Superior Plus Corp.

Thank you for standing by, and welcome to the Superior Plus 2021 Third Quarter Results Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question-and-answer session. To ask a question at that time, please press star then 1 on your touchstone telephone. I would now like to turn the conference over to your host, Mr. Rob Doran, Vice President of 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 Rebar, 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, Luke and Beth will begin with their prepared remarks, and then we will open up the call for questions. Before I turn the call to Luke, 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 CDARC. 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 Luke.

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 to safety, reliability, and we continue to provide essential fuel and services for our customers, whether they're employees or out in the field and working remotely. We're making good progress in our Superior Way Forward growth plan to requisition continuous improvement in organic growth, In the past 12 months, we've announced and completed 625 million of propane acquisition, including the acquisition of Camp 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, utilizing the Superior Way operating platform, and leveraging our larger scale as we are reducing redundant operating and back office functions. On September 23rd, 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 Camp 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 authorities 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 CAMP will occur in the first quarter of 2022. We still expect to finish within our adjusted guidance range of 390 to 420 million in 2021, even though the closing of CAMP has been delayed, which demonstrates the resilience of our business and the positive impact of the efficiency improvement and sales and marketing initiative taking as part of our barrier 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 margin were set in part by higher operating costs, particularly in the U.S. due to the recent acquisition. The third quarter is the seasonally lowest quarter due to the lack of eating demand in many of our regions. As a result, the increase operating costs from acquisition recently completed more than have said 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 two and three, so therefore more difficult to have profit, which comes in quarter four, as well as quarter one of 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 upset by higher average margin and higher sales volume related to near incremental contribution from acquisition. U.S. Propane EBITDA from operation in 2021 is anticipated to be higher than 2020, primarily due to the impact of acquisition complete in 2020 and in 2021, benefits from the Superior Wage and Decisional Workforce Optimization Initiative, and realized synergy from acquisition. Canada propane results for the third quarter were modestly lower than the prior year quarter, primarily due to the decrease in benefit from the COWS, partially upset 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 2021 anticipates to be lowered in 2020, primarily due to the decrease in average unit margin as well as reduction in CLW benefit. We're optimistic more than COVID-19 restriction 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 and more details.

Thank you, Luke, 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 was $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 expense. Our consolidated AOCS 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 taxes. 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 is measured by degree days across markets where U.S. propane operates with 17% warmer than the prior year quarter. Commercial sales volumes were 13% higher compared to the prior year quarter primarily due to incremental volumes from acquisitions and the easing of COVID-19 restrictions. Price margins were 37.9 cents 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 and 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, was 15% warmer than the prior year. Commercial sales volumes were also consistent with the prior year quarter, as increased demand from the oil field and remote camp businesses were offset by declines in some other segments, such as resales, 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 the 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, with 3.5 times. which is at the higher end of Superior's long-term range target of three to three and a half times. We're confirming our 2021 adjusted EBITDA guidance range of $390 million to $420 million, with a midpoint of $405 million, even though we had previously expected CAMHS would contribute to the business in 2021. For the remainder of 2021, we anticipate average weather to be consistent with the five-year average, for the U.S. and Canada and wholesale propane fundamentals to be consistent with the first nine months. With that, I'll turn the call over to Q&A.

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Again, to ask a question, please press star then 1. Our first question comes from David Newman of Desjardins. Your line is open.

Good morning, folks. Good morning. You can hear me okay? Yes, sir. Very good. Just looking at camps here, I understand the FTC has one request, but maybe just the nature of the second request here. And if we're modeling this up, I mean, obviously camps 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 Rebar on the FTC. Darren is our chief legal officer here, and he's in the weeds of that on the FTC. Daily basis. Thanks, Luke.

Yeah, no, I think, you know, as we announced previously, we received the second request September 23rd. So since that time, we've been working cooperatively with the FTC and CAPS has as well as they conduct the review of the transaction. And, you know, as we work through that, there's a fair amount of data that we have to provide. They, you know, determine what the custodians are and We work through that process. I think that's where we sort of find ourselves, you know, 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, you know, we should be thinking about where do we place the close?

Hard to predict. I would say... Yeah. Maybe I'll explain first what's happening in a bit more color is that our market position in California is, even with TAM, very low, and retail questions from the FTC are nonexistent, but not that much.

Yeah, 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 dominating or concentrating have the concentration in that market, right, Luke?

No, I think what's happening is they received orders 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 doing share at all. I think the wholesale is more complex for them to understand. who would carry the wholesale supplier, from where, and that's a, it is complex, and there's a lot of suppliers, and it comes sometimes from Canada, or they're wholesalers, and I think that whole area is where they're drilling down more. To understand it, I guess, they're preparing themselves for all sorts of requisition in this propane 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 pass go, 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.

Yeah, 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.

For sure.

What I would say is maybe to be conservative, assume it's towards the end of the quarter or at the end of the quarter, and give you a bit of a sense. you know, probably the way to think about it is Q1 would likely generate in the range of 50 million U.S. 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 things. Obviously, exports going out of the country. I know that you guys contract your supply in the spring, you know, and does that get you through the winter? And how much wiggle room you have on, you know, RAC++? In other words, the ability to actually price up in this kind of market. And just, you know, the speed at which you can get that through. Maybe just the dynamics of the market right now.

I think the first part that has to do with our market and the second part is to our position for the winter for supply. So 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 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 supply, Beth can explain what's happening there.

Yeah, so to 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 three quarters, we've also seen propane increasing a fair bit. So to fit with the overall market, And actually, we've seen 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 three-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 the inventory levels are okay. And this isn't a 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's a little bit of a different story. I think 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 three-year average for inventory levels, and it does tend to ease 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. We see some higher there, so the supply is sitting where we need it. From our perspective, 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 supplies 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 for 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. Thank you very much. Thank you.

Thank you. Our next question comes from Ben Isaacson of Scotiabank. Your line is open.

Thank you and good morning everybody. Luke and Beth, just three non-operational 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 five-year plan and our acquisition, the 25% improvement on the 18 deals we've done, and they're extremely impressed and excited. They met the management, everyone in my direct report, and a few additional people during the afternoon. And they walked away saying, wow, the transparency, the openness, the clarification of where we're at. First time we met in person, they were 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 being an anchor investor. That's their position. That's what they're... convince us they want to do. So good relation. As we grow, they intend to be there and participate. And they like the business. They like the management. They like our market position and what we've been able to accomplish in the last few years. They're, 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 at different companies like they did to us.

So, Luke, 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 $19,900. Is that right?

Yeah, the board seat was in discuss at this stage. It might come later, but it certainly was in discuss. And for my position... In an anchor investor, they certainly don't intend to take a majority position in the company. I know, Darren, if there's anything else you could be more precise on that.

Yeah, I think you're just alluding to under securities law and under our SRP, they wouldn't be able to go beyond 20%. And so I think their actions have been completely consistent with that and that of staying a supportive anchor investor.

Great, thanks. My second question is back to CAMPS. I know 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 I'm glad you asked the question, I don't think we'll have any issue buying retail business or painting estates in the years to come. Our position, market share is 70% independent. Our position is good, good, good. If we do deals that are smaller than 100, then we don't even have to go to them. But over that, we do and we will. And I think today what we've learned is we expect when we do, they'll go to more than, they'll do a lot of deep search like they're doing now to make sure that the oil and gas remain competitive. It's a long way to go before I think we have real issues. Also, like I said earlier, It is complex, and when you think of who supplies what where, CAP supplies to 14 different states, and they don't have a big position in those 13 of the 14 states. In California, it's not even that much. So you kind of have 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'd like everybody to leave with is we're going to do a lot of retail acquisition, and we don't expect that we're not going to close on the deals we're going to make.

Right. Thank you. 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 propane 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?

Yeah, there's certainly no switch during the wintertime. There's a story which shows there's more churn when price goes up. I kind of feel personally that's a big thing of experience and where I'm sitting at with the work we do with the businesses is I don't think it'll be as big as other years that the price went up for a couple of reasons. It will be less switching due to COVID. And I think most importantly, everything is going up like crazy. And if you think of commercial and industrial customers, they get it. When you think of residential customers, it would tie to look at, wow, the price of my Okay, we have $1,000 to $2,000 more. I'm going to look at the supplier. But then they go to them to fill 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 TURN. But we do know that TURN happens more. We get more new customers, and we lose more customers. So there's a cost issue to in and out of that. Not ideal. But I don't know, with all the price, residential usually are not so aware, why are they charging me so much? I think they are today because they go to the thing for their car and they say, okay, that's like in the air everywhere, in the newspapers, radio, every small town, you know, everybody talks about that. So hopefully that doesn't create the type of turn that the story table, the price are very high, as 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 because all our competitors are in the same position. I think, Beth, anything you would add to that?

No, I think it's, you know, it's one link where I, you know, reiterating everything you said, it fundamentally will have a better sense if, you know, what the impact potentially would be once you get out of the winter months. There would be more of an April, 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. So I think net-net to the business, I think we're comfortable from a volume perspective. But as Luke 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.

That makes sense. Okay, great. Thanks so much, guys.

Thank you. Our next question comes from Joel Jackson of BMO Capital Markets. Your line is open.

Hi, good morning, everyone. I have 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, despite camps pushing out into early next year, can we talk about, can you please elaborate on what the offsets were in terms of better fundamentals, CWS benefit, better volume than you thought that was able to offset the $10 million? Thanks.

Yeah, I'll give a few color and then we'll add a little toothbrush. 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 our customers and our brand that's known when people look at propane, Superior gets a lot of calls. I think it's 6,000 a year. So we're humming 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 certainly expect to make the same margin, and we charge for inflation is there, more than in the past, but we'll cover inflation with pricing since 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 two and three, with our acquisition, we made way more cost than the 20% and 5% of the sales, so not great. But then you get to quarter four, quarter one, and you have all the sales coming, so you're rebalancing properly the profitability over a year. There might be additional point, Beth, that you can see in that.

Well, I would say one way of thinking about it is part of it is from where our expectations were, Q3 was an overperformance. So that would have been above where you 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, you know... in your range of sort of 2 to 5 million, but that being said, that pricing was higher, so there's a bit of a pickup there. You know, from an LTIP perspective, that would be a little different. And then, you know, the reality is wage subsidy potentially a little higher than we might have originally been expecting. So when you look at that overperformance and the reasons that Luke's alluding to, you know, we had roughly that $8 to $10 million range we were expecting from camps this year. When you look at all the various pieces, we're still comfortable that we'll be in line now with the guidance of that 490 to 520, or 390. That would be really good. Okay, and then, so if we look at 2022 with, you know, trying to bridge what we could see in 2022, a lot of moving parts, obviously.

I guess we'll get some more recovery in volumes.

um hopefully you'll have the camps deal done in early 20 early part of the year don't exactly know when you have maybe some other tuck-ins you might do you won't get maybe the same level of cw's benefits hopefully for society uh if we're done through covid can you walk us through you know what 2022 could look like uh trying to bridge the different components so the backlog for acquisition continued to be very strong that's one thing me i would be if I was here, would be conservative on CAM because we don't control the exact dates.

I would say too bad we're missing January, February, or part of the quarter one goes away. The COW from the government, of course, is gone. And then you have the return of COVID and commercial industrial Canada not fully returning. The government goes faster away than the return after COVID. We still own those customer, those tanks, and the volume and commercial industrial is not what it was prior to COVID. And I don't think it'll come back until 2023. So big picture, those are, I would say, my bullet points that I would mention, and I'll pass it to Beth for additional.

Yeah, I think you've covered all of the key, you know, areas that'll 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, my last question, it also relates back to a question that Ben asked a little bit earlier. So, you know, you think your pipeline for tuck-ins and acquisitions remains the same despite, you know, some of the stuff that's coming from the FTC. Now, does this mean, though, that you need to budget now for longer approval periods so your tuck-in programs 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, is what I'm saying.

Yeah, that's a good question. But, you know, we thought we would do $1.9 billion by 2026. Well, we did done a third of that. So what's happening right now, for a multitude of reasons, from entrepreneur and dependents that are in the propane industry, will, you know, the average, we thought we'd do $250, $300 a year. It's more than that this year, like double than 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 because when are we coming to what size of EBITDA and then the synergy comes the year after. So we're not prepared to put any acquisition in the forecast because we don't want to mislead the market and then find out that it takes more time or ideally it's too many small mid-sized 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, 300 in 2022. I think we're going to be above that.

Yeah, and the only other thing I think I'd add, Luke, is that, you know, I think in terms of the timing on, you know, future transactions, I think with camps, 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 camps, it is going to cause us a little bit of delay. Good point.

Thank you very much.

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

Yeah, 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 continuous improvement are there. The COVID, are we adjusting that? It's quite extraordinary. and the customer service and the customer gain are good. So even though it's a small quarter, I feel very good and we're in a great position. I think the quarter shows, though, the trend and the momentum that we have. And it's really, when you think we're losing a bit of temp in the wintertime of this fourth quarter and we're talking about guidance beyond that, we're pretty satisfied and pretty We're going to continue to improve our company at many levels. So small quarter, but a good trend and a good direction where we're on. 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.