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

Hello, and welcome to the Superior Plus Corp. Annual Meeting of Shareholders for 2020. Please note that today's meeting is being recorded. It is now my pleasure to turn the meeting over to Chairman, David Smith. The floor is yours.

Thank you. Ladies and gentlemen, good afternoon, and welcome to the 2020 Annual Meeting of the Shareholders of Superior Plus Corp. I'm David Smith, and as Chair of the Board of Directors of Superior Plus, it is my responsibility and privilege to act as Chair of this Annual General Meeting. In these unprecedented times, the health and well-being of our shareholders, employees and customers is our top priority. In support of public health efforts to manage COVID-19, we are holding this meeting virtually. However, it is important to us that we meet in person with our shareholders, and we intend to resume our in-person Annual General Meeting next year. Naturally, the virtual nature of this meeting will have an impact on the way the meeting is conducted, which I will explain shortly. Our goal is to replicate as best we can the experience you would have had if we were meeting in person, and to preserve the rights of shareholders and proxy holders to address the meeting and to vote on each of the resolutions before the meeting. I welcome our registered shareholders and all guests that are joining this meeting today through our virtual Annual General Meeting platform. We're excited to have your virtual participation in the meeting, and thank you for your interest in the affairs of Superior Plus. This meeting is being live webcast as well. There is also an accompanying presentation for the formal part of the meeting, which is viewable in the virtual Annual General Meeting platform and on our website at superiorplus.com. Please note, the presentation is self-directed. So I will be referring to the slide numbers as we move through the meeting. Also joining me at this meeting is Luc Desjardins, President and Chief Executive Officer; Beth Summers, Executive Vice President and Chief Financial Officer; as well as Darren Hribar, Senior Vice President and Chief Legal Officer of Superior Plus, who will act as secretary of the meeting. The moderator of the meeting is Rob Dorran, Vice President Investor Relations and Treasurer. In the event of a technical difficulty where I will not be able to chair the meeting, Beth Summers is ready to step in and chair the meeting. The Board of Superior Plus is composed of 9 members with extensive business and Board experience. It is responsible for overseeing the management and overall direction of the operations of Superior Plus. Of the 9 Board members, Luc Desjardins is the only director who is also a member of management, and therefore, is not considered independent under regulatory rules. You will find information and disclosure on our existing corporate governance processes in the information circular. Your Board is committed to ensuring that Superior Plus continues to carry out high standards of corporate governance. The Directors of Superior, each of whom is standing for election at this meeting are as follows: Catherine Best, Richard Bradeen, Eugene Bissell; Luc Desjardins, President and CEO of Superior; Randall Findlay, Patrick Gottschalk; Douglas Harrison; Mary Jordan and David Smith. The scrutineer for the meeting today is Kyle Gould of Computershare Trust Company of Canada. The impact of the novel coronavirus or COVID-19 pandemic has been swift, requiring unprecedented actions to control the spread of the virus and has resulted in governments and businesses worldwide enacting emergency measures and restrictions to combat the spread COVID-19. These measures and restrictions, which include the implementation of travel bans, mandated or voluntary business closures and self-imposed and mandatory quarantine periods, isolation orders and social distancing have caused material disruptions to businesses globally resulting in an economic slowdown. The COVID-19 pandemic has led to disruptions to our workforce, customers' production, sales and operations and supply chain. I would like to thank management for their prompt response to ensure that Superior's business operates safely and mitigate potential exposure for our employees, customers and suppliers. The safety, health and the well-being of our employees in the communities in which we operate remain our primary focus. I would also like to thank all of our employees who continue to work through the current situation, ensuring our customers' needs are met to the best of our ability. Our Energy Distribution and Specialty Chemicals businesses have been deemed critical and essential services, products and infrastructure by the federal, provincial and U.S. government. Immediately following the formal meeting, Luc will make a presentation on Superior Plus' first quarter performance and updated 2020 outlook. Note, the presentation contains forward-looking statements and the use of non-GAAP measures. Turning to Slide 1. I would like to take a moment to comment on the voting procedures to be used at today's meeting. Most shareholders or duly appointed proxy holders would have voted in advance of the meeting using the 15-digit control number provided to them by Computershare. If you have voted -- if you voted in advance of the meeting or sent in your proxy and do not wish to change your vote, no further action is required. Once voting has opened, the polling icon will appear in the navigation bar. And after you vote, a message confirming that your vote has been received will appear. The polls will remain open for all matters being voted on until the last item of the formal business has concluded. After each motion, registered shareholders and proxy holders may ask a question related to that specific motion. Please note, we won't be addressing any general questions related to the business, financial results or outlook until the formal portion of the meeting is complete. We will do our best to respond to all of your questions of the motions during the meeting. Any questions not answered during the formal portion of the meeting will be answered during the Q&A session of the management presentation if time permits. If you have a question or comment on a specific motion, I ask that you use the messaging button appearing on the top right side of your screen and type your question or comment in the text box appearing at the bottom of the screen. Once you have finished typing your question or comment, please select the Accept button and submit your question. Mr. Dorran will read your questions to the meeting and forward the question to me. Mr. Dorran has also received some questions in advance of the meeting that Luc or Beth will try to address, time permitting, following the formal portion of this meeting. The online polls are now open. As noted, today's meeting is being held entirely by means of electronic communication facilities in accordance with our bylaws and applicable laws. Superior Plus used the notice-and-access process for provision of its information circular and other meeting materials to shareholders for this meeting. I have received an affidavit from an official of Computershare that proper notice of the meeting has been given and that the notice and form of proxy were mailed on April 2, 2020, to all shareholders of record as of March 27, 2020. The 2019 annual report, which includes the audited financial statements for the year ended December 31, 2019, was also mailed to those shareholders who elected to receive it. I direct that the affidavit, together with a copy of the documents mailed to shareholders, be annexed to the minutes of this meeting. I'm advised by the scrutineer that there is a quorum present. I declare that this meeting is properly convened and regularly constituted for the transaction of business. Only a registered shareholder or a person appointed as proxy holder of such a shareholder is entitled to make or second motions or to vote at this meeting. In order to assure that the meeting covers the required business in an efficient manner, we have prearranged that Darren Hribar, who is a duly appointed proxy holder, to move the motions of business. I will now proceed with the formal business of this meeting. I am now tabling the 2019 annual report, which includes the consolidated financial statements and the auditor's report thereon. The annual report was duly mailed to those shareholders who have requested to receive it. Turning to Slide 3. The number of directors to be elected at this meeting has been fixed at 9. It is now in order to proceed with the election of 9 directors of Superior Plus Corp. The information circular lists the nominees for election for the ensuing year. May I now have nominations for the 9 directors to be elected?

I nominate the following persons for election as directors of Superior Plus Corp. to hold office until the next annual meeting or until their successors are elected or appointed. Catherine M. Best, Eugene V.N. Bissell, Richard C. Bradeen, Luc Desjardins, Randall J. Findlay, Patrick E. Gottschalk, Douglas J. Harrison, Mary B. Jordan, David P. Smith.

Under the bylaws of the corporation, advance notice is required for additional nominations to the Board. There were no other nominations received within the requirements of the advance notice bylaw, therefore, I declare the motion -- the nominations closed. The voting for directors is by way of individual and not by way of slate vote and will be conducted by ballot. Nonetheless, since the number of nominees does not exceed the number of directors to be elected at this meeting, each of the nominees will be elected as directors. May I have a motion to elect the nominees as directors of Superior Plus Corp.? I hereby ask Darren Hribar to move the motion.

I move that the 9 persons who have been nominated be elected as Directors of Superior Plus Corp. to hold office until the next annual meeting or until their successors are elected or appointed.

Thank you, Darren. Rob, have any questions come in?

Mr. Chairman, there are no questions directly related to this motion that have come in.

Voting is now open. If you have already voted or appointed a proxy holder, no further action is required unless you would like to change your vote. If you are participating in the meeting through the virtual platform, please record your vote. [Voting]

Based on the preliminary voting results for this matter, it is expected that the resolution will be carried. We will continue with the remainder of the business of the meeting while the scrutineer tabulates the results of the voting. Turning to Slide 4. Our next item is the reappointment of Ernst & Young LLP as the auditor of Superior Plus Corp. I hereby ask Darren Hribar to move the motion.

I move that Ernst & Young LLP be reappointed auditor of Superior Plus Corp. to hold office until the next annual meeting or until their successors are appointed at such remuneration as may be fixed by the directors of Superior Plus Corp.

Thanks, Darren. Rob, have any questions come in?

Mr. Chairman, there are no questions directly related to this motion that have come in.

Thank you. Voting is now open. If you have already voted or appointed a proxy holder, no further action is required unless you would like to change your vote. If you are participating in the meeting through the virtual platform, please record your vote. [Voting]

Based on the preliminary voting results for this matter, it is expected that the resolution will be carried. We will continue with the remainder of the business of the meeting while the Scrutineer tabulates the results of the voting. As part of Superior's commitment to good corporate governance, the Board has sought a nonbinding advisory vote to accept Superior's pay-for-performance approach on executive compensation, as more particularly described in the information circular. I hereby ask Darren to move the motion.

I move that the form of resolution set forth in the information circular respecting the nonbinding advisory vote regarding Superior's approach to executive compensation be approved.

Thanks, Darren. Rob, have any questions come in?

Mr. Chairman, there are no questions directly related to this motion that have come in.

Thank you. Voting is now open. If you have already voted or appointed a proxy holder, no further action is required unless you would like to change your vote. If you are participating in the meeting through the virtual platform, please record your vote. [Voting]

Ladies and gentlemen, I have received the preliminary scrutineer's report on the voting results. I've been advised by the Scrutineers that based upon the proxies deposited for the meeting and total votes received in advance of the votes entered through the virtual platform, each of the motions and resolutions for all matters to be voted upon at the meeting has been carried. I declare that each of the resolutions carried and direct that the results of the poll and the votes entered through the virtual platform for all matters to be voted on at the meeting be included with the minutes of this meeting. We will also press release the voting results as required by applicable securities laws. I direct that the final scrutineer's report on votes be filed with the minutes of this meeting. That concludes the formal part of the meeting. Is there any other business to come before the meeting? If not, I will entertain a motion to conclude the meeting.

I move that the meeting be concluded.

Ladies and gentlemen, I declare the meeting concluded. We will now move to a short presentation by Luc, and he can address any questions we didn't respond to during the formal part of this meeting. Thank you.

Thank you, David, and good afternoon, everyone. Thanks for joining us for annual meeting. I hope you have all been staying safe and healthy in this truly unprecedented time. I would like to start out by saying thank you to all of our employees, those working remotely and those leaving home each day to deliver propane, provide service work or keep our plant and facilitate operating during this pandemic. I'm extremely proud of the way the Superior team has responded quickly to adapt and to continue to provide our products and services to our customers. During this presentation, I'll take you through our response to COVID-19, how operations are expected to continue and meet customer demand through this time and our outlook for 2020. Beth will also join me on the call to discuss our financial performance, the strength of our balance sheet and our guidance for 2020. At the end, I will be able to respond to any questions you have submitted prior to or during this call, by e-mail or Investor Relations team. I must remind you that some of the statements Beth and I will make are forward-looking in nature. And throughout this presentation, we will be referring certain non-GAAP measure. I ask that you review the material on Slide 25 and 26 for more information on forward-looking statements and non-GAAP measures. Turning to the Slide #8. I would like to remind you that the safety of our employees and other stakeholders and their family is our top priority. At Superior, we have adopted an operating procedure with the health and safety of our employees, our customers and our local community, first and foremost. Our Energy Distribution and Specialty Chemicals business are considered essential for the coal services product and infrastructure in all the states, province and territory in which we operate. As the COVID-19 situation developed in the early part of 2020, we responded quickly as new information became available. In March, we put a ban of nonessential travel, moved to virtual meeting and remote work where possible. We have kept some of our office space open for employees who are unable to work from home, but we have provided strict guidelines to adhere to social distancing and local health authority guidelines. We adjusted the operating procedure for our drivers and service technicians to avoid face-to-face contact with our customers and other employees. We adjusted the operating procedure for essential chemical plant staff to keep them safe and well. In response to the expected impact or the customer demand directly related to COVID-19 and the impact of the lower price of oil and to ensure we continue to be in a strong financial position, we have taken some in-depth look at where we could cut operating expense and capital spending. I'm proud that the management team has been -- they quickly identified and reduced capital spending for 2020 to the tune of $30 million and operating expense have been reduced by more than $30 million for the rest of the year. Our investors often ask about the dividend, and we are in a good position to keep paying our dividend at the current level based on our current estimates. Beth can speak to this more in her presentation, but we target the payout ratio of 40% to 60%, and we are -- we expect to be comfortably in that range for 2020. We see a good opportunity to continue our -- with propane tuck-in acquisition in the U.S. and Canada, and there will likely be more opportunities coming out of the pandemic. However, we're going to be selective on the acquisition we complete in 2020, and we'll focus on those opportunities with the highest return. Turning to Slide #9. I'd like to take a moment to discuss the resiliency of our businesses. Our Energy Distribution business is entirely just -- and we're in the slower part of the year as heating demand decreased in quarter 2 and quarter 3. The second and third quarter have historically accounted for approximately 10% of our Energy Distribution annual EBITDA from operation. The percentage of variable cost in our business vary, but at least 70% of our costs are variable, which enabled us to respond quickly and adjust our cost structure for a change in demand in the energy group. As we look at where we could be most impacted in our propane business, we expect a modest decrease in our volume. Due to the reduced demand for motor oil, commercial and oilfield volumes, we are already seeing a decrease in demand for fuel, especially for the taxi fleet, school bus and fork lifts. The decline in oil price and reduced activity is not new to us. It's been 2 years now. And it's also expect to have an impact on our business. However, many of our customers have been deemed essential and continue to operate. We also still need to meet our home and commercial building, so we expect continued demand and [ colder months ] of course in quarter 4. In our Specialty Chemical business, we continue to see strong demand for most of our products with the exception of hydrochloric acid, sodium chlorite due to the lower price of oil, and sodium chlorate business anticipates to be on plan. Now there is some minus, the reductions in demand, in toilet paper, as more people are working from home and school. College, university are closed. For our pulp and paper customers, however, see strong demand in absorbent tissue, face mask, disposable clothing segment. We're also seeing strong demand for our caustic soda and chlorine product for bleaching and cleaning. So turning to Slide #10. One of the benefits of having 2 businesses is the diversification and exposure to different end markets. We also benefit from our geographic diversification as well. We now generate 61% of our revenue from the U.S. and 35% from Canada and 4% international. Turning to Slide #11. This slide highlights diversification by segment in the different businesses. Our propane distribution business is approximately 72% of our business now. We are the largest propane distributor in Canada, and the third largest in North America. Our U.S. business is now #5 largest propane distributor in U.S. We have annual sales volume of close to 4 billion liter of retail and wholesale propane and other refined fuel products. Our Specialty Chemical business represents 27% of the EBITDA. And we have 3 product lines: sodium chlorate, chlor-alkali and sodium chlorate. Sodium chlorate is 57%, doing very well, 57% over EBITDA, that is. Chlor-alkali is 38% and sodium chlorate 5%. Moving to our sales process of this business in 2019 and into 2020, where we have decided to roll into the business for now. Turning to Slide #12. We've provided a look back of the result of our Energy Distribution and Specialty Chemical businesses. You can see that we have been able to significantly grow our EBITDA operations through acquisition, organic growth and continuous improvement initiatives. Since I started in 2011, we had gross EBITDA from operations by over $300 million. And don't forget, we sold some business with that. This slide also highlights how we have been impacted modestly during downturn of the economy and low commodity cycle, but the business has quickly recovered and continue to grow its trajectory. Turning to Slide #13. This slide shows the historical propane demand in the Eastern U.S., where most of our U.S. retail business operate. As you can see, the volume of this region trend more closely with heating degree days other than economic cycle as the majority of our propane is used for heating application. On Slide #14, we have highlighted our primary focus area for 2020. As I mentioned earlier, the health and safety of employees, customers and other stakeholders is a top priority. So we will continue to operate in a safe manner following all guidelines provided by local, federal authorities. We have done excellent work to identify cost reduction opportunity in response to the slower business anticipated going forward, and we have a lot of improvement initiatives in work. We expect to emerge from the COVID-19 pandemic as a stronger company ready to capitalize on many opportunities we have to grow. The strength of our balance sheet, ability to meet bank covenants and pay dividend is important to us. So we will not lose sight of maintaining our strong free cash flow profile. The propane distribution business, we are focused on safety and cost savings, but we remain on track to realize our target run rate synergy of USD 24 million exiting the 2020 year for the acquisition in NGL U.S. In the first quarter, we realized an additional USD 3.5 million in synergy, which brings the total to the USD 24 million, as mentioned, as a run rate synergy. The significant acquisition opportunity or current market and adjustment market, we will continue to acquire companies at attractive valuations, probably better now, and increase the return of those acquisitions for our best-in-class integration and realization of synergies. Our approach will, however, be disciplined and we're not afraid to walk away from an acquisition if it doesn't meet or return our goals. We expect an increase in fillers coming out of the current environment. Our Specialty Chemical business continues to exceed our expectations for 2020. The downturn of the economy has led to a decrease in byproduct caustic soda in the market from a supply point of view, which has already resulted in higher sales price for April and May, and we believe going forward for the rest of the year. Our sodium chlorate business continue on a steady pace, and we are experiencing some tailwind from weaker Canadian dollar on the U.S.-denominated sales. We're still facing some headwinds in hydrochloric acid and sodium chlorite business due to the reduced oil and gas drilling activity in Canada and in the U.S. I will now turn the call over to Beth to walk you through our financial and credit information.

Thank you, Luc, and good afternoon, everyone. Thanks for joining us in this virtual format today. I'd like to highlight, turning to Slide 16, our performance since the last AGM. Our 2020 first quarter results were 9% lower than the prior year quarter, primarily due to the warmer weather in the U.S. and the continued weakness in the chlor-alkali market. We did, however, have another record fourth quarter and our full year results for 2019 were significantly higher than the prior year due to the contribution from the NGL Retail East acquisition and the related synergies. We made good progress in our tuck-in acquisition strategy, completing 5 acquisitions in 2019 for total consideration of $70 million. We also completed an acquisition in January for $30 million, adding to our retail propane distribution footprint in California. Turning to Slide 17. We expect to finish 2020 at the lower end of our adjusted EBITDA guidance range of $475 million to $515 million, due primarily to the warm weather experienced in Q1 and anticipated impact from COVID-19 related to customer demand and continued weakness in the oil and gas sector. We've also taken measures, which Luc discussed earlier, to reduce the negative impact from COVID-19 to mitigate that loss in customer volumes. We now expect our total debt-to-adjusted EBITDA at December 31, 2020, to be in the range of 3.6x to 4x due to the lower results in the first quarter and the expected impact from the weaker Canadian dollar on the translation of U.S.-denominated debt. Our senior debt-to-credit facility EBITDA leverage ratio, which is one of the main bank covenants, is anticipated to be the -- to be in the same range, potentially 0.1x lower than the total debt-to-EBITDA range. We expect to be well within our 5x leverage limit at the end of 2020. Turning to Slide 18. One of our more restrictive bank covenants is to maintain a consolidated debt or senior debt-to-credit-facility EBITDA ratio of no more than 5x. Our senior debt includes all of our secured debt obligations, including the credit facility, capital leases and deferred purchase consideration. It does not include IFRS 16 leases. Our credit facility EBITDA excludes the impact of IFRS 16 as well and includes the pro forma EBITDA of any acquisition. At December 31, 2019, this ratio was 3.7x. And at March 31, 2020, this ratio was 4x. The increase in the leverage ratio was primarily due to the lower EBITDA in the first quarter and higher debt due to acquisitions completed in the past 12 months and the impact of the weaker Canadian dollar on the translation of U.S.-denominated debt. We've reinstated the DRIP, reduced our planned capital expenditures and reduced the number of tuck-in acquisitions in 2020 in an effort to lower leverage with the anticipated decrease in EBITDA. Our senior debt leverage ratio is still well below the 5x covenant. Our senior secured leverage ratio was 1.2x at December 31, 2019, and 1.3x at March 31, 2020. The senior secured debt excludes the IFRS 16 leases and the high-yield unsecured notes. We are significantly below the 3x leverage limit as required under the credit facility agreement. Turning to Slide 19. We're in a good position from our maturity profile as we don't have any significant upcoming maturities until 2024. We're well positioned and have no immediate refinancing requirements, so we're comfortable with our current liquidity needs. We're committed to our strong BB and Ba2 credit rating. When we evaluate our financial strength, our credit rating and our dividend policy, we'd like to focus on a few things. Firstly, we've established a long-term debt to EBITDA target of 3 to 3.5x, while we execute our tuck-in acquisition strategy. Due to the unevenly warmer weather and the impact of the weaker Canadian dollar on the translation of U.S. debt, our leverage increased since December 31, 2019. We continue to drive towards achieving this range in the next 18 to 24 months. Our payout ratio target is 40% to 60%, and we were at 46% for the trailing 12 months ended March 31, 2020. So we're comfortable with the dividend at the current level. We also like to ensure that we have at least $100 million in liquidity on the bank line at all times, especially in the winter heating months when our working capital requirements are at the highest. Our credit facility had $487 million drawn as of March 31, 2020, and a limit of $750 million. So we have over $260 million in liquidity available. We can further increase that facility by $300 million through the accordion feature. However, we don't anticipate a need to access that liquidity in the near term. We're entering our seasonally slower period in the Energy Distribution business when our working capital requirements and debt levels are at their lowest, so we expect our capacity on the credit facility to increase in the near term. Turning to Slide 20. Our businesses generate significant free cash flow, which we can use for growth and other nonrecurring CapEx to repay debt or make acquisitions. We also have over $500 million in capacity available through our bank facility and the accordion. So we're in a good position from a balance sheet perspective to weather the impact of COVID-19. And now I'll turn the call back to Luc to conclude.

Thank you, Beth. And I'd like to finish on Slide 22. You have seen this slide before. It summarizes what we put importance on at Superior. We have a great management team, as evidenced by our ability to quickly react and reduce expense when faced with COVID-19. We have a strong balance sheet, so I want to thank Beth and her team for their effort to position us very well. Our commitment to the safety of our employees and other stakeholders is also of importance to our success as an organization. And finally, we're in a good position to survive this pandemic, emerge stronger and capitalize on numerous growth opportunity in front of us. Just want to highlight that the only reason we're still on our guide range for 2020, the only reason we think we're probably in the middle [ of an award. ] Going forward, we've had 17% warmer weather in Northeast USA, 10% in Canada, and 17% warmer in U.S. happened this time [ in our winter of the ] year. Our U.S. President was telling us and the Board today, he's been in the business for 12 years, he's never seen it that warm. Now going forward, I guess, March, April and May looks cooler and we so will take it, but it's a smaller quarter than the first quarter of the year. But what that says, I think, to all of you is we really operate well. The economy slowed down, we're still on guidance, and we are adjusting to make sure that what we present to the market, we execute on and are on target. So with that, I would like to address the question that came in ahead of the meeting or during the meeting.

Luc, it's Rob here. We had 1 question come from a guest through our IR inbox, and it's how comfortable are you with the forecast for 2020?

Very comfortable. When you think of -- the way I finish is to really put everything in perspective. We have a situation where we forecast the economy slow down this year and the next year. So we're not doing it short term. We think it's going to last. So let's adapt to that. We have a situation 17%, 10% warmer in quarter 1 in Canada, 17% Northeast USA, and we're on guidance. I don't know of any company out there that you can find that are in that situation that can adapt so fast. Now we also happen to be very fortunate, when businesses that continues in a tough time. We look back, as I recall, and often in a slow economy, the caustic business does well. So we're -- and chlorate is pretty solid, sustainable. So we happen to be lucky to be in industry that doesn't get affected too much by the economy slowdown. And of course, all of you can relate to propane. And in the states where residential to the tune of 85%, 90%, that doesn't change and then slow down the economy. We have proof of that. And Canada, we're a little bit more skew with residential, commercial, industrial. No commercial building still have to meet it. But industrial might -- will slow down, and we expect that. And that's why you've seen the $30-plus million cost reduction in our businesses overall because we've assumed that we will have less volume in the months during the year that have to come, and we're -- adjust ourselves accordingly. So we're really -- I would call it a pretty good job from our management team to have adapt, adjust and continue to perform the way we perform.

There are no further questions.

All right. Thank you, everyone, and be safe. And thank you for investing in our company. I strongly believe that you will be rewarded in time.

This concludes the meeting. You may now disconnect.