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

Thank you for standing by, and welcome to the Superior Plus 2021 Third Quarter Results Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Rob Dorran, Vice President Investor Relations and Treasurer. Sir, please begin.

Thank you, Valerie. Good morning, everyone, and welcome to Superior Plus' Conference Call and Webcast to review our 2021 third quarter results. Joining on the call today are Luc Desjardins, President and CEO; Beth Summers, Executive VP and CFO; and Darren Hribar, Senior VP and Chief Legal Officer. Today's call is being webcast, and we encourage listeners to follow along with the supporting presentation, which is also available on our website. For this morning's call, Luc and Beth will begin with their prepared remarks, and then we will open up the call for questions. Before I turn the call 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 third 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 third 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. Thanks for joining the call. I hope everyone is staying safe and healthy. I'd like to start the call by thanking our entire Superior Plus team. I'm proud of our team's commitment and safety, reliability and we continue to provide essential field and services for customers, whether our employees or out in the field and working remotely. We're making good progress in our Superior Way Forward growth plan for acquisition, continues to improve in an organic growth. In the past 12 months, we've announced and complete $625 million of Propane acquisition, including the acquisition of Kamps Propane. In 2021, we have announced or completed approximately $600 million of acquisition, which is over 30% of our $1.9 billion target set for Superior Way Forward acquisition initiative. So we're well on our way to achieve our acquisition target through 2026. We have a proven track record of executing on our synergy targets for acquisition, and we target 25% improvement in the EBITDA of businesses we acquired by optimizing the operation devising the Superior Way operating platform and leveraging our larger scale as we are reducing redundant operating and back-office functions. On September 23, we've announced that we received a request for additional information from the FTC related to our proposed acquisition of the company that makes up Kamps Propane in California. We must provide this additional information to the authorities before we're able to close the transaction. In the current environment, U.S. regulator [indiscernible] are taking more time reviewing more information on energy-related transactions before making decisions, which is pushing out the timing of the deal. Due to this continued review, we anticipate the closing of Kamps will enter in the first quarter of 2022. We still expect to finish within our adjusted EBITDA guidance range of $390 million to $420 million. in 2021, even though the closing of Kamps has been delayed, which demonstrates the resilience of our business and the positive impact of the efficiency improvement and sales and marketing initiatives taking as part of our Superior Way Forward Plan. On the financial and operating results, our third quarter results were modestly higher than the prior year driven by improved sales volume and average margin as well as a decrease in corporate costs. The increase in sales volume and margins were offset in part by higher operating costs, particularly in the U.S. due to the recent acquisition, the third quarter is a seasonally lowest quarter due to the lack of heating demand in many of our regions. As a result, the increased operating costs from acquisition recently completed more than offset the increase in gross profit. So the bottom line is you end up with the full cost, but you have less volume in those quarter 2 and 3. So therefore, more difficult to add profit, which comes in quarter 4 as well as quarter 1 every year. For reference to the third quarter adjusted EBITDA of $13 million represents approximately 3% of our annual adjusted EBITDA based on the midpoint of our 2021 guidance. In the third quarter, U.S. Propane results decreased compared to the prior year quarter, primarily due to the higher incremental operating expense related to acquisition, partially offset by higher average margins and higher sales volumes related to the incremental contribution from acquisitions. U.S. Propane EBITDA from operations in 2021 is anticipated to be higher than 2020 and primarily due to the impact of acquisitions completed in 2020 and in 2021, benefit from the Superior Way and decisional workforce optimization initiatives and realized synergies from acquisitions. Canadian Propane result for the third quarter were modestly lower than the prior year quarter, primarily due to the decrease in benefit from the CEWS, partially offset by an increase in average margin and volume. We're seeing modest improvement in commercial and wholesale volume in our Canadian Propane distribution business as COVID-19 restrictions continue to be lifted. Canadian Propane EBITDA from operation in 2021 anticipated to be lower than 2020, primarily due to the decrease in average unit margin as well as reduction in CEWS benefit. We're optimistic more than COVID-19 restrictions will be lifted in the fourth quarter and for the coming 2022 year, allowing our commercial customer to operate at a higher capacity, which is expected to increase Propane demand when COVID is more behind us. I'll now turn the call over to Beth to discuss the financial results in more detail.

Thank you, Luc, and good morning, everyone. Superior generated third quarter adjusted EBITDA of $13 million, a $2.2 million or 20% increase over the prior year quarter, primarily due to lower corporate costs. partially offset by lower EBITDA from operations in U.S. Propane. The third quarter net loss from continuing operations of $35.9 million compared to a net loss of $26.1 million in the prior year quarter. The primary driver for the higher net loss was the increase in selling, distribution and administrative costs and a decrease in gains on derivatives, partially offset by the increase in gross profit and decrease in finance beds. Our consolidated AOCF before transaction and other costs for the third quarter was negative $4.8 million, a $7.9 million increase compared to the prior year quarter, primarily due to lower interest expense, higher adjusted EBITDA and lower cash tax. Turning now to the individual business results. U.S. Propane EBITDA from operations was negative $7.8 million, a decrease of $3.8 million from the prior year quarter primarily due to higher operating costs, partially offset by higher sales volumes and higher average margins. Residential and wholesale sales volumes were consistent with the prior year quarter, primarily due to acquisitions, offset by the impact from warmer weather. Average weather, as measured by degree days across markets where U.S. Propane operates was 17% warmer than the prior year quarter. Commercial sales volumes were 13% higher compared to the prior year quarter, primarily due to incremental volume from acquisitions and the easing of COVID-19 restrictions. Average margins were $0.379 per liter, which is 4% higher than the prior year quarter. This is primarily due to our continued focus on growth of high-margin propane customers partially offset by the impact of the stronger Canadian dollar on the translation of the U.S.-denominated gross profit and customer mix. Operating costs increased by 20% compared to the prior year quarter due to acquisitions, partially offset by workforce optimization initiatives, realized synergies and the impact of the stronger Canadian dollar on U.S.-denominated expenses. Canadian Propane EBITDA from operations of $21.2 million was consistent with the prior year quarter as higher sales volumes at higher average margins were offset by higher operating costs. Residential sales volumes were consistent with the prior year quarter and the impact of acquisitions completed during the first quarter was offset by warmer weather. The average weather across Canada for the third quarter, as measured by degree days with 15% more than the prior year. Commercial sales volumes were also consistent with the prior year quarter, as increased demand from the oil fields or our mobile Kamps businesses were offset by declines in some other segments, such as reseller or agent demand relating to the easing of COVID-19 restrictions. Wholesale propane volumes were 7% higher compared to the prior year quarter due to increased demand in the California market related to the easing of COVID-19 restrictions and to a lesser extent, sales and marketing efforts to increase third-party spot price, wholesale propane sales. Average margins were 9% higher than the prior year quarter due to the timing of carbon offset credit sales and the impact of weaker wholesale propane market fundamentals in the prior year quarter. Operating costs increased by 19% compared to the prior year quarter due to the impact from the CEWS benefit. And in the prior year, the CEWS benefit was higher due to significant impact on customer demand in the early stages of the pandemic. Lastly, the corporate results. The adjusted EBITDA guidance as well as leverage. The corporate operating costs were $1 million. This was a decrease of $6.1 million compared to the $7.1 million in the prior year quarter. This was primarily due to lower long-term incentive plan costs related to share price declines in the current quarter. Interest costs decreased 21% compared to the prior year quarter due to lower average debt levels and lower average interest rates. Superior's total net debt to adjusted EBITDA leverage ratio for the trailing 12 months ended September 30, 2021, was 3.5x, which is at the higher end of Superior's long-term range target of 3 to 3.5x. We're confirming our 2021 adjusted EBITDA guidance range of $390 million to $420 million with the midpoint of $405 million, even though we had previously expected Kamps would contribute to the business in 2021. For the remainder of 2021, we anticipate average weather to be consistent with the 5-year average for the U.S. and Canada and wholesale propane fundamentals to be consistent with the first 9 months. With that, I'll turn the call over to Q&A.

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

You can hear me okay?

Yes, sir, very good.

Just looking at Kamps here. I understand the FTC has one request, maybe just the nature of the second request here. And if we're modeling this up, I mean, obviously, Kamps is going to be kind of in the wheelhouse of the winter, should we be modeling it mid-quarter, end of quarter, beginning of quarter because obviously, it will have an impact on 1Q?

Absolutely. I think we'll start with Darren Hribar on FTC, and Darren is our Chief Legal Officer here. And he's in the leads of that on a daily basis. So excellent.

Yes. No, I think as we announced previously, we received the second request, September 23. So since that time, we've been working cooperatively with the FTC and Kamps has as well, as they conduct the review of the transaction and as we work through that, there's a fair amount of data that we have to provide. They determine what the custodians are, and we work through that process. I think that's where we sort of find ourselves thinking that, look, by the time we get all of that material submitted, the second request is going to take us into closing sometime in the first quarter.

And if I'm modeling this up, any sense of what we should be thinking about where do we place the close?

Hard to predict, I would say. Yes. Maybe I'll explain first what's happening in this more color is that our market position in California is driven with Kamps, very low in retail question from FTC are not very -- not [indiscernible] , but doesn't that much. So...

Yes, because you're not bumping up against any market share here, no Herfindahl or whatever they use for their index, I mean clearly, your market share is not -- you're not dominating or had the concentration in that market, right, Luc?

No. I think what's happening is they received order from Washington that everything that's oil and gas should be reviewed in the second request. The retail is pretty plain vanilla not much going there with a lot of competition, and we're not seeing share at all. I think the wholesale is more complex for them to understand who would [indiscernible] sales supplier from where. And that said, it is complex, and there's a lot of suppliers, and it comes from types of Canada or other wholesalers. And I think that all areas where they're drilling down more to understand it, I guess, they're preparing themselves for ultra-true acquisition in this comparing world. So not to worry much about what's going on in the overall because we know the numbers are all good enough to just have to but it's something now that we have to do. And to your timing -- and I'll ask Beth if she has a better view of the timing or guidance?

Yes. I mean I wouldn't say I have a better view of the timing to be consistent, but it's always hard to anticipate from a regulatory perspective, what the timing will be. What I would say is maybe to be conservative, assume it's towards the end of the quarter -- at the end of the quarter to give you a bit of a sense probably the way to think about it is Q1 would likely generate in the range of USD 15 million or 15 1-5.

Got it. Okay. Very good. And switching gears over to this environment, which is absolutely crazy. I think the propane prices are the highest since 2014. If I look at it and just kind of wondering a couple of things. Obviously, exports going out of the country. I know that you guys contract your supply in the spring. And does that get you through the winter? And how much wiggle room you have on rack plus-plus? In other words, your ability to actually price up in this kind of market and just the speed at which you can get that through? Maybe just the dynamics of the market right now?

I'll take the first part that has to do with our market and Beth can take the second part is to how we're positioned for the winter for supply. So we -- for us, when you look at our segment and customers, it's a pass-through. So we expect to be paid for inflation, and we'll expect to be paid and we will be paid for added value service. So the margins are going to be as good as ever on what we sell. And then from a wholesale and then from a supplier, Beth can explain what's happening there.

Yes. So if you talk about just the general market fundamentals. So in the U.S., I think starting to drive some of that higher pricing is first off. It does tend to be linked to overall commodity prices, in particular, crude. So as crude has been increasing over the last 3 quarters, we've also seen propane increasing a fair bit. So in comparison with the overall market. And actually, we see somewhat a bit of a return-to-normal as a percentage of crude where for a period of time, it was down more around 50%, 55%, where it's creeping up back to that 70%, which is probably more of a historic percentage of crude type pricing. But fundamentally, part of the drivers from a supply perspective. So U.S. inventories are low. But if you look at it where in the U.S. where they're low, differs, so they tend to be quite low from the 3-year average when you're looking in the Gulf Coast, which is where exports are occurring. When you look to the markets where we're in, so if you think about the Northeast, actually, inventory levels are okay. And it isn't to production, there is a lot of production, and production is higher. If you look at it somewhat on a year-over-year basis, it is linked to the exports driving it. And that does have an influence on the overall pricing. Now Canada is a little bit of a different story that the increase in Canada is getting linked to that overall commodity increasing. But from an inventory perspective, it's actually quite healthy. a little lower than it was than last year or below last year, but it is higher than the 3-year average for inventory levels. And it does tend to the East, inventory levels are higher than we would have seen in previous years, which I suspect are just people mitigating some of that risk from Line 5. They see some higher there. So the supply is sitting where we need it. From our perspective of getting back to your question around the contract years, you're correct, our contracting year is from April to the end of March. And we're comfortable. We have all of our contracts in place, and we have all the supply that we require contracted through the year. So we're comfortable that we have what we need and that we'll be able to get it when we need it to that security supply for our customers.

Excellent. And it looks like Washington might not be so quick to back Michigan on this Line 5 dispute, which is good to see. So I'll hand over the line now.

Our next question comes from Ben Isaacson of Scotiabank.

Luc and Beth, just 3 nonoperational questions. First, I believe you met with M&B recently. Can you just highlight how that went and whether there was anything interesting to pass on?

Yes. They came to visit this week. So we've had a good session to talk about what we have in the public market on our 5-year plan and our acquisition, the 25% improvement on the 18 deals we've done, and they're extremely impressed and excited. They did -- they met the management, everyone in my direct report and a few additional people during the afternoon. They walked away saying, wow, the transparency, the openness, the clarification and the work we're at, first time we met in-person, and we're really, really, really impressed. And their position is to be a good anchor investor at the rate they are now and not to have any play to go further than their position around [indiscernible] anchor investor. That's their position. That's what they convinced us. They want to do. So good relation as we grow, they intend to be there to participate and they liked the business. They liked the management. They liked our market position and what we've been able to accomplish in the last few years there, I would say, extremely impressed. They had one big core business. They sold the rest. And what they're doing now, they're investing, diversifying their family money into taking a position in different companies like they did to us.

So Luc, just to reiterate, was there any discussion about a Board seat or seats? And I just want to make sure I understand, clearly, they do not intend to go above [ 19.9% ], is that right?

Yes. The Board seats wasn't discussed at this stage, it might come later, but it certainly wasn't discussed. And from a position, being an anchor investor, they certainly don't intend to take a majority position in the company. And on, Darren, if there's anything else to be more precise on that?

Yes. I think you're just alluding to like under securities law and under our [ SRP ] they would be able to go beyond 5%. And so I think their actions have been completely consistent with that and that of staying a supportive anchor investor.

Great. My second question is back to Kamps. I know that the FTC review is focused on wholesale. And I believe FTC doesn't look at deals under $100 million. So with that context, can you talk about whether this review has changed or evolved your strategy in terms of what you do in the future from a consolidation viewpoint?

No. As you know, this deal is over $200 million. So it was a deal they had to review. I personally think, and then you asked the question. I don't think we'll have any issue by retail business propane in the States in the years to come or position market share of 70% independent our position is good, good, good. If we do the deals that are smaller than $100 million we don't have to go to them. But over that, we do and we will. And I think today, what we've learned is we expect what we do go to more than -- they'll do a lot of deep search like they're doing now to make sure that the ordinary oil and gas remains competitive. So long way to go before I think we had real issues. Wholesale, like I said earlier, it is complex. And when you think of who -- by who supplies, what, where, Kamps supplies to 14 different states, and they don't have a big position and those 13 of the 14 states. In California, not even that much. But it's -- so you kind of had a good feeling that, well, this should pass the threshold that they have to review businesses. So, no, I think the message, I think, I would like everybody to leave with is we're going to do a lot of [indiscernible] position, and we may expect that we're not going to close of the deals we're going to make.

Right. And just my final question. We've talked in the past about customer churn in this environment of high propane prices. I'm just wondering if you have any new data points or color on the rate of that churn? Have you seen customers switching out or switching in to Superior at a higher rate recently than in the past?

They certainly don't switch during the wintertime. The absolutely turning would show there's more churn when price goes up. I kind of feel personally, that's a big thing of experience and we're sitting at with the work we do with the businesses. I don't think it'll be as big as other years and the price went up for a couple of reasons. There would be less switching due to COVID. And I think most importantly, everything is called energy is going up like crazy. And if you think of commercial investor big at it, when you take of residential customers, they would try to look at, wow, my price of my propane went up $1,000 to $2,000 more, and then they go to supplier. But then they go to the build up their car and they're aware of the price being so high everywhere. So I think that might put a bit of less pressure on churns. But we do know that churn happens more, we get more new customers and we lose more customer. So there is a cost issue to in and out of that, not ideal. But I don't know, without the price, residential usually are not so aware why they're charging me so much. I think they are today because to be able to their car to be fixed, everywhere in the newspaper and radio, every small town, everybody talks about that. So hopefully, that doesn't create the type of turn that historically when the prices are very high that we've seen. But there's a cost to in and out. But at the end, we'll probably end up at the same place as all our competitors are in the same position. I think Beth, anything you would add to that?

No. I think it's one like where I -- reiterating everything you said, it fundamentally will have a better sense if what the impact potentially would be once you get out of the winter months. So it would be more of in April, May. I think we would have a better sense. But that being said, I mean, the reality is they still need the propane for those that just are doing it because of sticker shock, they're going to change from one to another. So we'll be picking up as well depending on those attrition levels. I think net-net to the business, I think we're comfortable from a volume perspective. But as Luc said, it could have some impact on margins just because your new customer margin is different with introductory pricing, et cetera, than a retained customer.

Our next question comes from Joel Jackson of BMO Capital Markets.

A few questions. I'll go one at a time. Just first on the 2021 bridge to be able to hold the midpoint of the guidance excuse me, despite Kamps pushing into early next year. Can we talk about -- can you please elaborate on what the offsets were in terms of better fundamentals, CEWS benefit, better volume than you thought that was able to offset the $10 million?

Yes. I'll give a few color, and Beth will add to complete the answer for you. We're certainly getting good retail consumer residential growth in Canada. Our marketing and sales are humming well, our digital approach and connection with these customers and our brand that's now when people look at propane, Superior gets a lot of calls, I think it's 6,000 a year. So we're having in that regard. We've been very careful on cost as we've always been, and we've seen some cost reduction and improvement in the overall company. We're certainly expect to make the same margin, and we charge for inflation is there more than the past, but we'll cover inflation with pricing because we don't want to lose any benefit from pricing from the service we render to customer. You're getting -- and I'm sure you all get it on the call that quarter 2 and 3 with our acquisition we made went up with way more cost into the 20% and 5% of the sales. So not great, but then you get to quarter 4, quarter 1, and you have all the sales coming, so you're rebalancing properly the profitability of over a year. So there might be an additional point, Beth, you can see in the ...

What I would say, one way of thinking about it is part of it is some where our expectations were, Q3 was in over performance. So that would have been above what we originally expected it to be. I think from a pricing perspective, they were quite high when it comes to the carbon credits. Again, that's in your range of sort of $2 million to $5 million. But that being said, that pricing was higher. So there's a bit of a pickup there. From an LTIP perspective, that would be a little different. And then the reality is we see potentially a little higher than we might have originally been expected. So when you look at that over performance and the reasons that Luc's alluding to, we had roughly that $8 million to $10 million range we were expecting from Kamps this year. When you look at all of the various pieces, we're still comfortable that we'll be in line now with the guidance of that $490 million to $520 million (sic) [ $390 million to $420 million ] -- $390 million. .

$390 million, $490 isn't...

That would be really good.

[indiscernible] we're not just there.

Okay. And then so if we look at 2022 with kind of bridge, what we could see in 2022, a lot of moving parts, obviously, I guess, we'll get some more recovery in volumes. Hopefully, you'll have the Kamps deal done in early part of the year, I don't exactly know when. You have maybe some other tuck-ins you might do you won't get maybe the same level of CEWS benefits, hopefully, for society, going down to COVID. Can you walk us through what 2022 could look like turn of bridge is the different components?

So the backlog for our acquisition continued to be very strong. That's one thing. Me, it would be -- if I was here would be conservative on Kamps because we don't control the fact date, I would say, too bad, we're missing either January, February or parts of the quarter 1 goes away. The CEWS from the government, of course, is gone. And then you have the return of COVID in commercial industrial Canada, not fully returning. The government went a bit faster way than the return after COVID. We still own those customers, those tanks and the volume on commercial industrial is not what it was prior to COVID. And I don't think it will come back until 2023. So big picture, those are, I would say, my other points that I would mention, and I'll pass it to Beth for additional.

Yes. I think you've covered all of the key areas that will be impacting us in 2022 from an actual guidance perspective. We'll issue guidance for 2022 when we issue our Q4 results, which should be consistent with what we've been doing in the past.

And just on -- this and my last question and also released back to a question that Ben asked a little bit earlier. So you don't -- you think your pipeline for tuck-ins and acquisitions remain the same despite some of the stuff coming from the FTC. Now does this mean though that you need to budget now for longer approval periods, so your tuck-in program has a bit of a delay, I guess, right now because you have to assume that the tuck-ins will take longer to get approval? If that makes any sense what I'm saying.

Yes. That's a good question. But we thought would do $1.9 billion by 2026. What we did done 1/3 of that. So what's happening right now for multitude the reason from entrepreneur independent that are the propane industry, will -- the average what we thought would do $250 million, $300 million a year. It's more than that this year. We doubled in that. So I think we'll do more than that next year, too. But as you know, we don't put that in our guidance when it be coming to what size of EBITDA, then the synergy comes a year after. So we're not prepared to put any acquisition in the forecast because we're -- don't want to mislead the market and then find out that it takes more time or a deal with too many small in size or not enough mid larger size. So net-net, I think we're going to do maybe not as much as this year, but more than the average of $250 million, $300 million in 2022, I think we're going to be above that.

Yes. The only other thing I think I'd add, Luc, is I think in terms of the timing on future transactions. I think with Kamps, it's a bit of a unique situation with the wholesale business and a different position. Most of the retail acquisitions that we've done are pure retail and highly fragmented market where you've got similar to California, very little overlap. And then even where there is there's a significant number of competitors. In some of those places, it's 12, 13 competitors. So I don't think that you're going to see that. And then there's just the fact that when you're looking at these tuck-in acquisitions, they have to go over the threshold of the $90 million or whatever it is in the U.S. So there's not a significant portion of those that are at that level. So I don't think it's going to change how we look at that. But certainly, for something like Kamps, it is going to cause us a little bit of delight.

That's good point.

Thank you. I'm showing no further questions at this time. I will turn the call back over to Luc Desjardins, President and CEO, for any closing remarks.

Yes. So I'd like to thank our management and employees, very proud of all of our accomplishments to date in 2021. The action and the considerate improvement are there and the COVID, how we adjust to that. It's quite extraordinary. So in the customer service and the customer gains are good. There is a small quarter, we feel very good that we're in a great position. I think the quarter shows the trend and the momentum that we have. And it's really -- when you think we're losing the EBITDA of Kamps and the winter time of this fourth quarter, and we're talking about guidance beyond that, we're pretty satisfied and pretty -- we're going to continue to do [indiscernible] company at any level. So small quarter, but a good trend and a good direction where was. So thank you, everyone, to participate in our call.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.