Morning, ladies and gentlemen. Welcome to the Chemtrade Logistics Income Fund Q4 2022 and Annual Results Conference Call. At this time, all lines are in 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, February 23, 2023.
I would now like to turn the conference over to Rohit Bhardwaj, Chief Financial Officer. Please go ahead.
Thank you, operator. Good morning, and thank you for attending Chemtrade Logistics Income Fund's earnings conference call for the fourth quarter of 2022. As always, joining me today on this morning's call is Scott Rook, President and Chief Executive Officer of Chemtrade. Please note that this call has an accompanying presentation which is available on our website at chemtradelogistics.com. I'll turn to the agenda now. The fourth quarter of 2022 marked a strong end to a record year for Chemtrade. Many of the favorable trends that we saw during 2022 carried into the first quarter, our focus on operational execution, productivity, reliability continued to allow us to capitalize on good market dynamics, further bolstering our results.
On today's call, I will begin by discussing our strong fourth quarter and 2022 performance. I will walk you through the 2023 guidance that we announced in January. I will hand the call over to Scott, who will provide an update on the market fundamentals for our key products and the organic growth projects that we're undertaking. Scott will conclude by providing a high-level recap of the items that give us continued confidence in our outlook for 2023 and beyond. We'll open up the call for 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.
Prior to discussing our fourth quarter performance, I would like to quickly recap our results for the full year. Chemtrade generated CAD 430.9 million of EBITDA in 2022, the highest level of EBITDA in our company's history by almost CAD 100 million. Strong Chlor-Alkali markets were certainly a contributor to this record performance, but they were by no means the only driver. We saw strength across most of our key product lines in 2022, including Regen Acid, Merchant Acid, sodium nitrite, and water solutions products in addition to Chlor-Alkali. We also made significant strides on productivity and reliability in 2022, which included new commercial excellence initiatives. These measures enabled Chemtrade to fully capture value from the strong market fundamentals across our portfolio of products. Without the focus and hard work of all of our team members, these results would not have been possible.
I will also note that these record results in 2022 were achieved despite the biennial maintenance turnaround at our North Vancouver Chlor-Alkali facility, which, although very well executed, had a negative impact of roughly CAD 17 million on EBITDA. We've established a strong foundation for future success in 2022, and the actions we took as an organization will continue to bear fruit in 2023 and beyond. Turning to our consolidated results for the fourth quarter of 2022, it was yet another quarter of strong year-over-year improvement across our key financial metrics. This included a 29% increase in revenue, a 13% increase in EBITDA, and a 69% increase in distributable cash on a year-over-year basis.
Our operating performance was even better than that suggested by our EBITDA growth, as results in Q4 2021 included a CAD 17.7 million gain related to the settlement of our NATO lawsuit. If you exclude corporate costs, EBITDA for our two operating segments increased by 42% year-over-year in Q4 2022. These results once again reflect strong performance and improvement in both of our operating segments, with continued strength across most of our products. Our plants also continued to operate very well in Q4, emblematic of our ongoing focus on productivity and reliability. We further strengthened our balance sheet in the fourth quarter, with our leverage ratio ending the quarter at 2.2x . This improved financial flexibility positions us well as we continue to invest in the high return organic growth opportunities.
Our CAD 0.05 per month distribution, which equates to an attractive distribution yield of approximately 6%, remains very well covered by our cash flow generation, with a payout ratio of only 30% in 2022. We remain confident in our ability to balance the return of capital to our unitholders with our other capital allocation priorities, which include investing in organic growth and maintaining a healthy balance sheet. Moving to our segmented performance. In the Sulfur and Water Chemicals, or SWC segment, we generated revenue of CAD 264.7 million during the fourth quarter of 2022, an increase of CAD 52.6 million, or 25%, over the fourth quarter of 2021. EBITDA for the quarter was CAD 57.1 million, an increase of CAD 3.5 million or 7% compared to the fourth quarter of 2021.
Adjusting for the specialty chemical business sold in November of 2021, which contributed roughly one month of results in the prior year period, EBITDA increased by 9% year-over-year. The increase in SWC revenue was driven by higher selling prices for a number of our chemicals that included merchant acid, water chemicals, sodium nitrite, and Regen Acid. The higher selling prices more than offset increases in raw material costs, including high sulfur costs, resulting in year-over-year improvements in EBITDA. Overall, product market fundamentals across the segment remained strong in the fourth quarter. As Scott will discuss, we remain cautiously optimistic about the SW segment in 2023.
Although Merchant Acid does have broader exposure to industrial output in North America and could be negatively affected by an economic downturn, most of SWC's other key products are relatively defensive and should continue to perform well regardless of the economic backdrop. Transitioning to our Electrochemicals, or EC segment. This segment also had another strong quarter, particularly relative to the fourth quarter of 2021. Revenue of $192 million was up $50.3 million or 36% year-over-year, and EBITDA of $78.3 million was up $36.5 million or 87% year-over-year. The sharp increase in EBITDA reflects higher selling prices for each of Chemtrade's three Chlor-Alkali products: Caustic Soda, Chlorine, and Hydrochloric Acid or HCl. These products have benefited from a number of factors, including global supply dislocations and elevated energy costs for our overseas competitors.
For example, Northeast Asia Caustic Soda pricing, upon which our realized Caustic Soda pricing is based, has been supported by reduced caustic supply from Europe, given elevated European energy prices. Elevated energy prices overseas have also contributed to increased demand for natural gas exports from North America, which has in turn boosted HCl demand from fracking. Chlorine pricing has continued to benefit from tighter industrial supply in North America. Owing to these dynamics, our realized MECU net backs in Q4 were up approximately CAD 770 year-over-year, with roughly 40% of this increase attributable to stronger Caustic Soda pricing, and the other 60% attributable to stronger pricing for Chlorine, and to a lesser extent, HCl. Our Brazil business also had another strong quarter in Q4 with improvement in pricing as well as demand.
Lower sales volume of sodium chlorate were a partial offset to our EC results in Q4 as we rationalized our footprint during the quarter with the closure of our Beauharnois, Quebec plant. While our expectation is that the 2023 EC segment results are unlikely to match the record results in 2022 that benefited from historically high caustic soda pricing, we remain optimistic about the outlook for EC moving forward. In particular, we expect our advantaged position on electricity relative to overseas Electrochemicals producers to remain for at least the next several years, making our Electrochemicals production more competitive on a global scale. Scott will provide more details on our outlook shortly.
Turning to corporate costs. Our corporate cost for fourth quarter of 2022 was CAD 31.1 million, up from CAD 2.8 million in the fourth quarter of 2021. As I previously alluded to, the large year-over-year increase resulted from several non-recurring items. The lower corporate costs in Q4 2021 are mainly attributed to a CAD 17.7 million recovery related to our NATO lawsuit settlement. Also, legal costs in Q4 2021 were lower because of successful projects that offset these costs during the period. Higher realized foreign exchange losses and increased Deferred Unit Plan costs also contributed to the year-over increase in corporate costs, while lower short-term incentive costs were a partial offset.
Overall, our core corporate cost in the quarter was largely in line with our expectations, and we remain focused on prudently managing these costs into the future. Moving to our balance sheet. We continued to deliver improvements in our liquidity and financial flexibility in the fourth quarter, as I previously noted. This included a decline in our leverage ratio to 2.2x at the end of 2022, as compared with 4.2x one year ago. We ended the fourth quarter of 2022 with approximately $377 million undrawn on our senior credit facility, in addition to CAD 72.6 million of cash on hand. The balance sheet improvements we delivered over the past 12 months reflects not only the significant cash generation and EBITDA growth that we realized in 2022, but also several proactive actions, including a CAD 86.5 million equity financing in Q3 of 2022, that will further support the investments we are making in high return organic growth projects.
Along with investing in organic growth and continuing to return capital to unitholders through our distribution, maintaining a strong balance sheet is a top capital allocation priority for Chemtrade moving forward. We are focused on building unitholder value for the long term while preserving financial stability. 2023 is a bigger investment year for Chemtrade as we have guided to CAD 100 million-CAD 140 million of growth CapEx on our organic growth projects this year. During the construction phase, we are comfortable allowing our leverage to increase to about 3x , which is slightly higher than our long-term target leverage. Once the growth projects start delivering the strong results we expect, we will reduce leverage. Before turning to our 2023 guidance, I want to provide a brief update on two balance sheet related items.
First, as I mentioned earlier, in December 2022, Chemtrade was awarded CAD 25 million in a favorable judgment related to a lawsuit we had against Superior Plus Corp. We received payment of the CAD 25 million in January 2023. Did not recognize the related gain as Superior Plus is appealing the decision and uncertainty therefore remains. Second, as noted in our MD&A and earnings release, due to the recent sharp decline in the real estate sector, we have elected to suspend the sale and leaseback process of our North Vancouver Chlor-Alkali facility.
Turning now to our guidance. In January, we announced our 2023 guidance. Yesterday we reaffirmed this guidance while highlighting that we expect to be above the midpoint of the range. We're expecting to generate EBITDA of CAD 360 million-CAD 400 million this year. While this implies a decrease relative to the record results we generated in 2022, the midpoint of this guidance range of CAD 380 million would still represent the second highest level of EBITDA ever generated by Chemtrade and would be CAD 100 million higher than our 2021 EBITDA.
As I mentioned, given the strong start to 2023, we now expect to be above the midpoint of the adjusted range. In our view, the 2023 guidance that we have laid out highlights that we expect another successful year across the business. Much of that strength we saw across our product portfolio in 2022 has carried into the beginning of 2023, and while we anticipate softening in certain areas as the year progresses, we expect continued strength or incremental improvements in others.
We believe that this guidance helps illustrate our differentiation from our chemical peers, many of whom are facing mounting challenges in the current environment. I would also like to point out that the midpoint of our 2023 guidance implies a payout ratio of roughly 40%, again highlighting the sustainability of our attractive distribution. The key assumptions underlying our 2023 guidance are provided in our disclosure documents, I will not repeat them here. I will now hand the call over to Scott, who will walk through the outlook for each of our key products and the factors that give us continued optimism for 2023 and beyond.
Thank you. Scott?
Thank you, Rohit. Good morning, everyone. Thank you for joining us on today's call. I'd like to start out by saying that I'm extremely pleased by the strong fourth quarter results that we had to cap off the best year in our company's history. Our strong execution and operational initiatives put us in a great position to take advantage of the opportunities we had over the course of the year. As Rohit said, we continue to see favorable market fundamentals across most of our product portfolio, with a number of varied drivers providing us with continued confidence for the year ahead. Starting with our sulfur products, market fundamentals remain solid for all three of our sulfuric acid businesses.
Demand and pricing for Regen Acid, which is used in the production of gasoline, fully rebounded in 2022 and has remained stable as we start 2023. We expect this momentum to continue, given that Regen demand is tied to refinery utilization rates, which tend to hold up well in a typical recession. UltraPure Sulphuric Acid continued to see strong demand despite a general slowdown in the global semiconductor industry. UltraPure continues to be the most significant growth opportunity for Chemtrade over the coming years. There are approximately 10 new semiconductor fabrication plants that have been announced and are currently under construction in the U.S. We expect the U.S. market for UltraPure acid to grow by 2x to 3x in the next five years as the U.S. seeks to become self-reliant for chip manufacturing.
We now have two projects underway to add additional capacity to capture some of this demand growth. I'll provide an update on those projects in a few minutes when I discuss our organic growth opportunities in more detail. We also expect sales volume and pricing for UltraPure acid to increase in 2023 relative to last year, given the continued tightness in industry supply of ultrapure relative to strong market demand. Merchant Acid also continued to remain stable at the start of this year. Merchant Acid is used in a broad range of industrial applications. If an economic recession were to occur this year, we may see some softening of demand as the year progresses. However, we have yet to see any noticeable weakening of merchant demand to date, and two factors give us encouragement. First, economists are increasingly calling for a shallow recession.
Second, global supply disruptions across various end-use markets have led to increased demand for Merchant Acid in North America, which could help to dampen the impact of any economic weakness. One more item I'd like to note with respect to our sulfuric acid business. In 2023, we plan to increase our spending at our plants for various reliability improvements. These projects will ensure that we continue to get the most out of our assets over the long term, and ultimately, we believe these investments will pay for themselves over time. Moving over to our water treatment chemicals. We anticipate demand for water chemicals will continue to grow steadily over time, particularly for PAC and ACH, which are growing at roughly 5% annually. To capture this growing demand for PAC and ACH, we made some small investments in additional capacity last year.
We expect these projects will start to contribute more meaningfully to the water business in 2023. Raw material costs were a headwind for the water chemicals business in the first half of last year. These raw material costs have since stabilized and started to decline, we are now starting to see a tailwind benefit to the business. We're hopeful that we will see stable margins during 2023. I would also reiterate that these chemicals are largely nondiscretionary, we therefore expect to see limited impact on demand in the event that an economic downturn occurs.
Turning to the outlook for our Electrochemicals segment. We continue to see a supportive market backdrop for the EC segment. 2022 was a record year for the EC segment by a wide margin. This was the result of strong Chlor-Alkali pricing, including historically high pricing for Caustic Soda. A number of factors contributed, including a global supply dislocations that resulted from geopolitical conflicts, increased freight costs and utility costs overseas, leading to higher pricing, and finally, improved cost position for Chemtrade's production. We foresee that many of the factors that supported this strong performance will carry into this year and beyond. Most notably, with the ongoing crisis in Ukraine, Europe has shifted its energy supply away from Russia to other higher cost sources. This shift has driven up energy prices in Europe, along with other regions of the world.
Conversely, Chemtrade benefits from access to British Columbia and Manitoba's low-cost, renewable hydroelectricity sources. Chemtrade's EC plants operate in these low-cost, cost-regulated energy markets, providing a significant cost advantage relative to competitors in Europe and Asia. This cost advantage will likely remain in place for at least the next several years. We expect that benefit will continue to support increased demand for North American Electrochemicals. In our 2023 guidance for Caustic Soda, we assume that the average Northeast Asia index pricing will be $185 per ton lower than last year's average. This is based on industry forecasts that have called for moderation in pricing compared to last year.
As a reminder, every $50 per ton change has a roughly $12 million impact to our annual EBITDA. Shifting to Chlorine, the North American merchant Chlorine market remains stable, with industry supply still tight and end market demand continuing to hold up well. The outlook for Hydrochloric Acid is also very positive. North American rig counts remain significantly higher than a year ago, reflecting the improving market conditions for HCl in early 2023. Elevated natural gas prices in Europe have also led to increased demand for exports of natural gas from North America. This trend will further support increased rig counts resulting in higher HCl demand. In our guidance for this year, we highlighted that total MECU sales volumes will be lower in this year than last year. This assumption reflects the potential for economic softening that could impact our ability to place a portion of our volumes in the market.
As we have noted before, the ultimate impact to our EC business in an economic downturn will be determined by the relative impact on caustic demand versus Chlorine demand. If chlorine sees a more outsized demand reduction than that of caustic, then the overall price we realize per MECU could in fact increase. Additionally, the global supply dislocations and elevated energy prices that I just spoke to could mitigate the potential downward movements in pricing for our Electrochemicals in an economic downturn.
Finally, moving on to sodium chlorate. The elevated global electricity costs have also improved the cost position of Chemtrade's sodium chlorate business. Similar to Chlor-Alkali, Chemtrade's sodium chlorate business benefits from low-cost hydroelectric energy that is regulated. Approximately 75% of the variable cost to manufacture sodium chlorate is attributed to input cost of energy. This gives Chemtrade a particularly strong position, especially given that our Brandon plant is the largest and lowest cost sodium chlorate plant in the world.
As a result of the increase in electricity costs in Europe, previously a net exporting region for Sodium Chlorate, they are now a net importer. Again, this is an advantage that we expect will remain in place for at least the next several years. Most of our Sodium Chlorate agreements are negotiated annually, which limited our ability to benefit from changing market conditions last year. However, s tarting in the first quarter of this year, we expect to see a significant improvement in this business performance reflecting the global shift in operating rates. However, I would note that our guidance assumes lower sales volumes of Sodium Chlorate this year compared to last year, owing to a potential economic softening and the related impact on Chlorate demand in industrial end markets.
I would now like to provide you with an update on our various organic growth projects. Chemtrade's objective is to deliver sustained earnings growth and generate value for our unitholders. These organic growth projects are high return opportunities that we expect will create incremental value for the long term. We estimate these various organic growth projects will contribute an incremental CAD 45 million of EBITDA by the end of 2025 and an incremental CAD 75 million in EBITDA by the end of 2027.
At our inaugural Investor Day this past November, we provided more detail on some of the organic growth projects that Chemtrade is undertaking over the next several years. For more information on the Investor Day event, the presentation slides and a video recording can be found on our website's Investor page. As I mentioned in the SWC outlook, our UltraPure Sulphuric Acid remains the largest opportunity for growth for Chemtrade. Over the next five years, we expect demand for UltraPure to increase by 2x-3x . With this step change in demand, there will also be a step change in quality needed to meet the requirements for the next generation chips produced in the U.S.
We have two projects that we announced last year to capture some of the demand growth. These projects include a quality upgrade and expansion at our facility in Cairo, Ohio, as well as a new joint venture, KPCT Advanced Chemicals, to build a world-scale plant in Casa Grande, Arizona. Our Cairo, Ohio expansion project will be the first plant in North America to make the new quality sulfuric acid that will be required by these new semiconductor fabs. In December, we hosted a well-attended groundbreaking ceremony to celebrate this important milestone for Chemtrade. This project is underway, and all of the long lead time equipment required for the project has been ordered.
Cairo is progressing well, and we expect construction to be completed in the first quarter of 2024, and with commissioning and startup later in 2024. Our Casa Grande, Arizona UltraPure project also continues to progress well. We are currently undertaking a Front-End Engineering Design study which remains on track, and we will provide updated capital cost and schedule for this project by mid 2023. We will continue to share more information on this important project as the year progresses. Turning to our water chemicals projects, as I noted earlier, the small projects we undertook last year were successfully completed. These project added additional production capacity of both PAC and ACH, which are the two higher growth water chemicals that we manufacture. This incremental production capacity is currently installed, and we expect the business to see benefit this year.
We are continuing to assess additional growth opportunities in the water chemicals business. Regarding our green hydrogen projects, our previously announced project at our Prince George sodium chlorate plant has been delayed. One of Chemtrade's partners for that project decided to conserve their capital with current ongoing economic uncertainty. It's important to note that our other hydrogen projects are unaffected and continue to move ahead. We'll continue to provide updates on these projects as they move forward. To support these organic growth projects, we plan to allocate CAD 110 million-CAD 140 million to growth capital expenditures this year, with the majority of this growth capital going towards our two UltraPure acid capacity expansion projects.
Finally, ongoing productivity and reliability improvements remain a core focus for Chemtrade this year and beyond. The improvements we made in past years will continue to bear fruit. We intend to make further improvements over the course of the year. We remain committed to our target of generating at least CAD 15 million of incremental savings each year from these improvements, which will help mitigate the impact of inflation across our business. Before opening the call to analysts or to Q&A, I'd like to quickly reiterate some of the notable points we made throughout this call and summarize some of the key characteristics of Chemtrade for our investor audience who may be listening for the first time. I would like to reiterate that we are differentiated from other chemical companies for a number of reasons that we'll highlight on this call.
We have a diversified product portfolio with significant regional market share across our key products. In addition, many of our key products have historically exhibited defensiveness through economic downturns, and others are seeing strong tailwinds that could help limit their downside in an economic downturn. We have a significantly strengthened balance sheet. For these reasons, we believe we are in a much better position than many of our chemical peers and should the economy enter a recession. Second, I wanna stress the significant cost advantage we have in the Electrochemicals business. Our access to regulated and renewable hydropower puts us in a great position relative to our international competitors, benefiting both from the pricing and demand we are seeing across our EC portfolio.
Again, this is not an advantage that we expect will be short-lived, as many of the underlying factors impacting elevated global energy prices overseas will not be easily resolved. Consequently, we believe this will provide a competitive advantage for the EC segment for the foreseeable future. Third, we remain keenly focused on operational excellence, which includes improved productivity and reliability and strong operational execution across our footprint. This focus allowed us to capitalize on strong market dynamics last year and supports our expectations of having the second strongest year in our company's history in 2023. Fourth, our organic growth projects continue to progress well, and we believe the opportunities we are pursuing will generate attractive, sustainable, and long-term returns for our unit holders.
We now have the balance sheet to support these investments while maintaining good financial flexibility, and we remain committed to the targets we have established, including generating CAD 75 million of incremental EBITDA over the next five years from these projects. Fifth, we continue to make great strides in our ESG initiatives, and are positioning Chemtrade to be an industry leader on this front. Finally, recognizing the importance of balanced capital returns for our unit holders, we continue to pay an attractive and sustainable distribution with a current yield of approximately 6%. I am incredibly proud of our company and more specifically, our team of almost 1,400 dedicated employees. I believe that Chemtrade is truly a great company that's just beginning to show its true potential, and I look forward to another successful year in 2023.
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. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have any question, please press star followed by one on your touch tone phone. You will hear a three-tone prompt acknowledging your request. Your first question comes from the line of Jacob Bout from CIBC. Your line is now open.
Good morning.
Morning.
My first question is on the dividend and your CapEx. If we take the midpoint of your EBITDA guidance range, and we back out your midpoint of maintenance growth CapEx, cash interest tax and lease, you know, the free cash flow doesn't cover the dividend. A, I guess, how committed are you on the dividend? Just on this CapEx guidance that you provided, are you front loading this ultrapure project?
Okay. I can talk about the math you just did. The way our approach to, you know, funding the organic growth is that we do have, you know, strong internal cash flow. As you know, we did raise some equity last year. Our dividend, you know, decision obviously is a board decision. You know, Scott and I advise the board as well on that topic. We don't think that our distribution should be affected by, you know, organic growth CapEx because the distribution is really what the business can sustainably offer in the, you know, in the long term. In the short term, if we have this funding requirement, we are going to fund it, you know, from excess cash flow.
We've been able to bring our leverage down to 2.2x as we mentioned. We are comfortable getting leverage to go up to roughly 3x in the construction phase. I think that should tell you that we are very committed to our dividend. Clearly it's a board decision, but, you know, we are committed to it. In terms of front loading, I think we'll give you a better idea of CapEx for the growth project, the big one in Arizona in, you know, middle of this year when we have our FEED study done and we've reviewed it. We'll give an update on both project timing and on project cost and some idea of how the costs will be spread out.
Ohio is well underway, as you know. A lot of that spending will be happening in 2023.
All right.
Yeah. Just to add to that. It's clear I think that our organic growth spending is going to happen. We do that obviously in advance of generating revenue as you know. That's gonna be a one or two-year event, and it's not going to be an ongoing basis. If we thought we were gonna spend that much on organic growth every year, that would be a different story. This is a short time period, and as we said, we're during this period where we're spending more, we're comfortable with allowing our leverage to move up to around 3x. We think we can get these projects done while it's at 3x, and then after that they're done it'll our leverage will return to more historical lower levels.
Okay. Thanks for that. Maybe just a secondary question on chlorate. You know, you're commenting that 2023 guidance will be, you know, above midpoint, talking about tailwinds in Electrochemicals. How much of that is actually coming from chlorate? Maybe just help us out here a bit on the math. I know during the Canexus days, they used to break out, you know, what that chlorate division would generate, and it was roughly, you know, say call it CAD 70 million-CAD 90 million in EBITDA. You know, how did that drop during the pandemic with everyone staying at home and how big of a tailwind can we expect in 2023?
Yes, you know, I think your memory on Canexus is right. So I don't think we want to. So what we have said is that demand in general for chlorate had dropped about 8% during the pandemic. This is for the industry. You can, you know, assume that that's that affected us as well, and it is a profitable business. High variable margin business, so when you lose volume, it is quite painful. In terms of, you know, what we have talked about our guidance, I think the reason we've said we think we're gonna be above the midpoint now is because, you know, more because the Chlor-Alkali segment, because, you know, Northeast Asia has remained higher than we had initially estimated.
Also the other products in Chlor-Alkali are doing better than we had expected. I would say it's more to do with that and to some extent chlorate as well. The other thing I should point out, just in case there's any confusion, is that we did not update our assumptions in our guidance. Just to clarify that in case there's any confusion about it.
Thank you.
Your next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is now open.
Hi. Good morning, everyone. A few questions. Maybe just on something that Scott, you said a couple minutes ago with Jacob. You're comfortable if leverage goes up to 3x. Does that imply that, you know, in a bear case scenario, you see EBITDA falling to about CAD 300 million? Just want to get the implication of what that meant.
No, we do not. No, we have You know, we've issued our guidance. We stand by that. No. We do not see that.
Sorry, Scott. I'm talking about guidance for 2023, you said you're comfortable getting leverage, sorry to interrupt, 3x to 1x, 2x leverage. Net, that's about CAD 900 million.
I mean, Joel, sorry to interrupt you. I can help there. I think what that comment was the fact that when we are spending on organic growth, we're gonna be borrowing money from our bank line to pay for the organic growth. During that construction phase, leverage could creep up to, you know, from the 2.2x it's today to, you know, around 3x. We are comfortable during the construction phase for a couple of years to live with that higher leverage. As and when the projects start paying off, which are, you know, very attractive returns, we will bring leverage back down to, you know, below 3x, which is where we would like long-term to be, you know, below 3x fully levered. I think that comment was more around.
That's exactly right. It's we're comfortable as we're spending, you know, the CAD 110 million-CAD 140 million on organic growth, that will, you know, could move our leverage up to around 3x from where it's at, where we finished at the end of last year at 2.2x.
Okay. What do you think corporate costs would look like in 2023, Rohit or Scott?
Well, yeah. I think, you know, for modeling purposes, you can look at about CAD 80 million for the year. I think, some of the, some of the things that are harder to predict are, you know, foreign exchange losses because, you know, we have an assumption on the dollar, but things can change. The other thing is, of course, our long-term incentive plans get, you know, get affected by aluminum price and what else is happening, you know, on a relative basis. I would say in a normal case, we expect CAD 80 million , but we will try and give you some visibility on our LTIP assumption every quarter so you can, you know, take that into account. But that's what we expect it to be, roughly.
Okay. Then, you know, you indicate now that you think that you'll be able to come in a bit above the midpoint of the CAD 380 million midpoint guidance. I don't know if that means CAD 2 million, CAD 5 million, CAD 10 million. I don't know if you can tell me what it is. You didn't change any of your key modeling assumptions. Can you maybe tell us where was the upside? Can you try to scale it for us?
Sure. I don't think we want to get into precision about, you know, how much above the midpoint we expect to be. And that's one of the reasons why we didn't want to tinker with the assumptions either, because, you know, it's still sitting here on February 23rd. We've got a long way to go this year. To give you some idea, it's principally coming from the Electrochemicals segment. If you look at our Northeast Asia assumption, you will see that, you know, our assumption basically that the caustic is coming in higher than our assumption, because Q1 pricing sets Q2, and our Q1, you know, assumption is lower than where it is today.
Also the other parts of the, you know, the Hydrochloric Acid and Chlorine are showing more strength than we perhaps might have forecast earlier when we did our guidance. I think I'd like to leave it at that for now. Obviously, in Q1, we will give you updated assumptions and give you more color on, you know, how we see the year shaping up.
Thank you.
Your next question comes from the line of Steve Hansen from Raymond James. Your line is now open.
Good morning, guys. Thanks. Scott, Rohit, you mentioned earlier in your commentary that you expect to see stable margins in the water chem space. I think at the same time, you were also suggesting that pricing has finally caught up to the headwinds that we were facing last year. I'm just trying to square those two comments. Should we expect to see margins stable or slightly better as we roll forward and some of those contractual elements start to catch up?
Well, I'll say, look, as we'll we are hopeful to see expanding margins in water. We're somewhat cautious because sulfur has fallen, but sulfur is also forecasted to go up. If sulfur goes up per the forecast, it, you know, then that might be, then that would probably mean more of a stable water margins.
Understood. Okay, that's helpful.
Yeah.
Just maybe a second comment about portfolio composition. You know, this goes back some time now, but I recall when the Canexus transaction happened, you know, there was some debate about the volatility in EC and how that would fit longer term within the portfolio. Clearly, it's been a good source of cash flow of late. As you think forward to when the organic projects are finishing off, you know, do you still think that EC will fit in the portfolio longer term? In other words, would you ever contemplate selling it, as some of these other projects are finishing off? Or how do you feel about that mix today?
Well, look, I think as we look at the business today, I think that fundamentally our Electrochemicals business is more competitive now perhaps than it ever has been. That's because of our low cost position with electricity relative to what's happening in the rest of the world. As we look at that and think about it for the next many years, we think that's going to remain. We'll leave it at that. I think that chlorate, you know, the chlorate market use is the pulp and paper industry, which does have some concerns in North America, both from a supply standpoint, but also from a demand standpoint.
While we did have some concerns there, now what's happening is that, you know, the whole global supply and demand balance has changed. Where the European region was an exporting region, and now because of the change in energy prices, Europe is not exporting and now they're importing. That's having an impact. The bottom line with that, you know, the trends that we see right now, look very favorable, and we'll continue to reassess those, you know, as time goes on.
If I can just add one clarification, Steve. We never, when the talk about the margins was all around the Chlor-Alkali business, never the sodium chlorate business. That all, you know, we-- That was kind of one of the big reasons why we bought Canexus is because we believe having the lowest cost plant in the world is a good thing. And then, and as Scott mentioned on the Chlor-Alkali side, the business is fundamentally different from what it was when we acquired it for the better.
That's helpful. Thanks. Just last one, if I may, is around, Scott, I think you referenced additional opportunities being contemplated in water chemicals, the silver and above the PAC and ACH expansions. What exactly does that imply? What are you looking at? Is it additional organic growth, or are you looking at some other types of opportunities as well?
Well, we are, I'll say, we are looking at and thinking about what could be additional capacity expansions in PAC and ACH. We have some ideas that could be new products, and I'll just leave it at that. We feel that there are other growth opportunities in water that we're exploring.
Okay. Very helpful. Thank you.
Yeah.
Your next question comes from the line of Gary Ho from Desjardins. Your line is now open.
Thanks. Good morning. Maybe just going back to Sodium Chlorate. Volumes in your 2023 guidance versus 2022 actual, down roughly 10%. You also highlighted, you know, higher selling prices for Sodium Chlorate. I think you've actually added significantly higher this quarter. I'm assuming, you know, the price will more than offset the volume drop. Maybe just give us an update on that side of the business to your outlook.
Gary, the volume drop is basically we shut down our, you know, higher cost plant in Quebec. That's really the volume. You know, this is a business where, you know, we're optimizing margin here. The volume is, you know, I think it made sense for us to shut that and cut some fixed costs out of the business and focus our, you know, focus our business on the two plants that are remaining. I don't want to get into price versus volume, but yes, for sure, you know, the decision was made basically to shed fixed costs.
Pricing has been, you know, probably independently affected because of what's happening globally with energy costs and the fact that, you know, as Scott mentioned, from a global supply demand perspective, there's been a fundamental shift with Europe becoming a net import zone and from an export zone. That has a knock-on effect on pricing. Plus, you know, the floor for Sodium Chlorate pricing is a lot higher now because, as you know, 60%-70% of cost is, of variable cost is electricity. As globally electricity goes up, and in fact, not even globally, a lot of parts of the U.S. have seen much higher electricity as well. That just sets the, you know, the floor for pricing at a much higher level than it has been in the past.
Okay. That's helpful. On caustic, the Northeast Asia prices have softened somewhat. I know still above what you've assumed. You know, what's your outlook there? Are you expecting this to stabilize? Maybe give us an update in terms of market dynamics. That'll be helpful.
Yeah, I'll do that. Look, we look at the same. We talk to the same industry experts on the outlook for caustic as you do. We've, you know, and we have offered-- We've offered in our guidance what the outlook for that is. So far, you know, the caustic pricing has been above what we have said. What's gonna happen, you know, we'll, as we look forward, I'll say the outlook that we read or that we look at, does call for gradually increasing caustic. That's, those are public documents, so we can see that. We're hopeful that that'll still transpire.
You know, caustic goes into the biggest market is aluminum. That has an impact. There's growing demand for caustic, for use in batteries for electric vehicles. That's creating, I think new demand for caustic, so. Which will increase demand, so.
Okay, great. My last one, maybe for Rohit. You know, you give us added disclosure around the average MECU netback MECU 2023 versus 2022. Any rule of thumb you can give us in terms of sensitivity of that metric to EBITDA perhaps? You've given us some sensitivity on the caustic side to EBITDA. Just wondering if you have the numbers there.
Sure. I mean, if you look, we do give you our MECU sales volume, and basically by telling you that the netback is going-- You know, every dollar change in netback is basically that times the annual volume, which we've given you what our assumption is for this year. That's probably where you can do the math. It all drops down to the bottom line.
Okay, great. That's it for me. Thank you.
Your next question comes from the line of Nelson Ng from RBC Capital Markets. Your line is now open.
Great, thanks. Just a quick question on the UltraPure asset side. I know you're obviously going through the FEED process at the Casa Grande project. Can you just comment on what the ability or likelihood is in terms of increasing the production capacity? Obviously design it such that an expansion at a later date could be pretty easy given all the, I guess, semiconductor activity we're seeing in the U.S.
Yeah, sure. I'll comment on that. The capital cost that we have shared, that we've shared publicly on that, we believe will be enough. It's enough capacity to meet demand there for the next, in that region for the next three, let's say three-five years. We still think that's the case. It's certainly possible that while the industry will need more capacity beyond that, the industry is going to need more capacity, most likely in the Arizona region, actually in Texas as well as Ohio. We are currently thinking through those market opportunities and how best to address that in the future.
Again, what we have in our capital estimate that we've shared, that will be enough production, we think to meet the demand there for the next three to five years.
Okay. Obviously you don't want to overbuild more than that, and you think the three-five is a good range to hit.
Yeah. We think that's the appropriate volume to build to meet demand. Look, we'll, you know, we'll adjust from there. We wanna make sure that this plant, that we build it, start it up, we run it right quality, that it meets the specs for our customers. While we're doing that, as our confidence grows, we'll start, we'll think more, we'll get more serious about what's coming after that.
Okay, got it. Then just moving to the hydrogen side. Like obviously you mentioned that the Prince George hydrogen project is getting delayed, and I know that that project wouldn't have contributed anything material for several years. Could you just give a bit of color as to whether this is like a slight delay, like a few quarters or or does there need to be more visibility on a potential recession? That could obviously take like a year or two.
Well, I would say at this time we don't know how long this delay is going to last. As, you know, what we've shared before too is that this impact in terms of our numbers, it's a very small, almost negligible impact. You know, it's CAD 3 million-CAD 4 million in the future. We don't know right now how long that's going to delay, but I'll say we're actively working to try to bring that project online. That will have no impact on our other projects that we're working on.
In particular, you know, as I keep talking about Brandon has the potential to be our largest hydrogen project. This delay at Prince George will have no impact on what we decide in Brandon.
Okay. Just one quick follow-up on the Prince George one. Like, do you have the flexibility to switch partners, if the opportunity--
I won't, I won't comment any more on that. I'll just say we're working to get a project back on track, and I'll just leave it at that.
Okay, got it. Just one kind of last big picture question. Obviously everyone's heard about the train derailment on Ohio or in Ohio, and I guess you guys rely on rail transportation as well. Can you just talk about the cost of transportation and the cost of insurance for some of your more, I guess, hazardous materials?
Maybe I can take that. You know, rail is a big part of the cost, but, you know, it affects the entire industry. We actually in some cases the higher the rail cost it actually is beneficial to us just because it makes the optimization of our, of our network more valuable. It is a significant cost. We keep an eye on it. We more than meet safety standards. We often win safety awards from the railways. Clearly, you know, the railways can, they have to be responsible for their own performance. As we are concerned, we take all the right steps to, you know, have our product safely transported. We actually worry more about the reliability of the service.
Obviously, cost is a concern, cost typically affects the whole industry and gets passed through to customers. It's really more around the reliability, making sure that, you know, we don't have disruptions to the rail service. Those are more critical things for us.
Okay, thanks. I'll leave it there.
Your next question comes from the line of Andrew-- Endri Leno from National Bank. Your line is now open.
Hey. Yeah, good morning. Thanks for taking my questions. A couple for me, but the first one, I just wanted to clarify something back to the export opportunities in the EC. Is this only for Sodium Chlorate, or is there any possibility to export caustic as well?
Yeah, no, it would just be for chlorate. Our-- yeah. There could be caustic, let's say, exported from North America, but we're not in a position at our plant in Vancouver really to do that.
In fact, our core market, there the Western Canadian, Northwestern U.S. market, is actually short domestic products. About half of the product actually comes in as imports. On caustic is very different because that's getting imported from Asia. The other parts of the U.S. that can export from the Gulf Coast, et cetera, but our market is actually short product, and so we don't have any reason to look at trying to export caustic.
No, that's great. That's what I thought, but just wanted to clarify. A follow-up on that then. If Brandon has the best cost structure in the industry, do you contemplate like any scenarios where you could add capacity there, for example, to take advantage and take market share and export to Europe, or you don't see that happening at any point?
We will look at. I'll just say, we will look at that and see that there could be options to expand capacity there. We'll consider that. I'll just say right now, yeah, we'll just leave it at that. We'll look at that. You know, Brandon is not close to a port, so the freight part it would be a key component. It is the largest chlorate plant in the world, and it is a low cost position. It's not located close to a port, so.
I think most important is that so long as production from North America is being exported, doesn't really matter who's exporting it. We just, you know, it's just good that the product is, you know, is leaving North America because clearly in the end, we're here to optimize margin and not necessarily, you know, optimize volume, so.
Okay. That's great. Makes sense. One other question for me. On the water product, and I'm not sure, maybe you've disclosed this before, but are you able to give us a breakdown on your end markets? What is industrial versus what is municipal? Should there be, for example, an economic slowdown, I mean, would you anticipate any impact to the industrial water product?
So in the- - Go ahead.
Yeah. I would say no. We're, you know, what's happening is the demand coming from city municipalities is independent of what, I'll say, of any economic impact. That's more just driven by the population. That, that has no impact. The more industrial uses that, you know, that we-- Well, they're growing mainly because of requirements through regulations. So that's driving growth. We don't see that really changing. I don't see that changing, and that's not, that has not in the past been subject really to economic pressures.
In fact, typically, as you said, what happens in a recession is raw materials drop. Actually water margins, you know, tend to expand in a recession, as opposed to, you know, go the other way.
That's great. Thank you. That's it for me.
There are no further questions at this time. Please proceed.
All right. We would like to thank everyone for participating, and have a good rest of the day. Thanks, everyone.
Thank you.
Ladies and gentlemen, this concludes today's conference call. We thank you for participation. You may