Superior Plus Corp.

Good day, and thank you for standing by. Welcome to Superior Plus 2022 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Rob Dorian, Vice President of Capital Markets. Please go ahead.

Thank you, Norma. Good morning, everyone, and welcome to Superior Plus' conference call and webcast to review our 2022 first quarter results. On the call today from Superior Plus are Luke Desjardins, President and CEO, and Beth Summers, Executive VP and CFO. For this morning's call, Luke 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 CDAR 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 Lisa. Well, 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 at $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 result and expected contribution from the recent announced acquisition of the propane distribution asset of Coal Petroleum, we're increasing our 2022 adjusted bidder guidance from $4.10 to $4.50 to a range of $4.25 to $4.65. We can also see in the Canadian market some improvement of our commercial Canadian business which suffered from the COVID business overall. Making great progress on our superior way forward in our growth initiative through acquisition, continuous improvement, and organic growth, on March 23rd, we closed the acquisition of TAM Propane, which includes the wholesale propane business, Kiva Energy. We're excited about adding this strong operating platform to grow a retail wholesale business in the attractive western U.S. propane market. We announced acquisition of propane distribution assets of Coal Petroleum, $180 million 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 two small acquisitions in 2022, one in Ohio, one in 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 to $300 million in acquired assets in the 2022 year. We're happy to announce we signed a definitive agreement with Charbon Hydrogen to distribute green hydrogen to commercial industrial customers in Quebec who are very focused on pursuing lower carbon energy distribution opportunities, including renewable propane. We want these opportunities to leverage our existing expertise in safe and cost-efficient distribution of mobile energy solutions. We believe superior propane as a product will play a significant role in the transition to lower carbon in eventual net zero emission future. We have put an energy transition team in place to identify and develop opportunities in this space. 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 where growth proceeds at $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 results in the first quarter, having accelerated our acquisition in 2021 and to start 2022. Our focus in 2022 will be integrating and capturing the synergy from the acquired businesses. We still see good pipeline of acquisition opportunity in the States and Canada, so we are definitely and we will be able to continue to acquire quality retail propane assets. 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 a superior way forward acquisition target of $1.9 billion from now to 2026. I'll now turn the call over to Beth to discuss the financial results in more detail.

Thank you, Luke, and good morning, everyone. As Liz mentioned, we had 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 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 SD&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 acquisitions partially offset by impact 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 litres 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 adjust an EBITDA leverage ratio for the trailing 12 months ended March 31st, 2022 was four times, which is at the higher end of Superior's target range of three and a half to four times. Proforma the application of the net proceeds of the equity issuance to the credit facility debt, the leverage ratio was 3.4 times. Proforma the acquisition of the Coral's assets We expect leverage to be within the target range and towards the lower end. As Liz 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 five-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.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Ben Isaacson with Scotiabank. Your line is open.

Thank you very much, and good morning, everyone. I was just looking back at your investor day, I guess it 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 was just hoping you could bridge that gap for us. Okay.

I'll take it that way.

Yeah, I mean, I think if you... Yeah, I mean, 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 camps or the synergies. It also doesn't include the full run rate of quarrels 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, as you look at achieving that $700 and $750, 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 that towards that $700 to $750. So even absent any more acquisitions, there would still be growth throughout that period to get closer. With that, Luke, I'm not sure if there's anything else you wanted to flag on that one.

Maybe the fact that I think we're around 40% of that number if we take those two deals that are not showing in our results right now, but will as the year unfolds next year. So we're marching on to a pace that's probably as good as $750 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 of valuation to be slowing down somewhat, and we're more difficult and prudent to do the deals that are really in their zone, make sense. We get the 25% improvement. We saw it, and we have the The playbook to get to that 25% by line, and it works all the time, and it will work in those two deals. So, marching on very positively, probably even ahead of the game.

And I guess to jump in, there was one category that I forgot to also mention, which isn't built into that, or 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 to 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 to that $7 to $7.50 range?

Yeah, based on our modeling as we go forward, the level of M&A, that would be required going forward. You know, with our target of that 3.5 to 4 times, you know, we're comfortable that we can do that as the M&A comes in on an even page throughout the period to get to that 7 to 750.

Great. Thanks so much.

Thank you. Our next question comes from Chi Lee with Desjardins. Your line is open.

Good morning, Luke and Beth. Congrats on the quarter. My first question would be on the commercial recovery. I know you touched on this before, but are you now expecting a more expedient recovery versus the previously expected Q4 of this year, and where are you seeing commercial trending right now?

That's a 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 the industrial commercial has slowed down quite a lot with COVID, and we see a return of that. 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. So we're seeing the commercial business in Canada coming back, somewhat sooner than we had originally forecast. And like I explained, we don't see it fully returning this year, but we certainly think by next year it will be all fully coming back.

Thank you. So my next question would be about, you know, M&A integration. So can you share some of your plans regarding the integration for Cannes and Coral this summer and the pace of synergy realization that you expect over the coming years? You want to start?

Yes, sure. So from an integration perspective, we'd be approaching Hanson 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. So 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 two summers to get there.

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

Sure. So from the U.S. margin, where we were sitting at Q1 at roughly that 43.5 cents, that is higher. Last year it was sitting at roughly 41.8 cents. Primary driver of that is the increase in margin, a little bit of detraction around mixed. As we look at 2022, we would view overall the average is going to be consistent with 2021. So we would expect to be somewhat similar, which was 32.5 cents U.S., U.S. dollars. 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 a pass-through. 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 feel 100% confident that we don't manage inflation, impair inflation. It's the world doing it to everybody around the world these days. But we're in a business that we will capture and not reduce our margin due to inflation or impair inflation. So those are the business we're in, and we can pass that through to customers, and we will.

Yeah, and I'll address the Canadian margin now. So from a Canada margin perspective, for the quarter, roughly 19.2 cents. That's a little higher than last year or higher than last year of our 18.4 cents. 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 14 to 18 cents. And part of that expectation would be as we look to mix for the remainder of the year, as you see that COVID recovery, you have some of the larger customers that have lower margins now mixing in to the overall volume.

That's really helpful. Thank you. I'll pass it on.

Thank you. Our next question comes from Matthew Weeks with IA Capital Markets. Your line is open.

Good morning. Thanks for taking my questions. I just wanted to ask kind of a macro question, just looking at where propane prices are right now and storage levels relatively low. 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 there's 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 of propane went up for every competitor. So 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 inflation, you look at oil at the pump where everybody would go and fill up their car. It's not like we have customers say, oh, my God, what happened to it? They're charging me way more. They see it every day at every aspect of their purchasing that inflation is there. They see it big time in diesel and oil with trucks and cars. So it's more known in our overall increase versus other commodities way less. Think of 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, historic average of the past years, we're probably going to gain some customers that are from other competitors are going to call us to see what we can do for them. So probably net-net, certainly we drill down big time because we want to make sure we didn't lose customers. Normally would have been a bit more attrition with those days. Right now, probably not so much because It's the whole world and every type of commodity in the world.

Okay, thanks. That's helpful. And I know you probably don't want to talk about the weather trends at this point, but it looks like a pretty cool start to Q2 and 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 say that the – You know, if you look at Florida 1, no doubt we got help from kind of the weather because we compared to a negative last year. I always said to everyone, if the business were in, one year and one quarter, we'll gain 10 million the other year. We'll lose 10 on weather, but over two, three years, the average comes back to more normal. And we gained in the States some business and... profitability has been good, and the weather has not helped us much in this state. In fact, March, the last two weeks of December were very warm, so it didn't help the beginning of January, and March was warm. So net-net, not big gain on weather, it's more the gain on the business. And in Canada, we've had commercial gain overall, and as you have said earlier, we can capture margin and keep it the same in spite of the inflation. So we're We don't mind winter, but we don't count on it. We just want to operate our business. The forecast we give you for the rest of the year doesn't affect better winter or worse. It's average. So we're humming, I think, on more than one front, and yes, winter has helped us quarter one. Anything else, Beth, you would add?

Yeah, I think all I would add is as you're looking to Q2, it's sort of the same thing with Q2 and Q3. They're 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 a Q1 and a Q4. I think part of the challenge is when you're using propane predominantly as heating load, even a cold Q2 often won't get you to a stage where you're actually using heating load.

Okay, that makes sense. Thanks for the commentary. I'll turn it back. Thank you.

Thank you. As a reminder, to ask a question, that's star 1. Our next question comes from Robert Cattelier with CIBC Capital Markets. Your line is open.

Robert Cattelier with CIBC. I just wondered if you could talk about the Charbon opportunity. I'm looking for some color on the size of this opportunity and the risk allocation. Specifically, is Superior taking a 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?

Yeah, tough question. There's a lot of incoming here and how they're going to unfold. But Charbonne is a good enterprise, and they intend to build a multi-plant in Canada and a few in the States. And we made an arrangement, and we expect, as they build a plant, that we own the customers. And we take it from their plant, and we deliver it and do the logistics to get to the end user with our helmet safety and our trucks, drivers, and our technicians. We're equipped to do that. We will make a similar margin that we make on propane. So there's no – for us, we don't invest in building the assets. We take it from the door. And we charge to the customer. We can bill the customer with a proper margin that we do in propane. So it's a good business proposition overall.

Yeah, and I'll just address part of 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 fleets. 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 a Q3. So as far as this year's EBITDA goes, you know, maybe one to two and a half million would be likely what you would see hitting this year.

And just to be totally transparent, every time I've seen in my career a project or a plan getting built, or doing a deal, actually. It's basically always a delay of two, three 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 plan to. We have seen the world goes around in big production of plans like that, or project, even our acquisition deal, it'll always take a bit longer. So I would take more quarter four. The same with quality. We're working with large and getting this done in quarter three, but quarter two, I wouldn't be surprised if it ends up in quarter three.

Yeah, I appreciate it, Tom. Charbonne 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 Charbonne, but is there anything in the agreement that restricts your ability to strike similar agreements with other operators where they don't overlap with Charbonne, or are you pretty much exclusive with them?

No, we don't have, we can have, we can do deal with other people if they build plans and we're the Think of us as superior with our logistics to distribute the mobile liquid. So we really, yes, 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 to somebody else next door who built the plant. We want to be able to distribute it.

Yeah, we do. Just for clarification, we do have a roper, a right of first refusal as well.

Yeah.

Okay, that's great. And then last question for me, you know, a bit of a detail, but just in terms of closing the quarrels acquisition, 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 gating items – That would cause it to slip maybe from the end of Q2 into Q3. Darren Rebar.

I think the main things are just normal commercial conditions. At this point, we've obviously 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, Mike pushed out. But, you know, my expectation is likely Q2. I think Luke's just pointing out it could slide to Q3.

All right. So it's just sort of normal acquisition mechanics from here?

Yeah. Okay.

Thank you, everyone. Thank you.

Thank you.

Thank you. And I'm 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.

Well, thank you. So as I wrap up this call, I would like to thank our management and employees. I'm very proud of all the accomplishments to date, 2022. We're in a solid position to deliver on our 2022 adjustment in our guidance, superior way. I've said it before, we're in a good industry, which always helps. It doesn't matter how good management is. If you're in a bad industry, you have a lot of wind in your face. This is a capacity to pass through inflation. It's a big thing for us this year, and we've proven we can do that. Deals are working towards our two-and-a-half, four times. We're in good shape there. Overall, I know 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. There's a number of shows, and we had it by business, what we bought, and what the, 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 situation comes to us. COVID-19, we're a couple of the plans on how to do it, deal with it. We lost some business and adjusted, so we were in more guidance last year than though for the past year. So just want to leave you all with our overall feeling of the business and the 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.