Good morning, and welcome to the Chemtrade Logistics Income Fund Q3 2023 conference. I will now turn the call over to Scott and Rohit. Please go ahead.
Good morning, and thank you for attending Chemtrade Logistics Income Fund's earnings conference call for the third quarter of 2023. Joining me on today's call is Scott Rook, President and CEO of Chemtrade. Scott and I will begin today's conference call with some prepared remarks, during which we will discuss our strong third quarter results, the latest update to our guidance, and our current outlook. Throughout the call, we may reference our accompanying presentation, which is available on our website, chemtradelogistics.com. Following our prepared remarks, we'll open the lines for analyst Q&A, and we'll be happy to address any questions you may have. Turning to slide 3. Today's call will contain certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Actual results may differ materially from expectations.
Further information identifying risks, uncertainties, 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 securities regulatory authorities, available on SEDAR+. One of the measures that we will refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude certain non-cash items such as unrealized foreign exchange gains and losses. While our accompanying presentation refers to adjusted EBITDA, we will refer to it as simply as EBITDA in our remarks. The third quarter of 2023 was yet another very strong quarter for Chemtrade in what we expect will be a record year for the company. On a consolidated basis, revenue declined by 7%, with lower prices for sulfur and caustic soda, more than offsetting higher prices for water products, sodium chlorate, regen acid, and chlorine.
However, despite the lower revenue, we were able to achieve a 4% growth in consolidated EBITDA and a 5% increase in distributable cash. Our outstanding performance stemmed from the focus and execution of our employees across the entire organization. Their collaborative efforts were pivotal in driving commercialization and profitability initiatives across our product portfolio. Our sustained commitment to reliability over recent years also remains a key driver of our results, allowing our businesses to fully capitalize on favorable market conditions. Furthermore, our diversified product portfolio has proven strength, with notable outperformance in our water business, regen acid, chlorine, hydrochloric acid or HCI, effectively offsetting areas of weakness, including a significant year-over-year reduction in caustic soda pricing.
In the Sulfur and Water Chemicals, or SWC segment, strong performance in our water business was the biggest driver of our 19% EBITDA improvement in Q3 of this year over Q3 of last year. The robust results we have been generating in water solutions stemmed from a combination of lower raw material costs and improved pricing. This highlights the success of the commercialization initiatives we've been undertaking. Regen Acid was another bright spot in SWC during the quarter, experiencing both higher volumes and pricing. Lower sulfur prices in the third quarter led to lower pricing and revenue for merchant sulfuric acid in Q3. As a reminder, we have risk-shared supply contracts in the Merchant Acid business that help to soften the downside of the commodity cycle. These contracts adjust the amount we pay for acid based on selling prices realized for acid.
The manner in which we have structured our Merchant Acid business has allowed us to maintain fairly consistent margins despite significantly reduced selling prices. In the Electrochemical or EC segment, EBITDA declined by 8% in Q3 due to significantly lower selling prices for caustic soda. Improved pricing and margins for sodium chlorate, chlorine, and HCI, in addition to a weaker Canadian dollar, helped to partially offset the impact of lower caustic soda pricing. Our EC segment, in particular, sodium chlorate, continues to benefit from our advantage energy position, which is due to our access to regulated renewable hydropower. This advantage is particularly valuable as elevated energy costs globally continue to put pressure on operating rates in overseas markets. Our Brazil business also continued to perform well during the quarter and remains on track for a record year. Turning to corporate costs.
Corporate costs in the third quarter were CAD 25.8 million, an increase of CAD 5.2 million year-over-year due to provisions we took for certain non-income tax-related audits, higher incentive compensation costs, and to a lesser extent, higher discretionary spending during the period. Looking at our balance sheet, the robust EBITDA and cash flow we generated in Q3 2023 enabled us to continue to delever and strengthen our balance sheet. Our net debt to EBITDA ratio as of the end of Q3 stood at 1.7x , compared to 2.2x at the end of 2022. We ended the third quarter with $404.1 million undrawn on our revolver and CAD 35.8 million in cash on hand.
Considering our current leverage and available liquidity, coupled with our next debt maturity not occurring until September 2025, we are confident in our ability to withstand any potential economic weakness, and we remain committed to our strategic organic investments and to returning capital to our Unitholders. We anticipate that our leverage levels will remain below 2.2x exiting 2023. I would also like to take a moment to highlight a recent development. We completed the sale of our Phosphorus Pentasulfide, or P2S5 business, on November 8, 2023. This business was sold for gross proceeds of approximately $43 million, which consisted of cash of approximately $39.4 million and the assumption of indebtedness as defined in the sales agreement of approximately $3.6 million.
An estimated pretax gain of approximately $14 million on the sale of this business will be recorded during the fourth quarter of 2023. We would like to thank all of the employees of the P2S5 business for their hard work and dedication, and wish them continued success under the new ownership. Looking at guidance, given our record performance in the first nine months of the year and based on our visibility for the fourth quarter, we now expect 2023 EBITDA to exceed $490 million. This is compared to the prior guidance update we provided on October 10 for EBITDA to be at least $475 million. The updated assumptions underlying the latest updated guidance are available in the accompanying presentation slides and disclosure documents.
We are incredibly proud of what we have achieved so far in 2023 and expect to close out the year with the same level of diligence that has become ingrained across our business. EBITDA above CAD 490 million would represent a high water mark for Chemtrade, which is well above the previous record levels of EBITDA we generated last year. As a matter of fact, in just the first nine months of the year, we have generated EBITDA of CAD 480 million compared to record EBITDA for the full year of 2022 of CAD 430.9 million. Many positive factors have contributed to our impressive EBITDA performance in 2023. However, as Scott will elaborate, we have seen a moderation in demand and price across several products as the year has progressed.
While we will not announce 2024 guidance until early in the new year, as usual, it is important to recognize that the record level of EBITDA we expect to generate in 2023 is unlikely to represent our ongoing EBITDA run rate. In 2024, in addition to the economists' expectations of some economic softening in North America, we also have a biennial maintenance turnaround at our North Vancouver chlor-alkali Plant scheduled. While we have emphasized that Chemtrade is more defensive than a typical chemical company, we are not immune to an economic downturn. Our updated guidance for 2023 implies a distribution payout ratio for the year of approximately 25%. This once again highlights the sustainability of our attractive CAD 0.05 per month distribution, with an implied yield of 7% based on yesterday's unit price.
We recognize the importance of this distribution to unit holders and remain committed to a balanced capital allocation strategy moving forward. I'll now turn the call over to Scott, who will provide some additional color on our business and outlook. Scott?
Thank you, Rohit, and thank you as well to everyone who has joined the call this morning. We appreciate your continued interest in Chemtrade. I would also like to extend my sincere gratitude to each of our 1,400 employees across the organization who are the real drivers of our continued strong results. The effort and fortitude that I witness daily is impressive, and I am incredibly proud of our team. My thanks to you once again for all your hard work and your commitment to make Chemtrade great. As Rohit just highlighted, 2023 is set to be another record year for us. This is a testament to the entire team and a reflection of the many strategic initiatives undertaken in recent years to position Chemtrade for sustained excellence.
As Rohit also noted, given the current macroeconomic outlook, it's unlikely that we will repeat this level of record earnings next year in 2024. However, as we have spoken about in the past, there are three main long-term global trends that we expect will continue to benefit our business in the coming years. First, our electrochemical business is benefiting from its access to regulated, low-cost, renewable hydropower against a backdrop of elevated energy costs globally. Second, our ultrapure acid business is positioned to benefit from a significant increase in the North American production of semiconductors in the coming years. And third, growing demand and increasing regulations in water treatment are contributing to growth in our water solutions business. Beginning in the SWC segment with our water chemicals business. As Rohit mentioned, our water chemicals business was a strong performer in the third quarter.
A combination of factors has contributed to this robust performance and instilled confidence in the outlook for this business moving forward. The commercial initiatives, along with a focus on operating performance, have played a pivotal role in driving improvements in pricing and profitability. Concurrently, the steady growth and demand for these chemicals, coupled with our strategic investments in additional production capacity, namely for PAC and ACH, has allowed us to capture an incremental share of the market. These capacity expansions are now running well and further contributing to results. Furthermore, the recent reduction in raw material input costs, particularly sulfur prices, has further bolstered our margins. As we look forward, it's prudent to assume there will be some normalization to our water chemicals margin from current levels as our predominantly annual contracts come up for renewal.
However, it's important to emphasize that our water chemicals are largely nondiscretionary in nature, meaning we expect minimal impact on volume, even in an economic downturn. In addition, should economic weakness cause raw material costs to fall further, we could see further improvements in margins. In our sulfur products, Regen Acid continues to be a strong performer, both on pricing and volume. The demand for Regen Acid is closely tied to driving activity and refinery utilization rates due to use in Gasoline Alkylate production. These factors tend to experience minimal impact during a standard recession. As a result, we anticipate continued strong performance in our Regen business in the near term. For Merchant Acid, which is widely used in industrial chemicals, we have begun to see some softening of demand. We believe merchant volumes could decline further should industrial activity slow.
Concurrently, Merchant Acid prices have been tracking sulfur prices, which are lower. However, recall that this business has risk-sharing agreements in place with our byproduct suppliers, significantly mitigating the impact on margins of lower pricing. For ultrapure acid, the favorable medium and long-term outlook remains intact, with demand expected to increase materially as additional semiconductor production capacity comes online in North America. Given the United States strategic focus to support onshoring semiconductor production and the announced fabs that are currently under construction, we remain very bullish on the macro conditions for this business. I will provide an update on the projects we have announced to capture this incremental demand shortly. Moving over to our electrochemicals business. As mentioned earlier, our EC segment continues to benefit from an advantaged energy cost position relative to overseas competitors.
In sodium chlorate, the elevated overseas energy costs have led to increased opportunities for North American producers to export volume to Europe and Asia. In conjunction with capacity rationalization in the industry in recent years, this has led to a tighter market, improved pricing, and significantly higher margins in 2023. We expect energy costs or our energy cost advantage to remain a positive factor in the coming years. While demand in Western Canada might be soft going into next year, we expect pricing to remain elevated due to strong export markets. Chlorine and HCI both continue to be strong performers for Chemtrade. We have generated improved margins in these businesses on the back of solid demand and higher pricing.
Market supply for merchant chlorine remains tight, supporting a continued favorable near-term outlook, and demand for HCI used in fracking remains strong, with rig counts in Canada at record highs and forecasted to remain strong, signaling continued good near-term demand. In addition, higher energy costs in Europe have led to increased natural gas exports from North America, further contributing to HCI demand. Ultimately, however, the impact on our chlor-alkali chemical profitability from an economic downturn will be determined by the relative impact on demand of chlorine versus caustic soda. This could prove to be a net benefit for Chemtrade if chlorine demand is disproportionately impacted, resulting in the curtailment of industry chlor-alkali production and improved caustic soda pricing.
Encouragingly, after record-high Northeast Asia caustic soda prices fell in 2022, and steady declines in pricing through the first half of this year, Taiwan contract pricing and industry consultants suggest that caustic soda pricing has now hit a trough. The current expectation is that Northeast Asia caustic soda prices will now begin an upward trajectory, which will continue into 2024 and 2025. Our updated guidance for this year assumes an average Northeast Asia caustic soda index price of $455 per ton. This implies, this implies index pricing of $365 per ton for the fourth quarter of this year, compared to $580 for the fourth quarter of 2022.
While we do anticipate that realized caustic soda pricing will begin improving in the coming quarters, there's still a gap to close between current index pricing and the average price realized over the course of 2023. This is particularly true given our, our pricing tracks the index with roughly one quarter lag, with our Q1 2024 pricing already set. To reiterate, 2023 is set to be the second consecutive year of record EBITDA for Chemtrade. With macroeconomic conditions and market fundamentals for several key products now beginning to soften, it is not appropriate to take this year's EBITDA as representative of the run rate for Chemtrade moving forward. However, having said that, we believe we are much better positioned than most chemical manufacturers for a potential recession, given the defensive attributes of many of our key products, as I've just highlighted.
Our strengthened balance sheet and the long-term global trends that we are benefiting from further enhance this defensiveness. Switching over to our organic growth projects, we disclosed that we now expect growth capital expenditures this year to total between CAD 50 million and CAD 75 million. I'm pleased to report that our Cairo, Ohio, ultrapure expansion and upgrade project continues to progress on schedule and on budget. As a reminder, this will be the first ultrapure acid plant in North America that will meet the more stringent requirements for ultrapure acid needed by the next generation semiconductors. And it'll further bolster our position as the top North American supplier of ultrapure acid. Construction at the plant is expected to be completed in the first quarter of next year, with commissioning and startup expected later in the year, and commercial ramp-up expected in 2025.
In our water chemicals business, as we mentioned, the new capacity that we put in place in 2022 is now all running smoothly. With those small projects now behind us, we are planning additional small expansion projects next year in 2024. As with all of our organic growth projects, we're being prudent in making these investments, ensuring that they meet attractive return thresholds. We will provide additional details on these opportunities as they progress. Given our strengthened balance sheet, we are in a strong position to make these and other attractive investments in growth, while still maintaining significant financial flexibility and keeping leverage within our targeted levels.
To conclude, I would like to reiterate how thankful I am to the whole Chemtrade team, as these results are really a reflection of their grit and determination to continue driving Chemtrade to greater and greater heights. It is because of these team members that we are generating the record results you have been seeing, and I am supremely confident in our ability to manage through any environment. We expect to close out this year and enter 2024 with the same level of focus and execution that has driven our recent success. As I look across the organization, I am incredibly, incredibly proud of what has been built to date and look forward to continuing to build on the strong track record that we have established. Chemtrade is becoming increasingly known for its diversified product portfolio and its operational reliability.
At the same time, we have long-term tailwinds at our back that should propel some of our key products to new heights in the coming years. We have been delivering ongoing efficiency improvements across our footprint, and we're taking a prudent approach to capital allocation, selectively investing in organic growth projects that'll generate an attractive return, rate of return. With our strong balance sheet, conservative payout ratio, industry leadership on ESG, and defensive attributes, we believe the future remains incredibly bright for Chemtrade. With that, I'll turn the call back to the operator to open the call for analyst questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Jacob Bout of CIBC. Please go ahead.
Good morning.
Morning.
Maybe to start off, just a question on the sustainability of the improvement in SWC margins. You know, when you look at it on a year-on-year basis, I think revenue is actually down, but margins are up quite sharply. And maybe you can help us just, you know, in buckets, what was the driver there as far as operation improvement? You know, what was that versus lower raw material prices? And then, you know, as you go forward, what part of that margin improvement would be sustainable in your mind? And really, how does... You talked about water contracts coming up for renewal. You know, how does that play into your margins?
Okay, so, Nick, I, I'll give you a couple of things here. One, if you look at the quarter, you look at the EBITDA dollar improvement, you know, over last year, the water business accounted for all of that. It's actually a bit more than that. There are a few offsets in the rest of SWC, so water was extremely strong. If you look at, if you're talking about margin percentage, the one thing to be careful with the offset is that because we have risk-shared contracts and we are able to, you know, on the acid business, we're able to offset sulfur. When sulfur goes up, we're able to get higher pricing. When sulfur goes down, it, you know, prices come down.
So, so bizarrely, what happens is, when revenue goes down, our margin percentage actually goes up because we're, we're protecting a dollar per ton kind of margin on the acid business. And so when the revenue is down, that dollar per ton represents a higher percentage. You've got to be careful with our percentage margins in this, in this segment, but I, I hope, I hope that, that helps. But water was definitely strong in terms of when you're looking at next year, you know, in terms of it continuing, I think, the water had a, is, is on track for a record year this year, and we'll maybe see some easing off next year. But, you know, we'll have to wait to see how, how the year unfolds.
And on the rest of the acid business, again, if there's economic downturn, the one risk we take in the acid business is volume risk. We are pretty well insulated on pricing because we're able to, with the risk share contracts, share that with our supplier partners. But volume is a factor, and if general industrial activity drops, you know, we do take some hit on the volume, so we'll have to see how that plays out. I think at this stage, we'll probably leave it at that, and we'll be giving guidance early next year, so we'll give a little more color at that point.
How about the operational improvement initiatives within the segment?
Yeah. So I'll say we have seen... Well, we've seen continued operational improvements in, particularly in our water chemicals business. And keep in mind that we have made several small capacity expansions with our PAC and ACH, and so those are running well. So, particularly within the water business, what we've seen is for the last 18 months to two years in this business, our team has been pushing price hard as raw materials have continuously climbed. And so our pricing moves up in this business as well as others. It tends to move up fairly quickly, and then it's slower to come down. So I think that's in mind. And so when raw materials fall, like what's happened with sulfur prices, sulfur prices fell.
That's a benefit in our water business, and so we've definitely seen that improvement. But what's been happening is a lot of improvement in pricing and then a fall in sulfur prices. But with that, better reliability, and we have the impact of the new capacity expansions in PAC and ACH, which will continue. So we remain optimistic about opportunities, in particular with that product line.
Maybe just a quick second one here. Just the full year guidance, you know, raised it again, but when you actualize what you've done so far, you know, it suggests that fourth quarter EBITDA would drop by 40% quarter-on-quarter. You know, I know there's some seasonality here, but, you know, what level of conservatism are you baking in here?
I think, you know, it seems—I think let's take a couple of things. One is we know that Scott actually outlined the caustic assumptions for you, and so caustic in Q4 this year is about $215 per ton lower than last year. So if you look at that, that's, you know, call it $15 million right there. Seasonality is in a couple of places. Regen business, if you look at, you know, refinery utilization and driven miles in the U.S., Q4 and Q1 are a lot weaker than Q2 and Q3, the summer months. In the water business, you see a down, you know, reduced demand for water products in Q4. You look at chlorine tends to drop off in Q4. Even HCI fracking tends to drop off in the last half of December.
So there are many, you know, there is seasonality is something that shouldn't be, you know, taken lightly, and then combine that with the chlorate... Sorry, the caustic difference. That's pretty significant reductions. And I think in terms of conservatism, I would rather not get into that discussion.
Thank you.
Our next question comes from the line of Joel Jackson of BMO Capital Markets. Please go ahead.
Hi, good morning. Thanks for taking my questions. Sorry if you hear any background noise. Let me follow up, following on Jacob's question. If you look at the implied Q4 EBITDA, you know, if you do a CAD 490 minimum, you're implying EBITDA margins are gonna come down drastically in, it seems like, in both segments. Caustic soda prices are generally hanging in, give or take. They're up a little bit now in October, although you set prices end of August, September. Okay, but margins, like you're implying, just huge margin drop, especially for electrochem, when caustic prices are hanging in. Does that make any sense, you know, that would happen in Q4?
So sorry, I'm not sure your comment on caustic, but I just said caustic is about $215. So I-
But quarter, but it's quarter-over-quarter. I'm comparing margins between electrochem margins in Q3 and Q4. So you, you're implying if you to get to 490 EBITDA, sorry to interrupt, but, you just like huge margin, quarter-over-quarter implosion in electrochem in Q4. Does that make sense?
So I think as so we've talked about seasonality in that segment, too. We've talked about the reduced demand for chlorine in Q4. We've talked about HCI fracking going down in Q4. So I would caution from going quarter over quarter because our business, it's hard to compare a Q3– Q4. I'd rather compare Q4 last year with this year's Q4, just because, you know, there is seasonality, so it's a little dangerous to, you know, go sequentially, and we never talk sequentially for that reason. So if you look at last year, we did CAD 105 million in EBITDA and, you know, that was CAD 15 million right off in caustic itself. And then there are a few other, you know, factors in that come into play as well.
So I think rather than focusing on our one quarter results, I think, you know, we should maybe look at the second half of 2023, and we think the second half is probably more indicative of a run rate for Chemtrade than looking at this one quarter, or and as Scott mentioned, you know, while we're very happy with our 2023 results, we don't think that is particularly indicative of a go-forward run rate. So, you know, so we're not gonna focus on the one quarter.
We would, but just adding color to that, as we've talked about this. We do think that the run rate that we're seeing in the second half of this year is more indicative. We will be giving updated guidance in January, but Joel, as you and others are thinking about the business, I think what's important to note is that the run rate in the second half is fairly indicative of what we see going forward. However, next year we're going to have the turnaround, the turnaround at Vancouver, which, you know, well, is obviously going to have an impact on the business.
Then there could be some softening in the economy, depending on, you know, what happens with overall GDP.
My follow-up is, okay, I think it's CAD 214 million EBITDA implied by for second half of the year, if I take your minimum case this year. So let's call that CAD 420 million dollars run rate, consensus, CAD 40 million dollars. At that type of EBITDA level, your payout ratio is gonna be 30, instead of a three handle, something in the 30s. You know, in this higher interest rate environment where we could all go to the bank and get a 4.5% or 5% GIC on guaranteed money, you know, is a 7% interest rate, excuse me, 7% dividend yield, you know, the right dividend yield for this company with such a very attractive payout cushion?
So I think, you know, I mean, we look at the board and us look at, you know, capital allocation, you know, all the time, and I think, this dividend was set in March of 2020. It's one of the things we look at. We look at, you know, obviously, we're looking at organic growth, capital to be deployed. So yeah, it's something that's looked at, and, you know, the board and us will make the right call when we think it's appropriate.
Thank you.
Our next question comes from the line of Nelson Ng of RBC Capital. Please go ahead.
Great, thanks. Good morning, everyone. Just on that question of, run rate, so-
... like in the beginning of the year, back in January, you had an EBITDA guidance range of like CAD 360 million–CAD 400 million. Obviously, a number of things have turned out better than you expected. Can you just go through some of the, I guess, permanent or longer-term improvements you've seen, over the past year or since, since January? I presume sodium chlorate prices are kind of one of them in terms of more disciplined pricing from the sector, but can you just hit on a few other things where you're seeing a permanent, or more permanent improvement?
So, Nelson, I guess I'll shy away from talking about permanent. I would love to be able to look at it and say with confidence, here, here's exactly what's gonna happen three, four, five, and 10 years out. But what I would say as the stronger changes in the business right now, number one, changes that we've seen in the chlorate market. And so it is true. So, volumes have been relatively strong this year, although what's happening is that is that chlorate demand in North America has been declining. And so we've seen that, but demand for chlorate from North America getting exported...
exporting to Europe and exported to Asia because of the difference in global energy prices, that has remained. That's allowed this market to remain relatively strong, and with that, significant pricing. As we look forward, we do see that demand for chlorate in North America will be dropping slightly, and so that's concerning. We're watching that and thinking that will exports remain in place because of the difference in energy prices? And we think so. And so I would say that we feel pretty confident that those export volumes will stay in place. So that's number one. Next, we've seen, I think, a fundamental change in the chlorine market, and so there's been strong demand.
There has been, there's been some capacity rationalizations, and so I think the positive changes that we've seen there are impactful and will stay. We've talked a lot about hydrochloric acid volumes, hydrochloric acid demand, as well as pricing, and so the, I'll call your attention to the rig counts. So the rig counts in Canada are at all-time highs, and I think, you know, long term, what's happening is that fracking activity, both in the U.S. and in Canada, has been gaining, gaining steam. And in Canada, it's at record volume, and so that's... Particularly Canada is very beneficial for our business that we have. And so as North America continues to export natural gas to Europe, I think that's gonna...
And I think that's so I'll say, that's gonna that demand will stay in place for the, certainly for the foreseeable future, and that's gonna lead to strong demand for HCI. So that's there. And then, the water business, you know, that's our water business has been very strong this year. Strong underlying demand, improvements in reliability, we've added capacity, good pricing, and then we've benefited, no doubt from a drop in sulfur prices. And so that's kind of a. That is a large boost, that's kind of come in in the second half.
Okay. That's, that's great color. And then just switching gears a bit, in your Cairo expansion, I just want to clarify, I guess, the timing. You say that construction completion is early next year. Does that mean it's, like, mechanically completed, and then it's gonna take some time to commission? And then for 2020-
So-
Sorry. And then for 2025, are you, are you expecting it to go through a ramp-up stage in 2025, or are you expecting it to be fully ramped in, like, for calendar 2025?
So great question. Let me... I'll let me add this, this color. So we'll complete construction of this in first quarter of next year, and then we'll be up and running that plant in the second half of next year. And as we start running that plant, we will sell... We're confident that we're going to to sell material. So as we look at this market, there's we can sell that into the existing marketplace for semiconductors. There are other places where we can move this as well, but there's the existing older technology market for semiconductors that's in the U.S. Think of that as the larger, the larger nanometer chip size.
And then there is, there's the small chip size from the fabs that, that's what is currently being built by the new fabs, and so that's what's starting up. And so we'll be starting up and running and selling the plant, you know, in the next year. We'll be selling material. We'll be working on the qualifications, and so what will happen in 2025 is we will be selling more and more of that into the small nanometer chip size, and eventually, that it's all going to be small nanometer chip material coming out of Cairo.
Okay, I see. So just to clarify, you'll be selling materials, but to the older technology as you certify your products so that it can be used-
Yep
... in the smaller chips?
... That's exactly right. And so these, And so what's happening, the, the timing of that is there are-- So, there are fabs that are, that I'll, I'll refrain from calling out, which ones are which, but, this, this is relatively public, I believe. So those fabs are getting built, and they're they will be starting up. And so, so many of the fabs that have added capacity will be starting up next year, but at different rates. Some will be, well, we'll just say, starting up next year and into 2025. So they'll be starting up and then ramping up their production. And then, you know, for, for the next five years, there's, there's more than a dozen fabs that are, that will be built and started up.
Okay. And then just moving to the other project, Casa Grande. So, like, I'm thinking in terms of, like, given that you'll be supplying TSMC, like, when do they actually need the acid and kind of working back? Like, so I think there's articles out there saying they'll be completed in the first half of 2025. So sometime in 2025, they might need the acid , but I guess they-- Do they actually need the acid from Casa Grande, or can they just import it from elsewhere? And then the other part of the question is, like, how long does it take to construct Casa Grande if you were to move forward with it tomorrow, let's say?
Yes. So let me put it like this. If we were to move forward with it tomorrow, it would take roughly 24 months to build, and then it would take more time, let's say, to start it up and get it ramped out and approved. So that's roughly the timeline what we're talking about. The critical decision for us as we look at this would be having a very clear commitment from the fabs that we could ramp up to the volume that... So if we're going to build this plant in Casa Grande, it needs to be world scale. It needs to. And we've said that would be roughly 100,000 tons.
So we would need a very clear commitment from the fabs that we have a picture of, that we could ramp up to close to 100,000 tons. And so until we get that clear commitment that we could ramp up, then this project will probably stay on pause until we get that clear picture. The other thing that we have done is that we, as a joint venture, have submitted the paperwork, and we have applied for government funding as part of the U.S. CHIPS Act. And we have inquired as to how long that's gonna take and what's the probability and all that. We don't know at this time. Yeah, I don't want to speculate. We're hoping that we'll hear something next year.
That could have an influence on this project as well. And I'll add that, we have seen maybe a little slowdown in construction of the fabs as it looks like, the fabs are waiting to get money from the CHIPS Act as well. And so the pace of construction is a little bit slower than what the fabs had said it was gonna be even 12 months ago. And we hear that's because they're also waiting to receive money from the CHIPS Act.
I see. And then you mentioned that there's gonna be all these other, like, or several fabs coming online next year. So do you see a big shortage in the domestic supply of ultrapure acid, and-
Yes.
Are you expecting to see a lot of imports coming in?
So I, the answer is, I think with, over the next three years, yes, I, I think there's I think there, right now there's going to be a, a shortage, and I think that right now, the way the market's looking is that shortage would be met by imports.
Okay, got it. All right, thanks, Scott. I'll leave it there.
Yep.
Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by one. Our next question comes from the line of Gary Ho of Desjardins. Please go ahead.
Thanks, and good morning. I just wanna maybe touch on the P2S5 business disposition. Kind of was that solicited, unsolicited? You know, how did the disposition came about? Maybe you can disclose the EBITDA contribution on a trailing twelve-month basis. And are there other kind of potential assets that you're looking to sell?
Okay, so this is a business that we acquired in 2005. It came along with our acid business, so it was never really part of the portfolio, a strategic part of the portfolio. And we did get some inbound calls on this business, and when we looked at it, there's not much synergy with the rest of our business, so it made sense to divest it. It's also an end market that, you know, was one that we didn't really participate in in any other way and we're quite okay with exiting that end market. In terms of the EBITDA, it's actually not a material transaction, so you really won't see... I would say for your modeling purposes, I wouldn't even bother adjusting it.
But to give you a rough idea, you know, you can consider it over a 10x multiple. So obviously, it was attractive to somebody else, where it was a strategic fit for them. In terms of your question on other parts of the portfolio, I mean, we look at that all the time, but there's normally not anything, you know, that's out there of any size that that you should be thinking is something that make a meaningful difference. But having said that, we continue to be disciplined and look at the portfolio as well.
... Got it. Thanks for that. And then maybe a related question, but turning to capital allocation. So we kind of look at the pro forma, this transaction, kind of your, your leverage could grind down a little bit, but obviously next year, maybe your EBITDA profile drops a little bit as well. But, you know, when, when you look out and if the Ultrapure acid project gets pushed out as well, any new discussions on capital allocation, buybacks, and are you comfortable in that 1.5x–2x range?
So, with capital allocation, this is, it's a discussion that we have with our board all the time. And, you know, I'll just say, as we consider what to do with the cash that we're generating, the options that we have are to invest money in organic growth projects, number one, as well as any other changes that we could do to our capital structure. So those discussions do take place with our board. We feel the optimum thing that we can do is put that money to work and with growth projects and create value. And so where we see opportunities to do that, I think that'll be our priority.
Yeah, and in terms of the 1.5-2, that we wouldn't be comfortable with that in the long run because that's an inefficient balance sheet. But, you know, for a period of time, we're willing, we're okay with it being there because we know that we have lots of ideas to grow this business, and we think that'll be the best, you know, use of that money for the long-term interests of our unit holders.
Okay, and would you look at any potential M&A by any chance?
Yeah, I mean, that's something we-
Yeah. I'll just say that certainly, as we think about the ways to grow the company, you know, our ideas are build, or we categorize them in terms of build or buy. And so, yes.
But unlikely, you know, if you look at Chemtrade's history, the last couple of deals we did were CAD 1 billion, were about CAD 1 billion each. So it's unlikely we would do something of that magnitude because we now do have organic opportunities. Even if you park Casa Grande, there are other opportunities in the business, so it's unlikely to be something of that magnitude, but definitely something, more manageable size that, you know, that might make sense.
Great. Then if I can just sneak one more in. There was some recent announcement from your Suzano partner in Brazil on expansion investment. Just curious if you can give us an update on that relationship and whether you expect to benefit from their investment?
Oh, so our partner in Brazil is building, actually. They have two plants that they are building. But we are not in a position to supply chemicals for those products and, yeah, unfortunately, but we're not in a position to do that.
Got it. Okay. Those are, those are my... Thanks very much.
Yeah.
There are no further questions at this time, so I'll hand the call back to Scott and Rohit. Please proceed.
All right. Well, we again, we'd like to thank everyone for attending the call, and hope you have a good rest of the day.
Thank you. Bye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.