Good morning, ladies and gentlemen, welcome to the Chemtrade Logistics Income Fund Q3 2022 results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require any assistance, please press star zero for the operator. This call is being recorded on Tuesday, November 8th, 2022. I would now like to turn the conference over to Rohit Bhardwaj, Chief Financial Officer. Please go ahead.
Thank you, Sergio. Good morning, everyone, thank you for attending Chemtrade Logistics Income Fund's third quarter 2022 earnings conference call. As usual, joining me today on the call is Scott Rook, our Chief Executive Officer. Please note that this call has an accompanying presentation available on our website, chemtradelogistics.com. The third quarter of 2022 was a record quarter for Chemtrade, with adjusted EBITDA more than double that of Q3 2021. Trends remain broadly favorable across our product portfolio in terms of both market demand and pricing. Our focus on operational reliability and productivity has ensured that we are capitalizing on market fundamentals. We believe that the supportive market conditions we are seeing and the various actions that we have taken as an organization to strengthen our business and drive future growth, positions us well to deliver continued strong performance for the balance of the year and into 2023.
To begin today's call, I will first walk you through our record third quarter results and the drivers of this performance. I will then outline the latest increase in our 2022 guidance, with this being the third consecutive quarter that we have raised this guidance. Scott will then discuss the continued positive market fundamentals we are seeing across our business. We'll also provide an update on our various organic growth projects. Scott will conclude by summarizing the various differentiated characteristics that set Chemtrade apart from many of its peers and position us for continued success moving forward. Following the prepared remarks, we will open the call for your questions. Before proceeding, I would like to remind you that our presentations contain 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 regarding 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 authorities available on sedar.com. One of the measures that we will refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude only non-cash items, such as unrealized foreign exchange gains and losses. For simplicity, although our accompanying presentation will refer to adjusted EBITDA, we'll just refer to it as EBITDA in our remarks as opposed to adjusted EBITDA. Non-IFRS and other financial measures are fully defined in our MD&A. Starting with our consolidated results for the third quarter of 2022, we once again delivered strong year-over-year improvements across our key financial metrics. This included a 42% increase in revenue, 104% increase in EBITDA, and a 327% increase in distributable cash.
While strong chlor-alkali performance was certainly a contributor to these results, it was by no means the only driver. Results improved significantly in both of our segments, with most of our products seeing improved performance. Additionally, our plants operated very well through the quarter, reflective of our continued focus on productivity and reliability. The improvement we are delivering also extends to our balance sheet and cash generation. Our CAD 0.05 per month distribution, which equates to an attractive yield of over 8% based on yesterday's unit price, remains very well covered with a payout ratio of only 32% on a trailing 12-month basis. Our leverage ratio has also improved dramatically, ending the quarter at only 2.4x EBITDA as compared to 6x a year ago. We expect to end the year with slightly lower leverage than the third quarter.
This improved financial flexibility we have produced allows us to capitalize on the attractive organic growth opportunities that we see across our business and to continue generating incremental value for our unitholders. Moving to our segmented performance in the sulfur and water chemicals, or SWC segment, we generated revenue of CAD 311.5 million during the third quarter of 2022, an increase of CAD 82.9 million, or 36%, over the third quarter of 2021. EBITDA for the quarter was CAD 69.5 million, an increase of CAD 10.2 million, or 17%, compared to the third quarter of 2021. Adjusting for the specialty chemicals business, which was sold in Q4 of 2021, EBITDA increased by CAD 13.8 million compared to the prior year period. Increase in SWC revenue resulted primarily from higher sales volumes and selling prices for merchant acid, as well as higher selling prices for V10 and our water solutions products.
End market demand across the segment remained strong in the third quarter. The higher selling prices of merchant acid and water solutions products offset the higher cost for sulfur and freight compared to the third quarter of 2021. As Scott will discuss, we have seen sulfur costs decline recently, which we expect will be a tailwind for our water chemicals business in the coming quarters. Transitioning to our Electrochemical, or EC segment. This segment also had a very strong quarter. Revenue of CAD 208.4 million was up CAD 72 million or 53% year-over-year, and EBITDA of CAD 88.2 million was up by CAD 54.5 million or 162% year-over-year. Increases in ECU revenue and EBITDA is reflective of higher selling prices for each of our chlor-alkali products: caustic soda, chlorine, and hydrochloric acid.
Continued favorable market fundamentals for chlor-alkali chemicals resulted in Chemtrade's MECU netbacks, which is selling price less freight, being up approximately CAD 980 year-over-year in the third quarter of 2022, with approximately half of the increase in netbacks attributable to higher realized prices for caustic soda and the balance attributable to higher realized prices for chlorine and, to a lesser extent, for hydrochloric acid. Asian caustic soda fundamentals, which drive our selling price, were supported by reduced supply in Europe due to very high costs for electricity, the main input cost for chlor-alkali. Demand for HCL was strong due to increased fracking activity in North America. Chlorine benefited from generally reduced supply in the industry. Our Brazil business also delivered a very strong set of results in Q3, benefiting from a broad improvement in demand and pricing across a number of the products.
Meanwhile, our sodium chlorate results were relatively consistent on a year-over-year basis. For both our chlor-alkali products and sodium chlorate, we see factors that give us optimism that some of the positive pricing trends we have seen recently should carry forward into 2023. Scott will provide more details on the outlook momentarily. Turning to corporate costs. Our corporate costs for the third quarter of 2022 were CAD 20.6 million, down CAD 5 million or 20% from the third quarter of 2021. The main driver of this year-over-year decrease were lower LTP accruals relative to the third quarter of 2021, when they were unusually high. Our operating costs remain relatively consistent with the prior year period as our team continues to focus on efficiencies to mitigate inflationary impacts. Moving to our balance sheet. As I noted earlier, we continue to deliver improvements in our liquidity and financial flexibility.
This includes our leverage ratio declining to 2.4 times EBITDA at the end of the third quarter as compared with six times a year ago. It also includes approximately $363 million undrawn on our senior credit facility as of the quarter end, in addition to CAD 36.9 million of cash on hand. We expect to end 2022 with slightly lower leverage than the third quarter of 2022. Stock improvement is reflective of the strong results we have delivered year to date, as well as a number of proactive steps we have undertaken to strengthen our financial position, such as selling non-core assets. In addition, it also reflects the CAD 86.5 million equity financing that we completed during the third quarter of 2022, the proceeds of which will be used to partially finance our previously announced high return ultra-pure sulfuric acid growth projects in Ohio and Arizona.
We remain focused on maintaining a prudent amount of leverage moving forward and hope that our strengthened balance sheet instills our unitholders with confidence about our ability to balance growth, a sustainable distribution, and financial stability in the coming years. Turning to our guidance. Yesterday, we announced an increase in our 2022 EBITDA guidance for the third quarter. We are now expecting EBITDA of CAD 420 million-CAD 430 million this year versus our prior guidance of CAD 360 million-CAD 380 million. The latest increase in our guidance reflects the extraordinary results we have produced year to date, in addition to the ongoing strength in market fundamentals we are seeing for most of our key products, including chlor-alkali chemicals. Notably, our guidance now assumes the average Northeast Asia spot price for caustic soda will be $650 per ton.
This is $360 per ton higher than 2021, $10 per ton higher than our previous assumption. Recall that every $50 per ton change in pricing translates into approximately CAD 10 million of incremental EBITDA for Chemtrade. The remainder of our key guidance assumptions are set out on the slide deck in our MD&A. As with our prior guidance, this increased EBITDA guidance indicates a record year for Chemtrade. The midpoint of the new guidance is CAD 425 million, which represents an expected improvement of CAD 176.5 million over 2021 after adjusting for the sale of the specialty chemical business and the NATO lawsuit settlement in 2021. This is despite the impact of the biennial turnaround at our North Vancouver chlor-alkali facility in Q2 of 2022.
While many chemical peers are facing challenges in the current environment, our continued strong performance and this latest increase to our guidance should help reaffirm to investors that not only are we seeing these same pressures so far, but we are in fact delivering outstanding results. Fundamentals remain very favorable, in many cases have recently improved across our product portfolio. Further, we continue to successfully execute on our strategic plan to maximize the value of our portfolio, and our ongoing focus on reliability and productivity continues to yield positive results. With that, I will now hand the call back to Scott, who will walk you through some of the reasons why we believe our results should remain strong through the fourth quarter and into 2023. Scott?
Thank you, Rohit, and good morning, everyone. Thank you for joining us on today's call. As Rohit said, we continue to see strong momentum across our product portfolio with a number of varied drivers instilling us with confidence for our performance as we close out the year. Starting with our sulfur products, market fundamentals remain supportive for all three of our sulfuric acid businesses. In the third quarter, fertilizer prices declined globally, but were still above historical averages. This resulted in downward pressure on North American sulfur prices, the key raw material for sulfuric acid. Despite the downward pressure on sulfur, the merchant acid market remained steady, given sulfuric acid's broad industrial uses. The lower sulfur costs have led to margin improvement in parts of our portfolio.
In our regen acid business, we continue to see strong demand and pricing on the back of higher refinery utilization rates in the regions where we operate. In addition, our plants have been running reliably, allowing us to capitalize on the market strength. We could see a slight downturn in the regen business if a recession were to materially impact the miles driven in North America. For now, we have not seen any impact. Demand for ultrapure acid also remained strong in the third quarter, despite the recent slowdown in the global semiconductor industry. Ultrapure remains the biggest organic growth opportunity for Chemtrade in the coming years. The medium and long-term growth outlook for ultrapure acid is underpinned by increasing semiconductor production capacity in North America as the U.S. seeks to become self-reliant for chip manufacturing.
While our projects in Ohio and Arizona will add ultrapure capacity to Chemtrade in the coming years, tight supply and demand fundamentals also lead us to expect improved demand and pricing in 2023. Moving over to our water treatment chemicals, during the past few quarterly reviews, we have highlighted the headwinds that the water business was facing from higher raw material costs. We are now caught up on passing through those higher raw material costs to customers and are now starting to see the benefits of lower sulfur pricing. Although sulfur prices in Q3 were up year-over-year, we have seen sulfur prices begin to decline in the third quarter, with Tampa pricing recently falling by about CAD 200 per ton for the fourth quarter.
Our water chemicals customers are primarily on annual one-year fixed price contracts, we anticipate that the falling input costs will result in a margin tailwind for the coming quarters. Demand for our water chemicals continue to grow steadily, and it is worth reiterating that these chemicals are largely non-discretionary. In particular, demand for PAC and ACH is growing at roughly 5% annually, and we are focused on capitalizing on this growth through expanded production capacity, which is expected to come online in Q4 and contribute more meaningfully to our results next year. Turning to the outlook for our Electrochem segment, as I stated on our previous conference call, we expect this to be a record year for the EC segment by a wide margin.
Caustic soda has certainly been a significant driver of this strong performance, but our chlorine performance has also increased significantly, and hydrochloric acid continues to improve steadily. Pricing for caustic soda has strengthened again recently, returning back to close to $700 per ton U.S. Chlorine demand and pricing also remain strong. For both of these co-products, tight industry supply and continued strength in end market demand have been helping to support pricing. Another key factor supporting chlor-alkali pricing is elevated utility costs in Europe and Asia and increased global freight costs. These elevated costs for overseas competitors are impacting the pricing that they are able to charge customers. Given Chemtrade's access to low-cost electricity, we are not facing the same challenges and are advantaged relative to overseas competitors. We are seeing a similar level of pricing gains, but without the corresponding increases in production costs.
In addition, should energy prices in Europe and Asia remained elevated near term, we believe this could continue to support pricing for both chlorine and caustic in the coming quarters. Meanwhile, the hydrochloric acid market continues to improve in line with our expectations. Higher natural gas prices in Europe are leading to increased export activity of natural gas from North America to Europe. This, in turn, driving increased fracking activity in North America and increased demand and pricing for hydrochloric acid. We expect continued improvement into 2023 as this export activity and North America rig count continues to increase. Finally, moving on to sodium chlorate, we are forecasting a significant improvement in sodium chlorate next year owing to two factors. First, as with our chlor-alkali chemicals, elevated electricity costs in Europe and Asia are significantly impacting operating costs for overseas producers.
Producers in North America have not seen the same cost increases, which have given them a competitive advantage globally, and Chemtrade benefits from stable, low-cost hydroelectric power in Canada. This trend is driving an increase in demand for North American exports to those higher-cost regions. Recall that electricity represents about 60% of the variable cost of sodium chlorate production. While energy prices fluctuate over time, we think the recent crisis in Europe, coupled with higher inflation, have raised the baseline for non-renewable energy, resulting in a long-term benefit for our hydroelectric sites. Second, industry capacity rationalizations taking place in North America are expected to result in improved industry operating rates. Given the planned closure of our Beauharnois facility this year, we will see its production volumes absorbed by our other facilities. We also expect to have improved cost structure for sodium chlorate next year.
With that, I would like to provide you with a brief update on the status of our various organic growth projects. These projects are focused in areas where we see a market opportunity and also where we believe we are strategically positioned to capitalize on that market opportunity. Ultimately, the objective is to invest in high-return opportunities that generate sustainable returns and deliver incremental value for our unitholders. Starting with our largest growth opportunity, which is ultrapure acid, both of our projects continue to proceed on schedule. The 15,000 metric ton capacity expansion in Cairo, Ohio, is expected to start up in 2024, and we will be hosting a groundbreaking ceremony at this facility on December 9th. Notably, attendees at the event are expected to include representatives from the American Chemistry Council, various major global foundries, and U.S. Congress.
Our 100,000 metric ton joint venture in Casa Grande, Arizona, with Kanto Group, also remains on track. We contributed $4.5 million of capital towards this joint venture in the third quarter. We are undertaking a FEED study for the project and expect to have more detailed engineering plans and cost estimates in the coming months. Once both projects are completed, we will have approximately 130,000 metric ton of combined new production capacity for ultrapure acid, strengthening our position as the North American market leader for this product and capitalizing on the explosive industry growth expected in the coming years. Meanwhile, our smaller organic growth projects in water chemicals are nearing completion. The additional production capacity of PAC and ACH that we are adding is expected to come online before year-end, contributing more meaningfully to results next year.
We will evaluate additional small water chemical projects that we see both a market opportunity and an opportunity to generate incremental value for our unitholders. Finally, we continue to progress on a project for green hydrogen monetization in Prince George, BC, which is expected to be completed next year. We will provide additional updates on this project and on the potential larger project in Brandon, Manitoba, when we have more meaningful developments to communicate. Before concluding, I wanted to highlight the various strategic initiatives that we are undertaking on ESG. I would encourage you all to visit our website to review our recently published sustainability report. We look forward to updating you over time on the progress we are making across the spectrum of environmental, social, and governance. Now to reiterate and conclude.
Number one, our Q3 2022 EBITDA was more than double one year ago levels, and Chemtrade is poised for a record year in 2022. Number two, the vast majority of our product portfolio continues to see strong market fundamentals, and we expect much of this strength to carry into next year. Number three, we have significantly strengthened our balance sheet. Number four, we continue to deliver improved productivity and reliability. Number five, we have a number of high-return organic growth projects that will deliver incremental value in the coming years. On top of all of these positive characteristics, our portfolio is also much more defensive than that of a typical chemical company. We have previously outlined all of the reasons that enhance the defensiveness of our product portfolio, and that gives us confidence that we will still perform well when an economic downturn does occur.
Some of these reasons include the non-discretionary nature of our water chemicals business, the limited economic sensitivity of the regen acid market, the significant growth anticipated in the ultrapure acid market, and our advantaged access to low-cost electricity relative to overseas electrochemical competitors. Despite all the positive attributes of Chemtrade, we have found that our unit price has been dragged down alongside other companies, most of which do not share the same characteristics. However, we remain confident that as we continue to execute on our strategic plan, investors will increasingly realize our differentiated qualities and the long-term value creation that we are delivering. We look forward to providing even more detail on what makes us different and how we are creating value at our upcoming first-ever investor day on November 18th. Further details are available on our website. We hope to see you all there.
With that, we'll now open the call for Q&A, and Rohit and I would be happy to address any questions you may have. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Do you have a question, please press the star followed by the number 1 on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Do you wish to decline from the polling process, please press star followed by the number 2. One moment please for your first question. First question comes from Joel Jackson from BMO Capital Markets. Please go ahead.
Hi. Good morning, gentlemen.
Morning.
Could you help us bridge? You raised guidance by a little over CAD 50 million for the year, EBITDA, obviously on the second half. Can you bridge as much as you can, as granular as possible, where is that CAD 55 million coming from between caustic pricing, other pricing, volume cost, currency? You tell me. You cover.
Okay. When we gave the guidance in middle of the year, there were a few things we were looking ahead into and thinking about, including there was some caution due to the potential rail strike. The other thing which I don't know if you are aware, there was a Seaspan strike in Vancouver that was affecting kind of incoming shipments of salt and caustic. Those were some things that were weighing on our mind when we gave that guidance. In addition to that, we were looking at the strength in particularly chlorine and HCL. I think, caustic, we didn't change the assumption that much, but chlorine and HCL delivered really strong results. Our regen and merchant business performed extremely well. Our water business that we had been concerned about started to improve with some easing of raw materials and some initiatives that were taken in pricing.
Our focus on reliability and operational performance was extremely good with very little unplanned kind of downtime relative to previous years. Our Brazil business did extremely well, they are poised to have a really good year, better than most years they've had recently. I think those are kind of the big. There are several things that contributed to the increase in guidance. There was a bit of caution because we were in the middle of the year when we gave it, and there were a few things on the horizon that we were concerned with. Yes, FX helped a bit too, it was really a number of a variety of things that helped us.
Let me try the question a different way. CAD 55 million higher guidance. How would you break that down in that bridge between SWC and Electrochem?
Probably I would say 40% in SWC and 60 in EC.
My final question would be, we've seen a lot of volatility in sulfur prices the last bunch of months. Obviously, you have a bit of a different business in terms of contracts and pass-through. Talk about how the volatility of sulfur prices impacts your business second half of this year, and what it might look like going to 2023 as you reprice some things.
There are two aspects to that. One is our acid business. Our acid business is generally quite immune to sulfur. We're able to offset sulfur up or down. There's some contractual, but there's some just market-driven things that happen. It's our water business that was hurt by high sulfur because, as you said before, a lot of that business is municipal one-year fixed contracts. Typically what happens is in a rising raw material environment, your margins are squeezed, and then when raw materials ease off, you start to pick up the benefits. The sulfur reduction you're talking about just happened in Q4. Really there was a bit of impact in Q4, but it's really positioning us well for the next two years. Typically, in the water business, it takes a couple of years once raw materials stabilize and go down, where margins might come down.
For the first couple of years after raw materials stabilize, historically at least, margins have always improved.
Thank you.
Thank you. Your next question comes from Steve Hansen from Raymond James. Please go ahead.
Thanks, guys. Could you maybe elaborate just a bit more on the Brazilian business? We haven't heard a lot from the Brazil business of late, and I think you just referred to it being strong, but maybe just some additional color there on what's driving those results specifically would help.
This is Scott. Number 1, what we are seeing in Brazil are very strong results and a very strong year. Number 1, the exports of pulp, at least from our customers, have been strong and picking up. We work with one large customer. That customer has been adding capacity, and we're benefiting from that, number 1. Number 2, we have a chlor-alkali business there, and that business is strong. We also sell remaining chlorate, and we're seeing strong results from, I'll say, in chlorate there as well. Strong performance across practically all of the products that we have in Brazil, both demand and pricing.
If I can add one thing, Scott. As we've talked in the past, our main customer there, announced a couple of years ago that they want to invest significantly in the mill that we are connected with and make that a more cost-competitive mill. Some of that has been happening, and so we are benefiting from the better cost positioning of the mill that we supply.
No, that makes sense. Okay, that's helpful. Just on the acid, on the ultrapure side in particular, it's been quite a reversal of that business. It wasn't that long ago you were looking to find a home for some of your capacity. Now the market's tightened up quite a bit. I think, Scott, you had referred to improved demand in pricing in 2023. Can you just remind us, is that a contract structure system that works through there? Have you entered into those negotiations as yet or already firmed up pricing? Just where are we at with that sort of look into next year?
Yeah. I would say we've lined up a lot of pricing. This market, the production in North America does not meet all of the demand. There's imports coming in to meet the total demand, and as I have said before, I think we can sell everything that we can produce. We have a big focus to improve our reliability, improve our production. The market's tight in spite of what we've talked about with demand, short-term demand for chips dropping a bit. The overall supply and demand balance for ultrapure acid is very strong right now.
Steve, what really happened when we mentioned that our demand had dropped, it was not so much that demand had dropped, it was one big customer who had decided to make a different supply chain choice and start bringing in imports. This was just pre-pandemic, and as you can imagine, the whole world has changed now and there's a push to onshoring.
Of course
strategically people are making different decisions now, so.
No, understood. That's helpful context. Just lastly, if I may, is around future capital allocation. You clearly have some growth projects lined up here. Have you contemplated the buyback of magnitude here, just thinking about fundamentals carrying over into next year? Arguably, you've got even some additional tailwinds around not having to face the turnaround, for example, other things. You're going to have some incremental cash flow to allocate here. How do you feel about the buyback at this point?
I think, clearly the buyback is attractive. On the other hand, one thing we have said is we are balancing three things here. One is the sustainability of our distribution. Second is maintaining a strength in our balance sheet, and third is organic growth. We have very attractive organic growth opportunities here. I think at this stage, obviously our board looks at our capital allocation, and Scott and I obviously spend a lot of time thinking about it. At this stage, we think it's in the best interest of our unit holders that we continue to invest in the business, grow the business. We have very attractive opportunities, and we are very mindful of leverage. We were in the penalty box for a couple of years.
We don't ever want to get close to that again, so we want to maintain strength in the balance sheet.
Fair enough. Appreciate the time.
Thank you. Your next question comes from Ben Isaacson from Scotiabank. Please go ahead.
Hi, good morning, and congrats on the results. I have a high-level question about how Chemtrade is positioned for a recession or for a weaker macro backdrop. It's really a three-part question. I'll just ask it all at once if I can. Number 1, can you talk about in past recessions, what has the relationship between chlorine and caustic looked like? Is this time going to be any different given what's happening with European energy prices? Number 2, your business model has really evolved over the last few years, and can you just give us a bit of maybe some goalposts? I'm not looking for guidance, but just some goalposts in terms of what the segments could do on the downside in a recession. Finally, can you just talk about how is Chemtrade better positioned for a recession? You've obviously got your leverage down.
You've cut the distribution in the past. Are there other things that investors should be aware of in terms of the cushion that Chemtrade has going into a period of macro weakness? Thank you.
Yeah. Let me see. I'll address those questions. Rohit can add if he likes at the end. In past recessions, the relationship between chlorine and caustic probably has been different. The relationship has been different in the past. I believe what's different now is that with chlor-alkali, 60% of the variable cost is tied to utilities. We're just in a very different environment with global utilities than we have been in with past recessions. I believe that that's going to have an impact going forward. We'll see. In terms of your second question with our business model, and again, how are we set up for a recession? Number one, our water business is nondiscretionary. Nondiscretionary for municipalities, then the growth in industrial uses is more tied to regulatory actions. Those are continuing.
We see continued growth for our water treatment chemicals in spite of any economic slowdown. Next, in past, as we've looked at this, in typical recessions, we've seen refining rates drop maybe 1%-2%, but not very significant. We're looking at that, and we think that it's possible we may see some refinery drops, but as you know, the refineries in the U.S. are running pretty strongly right now. Driving is still there, and so we're optimistic that we will not see a significant slowdown in driving. The other thing about our business, the chlorate market is poised for stronger results. We've seen weakness in the chlorate market for the past couple of years.
Again, as we look at what's happening globally, there's strong interest, again, for exports for chlorate, and I think that's having an impact, or that will have an impact going forward.
If I can add just a couple of things there. On the chlorate, there are two things going on. One is the people returning back to office and schools, et cetera, which will drive demand up a bit. We think even in a recession, that'll offset any kind of drop in demand in a recession. Of course, as Scott said, the big thing is the change fundamentally in North America versus the rest of the world, where North America has become a lot more competitive, and especially Canada, with hydroelectric power. The other thing I'll add is water tends to be actually counter-cyclical a bit because as raw materials come down, and as Scott said, demand is nondiscretionary. Demand stays steady, raw materials come down, so margins actually expand in a recession.
I know there's a bit of talk on the semiconductor side where demand for chips has been slowing down. I think the bigger factor there is, yes, that's true. Firstly, that's not going to impact the investments that people are making because U.S. has to become self-reliant, and so that investment is going to continue. On the other hand, even if globally demand for chips has been dropping because so much of acid was being imported from offshore, we think that the U.S. side is going to be very strong for acid. As Scott said, we can sell every drop we can make, and we don't see that changing in a recession at all. I think in general, our portfolio is pretty resilient in a recession.
Great. Thank you very much.
Thank you. Your next question comes from Nelson Ng from RBC Capital Markets. Please go ahead.
Great. Thanks, and congrats on those strong results. My first quick question is just the PAC and ACH capacity expansions. Can you just remind us how much the total investments for the expansions were and what the potential incremental EBITDA contribution would be?
Yeah. We have not shared specific numbers on that. Yeah. I'm not prepared to share what those specific numbers are. They're smaller in size relative to our Ultrapure announcements, there are multiple, I'll say multiples, small expansions. We have been I'll say this market's growing at least 5% or so a year. As I've mentioned a couple of times, our assets are running full. We've been out of capacity. We've been adding capacity so that we can meet this growing market demand. We have several smaller projects that we've been executing this year. Those projects will be coming online in Q4, and we'll be positioned for growth next year.
Okay. Got it. Just moving to Ultrapure. In terms of the JV, you mentioned that you're working on the FEED. Can you just give us a quick update in terms of timing? Are you still in the early stages of design engineering and costing? When should we expect a narrowing of the CapEx expectation?
We'll have a narrowing view of that in Q2 of next year. Yeah. The Front-End Engineering Design is being worked right now. We'll finish that late Q1, early Q2. There'll be some time to refine that estimate, I think we'll be sharing an updated view a little before mid-year next year.
Okay. If the updates in Q2, would construction potentially start by the end of next year, or what's the timetable for?
Yes.
Okay. Got it.
Yeah.
I guess my next question is in terms of your funding structure. I believe you currently have about, I think, CAD 325 million of debt that's hedged from an interest rate perspective out to December 2024. Can you just talk about your, I guess, interest rate exposure to your higher interest rates? I think most or if not all of your senior debt is hedged, and then I guess when you eventually draw down on your credit facility to construct that ultrapure facility, you will obviously be less hedged. Can you just talk about what your floating rate exposure is right now?
Yeah. Sure. Right now it's nothing because all of our debt is fixed. In fact, we may be slightly over-hedged on our revolving. One thing you may have noticed through our statements is we de-designated some of our hedges, just because we've been generating excess cash flow and we did the equity raise. We've actually ended up being in an over-hedged position, we de-designated the hedges. We think that as we draw next year and start constructing, it's not going to be very material in terms of what our exposure to floating is going to be, even through next year. Clearly, if you look at the amount of excess cash flow we are generating and expect to generate, we don't think it's going to be a material item for us.
Okay, thanks. One last question. I know you're not looking to provide an update on your sale and lease back, but obviously interest rates have moved up and there's a looming recession that people are generally expecting. Is there anything we should read through in terms of how that process is coming along?
No, I think, it's a live process and clearly what we had told you at the start was that either we announce a transaction or we announce that we are suspending the process, and we've done neither. You can read what you want in that. Obviously, it's taking a bit longer. This is a complex transaction. This is a very unique parcel of land, and it has complexities, as you'd expect on an industrial property of this nature. It's taking longer, but it's still a live process.
Great. Thanks for the update. I'll leave it there.
Thank you. The next question comes from Gary Ho from Desjardins Capital Markets. Please go ahead.
Thanks. Good morning. There's been quite a few questions just on the slowing macro environment and potential recession. On that, to close it off, wondering if you can help us, maybe at least qualitatively, if you hit the CAD 420 million-CAD 430 million EBITDA target in a slowing environment, how much of that is repeatable, and how much do you think could go away? Or do you think all of that could be repeatable? Just wondering if you can help us at least qualitatively think through your results looking out next couple of years.
We will not be, let's say, issuing guidance right now for 2023. We've obviously shared a lot of comments on what we expect and the market conditions, but we're not releasing any guidance right now. We will be, though, early next year. In general, the market comments that I would make, at least the general directions to reiterate what we've said here. We see next year, let's say strong demand growth, both pricing, and let's say a strong outlook in ultrapure acid. In particular, we see the water business. We've got capacity expansions in the water that we've talked about. I think that the market fundamentals in chlorate, just as we have covered, are quite strong. Very strong. The chlor-alkali business is very strong right now. We don't see it changing significantly for a while.
Within that, we see hydrochloric both growing in terms of demand tied to increased fracking activity. I think that bodes well. Again, I think that strength in chlor-alkali is tied to the factors that we've gone over. Even in a recession, our regen business should be pretty strong. Again, we've talked about water as well. I think that's our outlook, without putting numbers on it. You can do that.
I'll just add one comment. I think it's very important to think through the ramifications of the energy crisis in Europe, because that is a different thing, and there's no quick fix to that. That has fundamentally changed kind of our electrochemical business because we are benefiting from regulated industries and hydroelectric power. That fundamentally changes the equation and that's something to think through, even if there's a recession now, why it may play out differently than in the past.
Okay, perfect. No, thanks for the color. Just listening to your commentary, you sounded quite, I would say, cautiously optimistic just on the sodium chlorate side for 2023. How torquey can that segment be in particular? I'm not sure if you can give us some guideposts on that one as well.
I'll point you in a direction that might help you. If you look back at when Canexus was a reporting issuer, even after we bought Canexus, they were still a reporting issuer for a couple of years because they had public debt. Their operating segments were structured as chlor-alkali, chlorate, and Brazil. You can go back and check what their historic chlorate margins were. There was a deterioration in the last five years. We're not going to say we're going to go all the way, but you can see directionally what the potential of that business might be. This is prior to the European crisis, because back then Europe was a net exporter of chlorate globally, and now they're a net importer. That has changed. We believe that there's rational behavior in the market.
Anyway, that'll give you a sense of what's the potential for chlorate.
Okay, great. The last one, Rohit, now that I have you here. You mentioned you want to maintain balance sheet strength, not go back to elevated leverage. What do you think is the optimal leverage for your business looking out?
We are targeting a total leverage ratio below 3. Clearly right now we are quite a bit below that. As you know, we've got some investment cycles coming up. The one thing we've said is, we are morphing from an M&A company to an organic growth focus, at least in the short to mid-term. What happens with that is it takes a couple of years to start getting the returns on your investments. Once you start getting returns, it becomes self-perpetuating. During the initial investment cycle, you have cash outflows and no inflows coming in from the project. You do get a little bit higher leverage. We think 3 and below is good. That's what our target would be.
Okay, great. Those are all my questions.
Okay. Thank you.
Thank you. Your next question comes from Andrew Leung from National Bank. Please go ahead.
Yeah, good morning. Thanks for taking my questions and congrats on the results. Most of them have been answered, but just a couple. First, you appointed a new board trustee, announced last night. The experience that the new trustee has is extensively in water. I know you're expanding, you mentioned that several times, water, but is there something to consider? Is that water could be more of a focus for you guys going forward?
Number one, we did expand the board. This new board member comes in with experience in water, but also comes in with a lot of experience in building and construction. He spent his career working at engineering companies. That was something that we did not have as well represented on the board as we would like. Given our significant plant capacity expansions, we thought it would be helpful to have someone on the board with more background in that area. It's also a plus that he's coming in with water.
Yeah. That's great to hear. Thank you. Last one for me. There was some announcement from Vale. I think they're expanding a project in Sudbury and there is more expansion coming. Could there be any incremental supply of sulfuric acid for you there? Anything you can talk to?
I think one of the challenges that site has is that they have some restrictions on their environmental permits on how much they can release into the atmosphere. That's what they were butting up against. There might be some incremental acid, but they would have to make a pretty sizable investment in environmental compliance there. Because the reason they went from two furnaces down to one two years ago was back then they had to spend a significant amount of money on the environmental compliance to capture the rest of the emissions that they needed to. They decided not to do it. Now fundamentals change and they make that investment? Sure. Before they were supplying almost double the acid that they are now. We haven't seen anything more than that.
Frankly, even if we have any private discussions with them, we are not in a position to ever bring those up. We rely on the public statements that are made as well.
Okay. No, that's it for me. Thank you. Good quarter.
Thank you.
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We'd like to thank everyone for your time. I'd like to thank our employees again for delivering the results, and wish everyone has a very nice day. Thank you.
Okay, bye.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. I now ask that you please disconnect your lines.