Transcripts
Chemtrade Logistics Income Fund (CGIFF) Q1 2023 Earnings Call Transcript
Operator
Good morning ladies and gentlemen and welcome to the Chemtrade Logistics Income Fund First Quarter 2023 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, May 11, 2023. I would now like to turn the conference over to Rohit Bhardwaj, Chief Financial Officer. Please go ahead.
Rohit Bhardwaj
Thank you, operator. Good morning and thank you for attending Chemtrade Logistics Income Fund’s earnings conference call for the first quarter of ‘23. With me on today’s call is Scott Rook, President and CEO of Chemtrade. Please note that this call has an accompanying presentation available on our website, chemtradelogistics.com.
On today’s call, I will start by discussing our strong first quarter, after which I will walk you through the 2023 updated guidance that we announced yesterday. I will then 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 are undertaking. Scott will conclude by providing a high level recap of the items that give us continued confidence in our updated outlook for ‘23 and beyond, after which we will open up the call for your Q&A.
Before proceeding, please note 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. Although our accompanying presentation will refer to adjusted EBITDA, we will refer to it simply as EBITDA in our remarks. Non-IFRS and other financial measures are fully defined in our MD&A.
The first quarter of ‘23 experienced a very strong start to the year. In fact, EBITDA of $131.7 million represented a record level for Q1 for Chemtrade for the second highest quarterly EBITDA ever. If not for an elevated amount of maintenance turnaround activity for our regen customers, we believe EBITDA would have surpassed the record quarterly level set in the third quarter of ‘22. On a year-over-year basis, revenue increased by 21%, EBITDA increased by 22%, and distributable cash increased by 38%.
Our balance sheet has ended the quarter in a strong position. We achieved a net debt-to-EBITDA ratio of 2.2x compared to 3.5x at the end of Q1 ‘22. And our $0.05 per month distribution equates to a distribution yield of approximately 8% based on yesterday’s closing price, remains very well covered by our cash flow generation with a payout ratio on a last 12-month basis of only 28%.
There were a number of factors that contributed to our strong quarterly performance, which we will elaborate on during this call. Our water chemicals business is performing very well and has achieved some margin expansion. Pricing in merchant acid has been stable, and sodium chlorate has finally turned the corner and achieved significant improvement in pricing. Caustic soda pricing has fallen from its ‘22 highs, as we anticipated. However, chlorine and hydrochloric acid fundamentals remain robust and have supported strong year-over-year improvement in pricing on an MECU basis. So while caustic soda pricing can have a meaningful impact on results, Chemtrade’s other diversified businesses are helping offset the weakness that we have seen in the caustic market. Additionally, our focus on operational reliability and productivity continues to position us to capitalize on the attractive market opportunities we have seen.
Our strong Q1 results and updated outlook for 2023 has given us the confidence to increase our full year ‘23 guidance. We are confident that ‘23 will be another successful year for Chemtrade, not only financially but also operationally and strategically. We continue to progress on our organic growth projects, which we anticipate will further bolster our results in the coming years. And we continue to remain focused on maintaining a solid balance sheet and returning capital to our unitholders.
Turning now to our segmented performance. In the first quarter of ‘23, our Sulfur and Water Chemicals, or SWC segment, generated revenue of $262.5 million representing an increase of 15% over the first quarter of ‘22. EBITDA for the quarter was $55.4 million, a decrease of 11% compared with the first quarter of ‘22. The decline in EBITDA for the period was primarily due to an increase in the number of refinery turnarounds by several of our large regen acid customers. The refineries we serve typically take prolonged turnarounds once every 5 years, which occurred this period. In addition, two of our regen sulfuric acid plants had higher maintenance costs during the quarter related to maintenance turnarounds at these facilities.
The reduced earnings for acid products were partially offset by significantly stronger results for water solutions products. As we have commented, we expect margins to expand once raw materials declined. Additionally, sodium nitrite, regen acid and merchant acid achieved higher pricing in Q1 ‘23 compared to the same period of last year. If not for the significant turnaround activity, we estimate that EBITDA in the SWC segment would have been higher than Q1 ‘22. It is important to note that this level of turnaround activity was confined to Q1 ‘23, and we do not expect any material impact for the rest of the year.
Switching over to our Electrochemicals or EC segment, in Q1 ‘23, EC had another strong quarter with revenue of $208.7 million, representing an increase of 29% over Q1 ‘22. EBITDA was $99.9 million, representing an increase of 52% over the prior year period. This growth reflects improved fundamentals across our EC portfolio, which includes chlor-alkali chemicals and sodium chlorate. Caustic soda pricing in the first quarter was higher than the prior year period, but it was lower than the 2022 peak.
Despite this, our realized MECU netbacks still increased by $550 year-over-year, with higher pricing for both chlorine and hydrochloric acid being the main contributors. The stronger U.S. dollar relative to the Canadian dollar also contributed to the higher realized MECU netback, accounting for roughly 20% of the improvement. Roughly 60% of the increase in the MECU was attributed to higher chlorine pricing and, to a lesser extent, ACL. The improvement in the merchant chlorine market in North America reflects the reduced industry supply that has occurred over the past few years as the larger chlor-alkali producers have rationalized capacity. Meanwhile, the higher HCL pricing is largely due to improved demand resulting from increased fracking activity in North America.
As we have previously indicated, we expected a significant improvement for sodium chlorate in ‘23. In the first quarter, we achieved a significant increase in pricing for sodium chlorate. This was driven by contract renewals that reflected the global shift in operating rates that resulted from higher energy costs for overseas producers. Our Brazil business also delivered improved performance in Q1, with gains achieved across multiple products. Scott will provide an update on our outlook shortly, but we remain confident that the tailwinds we are seeing in the EC segment, stemming from higher energy costs globally, are likely to persist for years to come.
Our corporate costs for the first quarter of ‘23 were $23.7 million, reflecting an increase of $3.4 million over the prior year period. The increase in corporate costs can be attributed to a few factors. First, we had a realized foreign exchange loss of $600,000 this quarter versus a gain of $2.1 million in Q1 ‘22. Additionally, short-term incentive compensation costs increased by $1.6 million on a year-over-year basis. This was partially offset by lower legal costs relative to ‘22 when a reserve for $800,000 for legal proceedings was recorded. Excluding these items, corporate costs were consistent with the prior year period and aligned with our expectations.
Moving now to our balance sheet. Our balance sheet remained strong at quarter-end with our net debt to trailing EBITDA ratio decreasing to 2.2x compared to 3.5x at the end of Q1 ‘22. This improvement reflects the strong EBITDA growth and related cash flow generation. In addition, we raised capital through an equity sale that we completed in Q3 ‘22 and we also had a small asset sale that we completed in Q2 ‘22. We exited the quarter with approximately $393.1 million undrawn on our revolving credit facilities in addition to CAD132.7 million of cash on hand.
During the quarter, we issued $110 million of debentures and used the proceeds of this debenture financing to partially redeem the debentures we have coming due in May of ‘24. We announced yesterday that we will redeem the remainder of these May ‘24 debentures, totaling $101.1 million, using a combination of cash and liquidity on our revolving credit facilities. This will bring the aggregate principle of outstanding debentures to approximately $426.3 million, which is a reduction of roughly $91 million from the level at the end of the year. Following this redemption, we continue to maintain significant available liquidity, and our next debt maturity is not until September of 25. As a result, we remain in a very strong position financially and have adequate financial flexibility to invest in growth. Despite an elevated level of growth CapEx planned this year, we expect our leverage will remain below 3x target.
Turning now to our guidance. Yesterday, we announced an increase to our ‘23 guidance, which was initially released in January. We now expect to generate EBITDA at or above last year’s record level of $430.9 million. This increase to our guidance is attributed to our strong Q1 results and the continued strength we see across the majority of our product portfolio. When we issued our guidance, we are pursuing a number of aggressive commercial initiatives to significantly boost earnings, and we are unsure as to the likelihood of their success. These have been largely successful and therefore, we have now revised our outlook for ‘23 and we now expect this to be a record year for Chemtrade.
On balance, we expect another great year for the business. While we acknowledge the possibility that certain areas of our business that are more economically sensitive could weaken in a slowing economy, we also see the potential for additional improvements in other areas. Furthermore, our confidence is bolstered by the defensive nature of many of our products. The key assumptions underlying our updated ‘23 guidance are provided in our disclosure documents.
With that, I will now hand over the call to Scott, who will walk you through our outlook and our organic growth projects before we open the call up for Q&A. Scott?
Scott Rook
Thank you, Rohit, and good morning, everyone. Thank you for joining us on today’s call. We are incredibly pleased with the results we have delivered in the first quarter. These results reflect the operational excellence culture we have built with the support of our employees and our leadership team.
The strong results also reflect the supportive market fundamentals across most of our key products. We believe the improved fundamentals we are seeing remain in place for many years to come, instilling us with confidence not just for this year, but also for 2024 and beyond. We also believe our diverse portfolio products provide a natural defense against a slowing economy should that occur, and our ongoing organic growth projects will put us in a position to continue to grow for years to come.
Moving to the outlook for our products, and I will begin with regen acid. Our regen sales volume in the first quarter, were impacted by elevated turnaround activity at our refinery customers and in our own facilities. However, we expect regen volumes to rebound in Q2 and remain strong for the rest of the year as driving activity and refinery utilization rates remain high in North America. Refinery utilization rates also tend to see a limited impact in a recession, which gives us confidence that regen will continue to perform well should the economy slow down.
For ultra pure acid, we continue to maintain a positive outlook for the medium- and long-term despite the recent slowdown in the semiconductor industry. The United States strategic initiative to become self-reliant on chip manufacturing is expected to increase demand for ultra pure acid by 2x to 3x over the next 5 years. We don’t expect that the recent slowdown in this industry will deter the U.S. focus on adding industry capacity in North America. I will provide an update on our two ultra pure acid project shortly.
Merchant acid pricing has been stable, as North America’s supply continues to remain balanced with firm demand. Market demand has returned to pre-pandemic levels, driven by demand from North American fertilizer and mining segments. If the economy were to slow down, we expect that merchant acid demand would soften, given the broad industrial end markets it’s used in. However, we have not seen any noticeable softening of demand for merchant acids so far this year.
Moving now to our water treatment chemicals, in recent quarters, we have discussed our outlook for water chemicals, and we now expect to benefit from margin enhancement as raw materials stabilized and decreased. We are now seeing this happen as lower raw material costs have led to our margin improvement. We expect to benefit from this tailwind for several more quarters. In 2022, we added capacity for our PAC and ACH product lines. We expect these expansions to contribute more meaningful in the coming quarters. Chemtrade is well-positioned to benefit from the growth in this industry, which further supports our positive outlook for the foreseeable future. I would also like to emphasize that water treatment chemicals are essential for clean water, making them largely nondiscretionary. As a result, we expect there would be minimal impact, if any, to our sales volumes in a recession. In fact, these chemicals are often countercyclical, as raw material prices tend to fall in a recession, driving improved margins.
Turning to the outlook for our EC segment, this segment has continued to benefit from strong market conditions, and we anticipate many of the factors that supported the strong performance in the first quarter will continue through 2023 and beyond. Both chlor-alkali chemicals and sodium chlorate have a significant portion of their variable costs tied to energy. Our plants in British Columbia and Manitoba benefit from access to low-cost renewable hydroelectric sources. This puts Chemtrade at a significant advantage to overseas producers.
With the ongoing crisis in Ukraine, Europe has shifted its energy supply away from Russia to other higher-cost sources. This shift drove a significant spike in energy costs starting 2022 and has continued into this year. And in particular, certain European regions that were net exporters of sodium chlorate have idled some of their capacity in favor of lower-cost imports. This has opened export opportunities for North American producers. While Chemtrade does not export EC Chemicals, the shift has taken excess supply out of North America and helped to rebalance supply and demand for sodium quarry.
With this new American export demand for sodium chlorate, North American supply has tightened in the domestic market. As a result, Chemtrade sodium chlorate has been able to benefit from higher pricing and expanding margins. Since most of our sodium chlorate contracts are negotiated annually, we had to wait until Q1 of this year to begin to see the benefit. We expect this business to continue to perform well over the balance of the year. I would caution that demand for sodium chlorate from industrial end markets could soften if a recession were to take hold, but we believe the favorable energy backdrop should help to offset this impact. Since our chlorate plant in Brandon, Manitoba is the largest and lowest-cost sodium chlorate plant in the world, we are really well-positioned to benefit from this shift in global energy pricing, and we expect this cost advantage will remain for the foreseeable future, as there is no easy fix for Europe’s energy challenges.
Moving to chlor-alkali, our strong position on electricity cost is benefiting not only our chloric products, but also our chloral alkali business. The high natural gas prices in Europe have led to increased exports of natural gas from North America, resulting in an increase for hydrochloric acid, particularly for use in the fracking industry. North American rig counts remained higher than in recent years, signaling continued robust demand for hydrochloric acid in the near-term.
Meanwhile, merchant chlorine demand remains very strong across all end markets. Industry supply remains tight following moves by larger suppliers in North America to rationalize capacity over the past few years. As a result, pricing for both hydrochloric acid and chlorine have remained strong early this year. While we expect both chemicals to continue to benefit in the coming years from our advantaged energy position, we do reserve some caution as the recession could impact demand. However, as I have stated in the past, the ultimate impact to our chloral alkali business and MECU pricing in an economic downturn will be determined by the relevant on caustic demand versus chlorine demand.
Turning to caustic soda, after reaching record high levels in 2022, the Northeast Asia spot index declined steadily through the second half of last year and into early 2023. This was attributed to inventory destocking after buyers overstocked in 2022. The good news is that caustic soda Taiwan contract prices, which are an indicator for the Northeast Asia spot index, suggests prices will likely stabilize and improve over the course of 2023, followed by further pricing improvements in ‘24 and ‘25. It is important to note that our realized pricing in Q1 this year was based on the index price in late 2022. So the full extent of the lower pricing has yet to flow through to our [indiscernible].
Our Q2 realized pricing will be largely based off of index prices in Q1, and the average index price was approximately $478 per ton. As a result, our pricing for Q2 is already known and is reflected in the updated guidance that we issued. For the full-year guidance, we assumed an average Northeast Asian index price of $465 per ton, which has an implied Northeast Asia spot index price of $390 for the second half of this year. These estimates are based on industry forecast. As a reminder, every $50 per ton change has a roughly $13 million impact to our EBITDA.
I would now like to provide you with a brief update on the various organic growth projects we have underway. To provide some background, the biggest organic growth opportunity for our company over the medium-term is ultrapure acid. Over the next 5 years, we expect demand for ultrapure to increase by 2x to 3x, reflecting the onshoring of semiconductor manufacturing in North America. Furthermore, the new chips that will be manufactured in the U.S. will be much smaller and will require a greater purity level of ultrapure acid that is not produced in North America today.
To meet this new demand, we have two projects currently underway that will add significant production capacity and enable us to meet the new quality standards required. The first project is an expansion at our facility in Cairo, Ohio, which will be the first in North America to meet the newer higher-quality standard required for the new semiconductor fabs being built. This project is progressing on schedule and on budget, and construction will be completed in Q1 2024, with a start-up later in the year. The project is estimated to cost $50 million to $55 million and is expected to generate an IRR of over 25%.
Our second ultrapure project is a joint venture with KPCT Advanced Chemicals to construct and operate a new 100,000-ton facility in Casa Grande, Arizona. The Front-End Engineering and Design, or FEED study, for the project was recently completed, and we are now reviewing the details with our joint venture partner. We expect to share an updated timeline and cost estimate for the project midyear. While we are not in a position to share revised estimates at this stage, we can say that we are seeing the same inflationary pressures on capital equipment and commercial construction as being experienced at a macro level across the U.S. As a result, we now expect the aggregate capital cost to be significantly higher than the top end of the previous estimated range, which was $175 million to $250 million. As previously communicated, we expect to provide an update on this project towards the middle of this year.
With respect to our organic growth opportunities, we have limited updates to share at this time. The water chemicals projects completed in 2022 are expected to contribute more meaningfully to results as this year progresses, and we continue to evaluate other water chemical projects. We are also continuing to assess options for the monetization of the hydrogen we produce at our EC facilities, and progress on these initiatives will be provided when there are material updates to share.
Finally, we continue to invest in productivity and reliability across our footprint. One area in particular that we are investing in this year is to improve the reliability of our sulfuric acid facilities. We are targeting at least $15 million of incremental savings each year from productivity and reliability improvements to help mitigate the impacts of inflation across our business. To support these organic growth projects, we intend to allocate $110 million to $140 million to growth capital expenditures this year, with the majority of this growth capital going towards our two ultrapure acid capacity expansion projects.
We are purposely prudent and thoughtful with respect to the organic growth projects that we elect to undertake. We invest in opportunities where we can generate attractive returns on our investment, where we can build upon or establish competitive advantages, and where we see a long-term opportunity. Ultimately, we strive to generate incremental value for our stakeholders in a disciplined manner, and we remain confident that the organic growth opportunities we are undertaking will accomplish that goal.
Before we move on to Q&A, I want to emphasize some of the key attributes that we believe set Chemtrade apart from others in the chemical industry give us confidence for the years to come. Our product portfolio is a significant strength, as we have demonstrated this quarter by delivering strong results even when some of our key products face challenges, such as lower caustic soda pricing or significant maintenance turnaround activity at our regen acid customers. Our diversified product portfolio, combined with the focus and dedication of our 1,400 employees who embrace our philosophy of operational excellence, has enabled us to fully leverage opportunities in the marketplace.
Moreover, our portfolio consists of many products that have historically exhibited defensiveness during periods of economic turbulence. Demand for products like regen acid and water treatment chemicals typically see limited impact in recession. For other products like ultra pure acid and our EC chemicals, we expect to continue to benefit from favorable market conditions that could mitigate the impact of any economic weakness. We are well-positioned to capitalize on growth of ultra pure acid over the next few years, given our existing leadership position in ultra pure in North America and the high-returns projects we are undertaking.
Our global advantage on energy is contributing to improved pricing and demand for both chloral alkali chemicals and sodium chlorate. And again, this is a trend we believe will last for many years to come. Chemtrade is stable and growing in the chemical industry. We have a strong balance sheet. We pay a monthly distribution of $0.05 per unit. We are a leading example of ESG initiatives. We invite you to see our 2022 Sustainability Report. We are admittedly surprised that our valuation remains low. However, we are confident that, as we continue to execute and build a track record of success, our value will continue to be more widely recognized.
With that, we will 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.
Rohit Bhardwaj
Operator, before you do that, just one comment. We understand there were some issues on the webcast. We apologize for that, but we would like to continue with this call because we have analysts on the telephone line that is working fine. So we apologize for people who joined by webcast, unfortunately were able to hear us or for the presentation. But I’m sure we will have a recording available later for you through the phone line. And the slides are now up on the webcast, so you can access the slides there. And again, we apologize for this, but we’ll just continue with this call because we do have analysts on the telephone lines.
So operator, you can now open it up for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We have our first question from Gary Ho with Desjardins. Please go ahead.
Gary Ho
Thanks. Good morning, gentlemen. Yes, I just want to dig into the project increase. I know you can’t give numbers, but this is a JV, but Kanto has a 51% stake. So maybe provide a bit more color, do both parties need to agree on the go-ahead before the project starts? And how is Kanto thinking about the project price increase?
Scott Rook
Hi, sure, Gary. So this is Scott. So the answer is yes. Both parties have to agree. And so as I’ve shared, as we have shared, we plan to give a project update around mid-year. We obviously shared that, as the FEED estimates are coming in, they are significantly higher than what we shared 1 year ago. So what we are doing, our joint venture, our partner in Chemtrade, we’re working aggressively right now to look at the FEED estimates and to see where we could lower those costs. So that’s number one. Number two, we are discussing the new commercial agreements that we would need to put in place as a joint venture to go to the market with higher prices. And those discussions are happening right now with the semiconductor producers, and we’re having discussions about the higher prices that would be needed to justify the higher cost of production. So that’s happening right now. And we expect to issue an update around mid-year.
Gary Ho
Okay. And then my second question I guess relates to the piece that you just talked about. So you did not put any language around the $45 million adjusted EBITDA from the growth project, and then the $75 million for looking out. Those are unchanged, but the cost of the project has gone up. Does this mean you’ll be lowering your IRR? How should we think about the return threshold? And then, sorry, just maybe [indiscernible] this. At what point would it be uneconomical to go ahead? I always thought the ultrapure is a small piece of the chip manufacturing process and not very price-sensitive. So why can’t you negotiate for a much higher price, just on your thoughts there, please?
Rohit Bhardwaj
So Gary, first thing I’ll clarify is that the numbers that you referenced were what we shared at the Investor Day. So we have not gone back and we’ve done the numbers. As Scott said, we are in the process of – I mean, it’s all unfolding in real time. We’re giving you information as it’s coming to us. And we are working on new commercial agreements. So it didn’t make sense for us to try and change those numbers. But we are looking at, as Scott said, both the cost side and the revenue side, and we can give the update to the middle of the year. And I don’t think we’re going to answer the question as to what’s the minimum. Obviously, we run a business. This thing has to make sense. And we agree with you that this is not a big cost element for semiconductor manufacturers. But we’ll give you more information when we can share it in the middle of the year.
Gary Ho
Okay. And then maybe just last question, just on this for Rohit, while I have you. Regardless of the past, we should still think sub-3x leverage through the growth CapEx base next few years. That hasn’t changed?
Rohit Bhardwaj
Yes. I mean if you look at we just upped our guidance for this year considerably, and so we are generating a lot more cash. And yes, we do expect that we’ll be able to maintain it below 3 through the construction phase.
Gary Ho
Okay. Got it. Those are my questions. Thank you.
Rohit Bhardwaj
Thank you.
Operator
Thank you. Next question, we have Ben Isaacson with Scotiabank. Please go ahead.
Ben Isaacson
Hey, good morning and congrats on the beaten race.
Rohit Bhardwaj
Good morning. Thank you.
Ben Isaacson
Just a couple of questions, and I hope I’m not repeating the last question. So with the $175 million to $250 million previously announced, can you also say what the range of IRR expectations were at that level? So what was the return at $175 million, and what was the return at $250 million?
Rohit Bhardwaj
Well, I’ll tell you that, at the midpoint, the return was about 20% IRR, so you can triangulate that, I think, with that information.
Ben Isaacson
Yes. That’s good. And then why are we seeing – maybe I’m misinterpreting this or read it wrong, but why are we seeing CapEx creep at the Arizona project but not the Ohio one?
Scott Rook
So we had an earlier start on Ohio. And so that project, say, we decided we were going to do that and move forward with that. And we already had a facility there. We weren’t starting with, let’s say, a complete Greenfield facility. So we started that, and we put in place agreements, let’s say, to basically to kind of fix our pricing some time ago. And I think that was a good move. And so we feel confident so far. We feel very confident in both the budget outlook and the schedule for Cairo.
Rohit Bhardwaj
And I think there are less unknowns when you’re de-bottlenecking an existing plant than when you start from scratch. So the scope was much better defined for the Ohio facility upfront. And frankly, we’ve done not quite that scale, but similar stuff at a couple of other sites. So we went in with it with a lot more information than you would with a Greenfield.
Ben Isaacson
And so not to beat a dead horse, but was there not the opportunity to do fixed price EPC contracts for the Casa Grande?
Scott Rook
Well, without getting into, I’ll say, a great amount of detail with that, the Cairo expansion project started out of the gate sooner. And what we’ve done in Arizona with our joint venture partner was really start with a blank sheet of paper and said let’s build a Greenfield site at this particular spot, and that takes a lot more time. And at the same time, the joint venture had to pick out land and figure out how utilities were going to come in. There’s a lot of infrastructure and work, a lot more work to build a Greenfield plant.
Ben Isaacson
Got it. And just last question for me. The sodium chlorate recovery, that is largely tied to electricity prices in Europe. Is that correct?
Scott Rook
Yes. So, what’s been happening in the market is that because of the high energy prices in Europe, Europe was a region that was exporting sodium chlorate. So, in most of the years previously, Europe was exporting sodium chlorate. Because of the high energy costs in Europe, they are no longer exporting sodium chlorate. And instead, they have turned around and they are importing chlorate. And so the region where they are bringing it in from is North America. So, that’s creating new demand in North America to export over to Europe. And so that’s tightened up the market quite a bit.
Rohit Bhardwaj
And I can just add one thing to it. I will just add one comment, which is prior to the energy crisis, the sodium chlorate industry in North America was already starting to displace some more rational behavior. If you go back 10 years ago, the sodium chlorate market was quite rational, and then there was a lot of changes in the industry with a couple of major players being bought and sold, and that caused some behavior in the marketplace which was suboptimal. And so, even prior to the crisis, things were starting to get more rational with a couple of high-cost plants being closed, so their operating rates remain pretty high. And so then, of course, the major change came afterwards, but it was starting to show signs of improvement even just before the crisis.
Ben Isaacson
So, just my very last question on that topic and overall is now we have seen natural gas prices in Europe crater from, I don’t know, $50, $60 last summer to $12 today. So, does that mean, all else equal if nothing were to change, does that mean that the next round of sodium chlorate contract renewals will be a headwind?
Scott Rook
So look, it is – it’s fair to say that, with sodium chlorate and with chloral alkali, roughly 70% of the variable cost of those products is electricity. So, the regional electricity rates have a lot to do with the variable costs. So it is true, there has been a drop in natural gas prices. In particular, let’s say, what we have seen in the outlook, including the first half of this year. But what we look at is second half of this year and look out for the next couple of years. And what is true is that Europe will not be bringing in natural gas from Russia. That’s already been established. The natural gas that they are bringing in is going to be LNG gas that’s being shipped in from North America and from the Middle East. And that natural gas that’s going to get shipped in, we will be at – the total cost of that delivered gas will be higher than what was coming in on the previous pipeline. There will be peaks and valleys – over short-term peaks and valleys based on supply and demand and inventory levels, but the fundamental is that the LNG that’s going to arrive by ship will be higher cost than the natural gas that was coming in on a pipeline. And just simply because of that, and if you look at the outlook, the outlooks are for electricity and energy prices to be higher for the next several years to come.
Rohit Bhardwaj
And they have come off their highs, but they are still much higher than they were prior to their energy crisis. So, yes, while they may be off the peak, but they are still maybe double what they were. So, that still makes it very prohibitive for…
Scott Rook
That’s right. And so for Europe, again, which was an exporting region of chlorate in the past because of lower cost energy, our view is that it’s unlikely that they would remain a region exporting significant amounts of chlorate in the future. We will see how that plays out.
Ben Isaacson
Yes. And I guess, even add to support your point, I mean gas futures in Europe are going up 50% to $18 by October, and they are going to stay there for all of ‘24. So, that makes a lot of sense. Thanks a lot and congrats again on the quarter.
Scott Rook
Thank you.
Operator
Thank you. And next question, we have Steve Hansen with Raymond James. Please go ahead.
Steve Hansen
Yes, very good. I will follow-up on the chlorate question. Is it possible to perhaps parse out the quarter-over-quarter change in electrochem and what that sort of delta could be attributed to the chlorate move? And it’s always hard for us to sort of see what’s driving electrochem business, whether it’s caustic, the chlorate, etcetera. And so just trying to isolate that movement and what kind of change you think, from an EBITDA standpoint, that pricing reset has had.
Rohit Bhardwaj
We will try and help you out. The one thing we walk a very careful line is from an antitrust perspective. We are very cautious with what comments we make, especially around chlorate, because it is a very consolidated market, and we are very mindful of not sending any signals and getting into trouble for things like that. So, that’s where we are a little bit careful. But in this quarter, we can tell you, since it was so significant, that the change in EBITDA was a little bit from Brazil, and the rest was almost evenly between chlor-alkali and chlorate.
Steve Hansen
Okay. That’s actually quite helpful. Appreciate that. Just trying to understand the cadence, going forward, as we contemplate caustic and moving in the other direction, but that’s quite helpful. And then if I take a step back and go back to the plant question, I apologize, in Arizona, as you look to clarify the costs, better understand the levers you can pull, whether it’s pricing or otherwise, is the 20% return threshold that I think you discussed earlier still ultimately the acceptable target from your side, or would you be willing to accept lower? Just trying to understand what the decision vectors might be as you wrestle with some of these issues?
Scott Rook
Well, look, I will reemphasize that our target remains 20% for that project. And we could add some color to that, but our target…
Rohit Bhardwaj
And I think since we are negotiating things, we really don’t want to get too public with anything, but that was our target, and that is something – that is our target.
Steve Hansen
I understand. It’s sensitive. And then just maybe, could we just maybe talk about the other facility then since it’s actually not that far out from start-up? I think you described first quarter on startup, Rohit. Just maybe give us a sense for the pace of ramps there. Is that something we should expect to be contributing in the second quarter next year and defer a rough magnitude of the incremental opportunity?
Rohit Bhardwaj
So, I think you should – I would not put it in second quarter just because there is sometimes disqualifications that happen, etcetera. So really, start looking at the back half. And we had said the IRR there is about 25%, and you can assume that there was a bit of a ramp-up. It’s not like you click a button and you get the 25% on day one. So, we are kind of start ramping it up in the back half.
Steve Hansen
Okay. That’s quite helpful. And then just the last one, if I may, is I think going to the one segment I haven’t talked about on the water chem side. I think it was referenced that we will see a couple of quarters of improvement as we sort of settle through some of these input costs. Is that something that is a good visibility on at this point? We can see the raw material prices, of course, but I am just trying to get a sense of that cadence and whether you have got strong visibility on the three quarters or four quarters for the balance of the year improvement.
Scott Rook
So, I would do. And yes, we feel good about that. So, there is really two things happening, two to three things happening in water. So, number one, we have been coming off of at least an 18-month period with kind of steady increases in raw materials. And as you have heard us say many times before, with the municipal side of our water business, we sell our alum to these on an annual fixed price. So, for the past 18 months, we have seen raw materials going up, and we have been negotiating contracts at higher prices for that entire period of time. Now, we have started to – we have been seeing raw materials fall, and that’s expected to continue. And so a lot of the prices are fixed for at least six months or a year or so. So, we will have expanding margins. So, that’s going on. And we have got good visibility into that. We feel good about that certainly as we go through the rest of this year. The second thing going on in water business is we have been adding capacity at our PAC and ACH products. And so there is projects that we brought online at the end of last year and that we continue to do it. They are relatively smaller, but there are several of them, and we expect those to contribute more meaningful as this year goes on and as we move into next year, as well. So, both of those factors, I think make me feel good about the results in water.
Rohit Bhardwaj
And historically, what we found in the alum business is that, when you go through rapidly escalating raw materials and when pricing catches up, it doesn’t come down that quickly. It tends to persist for at least a couple of years just because suppliers aren’t rushing out to bring down pricing. So, that’s been the historic experience.
Steve Hansen
Okay. That’s very helpful. And just one point of clarification actually on the chlorate side, is all of the business contracted on January 1st, or is it a series of contracts that stage through the year?
Scott Rook
No. It’s a series of contracts that go through the year, the majority of them, though, reset in January.
Steve Hansen
Okay. Thanks for that. Appreciate it.
Operator
Thank you. Next question, we have Joel Jackson with BMO.
Unidentified Analyst
Hey. Good morning guys. This is Justin on for Joel. Could you just please refresh us on how much of pricing is locked in for chlorine and HCL for the rest of the year and how those levels compare to Q1?
Rohit Bhardwaj
So, we don’t really lock in pricing. It’s more of a quarterly kind of pricing in that business. So, I wouldn’t say a lot of it is locked in, but we feel very confident that the high pricing will persist and which is why we have raised our – when you look at our MECU change in guidance assumption, we have raised our average for the year by $280 and the bulk of that, and then we kept the Northeast Asia assumption unchanged. So, all of that is coming from chlorine and HCL.
Unidentified Analyst
Okay. Great. And then in terms of EBITDA guidance, so if the bear case is going to be 2022 levels, could you just give an idea maybe in percentage terms on what the bull case would be and what assumptions you would have to make to arrive at that?
Rohit Bhardwaj
Yes. I don’t think we want to get into that right now. I think we are comfortable with what we said there in terms of what we gave. But we told you we don’t do – there is a reason we didn’t give a range this time.
Unidentified Analyst
Okay. Fair enough. Thank you.
Rohit Bhardwaj
Thank you.
Operator
[Operator Instructions] Next question, we have Endri Leno with National Bank Financial.
Endri Leno
Hey. Good morning. Thanks for taking my questions. Congrats on the great quarter guidance. Just a couple for me, I mean the first one, just returning to the Casa Grande project. Just have a quick question in there. Depending on how those costs go, is there any scenario where you or your partner can change the percentage of that JV, saying if someone didn’t take the cost, then the other one does, and proportionately gets a higher part of the JV, or is it set?
Scott Rook
So, I don’t want to share comments right now on how our – what the specific details of the joint venture agreement. I think we would consider those confidential. So, it will just – I think what we can do is just share that the joint venture is a 51% to 49%, and we will just leave it at that for now.
Endri Leno
Okay. Fair enough. Thank you. And then the other question I have is on the SWC. Just kind of more directionally, with the turnaround presumably finished in Q1, should we expect at least Q2 and the rest of the year to be at least kind of stable-ish year-over-year, or any improvements there?
Rohit Bhardwaj
Yes. No, I think we should see – as we mentioned, most of the costs were in those terminals [ph] in Q1, so you should see the rest of the year improving. Now, keeping in mind there is some seasonality in that business, but subject to that, it should improve.
Endri Leno
Thank you. And then just one follow-up there, Rohit. I think there are sometimes the refineries, there are some turnarounds in Q4 as well. Is there something that you expect for this year in Q4 as far as you can see?
Rohit Bhardwaj
Nothing major, but Q4 is seasonally a weaker quarter because regen business tends to be a little bit lower and alum goes down a little bit, too. But we are not expecting any major turnarounds in Q4.
Endri Leno
Okay. Fair enough. That’s it for me. Thank you. Congrats again.
Rohit Bhardwaj
Thank you.
Operator
And there are no further questions at this time. I will now turn the call over for closing remarks.
Scott Rook
Alright. Well, we would like to say thank you to everyone for attending the call. I would like to also, again, thank all of the employees at Chemtrade for a very successful quarter. And look forward to everyone staying safe, and have a good rest of the day. Thank you.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.