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

Good day, and thank you for standing by. Welcome to Superior Plus 2022 First Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Rob Dorran, Vice President of Capital Markets. Please go ahead.

Thank you, Nora. Good morning, everyone. And welcome to Superior Plus's conference call and webcast to review our 2022 first quarter results. On the call today from Superior Plus are Luc Desjardins, President and CEO; and Beth Summers, Executive VP and CFO. For this morning's call, Luc and Beth will begin with their prepared remarks and then we will open up the call for questions. Listeners are reminded 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 continuous disclosure documents available on [indiscernible] and Superior's website yesterday for further details. Dollar amounts discussed on today's call are expressed in Canadian dollars unless otherwise noted. I'll now turn the call over to Luc.

Thank you, Rob. And good morning, everyone. Thanks for joining the call to discuss our first-quarter results. I'm pleased to say 2022 is off to a solid start with a record first quarter for energy distribution business. Adjusted EBITDA of $250 million, an increase of 18% compared to the prior-year quarter driven by a higher result in the U.S. propane, Canadian propane business as well as lower corporate costs. Based on our strong first-quarter results and expected contribution from the recent announced acquisition of the propane distribution asset of Quarles Petroleum, we're increasing our 2022 adjusted EBITDA guidance from $410 million to $450 million to a range $425 million to $465 million. We can also see in the Canadian market some improvement of our commercial Canadian business would suffer from the COVID business overall. Making great progress on our superior way forward EBITDA growth initiative through requisition, continuous improvement, and organic growing. On March 23, we closed the acquisition of Kamp Propane, which includes the wholesale propane business Kiva Energy. We're excited about adding this strong operating platform to grow our retail wholesale business in the attractive western U.S. propane market. We announced the acquisition of propane distribution assets of Quarles Petroleum [indiscernible] in Virginia. We expect this acquisition to close during the second or third quarter as we look forward to welcoming the team and servicing their close customers. We also closed 2 small acquisition in 2022. One in Ohio, one in the South Carolina for a total consideration of $10.6 million. We are on pace to achieve the lower end of our previously stated acquisition target of $200 million to $300 million and our acquired assets end of 2022 year. We're happy to announce we signed a definitive agreement with Charbone Hydrogen to distribute green hydrogen to commercial industrial customer in Quebec. We're very focused on pursuing lower carbon energy distribution and opportunity, including renewable propane. We want these opportunities to leverage our existing expertise in a safe and cost-efficient distribution of mobile energy solution. We believe Superior and propane as a product will play a significant role in the transition to lower carbon and eventual net-zero emission future. We have put the energy transition in place to identify developing opportunities in the phase. We're working on various projects mainly focused on lower-carbon propane source, including DME and hydrogen, currently. We look forward to presenting our lower-carbon and alternative fuel strategy later this year. We are in a strong financial position from a debt and leverage perspective following a recent common equity insurance for gross proceeds of $288 million. The additional liquidity from equity insurance and our stable cash flow from operation is expected to provide us with the capital to continue our growth through acquisition, investment, and organic growth, and continuous improvement initiatives. We have started 2022 in a strong position with good result in the first quarter, and they accelerated our acquisition in 2021 and to start 2022. Our focus in 2022 will be integrating and factoring the synergy from the acquired businesses. We still see a good pipeline of acquisition opportunities in the States and Canada. So, we are definitely and we will be able to cut into our fourth quality retail propane asset, we believe, at probably lower costs overall right now, because of the numbers and the overall market situation and the aging of some of the owners, to achieve our superior way forward acquisition target of $1.9 million from now until 2026. I'll kindly turn over to Beth to discuss the financial results in more details.

Thank you, Luc. And good morning, everyone. As Luc mentioned, we have a solid quarter driven by improvements in both the U.S. and Canada. Superior generated first-quarter adjusted EBITDA of $250.4 million, a $38.8 million, or a 18% increase over the prior-year quarter, primarily due to higher results from U.S. propane and Canadian propane and lower corporate costs. This was partially offset by lower realized gains on FX hedging. The first-quarter earnings from continuing operations were $141 million, an increase of $61.6 million compared to the prior-year quarter. The primary driver for the higher net earnings was the increase in gross profit related to improved sales volume and higher average margins partially offset by increased FD&A costs. Turning now to the individual business results, U.S. propane adjusted EBITDA was $162.9 million, an increase of $22.8 million from the prior-year quarter, primarily due to contribution from acquisitions completed in the past 12 months and higher margins. Average weather as measured by degree days across markets where U.S. propane operates was 3% colder than the prior-year quarter. U.S. propane sales volumes of $618 million liters increased 13% compared to the prior-year quarter. Primarily due to contribution from acquisition partially offset by impacts from unseasonably warm and inconsistent temperatures in March and customer conservation stemming from the high-commodity price environment. Canadian propane adjusted EBITDA was $88.7 million, an increase of $12.4 million from the prior-year quarter primarily due to higher sales volumes and higher average margins. This was partially offset by higher operating costs. Average weather across Canada for the first quarter, as measured by degree days, was 8% colder than the prior-year quarter. Canadian propane sales volumes of $779 million liters increased 9% driven primarily by wholesale propane volumes. Wholesale propane volumes were higher due to the 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. During the corporate results, the adjusted EBITDA guidance as well as leverage, corporate operating costs were $2.7 million, a decrease of $7.6 million compared to the prior-year quarter. Primarily due to lower long-term incentive plan costs related to the share price declines in the current quarter. Superior's total net debt to adjusted EBITDA leverage ratio for the trailing 12 months ended March 31, 2022 was 4x, which is at the higher end of Superior's target range of 3.5x to 4x. Pro-forma the application of the net proceeds of the equity issuance to the credit facility debt, the leverage ratio was 3.4x. Pro-forma the acquisition of the Quarles' assets, we expect leverage to be within the target range and towards the lower end. As Luc mentioned, we're increasing our 2022 adjusted EBITDA guidance range to $425 million to $465 million with a midpoint of $445 million. For the remainder of 2022, 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 2021. With that, I'd like to turn the call over for Q&A.

[Operator Instructions] Our first question comes from Ben Isaacson with Scotiabank.

I was just looking back at your investor day, I guess, was about a year ago. And you showed a goal of 10% to 11% EBITDA CAGR getting to $700 million to $750 million of EBITDA by 2026. When we look at the midpoint of your guidance of $445 million, and if we use that CAGR, we get closer to $650 million to $675 million by 2026. So I just hoping you could bridge that gap for us.

Okay. [indiscernible]

Yes, I mean, I think it's...

[indiscernible]

Yes, I mean, [indiscernible]. I'll kick it off by saying we're still confident. Our expectation would be that we'll achieve that $700 million and $750 million by 2026. And if you look at what drives that, I mean, there's a few pieces to it. One is M&A, which we still are going forward. And going forward we'll continue to do M&A across the remainder of the years. We are ahead in the acquisitions where we thought we would be. If you're thinking of this year's $445 million, it doesn't include a full year run rate of Kamps or the synergies. It also doesn't include the full run rate of Quarles or the synergies associated with those acquisitions. If you looked at that from a trailing 12 months for the completed transactions, it would be somewhere closer to roughly $472 million. In addition to that, if you look at achieving that $700 million and $750 million, there's also organic growth in the base business that will continue to drive throughout the period. There are continuous improvement, targets that we have in place, which will also drive towards that $700 million and $750 million. So even absent any more acquisitions, there would still be growth throughout that period to get closer. With that Luc, I'm not sure if there's anything else you wanted to fly it on that one.

Well, maybe the fact that if we're around the 40% of that number, if we take those 2 deals that are not showing in their result right now but will as the year unfolds and next year. So we're marching on to a pace that's probably as good as $750 million or more. But we're going to be very prudent. We're not doing deals for the sake of doing deals. We see the pressure on price evaluation to be slowing down somewhat, and we're getting more difficult and prudent to do the deals that are really in their zone, make sense, get to 25% improvement. And we saw that and we have the playbook to get to that 25% byline, and it works all the time, and it will work in those 2 deals. So, marching on very positively probably even ahead of the beginning.

And I guess, to jump in, like, there was one category that I forgot to also mention, which isn't built into that, where you wouldn't fully see it in the 2022 guidance, would be around the COVID recovery in the Canadian business. We're seeing recovery. We would still expect not having full recovery throughout the end of 2022. And we're certainly not there yet. And, you know, continuing to recover into Q4. So, that's another area where, you know, as you're looking at it going forward, we would anticipate some increase as well.

That's very helpful. And just a follow-up to that question. And forgive me, you may have said this in the past, but do you anticipate needing any equity to meet those objectives? Or do you think facilities plus cash flow generation will be sufficient to fund that growth for that $700 million to $750 million range?

Yes, based on our modeling as we go forward, the level of M&A that would be required going forward, you know, with our target about 3.5 to 4x, you know, we're comfortable that we can do that as the M&A comes in on an even pace throughout the period to get to that $700 million and $750 million.

Our next question comes from Chi Le with Desjardins.

Congrats on the quarter. My first question would be, so, under commercial recovery, I know you touched on this before, but are you not expecting a more expedient recovery versus the previously expected, you know, Q4 of this year? And where are you seeing commercial training right now?

Very good question, because it was quite a big volume. And we didn't get affected in the States because we're residential, but in Canada, as you know, residential, commercial, industrial, and industrial-commercial has slowed down quite a lot with COVID. And we see a return on that. And so it's helped us this quarter and the rest of the year, probably. And didn't anticipate the oil field to start producing more. And when you do that in Western Canada, the commercial business in those neighborhoods picks up volume too. We're seeing the commercial visitors in Canada coming back somewhat sooner than we had originally forecast. That explains we don't see it fully returning this year, but we certainly think by next year we would be all fully coming back.

So my next question would be about M&A integration. Can you share some of your clients regarding the integration for Kamps and Quarles with summer and the pace of synergy realization that you expect over the coming years?

You want to start with that?

Yes, sure. From an integration perspective, we'd be approaching Kamps and Quarles in similar ways to other businesses where because of the time of the year when they're closing, we'll be able to very quickly jumpstart the integration process. As you'd be aware, once we hit the winter months with the heating load, we try not to do too many additional integration activities just because it stresses the business, and really delivering at that point in time is where we want to have our focus. There should be a jump start which actually helps when you close this time of year to actually have those synergies rolling in over 18 months as opposed to 24 months, which if you're closing the transactions more so in the winter, sometimes it can take you 2 summers to get there.

Thank you, Beth. That's helpful. My last one will be regarding the margin. It was very strong this quarter. Can you share your expectation for margin in both Canada and the U.S. for the rest of the year?

Sure. From the U.S. margin where we were sitting at Q1 at roughly about $43.50, that is higher. Last year it was sitting at roughly $41.80. The primary driver of that is the increase in margin, a little bit of detraction around mix. As we look at 2022, we would view overall the average is going to be consistent with 2021. We wouldn't expect to be somewhat similar, which was US$32.50. And I think as you look at that margin, I mean, part of the margin is higher as a result of our response to facing some inflation pressures around costs and operating the business where the margin is a little higher there to ensure that our overall EBITDA levels and profitability is maintained.

Maybe I can add to that, that we're very confident and somewhat lucky to be in an industry that their basic product, as you know, is the [indiscernible], but also we've developed this year by a game plan on our capital investment, our P&L byline and all the business review we do monthly address all the inflation by line. And we're still 100% confident that we don't manage inflation implementation. That's the world doing it to everybody around the world these days. We're in a business that we will capture and not reduce our margin due to inflation or impairment solution. So those are the business we're in, and we can pass that through to customers, and we will.

yes. And I'll address the Canadian margin now. So from a Canada margin perspective, for the quarter, roughly $19.2, that's a little higher than last year or higher than last year, about $18.4. The primary driver of that are the basically more robust on a year-over-year basis. The market fundamentals, wholesale market fundamentals. As we look at Canada for the remainder of the year, we would expect it to be slightly lower than 2021. 2021 had an average of $18.1 cents. So the high end of our $0.14 to $0.18. And part of that expectation would be as we look to mix for the remainder of the year, you see that COVID recovery. You have some of the larger customers that have lower margins now mixing in to the overall volume.

Our next question comes from Matthew Weekes with iA Capital Markets.

I just wanted to ask a macro question. I'm just looking at where propane prices are right now and storage levels are relatively low. You know, are you seeing any sort of above-average amount of customer attrition, or I was just wondering if you could comment on the sort of supply-demand fundamentals in the market right now?

Very good question. At this stage, we don't see it, but they're going to be attrition more in the months to come, usually when attrition comes for the summer. Usually or historically, you could say yes. Now you have more attrition and you gain more customers because your attrition is everybody's price and propane went up for every competitor. It's kind of a balancing act in that regard. But theoretically, we feel that there won't be that much more this year because the whole world is stationed, you look at oil at the pumps where everybody they go and fill up their car. It's not like we have customers say, "Oh, my God, what happened to pair? They're charging me way more." They see it every day at every aspect of their purchasing, that inflation is there. They see it a big-time in diesel and oil with trucks and cars. So it's more known in our overall increase versus other commodities weigh less, and take oil and diesel. So we expect from our forecast, not too much more attrition. And if there's some attrition that are more than the average history, average of the past few years. We'll probably we're going to gain some customers that are from other competitors and they call us to see what we can do for them. So proudly, [indiscernible] certainly we drill down big time, because we want to make sure we didn't lose customer. Nobody would have been a bit more attrition with those days. Right now, probably not so much, because it's the old world and every [indiscernible] commodity in the world.

Okay. That's helpful. And I know you probably don't want to talk about the weather trends at this point but it looks like pretty cool started to Q2 in a lot of the geographies and kind of a slow start to spring here. Is that sort of what you're seeing at this point?

So I could just say that if you look forward to one no doubt, we got help from Canada weather [indiscernible] because we compared to I think I said last year. I always said to everyone, the business we're in one year and one quarter will gain, and then in another year, will get loose down on weather. But over 2, 3 years, you're always average coming back to our normal. And we gained in the states on the business and profitability has been good. And the winter doesn't help us much on the [indiscernible] The last 2 weeks of December, was very warm. So then the beginning January and March was warm. So [indiscernible] not the gain on whether it's more the gain on the business, and then Canada without commercial gain overall. And as you have said earlier, it's an extra margin and keep us the same as in spite of the inflation. So we don't mind weather but we don't have [indiscernible]. We just want to operate our business. The forecast we give the rest of the year doesn't expect better winter or worse. It's average. So we're having nothing and more than one front. And, yes, where there is no [indiscernible] Quarter 1. Anything else, Beth, that you want to add?

Yes. I think all I would add is as you're looking to Q2, it's sort of the same thing with Q2 and Q3, the shoulder quarters. So even when you tend to have a cold Q2, a positive impact from colder weather in Q2 is much more muted, obviously, than Q1 and a Q4. And part of the challenges when you're using propane predominantly is heating load. Even a cold Q2 often won't get you to a stage where you're actually using heating load.

[Operator Instructions] Our next question comes from Robert Catellier with CIBC Capital Markets.

Rob Catellier with CIBC. I just wondered if you could talk about the [indiscernible] opportunity. I'm looking for some color on the size of this opportunity and the risk allocation, specifically Superior take any price risk on the molecule or is this a cost-plus type arrangement? And what do you expect in terms of the rollout of low carbon products and other regions?

Tough question because there's a lot of incoming here and how they're going to unfold, but [indiscernible] is a good enterprise and they intend to build mostly plant in Canada and a few in the states. And we have made arrangement and we expect as they build plants, that we own the customers and we take it from their plant, and we delivered and do the logistic to get to the end user with our health and safety, and our trucks drivers, and our technician were equipped to do that. We will make same similar margin that we make on propane. So there's no, for us, it's we don't invest in building the assets. We take it from their door and we charge to the customer. We can build the customer with our proper margin that we do in propane. So it's a good business proposition overall.

Yes. And in all, I'll just address some of the other parts of your question from a risk structuring perspective, it functions like cost plus similar to our propane distribution business. And we don't have any investment in capital or existing fleet can transport the green hydrogen. And as far as size for this year, really, it's going to, in theory, kick off or start from our actual distribution perspective likely in Q3. So as far as this year's EBITDA goes, you know, maybe $1 to $2.5 million would be likely what you would see hitting this year.

And just to totally experiment, every time I've seen in my career a project or a plant getting built, doing a deal actually, it's basically always a delay or 2 3 months that nobody has planned for. So I would be cautious this year to think that they'll be operating the same day that they planned to. Here's the way I've seen the world goes around in big production of plant like that or project, even though acquisition deal will always take a bit longer. So I would take more Quarter 4. The same with growth, you know. We're working with large and getting this done in Quarter 3, but when this Quarter 2, I wouldn’t be surprised, it ends up in Quarter 2.

I appreciate it. [indiscernible] is an opportunity for the long-term. But Is there any exclusivity in that agreement? I know you're going to want to be a good partner for [indiscernible], but is there anything in the agreement that restricts your ability to strike similar agreements with other operators where they don't overlap with [indiscernible] or are you pretty much exclusive with them?

No. We can do deal with other people if they build plant. And we're the biggest Superior with our logistics to distribute the mobile liquid. So we're really in Canada. I have a hard time thinking who else can do that to get to the last mile? So our arrangements are not to have exclusivity. We want exclusivity from the producer, but we don't want to give exclusivity because if somebody else next door build a plant, we want to be able to distribute it.

Yes, we do. Just for clarification. We do have a ROFR, a Right of First Refusal as well.

Yes.

Okay. That's great. And then last question for me, you know, a bit of detail, but just in terms of closing the Corals acquisition, and, you know, whether it's Q2 or Q3, you know, just given the seasonality, I'm not sure it really matters that much financially. But what are the gaining items that would cause it to slip maybe from the end of Q2 into Q3?

Yes, so it's Darren Hribar. I think the main things are just normal commercial conditions. At this point, we've obviously filed our HSR application waiting for clearance there. And then it's just normal commercial conditions in the agreement that would take time to complete. It's an asset deal, so there's a number of consents to assignment and things like that that you have to obtain. So those, I think, is really all we're thinking about might push it out, but, you know, my expectation is likely Q2. I think we were just pointing out it could slide to Q3.

All right, so it's just sort of normal acquisition mechanics from here?

Yes.

And I am currently showing no further questions at this time. I'd like to turn the call back over to Mr. Luc Desjardins for any closing remarks.

Oh, thank you. So to wrap up this call, I would like to thank our management and employee. I'm very proud of all the accomplishments to date 2022. We're in a solid position to deliver on our 2022 adjusted EBITDA guidance Superior way. I've said it before, we're in a good industry and which always helps. Doesn't matter [indiscernible] if you're in a bad industry or you have a lot of wind in your face, and this is a capacity to pass through. Inflation is a big thing for us this year and we've proven we can do that. Deals are working towards we're going to have 4 times that's in good shape there. Overall, I know we have the-- we certainly are very confident going forward that this is looking very good and we're very pleased with everything we're doing. I think the most important to me when you think of execution, the 25%, we're doing that. Where the numbers shown and we added 5 business and what we bought, and what after 18 months what the results are. The machine is working extremely well. We have good talent to keep going and very proud of everything we do, including adapting and adjusting when a situation comes to us. COVID-19 toppled the plans on how to do it and deal with it. We lost some business and adjusted to [indiscernible] more guidance last year than [indiscernible] So just want to leave you all with an overall feeling of the business and entrepreneur, and management is really, really high. So thank you all for your time.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.