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

Good day, and welcome to the Superior Plus 2022 Second Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Rob Dorran, Vice President of Capital Markets. Please go ahead.

Thank you, Sheri. Good morning, everyone, and welcome to Superior Plus' conference call and webcast to review our 2022 second 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 SEDAR 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.

Well, thank you, Rob, and good morning, everyone. Thanks for joining the call to discuss our second quarter results. It's to say, we've maintained the strong momentum we generated in quarter 1 2022 and through the quarter 2. It is important to note that quarter 2, along with quarter 3, are seasonally slower quarters for our business due to the lower heating load and, typically together, amounts only approximately 10% of our annual EBITDA. Keep in mind that recently, we've acquired Kamps and Quarles. So if you look at the full year, we get 25% of the cost of those 2 businesses for this quarter but only 10% of the sales. So no doubt that you'll end up having a -- for the timing of those acquisitions, this is how it connects for quarter 2 and 3. So they're -- over a full year, of course, the full results are there and the integration plans are going extremely well. So our quarter 2 results are testament of our strength and our business in the face of rising costs due to inflation whether that in volatility commodity costs, which has driven some customer conservation. But as we look to the past, in 2022, we're comfortable in our ability to manage the impact of the inflationary pressures on our business by passing on these rising costs to our customers, which is evident in our average margin growth over the current year-to-year. We saw the benefit of acquisitions completed over the last year to high volume quarter-over-quarter. However, we also saw a higher operating expense in the quarter based on our strong first quarter results and the second quarter results, we are confirming and are very comfortable that our adjusted EBITDA guidance range of CAD 425 million to CAD 465 million is right on target. We're making great progress on our Superior Way Forward EBITDA growth initiative through acquisition, continuous improvement and organic growth. On June 1, we closed acquisition and delivered fuel business of Quarles Petroleum, which expanded the operation in the attractive Virginia market. We're excited about having this established retail propane distributor to our strong base in the Eastern U.S. region. We also closed 3 smaller acquisitions in 2022, 1 in Ohio and 2 in South Carolina, for a total of CAD 12.9 million, quite smaller add-on acquisition. With these 4 acquisitions, we're on track to achieve the lower end of our previous statement -- excuse me for a minute. Acquisition target, excluding the Kamps acquisition, of CAD 200 million to CAD 300 million and core assets in 2022. We released our second annual sustainability report in June, which contains improved disclosure from an inaugural report and demonstrate our focus on prioritizing ESG in our operation. We believe Superior Propane as a product will play a significant role and transition to a lower carbon and eventual net-zero emission future. We have put an energy transition team in place to identify and develop opportunities in this space and recently hired a director of sustainability. We're working on various projects, mainly focused on lower carbon propane source, currently including renewable DME and hydrogen. Following the end of the quarter, we entered into an agreement with InEnTec to bring renewable DME to our customer base, providing a carbon-friendly enhance to traditionally sourced propane. InEnTec plasma enhanced smelter PEM gasification process will divert organic waste from landfill and convert into carbon-friendly, clean-burning DME, which can be effectively blend with propane and use as an alternative renewable fuel of [ result ]. We're excited to enter this partnership, where we will not only be able to provide carbon-friendly fuel to our customer, but we will also be reducing the waste that this will [ be selling our ] country plant fields. According to EPA, organic material continues to be a largest component of municipal solid waste and also contribute to increased greenhouse gas being released into the atmosphere. So we will now be part of the process of recycling that waste material by converting it into clean-burning fuel and providing it to our customers. We are in a strong financial position from our debt and leverage perspective following our recent common equity insurance or gross proceeds of CAD 288 million. The additional liquidity from the equity insurance and our stable cash flow from operation is expected to provide us with capital to continue our growth through acquisitions, investment in organic growth and continuous improvement project. Having accelerated our acquisition in 2021, and to start 2022, our focus in 2022 will be integrating and capturing the synergy from acquired business. I can assure you, we've had a review of those 2 larger acquisitions this week, and everything is on plan and doing very well. We still see a strong pipeline of acquisition opportunity in U.S. and Canada. So we're confident, and we will continue to acquire quality retail propane assets and achieve a Superior Way Forward target of CAD 1.9 billion. And we've passed about 40% of that target as we speak today. And the price of acquisition, the valuations are coming down somewhat, which is good for us. Before I turn the call to Beth, I would like to make a brief comment on my planned retirement. As mentioned in quarter 2 press release, I will be formally retiring on July 31, 2023. With our seasoned executive and strong team, Superior is well positioned for the future. The Board has appointed a succession committee to find a new CEO for Superior and to address the transition. I will work with the Board to ensure a smooth transition as we continue to build on our operational momentum through the implementation of Superior Way Forward initiatives and drive shareholder returns. A recount of what we've accomplished over those past 11 years, and we look forward to executing our plan for the ongoing benefit of all our stakeholders. I will now turn the call over to Beth to discuss the financial results in more details.

Thank you, Luc, and good morning, everyone. As Luc mentioned, Q2 is a seasonally slower quarter for our business as we exit the colder winter months, and the results are in line with our expectations. Superior generated second quarter adjusted EBITDA of CAD 25.6 million, a CAD 6 million or 19% decrease over the prior year quarter. This was primarily due to the impact from the huge benefit that was received in the prior year's quarter and lower realized gains on FX hedging. The decrease was partially offset by improved sales volumes and higher average margins in our Canadian Propane business and higher results from U.S. Propane and lower corporate costs. In addition, as Luc mentioned previously, with the Kamps and Quarles acquisitions, in Q2, we have 25% of the cost, but only approximately 10% of the volume. This is all factored into Superior maintaining our guidance for the 2022 year. As you will have noticed, we updated our reporting segments in our Q2 financial statements. And we will be reporting the following 3 segments going forward: Canadian Propane, U.S. Propane and Wholesale Propane. These segments are better aligned to the specific characteristics of our operations and will provide a higher level of detail with regards to those customer segments. The second quarter loss from continuing operations was CAD 85 million, an increase of CAD 48.9 million compared to the prior year quarter. The primary driver for the higher net loss was an unrealized loss on derivatives and foreign currency translation of borrowings compared to an unrealized gain in the prior year quarter. Turning now to individual business results. U.S. Propane adjusted EBITDA was CAD 16.2 million, an increase of CAD 2.2 million from the prior year quarter, primarily due to contributions from acquisitions completed in the past 12 months and higher margins. U.S. Propane sales volumes of 246 million liters increased 16% compared to the prior year quarter, primarily due to contributions from acquisitions, partially offset by an impact from unseasonably warm and inconsistent temperatures in Q2 and customer conservation stemming from the high commodity price environment. Canadian Propane adjusted EBITDA was CAD 13.3 million, a decrease of CAD 8 million from the prior year quarter, primarily due to higher operating costs as a result of the impact of the CAD 7.8 million [ fuel ] benefit recorded in the prior year quarter. Canadian Propane sales volumes of 226 million liters increased 5%, driven primarily by commercial volumes. Commercial sales volumes increased due to improved oil field demand and the impact from the listing of public health measures associated with COVID. Wholesale Propane adjusted EBITDA was CAD 1.8 million, which was consistent with the prior year as the impact of the Kiva acquisition was offset by weaker market fundamentals in California. Turning to corporate results, the adjusted EBITDA guidance and leverage. Corporate operating costs were CAD 6 million, a decrease of CAD 2.2 million compared to the prior year quarter, primarily due to lower longer-term incentive plan costs related to the share price decline in the current quarter. Superior realized gains on foreign currency hedging contracts of CAD 0.3 million compared to a gain of CAD 2.8 million in the prior year quarter due to lower average hedge rate relative to changes in exchange rates, and a decrease in amount hedged as a result of the sale of the Specialty Chemicals segment. Superior's total net debt to adjusted EBITDA leverage ratio for the trailing 12 months ended June 30, 2022, was 3.7x, which is within our target range of 3.5x to 4x. As Luc mentioned, we're maintaining our 2022 adjusted EBITDA guidance range at CAD 425 million to CAD 465 million with a midpoint of CAD 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 will come from Nelson Ng with RBC Capital Markets.

Luc, congrats on your retirement plans.

Thank you.

First question is related to the renewable DME. I think similar to -- I guess the question is, last time when we talked about green hydrogen, you said the margins were pretty similar to propane. Is this arrangement similar to green hydrogen, where you essentially get supplied the DME you distributed and the margins are similar as well?

Yes. It's very early to be 100% sure, but I am convinced personally, even before we get customer and what's the pricing for customers by the time the production comes on, really confident we'll have a similar margin. We're into the [indiscernible] brand new business, and a lot of service comes around supplying tanks and fulfilling tanks and our technician work that they do. So my expectation from what I've seen so far, that margins are going to be as good. I'm even a bit optimist that we can try to get more because it's green and there's a lot of customers that are going to want green propane. And I think there's a tweaking for us that at least what we have at margin and maybe optimistically a bit more.

And the one thing that I'll just add, Nelson, is that we'll have the ability to blend the DME. So we'll have the product that we'll buy the product, and then we will blend it with propane in addition to the ability to use it as a renewable fuel completely on its own. So there's these two options.

Okay. And there's probably limited CapEx you need to make for this, right?

Right. But those CapEx are not on our watch.

Yes, we're buying the product.

Yes.

No, I'm just thinking from an equipment perspective for blending and other things, and you're just going to use the same propane trucks to make the deliveries, right?

It will be the same propane trucks, but there will be a small capital requirement to have the equipment to do the blending.

But with the same thing [indiscernible]...

Yes, it's the same thing. It's just blending equipment.

Okay. Got it. And then, Beth, you touched on consumer conservation of energy due to higher prices. So can you -- there's two questions. I guess the first question is for the average retail consumer, roughly what was the cost increase they saw year-over-year? And then I guess the second part of that question is roughly what percentage decline in demand that you see from some -- versus what you expected, assuming a similar temperature of weather?

Yes. So on the first part of your question, from an overall cost increase on average, that would be seen by the customer all in, it would be roughly 20%. And then from a conservation perspective, that one there is at this point in time, we're seeing some impact but it wasn't from a percentage perspective. I wouldn't even say it's necessarily 1%. I do think as we go forward with the higher prices, there is potential for us to see more impact from a conservation perspective. Luc, I'm not sure if there's something you want to add?

Yes. The theory from the beginning, when all the energy price went up, 20% is a lot, but it's a lot when you think of filling up your car with energy, oil and diesel and all the natural gas. So net-net, we thought that the customer shouldn't think, oh, that Superior charging me too much. Philosophically, if you go back with a year, something like that happen, oh, they're charging me too much. We're going to call the competitor, which is a lot of trouble to get the tank and make the change. Today, I didn't expect that to come, will be an issue too much because everybody knows wherever you are today, you know that every emerging content gone up so much, but people are aware it's not Superior gauging and increasing their margin too much. So I think we had a path this year because it's known around every segment of customer. Well, energy guys are really going up. So one thing I can also confirm is if there is a 1% conservation, I think what happens, I think that somewhat in quarter 2, people might not take the fill. But when quarter 3 comes or 4, they'll take -- will have to fill up more. So it might be that they put the thermostat down and that affects a small percentage of our customer. I can assure you from a guidance point of view, I am zero worried that we will not cover that some ways and make this a tougher process.

Okay. Great color. One more question before I get back in the queue. So Luc, in terms of your retirements, like what were the key factors that led to your decision to retire next year?

A couple of things. First, I'm very healthy, still full of energy and -- so I just love work. But I think I could have done before years, as you know, from a part of an equity firm, I've done a real project then I'm not CEO and done traveling, [indiscernible] present these that you need to work. So maybe bringing the pace down somewhat. That was my first objective. And so when it comes to the company, it's a tough decision because company's coming to the level that we can say, wow, like with the 2 acquisitions we just did, they're going to improve the bottom line by 25%. You can find that and put my name to it, it happens. So I think we're in a good position of how we execute and the team in place and the operation effectiveness that's coming, we have continuous improvement every year. We have keep our margin in the recession or whatever doesn't affect our industry as much as others, and the team is there to really execute properly. So when I thought of all that, what's the right timing? Many of you probably don't know, I'm just 70 years old. So I'll be 71-plus when this happens. And I've offered the Board, I said to them, I'm telling you that. I'm doing this, but at the same time, if a year becomes 14 months because of necessity or it already becomes 10, because you get to the new CEO person sooner, I'm flexible to help until the end, and I want this company to do well. I still own a ton of stock. So most probably maybe earlier than I would have expected from my own lifestyle, but get to a point and we say, well, maybe bring it down a notch from the fashion drive and experts and work. So it was all that.

One moment for our next question. That will come from the line of Chi Le with Desjardins.

Luc, congrats on your retirement and the achievement you have had at Superior.

Thank you.

Maybe just a bit on that. I know it's early in the process, but what would the Board be looking for in terms of the next CEO? Is there any preference for internal versus external? Would you be as to be looking into U.S. as well?

That has not been decided yet. So what happened is by me confirming with the Board what I'll do and say, a year, so it's like not tomorrow, lots of time. We have a great year, and I want to make sure we're on every aspect for the next until there and after. So for them, they have to alter them, sit down and say, okay, let's look at the type of CEO we would want, and they have not done all that work yet. So developing a profile, organizing a search, which will come in months to come. It's not a panic sort of situation that demands a rush and make quick decisions because I'm giving them a year. So they're really going to take their time to look at all the angles, how to proceed, what are the profile and then come to those conclusions in the next 3, 4 months and then move on to decide what's the right CEO for this company going forward. None of that work has been done. But we wanted to announce in kind of some into December, CEO of a company. I've been here 11 years or plus coming. And then we said, look, you made that decision, you declare, let's announce right away. We're a public company. We don't want any shareholder out there to know a month later or -- so we've announced before all the work of preparing the succession was -- the profile and the type of CEO has been the work is coming. So we've decided to announce immediately as soon as I've made my decision.

Great color. Maybe this question is for Beth. So operating cost was higher, especially in the U.S. So I know you said part of it is due to the fixed conversion by the acquisitions and partly from inflation. So just want to see how would be the split between the increase between the two factor, trying to see like what the run rate could be going forward?

I think I missed the two myself.

Yes. I just try to -- let me -- I think I heard the question, just you're a little choppy, somewhat we can hear. So are you asking [indiscernible] incremental costs associated with the U.S. business, how much is due to acquisitions and how much is from an inflationary perspective or other cost increase perspective? Is that the question?

Yes. Just trying to see how much of the increase attributable for each factor. So we can look at the run rate going forward.

Yes. So I mean, maybe the best way from an inflationary and a labor cost perspective, where we've seen those impacts overall in the business. For Q2, if you want to think about it, the impact is somewhere -- like it's in that CAD 7 million to CAD 9 million range. So predominantly or primarily the rest of the cost increases would all be associated with acquisitions, a little bit for organic growth potentially, but the vast majority, I think it's reasonable to just sort of put it all in a bucket for acquisitions. I was just going to say, so for run rate, you could think of the costs from that perspective, but remember, a lot of the costs are variable in nature as well. So the costs will still always be higher in Q4 and Q1 on an even run rate basis.

One moment for our next question. That comes from the line of Joel Jackson with BMO Capital Markets.

If we look at the rest of the pipeline for prepaying tuck-ins or acquisitions this year, are we pretty much done or at least done for what actually could impact 2022 earnings?

What could happen, Joel, is more small tuck-in, and the return are quite big when you do a small tuck-ins. So that could happen. When it comes to the mid to larger size, nothing this year. We really are focusing on the integration of the 2, which is ahead of plan by the way of Quarles and Kamps, doing it faster and quicker than the 18 months we usually take because we ended up buying them at a [ propelling ] timing, if you want, look for the next 10, 20 years. But for this year, April, May, you'd rather buy something in November, you get the winter. So we have -- but it's giving us the opportunity to say, okay, this summer, we still made this happen sooner or faster. So there will be all hands on deck to integrate properly those 2-sized company, small tuck-in and then review for bigger, larger deals in the years to come. We're on a cheaper debt down. And so it's not much coming in the next while.

And Joel, just as a refresher, I think, with respect to your question. So if we did close an acquisition or we close acquisitions in Q3, we'll only get roughly 35% of the EBITDA, and that happens in Q4. But as Luc's saying, as we're looking at it, it's not -- it's like there's nothing in our view from a materiality for this year or that would impact guidance.

Right. So the kind of guidance, what's the guidance range now, which never includes future acquisitions. At least from a future acquisition perspective, you're kind of done for what can impact 2022. Does that make up something? I'm asking the question the same way...

Yes. No, that makes sense based on what we know currently, yes.

Yes, makes sense.

The other question I have is covering the stock or company for a long time, we're kind of used to what Canadian Propane margins are, good years, CAD 0.19 a liter, CAD 0.20 a liter; not such good years, CAD 0.15, CAD 0.16 a liter of gross profit per liter. And now that we've done the resegmentation, sort of all changes. Can you talk about kind of now what the range is now for kind of like good dynamics for Canadian Propane margins? And when the dynamic is not as strong?

Yes.

Yes. I think, including the segment, and currently where we're looking at it just assumes sort of lead the U.S. as it is. With respect to Canada, if you want to think it based on the segment, somewhere between CAD 0.25 to CAD 0.30 would be a range. So a challenging year, CAD 0.25; a good year, CAD 0.30. Obviously, customer mix, kind of an influence in Canada over where it sits within that range. And maybe the best way to think about Wholesale now that we separated out, typically Wholesale, those volumes will generate around CAD 0.03 per liter.

One moment for our next question. That will come from the line of Ben Isaacson with Scotiabank.

Congrats, Luc. I'm sure it's bitter sweet. Just two questions, if I may. Number one, on organic growth. Can you -- should we be modeling an increase in volume slowly over time without meaningful acquisition costs? In other words, do we see in certain regions that volume is increasing, our market share is increasing. That's not getting kind of taken back by some of the competitors without any meaningful spend?

Okay. So if you look at Canada, there's some good growth right now because we lost some commercial 20% of our volume, which is less margin, especially in the oil field due to COVID. And right now, you'll see for the next 2 years, about 6% or 7% growth a year in that segment. And then from a residential, we tip a lot of tools. And we're getting internal growth in the rate of about 3% in the retail Canada. So a lot of good, good success in Canada's internal growth versus overall industry maybe growing only 1%. And the sales were equal to the industry growth. So we're flat. We're not gaining on internal growth. We've done a lot more work in the last 6 months to take all our -- the way we built the business of innovation, development and digitalization with customers internally, we do projects in Canada, we execute. We now have a service project in works in Canada for orchestrating the distribution of the logistics and [indiscernible]. So once we cover all the province in Canada, that's in works, the machine is now rolled. It's working, and we're starting with Maritime. We'll cover all of Canada, then we'll go to the States. So I guess what I'm saying is the States have done a ton of work and a lot of work on acquisition and integration, will be number one. And we're then dealing and servicing the customer day to day. And then the marketing part that we have developed, the machine and the best tools in Canada is now this year started to be applied in the U.S. business. And there's the coordination between the best tools and the best marketing approach by segment, and we're now pushing that in the U.S. business. So you'll see -- I think I'm expecting by next year, U.S. won't come to more growth than the industry growth. For the moment, it's not the case. But we haven't executed on our marketing, all of our marketing approach to the U.S. at this stage. That's why there is differential between Canada and U.S. growth.

That's helpful. And then just my second question, transitioning from organic growth to strategic growth. Can you just talk a little bit about the Northern U.S. states? And what is the kind of long-term or midterm strategy there? And the margins in that region, are they closer to the Eastern U.S. or closer to Canadian margins? How should we think about that opportunity set in terms of the timing as well?