Superior Plus Corp.

Good day and thank you for standing by. Welcome to the Superior Plus fourth quarter 2023 results conference call. At this time, all participants are in a listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Karnick, Director of Culture, Finance and Investigation. Please go ahead.

Thank you, Shannon. Good morning everyone and welcome to Superior Plus Conference Call and Webcast to review our 2023 fourth quarter and full year results. On the call today are Alan McDonald, President and CEO, Greer Coulter, CFO, and Curtis Philippon, EVP at Superior Plus and President of Sertaris. For this morning's call, Alan and Greer 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 Plus and Superior's website 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 Alan.

Thanks, Adam. Let me start by saying just how proud I am to be speaking with all of you today about Superior Plus. Over the past three quarters, I've been speaking with you about our priorities and our vision for Superior Plus. We stated categorically that we were transitioning away from growth through acquisition and towards organic growth through operational excellence. We spoke to you about the importance of having the right team in place to lead Superior Plus. The team makes all the difference. Smart, skilled, and inspired leaders will always find a way to evolve to new models and deliver sustainable growth. We told you we valued the relationships with our customers and we would be focusing on building a bigger base of profitable customers, challenging traditional ways of doing business, delivering incremental growth and profitability from our existing businesses, all while continuing to reduce our costs and improve returns from our capital investments. Well, in Q4, I'm proud to say we made progress on all these fronts. The strength of our team, our focus on operational excellence and challenging ourselves to reduce costs. Transforming a company as complex as Superior is a journey and it takes time to see the fruits of our labor. But thanks to the hard work and commitment of the entire team, we're making progress every day. And we believe we have a very sustainable strategy. As you'll see in our 2024 outlook, the Procain Division is capable of delivering very consistent returns. With our renewed focus on operational excellence and having put the right team in place, we're confident we'll deliver growth in Procain while generating strong cash flow. The addition of Soteris in 2023 created a new engine for growth for Superior Plus. And with the integration behind us, we are more focused than ever on building this business. As we look forward to 2024, we're optimistic that Soteris will continue to demonstrate its potential to become a significant competitor in an emerging and quickly growing segment. With all that we accomplished in 2023, Superior Plus has undergone a significant transformation. And today, Superior stands as one of the best position companies in the industry. So let me offer a few comments about our Q4 results beforehand things over your career. The underlying strength of our Procain business was seen in our strong Q4 results. Despite record warm temperatures across North America, our Procain Divisions managed to post consistent financial returns. This is a testament to the hard work and commitment of our local teams, the stability of our customer base, good management of customer churn, and investing our resources wisely. I'm very proud of our team and I applaud their commitment to our focus on operational excellence. In Q4, Soteris continued to execute well on its growth strategy with an impressive 21% growth in EBITDA versus Q4 2023. Having 22, sorry, having reached a new high of 729 MSUs, at the end of the quarter, Soteris is well positioned for a successful 2024. The team very effectively balanced demand and MSU utilization, while at the same time staying on strategy, investing in new high growth segments like RNG and expanding beyond the wealth side with capital investments. So with that, let me turn things over to Greer to walk you through Q4 and provide some thoughts on 2024.

Thanks, Alan, and good morning, everyone. We were very pleased with the performance of the businesses in the fourth quarter. The weather conditions were a bit challenging, but the results demonstrated great resilience despite this. As Alan mentioned, fourth quarter adjusted EBITDA of 213.6 million was a record Q4 for us and represents an increase of 31 million versus Q4 2022, primarily due to the contribution from Soteris, which had a great quarter. Full year 2023 adjusted EBITDA was 552 million, 102 million higher than fiscal 2022 due to the addition of Soteris, and an increase in EBITDA from our propane businesses year over year, partially offset by higher corporate costs and losses on foreign currency hedges. Our fourth quarter net earnings of 78 million compared to net earnings of 63 million in the prior year quarter. Full year net earnings were 77 million compared to a net loss of 88 million in the prior year. Similar to our growth in EBITDA year over year, the primary driver for the improvement year was the addition of Soteris. Earnings per share attributable to superior was 23 cents in 2023 compared to a loss per share of 58 cents in the prior year. The increase in earnings per share is due to higher net earnings in the period, partially offset by the increase in average shares outstanding. Now turning to the businesses. Soteris achieved record adjusted EBITDA in the fourth quarter of 47.2 million, growing 21% versus Q4 of 22. The growth is reflective of the larger available fleet in 2023, where the average number of MSUs increased to 661 in 2023 versus 580 in 2022. On a full year basis, adjusted EBITDA was 187 million, which meant our elevated guidance that we issued along with our Q2 results. The US propane business produced adjusted EBITDA after the fourth quarter of 113.8 million, which was a decrease of 2.9 million compared to the prior year quarter. The business saw lower volumes due to the impact of warmer weather, partially offset by higher average unit margins. Average weather in the US for Q4 was 9% warmer in the prior year quarter than the prior year quarter and 11% warmer than the five year average. Full year adjusted EBITDA in 2023 for US propane was 302.5 million and increased to 17.6 million compared to 2022, primarily due to the impact of acquisitions, higher unit margins, and the impact of weaker Canadian currency on the translation of US dollar EBITDA, partially offset by the impact of warmer weather on sales volume. The Canadian propane business produced 50.2 million of adjusted EBITDA in the fourth quarter, which was a decrease of 8.1 million compared to the prior year quarter. Similar to the US, the decrease is primarily due to lower volumes from warmer weather and to a lesser extent, the impact of divesting the Northern Ontario assets, which was partially offset by higher average unit margins to offset the impact of inflation. You'll recall as part of the closing of the Sartaris transaction, we were required by the Canadian Competition Bureau to divest of various propane assets in Northern Ontario, which were sold in November, 2023. In Canada, average weather for Q4 was 13% warmer than the prior year and 13% warmer than the five-year average. Full year adjusted EBITDA in 2023 for Canadian propane was 133.9 million, a decrease of 10.9 million compared to 2022, primarily due to lower volumes due to warmer weather, the impact of divesting the Northern Ontario business, and the impact of inflation on expenses, which was offset by higher unit margins. The wholesale propane business generated adjusted EBITDA was 16.3 million in the fourth quarter, a decrease of 6.4 million compared to the prior year quarter, which was primarily due to weaker market differentials compared to the prior year quarter. Full year adjusted EBITDA in 2023 for wholesale propane was 63.4 million, an increase of 14.7 million compared to 2022, which was primarily due to the impact of the key to acquisition and exceptionally strong market fundamentals compared to the prior year. Turning to corporate results and leverage. Corporate administration costs for the fourth quarter were 8.0 million, which was a decrease of 3.0 million compared to the prior year quarter, primarily due to lower incentive plan costs with the lower share price and also lower insurance provisions. Superior realized a higher loss on foreign currency hedging contracts of 5.9 million versus a loss of 4.1 million in the prior year quarter. Of course, these hedges offset favorability in our US dollar cash flows. On a full year basis, corporate administration costs were 34.3 million, an increase of 8.4 million compared to 2022, primarily due to costs related to the onboarding of new management. For a full year, superior realized losses on foreign currency hedging contracts of 9.2 million compared to 2.7 in the prior year. Our leverage ratio for the trailing 12 months ended December 31, 2023 was 3.8 times, an improvement from 4.1 times a year earlier. While this number will continue to move around somewhat from quarter to quarter, due to the seasonal nature of the business, our objective is to continue to improve this metric with a long-term target of 3.0 times. Before I turn to the outlook for 2024, the board has approved a quarterly dividend at 18 cents per share. So looking ahead to 2024, the company is expecting adjusted edit-da growth in 2024 of approximately 5% compared to the 2023 pro forma adjusted edit-da of 643.3 million or US dollar 475.5 million. Included in the expected growth, we are assuming 15 to 20% edit-da growth for St. Paris and 1 to 5% edit-da growth for each of our US, Canadian and wholesale propane businesses. Note that in the case of the Canadian propane business, that we have normalized the sale of the Northern Ontario assets in the prior year comparative number to calculate the range, and that's about US dollar 7 million. And in the case of the wholesale business, we have normalized the impact of the unusual market differentials experienced in 2023 to calculate the growth range, and that's about US dollar 10 million. Lastly, we are anticipating approximately $25 million US of corporate operating costs and expect capital expenditures to be approximately US dollar 230 million, with St. Paris making up just over half that amount. Lastly, effective January 1st, 2024, Superior will begin reporting results in US dollars. Converting the reporting currency to US dollars will reduce foreign exchange volatility as approximately 2 thirds of our edit-da and over half our data is denominated in US dollars. Historical comparative financial information in US dollars can be found in our 2023 fourth quarter MDA. And with that, I'd like to turn the call over to Q&A.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A rocker. Our first question comes from the line of Gary Ho with Desjardins Capital Markets. Your line is now open.

Thanks, and good morning. Maybe just on the first question, you had pretty strong margins this quarter. Just wondering if you can share the competitive landscape that's on the ground. Are your competitors also maintaining higher prices and still a rational market? Maybe talk about the different regions. And Alan, you mentioned in your prepared remarks, your team is managing churn pretty well. Maybe you can elaborate on this and how are your attrition rates looking versus previous years?

Hey, Gary. Thanks, and good morning. I wanna be careful about giving up too much specificity or specific data when it comes to our customer numbers. But I'll tell you, we're managing our margins with a view to the impact it has on customer acquisition, so our ability to grow our customer base. And then, of course, how well we're managing our churn, so we're not going to the well on margin and driving customers away. I can say overall, I'm really pleased. And in pricing optimization, as we looked at, making sure that we're capturing the impacts of inflation. Prices sometimes go up, but when you're managing it with a view to acquiring customers and not churning them, you know you're in the right spot. So by default, we're doing really well competitively, so I'm feeling pretty good about where we are.

Okay, great. And then Curtis, a couple questions for you. Just first, on the MSU ads, seems like pretty healthy growth for 2024. How does your backlog look? Do you anticipate any delays putting those MSUs to work? And then second, last year, you guys benefited a bit from an early 23 due to lower net gas prices. Seems like we're going through that again. Just wanted to get your views on that.

Yeah, thanks, Gary. From an MSU perspective, you'll see us adding MSUs correlated with the 15 to 20% growth that Greer talked about, so expecting consistent profitability after the MSUs we're adding. The team is pretty confident on getting those deployed. We've got a backlog of projects waiting for us right now, and it's more a factor of just timing of getting them from the suppliers. We're in a sold-out situation here right now. And just looking forward to getting these back into the fleet. One comment I'd make on the additions of the MSUs this year is we had a fairly back-end year loaded for adding MSUs last year, with a lot of them came in at the back end of the year. Just part of the timing of getting the deal closed and things like that. In 2024, we expect a more even add of MSUs through the year.

Curtis, can you maybe talk about the lower net gas prices? Is that going to benefit Q1 results?

Yeah, it's good. Most of our net gas prices are effectively out passed through with our customers. Whether we're somewhat indifferent on ups and downs, there are a few unique situations where there's a margin opportunity with low net gas prices. We have seen some of that, in particular on West Texas, while pricing gets quite low, there's some interesting opportunities for margin on that. But I'd say in the overall impact of it, it's not really material overall. It's a pretty small part of the number.

OK, got it. And then just my last question, Grier, just on your point to turn to the leveraging target for 2024, maybe walk me through components to get there. Any debt repayments there at all, or is this primarily driven by your projected debt growth? And are you assuming any buybacks in that leverage reduction?

Yeah, so, OK, so the I think that the delavering, Gary, is the most part it will be driven by at a dog growth from the business of the last from outright debt reduction. We're also looking into managing the working capital of the business very carefully and maybe some of it will come from from that. With regards to buyback, I would say that, you know, our priority here is to make sure that the businesses have the right amount of capital to grow and to maximize medium and long term value. And, you know, we're obviously we've got our deleveraging as a very high priority. And I think, you know, those really sit really high for us in terms of our priorities. And so, you know, the reality is. Buybacks, if any, will be pretty minimal because from a prioritization standpoint, they come after those things, if that makes sense.

Yes, absolutely. OK, those. Thank you. Thank you.

Thank you. Our next question comes from the line of Aaron McNeil with TD Cowan. Your line is now open.

Hey, morning. Thanks for taking my questions, Alan. This one's similar to Gary's question. You obviously made a big change at the top of the propane division this quarter. You've spoken about the optimization. So where exactly are you in this process? I mean, are you just at the stage where you're getting the right people in the right place? Is Q4 or Q4 margins an indication of things you've already done? Or is there something specific you can point to that you've changed

that

we'll see

flow through in the next few quarters?

Please stand by. Speakers, you may resume the call. Aaron, you may continue with your question.

Did you guys hear the question? Do you want me to repeat it?

We didn't hear it. Sorry, our line dropped. Aaron, could you repeat it?

Yeah, no problem. So this one's for Alan, focused on the propane division. You've obviously made some changes there. You've spoken about optimization in the past. So could you just give us a bit of a sense of where you're at in this in the process? I mean, is the focus so far on getting the right team in place? Is Q4 an indication of improving margins from optimization efforts or is there something specific that you can point to that superiors changed to improve profitability that we'll see flow through in the next few quarters?

Hey, Aaron. I would say that Q4 is really our starting point. I mean, we've been focused on understanding what the opportunities are in the business and the best way to get at them. And then having the right team in place to make that possible. Can you hear me OK, by the way? Yeah, loud and clear. So early days, what we've done really now is set ourselves up to say, we know what our priorities are, and they're going to be very straightforward. Like I talked about in the call, it's about, you know, we've got a great team in this propane organization, great team. And what they need from us is a clarity around what our priorities are. And the resources to help it, you know, to extract the value that we all know is there. And that's just really doing the basic blocking and tackling really well. You know, acquiring customers, optimizing the pricing and managing your churn, all while you're keeping an eye to really good decisions around capital investment and managing your costs. So with the work that we did in Q4, I would say that the business is very, very stable. The team is really engaged, which is really good news. We've got line of sight into where those opportunities lie. And now it's just about, you know, blocking and tackling, just getting in there and doing the work. So what you're going to see, I think, is first stability, then improvement, and then, you know, a continued new level of performance expectation across. We think this business has a lot of legs. There's lots and lots of opportunities. So it's incumbent upon us to execute well, be really focused, be mindful of not having too many things to do and, you know, investing wisely. So no big bangs. And but also I'd say this is the starting point, certainly not the finish line.

Makes sense. The next one's for Curtis, maybe just ignoring demands, which seems pretty robust. What do you see as the governor's to your growth from an internal perspective? Like is it supply chain, people, infrastructure? And, you know, I can appreciate that you've grown more in percentage terms in the past. Sounds like you're pretty confident that all the growth this year will go to work at good economics. But do you start to worry that you'll see inefficiencies in the business, either through utilization or profitability, just given how large the growth is in absolute terms this year?

Yeah,

thanks, Aaron. From an overall growth percentage, this is not one of the bigger growth years for severely. We've had bigger percentage increases in previous years. And so the organization is quite used to a growth mindset. When I look at what we've got in front of us and where is the opportunity and where is the challenges, the biggest bottleneck to growth is just the time it takes to build up the teams to go support the equipment. So we have a highly engaged differentiated workforce that's out delivering CNG and R&G and hydrogen for us. And it takes time to build up those teams in different regions and to scale up to support the new equipment coming out. So that's where we spend the majority of our time.

Makes sense. I'll turn it over. Thanks, guys. Thanks, Aaron.

Thank you. As a reminder, to ask a question at this time, please press star 1-1. Or you touch on telephone. Our next question comes from the line of Robert Cattalier with CIBC Capital Markets. Your line is now open.

Hey, good morning, everyone. I just wanted to follow up, Alan, on the propane business and how you plan to bring out more efficiencies there. You talked about the blocking and tackling. So it sounds like there's a number of things you're after. But what are the measurable operating or financial metrics that you're most closely following to measure your success there? Does it really just come down to unit margins or is there something else that we should be tracking?

Hey, Rob. Unit margins are a funny indicator when it comes out because we need to be focused on profitable businesses and profitable customers, not necessarily volume. And to be honest, volume is going to fluctuate, obviously, with weather and the quality of the customer that we take on. So for us, let's build a really strong customer base. When we talk about organic growth, what that really means is acquiring more customers, but dealing with it with an high profitability. So for us, it's, you know, if we can continue to build our base organically and let's be clear, this is about taking care. You know, it's a modest and growing segment, but we think with the right focus, really, really well positioned to take share from our competitors. We've got great assets. So transformation from an M&A focused organization, as you'd expect, means a lot of our expertise and our focus has been on integration, your M&M synergies. And now that's got to shift to being about, you know, doing great marketing, being great at acquiring customers, being great at pricing effectively, making sure that our customers are profitable, managing current. So a very long-winded way of saying the size and the help of the customer base is what I'm most concerned with, and that's going to translate into great financial results, effective use of capital and good margin management. So that's how I'm thinking

about it. OK, that's helpful. And I have a number of financial questions here, and I don't want to bog the call down too much. So if we have to take some of these offline, that's fine. Just, Greer, I just wanted to talk about the guidance. I assume your guidance is based on the five-year average weather. Can you please confirm that?

Yeah, good question, Rob. So it is based on the five-year average weather. However, we did adjust it for -to-date warmer weather that we've seen. So we've obviously seen it warmer so far this year relative to the five years. So we adjusted that up to the release date, essentially. So it's been kind of brought current. But for the remainder of the year, so from this point forward, yes, it would be based on the five-year average.

OK, that's very helpful context. And then I just want to talk about the plan to report US dollars. First of all, what are you going to do with your hedging? You know, what's the plan for there for currency hedges? And is there a possibility that you monetize some of the unrealized currency gains?

So, yeah, so obviously the exposure goes down pretty significantly. Looking up from the US dollar sample, obviously, you got exposure on the Canadian side. It's now kind of a third roughly of our EBITDA, of course. You know, then we get into a conversation about whether you actually hedge EBITDA. So if you actually look at our cash flows, you know, after debt costs and taxes, we actually don't have as significant an exposure, certainly, if you look at it relative to EBITDA. So our thinking at this moment is our economic exposure is not that significant. And we probably will not do hedging. I mean, this may change and we'll continue to evaluate it. But we're no longer thinking we'll hedge EBITDA, which was a previous practice. So, A, we got lower exposure. B, the concept of hedging EBITDA is probably not something we'll do. We'll be more focused on economic or cash flow hedging or balance sheet hedging if we do it at all. But at this point, there's no hedging on. There's no positions on to hedge the Canadian exposure as we are sitting here. So we had some hedges on from the legacy US dollar exposure when we were a Canadian dollar reporter. We crystallized those the first of the year. And there, I don't have the number in front of me exactly. Its order of magnitude roughly $10 million of losses that were crystallized that would have been running through. But obviously, these hedges were no longer relevant. So we crystallized them and put that behind us.

OK, last question. I'm getting into the weeds here a bit. But what is the impact to adjusted EBITDA of no longer including the hedge contracts in adjusted EBITDA or segment profit, presumably you've already adjusted the guidance to take that into consideration?

Yeah, I mean, so if you look at the way we had it before, kind of, you know, like in the last quarter is probably the best example. You've got hedge losses. But of course, there's higher earnings coming through the EBITDA in the business line. And so there's an offset going forward. There would not be hedges and then we're exposed, obviously, to now the Canadian dollars. So obviously, if Canadian dollars are stronger than our results, all things equal would be a little bit better, right? In US dollars. So there'd be no offset from the hedge that's not hedged.

Yeah, OK, that's great. Thanks very much, everyone. Thanks, Rob. Thanks, Rob.

Thank you. Our next question comes from the line of Darryl Young with Stiefel. Your line is now open.

Hey, good morning, everyone. Just a quick one around Sotaris. And I'm just wondering if you can give us a bit of color on the customer mix and specifically, you know, which end markets are absorbing the new incremental MSG. And I guess the background would be wondering if the utilities are taking a bigger slug and if the cold snap in January at any impact on utilities appetite for backup sources. Yeah, thanks, Darryl. I think the big one of the big customer segments we look at is that utility space and LDCs right across Canada and the US are facing challenges with infrastructure, that they've got gaps in their infrastructure. And one of the biggest growth areas for Sotaris is helping these LDCs bridge those gaps in their infrastructure. So I wouldn't say that we necessarily had a specific weather impact spike in the last few months related to that, but more just an ongoing challenge that all these LDCs face and that we're not building new infrastructure at the pace that's needed for energy demands and they're needing to find creative ways to bridge gaps in their infrastructure. And increasingly, Sotaris gets to be more well known for that. We're being called to be brought in on very large scale projects. They're high profile, but also just a lot of smaller situations that virtually every LDC in North America faces where they need some sort of reinforcing in their natural gas pipeline networks, either short term or long term to sort of make sure customers are getting their energy. So increasingly, that's a very significant part of our business and it will be one of the biggest growth areas for us next year. OK, that's great. Thanks. Thanks very much.

Thank you. Our next question comes from the line of Patrick Kenny with National Bank Financial. Your line is now open.

Thank you. Good morning. Maybe just to follow up on the customer mix question there for Sotaris, but specifically the Curtis, the 20% plus ROIC that you've been generating here. Wondering how you're thinking about potentially trading higher returns for say longer duration contracts with, for example, the LDCs and whether or not over the next couple of years, we might see a slight shift in your cash flow quality profile.

I think you'll see that over time as you get into more contracted projects. The one prime example that would be the renewable natural gas space and that typically those R&G projects that we're getting into, they're looking for long term contract commitments and that is a different economic structure for those types of contracts. And you have sort of five year, even potentially longer than five year contract terms on those, but they can be structured a little bit differently and ensure the returns we're looking for. But you obviously price them a little differently than you would say a spot deal.

And sorry if I missed it, but the current percentage of customers that are oil and gas based and maybe where that's headed over the next, say one to three years.

Yeah, it's still the majority of our business is just over half is in the oil and gas drilling and completions activity, but we've seen significant growth in those other segments. And I like to always keep reminding people that over the last couple of years, we've been deploying the majority of our capital into these beyond well-paid applications just to make sure we're continuing to diversify the business. And I'll expect to see that again in 2024 with the majority of the capital going into the beyond well-paid applications. In saying that, our oil and gas business is a great business. It will continue to grow. We just know long term that there is a real benefit to make it through. We've got a very diverse portfolio.

Okay, thanks for that. And then maybe just for Greer on the leverage target, achieving your three times ratio mainly from growing to EBITDA, but wondering your thoughts around asset sales as potentially being part of the plan to accelerate that timeline to reach your target level.

Yeah, thanks, Patrick. So currently, our target to get to three times, we think we can do this in roughly three years. And we wouldn't need to rely on asset sales, I think. So there are no plans. I think we like the businesses we have. We like the footprints. There's nothing that we're actively looking to sell. Obviously, at certain prices, anything is for sale. Which kind of goes without saying. But I just say there's nothing that we have on the path and don't need to do that to achieve our objectives.

Okay, thank you.

Thank you. I'm currently showing no further questions at this time. I'd like to hand the call back over to Alan McDonald for closing remarks.

Thanks very much, everybody. We appreciate obviously your time and engagement on our business here. And I'd like to take the opportunity to thank all our employees at Superior for their continued contribution to our success, their focus on safety and reliably serving our customers. If it wasn't for our employees, none of this would be possible. Thanks for your participation. And I look forward to speaking with you all through the course of the next quarter. Have a great day, everyone.

I'll be off further. This concludes today's conference call. Thank you for your participation. You may now disconnect.