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

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Superior Plus 2020 Fourth Quarter and Full Year Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to your host, Mr. Rob Dorran. Sir, please begin.

Thank you, Howard. Good morning, everyone, and welcome to the Superior Plus' conference call and webcast to review our 2020 annual and fourth quarter results. Our speakers on the call today are Luc Desjardins, President and CEO; and Beth Summers, Executive VP and CFO. Darren Hribar, Senior VP and Chief Legal Counsel, is also joining today's call. This 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 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 2020 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.

Thank you, Rob, and good morning, everyone. Thanks for joining the call. We hope everyone is staying safe and healthy. I'd like first to take a moment to thank our employees for their exceptional effort this past year, working in the field, delivering fuel to our customer, working in our chemical plants and those working remotely supporting our operation. We have performed well, even in the face of tremendous adversity, and I appreciate your hard work and dedication. Our modified business practice continue with the health and safety of our employees, our customers, local communities as our first priority. As our propane distribution and specialty chemical businesses were considered essential and critical service and infrastructure in all of the province, territory 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. We announced the sale of Specialty Chemicals business to Birch Hill yesterday, which represents the final stage to our transition to a pure-play energy distribution company. The purchase price of $725 million represents a multiple of 8x on Specialty Chemicals for 2020. Pre-IFRS 16 EBITDA was $91 million for the ERCO business this year. Through the structure of the deal and the purchase price adjustment mechanism, Superior also continued to potentially benefit as the chlor-alkali market recovers, also the chlorate in over the next 3 years. The proceeds from the sales of Specialty Chemicals will improve our financial flexibility and allow us to accelerate our growth through acquisition strategy. We have demonstrated many times that we can execute on acquisition and integrate the newly acquired businesses into our operating platform quickly, enabling us to extract cost savings and synergies. Following the success of our 2020 acquisition with over $285 million in acquisition, we anticipate more than doubling the U.S. Propane EBITDA over the next 5 years through acquisition, organic growth and cost-saving initiatives. Actually, when we think of 5 years, in my mind, it will come faster. More recently, in the fourth quarter, we completed 2 retail propane acquisition, 1 in the Southern California, 1 in North Carolina. We have already made 3 more acquisitions, including 2 in Canada in 2020. We completed 5 retail propane distribution acquisition for a total consideration of $286.7 million. The investment from Brookfield in July provided capital for us to reduce our debt and quickly reinvest in propane acquisition. We continue to see a larger number of acquisition opportunities ranging in size in the Eastern U.S. and in California. We have improved the business we have acquired of at least 25% using our Superior Way operating platform and implementing our modern procurement, sales and marketing initiative, including our industry-leading digital service offering. Superior is one of the leading North America retail propane acquirer, and we are earning a reputation as the buyer of choice for many prospects, sellers in this industry. Turning to operational and financial results. Overall, I'm pleased that our fourth quarter and full year results, we achieved at the midpoint of our 2020 adjusted EBITDA guidance despite challenge of the COVID-19, significantly warmer weather in the first quarter, reduced drilling activity in North America and modestly warmer weather in our fourth quarter. The fourth quarter adjusted EBITDA of $169.8 million was 4% lower than the prior year quarter, primarily due to the decrease in EBITDA from operation. The full year 2020 adjusted EBITDA of $495.9 million, which was 6% lower than 2020, primarily due to the -- in 2020, primarily due to the decrease in EBITDA from operations. Fourth quarter EBITDA from operation was $171.7 million, a $16.1 million decrease over the prior year quarter primarily due to lower results from Specialty Chemicals and Canadian Propane, partially offset by our results in the U.S. Propane business. The full year 2020 EBITDA from operation was $518.4 million, a $43 million decrease from the prior year due to impact of COVID-19 and our business, partially offset by incremental contribution from acquisition in the U.S. Propane business. We expect the public health measure in place to reduce the spread of COVID to have an impact on our business in 2021 until the vaccine is widely distributed in U.S. and in Canada. Due to this measure, our commercial customer are operating at very much lower capacity and operating rate, and we have taken action to rightsize our business for the lower expected sales volume for the first 9 months of the year. We are, however, well positioned to service our customer once demand recover. We will emerge from the pandemic as much stronger with a better cost structure company and organization poised for the significant growth and increased shareholder value. The sale of Specialty Chemicals business is expected to provide more liquidity for us. We accelerated our strategy of growth through accretive acquisition, primarily in the U.S. propane market. We are optimistic the economy recovery will take place. We figure and our forecast in Canada late 2021 and probably back to normal in commercial/industrial in 2022. But in the U.S. business, immediately because we're more retail consumer-oriented in the States, while in Canada, as you know, our mix is big in industrial/commercial as well as retail. However, we have a resilient business, and we expect to generate strong free cash flow even in this challenging environment. Now I'll turn the call over to Beth to discuss the financial results of our 2021and our 2021 guidance. Beth, over to you.

Thank you, Luc. Good morning, everyone. Looking at the financial highlights for the fourth quarter and full year 2020, the fourth quarter adjusted EBITDA was $169.8 million, which was $6.9 million lower than the prior year quarter, primarily due to a decrease in EBITDA from operations, partially offset by a decrease in corporate costs and a realized gain on foreign currency hedging contracts compared to a loss in the prior year quarter. The full year 2020 adjusted EBITDA was $495.9 million, which was $28.6 million lower than 2019. This was primarily due to a decrease in EBITDA from operations, partially offset by a decrease in corporate costs and realized losses on foreign currency hedging contracts. Fourth quarter AOCF before transaction and other costs per share was $0.71 per share, a decrease of $0.12 compared to the prior year quarter due to lower adjusted EBITDA and higher weighted average shares outstanding, partially offset by lower interest expense and cash taxes. Weighted average shares outstanding increased due to the treatment of the preferred shares on an as converted basis and the impact of additional shares issued under the DRIP in early 2020. Interest expense decreased due to the lower average debt levels and lower interest rates on variable rate debt. AOCF before transaction and other costs per share for 2020 was $2.04 per share, $0.28 lower than the prior year due to a decrease in adjusted EBITDA and an increase in weighted average shares outstanding. This was partially offset by a decrease in interest expense and cash taxes. From a debt and leverage perspective, total debt to adjusted EBITDA, as of December 31, 2020, was 3.5x, which was at the higher end of the range 3x to 3.5x which we provided as guidance, and 0.2x lower than the leverage as at December 31, 2019. Turning now to the individual business results. U.S. Propane distribution EBITDA from operations for the fourth quarter was $80.4 million, an increase of $2.2 million compared to the prior year quarter. This was primarily due to higher sales volumes related to acquisitions and higher average unit margins, partially offset by higher operating costs related to the acquisition. Sales volumes increased 25 million liters, primarily due to incremental commercial and residential volumes from acquisitions completed in 2020, partially offset by lower commercial distillate volumes. Average unit margins were $0.412 per liter compared to $0.407 per liter in the prior year quarter primarily due to customer mix, partially offset by the impact of the stronger Canadian dollar on U.S.-denominated gross profit. Operating costs were higher due to the impact from tuck-in acquisitions, partially offset by the execution of cost-saving initiatives and realized synergies from NGL and other acquisitions. The U.S. Propane EBITDA from operations in 2020 was $206.9 million, modestly lower than 2019 primarily due to lower sales volumes in the first quarter related to significantly warmer weather, partially offset by the incremental contributions from acquisitions completed in 2020 and 2019 and realized synergies related to the NGL acquisition and other acquisitions. U.S. Propane EBITDA from operations in 2021 is anticipated to be higher than 2020 primarily due to the incremental contribution from acquisitions completed in 2020, increased sales volumes related to the expectation that weather will be consistent with the 5-year average, cost-saving initiatives and realized synergies from acquisitions completed in the past 24 months. Average weather in areas where we operate, as measured by degree days, is anticipated to be consistent with the 5-year average. Canadian Propane distribution EBITDA from operations for the fourth quarter was $65.6 million, a $10 million decrease primarily due to lower gross profit, partially offset by lower operating costs. Gross profit decreased compared to the prior year quarter, primarily due to lower sales volumes related to reduced drilling activity in Western Canada, the impact of COVID-19 on commercial and industrial customers and warmer weather, partially offset by higher reseller volumes. Operating costs were lower, primarily due to a decrease in volume-related expenses, the benefit from the wage subsidy program and cost savings initiatives. Canadian Propane 2020 EBITDA from operations was $195 million, $5.8 million lower than 2019, primarily due to a decrease in gross profit. This was partially offset by a decrease in operating costs. Gross profit decreased primarily due to the drilling -- reduced drilling activity in Western Canada and the impact of COVID-19. Operating costs were lower primarily due to a decrease in volume-related expenses, the benefit of the CEWS program and cost-saving initiatives. Canadian Propane distribution EBITDA from operations for 2021 is anticipated to be lower than 2020 as the impact of the CEWS program benefit in 2021 is expected to be significantly lower. Wholesale propane market fundamentals are also expected to be weaker and the impact of COVID-19 is expected to negatively impact commercial, and industrial sales volumes and commercial sales volumes in Western Canada are expected to be lower, partially offset by lower volume-related costs and cost savings initiatives. Average weather in Canada, as measured by degree days, is anticipated to be consistent with the 5-year average. Turning now to Specialty Chemicals. EBITDA from operations for the fourth quarter was $25.7 million, an $8.3 million decrease compared to the prior year quarter primarily due to lower gross profit, partially offset by lower operating costs. Specialty Chemicals 2020 EBITDA from operations was $116.5 million, which was $35.4 million lower than 2020 primarily due to decreased gross profit related to the impact of COVID-19, customer curtailment and reduced drilling activity, partially offset by a decrease in operating costs. Lastly, the corporate results and the adjusted EBITDA and leverage guidance. Corporate costs in the fourth quarter were $1.7 million lower than the prior year quarter. This was primarily due to a decrease in LTIP expense related to the share price performance. Interest expense was $24.4 million, a decrease of $1.3 million compared to the prior year quarter due to the lower average debt, lower variable interest rates and the impact of the stronger Canadian dollar on U.S.-denominated interest. Debt was lower primarily due to the impact of the proceeds from the Brookfield preferred share investment and the impact of the stronger Canadian dollar on U.S.-denominated debt. This was partially offset by acquisitions completed in the third and fourth quarter. In the fourth quarter, Superior had cash income tax expenses of $0.1 million, a decrease of $5.9 million compared to the prior year quarter due to lower provincial taxes and BEAT taxes in 2020. We are introducing our 2021 adjusted EBITDA guidance range of $370 million to $410 million, which implies a midpoint of $390 million. Based on the midpoint of our 2021 guidance, this represents a 3% increase compared to the 2020 full year pro forma result adjusted for the specialty chemicals EBITDA. When also adjusted for the CEWS benefit, this represents an approximate 10-year increase year-over-year. The increase is primarily due to higher expected EBITDA from operations, partially offset by higher corporate costs. EBITDA from operations in 2021 is expected to be higher primarily due to an increase in U.S. Propane EBITDA, partially offset by a decrease in Canadian Propane EBITDA. The low end of the range accounts for warmer-than-normal weather, reduced economic activity in Western Canada and delays in the economic recovery. The high end of the range accounts for colder-than-normal weather, stronger wholesale propane market fundamentals and increased drilling activity in Western Canada. With that, I'll turn the call over to Q&A.

[Operator Instructions] Our first question or comment comes from the line of David Newman from Desjardins.

Congratulations on your sale. Just on the sale, what do you -- is there -- what -- like why now? What do you see in the pipeline? We know there's a big player out there suffering. So any comment -- just any comment on the, I guess, near-term pipeline? And also, what might be your targeted spend for M&A in 2021?

Good question. You know how choppy deals can be. And -- but no doubt, we do have a pipeline that we've never seen since we start looking at chemical sale and energy growth. We're absolutely excited about this for a couple of reasons. The chemical sale, we heard that some people thought maybe not at the right full price, but 2 things come to play. We're going to have some upside when the chemical return over the next 2 years after they own it, so not the quarter 1 this year and not 2020. And then when you look at the pipeline in the States, it's really robust. It's -- there's some midsize enterprise. There's some small one. As you all know, we don't have in our forecast any acquisition, but we'll make some, of course. Hard to predict the numbers and the size. We don't think of the big one unless they happen. So it's not something that we -- when we say we'll acquire over the next 5 years, good growth and 2 acquisitions, we don't take in consideration we could do one of the big ones because we never know how that can unfold. So no doubt, if you take the money from the proceed and pay down debt and have some liquid to acquire, and then you buy those companies, the sooner, the better and many of them for sale more than ever, you have a better return than if you sold chemical for more money in 3 years. So it's focus, it's time and energy of everyone to be the best in this industry, which I think from an operation point of view, we have a big edge. I am convinced the deal we're looking at now will improve for at least 25% when we buy them. So you'll end up paying for bigger midsized enterprise 8.5, 9, and they'll end up at 7after we put our Superior Way, our sales and marketing pricing approach and our efficiency approach. So why now? Because the pipeline is big. Because we know when we buy them, we're going to improve the bottom line a lot, 25%. And then we now are pure play, which I think the market, investor, Canada, U.S., we've heard over the years a ton of investor interested in our game but didn't like the idea of 2 legs that are not -- nothing much in common. So there's never a best ideal time in the world, but we're getting good value. We're getting some potential good upside as the chlor-alkali market comes back and the chlorate market in late 2021 and 2022. So we'll be participating in some upside, we hope. We can never predict how much and when, but it's looking good. And we thought for the best of our shareholder, this is how we're going to get to be a very different company if you look 3 years from now.

Okay. And yes, no doubt. I like the upside because chemical is going to take a little while to recover. Did Brookfield or M&B out of Germany weigh in at all? I'm sure you won't be able to answer that. But obviously, you're now a clean ratable cash flow generator, a pure play and very attractive to potential strategic or other financial buyers. I mean any -- just any broad comments there, Luc, on that side?

Yes. They didn't play at all, the German company to making this happen. They have no say. We chat with them. I got a call from their CEO and their VP of M&A, I guess 1.5 months ago, and they did confirm that they were going to get over 10%. At that time, all they could say, and we didn't have any discussion since then, was "we're -- we have a big enterprise, EUR 14 billion. And we've sold some division, me as a new CEO for 2 years," he was explaining. "And now we're looking at a couple of businesses that we think are really sharp and they know what they're doing and they're the best model in an industry. And we want to take a position in a few of those companies, and we selected Superior as a great opportunity," and it's the first one that they invest in. So we understand they'll take a position. I think it's now 12.5 or more. We have no idea after that, what their intent is, except they didn't show any intent to go and make an offer for the enterprise. We heard nothing in that sort. And Brookfield had a bit more influence because we have a Board member that's with Brookfield. Absolutely, he like the play. He was totally pro for it. He likes the growth in the U.S. So there were -- as a Board member, he was really behind the management to do this, and he was -- he understood the value. That's what he does for a living and he said it makes sense. It creates more value plus with the energy growth.

Okay. Perfect. And I just have a couple of little housekeeping ones, if you don't mind, squeeze them in. Just corporate costs for this year, I think you said it might be a little higher in 2021. And then the second question is, just on Texas and the winter storms and all that, how it might have impacted logistics volumes and actually differentials between Conway and Edmonton.

A couple of questions there. I'll pass it to Beth.

Sure. So from a corporate cost perspective, I mean I think the best way to think about them for 2021 is being in a range of, say, sort of $22 million to $27 million or the range of $25 million is maybe a good way to think about it. Just sort of round it out there, David.

Okay. Why a little bit higher, I guess, is the question.

Yes.

Fundamentally, it would be linked back, price expectations from an LTIP perspective. In addition to that, you would also have no wage subsidy being reflected in the numbers. Right. So just a couple -- I would point to those as the most obvious one. There's other smaller items. Just everybody be aware, the insurance market is a little bit more expensive and other items like that as well. But just some smaller ones.

Got it. And on the Texas weather and all that stuff going on, any differential improvement and things like that in the logistics volumes and all that?

Sure. So just to cover it off, I mean, what we are seeing in the market is that the differentials are not as robust. They're weaker. We did expect that coming into the first quarter from what we saw in 2019 and 2020 where they were quite robust. What we're seeing now, there's still healthy inventory levels of propane, in particular, in Canada, but also there's still inventory in the U.S. even in light of the -- of colder weather. And from a production perspective, just to put it in order, there's still a fair bit of propane production. On a year-over-year basis, the production levels are virtually the same and about 20% higher than you would have seen in 2018 or 2 years ago. So there is a fair bit of production in propane. Now the exports are higher, which overall is with the cold weather driving the pricing higher. However, with all of this to be said, it's impacting pricing. But from an overall differential perspective, it isn't widening our view of opportunities from a differential perspective.

I'll add to that, David, your question about the weather in the Midwest. So we always do forecast with normal weather, but there's certainly an improvement right now because this particular weather in Midwest is coming East, and that's going to be looking good for us, generally speaking, for the quarter 1 because weather is going to -- February and March, I think, we'll have good months.

And you got easy comps in 4Q. And I certainly am glad I'm working from home.

[Operator Instructions] Our next question or comment comes from the line of Jacob Bout from CIBC.

Can you comment on the leverage levels that you're comfortable with now that you're a pure-play energy distribution company? And does -- has that changed?

Yes. From our perspective, our targets remain the same. We're targeting to be between 3 and 3.5x, while we're executing on acquisitions. I mean, of course, if we have a larger acquisition, as we've communicated previously, we're potentially comfortable to go a little bit over the 3.5x, but then have a line of sight to come down through delivered synergies back down within a 24-month period into that range. That hasn't changed.

And then when you're looking at the U.S. tuck-in market, how has COVID changed that? Are they more or less expensive? And maybe just remind us again, how we should be looking at it from a multiple perspective, pre-, post-synergy?

Yes. So let's go with the midsize, not go with the big one now for the moment until there's something real in the bag. There isn't. So -- in the midsize, it's a bit of an opportunity, and we have to be careful about the multiple. If you pay 8.5 to even 9 on the midsize enterprise, like mid like $25 million to $50 million EBITDA, you end up at 2x turn. After we take 18 months, we don't do it in 1 month or 3, no big bang here, and our execution and our Superior Way platform and all the different piece of the opportunity brings us to 8.5 becoming 6.5 or 9 becoming 7. So there's no doubt that, that's a good movie. There's a ton of them. And COVID what's helping a bit, and that won't show in the multiple, is many of them that we're looking at now have a percentage of their business that's commercial. So that has certainly been affected by the tone in North America Propane of about 15% less volume on the commercial/industrial side. So if we're looking at acquisition 9x right now, they're probably equal or -- and the retail consumer do better if they have 20-pound cylinder, but those are the 2 big players. So we're not looking at that. And then you have the opportunity with those multiple -- by 2022 for them and for us in Canada, commercial/industrial comes back. Those businesses would have a 15% lift of commercial/industrial. And in Canada, that's why I think our job this year has been extraordinary. We're 75% commercial/industrial and 25%, 30%, let's say, residential, 70% all others. When as our U.S. business is affected less because they're 90-plus percent residential. So good opportunity to buy because the EBITDA are affected somewhat because of commercial.

And how long does it take you to realize those synergies?

We usually do it in 2 summers. Depending on size and GL, it was 2 summers. So we don't touch the winter. And then we get going in the summer to install more sensor, to organize our system. And then if we're not finished by October, we stop and then we'll wait for the following year. It takes 2 summers for a larger one. A small one, we could do in one summer.

Okay. And just to circle back. So COVID really has -- really had no impact on what you're paying for [ these tuck-ins ]?

No. We'll pay the same multiple, but they probably could do more EBITDA when the full COVID disappears.

Our next question or comment comes from the line of Ben Isaacson from Scotiabank.

This is Ziad from Scotiabank. Congrats on -- this is Ziad on for Ben. Congrats on -- I just wanted to get a little bit more granular on the M&A opportunities in the pipeline you're seeing to the extent that you're able to share it. I'm just trying to understand that opportunity set. In that pipeline, is there may be more of a strategy to target larger? I know in the past, you've said you've been agnostic based on the best opportunity available. But with the balance sheet power you now have, is there maybe a desire to go for something larger? Or are you still going to continue to focus on the smaller space? And then just as a small follow-up, is there maybe any regional focus within the U.S. that you have in mind?

Yes. Our regional focus, for the moment, who knows in 3 years, is all the East Coast and then all the West Coast. California primary, but we could go a bit east of California. We could go, of course, north of California. Those are the 2 great markets. So why the -- what we can touch and feel and do and we feel comfortable about is doing midsize and small one because they become available, and we're their primary buyer for many reasons. First, there's a lot of respect for how we did all the deal we did, how we deal with the employees, how we do the health and safety. And we have a reputation now after all these years that we have an edge on buying. The most people we talk with, they would rather sell to us because of our position, our way to do things, and so we have a bit of an edge. The large one, not that we're not considering them. It's just there's only 3 midsize, let's say, $25 million to $50 million. We're all over that if we can do those. Small, of course, we can add small one and we pay less, of course. And we integrate them in a region where we are already, the small one. But the large one, we just understand them. We know where they're at. We know what we could do with their business if we were their acquirer. And it's, again, at least 25% better. But we don't go there because they're not for sale, and there -- and if that has to happen and if it was that an event would happen, we will certainly look at it. Well, we don't -- we usually execute everything we promise, and we do like we did for many -- all these years. So when we think of a big one and we're not in control of that and we don't know when and how, we just become -- don't understand it, then we know midsize and small are available, we just go for those.

Our next question or comment comes from the line of Steve Hansen from Raymond James.

Congrats on the sale. Maybe -- I just wanted to dig into the guide a bit, Luc or Beth. It sounds like Canada is one of the sources of the drag in the guidance. I'm just trying to understand it a bit in the context of weather seems colder thus far, E&P activity is on the rise along with oil and we should be lapping some of the COVID comps here fairly quickly. So I'm just trying to get a sense for how much of the drag is related to the subsidy going away. Just trying to -- maybe a bit more color on that would be great.

Yes. I'll start, and Beth can add about the subsidy. So no doubt, we're -- you've seen our history. We're not the type to not execute on what we promised. It's been hard for us to forecast 2021 in Canada more than the State. And we are predicting that for 9 months, business as usual, no gain. Commercial/industrial, no come back. We hope we're wrong. But the way we see the vaccine in Canada, the way we see the security that government brings into state home, which they should, I guess, we say we don't know. So we know it's not the next 3, 4, 5, 6 months. So why don't we just think of quarter 4, probably somewhat better. And then 2022 watch out, we're coming back.

I was going to say -- and yes, I mean, just adding to that, from an overall or a high level, the -- no wage subsidy but still facing the headwinds associated with COVID for the portion of the year is your primary driver.