Superior Plus Corp. (SPB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Superior Plus Fourth Quarter and Full Year 2019 Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Rob Dorran, VP, Investor Relations and Treasurer. Thank you. Please go ahead, sir.

Thank you, Daniel. Good morning, everyone, and welcome to Superior Plus' conference call and webcast to review our 2019 annual and fourth quarter results. Joining me today is Luc Desjardins, President and CEO; Beth Summers, Executive VP and CFO; and Darren Hribar, Senior VP and Chief Legal Officer. Today's call is being webcast, and we encourage listeners to follow along with the supporting presentation, which is also available on our website. For this morning's call, Luc and Beth will begin with their prepared remarks, and then we will open up the call for questions. Before I turn the call over to Luc, I'd like to remind you that some of the comments made today may be forward-looking in nature and are based on Superior's current expectations, estimates, judgments, projections and risks. Further, some of the information provided refers to non-GAAP measures. Please refer to Superior's annual MD&A posted on SEDAR and Superior's website yesterday for further details on forward-looking information and non-GAAP measures. I would encourage listeners to review the MD&A as it includes more detail on the financial information for 2019 and the fourth quarter as we won't be going over each financial metric on today's call. This will allow us to move more quickly into the question-and-answer period. I'll now turn the call over to Luc.

Well, thank you, Rob, and good morning, everyone. Overall, I'm pleased with the fourth quarter and full year results. The fourth quarter and full year 2019 had strong results driven primarily by our U.S. and Canadian Propane distribution businesses. The fourth quarter adjusted EBITDA before IFRS was $165.7 million. It was a record fourth quarter for Superior and 8% higher than the prior year quarter. The full year 2019 adjusted EBITDA was $485.7 million, which was also a record year for Superior and 30% higher than the 2018. The 2019 full year adjusted EBITDA, including IFRS, was $524.5 million, which was near the top end of our adjusted EBITDA guidance, which was $490 million to $530 million guidance. In the fourth quarter, Canadian and U.S. Propane distribution results were higher compared to last year primarily due to the improved wholesale propane market fundamentals and our ability to capitalize on those benefits, including effective price management and a lower price environment, realized synergy from an NGL and contribution from the tuck-ins completed in 2019. Specialty Chemicals EBITDA from operation in the fourth quarter were modestly higher primarily due to the impact of IFRS 16 and increased sodium chlorate results, offset, in part, by a decrease in chlor-alkali results. In the fourth quarter, we closed on 3 different retail propane acquisition with operation in North Carolina, New Brunswick, Delaware and Maryland. Following year-end, we acquired the propane distribution assets of a propane distributor in Southern California, which was our second retail propane acquisition in that space. From April 2019 to January 2020, we've made 6 retail propane distribution acquisition for a total consideration of $97.7 million. We made this acquisition using cash flow from our operation while also reducing our senior debt credit facility EBITDA leverage from 4.2 at December 31, 2018, to 3.7 at December 31, 2019. We continue to see a large number of acquisition opportunity, more than ever, ranging in sites in the Eastern U.S. and in California. So we have a good pipeline of growth through acquisition as well as organic growth and the capital available to execute on these opportunities, where we stated our DRIPs as well, which provide additional funding for more -- for a pipeline of acquisition, which is very robust. In 2019, our U.S. Propane business achieved record EBITDA from operation of $209 million, surpassing our Canadian Propane business EBITDA from operation for the first time. We're now bigger in the States. We expect the majority of our growth in the coming year to come from U.S. business, given the opportunity to grow through acquisition and the highly fragmented market, and we anticipate organic growth opportunities. Our Canadian Propane business is also expected to grow organically in Central and Eastern Canada, but we continue to face headwind in Western Canada due to broader economic conditions. In the fourth quarter, we made excellent progress on our 2019 realized synergy goal related to NGL acquisition. We've achieved a run rate synergy of USD 20 million exit in 2019, and we still expect to exit 2020 with USD 24 million in run rate synergy. Our U.S. Propane team has done an incredible job on our integration of NGL, which allow us to achieve our internal 2020 goal for our run rate synergy 1 year earlier in 2019. On January 28, we announced the completion of a strategic review process and the potential sale of our Specialty Chemical business. The decision not to sell at this time was a difficult one, but the right decision for all stakeholders in midterm involving Superior. We see higher value accruing to our shareholders in continuing to run Specialty Chemical business, and we may revisit the sale in the future. But for now, we're going to focus on operating the business and executing our plan for 2020. In the fourth quarter, we faced some industry headwind in chlor-alkali business, and it relates to the demand and pricing for caustic soda and hydrochloric acid. And those market fundamentals have continued into the 2020. That is why our forecast in 2020 is less than 2019 as an overall company. We do, however, expect positive momentum to return caustic soda probably by midyear 2020. Certain industry reports are forecasting North America caustic soda market doing good due to incremental demand in North America as well as the recent announcement of the closing of a large producer plant in U.S. during the 2020 year. Now I'll turn the call over to Beth to discuss the financial results and our 2020 guidance.

Thank you, Luc, and good morning, everyone. The fourth quarter adjusted EBITDA, including the impact of IFRS 16, was $176.7 million, which was $23.7 million higher than the prior year quarter primarily due to increased EBITDA from operations, partially offset by an increase in corporate costs related to LTIP costs. The full year 2019 adjusted EBITDA, including IFRS 16, was $524.5 million, which was $150.2 million higher than 2018 primarily due to increased EBITDA from operations, partially offset by increased corporate costs and realized losses on foreign currency hedging contracts. The adoption of IFRS 16 had an $11 million impact on our fourth quarter results and a $38.8 million impact on our 2019 full year results. Fourth quarter adjusted operating cash flows before transaction and other costs per share was $0.83 per share, which was $0.07 higher than the prior year quarter due to increased adjusted EBITDA, partially offset by increased interest expense and cash taxes as well as the impact of increased average shares outstanding. Interest expense increased due to the higher average debt levels related to financing tuck-in acquisitions completed in 2019 using the credit facility. Weighted average shares outstanding increased due to the NGL acquisition financing in 2018. AOCF before transaction and other costs per share for 2019 was $2.32 per share, $0.41 higher than the prior year due to an increase in adjusted EBITDA, partially offset by an increase in interest expense, cash taxes and the weighted average shares outstanding. From a debt leverage perspective, senior debt-to-credit facility EBITDA as at December 31, 2019, was 3.7x, which was near the lower end of the 3.6x to 4x guidance range and 0.5x lower than the leverage as at December 31, 2018. Turning now to the individual business results. Canadian Propane distribution EBITDA from operations for the fourth quarter was $75.6 million, a $17.8 million increase primarily due to higher gross profit and the impact of IFRS 16. This is partially offset by modestly higher operating expenses. Gross profit increased compared to the prior year quarter primarily due to the wholesale propane market fundamentals and Superior's ability to capitalize on those benefits. Wholesale propane market fundamentals primarily benefited from the differential between the pricing at Conway compared to the Edmonton posted prices. Average unit margins were $0.181 per liter compared to $0.152 per liter in the prior year quarter primarily due to the group's wholesale propane market fundamentals and margin management initiatives. Canadian Propane distribution EBITDA from operations for 2019 was $200.8 million, $38.3 million higher than 2018 primarily due to an increase in gross profit, partially offset by modestly higher operating expenses. Gross profit increased $43.3 million primarily due to the impact of wholesale propane market fundamentals and higher wholesale volumes related to contributions from UPE. Operating expenses were modestly higher due to the incremental expenses from UPE, partially offset by realized synergies from Canwest and a reduction in costs related to sales volume decline in Western Canada. Canadian Propane distribution EBITDA from operations for 2020 is anticipated to be lower than 2019 primarily due to the -- an expected decrease in average margins and sales volumes. Average margins are expected to decrease as wholesale propane market fundamentals are not expected to be as strong as they were in 2019. Sales volumes are expected to decrease primarily due to competitive pressures in Western Canada and the assumption of normal weather for 2020 as well as anticipated weaker economic conditions in Western Canada. Average weather for Canada, as measured by degree days, for 2019 was 4% colder than the 5-year average. U.S. Propane distribution EBITDA from operations for the fourth quarter was $78.2 million, an increase of $7 million compared to the prior year quarter primarily due to higher average unit margins, partially offset by modestly higher operating expenses. Average unit margins were $0.389 per liter compared to $0.34 per liter in the prior year quarter primarily due to lower wholesale propane prices and effective management of pricing in a low commodity price environment. Operating expenses were modestly higher due to the impact from tuck-in acquisitions, partially offset by realized synergies. U.S. Propane EBITDA from operations for 2019 was $209.4 million, $106.7 million higher than 2018 primarily due to the incremental contribution from NGL and the tuck-in acquisitions completed in 2018 and early 2019 and lower wholesale propane prices as well as realized synergies related to the NGL acquisition. U.S. Propane EBITDA from operations for 2020 is anticipated to be higher than 2019 primarily due to the incremental contribution from the tuck-in acquisitions completed in 2019 and incremental synergies related to the NGL acquisition. Turning now to Specialty Chemicals. EBITDA from operations for the fourth quarter was $34 million, a modest increase compared to the prior year quarter driven primarily by the impact of IFRS 16. Excluding the impact of IFRS 16, EBITDA from operations was $26.7 million, a decrease of $7.3 million compared to the prior year quarter. This was primarily due to lower chlor-alkali gross profit and higher operating expenses, partially offset by higher sodium chlorate gross profit. Specialty Chemicals 2019 EBITDA from operations was $151.9 million, which was $14.3 million higher than 2018 primarily due to the impact of adopting IFRS 16 and increased sodium chlorate selling prices and sales volumes. This was partially offset by lower chlor-alkali results. Specialty Chemicals EBITDA from operations for 2020 is anticipated to be lower than 2019 due to an expected significant increase in chlor-alkali gross profit, a modest decrease in sodium chlorate gross profit and a modest increase in operating expenses. Chlor-alkali gross profit is anticipated to be lower than 2019 due to the continued weakness in hydrochloric acid pricing driven by reduced oil and gas demand, a decrease in caustic potash sales volumes and pricing related to customer mix and weakness in caustic soda pricing related to supply and demand fundamentals entering 2020 in the North American market. Sodium chlorate gross profit is anticipated to be modestly lower than 2019 as modest improvement in sales prices are expected to be more than offset by modestly lower sales volumes and the impact of a weaker U.S. dollar compared to 2019. Lastly, the corporate results and adjusted EBITDA and leverage guidance. Corporate costs were $2.2 million higher than the prior year primarily due to an increase in LTIP expense related to the share price appreciation. Interest expense was $25.7 million, $2.1 million higher than the prior year quarter due to the increased average debt and effective interest rates as well as the impact from IFRS 16. Debt was higher primarily due to the tuck-in acquisitions completed in 2019. In the fourth quarter, Superior had cash income tax expenses of $6 million compared to a recovery of $3.3 million in the prior year quarter due to income tax true-ups and higher earnings in 2019. We're introducing our 2020 adjusted EBITDA guidance range of $475 million to $515 million, which implies a midpoint of $495 million. Based on the midpoint of our 2020 guidance, this represents a 6% decrease compared to our 2019 full year results. We're facing weaker chlor-alkali markets in 2020, especially in the hydrochloric acid and caustic soda segments of our business, and headwinds in our Canadian Propane distribution business in Western Canada related to competitive pressures and slower activity. In addition, our 2019 full year results benefited from the strong wholesale propane fundamentals, which aren't expected to be as strong in 2020. The low end of the range accounts for warmer-than-normal weather, reduced economic activity in Western Canada, further weakness in North American caustic soda and hydrochloric acid market and any impact on our operations related to the CN rail blockade. The high end of the range accounts for colder-than-normal weather, wholesale propane market fundamentals similar to 2019, increased drilling activity in Western Canada and improved North American caustic soda and hydrochloric acid markets. We're also introducing our total debt-to-adjusted EBITDA leverage range for December 31, 2020, of 3.4x to 3.8x. Leverage could trend to the higher end of the range if wholesale propane prices increase significantly and we complete more tuck-in acquisitions before year-end. Superior's businesses generate significant cash flows that can be used for capital expenditures, acquisitions or to repay debt. During the year, Superior generated $406.2 million in AOCF before transaction and other costs. Transaction and other costs were $29.9 million for 2019. After lease repayments and maintenance capital, Superior had $273.5 million available for dividends, nonrecurring capital expenditures, acquisitions and debt reductions. After dividends and nonrecurring capital expenditures, Superior had $80.1 million available for debt reduction and acquisitions. During 2019, Superior acquired $69.2 million in retail propane distribution assets using the cash available after capital expenditures, lease repayments and dividends. With that, I'd like to turn the call over for Q&A.

[Operator Instructions] Our first question comes from David Newman with Desjardins.

Just looking at your guidance for the entire year with the $15 million, I guess, on the tail end of the range on both sides, is it -- we think about this, should the U.S. sort of whitewash the Canadian downside, such that the net impact is, frankly, just related to caustic soda and hydrochloric acid?

You're like -- you're right on target.

Okay. And have you guys contemplated any sort of second half recovery at all in caustic? Or are you -- what are you assuming, I guess, in your caustic and hydrochloric acid assumptions?

Some improvement in third and fourth quarter for caustic price.

Okay. And hydrochloric? Sorry, Luc, I just need you to reiterate there.

None of -- none in that. No way to predict the year because we don't know.

Okay. And then if you look at the acquisitions you did last year, you spent $69 million and got the California early this year. Is that baked into your guidance? And what was -- what would be the year-over-year EBITDA impact from the acquisitions that you've executed over the past year? And did you include California?

Yes. We've included what was done before the year. What we don't include in the forecast is new acquisition that we'll do during 2020, and our pipeline has never been that big. There's a lot of opportunity this year.

California is in there, Luc, then, or...

California, around -- yes, it is. Yes.

Yes.

Okay. And on the balance sheet, probably more Beth, but the participation rate that you're anticipating on the DRIP, is it kind of in -- around 30%? Or what are you thinking?

Yes. Our view would be 30%, consistent with historic participation rates.

Yes. Okay. And then we've had a really warm start this year. Yes, obviously, it's been -- January and February have been, I think, fairly warm. The basis differentials that you enjoyed between Conway and Edmonton, we do see that, that has shrunk a little bit. But do you think you could see a replication of what you saw in 4Q, that if you saw volume softness, obviously, Western Canada is another story, but that you could skate on [ side ] because the margins would be fairly decent in Canada? And the U.S. did very well as well.

I think from an overall margin perspective, you do sometimes see some offset. I think from a weather perspective, warm weather will have an impact, certainly, when you look at January, February, just because they're such big months from a volume perspective. Just to give you a bit of a sense, in the U.S., in the markets where we are, we were roughly 18% higher -- or warmer than the 5-year average, and that's roughly 19% warmer than 2019. Canada is not quite as much. Overall, nationally, it's roughly been 3% warmer, but that's 11% warmer in the east and roughly 3% colder in the west. So I think from a differential perspective, there could potentially be some offsets there. We entered the year with stronger differentials than the average, but they have narrowed. So I think going forward and what we build in our forecast is an average -- a 5-year average similar to weather on differential performance. So that's what would be built in our forecast.

Okay. And if you look in the U.S., obviously, you must count your blessings that you acquired NGL given the retail and the stickiness from the pricing. Can you tell us what the dynamics are going on down there? I realize you had lower propane prices, and you guys have had effective margin management on that and maintained your prices. But my understanding is that you were able to take price increases on the retail side, such that consumer's bill would be kind of the same, on the back the hazmat fees. Maybe just talk about the dynamics that are going down in the U.S. on the retail pricing side.

Yes. No, the U.S. looks better than ever. We have more acquisition opportunity lineup. We've realized in the $20 million -- as you know, we went up to $24 million, $25 million of synergy. We've realized once we took over the enterprise, that we could increase price and then lose business. We actually have lost several business on the acquisition. Usually, the first year is a bit dicey in that regard. It's very positive. We're putting in place our marketing and sales program that we -- in the last year that we have in Canada. We're getting internal growth in Canada beside the oilfield Western economy in every segment. And then in the U.S., it's going to hover in that regard going forward. So we're not baking in additional acquisition. That will come during the year they will. And I can see 2, 3 years from now a very great position in the States. We are really sure now more and more that our business model, we take over the sales and marketing approach, it's more modern, the efficiency, logistic, and we gained 25% of everything we buy. That's going to continue. So of course, hiccup this year, 2020, more related, like you said, to the chemical world, which kind of we didn't expect. And then when quarter 4 started to happen, we realized, "Oh boy, here we go." But from an energy business, if you look ahead 2, 3 years, it's going to be, I don't know, they'll be about -- they're 70% independent. And we're really the main acquirer of those thing, and we're going to grow, grow, grow and make it a great business. Totally [indiscernible].

Okay. Last one I got, guys, and I'll give up the line. Luc, does this -- does your success in the U.S., does that prompt you to kind of -- because the retail is so sticky, to really kind of quicken the pace on implementing sensors down there and things like that?

Yes. We started already, and this -- next summer, more to come. And we may then develop a new advantage with sensor and dispatching and logistic of the weather to really then maximize logistic. We're doing it in Canada in the next year to 2 of execution. It's another level of gain. And of course, once we have it, we apply our best practice anywhere in North America. It's -- we're fortunate we have a great business model that's giving us -- and we're not finished. We have more data information now that we can -- from a digital point connection with customer, we're bringing efficiency. We have another level of incoming in the next 2 years on both business.

Our next question comes from Jacob Bout with CIBC.

What are your thoughts on -- currently on caustic prices? I know you just said that you're expecting kind of, second half, things are going to improve. But there's a number of moving parts here. We just got off a call with one of your competitors talking about, in a Northeast Asia spot, possibly being up $50 a tonne. I know the U.S. Gulf Coast -- or sorry, the U.S. Gulf producers are looking at raising contract price by $30 a tonne. Are you feeling a sense of optimism here and maybe you've been a bit too cautious?

Well, I don't know how many quarters in 10 years we didn't make our results, but we can -- it's probably not too many, 1 or 2. So I think we're realistic when we start the year, but we never overpromise. We don't like that. In a way, we have a good reputation of saying it the way it is. So we see opportunity, and price have been discussed to be increased. We have not seen the actual increase being executed. So we don't count on it. We're watching it every day, and we hope so big time. But nothing is baked in here that's a dream. We're realistic and we've always been. No, Beth, if anything else comes to mind.

The only thing that I would add, Jacob, just to give you a bit of a sense, when we look at our overall average forecasted pricing in 2020 versus 2019, it's roughly 10% lower, just to give you a sense overall. And as Luc mentioned earlier, we would expect caustic to improve in the back half of the year or that was what our expectation was. If it happens earlier, that's great. But even with that improvement, our view is still, year-over-year, there would be a price decline of roughly 10%.

Okay. And then moving over to the rail disruptions, I guess, twofold, propane but also on the chlorine side. I guess there's been some boil advisories coming out because of chlorine shortages. Maybe just talk a bit about that market dynamic and then how we should be thinking about the propane as well.

Yes. No, I -- it's -- for the moment, there's no doubt we're incurring additional costs because of transportation. If you remember when the last -- the Canadian National Railway situation, we were able, and probably the only propane company in the East, to have propane, and we distributed to all our customers. Nobody ran out. Same thing is happening because we have the scale. We have a big wholesale business. We have the logistic. And we have the Southeast where we're big now, and we can move product from Southeast to Quebec and Maritime. We're doing that as we speak. So we're still in a good position to service customer. Two weeks from now, probably not. And then it's costing us more, more transportation, more logistic cost. Same thing with chemical is we were able to continue to service that customer with additional cost in transportation. So for us, no doubt, there's extra cost. I want to be clear that's not a huge impact unless it continues longer. The chlor-alkali is the real impact here. Then after that, when it comes to rail, so far, worth a couple of million and more, hopefully, it goes away soon, and it gets resolved. And then from the virus, we don't play that game. We don't think that's affecting business. Well, we don't go to that level of making commitment that -- or comment that we don't trust and believe.

Okay. And then maybe my last question here, just on the U.S. Propane business. How should we be thinking about same-store sales basis and versus acquisition growth? What type of growth are you looking for kind of on a same-store sale basis, everything else being equal? And then...

Yes. Our marketing and sales group that we developed and have been developing for a year plus in the States, with the NGL acquisition, we make sure everybody gets it and the -- where pricing intelligence is centralized, where the marketing approach has reduced attrition in half and grows with the sales, about 2% to 3% internal growth. We've done that forever in Canada more than that these days in different segment, except oilfield. So we're putting that in place. And acquisition, it comes and goes. We always say just wait, and you never know which quarter, which month. The pipeline is -- has never been that big as it is right now. So I think internal growth, you can trust on us. We will have 2%, 3% internal growth. We have the investment, marketing and sales in place to make that happen. It's happening.

Our next question comes from Steve Hansen with Raymond James.

Just very quickly, if I may, to follow on the M&A concept. Luc, can you perhaps just talk about -- you keep describing how flush the pipeline is. I think that's well understood. What I'm trying to understand is where your priorities are really going to lie if you've got such a broad set of opportunities. You've got roughly $100 million of capital to deploy per year, if last year is any indication. Where are you going to really try and focus that to get best value for that money?

Yes. I think -- I mean how we will typically look at it, we obviously have the markets which, from a strategic perspective, we like the most, where there are higher margins, returns and, frankly, where we get higher synergies. So if you think of where our footprint is, that would be the Northeast, in those markets. But fundamentally, we'll approach them. There are a lot of opportunities, but again, the timing of those opportunities isn't always predictable. So we will look at them, and we'll basically look at the return. And we'll make the acquisitions where the returns look the greatest, layered in with, longer term, where we want to build. So an example of that would be California synergies aren't as high on acquisitions in California because we're building out that footprint, but it's a great acquisition and we've got our wholesale footprint in California. So now we're building out that retail, and then we'll start getting those higher level of synergies going forward after that footprint gets built in a little bit more.

Okay. That's helpful. And just a follow-up, if I may. I think your comment earlier, Luc, was -- did you suggest you have roughly 2 weeks of flexibility still in your supply chain to manage through the current blockades, and if it's beyond that, then that's when you'll start to feel more significant impact? Is that what I heard?

Yes, there will be 1 to 2 weeks, I would think. And -- but it doesn't mean after that, it's -- after that, what happens is we got to start to [ curtail ]. We're going to start to look at not even filling everything full. You just -- straight to a level and you do more customers. So we'll have a major, major work of logistic to do to make sure customers don't run out, but you don't feel the same rate. Your goal is straight to not filling up the tank totally instead of filling it up. So this is not that it drops a cliff after 8 days or 10. It's just it gets twice as difficult and more logistic to make sure customers don't run out.

Yes. It's similar to the same activities with the strike where there is allocations, where there's noncritical volume, making sure that critical and heating, load, et cetera. But as Luc say, again, we -- you don't necessarily fill the tank. You do partial fills. So there are ways to manage through it, but it becomes much more difficult to manage in the next 1 to 2 weeks on the propane side.

No, understood. With luck, we'll get some political fortitude here and get these issues dealt with sooner rather than later.

Our next question comes from Patrick Kenny with National Bank Financial.

Yes. Luc, I appreciate the guidance for 2020, but now that the chemical sales process is complete, just curious when you'll be unveiling your next 4-year plan. And I'm not trying to be fastidious here, but given the stock is down, I guess, 10% now over the past 3 years, just wondering what you would change if you could go back to late 2016 when you came out with Evolution 2020. Or I guess what might you think about implementing differently within your next 4-year plan?

No. It's a good point, and there are things I would do differently. I think the energy is probably locked because we're really -- from a business model of opportunity for growth in U.S., there's a ton of opportunity. It's going to get better by having the NGL and getting size, went over $200 million EBITDA U.S. [indiscernible] 300 and 400, which is all available, and we get so much synergy every time we acquire. Probably would have sold chemicals a year earlier. I go back to my career. There's been 8-plus big turnaround like this one. And I mean I often say, when you look at changing something, you often take 3, 6 months too long to get everybody in line to decide and move on. So they're just using your [ gas ]. That 3, 6 months, I would go back and do it a bit earlier because we didn't expect the chlor-alkali change. Economy was reasonably good. We didn't expect a big change like that in this November, December and now carrying into 2020. Taken by surprise, the midyear 2019, we didn't see it. When we put the company in the market, we didn't know that was coming and where. Probably we'd redo it and do it earlier.