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

Ladies and gentlemen, thank you for standing by, and welcome to the Superior Plus 2020 Second Quarter Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Rob Dorran, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

Thank you, Shri. Good morning, everyone, and welcome to Superior Plus' conference call and webcast to review our 2020 second quarter results. Our speakers on the call today will be Luc Desjardins, President and CEO; and Beth Summers, Executive VP and CFO. Darren Hribar, Senior VP and Chief Legal Officer, will also be available to answer any questions during the question-and-answer period of today's call. 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 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 second quarter 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 the second 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. Thank you for joining the call. Overall, we delivered good results in the second quarter, considering the challenges we were facing related to reduced economy activity, reduced activity in the oil field and challenging hydrochloric acid market in Specialty Chemicals. Our second quarter adjusted EBITDA was $67.3 million, $8 million or 13% higher than the prior year quarter, primarily due to an increase in EBITDA from operations and lower corporate costs. I'm proud of the fact that our dedicated workforce, over 4,000 employees, have been able to maintain safe and reliable operation during this challenging time. We continue to deliver critical energy specialty chemical products to our customers and safely service the community in which we operate. The resilience demonstrated by our team members from every level of the organization gives me confidence we will continue to execute our strategy and maintain our commitment to safety and continuous improvement through operational excellence. At Superior Plus, we have continued with our modified business practices with the health and safety of our employees, our customers and local community as our first priority. As our propane distribution and Specialty Chemicals businesses are considered essential and critical services and infrastructure in all the provinces, territories and states in which we operate in the U.S., Canada and Chile. We have continued to service our customers that have been classified as essential. In response, we anticipate the impact of COVID-19 as a part of our ongoing cost-saving initiative, we took immediate action to protect our business and financial strength in the effort to position Superior to emerge from this situation even stronger. In 2020, we have reduced our planned capital expenditure by about $30 million and reduced our expected operational expense by $30 million, even though we continue to look into all those costs. So more is coming. I'm proud to tell you we are on plan for the cost reduction and capital expenditures reduction as of the second quarter. Consistent with our first quarter updated, we expect to finish '20 at the lower end of our previously communicated adjusted EBITDA range of $475 million to $515 million, primarily due to the impact of the warm winter in the eastern region of U.S. and Canada as well as the anticipated impact from COVID-19 and the low price of oil reduced drilling activity impacting the Western Canadian economy. Although, we had an excellent second quarter due to strong propane distribution margin, cost reduction and colder weather in April and May, we still anticipate there will be modest negative impact on our business due to the economic recession related to COVID-19 shutdown and the lower price of oil and reduced drilling activity. We have done a super job of adapting and adjusting to the decline in our sales volume related to slowdown of the economy and the low price of oil, which enabled us to maintain our adjusted EBITDA guidance for 2020 at the lower end. I'm proud of our employees and our ability to respond quickly to this unprecedented situation. I would like to mention some highlights of the second quarter in recent weeks following the end of the quarter. On June 8, we announced that Brookfield would invest USD 260 million in our Superior exchangeable preferred share investment, and we closed the transaction on July 13. We have used the proceed from Brookfield Investment to immediately reduce our debt and leverage and we plan to use our ample liquidity and ability to execute on acquisition to more aggressively pursue acquisition, [indiscernible] the U.S. retail propane distribution space. We have never seen a backlog of potential acquisition as we have right now. On August 3, we closed on the acquisition of Champagne's Energy, USD 27.3 million, which had an additional 42 million liters for U.S. propane distribution business in the Maine. We have many opportunity to grow requisition in the Eastern U.S. and in California, and we have a robust, like I said earlier, bigger pipeline than we've ever had in the last many years. We expect there will be more acquisition opportunity coming out of the economy slowdown as many small and mid-sized propane retail distributor company has been negatively impact and not commercial customer demand and increased cost to do business, as many of them are aging and there are [ 70,000 ] -- the whole market in the state being independent, no doubt that people are requestioning their lives going forward and more and more deals will come our way. We continue to realize synergy of NGL retail acquisition in our recent tuck-in acquisition. We still expect to exit 2020 with at least USD 24 million in run rate synergy related to NGL. We were able to reduce our operating expense in the U.S. propane distribution business by $5.5 million in the second quarter compared to prior year quarter due workforce optimization initiative utilizing our Superior operating platform we developed in the Canadian propane distribution business, and we're now applying it to our U.S. business. Second quarter EBITDA from operations was $76.9 million, $5.5 million or 8% increase from the prior year quarter primarily due to higher results from U.S. propane and Canadian propane, partially offset by some lower results from the Specialty Chemicals. In the second quarter, the U.S. Propane result increased compared to prior year quarter due to higher margin and lower operating expense, partially offset by lower sales volume. U.S. Propane EBITDA from operation for 2020 is anticipated to be lower than 2019, but not by too much, but primarily due by the significant warmer weather experienced in the first quarter. When you think of the first quarter warm weather cost us $30 million of EBITDA, and we are calling it that it will be on our guidance this year. So partially offset by incremental contribution from tuck-in acquisition, we didn't have too many in the past, there will be a lot in the future and complete our 2020 and fourth quarter of 2019. The incremental synergy related to NGL acquisition and the tuck-in acquisition. Canadian Propane result for the second quarter were modestly higher than the prior year quarter due to decrease in operating expense and higher average margin, partially offset by the decrease in volume due to the economy. Canadian Propane EBITDA from operation 2020 is anticipated to be lower than 2019, somewhat primarily due to an expected decrease in sales volume and average in this margin, partially offset by a decrease in operating expense. Sales volume are expected to decrease due to the impact of COVID-19, reduced activity in the oil and gas in Western Canada and the related low price of oil. Specialty Chemicals EBITDA from operations in the second quarter was somewhat lower primarily due to the decrease in sales volume of chlor-alkali price, partially offset by a modest increase in sodium chlorate price, the decrease in electricity costs and the reduction of operating expense again. Specialty Chemicals EBITDA from operation for 2020 is anticipated to be lower than 2019 due to an expected decrease in chlor-alkali gross profit, partially offset by a modest increase in sodium chlorate gross profit and a modest decrease in operating expense. So now I'll turn the call over to Beth to discuss the financial result in more detail.

Thank you, Luc, and good morning, everyone. Looking at the financial highlights for the second quarter, our consolidated second quarter adjusted operating cash flow before transaction and other costs per share was $0.23 per share, which was $0.05 higher than the prior year quarter due to the increase in adjusted EBITDA and decreased interest expense, partially offset by an increase in cash taxes. Interest expense decreased primarily due to lower average interest rates on our variable rate debt and modestly lower average debt levels. Superior consolidated net income of $7.5 million compared to a net loss of $29.3 million in the prior year quarter, primarily due to higher unrealized gains on derivative contracts and foreign currency translation of borrowings and lower SG&A costs, partially offset by an increase in income tax expense. Turning now to the individual business results. Canadian Propane EBITDA from operations for the second quarter was $21.3 million, a $1.2 million increase compared to the prior year quarter, primarily due to higher adjusted gross profit and lower operating expenses. Adjusted gross profit increased compared to the prior year quarter, primarily due to effective margin management and a low wholesale propane price environment, partially offset by lower sales volume. Average unit margins were $0.194 per liter compared to $0.169 per liter in the prior year quarter due to margin management initiatives and customer mix, partially offset by modestly weaker wholesale propane fundamentals. Total sales volumes were 360 million liters, a decrease of 77 million liters or 18%. This was primarily due to reduced demand in the wholesale, oilfield, commercial and motor fuel segments. Average weather across Canada, as measured by degree days, was 2% colder than the prior year quarter and 8% colder than the 5-year average. Operating expenses were $6.4 million lower due to cost reductions in response to lower sales volumes. U.S. Propane EBITDA from operations for the second quarter was $27.1 million, an increase of $14.3 million compared to the prior year quarter. This was primarily due to average unit margins, higher average unit margins and lower operating expenses, partially offset by modestly lower sales volumes. Average unit margins were $0.462 per liter compared to $0.387 per liter in the prior year quarter. This was primarily due to lower wholesale propane prices and effective management of pricing in a low commodity price environment, the impact from the translation of U.S.-denominated gross profit and, to a lesser extent, customer mix related to a focus on organic growth of higher-margin propane customers. Total sales volumes decreased 11 million liters or 5%, primarily due to the lower commercial and wholesale volumes, partially offset by higher residential volume. Average weather, as measured by degree days, across the markets where Superior operates in the Eastern U.S. was 30% colder than the prior year quarter and 28% colder than the 5-year average. Colder weather is less of an impact in the second quarter due to lower demand from heating end-use customers. Operating expenses were $5.5 million lower than the prior year quarter due to cost reductions related to workforce optimization initiatives and realized synergies from acquisitions. Turning now to Specialty Chemicals. EBITDA from operations for the second quarter was $28.6 million, a $10 million decrease compared to the prior year quarter. This is primarily due to lower gross profit, partially offset by lower operating expenses. Gross profit decreased due to lower chlor-alkali sales prices and volume and lower sodium chlorate sales volume, partially offset by higher sodium chlorate sales prices and lower electricity mill rates. Operating expenses decreased primarily due to cost reduction initiatives related to COVID-19, lower freight costs related to reduced sales volumes and the impact of the closure of the Saskatoon sodium chlorate facility, which occurred in 2019. Lastly, to talk about corporate results and the adjusted EBITDA and leverage guidance. Corporate costs were $7 million, a decrease of $1.5 million compared to the prior year quarter, primarily due to lower discretionary spending and cost reductions related to COVID-19 and the lower LTIP expense related to the share price decline. Interest expense was $24.3 million, a decrease of $2.2 million. This was primarily due to lower average interest rates on variable rate debt and modestly lower average debt level. Interest rates on variable rate debt were lower due to interest rate cuts by the Bank of Canada and the Federal Reserve in 2020. In the second quarter, Superior had cash income tax expenses of $2.6 million, a modest increase from prior year. We still expect to finish at the lower end of our 2020 adjusted EBITDA guidance range of $475 million to $550 million, primarily due to significantly warmer-than-average weather experienced in the first quarter in the U.S. as well as the anticipated impact from COVID-19 and the lower price of oil on our business and our customers. Average weather, as measured by degree days, for the remainder of 2020 is anticipated to be consistent with the 5-year average for Canada and the U.S. The low end of the range accounts for warmer than normal weather for the remainder of 2020, further weakness in economic activity in Western Canada, further weakness in North American caustic soda and hydrochloric acid market and any further volume decline related to COVID-19. The high end of the range accounts for colder-than-normal weather for the rest of 2020, wholesale propane market fundamentals similar to 2019, increased drilling activity in Western Canada, improved North American caustic soda and hydrochloric acid market and faster economic recovery from the COVID-19 pandemic. From a debt and leverage perspective, the total debt to adjusted EBITDA leverage ratio for the trailing 12 months as of June 30, 2020, was 3.7x. This compares to 4x at March 31, 2019. The increase in the leverage ratio from March 31, 2019, was primarily due to higher adjusted EBITDA and lower debt as cash generated from operations was used to repay debt and the impact of the stronger Canadian dollar on the translation of Superior's U.S.-denominated debt. We're confirming our guidance for total debt to adjusted EBITDA leverage at December 31, 2020, to a range of 3 to 3.5x, consistent with our prior disclosure on June 8, 2020. With that, I'd like to turn the call over to Q&A.

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

Strong results. With the strong quarter, though, effective margin management, I think Luc had flagged last time $10 million to $11 million in permanent savings. FX is working your way and then you're going to close Champagne, and congratulations on Champagne in the third quarter. I would have thought you might have raised your guidance more towards the midpoint of your range. So you touched on it and certainly Q1 was tough, but the guidance was provided at the end of Q1, then you had a better quarter. What are the key reasons you think overall for your caution? Is it just COVID, oil and gas, Western Canada caustic rolling over and hydrochloric acid? Maybe long-winded question, but just trying to get a sense of where your head was at on setting the guidance where it is.

Very good point. And maybe I will start a bit and give you more color. There's no doubt that there's a lot of variable things going out there that we cannot forecast completely as we did in the past years and be more in tune by the million, which we did in the past year. There's more variable out there that some are -- many of them outside of our control. Very confident with our guidance, things are really moving well. But to take a chance to change the guidance at this stage, we have still quarter 3 and 4 ahead of us. So we kind of figure we're in the guidance and that's what we decide to continue with our past communication. And we're not the type, as you know, that change guidance from quarter-to-quarter. So it's a bit -- we just wanted to be cautious and maybe Beth, more detail to add to that?

Sure. Just as a little bit more context around it. We're pleased with the second quarter, but it is a lower quarter from a contribution perspective overall for the year, as you'd be aware. So if you think of our range of $475 million to $515 million, it's roughly $20 million on each side of the midpoint. So again, to put Q2 in context, it was higher by $8 million versus 2019, modestly higher than potentially our expectations, but that would still have us within the lower end of the range, if you want to look at it in the magnitude of the Q2 outperform. And again, as you flagged, being cautious from a COVID-19 perspective, we didn't necessarily see as much impact of propane as we initially would have expected, but we're seeing more headwinds on the chemical side. So from that perspective, as we look at it going forward for the year from a cautious perspective and not knowing exactly what is going to happen, we were comfortable with the low end of the range.

Okay. Well, we'll stay tuned and I'm sure you'll beat your guidance by the end of the year. Second question. On Canadian Propane margins, the build-out of -- there's a lot of build-out over the export capacity in Western Canada, of course. And the Western Canadian market could tighten. Do you think there's a chance here that it could drive the basis differentials between Edmonton and Conway? So I guess, ultimately, what is your forecast on sort of the Canadian margins? It was a good -- great quarter from a margin perspective, but what should we anticipate there?

Yes. And over 90% of our propane comes from natural gas. So there is a high level of confidence that there won't be a tight market out there that we will have, and that's how it could supply [ in the fall ]. And then when it comes to the difference in price in -- for our wholesale business and for our retail, I'll ask Beth to answer that.

Yes. And we're referring to the Edmonton-Conway spread. Towards the end of the quarter, we did see it moving more towards the 5-year averages where it has been more robust for the first part of the year or the first half of the year. So overall, when we were looking at the second quarter, the second quarter -- those differentials were lower than you would have seen in 2019. So we would expect them towards the remainder of the year to come back more in line with that -- with the 5-year average. And fundamentally, if you want to think about that being lower than we would have seen in Q2 at the beginning -- the beginning of Q2 and in Q1, it reflects the fact that the Western Canadian market right now is quite healthy from an inventory perspective, and domestic demand also has seen some pressures from the reduction in the oil field activity. So again, our expectation would be more so the 5-year average differential.

Okay. And similar in the U.S., propane prices have recovered from the lows, I guess, earlier in the quarter to some degree. And you've had very effective margins on the back of that. Any forecast? Like this is a very lofty number again. So on the U.S. side, should we be modeling a little bit lower than what you had in the quarter?

Yes. We would expect the low propane prices did allow us to pick up some incremental margin from some of the customer base. We are expecting, with the commodity prices recovering and being a little higher, for that ability for the remainder of the year to be narrower. So yes. It's the long way of answering. You're correct if you want to think of the U.S., bringing it back more in line when you look at the whole year to the margin which is at USD 0.25 to USD 0.30 or CAD 0.34 to CAD 0.41 is the more reasonable range to look at for the whole year and similar in Canada, over at -- yes.

Excellent. And last one for me. Chlor-alkali has been weighed down by caustic rolling over and then the downward slope in hydrochloric acid, which doesn't seem to stop. So taken together as sodium chlorate where the volume -- I'm not sure if the volumes are coming back up to some of the outages, but what does the second half look like for Specialty Chemicals overall?

I could start and Beth, I'm sure you have additional points to make. So we did adjust our forecast to be a bit lower in the chemical for the next 6 months. Price of caustic was going up for second quarter, and now it went down. On the chlorate, we have enough -- our sales for this year are all planned. So we're in good shape there. A bit lower chlorate volume because one of our big customers has a big outage in their plant and they have to repair the plant and probably won't be back until the following year, next year, 2021. So it's kind of a little bit less on chlorate because of that particular customer. Now we're trying hard to place it on export. We have some good export business, a lot of connections around the world. Sometimes last minute so it could be hard to place. But the -- and then for next year, we have about 25% left of our chlorate contract to fill up our plans for next year. So that's -- when [ you think we're in obvious ] -- that's kind of reasonable, even not so bad at all from next year prediction. So now chlor-alkali, I guess, is the area that's more difficult to predict. No doubt on chlorate. It's a very solid, sustainable business and we do export. But this year with COVID, all the offices are not using a lot of paper. And we're only [ 7% ]...

I'm hitting print-at-home a lot.

No. We don't have a lot on the paper side of our total mix, about 7% what our competitors have, and that creates a competitive -- more pressure from our competition to get volume that comes available month by month. So net-net, we did reduce our forecast to be cautious for ERCO for the rest of the year. We really think ERCO, when you look at 10 years or 20 years, it's pretty much at the bottom of the cycle right now. I'd like to stay there under the year or so. But we're looking at different angles to get ERCO back to more growth in the future, we'll see. So Beth, I'd like you to answer the [ second Q ].

Well, I was just going to say -- to summarize at a high level maybe one way as opposed to going through it on a line-by-line or a product line by product line basis initially anyway, is that the second half to be modestly better than the first half in all the product lines, potentially other than hydrochloric acid, which is you had noticed, I think, from our perspective, still has a lot of pressure on both price as well as on volume.

Well, excellent results guys.

Our next question will come from Jacob Bout with CIBC.

I want to talk a bit about M&A. Now that Brookfield has closed, how are you expecting to step that up? I noticed you had one small acquisition for Champagne. Maybe talk a bit about the multiple you're paying. And are things getting a little bit more reasonable in the U.S. right now as from a valuation perspective?

Yes. I know and I've said it before, I think you can't let crisis goes to waste. I don't where I've heard that. I think it was Obama that said that one day, and it kind of clicked with me. So that's why we're taking so many actions to stay on course with our EBITDA and guidance. And it's happening to -- it's helping. What's happening is we kind of didn't go hard at acquisition until Brookfield came in. So for the last year, we were not pursuing acquisition as much as we could have. And the main reason was we didn't take the market like the fact that we were 4x leveraged. So now that we could breathe and we could have a good banker investor with us as a great partner, and then we have the COVID and a lot of -- 70% independent, they just -- it's just kind of changing the landscape big time. We're getting more calls than we've ever received. We have a lineup of acquisition that's very robust. And you will see us starting to roll them in at a much higher level than the past. Higher EBITDA, better quality business. You're paying -- at the high end, we'll pay 8x. We don't want to pay more than that. Average, we're probably paying 7 on deals. And then when you look at our business model, which we've built in more than once, and we've analyzed it against every propane company in North America we can analyze it with. And we know we have more differentiation, more glue to stick with customers sticking with us, and better operating cost in the industry by [ a good tool ] that when you put it all together, I always say everything we buy, we improve by 25%. So 7 becomes 6, there's not much overlap or 8 becomes 6 even, if there's more overlap. So we're in a great position, never been in a better position than right now.

If we think about it from a capital allocation perspective, you're at the low end of your leverage range, but basically there at 3x. So should we assume that these tuck-in acquisitions would be just in line with free cash flow [ after dividend ]?

Yes. I think from our perspective, as we've always communicated, our target is 3 to 3.5x while we're doing tuck-in acquisitions. So it would be our expectation to remain within that 3 to 3.5x.

Okay. Turning to chlorate. So a change in tone there. It sounds like you have a fairly major customer that's down. How long does that continue for? And as we think about the back half of the year, I think you're talking about chlorate volumes actually higher year-on-year in the first quarter, I think you're down 12%. Is that what it's going to look like for the remainder of the year?

I think so. I hope that this -- okay, that customer, obviously, is not coming back until early next year, I guess, but [ then you can go ] 6 months to prepare.

Yes. The expectation is that, that customer would be out for the remainder of the year. We did identify some incremental export sales, but certainly, we are seeing pressure from a COVID-19 perspective on chlorate as well.

Okay. So you could be down double digits for the back half of the year?

I would say from our expectation around volume, I would say our initial gut feel is something closer to 5% for the back half of the year from where we would have been in the front half of the year.

Okay. Last question here is just on cost restructuring. So it sounds like you've made some headway in the quarter. What are your plans to further reduce costs? What have you learned during this pandemic here? I know we've heard other companies talking about some of the efficiencies around working from home, real estate costs, that type of thing. What's your thinking right now?

No, there are absolutely -- it didn't -- we've announced $30 million of cost reduction. We're actually continuing on that path to say, what do we need, how do we go forward and requestioning everything. And we will end up with additional cap saving. It will be in the tune of -- not having as many location, bricks and bar that we have. It will be -- there's some saving on -- we learned through COVID that we could run some of their operation with less people. On the Western Canada, we had reduced the personnel operation and we have not done the same at the next level, and we are doing that right now because there's less volume in the oil field. So this is a -- we're in the continuous improvement on everything we do, and we know there's always room on cost efficiency. We're including 2 projects and additional digitalization of our fleets and our dispatcher. And as we unfold those projects that are more using the data and the digital to standardize and restructure some of our operation, there's project going on right now, and they will bring benefit. And once we have it in the region, let's say, Western Canada or Eastern Canada, we start somewhere, we unfold across the country, then we unfold all of those best practice in the states. There's projects like that going on, Jacob, like there will never be a stop less, but there are -- now there is millions and millions of opportunity to continue to be more efficient.

Our next question will come from Ben Isaacson with Scotiabank.

Most of my questions have been answered, but just maybe 2 more, one on the multiples with respect to M&A. First, is there a difference between multiples that you pay for acquisitions in California versus the eastern seaboard? And then maybe kind of a second part to that question is under a Biden presidency where tax rates presumably go higher to about 28% or so, would that not result in lower multiples being paid for EBITDA as EBITDA is worth less on an after-tax cash basis?

I'll answer the first question, and Beth will take the tax question. The multiple are the same east or west. And the reason for that is this is a small business, and it's on its own, and there is [ no 2 bigs ]. We pay 7. They said, "Wow, good scale." And then you have to say a bit more. So east or west, California or East Coast, pretty much the same. We do have more synergy when we acquire in the East Coast right now because we have more operation. And the first -- the acquisition we'll do in California will bring a little bit less synergy. That's a onetime with our operational effectiveness versus 2 when you have overlap of branch and offices. Because we don't have the scale yet in California, we will 1 day. On tax, Beth?

Yes. I think from my perspective, yes, from a valuation perspective, as you look at a discounted cash flow on an after tax, but it would have an impact on returns. So I would think longer-term with those types of changes coming in place that will have an impact on multiples. But again, I don't know that you'd necessarily see that immediately. Typically, what you'll see is these tend to roll in over time.

Great. Next question is on your cost cutting efforts. You talked about the $30 million and being on plan. I just want to understand, is that all recurring cost savings? Or is some of that onetime? Or if it is all recurring, is there additional onetime savings that you're seeing as a result of COVID?

Well, yes. I think from a savings perspective of the $30 million, think of it from an operating perspective, roughly half of it would be ongoing.

Okay. So just so I'm clear, $15 million recurring next year, $30 million this year, half of which is onetime for COVID?

Yes. Rough ranges, yes.

Yes. Adjusting -- roughly $15 million adjusting to the net volume. So volume comes back and next year those wells will have more charged technician, more truck driver to do a good job. Nothing at the top, we don't need more people at the top. And then the $15 million is -- yes, which, by the way, if you look at half of the year gain this year and the full running rate, it will still be $15 million for next year with a full running rate for 2021. For about $15 million? Okay.

Yes.

Our next question will come from Steve Hansen with Raymond James.

Luc, just thinking back to the M&A here again for a minute. It's obviously topical on the back of the Brookfield deal. I'm just trying to get a sense of what the complexion of your business is going to look like in the U.S. in a couple of years. You've obviously got a great deal of work still to do, I understand that. But you've already also got a big list of M&A targets sort of at your disposal. Is the complexion going to change much at all from an end market standpoint? And I'm thinking retail versus industrial commercial. Are the exposures going to shift, West Coast, East Coast? Or are you going to fill in the Midwest gap that's still there? How should we think about that as you look to deploy this large amount of capital you've got at disposal now?

Yes. So no doubt, we -- the East Coast and West Coast is what we have in front of us for the next many years, unless a special event comes that -- we certainly would look at everything that's called propane then in the states. But the -- we don't look at retail as -- retail, commercial, industrial. Yes, we're 75% not retail in Canada. We're 80-plus percent in the states retail. So there's [ plus and minus some goals ]. You get more affected by the weather when you retail versus commercial industrial. Economy slowdown, we sell not much. Right now, we see it, there's not much reduction in volume, and then you have it in commercial, industrial to balance. Probably in Canada, East, West, where you get more -- less effect on the weather in Canada because we're -- it could be warm in the East and cold in the West. And overall, we have more balancing act and less big variance. Right now, we have a few in the East. So we -- as of quarter 1, we got affected more by the weather because we're retail more on the East. One day we'll be all the way in the East Coast or some. One day we'll be everywhere in California and probably even coming in from California East -- on the East side. So I think if you look at -- we're doing or finding new plans every year. We're due in November to do digital review with our Board. There's no doubt we're going to grow the states by the tune of a couple of hundred million of EBITDA. We'll cover these, call it the West Coast. We'll get our synergy that we've been able to achieve [indiscernible]. And we'll be a business that will be [indiscernible] skewed towards energy big time versus energy and chemical. So...

Okay. That's helpful. And just maybe as a follow-up, if I may. And as you think about, again, that list of yours, it's quite long. Is there not a good rationale behind going after a lot of the smaller tuck-ins to really exploit synergy opportunities, I'm just thinking back to the NGL deal that you did a couple of years back now, and it was a bigger step out. You were still able to glean a good amount of synergies and did more than you initially targeted, but it came with less. And so I'm just trying to think about that split between platform deals that really broaden your reach versus the densification benefit of smaller tuck-ins? And what kind of mix we should expect?

Yes. To predict who's for sale and when, hard to do. There's not too many large enterprise, I think there's only 3. And then the rest -- there are some mid-sized. Mid-size, let's say, $25 million to $50 million. And then the smaller one, $1 million to $5 million EBITDA. We don't look at them all. It's -- we won't segregate because 1 day we want to be doubling up in the states. So we won't say, it's a small one and let's not acquire it today. Let's acquire a mid-sized one. We will say it's a propane business, can we improve it 25%? Is it in the East Coast and West Coast? Yes. Let's go buy it. Let's go do it. The question of -- we won't segregate small median or even large if we have opportunities to go bigger. We're certainly not against that. I don't know how many business in the industry out there that we don't have a lot of growth in energy. It's a reasonable 1%, 2% growth industry. But when you think you have a machine in the business model that makes everything you buy the Canwest of this world, the NGL, the Champagne and on and on coming that you improve the bottom line by 25%, and you pay 7 to 8x. And to tell you my friend, we've got to roll demand as fast as we can.

Our next question will come from Nelson Ng with RBC Capital Markets.

In terms of the -- just the first question relates to Specialty Chemicals on the chlorate side. The 12% reduction in volumes, could you give a rough split in terms of whether it was due to lower demand versus higher levels of maintenance and that forced outage from that large customer?

Absolutely.

Yes. Roughly, if you want to think of it as split, think of it as a 20-80 split, 20% was the customer outage, 80% is the impact seen, which we would say are COVID-19 impacting.

Okay. And then, Beth, just to clarify, you mentioned that for the second half of the year, you expect chlorate volumes to be 5% lower. Is it 5% lower than the first half of this year? Or 5% lower than the second half of last year?

Second half of last year.

Okay. Got it. And then the other question I had on the chemical side is in terms of the chlorine and the HCl volumes that are down materially, has that been causing you -- like is that the main driver of lower utilization rates? Like I know caustic is the more valuable product for you guys, but has the reduction in demand or lack of demand materially reducing your operating rate for your chlor-alkali side?

Yes.

Yes. I mean we're -- what we're seeing from a chlor-alkali perspective is our operating rates are between 75% and 80%. And you're correct, that's a result of our ability to move the chlorine molecule. We are converting now roughly 50% of our chlorine into hydrochloric acid. And you may recall, we've been as high as 65% to 75% historically. So that is influencing how much we can produce and how much caustic we're selling.

Okay. Got it. And then just one last question in terms of tuck-ins. So you mentioned that you're looking at a wide range of tuck-ins. Does that Champagne tuck in, is that a -- I guess, can you call that typical size for a tuck-in? Like are most of the opportunities you're looking at in that range of roughly, call it, USD 27 million?

That's a small size. It's on the small size, and there's a few that we're looking at mid-size.

Our next question will come from Patrick Kenny with National Bank Financial.

Just wanted to go back to the propane margins here. It looks like the market is tightening up here in Western Canada. I know your guidance assumes similar wholesale margins this winter compared to last year. But as West Coast propane exports continue to rise, curious to get your thoughts on how stronger Edmonton pricing might affect your wholesale operations going forward and your overall margin per liter performance relative to your base guidance.

Yes. And again, from our perspective, we would see returning back to sort of average and that's specifically talking about differentials. But you'll recall, the wholesale business, average differentials got factored into the guidance. But if you think about the margins from a retail customer or from our retail propane businesses, think of commodity really from a business model perspective as the past year. We have, based on margin management, as we talked about, picked up a little bit of incremental margin as a result of that in both the U.S. and Canada. From a Canadian perspective, to give you a bit of a sense from our residential -- or our retail propane, that margin impact was roughly $0.01. So this is one where we were at $0.19 per liter for the quarter, while we're saying, think about for the whole year being more so at the high end of our typical $0.14 to $0.17 per liter guidance.

Okay. And then maybe more on the volume side. So we saw the Enbridge Line 5 pipeline temporarily out of service this quarter. Obviously, back online now. But assuming a scenario where there is an extended outage in line -- on Line 5, either because of operational issues or legal challenges, what have you, how are you guys positioned to take advantage of the drop-off in pipeline deliveries through the Midwest? Maybe you can speak to both your distribution business as well as any opportunities on the wholesale front?

Yes. There's no doubt that the couple of weeks -- the Line 5 covers the Chicago region and then from the lake goes to Sarnia. It's a big input of propane in the East Coast of Canada. And if you recall that -- and they finally quickly resolved it and now they're -- your right saying, is there more potential discussion. And do they have to do some repairs on the line and probably stay open. No, we don't take those top -- we don't know how it takes, going to happen and a couple of weeks of hiccup could come back again. That's a good point. And it could be in the way that they're [ retired ]. So if you look at the 2 events that happened recently with the propane that had the difficulty from rail to move to the East to Quebec maritime. We were, for a few weeks, the only company in the East of Canada that could service our customer, probably. And the reason for that is we're really scale. We were in Canada and on the East Coast of U.S.A., then we have our wholesale business in California that's pretty big. So when an event like that happens, our professional people [ in Calgary ] who works for them, they're like tweaking stuff every day from a logistic. And what happened last year with the -- it was 2 breaks, one on them being the rail, we started to move propane to the East Coast of U.S.A., moved it north from the East Coast. That's how we can service our customer in Quebec maritime. So that's always on our mind as to what's the plan A, B, C? What are the events? Where do you buy cheaper and ship it to what location we have? There's 25 people doing that every hour of the day. So hopefully, we can continue to find solution because of our scale or size for storage and our wholesale business. But hopefully, there's never a big crisis where everybody runs out. I don't think that can happen because it's really -- for the people in the Chicago region or Quebec, we were talking about whether all the commercial business getting in with that. So don't think it will ever be that kind of crisis. But certainly something we look at and we look at other solutions, if this was to happen. Beth, anything you want to add to that?

I mean I think the reality is, as we approach the business, we're always focused on security supply for our internal business or our retail propane as well as the wholesale customers that we have. So we do try to diversify supply. We certainly are focused as a business to ensure that we have rail yards, et cetera. We're making some investments in transloaders to try to ensure that we have other options if disruptions occur. Certainly, Line 5 would be a very large disruption. But having seen that, we have really focused all of our talented people in that business to try to come up with strategies and ways to address if we do have further disruptions from that perspective.

Our next question will come from Joel Jackson with BMO Capital Markets.

I want to follow-up on the good margin performance. Can you help us bridge, you -- in U.S. Propane in the second quarter, you had about $14 million more margin in that business or $0.08 a liter. Can you help bridge how much of that was from FX? Was from good cost managers and synergies? Maybe help bridge how you got the $14 million and $0.08 a liter?

Okay. Thank you, Joel...

May I? Probably the easiest way to do it is sort of on a cent per liter basis. So if you want to think about it from the impact on margin, the -- looking at margins, specifically in the low commodity environment, think about as roughly $0.02. From a foreign exchange perspective, think of it as roughly $0.01. And then we do have a change in the mix as well as we focus on the higher-margin residential customers compared to some of the other commercial customers. So that mix impact would have been roughly in that range of 4%.

That's really helpful. And if you think of the FX tailwind that you've seen in 2020, can you maybe quantify that in terms of your overall full year EBITDA guidance?

Yes. For the overall EBITDA guidance, the impact is minor and that's because we do hedge both our cash flows as well as EBITDA. So think of it as being a modest impact from an FX perspective. It will impact the EBITDA from operations, but a total overall adjusted EBITDA basis because of the hedging. It's a much more muted impact.

Ladies and gentlemen, this does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Luc Desjardins for any further remarks.

Well, thank you for your questions. And I look forward to speaking with you after the third quarter. This is an exciting time for Superior as we're well positioned to execute on our growth strategy through acquisition, and we can significantly improve the operation with any business we're acquiring. Thank you for listening on the call and supporting us through this challenging time. And again, I would like to thank our management and employee, very proud of the action we have taken and the agility that we have to respond to the situation and our ability to continue to look forward consider improving of every scale that we deal with. So thank you for your participation, and talk to you all in the third quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.