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

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

Thank you, Katherine. Good morning, everyone, and welcome to Superior Plus' conference call and webcast to review our 2022 third 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.

Thank you, Rob, and good morning, everyone. Thanks for joining the call to discuss our third quarter results. I'm pleased to say quarter's results are in line with management expectation, and we're maintaining our 2022 adjusted EBITDA guidance range. It's important to note that quarter 3 is the seasonally slowest quarter for a business due to the lower heating low of this quarter, in particular, was negatively impacted by the timing of acquisitions completed in the past 9 months. We've acquired 2 pretty good-sized enterprise, and we incur all the costs associated with the acquired businesses, but the volumes are lower due to the lack of demand in the summertime, and we have not yet had the timing to achieve all the associated synergies, which are coming in the next 18 months. Artinian business was also negatively impacted by warmer weather, especially in Western Canada as well as the lack of Canadian emergency wage subsidy of third quarter of 2022. So basically, I think there is, I think, an opportunity where we want to understand that quarter 3 is so low in volume, and we made those 2 acquisitions not a year ago, but not having the chance to have all the EBITDA that comes in quarter 4 and quarter 1, which are going to be coming in the next 2 quarters. So there is a disconnect there. No surprise to us. We've acquired this business at the right price. The synergy are tracking a bit ahead of time as we start to work on it this summer, and there is absolutely no surprise for us of this situation in quarter 3. As we look to date results in quarter 4 2022, we're comfortable in our ability to manage the impact of inflationary pressure on their business to increase price and cost-saving initiatives. We saw the benefit of acquisitions completed over the last year to higher volume quarter-over-quarter. However, as I mentioned, we also saw our operating spend in the quarter. Our focus on being a per-play energy distributor means that their third quarter results would emphasize the seasonality of the industry we operate in, especially in the U.S. propane distribution segment, which has mainly residential customer whose consumption is dictated by inning degree day, which are very low in July to September. We're making great progress in their superior forward EBITDA growth initiative through acquisition, continuous improvement and organic growth. During the quarter, we made great progress on the integration of our Quarles and Kamps acquisition ahead of the evening season, which will set up very well for synergy ingratiation going forward. We also closed 3 small acquisitions since our last update in quarter 2, 1 in California, 1 in North Carolina and 1 in Ontario, Canada. -- for total consideration of CAD 29.9 million. With these 3 acquisitions, we have achieved a low end of our '22 acquisition target range of CAD 200 million to CAD 300 million in enterprise value, excluding Kamps acquisition. We continue to demonstrate our commitment to our dynamic capital allocation approach to our commencement of a normal cost issue bid in October 13, providing us at another level lever through which to return capital to shareholders. This does not mean we're no longer elevating M&A target. We will do acquisition, but we may also repurchase share if that opportunity to generate the appropriate returns. We are focused on creating long-term shareholder value, and we will only allocate capital to our most acquisitive opportunities. I'll now turn the call over to Beth to discuss the financial results in more detail.

Thank you, Luc. Good morning, everyone. As Luc mentioned, Q3 is the seasonally slowest quarter for our business and results were in line with our expectations. Superior generated third quarter adjusted EBITDA of negative CAD 8.8 million, a CAD 21.8 million decrease over the prior year quarter. This was primarily due to lower adjusted EBITDA at our Canadian Propane distribution and U.S. Propane distribution segment, higher corporate costs and a realized loss on foreign currency hedging contracts compared to a gain in the prior year quarter. The decrease was partially offset by higher adjusted EBITDA from our Wholesale Propane distribution segment. The third quarter loss from continuing operations was CAD 206.9 million. An increase of CAD 171 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, higher selling distribution and administrative costs, income tax expense and finance expense, partially offset by higher gross profit. The loss on derivatives and foreign currency translation of coring compared to a gain in the prior year quarter was primarily due to the changes in the market price of commodities, the timing of maturities of underlying financial instruments and the changes in foreign exchange rates relative to the amount hedged. Turning now to the individual business results. Our U.S. Propane division adjusted EBITDA was negative CAD 10.9 million, a decrease of CAD 3.1 million from the prior year quarter, primarily due to higher operating expenses, partially offset by higher sales volumes from acquisitions completed in the last 12 months and higher average margins. Canadian Propane adjusted EBITDA was CAD 3.6 million, a decrease of CAD 14.4 million from the prior year quarter, primarily due to higher operating costs and modestly lower sales volume than average margins. Operating costs were – or higher primarily due to the CAD 8.2 million Canadian emergency wage subsidy versus realized in the prior year quarter compared to mill received in the current quarter. Sales volumes decreased by 3%, primarily due to lower commercial demand related to warmer weather in Western Canada. And the average weather in Western Canada for the 3 months ended September 30, 2022, as measured by degree days, was 27% warmer than the prior year quarter. Average margins were lower primarily due to the impact from the sale of carbon offset credits amounted to CAD 4.7 million in the prior year quarter. Wholesale Propane adjusted EBITDA was CAD 5.1 million, which was an increase of CAD 1.9 million from the prior year quarter, primarily due to the contribution from the acquisition of Kiva Energy, Inc. Turning to corporate results. The adjusted EBITDA guidance as well as leverage. So the corporate operating costs were CAD 6.2 million, an increase of CAD 5.2 million compared to the prior year quarter, primarily due to higher insurance costs. higher professional fees in a lower long-term incentive plan recovery related to less of a share price decline in the current quarter compared to 2021 and the impact of inflation. Superior realized losses on foreign currency hedging contracts of CAD 0.4 million compared to a gain of CAD 0.6 million in the prior year quarter due to the average hedge rate of foreign exchange hedging contracts compared to the weakening of the Canadian dollar.  Superior's total net debt to adjusted EBITDA leverage ratio for the trailing 12 months ended September 30, 2022, was 4.3x, which is above our target range of 3.5 to 4x. The higher leverage ratio was primarily due to the impact of the higher U.S. tag rate on the U.S.-denominated debt. On a constant currency basis, using the rate as of June 30, 2022, Superior's leverage ratio at September 30, 2022, would be 4.1x. 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 fourth quarter, we anticipate average weather to be consistent with the 5-year average for the U.S. and Canada and the Wholesale Propane fundamentals to be consistent with the past 6 months. With that, I'd like to turn the call over to Q&A.

[Operator Instructions] Our first question comes from Gary Ho with Desjardins.

We just to start off with a question on your guidance. So you've confirmed the range. That's great to see. There's only 1.5 months to go here. So if you hit the 5-year average weather pattern, we should think about meeting the middle of that range and in vice versa for better or below. Is that how still how we should think about that when we track the heating degree days for the balance of people?

Yes. So as you know, historically, if we were not to be in the middle of the range, we usually tell everyone that we are just within that just because we feel confident today that the year, normal weather going forward, the year will be what it is and will be in the guidance. October weather is better than anticipated in the state. And of course, very warm in Canada, but we've been around for me 12 years here and there's many weeks to go, and the colder weather has already started out well. Any of you on the call that are question getting it. So not we're confident as of today, we feel when the range.

Okay. Great. And then Luc, while I have you, I want to get an update on the CEO transition plan, maybe discussions with the Board and what they're looking for your successes there.

Yes. That's sort of the work in progress. They are not so firm, but they're looking internally and externally as pretended it. And so advanced that much over the last 2, 3 months because this really is a process that usually takes 6 to 9 months, I would say. So there is a committee of the Board, 3 of the Board members that are on that, and there's a regular feedback to the Board on -- accordingly as to how that advancing, no news at this stage, it's somewhat early. So progressing normally, I think, for me because usually, a project like that is at least 6 to 9 months.

Okay. And then my last question, you have announced your NCIB and executed a bit of it recently. Maybe for Beth, as we stand here today, how would you kind of rank the capital allocation priorities, buybacks, M&A and deleverage? And then just on the latter part, leveraging, if rates stays at roughly about CAD 0.35 here, when will you get back to that 3.5 to kind of 4x target range.

Okay. So a couple of questions in there. So from a buyback perspective, yes, we have the NCIB in place. As far as allocation of capital, as we consistently communicated is a dynamic model. So we would look at what return makes sense or what our view on the returns are and how we allocate. So when you ask me sort of to look at it into judge whether it's M&A or buybacks. I mean that's going to be on an individual basis. I think from the perspective for M&A as you look out and Luc may want to add on to this. M&A as we look for the remainder of this year, in particular, typically, once you hit this time of year, you don't have a lot of people at this point looking to sell. That will typically pick back up from a normal shape perspective back after you're through the heating season, so that April, May into next year. To your question on leverage in our target of a 3.5 to 4x. I mean at this point, we would view ourselves at the end of this year being near the high end of our 3.5 to 4x synergies need to be -- or we'll continue to realize those, which will have a positive impact from a leverage perspective. And as we've always said that 3.5 to 4x range, while we're moving forward in doing our acquisitions. We have that range just because it's going to depend on the timing. We've had sort of very chunky where we've accelerated a bit ahead of our targets and what we're looking in that total. You may recall back from the Investor Day, the CAD 1.9 billion in total. We've been well ahead of the CAD 250 million per year target. So I mean, as we look to get to that 700 to 750 by the end of 2026 on EBITDA from operations, it's going to be chunky. So to answer your question, it's really going to be dependent on the opportunities and how they present ourselves for when we be down towards the bottom end of the range.

Our next question comes from Daryl Young with TD Securities.

Just one quick one for me. I just wanted to kind of reconcile your thinking around capital deployment, given where leverage is, and it seems like costs continue to march higher. I'm just wondering if it would make sense to hit pause on the M&A and the NCIB for a period of time and really focus on realizing those synergies and managing the cost profile. And I'm also speaking with respect to the pro forma EBITDA numbers and your net debt to EBITDA, I mean, with the Qs rolling off and the decline in that pro forma EBITDA number just seems like cost management could be a focus going forward?

Maybe I'll start and to that. So from an overall cost quarter-by-quarter, also difficult to be on the percentage always at the right amount, but overall costs are not going up more than inflation. And we are capturing all of that into margin. So we are not as great of not making our profitability due to cost increases on all the aspects. From an acquisition to point about the capital, good timing, we just did 2 good tight deal. We're integrating that. I can promise you all the 25% improvement is on track. And then a bit less deal, it's a small one that happening at this stage. Let's go do those 2 integrations. Let's go through the fall winter season, which slates that much deal going on, and we'll probably look at deals smaller in the second half of 2023 come. So at this stage, probably a good timing that we're not having another big crazy deal in front of us because to reach of intent, we're confident and we're ahead of the game, actually. So the balance act of having done 2 good deals slowing down a bit because we're going through our winter, we're doing this integration, we certainly have our leverage, I think, when we go to later 2023.

Yes. And maybe I'll just walk through a little bit. From a leverage perspective, we're at the end of the quarter, we are at 4.3x just to walk through sort of some of the factors. So the 4.3x, there was a lot of volatility with the FX rate right at the end of the quarter. So that's where we balance it out. There is roughly a $97 million impact on our foreign denominated debt, which has that 0.2x impact, which would bring us down to the 4.1x. And when you really look at the EBITDA in Q3, you do have some individual impacts that were impacting the year-over-year reduction of the CAD 22 million. So just to go through some of those, from an M&A perspective, where the U.S. acquisitions are primarily heating load, they in Q3 will have a negative impact. And so there was roughly almost $7 million of negative impact, which is Q4 and Q1, where you'll more than make up for that, and you're going to see the growth in that EBITDA as well as achieving all of those synergies. And obviously, the wage set be impacted in the timing of carbon credits, there was CAD 4.3 million of carbon credits in the Canadian business that we would have realized in Q3 last year. And this year, it will be more than likely moved into different quarters, so we'll see that in Q4. So again, looking at all of that from a leverage perspective, we do have that as one of our financial metrics, but we also balance that with the payout ratio. So from a payout ratio perspective, we do target that 40% to 60% range. If you look at Q3 with the impact, we're modestly above the 60%. But certainly, when we design that target, we have it, so there is a cushion. And again, that's just overall to ensure that we have plenty of free cash flow to pay out dividends. And so from a dividend perspective to always ensure that we have a cushion in rate.

Okay. And maybe just one follow-up to something that we've said about pricing and pricing the gross margin to account for the cost. Where do you stand today on a competitive basis in terms of your price? And is there a risk if price keeps going higher that you maybe create customer churn?

No, it's a very good question. We are doing now as a secularly regions as to where pricing of a market is. And we know that a 90% is always a small one that is the lagging of increasing the price according to new inflation cost. But the growth majority of our industry is increasing the price accordingly – people don’t want to make less profit year-to-year. And we see our pricing is other line by region, by market, where are we? What can we get increase price with inflation and lose business? So there isn't a business loss. We're actually growing market share in Canada, residential and commercial, very pleased with our marketing sales approach, not so much in the state, but still maintaining the same margin, same market position, market share. And so we're analyzing that properly and are careful to do it the right way. What we think we'll see in 2023, we had some much of that so far is probably an observation a bit more maybe 1% more in the winter time because people have less the money with what they're not having the big builds and a bit of healthy days for how we go through the winter is the paying price coming down compared to last year. So this is going to be a big help. So our customers really are going to be getting a reduction in price and that really shows well for the winter coming.

And our next question comes from Matthew Weekes with iA Capital Markets.

I was just wondering on the increase in kind of the U.S. dollar denominated debt, I was wondering if there's any offset, if there's an asset or if there's any swaps or hedges or anything like that? Or if that's something you'd think about doing going forward?

I think we do have FX hedges, which you disclosed that those hedges are designed for the cash flows of the business as well as EBITDA of the U.S. business. Offsetting the debt, no, it's done at a current rate, and we have the business generating. So the view is we have a natural hedge arguably as we go forward for that long-term the long-term debt. And again, because it gets marked at the current risk now and on an average basis, our U.S. EBITDA numbers and U.S. earnings, I mean, they, over time, will be at the average rate. It's just you have a large disconnect right now between the 2, between the EBITDA and the impact on the debt. But I will actually flag, which we don't factor into our leverage calculation, we do have a vendor note, which actually matures prior to the long-term debt, and that's CAD 135 million if you include the accrued interest. So that would actually have a positive impact on leverage if we reflected that in roughly 0.3x. But again, that matures before the long-term debts. But because it's not factored into typical covenant calculation, we don't reflect that and how we disclose our leverage.

And my next question is just kind of on synergies and you disclosed kind of the amount of synergies you expect to get from acquisitions here. And we'll probably see that more as we go through the winter heating season. But how does that compare to sort of your initial estimate? -- sorry, is synergy capture pretty in line with what you initially thought when you were acquiring these businesses?

Yes. So Kamps is perfectly as planned. And on case, we have a bit more than the usual 25%, we always commit to. So looking good when we do the smaller deal that they account for a lot, but they return or and the synergies are even higher, more than 30% range. So everything is as all the deals we've made everything is marching on accordingly. When we do our due diligence, we can easily take our approach and our dashboard of how the [indiscernible] are -- and having done it out time we're not a lot of growth for us being -- achieving or in plan because of our history or experience with our integration approach.

Our next question comes from Joel Jackson with BMO.

First question, if we -- I know you don't have 2023 quite yet. But can you may be based on some of the acquisitions you've done this year or you haven't achieved a full run rate of earnings or the synergies or some lagging synergies from deals you completed in the last few years. Like how much more would you think EBITDA earnings go up in '23 versus '22 just based on normalizing full run rate of some acquit this year, plus some lagging synergies you haven't achieved if you get my question, right?

Yes. This is not the time where we announced our guidance, but you're right, that's good as of now because we do those 2 deals and we have the synergy that we've even during the summer, we usually -- when we acquired on that immediately the summer ahead of us, the ideal time to acquire this to do it forever. So yes, we conduct, give you the guidance, but it's positive and it's going to be a good improvement over this year.

Yes. And Joel, maybe another way to think about it is if you look at the -- what our calculation for the leverage ratio going back to the TTM, -- like you have pro forma adjusted EBITDA on a TTM basis of CAD 468 million. That wouldn't from there, that does include sort of accounts and portals. So basically, that's because most of the EBITDA comes in Q1 and Q4. So I mean, from there, you have incremental synergies, which we'll be achieving going forward.

Right. That's what's kind of getting at. Okay. So my second question is, can we look at margins here. If I look at the Canadian Propane, U.S. Propane, Wholesale Propane, gross power for leader, what might Q4 look like versus Q3? And then what kind of average should we be thinking about for '23 and going on?

Sure. Okay. So Joel we'll talk about the U.S. first. So there was, I mean, obviously, an increase quarter-over-quarter of roughly CAD 0.07 getting us to the CAD 0.449 for the quarter. For the balance of the year, I think the best way to think about it is, again, looking at the range of USD 0.30 to USD 0.35 or CAD 0.39 to CAD 0.46 CAD. I think we'd anticipate for Q4 for it to be towards the high end of that range and what that would mean from an overall average basis for the year. Thinking about it like slightly better than 2021. And in 2021, it was USD 0.32. So from a Canadian Propane perspective, very consistent quarter-over-quarter for the balance of the year, think of it in that range of CAD 0.28 to CAD 0.30, and that's probably a good range for the total year as well or an average for the year at CAD 0.28 to CAD 0.30. And then Wholesale, I think the best way to think about the wholesale business is basically the range of CAD 0.03, which was sort of consistent quarter-over-quarter and also a relatively good number for an average for the year.

But you've been hitting a lot better than CAD 0.03 in wholesale, the last little one, right?

Yes. It's going to depend -- yes, it's going to depend, and you've got some FX in there as well. But CAD 0.03 is a good firm average.

And our next question will come from Steven Hansen with Raymond James.

Yes. Apologies if I missed it, but I was hoping you could perhaps speak to how you're thinking about the somewhat volatile propane macro backdrop we've been seeing of late and what it might mean for your business this winter. Weather is always the key driver, of course, but I'm just thinking about some of the conditions around energy shortage in Europe, the big export pull we've been seeing from North America on propane, weaker grain drying season factors like that. And just how you're navigating all those and whether you see this opportunity or risks or fairly neutral.

Sure. So -- at this point, in our view, the fundamentals are actually pretty neutral. So the inventory levels have improved. They're within 3-year averages are in that range for both Canada and the U.S. The U.S. has been well under 3-year average for a period of time. Also, from a price perspective, like the prices have come down, so they are weaker, and that is linked as you're flagging there to the crop drive. Now I think the next indicator where you could get some volatility is if you have extreme cold weather impacted. Now I think if there is that gold, obviously, the prices will typically strengthen -- but it's weather normal, then I think it will likely stay within the range or that would be our view. Now from a macro impact, I mean there's certainly pricing around WTI crew, the conflict in Ukraine as well as potential COVID resurgent strict resurgence is certainly at a macro level. That could have some impact in the next 4 to 5 months. Now from our perspective, I mean, we will purchase fixed price supply where we have fixed price contracts. So from that perspective, we're comfortable that we've got predictable margins. And then just to flag and I know everyone is aware, but just to flag, we do have the ability to pass through the increase in commodity costs. But again, the prices are down. They're down roughly 30% now from where they were in Q1, Q2, the high.

So I'll give you just a bit more color. When you produce more natural gas and you export, you also produce propane as a percentage of your total production. And companies an export as much as natural gas. So you end up in America, this days having good inventory that are going up. Prices have come down to that point, which is always a good thing for us. So we can maintain our margin, prices are coming down. We're going to do some fixed price with customers and help them also, I mean, to pay to their previous question, nitration and customer taking less volume, it's going to be a good year because we're going to end up giving them a discount, even though we keep the fact margin might be a bit better than the entries, but they're getting a discount for the next 6 months for the winter to come on the previous price they paid by this past year. All good.

That's great. That's really good perspective. guys. I appreciate that. And I don't mean to beat the dead horse on the capital allocation issue, but just wanted to circle back one more time on the idea around deleveraging versus M&A and even the buyback. I mean how do you feel about the opportunity set of just those 3 buckets? I'm just -- I'm struggling a little bit because the multiple has gotten a lot cheaper, of course, of late for the equity. I know your pipeline has got good opportunities in it as well, but then you've got this debt paydown issue. It's just striking is multiple priorities for the same set of capital. And I'm just trying to get a bit better sense for where you think the real priority is or if it's just -- if it is perfectly balanced.

Yes. I mean I think I can sort of kick it off. I mean, I think from an M&A perspective, as I mentioned before, we always see much less in Q4 and Q1 from an opportunity perspective. Again, from a share repurchase perspective, a very small amount as we were looking at that, and that's when the returns make sense, and we think that our shares are undervalued and it does present a better return to us. So I mean, I think it's fair to say we're always balancing all of our various metrics and looking to deliver balance with payout ratio and the other pieces and then returns. We didn't communicate what we were going through accelerated M&A that we were targeting to the 3.5 to 4x. So that hasn't changed, and we will deliver basically as the cash flows come in.

And our next question comes from Robert Catellier with CIBC.

Yes, I just have a question on the M&A market. Have you seen the market valuations change at all in light of the cost pressures in the higher interest rate environment?

I mentioned that in the last quarter, a good question. We're -- I believe price of acquisitions are going to come down. The last 2 late deal we did, we can see it. And not being in the market or a bigger deal now because of everything we chat about for 2023. The people like on the industry that just the years. They understand that generation is not the same -- good-sized company that are the permit industry, Canada and U.S. [indiscernible]. And of course, will always be to buy when we have our retarget that are expected. Otherwise, we don't. But the trend is now for a lower price overall for an independent company it is.

Okay. And then are you managing risk in the M&A process any differently in light of those -- the inflationary environment and the higher financing costs?

Yes. I mean I think from our perspective, I mean, if you look at the increasing interest rates, better obviously has an impact on our weighted average cost of capital. So we're looking in judging appropriate return model that does get factored in, and it will have an impact on the hurdles as we look at the businesses. So this gets back to as the underlying macroeconomic factors change, the expectation would be as things settle out, you're going to have lower multiples just to ensure that we get the appropriate level of returns to ensure that we're delivering what we need to from a shareholder perspective and a business return perspective.

Is there our equity per side they have a bigger situation than us when they go to the market day to day every deal for our interest rates are higher, where interest rate well organized for the years to come. So they're going to expect to pay less to get their return as well.

Sure. I was also wondering just about maybe how you structure the deals in light of the volatility that's out there, presumably some form of recession and whether you structure the deals to include more earnout rather than just a firm valuation.

No. I think you end up things to there don't like or about but they rather get the cash and move on. So I think it's valuation that much or not.

Well, and just to sort of clarify, you're concerned in that you're flagging that would get reflected in how we want. So that would be reflected in how we model the business and what we would anticipate or expect to see over the next 4, 5 years. So we would factor in recessionary pressures and the potential impact that would have. But what I will flag, I mean, recall our business typically as well as the acquisitions we've been making are pretty recession proof. If you look at historic and the values because they are typically related to heating load and people need to heat their houses, whether we have a recession or not.

And I'm showing no other questions in the queue. I'd like to turn the call back to Luc Desjardins for any closing remarks.

So I'll wrap up this call. I'd like to thank our management and employees. Very proud of all of our accomplishments today 2022, no surprise to us. We will regain plan. We're in a solid position to deliver the 2022 adjusted EBITDA guidance. And to a few questions that was raised, we expect a good year in 2023. Thank you all for your participation, and we'll see you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.