorate has led to about a 10% overall market decline. That 10% decline led to us making an announcement last quarter that we were gonna close our Beauharnois, Quebec facility, and it led to another announcement by one of the other suppliers.
We're seeing a modest uptick in chlorate demand. As across Canada and even in the U.S., as people are returning to schools and returning to offices, there's a modest pickup in demand. What we're seeing, let's say even over the last couple of months, is that I think there's a growing interest in exports of chlorate from North America going to Europe. With the price of electricity in Europe has skyrocketed, you know, tied to the natural gas price increase in Europe. Electricity is roughly 60%-70% of the variable cost of chlorate. That's leading to very high chlorate increases in Europe. That's leading to increased demand.
I can answer your Brazil question. On the Brazil question, we've been talking about this for, you know, a couple of years now that our key customer there has, you know, announced significant capital investments in the mill that we support, and those are now coming to play. Also they, you know, optimize their entire network and our costs. I'm sorry. Their mill there is now getting to be better on their cost curve. That's positive. We've been calling for this a couple of years. It's good to see it coming through. In terms of growth, you know, Brazil is the largest pulp manufacturer, but it's really positioned to export to Asia.
Asian demand is growing and Brazil will keep adding, you know, 2 million ton pulp mills, you know, every couple of years. That's where the growth is because they have the eucalyptus trees that, you know, grow within seven years. They definitely are the leader in terms of feeding the growth that's coming from Asia. It's very different from North America, because North America until recently hasn't been a big export market, whereas Brazil is a predominantly export market.
Thank you. That's good color. Maybe for follow-up on the Beauharnois closure. You incurred CAD 3.9 million in costs in 2Q. Should we model in any further cost before it's closed by the end of this year?
Yeah. There will be some more costs, but they're not gonna be significant. This was the more significant cost item.
Okay. My last question is, you know, going back to the UltraPure JV. You know, IRR up 20% for this JV, how would you benchmark it against, say, Kanto or, you know, other brownfields versus greenfield development?
The brownfields tend to be, you know,
Our Cairo
Sorry, go ahead, Scott, I guess.
Yeah. Our Cairo, Ohio facility is an expansion of an existing facility. Because of that makes it a little more efficient. We have publicly said that Cairo, Ohio will have a 25% return, whereas what we're calling for with our joint venture is 20%.
Thank you. That's it for me. I'll prep the line.
Okay, thank you.
Our next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is open.
Good morning, gentlemen.
Good morning.
I got a bunch of questions. I'll go one by one. On the UltraPure prospect here with Kanto, can you talk about if it's about CAD 130- 140 million CapEx spend over, if it gets approved, 2023, 2024, maybe early 2025? Can you give us kind of the breakdown what CapEx would look like, capital intensity in the different years?
Joel, we're not in a position right now. As we mentioned on the news release, we are getting detailed engineering studies done right now. We don't expect any significant costs in 2022. You'll start to see it in 2023 and 2024. We'll give you more color by the end of this year once we've got the detailed studies done.
Okay. Next on North Van. The MECU sales volume seems pretty strong guidance this year, despite the biannual turnaround. I don't know if you're buying third-party caustic or other products, but should we think about, you know, about 200,000 tons in a non-turnaround year and 180,000 in a turnaround year? Or how should we think about it?
Yeah, that's, you know, I'd say 190-195 maybe. You know, so 200 would be a very, very strong.
Sorry, there's some feedback there. Sorry.
Sorry. Yeah, there's some background noise. Yes. Yeah.
Can you say that last part again? Sorry.
200 would be, you know, you're talking about caustic or you're talking about MECU?
MECU.
MECU, I would say 200,000 would be flawless. 100,000, you know, would be difficult to achieve. I'd probably say 190,000-195,000 would be a good year for us without a turnaround.
The 181 this year. 180 this year.
Yeah.
Is that because you were buying third-party products, so the sales like the sales is more than production?
No. What we do is we do buy, but we don't count that in this volume because frankly, when we buy it, we don't really make much margin on it. This 180 is actually our production and, you know, call it our production number.
Okay, keep going here. Your guidance seems to imply you expect a decent drop down in costs or pricing that hit your books in Q4. I guess we'll get the August benchmarks soon that will sort of start the discussions for Q4 with your customers. Is that right?
Yeah.
A pretty big dropdown in caustic. Sorry, go ahead. Whatever.
Sorry, Joel. If you do the math on it, you'll come up with a $525 index value in Q3, which will set our 2024 pricing. That's what it's been set at, and that's really where, you know, the current market looks like it's in that ballpark. I think our estimate is pretty good.
The $525 index for Q3 that then will be used as discussion starters for Q4 realized prices.
Exactly.
The other question I wanted to ask was, and you've given sensitivity around this, but maybe we can be a little more explicit here. If we say that according to the midpoint of your guidance, you're gonna do about CAD 110 million higher EBITDA in 2022 year-over-year, how much of that is straight from caustic pricing?
What we've said is that our entire, you know, ECU is up. I think what we told you there is about 55% of the up in the ECU is coming from caustic and a significant portion of the remaining 45% from chlorine and then some from hydrochloric. It's more than a caustic story. It's actually the entire, you know, it's all three elements combined. You know, chlorine is actually a big contributor as well.
Just wanna think, what was the index value that you're using for Q2, that was for Q2 that affected Q3 realized prices for?
It was in the CAD 650+ range. I can actually tell you exactly. I have it here. Let's just see. It was actually CAD 700, around just over CAD 700.
Just my last question is, I think Scott's mentioned a couple times that you expect Electrochem to have its best quarter ever in Q3, so certainly better than Q1 of this year. Would you expect the same for the company that Q3 would be the highest earnings of the year?
I think we made the comment around cost, around Chlor-alkali. I don't think we want to get into quarterly. You know, I think we've given you our guidance for the year. Let's just leave it at that.
Yep.
Okay, thanks a lot.
Exactly.
Thanks a lot.
Thank you.
There are no further questions at this time. Mr. Scott Rook, I turn the call back over to you for some closing remarks.
All right. Well, we'd just like to say thanks, everyone, for your time. I'd like to thank our employees and have a good rest of the day. Thank you.
This concludes today's conference call. Thank you for your participation. You may now disconnect.