Chemtrade Logistics Income Fund (OTC:CGIFF) Q3 2022 Earnings Conference Call November 8, 2022 10:00 AM ET
Company Participants
Rohit Bhardwaj – Chief Financial Officer
Scott Rook – President & Chief Executive Officer
Conference Call Participants
Joel Jackson – BMO Capital Markets
Steve Hansen – Raymond James
Ben Isaacson – Scotiabank
Nelson Ng – RBC Capital Markets
Gary Ho – Desjardins Capital Markets
Endri Leno – National Bank
Operator
Good morning, ladies and gentlemen and welcome to the Chemtrade Logistics Income Fund Q3 2022 Results Conference Call. [Operator Instructions] This call is being recorded on Tuesday, November 8, 2022.
I would now like to turn the conference over to Rohit Bhardwaj, Chief Financial Officer. Please go ahead.
Rohit Bhardwaj
Thank you, Sergio. Good morning, everyone and thank you for attending the Chemtrade Logistics Income Fund 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 ’22 was a record quarter for Chemtrade with adjusted EBITDA more than double that of Q3 ’21. Trends remain broadly favorable across our product portfolio in terms of both market demand and pricing. And 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 ’23.
Beginning 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 noncash items such as unrealized foreign exchange gains and losses. For simplicity, although our accompanying presentation will refer to adjusted EBITDA, we will just refer to it as EBITDA in our remarks as opposed to adjusted EBITDA. Non-IFRS and other financial measures are fully defined in our MD&A.
Starting with our consolidated results for third quarter of ’22, we once again delivered strong year-over-year improvements across our key financial metrics. This included a 42% increase in revenue, a 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. Improvements, we are delivering also extends to our balance sheet and cash generation. Our $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.
The leverage ratio has also improved dramatically, ending the quarter at only 2.4x EBITDA as compared to the 6 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 unit holders.
Moving to our segmented performance. In the Sulfur and Water Chemicals or SWC segment, we generated revenue of $311.5 million during the third quarter of ’22, an increase of $82.9 million or 36% over the third quarter of ’21. EBITDA for the quarter was $69.5 million, an increase of $10.2 million or 17% compared to the third quarter of ’21.
Adjusting for the Specialty Chemicals business which was sold in Q4 of ’21, EBITDA increased by $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 regen 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 ’21.
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 $208.4 million was up $72 million or 53% year-over-year and EBITDA of $88.2 million was up by $54.5 million or 162% year-over-year. Increase in EC 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 $980 year-over-year in the third quarter of ’22, 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 was supported by reduced supply in Europe due to very high cost of 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 chloride 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’s not 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 ’22 were $20.6 million, down $5 million or 20% from the third quarter of ’21. The main driver of this year-over-year decrease were lower LTIP accruals relative to the third quarter of 2021 when they were unusually high. Our operating costs remained relatively consistent with the prior year period and our team continues to focus on efficiencies to mitigate inflationary impacts.
Moving to our balance sheet. As I noted earlier, we continued to deliver improvements in our liquidity and financial flexibility. This includes our leverage ratio declining to 2.4x EBITDA at the end of the third quarter as compared with 6x a year ago. It also includes approximately US$363 million undrawn on our senior credit facility end of the quarter end, in addition to $36.9 million of cash on hand. We expect to end ’22 with slightly lower leverage in the third quarter of ’22.
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 noncore assets. Addition it also reflects the $86.5 million equity financing that we completed in the third quarter of ’22. The proceeds of which will be used to partially finance our previously announced high return ultrapure 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 the unitholders with confidence about our ability to balance growth of sustainable distribution and financial stability in the coming years.
Turning to our guidance. Yesterday, we announced an increase in our ’22 EBITDA guidance for the third quarter. We’re now expecting EBITDA of $420 million to $430 million this year versus our prior guidance of $360 million to $380 million. Latest increase in our guidance reflects the extraordinary results we have produced year-to-date in addition to the ongoing strength and market fundamentals we are seeing for most of our key products, including chlorate chemicals.
Notably, our guidance now assumes the average Northeast Asia spot price for caustic soda will be $650 per ton. This is US$360 per ton higher than ’21 and US$10 per ton higher than our previous assumption.
Recall that every US$50 per ton change in pricing translates into approximately $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 of our prior guidance, this increased EBITDA guidance indicates a record year for Chemtrade. The midpoint of the new guidance was $425 million which represents an expected improvement of $176.5 million over ’21 after adjusting for the sale of the Specialty Chemicals business and the NATO Lawsuit settlement in ’21. This is despite the impact of the biannual turnaround at our North Vancouver chlor-alkali facility in Q2 of ’22.
While many chemical peers are facing challenges in the current environment, our continued strong performance and this latest increase to our guidance to help reaffirm to investors that not only are we seeing the same pressure so far but we are, in fact, delivering outstanding results. Fundamentals remain very favorable and 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 to remain strong in the fourth quarter and into 2023. Scott?
Scott Rook
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 3 of our sulfuric acid businesses. In the third quarter, fertilizer prices declined globally but we’re 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 remains steady, given sulfuric acids 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 but 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 ultra-pure 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 in 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 $200 per ton for the fourth quarter. Our water chemicals customers are primarily on annual 1-year fixed price contracts. So we anticipate that the falling input cost will result in a margin tailwind for the coming quarters.
Demand for our water chemicals continue to grow steadily and it’s worth reiterating that these chemicals are largely nondiscretionary. 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 Electrochemicals 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 US$700 per ton. Chlorine demand and pricing also remained strong. For both of these coproducts, 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 our advantage 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 in 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 2 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 nonrenewable 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 9. Notably, attendees at the event are expected to include representatives from the American Chemistry Council, various major GlobalFoundries and U.S. Congress.
Our 100,000 metric ton joint venture in Casa Grande, Arizona with Contra Group also remains on track. We contributed US$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 tons 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 and 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 the 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 1 year ago levels and Chemtrade is poised for a record year in 2022. Number 2, 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 3, we have significantly strengthened our balance sheet. Number 4, we continue to deliver improved productivity and reliability. And number 5, 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 nondiscretionary nature of our water chemicals business, the limited economic sensitivity of the regen asset market, significant growth anticipated in the ultrapure acid market and our advantaged access to low cost electricity relative to overseas electrochemical competitors.
Despite all of 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 18. Further details are available on our website. We hope to see you all there.
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. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] First question comes from Joel Jackson from BMO Capital Markets.
Joel Jackson
Could you help us bridge you raised guidance by a little over $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 the $55 million coming from between caustic pricing, other pricing, volume, cost, currency? You tell me — you tell us.
Rohit Bhardwaj
Okay. So when we gave the guidance in the 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. And the other thing which I don’t know if you are aware, there was the Seaspan strike in Vancouver that was affecting kind of incoming shipments of salt and caustic. So those are some things that were weighing on our mind when we get that guidance. In addition to that, we were looking at the strength in particularly chlorine and HCL. I think caustic, we had — 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 have been concerned about started to improve with some easing of raw materials and some initiatives that were taken in pricing. And then, 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 and we are poised to have a really good year, better than most years we’ve had recently. And so, I think those are kind of the big — so there are bunch — I mean there are several things that contributed to the increase in guidance. But there was a bit of — I mean, 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 but it was really a number of, as I said a variety of things that helped us.
Joel Jackson
Yes. Let me try the question a different way. $55 million higher guidance, how would you break that down in that bridge in SWC and electrochem?
Rohit Bhardwaj
Probably, I would say, 40% in SWC and 60% in EC.
Joel Jackson
Okay. Then 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. Could you talk about how the volatile sulfur prices impact your business second half of this year and what it might look like going to ’23 as you reprice and things?
Rohit Bhardwaj
So there are 2 aspects to that. One is our asset business. And our asset business is generally quite immune to sulfur. We’re able to offset sulfur up or down. And that’s not — there’s some contractual but there’s some just market-driven things that happened. It’s our water business that was hurt by high sulfur because, as we’ve said before, a lot of that business is municipal fixed 1-year fixed contracts. So typically, what happens within a rising raw material environment, you are squeezed — your margins are squeezed and then when raw materials ease off, you start to pick up the benefit. So the sulfur reduction you’re talking about just happened in Q4.
So really, there was a bit of impact, a little bit of impact in Q4 but it’s really positioning us well for the next 2 years. Typically, in the water business, it takes a couple of years once raw materials stabilize and go down, where margins might come down. But for the first couple of years after raw materials stabilized, historically at least margins have always improved.
Operator
Your next question comes from Steve Hansen from Raymond James.
Steven Hansen
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?
Scott Rook
Yes. This is Scott. So number one, what we are seeing in Brazil are very, very strong results and a very strong year. Number one, the exports of pulp at least from our customers have been strong and picking up. And so we work with one large customer. That customer has been adding capacity and so we’re benefiting from that, number one. Number two, we are seeing — so we have chlor-alkali business there and so that business is strong. We also sell remaining chlorate. And so we’re seeing strong results from, I’ll say, in chlorate there as well. But strong performance across practically all of the products that we have in Brazil, both demand and pricing.
Rohit Bhardwaj
If I can add one thing, Scott. So 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. So, some of that has been happening and so we are benefiting from the better cost positioning of our — the mill that we supply.
Steven Hansen
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 has tightened up quite a bit. I think, Scott, you referred to improved demand and pricing in ’23. Can you just remind us, is that a contract structure system that works through there? And 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?
Scott Rook
Yes. So I would say we’ve lined up a lot of pricing. And I would — this market, the production in North America does not meet all of the demand. And so 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. And so 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 but the overall supply and demand balance for ultrapure acid is very strong right now.
Rohit Bhardwaj
And Steve, what really happened when we mentioned that our demanded drop. It was not so much that demanded drop. It is one big customer who decided to make a different supply chain choice and start bringing in imports. And this was just pre-pandemic. And as you can imagine, the whole world has changed now and there’s a push to onshoring. And so I think strategically, people are making different decisions now.
Steven Hansen
No, understood. That’s helpful context. And just lastly, if I may, is around future capital allocation. You clearly have some growth projects lined up here. I mean, 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. So how do you feel about the buyback at this point?
Rohit Bhardwaj
I think clearly, the buyback is attractive. But on the other hand, we really — one thing we have said is we are balancing 3 things here: one is the sustainability of our distribution, second is maintaining a strength in our balance sheet and third is organic growth. And we have very attractive organic growth opportunities here. So I think at this stage, obviously, our Board and we look at — looks at our capital allocation. And Scott and I, obviously, spend about time thinking about it. But at this stage, we think it’s in the best interest of our unitholders that we continue to invest in the business, grow the business. We have very attractive opportunities. And we’re very mindful of leverage. I mean, 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.
Operator
Your next question comes from Ben Isaacson from Scotiabank.
Ben Isaacson
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 3-part question. I’ll just ask it all at once, if I can. So number one, can you talk about in past recessions, what has the relationship between chlorine and caustic look like? And is this time going to be any different, given what’s happening with European energy prices? Number two, can you just give us — 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 goalpost in terms of what the segment could do on the downside in a recession?
And then 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?
Scott Rook
Yes. So I’ll address those questions. Rohit can add if he likes at the end. So in past recessions, the relationship between chlorine and caustic probably has been different. And so 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. And we’re just in a very different environment with global utilities than we have been in with past recessions. And so I believe that, that’s going to have an impact going forward. We’ll see. And then — and so 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, our water business is nondiscretionary, so nondiscretionary for municipalities. And then the growth and industrial uses is more tied to regulatory actions. And so those will remain — those are continuing. And so we see continued growth for our water treatment chemicals in spite of any economic slowdown.
Next, in past and as we’ve looked at this, in typical recessions, we’ve seen refining rates drop maybe 1% to 2% but not very significant. And so 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. And then, the other thing about our business that the chlorate market, I think the chlorate market is poised for stronger results. We’ve seen chlorate been — we’ve seen weakness in the market for the past couple of years.
But 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.
Rohit Bhardwaj
If I can add just a couple of things there. So on the chlorate, there are 2 things going on. One is the people returning back to office and schools, et cetera which will drive demand up a bit. So we think even in the recession, that will offset any kind of drop in demand to a recession. And then of course, as Scott said, the big thing is the change fundamentally in North America versus the rest of the world, that 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 countercyclical a bit because as raw materials come down and as Scott said, demand is nondiscretionary. So demand stays steady, raw materials come down, so margins actually expand in a recession. And then I know there’s a bit of talk on the semiconductor side where demand for chips has been slowing down. But I think the bigger factor there is, yes, that’s true. But 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. And on the other hand, even if globally, demand for chips has been dropping because so much of asset was being imported from offshore, we think that the U.S. side is going to be very strong for asset.
And as Scott said, we can sell every drop we can make and we don’t see that changing in a recession at all. So I think in general, we are pretty resilient in a recession.
Operator
Your next question comes from Nelson Ng from RBC Capital Markets.
Nelson Ng
Congrats on the 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?
Scott Rook
Yes. We have not shared specific numbers on that. But yes and so we — and I’m not prepared to share what those specific numbers are. They’re smaller in size relative to our ultrapure announcements. And so but there are multiple, I’ll say, multiple small expansions. But we have been — so this market is growing at least 5% or so a year. And as I’ve mentioned a couple of times, our assets are running full. We’ve been out of capacity. And so we have been adding capacity so that we can meet this growing market demand. And so 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.
Nelson Ng
Okay. Got it. And then 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? So are you still in the early stages of design, engineering and costing? And when should we expect a narrowing of the CapEx expectation?
Scott Rook
We’ll have a narrowing view of that in Q2 of next year. Yes. So 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. And then I think we’ll be sharing an updated view a little before midyear next year.
Nelson Ng
Okay. And then so if the update is in Q2, would construction potentially start by the end of next year? Or what’s the timetable for…
Scott Rook
Yes. Yes.
Nelson Ng
Okay, got it. And then, I guess my next question is in terms of your funding structure. So I believe you currently have about, I think, $325 million of debt that’s hedged from an interest rate perspective out to December 2024. Is the plan — can you just talk about your, I guess, interest rate exposure to your higher interest rates? So 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. Like can you just talk about what your floating rate exposure is right now?
Rohit Bhardwaj
Yes. So right now, it’s nothing because all of our debt is fixed in fact, we may be slightly overhedged on our revolving. So one thing you may notice from our statements is we de-designated some of our hedges because we’ve been generating excess cash flow and we did the equity raise, we’ve actually ended up being in a overhedged position. So we de-designated, hedged it. So 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 because 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.
Nelson Ng
Okay. And then one last question. I know you’re not looking to provide an update on your sale leaseback. But obviously, interest rates have moved up and there’s like a looming recession in the — like that people are generally expecting. Is there anything we should read through in terms of how that process is coming along?
Rohit Bhardwaj
No, I think it’s a live process. And clearly, what we had told you at the start was that either we announced a transaction or we announced that we are extending the process and we’ve done neither. So you can read what you want. And that obviously, taking a bit longer but this is a complex transaction. This is a very unique part of the plan and it has complexities as you’d expect on industrial property of this nature. So it’s taking longer but it’s still a live process.
Operator
Your next question comes from Gary Ho from Desjardins Capital Markets.
Gary Ho
There’s been quite a few questions just on the slowing macro environment and potential recession. Maybe just on that to close it off, wondering if you can help us maybe at least qualitatively, if you hit the $420 million to $430 EBITDA target, any 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 the next couple of years?
Scott Rook
So well, 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 are not releasing any guidance right now. We will be though, early next year. But 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. And I think that the market fundamentals in chlorate just as we have covered are quite strong, very strong.
The chlor-alkali business is very, very strong right now. And we don’t see it changing significantly for a while. And within that, we see hydrochloric both growing in terms of demand tied to increased fracking activity. So I think that bodes well. And again, I think that strength in chlor-alkali is tied to the factors that we’ve gone over. Regen, even in a recession, our regen business should be pretty strong. And again and we’ve talked about the water as well. So I think that’s our outlook without getting — without putting numbers on it. You can do that.
Rohit Bhardwaj
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 fixed to that. And so that has fundamentally changed kind of our electrochemical business because we are benefiting from regulated industries and hydroelectric power. So that fundamentally changes the equation. And that’s one of the things through even — with the recession now why it may have play out differently than in the past.
Gary Ho
Okay, perfect. And then just listening to your comments here, you sound quite, I would say, cautiously optimistic just on the sodium chloric side for ’23. How turkey can that segment be in particular? Not sure if you can kind of give us some guidepost on that one as well.
Rohit Bhardwaj
I’ll give you — I’ll point you in a direction that might help you. So 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. And they had — their operating segments were structured as chlor-alkali, chlorate and not and Brazil. So you can go back and check what the historic chlorate margins were and there was a deterioration in the last 5 years. So we’re not going to say we’re going to go all the way. Everybody you can see directionally what the potential of that business might be. And this is prior to kind of the European prices because back then Europe was the net exporter of chlorate globally and now they are a net importer. So that has changed. And we believe that the market — there’s rational behavior in the market. So anyway, that gives you a sense of what’s the potential for chlorate.
Gary Ho
Okay, great. And then last one, Rohit, since I have you here. You mentioned you want to maintain balance sheet strength, not go back to elevated leverage. So what do you think is the optimal leverage for business looking out?
Rohit Bhardwaj
So we are targeting a leverage ratio below — total leverage ratio below 3. Clearly, right now, we are quite a bit below that. But as we know, we got the investment cycles coming up. And the one thing we’ve said is — so we are morphing from an M&A company to an organic growth focus, at least in the mid short to midterm. And what happens with that is it takes a couple of years to start getting the returns on your investments. Once you start getting returns, then it becomes self-perpetuating. But during the initial investment cycle, you have cash outflows and no inflows coming in from the projects. So you do get a little bit higher leverage. So we think 3 and below is good. And so that’s kind of what our target would be.
Operator
Your next question comes from Endri Leno from National Bank.
Endri Leno
Congrats on the results. Most of that have been answered but just a couple. First, you appointed a new Board Trust announced last night. And I mean the experience that the new trust has is extensively in water. I mean and I know you’re expanding, you mentioned that several times in the water but is there something to kind of consider, is that water could be more of a focus for you guys going forward?
Scott Rook
Well, so number one, yes, so we did expand the Board and so this new board member comes in with experience in water but also comes in with a lot of experience in building and construction. So he spent his career working at engineering companies. And so that was something that we did not have as well represented on the Board as we would like. And so given our significant plant capacity expansions, we thought it would be helpful to have someone on the board with more background in that area. And it’s also a plus that he is coming in with water.
Endri Leno
That’s great. And last one for me. There was some announcement from Vale. I think they’re expanding project in Sudbury and there is more expansion coming. Could there be any incremental supply of sulfuric acid for you there, if you can talk to?
Rohit Bhardwaj
So I think one of the challenges that site has is that there are some restrictions on their environmental permits on how much they can release into the atmosphere. So that’s what they were butting up against. So there might be some incremental assets but they would have to make a pretty sizable investment in kind of environmental compliance there. Because the reason they went from 2 furnaces down to 1, few years ago was back then, they have to spend a significant amount of money to — on the environmental compliance to capture the rest of the initials that they needed to. They decided not to do it.
Now fundamentals change and they make that investment. So then before they were supplying almost double the assets that they are now but we haven’t seen anything more than that. And frankly, even if you 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, so.
Operator
[Operator Instructions] There are no further questions at this time. You may proceed.
Scott Rook
So we’d like to thank everyone for your time. I’d like to thank our employees again for delivering the results and I wish everyone has a very nice day. Thank you.
Rohit Bhardwaj
Thanks. Bye.
Operator
Thank you, ladies and gentlemen. This concludes your conference call for today. We thank you for participating. And I’ll ask you to please disconnect your lines.
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