Chemtrade Logistics Income Fund (CHEUN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Chemtrade Logistics Income Fund Q4 and Full Year 2020 Results. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Rohit Bhardwaj, Chief Financial Officer. Please go ahead, sir.

Thank you, Christine. Good morning, everyone. We thank you for joining us today. I hope that all of you are staying safe and are well. As you know, Mark Davis is retiring at the end of this week, and Scott Rook will be our new President and Chief Executive Officer. So after hosting roughly 60 earnings calls with Mark, it's my pleasure to have Scott on the call today and going forward. I will start with a review of Q4. Scott will follow that with remarks from the current state and outlook for the business, and then we will have the usual Q&A session. As with the past 3 calls, we are in different locations. Before we commence the review, I would remind you that our presentation contains certain forward-looking statements that are based on current expectations and are subject to a number of uncertainties and risks, and actual results may differ materially. Further, information identifying risks, uncertainties and assumptions and additional information on certain non-IFRS measures referred to in this call can be found in the disclosure documents filed by Chemtrade with the securities regulatory authorities available at sedar.com. One of the non-IFRS measures that we'll refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude only noncash items for the unrealized foreign exchange gains and losses. For simplicity, we will just refer to it as EBITDA as opposed to adjusted EBITDA. Both these terms are fully defined in our MD&A. As a reminder, since Chemtrade falls under the essential business classification under U.S. state and Canadian provincial orders, all our operations have continued during the COVID-19 pandemic. Our highest priority has been our employees' health and safety. By following the measures we implemented, our employees have ensured that they can continue to work safely and supply our customers. Given the challenging circumstances created by the pandemic, our measures have been largely effective. I'm going to start this call by again thanking each member of our workforce for their dedication and outstanding performance during these trying times. Our fourth quarter results reflected the various matters we referred to in our last call. There was a significant maintenance turnaround at one of our regen plants. This plant had an extended turnaround coincident with its main refinery customers once every 5-year-extended maintenance turnaround. Our North Vancouver chlor-alkali facility also had a biennial turnaround in the fourth quarter instead of the third as previously planned. Generally speaking, the pandemic-related conditions that affected our second and third quarter results continue to prevail in the fourth quarter. As we've mentioned previously, COVID-19 has not affected our Water Solutions business. It has, however, adversely affected demand for some of our products, specifically regen, merchant sulfuric acid, sodium chlorate and hydrochloric acid or HCL. Regen demand is tied to refinery production, and that in turn depends on driving miles in North America. While travel restrictions or guidance remain in effect, we don't expect demand to return to pre-COVID levels, although it did significantly recover from the steep decline at the start of the pandemic. Demand for merchant sulfuric acid, which is one of the world's most widely used chemicals, was also lower than last year due to generally reduced level of economic activity. Demand for sodium chlorate continued to be weaker than 2019 as work from home reduced the demand for printing paper. Finally, fracking activity and thus demand for HCL remained well below 2019 levels. Looking first at the aggregate results of the fourth quarter of 2020. Revenue was $319.4 million, a decrease of $35.9 million from 2019. The decrease in revenue for the fourth quarter was primarily due to lower sales volumes and lower selling prices for caustic soda and HCL and lower sales volumes of sodium chlorate in the Electrochemicals or EC segment, lower sales volume of regen acid and merchant sulfuric acid in the Sulphur Products and Performance Chemicals or SPPC segments. Aggregate EBITDA for the fourth quarter of 2020 was $44.2 million compared with $70.3 million in the fourth quarter of 2019, a decline of $26.1 million. This shortfall was primarily attributable to the EC segment due to the fourth quarter maintenance turnaround, low caustic soda prices and reduced demand in prices for HCL and higher corporate costs and weaker results in the SPPC segment. These shortfalls were partially offset by stronger results from the Water Solutions and Specialty Chemicals, or WSSC segment, driven by our water business. [Technical Difficulty] Can I just get Christine, our operator? I'm getting a bit of feedback on the line. I'm not sure if there's an open line or...

I'll look into that. My apologies.

Okay. Thank you. While EBITDA was $44.2 million, distributable cash after maintenance CapEx for the fourth quarter of 2020 was negative $23 million or negative $0.25 per unit. Note that for the full year, D cash was $0.64 per unit. As we said on earlier calls, we expected CapEx to be very high in the fourth quarter due to the deferring of projects and turnarounds from earlier in the year. Maintenance CapEx for the quarter was $34 million or $0.37 per unit. For the full year, maintenance CapEx was in line with our expectations at $74.4 million. So approximately half of all of our CapEx was spent in Q4. Distributions declared for the fourth quarter were $0.15 per unit. For the full year, we generated EBITDA of $265.3 million, which includes a realized foreign exchange loss of $5.9 million. So without this loss, EBITDA from running our business, even during the pandemic, was about $270 million. Now turning to segmented results for the quarter. SPPC generated revenue of $100.7 million compared with $117.3 million in 2019. The decrease in revenue in the fourth quarter of 2020 was primarily due to the COVID-19 pandemic, which resulted in lower sales volumes for regen and merchant acids. The most significant factor that negatively affected EBITDA during the fourth quarter of 2020 was lower sales volume for regen acid as one of our regen plants took the extended turnaround. Also, government orders restricting nonessential travel and people working from home continued to reduce demand for gasoline. Therefore, refineries operating at lower utilization rates, which led to the reduced demand for regen services. Merchant acid demand was also lower due to the reduced level of economic activity. EBITDA for the fourth quarter of 2020 was $27.6 million, which was $6.6 million lower than 2019. Our WSSC segment reported fourth quarter revenue of $99.3 million compared with $101.8 million in 2019. The slight decrease is due to the lower sales volumes of water solutions products. EBITDA improved to $20.3 million from the $14.6 million generated in 2019. The improvement was due to higher margins for water products, which benefited from higher selling prices and lower raw material costs for water solutions products. Our EC segment reported revenue of $119.3 million for the fourth quarter of 2020, which was $16.7 million lower than the same period of 2019. The lower revenue in the fourth quarter of 2020 was primarily due to a 21% decrease in chlor-alkali sales volumes, a decrease of 12% in selling prices for caustic soda, a decrease of 12% in selling prices for HCL and approximately 6% lower sales volumes of sodium chlorate. During the fourth quarter, we had the biennial maintenance turnaround at our North Vancouver chlor-alkali plant that resulted in lower production. In addition, weakness in HCL demand from the oil and natural gas fracking industry continued to negatively impact sales volume and price. Chlorate sales also continued to be lower in 2019 due to people working from home during the pandemic, which led to reduced demand for paper and thus bleached pulp production. From an EBITDA perspective, EBITDA for the EC segment was $22.3 million for the fourth quarter of 2020 was $11.8 million lower than the same period of 2019. This was primarily due to the lower selling prices for both caustic soda and HCL as well as the effect of operating the North Vancouver facility at reduced rates due to the turnaround and to the reduced demand for HCL. In the fourth quarter, netbacks that is selling price less freight, for HCL were 23% lower than the same period of 2019. As noted earlier, maintenance CapEx in the fourth quarter was $34 million. Maintenance CapEx in 2020 was difficult to predict, primarily because of the uncertainty of being able to find contractors to carry out the work during the pandemic. We were able to hire contractors in the fourth quarter, and maintenance CapEx for the full year was $74.4 million, which was in line with our expectations given the pandemic. For '21 -- sorry, for 2021, we expect maintenance CapEx in of between $80 million and $85 million. Excluding unrealized foreign exchange gains, corporate costs during the fourth quarter of 2020 were $26 million compared with $12.7 million in the fourth quarter of 2019. Several items contributed to the higher costs. Our long-term incentive plan or LTIP costs were $7.3 million higher in the fourth quarter of 2020 compared to 2019. As we've said in the past, LTIP accruals are subject to volatility. And so for the first 9 months of 2020, LTIP expenses were negative $2.4 million. For the full year, LTIP expenses were $4.7 million lower than 2019. Additionally, incentive compensation costs in the fourth quarter of 2020 were $2.6 million higher than the fourth quarter of 2019 when these expenses are usually low. The fourth quarter of 2020 also includes $3 million related to the CEO's retirement and $1 million related to a long-term lease obligation for office space in Calgary, which was acquired as part of the Canexus acquisition. These were partially offset by a $2.6 million claim under the Canadian Emergency Wage Subsidy program. Turning to our balance sheet. During the fourth quarter, we completed the redemption of the debentures that were set to mature in 2021. With the full redemption of '21 debentures, we now have no debt maturities until 2023. We maintain ample liquidity with USD 221.2 million undrawn on our USD 850 million credit facility. We are in compliance with all our bank covenants. In April last year, we suspended guidance because of the economic uncertainty created by COVID-19. That uncertainty continues to prevent us in providing formal guidance. However, our fourth quarter MD&A does comment on certain key items that are expected to affect our 2021 earnings, while cautioning that this is a very fluid situation and that some of our comments are based largely on input from our customer base, which can and will likely change over time. Once economic conditions normalize and our visibility has improved, we will commence issuing formal guidance again. I'll now hand the call over to Scott for some comments on the broader outlook for Chemtrade. Scott?

Thank you, Rohit. First, let me say, while I've met some of you virtually, I am pleased to have this opportunity to meet the rest of you, albeit virtually. I look forward to in-person meetings in the not-too-distant future. While we can't give meaningful guidance with the level of uncertainty we still face, the MD&A's outlook section provides additional commentary on some of our current expectations for 2021. I will touch on some of those, but for the most part, I will try to look a little further ahead to post-COVID possibilities. Before I share my longer-term outlook, I wanted to briefly touch upon the severe freezing conditions experienced in parts of the U.S. and in Texas in particular. Some of our facilities and our customers' operations have been affected. At this time, it's difficult to estimate the financial impact. However, we do not expect it to be material. Turning now to our outlook. As Rohit mentioned, our water solution products are not affected by COVID-19, whereas others such as regen, merchant acid and sodium chlorate are affected by restricted travel, reduced industrial activity and work-from-home orders. We expect our water solutions business to have another good year with steady demand. We expect to see raw material cost increases, which will be offset by productivity improvements and price increases. Not only did this business demonstrate its resilience in down markets, but we also believe there are strong longer-term growth potential due to tighter government regulations and population growth. Two of our water solution products, PAC and ACH, both had a strong year in 2020. We expect demand to continue to grow going forward. We are debottlenecking 2 sites with additional capacity to keep up with the increased demand. In the SPPC segment, regen and merchant sulfuric acid demand will continue to depend on driving and industrial activity. Both of these markets will improve, as the COVID-19 threat diminishes and the economy rebounds. From a refinery utilization rate perspective, 2021 did not begin as well as we would have liked, particularly in California, where stay-at-home orders were in effect. More recently though, these restrictions have been eased, and this should translate into higher demand for our regen services. As far as merchant sulfuric acid is concerned, the recent increases in commodity prices, including metals and fertilizers, which are 2 of the largest demand sources for sulfuric acid, are positive developments. While as a general statement, we don't engage directly in those markets, strong demand from those sectors should have a beneficial impact on the broader market. But it's important to note that we share price movements both up and down with our byproduct supply partners. Ultra pure acid is a somewhat different story. We expect overall reduced demand for ultra pure unrelated to COVID. One of our large customers has decided to use a different supplier. However, we have gained share with another customer and recently gained a new customer. For now, the net impact to us will be lower volume. Our challenge will be to replace that volume. We are confident we'll be able to do that, but it will take some time. Demand, which is primarily from the semiconductor industry, remains robust, and we anticipate it will continue growing in the U.S. in the mid- to long-term outlook. In fact, in the recent past, we had turned away other customers because we were at capacity and demand growth outpaced our ability to add capacity. We are back in touch with those customers and working to take advantage of new opportunities as semiconductor manufacturing increases in the U.S. We believe we will be well positioned to replace and grow this business and have invested in capital upgrades to ensure we are properly set up to meet the increasing quality requirements of this industry. Two major players in the semiconductor industry have announced major U.S. expansions, which is very positive for ultra pure acid demand in the long term. Turning now to chlor-alkali. The positive news, of course, is that our North Vancouver facility is fully back online, and we do not have a turnaround schedule for this year. You will recall that caustic soda is produced as a co-product with chlorine or hydrochloric acid, or HCL, and our production is expected to be constrained by relatively low demand for HCL and chlorine, although more recently chlorine and HCL prices seem to be improving due to increased demand. The outlook for oil has turned positive, and this is leading to higher fracking activity. We are well positioned from an operational and logistical perspective to take advantage of the increased HCL demand, should it be sustained. As a reminder, we can convert up to 60% of our chlorine capacity at North Vancouver into HCL, whereas we've been operating at less than half of that rate. With respect to caustic soda prices, our outlook is for the average royalty spot price to be about $40 less in 2021 than last year. However, we expect the index to increase during the year, and we do foresee better prices going into 2022. Industry experts are forecasting an 8% year-over-year demand increase on caustic that goes into alumina. We believe the outlook is for caustic prices to increase for several years before they get close to reinvestment economics. I imagine almost everyone on the call is working from home during the pandemic. This has reduced the demand for paper, which means lower demand for bleached pulp production, and therefore, lower demand for sodium chlorate. While we expect some improvement in overall North American demand in 2021 over '20, this may lead to increased demand to sodium chlorate, we believe it will not recover to pre-COVID levels this year. And based on our customer mix, we anticipate our sales this year will be similar to 2020. We also expect realized pricing to be lower in 2021 than '20 because of a stronger Canadian dollar relative to the U.S. dollar. There are a couple of industry trends, though, that may have a favorable impact on the market demand and pricing. First, with potentially reduced pulp demand, and therefore, reduced demand for chlorate, there may be some capacity rationalization across the industry. Second, in 2020, several customers closed their production facilities. In Q1, we believe all our customers are operating at close to their capacity levels. Recently, there has been an increase in pricing and demand for pulp, and we are assessing that this will lead to greater chlorate demand. If the market demand does increase for pulp, we could see our customers restarting those sites. And finally, we are pleased to announce today a new project to commercialize our hydrogen co-product with Hydra Energy at one of our electric implant locations. The project includes a fleet of commercial trucks from Hydra, which will be fueled with diesel and our hydrogen. This is the first of hopefully several hydrogen projects to commercialize over the next several years. One of the advantages we have is our source of electrical power is hydroelectric. And therefore, the hydrogen generated by the electrochemical process is considered to be green hydrogen, which generally commands a premium well above its intrinsic energy value. On perspective, roughly 55 kgs of hydrogen is generated per ton of sodium chlorate. This project will have a relatively minor positive impact on our business for the next 4 to 5 years and will become more impactful for us in the year 2027. To summarize, the uncertainty about the duration and extent of the pandemic means the outlook for some of our businesses is difficult to predict for 2021, other than water solutions, which should continue to perform well. Looking a little further ahead when the pandemic is under control and our customers' businesses return to more normal operations, we believe we will be well positioned to serve those customers. We will benefit from increased driving, higher oil prices and increased fracking activity. We also believe caustic soda prices will move out of the prior year's trough and begin a multiyear upward trajectory. We will deliver on targeted growth projects, including ultra pure and PAC and ACH. We are continuing our emphasis on reliability. We have initiated a productivity program across the company that will improve our bottom line. Together, these actions will help us improve our balance sheet and reward our investors. Thank you. Rohit and I will now be pleased to take questions.

[Operator Instructions] Your first question comes from the line of Jacob Bout from CIBC.

Scott, my first question here is just on the outlook for chlor-alkali. So I guess it's really dependent on the shape of the recovery. Can you remind us again what the effective capacity is of North Van? And is there anything that would preclude you from ramping from the 175,000 tons MECU to full capacity?

So Jacob, that remains constrained with chlorine and hydrochloric demand. So we could get to about 200,000 MECU. So we have about 25,000 less than that. We do have the capability to produce more HCL and to move it in the form of chlorine. So it really depends on those -- on that sector recovering.

Right. But is there any -- like how long would it take it to ramp from 175,000 to 200,000? Is that just about...

It's instantaneous. It can be done on a daily basis, and we can ramp up any day.

Okay. And then on the Hydra Energy deal, you're talking a bit longer term here. But are we correct to think that you could contribute 30,000 tons per year of green hydrogen from North Van?

So North Van is not as big a factor because if you think about the chlor-alkali process, part of the hydrogen goes out in the form of caustic soda. So really, the bigger opportunity is in Brandon in the sodium chlorate facility. And so this Hydra project is actually at Prince George chlorate facility.

Got you. And so how much do you think you can contribute?

So Scott mentioned the 55 kilograms per ton of chlorate. And that plant has a capacity of, call it, 80,000 tons. So you can do the math from there. So about 5%, 6% of that.

Okay.

Yes, 5,000 tons.

And the ability to convert other facilities?

Well, Brandon, Manitoba is the big one, right?

Yes. I...

Go ahead, Scott. Scott, go ahead.

Yes. I was just going to say, look, our ability -- so hydrogen is a byproduct. So the ability -- I'll say, it's there. If the -- we have to capture it and then be able to do something with it. So capture, contain it and move it.

Okay. And is there anything that would -- say, in North Van, like are you locked into long-term HCL contracts? Or...

No, it tend to be a contract business.

Okay. Last question is just on the WSSC outlook. You talked about flat year-on-year demand growth. How should we be thinking about long-term organic growth rates? Or how are you thinking about that?

Yes. I would say that -- so long-term organic growth rate for our water business on average is 2% to 3%. We have some of the more specialty products that are growing 5% to 10%, and our larger, more established products on the lower range, probably 2%.

Your next question comes from the line of Joel Jackson from BMO Capital Markets.

A few questions, I'll just do one by one. So if I read throw all the helpful tidbits in your M&A and your guidance, is the way to look at it is that for '21, WSSC is going to be flat. That seems clear. And that we should see some modest improvements in earnings in both SPPC and Electrochem.

Yes. I think that's fair.

Okay. Dive down a bit more for the ultra pure situation. So can you talk about what is the impact on '21 from the loss of the customer? And you picked up another customer. You've expanded elsewhere. So how much -- what's the loss in '21? And do you think you'll be able to pick that up in '22? And anything you can provide on the different margin opportunities on the old customer and the new customer would be helpful.

All right. Thanks. So here's what I'll share, Joel. This situation is changing very, very rapidly. The -- and as you know, as you probably did, the semiconductor market is sold out right now. There's very high demand. And there's like a big need for increased production. And so our ultra pure business in terms of size and scope what we've shared before is about 1/4, 25%, of our asset business. And so we took a big hit. But we are working, as we shared, that we've gained share with another customer. We just picked up another customer as well. So I expect that we will be back to where we were -- where we started 2020 in 12 to 24 months and hopefully on the shorter end of that. But it's changing. I'll say that it's changing a lot. And so what has happened over the past couple of years is that there have been suppliers in Asia that have added capacity, and we are seeing more competition coming from Asia. But recently, I think the industry is being impacted by shipping delays coming out of Asia. So it's harder to find containers and there are delays. And that's -- I think that's part of the issue as well.

And Joel, if I can add one thing there. So you would have read as recently as yesterday, Biden administration is really putting a push on increasing semiconductor production in the U.S. and trying to get more domestic supply chains. So they're not dependent on others, also very strategic production. So I think the midterm outlook is very robust. There have been major expansions already announced by couple of the major players, like multibillion-dollar expansions. So as Scott said, once we get past the short-term stuff, it's really got a very good outlook.

My last question would be, Scott and Rohit, so I just think about the recovery and how you can recover earnings and grow earnings. There's obviously the cyclical, the commodity part. Caustic soda prices are very low, have to recover, right, eventually. So there's that part of it. But also what you can do now internally, different actions, different portfolio changes, different productivity programs to try to grow earnings, cut costs, whatever you have to do. Can you talk about that as you look the next few years? What are your opportunities to monetize on both the commodity cyclical part and on what you can self-help to yourself?

Well, Joel, as you recall, we have shared -- we shared early in 2020 that our guidance on EBITDA was going to be in the range of $300 million to $350 million. And once we get past the pandemic, there's no reason to believe that we should not be back in that similar range. So our strategy is focused on delivering the growth projects that we've talked about. We put that with the market recovery that we expect to see with caustic soda as well as fracking activity. We combined that with an emphasis on reliability and productivity. And I think we'll be on a good growth trajectory.

And Joel, on the caustic soda part, I mean the expectation is that as the index rises during '21, the average is still going to be, call it, USD 225. So that's about USD 125 per ton lower than its average for, let's say, for last 10 years. So that's -- if you look at that being CAD 160, call it, so that time, all invested like $35 million, $40 million just to get to its average. And you look at the -- what the industry experts say, it has to continue growing from there because it gets no way close to reinvestment economics to at least in the $500. So -- $500 to $600. So there's a long trajectory, but even just to get to the average, gives us a decent pick.

And just finally, there'll also be a North Van turnaround in 2022, correct, every 2 years?

That's right. Yes, that's right.

Your next question comes from the line of Ben Isaacson from Scotiabank.

Two questions and then maybe just a housekeeping item. So on the EC segment, you obviously saw Superior sell their assets in the past week. Orbia, down in Mexico, they're looking to exit vinyls. And part of that is the sale of our chlor-alkali assets. And the reasons why both are doing this is to increase the stability or predictability of their free cash flow and ultimately increase their multiple. When you think about Chemtrade, is there an opportunity to do a strategic review? Or is that -- is potentially selling or divesting some of those assets put to rest right now?

Yes. So I say -- I mean, we do look at -- we do look at all our businesses to see what fits -- what makes sense, whether it would be a good value for us. As you know, we've got some of our assets for sale right now. But I think there are -- I mean, I think Superior is very different because they are clearly an energy player, and they want to become a pure-play energy player. I mean, we are a chemical business. So it's not like we have something that doesn't kind of fit in particularly. So I think right -- it's a different situation because -- but having said that, Scott's come in new. And so we are going to look at everything with fresh pair of eyes. And if something makes sense to divest, we will. But it's not an easy story like Superior, which is a energy player. So...

Can you just talk a little bit more about the large customer that decided to obtain acid from somewhere else? Is -- how important is that customer? Do we know why they did that? And what's at risk here? I mean, is there a risk that we see more? Or is this just kind of normal switching, and every so often, you see some customers kind of play musical chair?

Yes. Yes. Well, so first of all, the quality requirements in this space have been getting tighter as our customers are producing smaller chips. The quality requirements have been increasing exponentially actually. And second, that's combined with increased volume. So the combination of increased demand and increased quality, I think, was a challenge for our production. We invested last year in several quality improvement projects at all of our sites. And I'll say, as a result of that, I think we were able to pick up share with one customer and gain another one. But there was another supplier, I think, that picked up -- or that shore could be supplied coming out of Asia. And in terms of the scope of this, as I said, our ultra pure business it's about 1/4 of the acid business. And again, look, all I can say is that I think that -- so I think we're going to have competition from Asia. I think that's not going to go away. But I think what we'll be there is our quality has to be at a point when we meet the demands of our customers. And we're committed to doing that. And we'll make sure that we've got the capacity and the reliability and quality to do that. So we have a short break here in terms of being sold out, and we have been sold out with our ultra pure business the last couple of years. And so we're going to use this break to ensure that we have -- I'll say, that our quality and reliability is exactly where it needs to be for our customers to hit their expectations for the next 2 to 3 years.

That's helpful. And then just a housekeeping item. On corporate expenses, it just caught me a little off-guard. It was a bit higher than I thought -- or I guess, a bit lower than I thought. What's the good run rate for your corporate EBITDA? And are there any one-offs that we should be thinking about either for Q1 or for 2021 as a whole?

So firstly, a good run rate is about $65 million to $70 million. And if you look at where we came in this year, once you strip out some of these items we talked about, including there was a $6 million realized foreign exchange loss. When you strip that out, we actually does fall back into that range. So as far -- and when I look ahead, the one moving part always is our LTIP because these are 3-year plans. You've got to run Monte Carlo simulations and come up with these accruals. And they can fluctuate quite widely. And really what matters is what they are at the end of the period when they get paid out. But in that journey, to get there is sometimes up and down, so that's a hard one to me to predict. But other than that, I think normally, $65 million, $70 million is good. And when I look ahead into next year, I don't -- I mean, I can't think of anything that would be coming in the horizon, but the nature of some of these things is that it's they're hard to predict. But looking right now, I can't really think of anything that's unusual that might come up.

Your next question comes from the line of Steve Hansen from Raymond James.

Just a couple for me, guys. First, Scott or Rohit, I think you mentioned some growth CapEx on PAC and ACH. Can you just give us a sense for the timing on those projects and the rough cost?

Yes. So they're -- well, we're debottlenecking 2 of our sites. The CapEx on that is relatively small, and those expansions are being completed early this year. So the expansions that we're working on will be in the first half. And they will basically enable us to keep up with the growth and demand that we see this year. The PAC and ACH expansions and reason we mentioned that, that is -- for us, it is a relatively, relatively minor expansion. But this is a growing part of the water business. That's why we wanted to include it on here. And we have several, I'll say, of these products that are growing faster than the regular rate.

Okay. That's helpful. Just sticking to water. In the past, going back a year, 18 months now, one of the challenges you did face was the escalating raw material costs relative to the pricing. And in your comments, you suggested that you expect to be able to offset that again. Do you have confidence in that? I just want to make -- get a sense for here whether we're going to get a squeeze as raw material prices rise. Or can you ultimately pass on those costs and roll contracts?

Yes. So -- I think we do. So we have seen the prices for aluminum increase, and so we factored that in. So we are seeing inflation -- we're seeing inflation in our raw material prices, but we are very focused again on productivity across the water business and our other businesses, along with pricing. And I think we'll -- I think those 2 will offset each other.

And Steve, what's interesting is that, as Scott mentioned, the key raw material for water are alumina or aluminum and sulfuric acids. So while -- even if there is a short-term squeeze -- we don't think there will be, but if there is, that's actually really good for our business because the alumina will drive up caustic soda, and obviously, sulfuric acid will benefit from higher pricing. So there's a bit of -- within the business has got a bit up ahead. But so I don't know if that helps.

Yes. No, that's helpful. And just one last one, if I may. It's just on -- 2 of the items you mentioned in your outlook commentary suggested that you're still evaluating or watching. So that would be the pulp price increase and the demand at the E&P side or the fracking activity levels. How far out do you think we are from seeing in those 2 respective industries impacts on the positive side from your business? In other words, how much more activity do we need to see on the rig count before we start to see you guys broadening rates at North Van? And how long do we need to see the pulp price increases last before you get higher chlorate demand? Both of those strike me as is already well in effect, but don't seem to be reflected in your commentary just yet.

Great. So listen, I'm going to start with oil. And so it's really been, within the past recent terms, that we saw oil prices move up to $60. And then -- and actually, just early this week, there are some reports to that oil might be above $70. We have not seen $70 oil, I think, since 2018 or so. So let's talk about rig counts. So let's -- if we start with Canada, the Canada rig count has already moved up some. And we are -- so we are beginning to see more HCL because of that. So rig counts averaged last year in Canada, I believe, high 80s, around 88. But already this year, we're up above 170. And I think the peak, if I'm not mistaken for Canada, is about 200. So we are beginning to see that. U.S., it's quite a bit lower, and they're coming back slower. So peak in the U.S. has been above 1,000, but rigs right now are around 400. So there's quite a bit of room on the rig count to go up in the U.S. But that's going to take some time because I think the industry was moved very -- moved quickly closing the rigs. Banks have been reluctant to loan money. So there needs to be confidence and then we will see that. But if oil is going to be $60 to $70, then we'll go back to see that. And so it's very possible we could see, I think, higher HCL demand really in second quarter, in the second half of the year, depending on what happens with the rig count. Turning to chlorate and the pulp demand. So the increased prices are for market pulp -- or what we call, market pulp. So that's pulp that gets sold to companies that are making paper. And there's a big increase in demand coming from China. So we're still waiting to see if that -- the increase in demand and prices on market pulp is going to translate into bleached pulp. And that's what we're hopeful it will, and we're watching that.

Your next question comes from the line of Nelson Ng from RBC Capital Markets.

Just a quick follow-up on the Hydra Energy arrangement. In Prince George, what are you guys currently doing with your hydrogen? Are you like using it as heats? Are you venting it? Or are you selling it to someone else?