Operator
Good day, and thank you for standing by. Welcome to Superior Plus 2024 Second 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 participate, you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised. To withdraw your questions, simply press star 11 again. Please be advised that today's conference is being recorded. Now I will pass the call over to Adam Kernick, Director of Corporate Finance and Investor Relations. Please go ahead.
Adam Kernick
Thank you, Carmen. Good morning, everyone, and welcome to Superior Plus conference call and webcast to review our 2024 second quarter results. On the call today are Alan MacDonald, President and CEO, and Greer Coulter, EVP and CFO. 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 CDARplus and Superior's website for further details. Dollar amounts discussed on today's call are expressed in US dollars unless otherwise noted. I'll now turn the call over to Alan.
Alan
Thanks Adam. Good morning everyone and thank you for joining our second quarter results call. We made encouraging progress in our propane divisions across Canada and the U.S. this quarter. Despite the challenges brought on by unseasonably warm weather, our team successfully mitigated most of those impacts. In Canada, we achieved growth compared to Q2 2023, driven by our focus on expanding our customer base and maintaining disciplined cost and margin management. In the U.S., We countered the weather impact with a similar focus on adding new customers, managing our pricing effectively, and capitalizing on cost reduction and productivity opportunities. While Q2 is a smaller quarter, I'm pleased to see that our early stage initiatives to grow the propane business and optimize our cost base are already showing positive results. Ceteris faced some regional pricing pressure particularly in West Texas, where the oil and gas sector is a significant part of our business in the quarter. Despite this, the Soteros team maintained strong margins and delivered a 15% increase in volumes, reinforcing its market-leading position. Now, this is an emerging sector and one that's still in its infancy, and we have long anticipated some volatility as it expands. Smaller regional investors with potentially different long-term aspirations than Superior, have been aggressive in the region, impacting the quarter's results. However, we remain confident in the long-term prospects of this business. Few sectors in the energy space today generate as much excitement and interest as CNG and RNG. When we acquired Sataris, we knew that market verticals would not necessarily evolve evenly quarter over quarter. However, our acquisition of Soteris wasn't about the short term or any one quarter. It was about the long-term value and potential of this business. In just one short year, Soteris has enabled Superior to become the largest player in the over-the-road CND distribution, commanding nearly half of the industry's fleet. It's allowed us to become the biggest distributor of over-the-road renewable natural gas with over 65 MSUs dedicated to delivering RNG full-time, 24 hours a day, 365 days a year. This acquisition has positioned Superior at the forefront of the expansion of low-carbon energy solutions to new segments like power generation and backup power support. So, as I reflect on the quarter, I am very encouraged. Our efforts to operate the propane business with a new leadership team, improved effectiveness and delivering organic growth are showing meaningful results. As we move forward, we will continue driving growth and incremental profitability within the propane segment, while growing Soteris and expanding into new segments and geographies as opportunities arise, all while ensuring we continue to operate our business safely and effectively as we have in the past. So now with that, let me hand the call over to Greer to give you some comments on the quarter's financial results. Greer.
Soteris
Thank you, Alan, and good morning, everyone. Before I get into the results, I'll remind everyone that all dollar figures are in U.S. dollars as we completed our transition on reporting currency beginning in Q1. Overall, the business generated $43.3 million of EBITDA in the quarter, which represents an increase of $14 million over Q2 2023. The majority of this increase is a result of the Soteris acquisition, which we closed on May 31st, 2023. Adjusted EBITDA per share for the second quarter increased by $0.04 compared to Q2 2023 to $0.16. Our second quarter net loss of $45.3 million compares to a net loss of $29.2 million in the prior year quarter. The decrease is primarily due to an unrealized gain on derivatives in the prior year that didn't repeat this quarter. Now turning to the businesses. And I'll start with propane. which generated solid results, particularly in light of generally warmer weather. In aggregate, these businesses landed in line with our expectations in Q2. The US propane business produced adjusted EBITDA of $9.8 million, which represents a decrease of $3.9 million, or 28%, compared to the prior year quarter. This decrease was driven by lower sales volumes from the warmer weather, higher tank levels coming out of Q1, and the divestiture of non-core heating oil assets in the prior year. The Canadian propane business produced $10.5 million of adjusted EBITDA in the second quarter, which was an increase of $400,000 compared to the prior year. You'll recall from our 2024 guidance expectations related to our acquisition of Souterras that we divested our Northern Ontario propane business in Q4 2023. Those assets contributed about $1.5 million of adjusted EBITDA in the prior year quarter, so we were especially pleased with the result given that the business grew 4% despite lapping a quarter with that contribution in the comparative figures. The business also saw the benefits of several operational initiatives related to workforce optimization and reduced customer attrition. The wholesale business generated adjusted EBITDA of $2.8 million in the second quarter, a decrease of $1.2 million compared to the prior year quarter, primarily due to lower sales volumes from the warmer weather. Moving to Soteras, the business produced adjusted EBITDA in the second quarter of $27.2 million, which represents a $2.6 million decrease compared to Q2 2023, which this accounts, of course, for the full quarter comparative number. Overall, the business did not meet our EBITDA expectations for the quarter. While we were pleased with the growth in volumes, which were 15% higher than Q2 2023, and this was driven primarily by the growth and increased efficiency of our MSUs, the business faced pressure on pricing as we moved out of the winter quarters and experienced an increase in competition, primarily in the oil and gas sector. Similar to Q1, we also faced approximately 10% headwind to our growth again in Q2 as our pricing evolves towards neutrality to natural gas pricing. In Q2 2023, we generated an additional $3.4 million in EBITDA from the movement in natural gas prices that didn't recur this quarter. And lastly, we experienced elevated operating costs that were unexpected and temporary in nature. So overall, we expect some pricing pressure to continue into Q3, but we don't expect to see the same headwinds from our change in contract pricing or elevated operating costs and we expect to see a better Q3. And as we return to Q4 and Q1, where overall market demand is historically stronger, we expect to have our MSU fleet deployed at excellent economics. For the full year, we are expecting Soteris to come in slightly below the low end of our assumed 15% to 20% growth range. We continue to focus on diversifying the business and customer base over the longer term, and we are fully confident that we can continue to grow the business and produce excellent returns from capital invested. Now turning to corporate results and leverage. Corporate operating costs for the second quarter were $7 million, a decrease of $800,000 compared to the prior year quarter, primarily due to onboarding costs related to the change in management and an insurance provision in the prior year quarter. Beginning in Q1 2024, we adopted hedge accounting for the majority of our long-term incentive hedges to minimize P&L fluctuation. Our leverage ratio for the trailing 12 months ended June 30, 2024 was 3.8 times an improvement from 3.9 times that year end, which was driven by an improvement in working capital due to the seasonality of the business and currency conversion on our CAD denominated debt. Our leverage will move around somewhat from quarter to quarter due to the seasonal nature of the business, but our objective is to improve the metric to 3.7 times by the end of 2024 with a longer-term objective of 3.0 times. We are confirming our adjusted EBITDA guidance of approximately $500 million for 2024. While we expect that Souterras will be slightly lower than the original assumed growth rate, we expect that the propane businesses and corporate costs will compensate to offset this. And lastly, the board has approved a quarterly dividend of 18 cents Canadian per share. And with that, I will turn the call over for Q&A.
Operator
Thank you. And as a reminder, to ask a question, press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. One moment for our first question that comes from Gary Hall with Judge Arden. Please go ahead.
Gary Hall
Thanks, and good morning. Maybe just start off with your guidance. You mentioned you're maintaining your 5% growth, 500 million, and you're suggesting a very strong second half. Maybe just walk us through maybe a bit more detail in terms of segments, Canada propane, US propane, and Soteris. And are there any bigger operational initiatives kind of driving the second half strength worth highlighting?
Alan
Hey, Gary, it's Alan. Let me start and then Guru will finish. We're maintaining guidance. The short answer is yes. We've been working really hard, as you know, on looking at opportunities in the propane business. We are very optimistic that we continue to add new customers and to improve the efficiency of the business. It's less about cost reduction, quite frankly, and more about the effectiveness of how we're operating the business and really working at managing retention better managing pricing and working really hard at acquiring new customers. So, short answer is we see more opportunities coming into the latter half of the year, but why don't I let Greer talk about sort of a little bit of the latter on how we get from here to there.
Soteris
Yeah, sure. So, you know, our target of 500, you know, obviously we'll see a little bit of headwind on the Soterios result. As I say, you know, I think if we look at the second quarter, this business missed by kind of $7 million-ish. We don't think Q2 will be that large a miss, but we're going to see some of the same pressures, as I said, some of the things temporary, some of the things a little bit more longer term for us to manage once we get into Q4. The winter work returns and the economics and the utilization, it's a much different picture. Overall for the year, we think Sir Terrace is probably going to end up kind of $10 million or so off where we thought, but we think through a couple of corporate cost initiatives and some of the stuff that Alan was talking about in the propane business, just initiatives that we see really primarily into 2025 that we might be able to nip that a little bit in 2024 and get a little bit of benefit. And when you kind of bake that all together, we see us getting very close to the $500, and that's why we've kept with that number.
Gary Hall
Okay, great. No, thanks for those. And then maybe second question, specifically on Satyaris, you mentioned the increased competition dynamics. I see the per MSU economics is down year over year and also versus 1Q. Can you parse out, you know, how much of your, let's call it 760 average MSUs were underutilized in the quarter? I'm trying to get a sense, you know, if we exclude those, how much better would the unit economics look year over year?
Soteris
Yeah, I think, Gary, it's less of an underutilized MSU situation. I think the team did a great job to be flowing gas. And if you look at the metrics, the flow actually was as high or higher. We actually had more flow per MSU than we would have in the prior year. So this was not about idle capacity and having MSUs not in service. This was a question of being competitive. and looking at the market dynamics and making sure that these MSUs were in use. So of the myths, you know, as I say, there are different components and some is temporary, but if we're talking about the competition part of this, you know, it's a very high percentage of this impact was the pricing dynamic versus utilization. So they were highly utilized.
Gary Hall
Got it. Okay. And then, Greer, while I have you to the quick numbers question, you guys used to disclose an adjusted operating cash flow figure, which backs out some of the noise in cash flow. Maybe share some of your views internally when you look at free cash flow. What do you look at and what's the current annualized run rate, free cash flow in the business today, and payout ratio against your current dividends?
Soteris
For sure, Gary. When you look at the avatar and you look at our growth and maintenance capital, the interest, the dividend, you can see it's relatively neutral right now. As we continue to talk about our plans for the business, whether we're talking propaners or tariffs, I think it will become clearer to the market what our plan is. We see growth. We see our ability to improve the cash flow picture and make it more of a positive scenario, which is how we get our head around the fact that these are all supportable. In our plans, we see sufficient cash flows to support the growth of business through CapEx, support our delivering plan. As I said in my remarks, it's super important for us to get to a more sensible leverage target by the end of 2026 and obviously support the dividend. So we see the cash flow picture that supports that. But as I say, as we continue to unveil our plans for the future and our confidence in growth of the businesses, I think it will become clear to the market. Okay.
Gary Hall
Great. Those are my questions. Thank you.
Soteris
Thanks, Gary.
Operator
Thank you. Our next question comes from the line of Darrell Young with CISO. Please proceed.
Q3
Hey, good morning, everyone. First question is just around the competitive pressures. Is it possible to speak to how much is the function of all the new MSUs in the market versus the downturn in oil and gas? And I guess what I'm really trying to get at is just, you know, what gives you the confidence that you're not going to have significant competitive pressure in the winter heating season as well? Because there does seem to be a lot of new MSUs in the marketplace.
Alan
That's a really tough one. When you think about the MSUs in the market, a lot of our competition is based in West Texas. That's really their home market and their focus area. So number one, you've got a higher concentration. A lot of these companies, the MSU business is an adjacency for them or a smaller investment. So if you think about their size relative to us, a lot of these competitors are quite small and very, very focused in this market. So the downturn in terms of activity, especially in Texas this time of year, coupled with the proximity of a lot of the competition has put some downward pressure on pricing. But I think it's very difficult to extrapolate that to the rest of our segments and especially in the busy winter seasons. So I wouldn't necessarily make that leap.
Q3
Okay. So when you look out, I know it's pretty early still to be talking 2025, but when you look out that period, does this cause you to reassess the growth rates for Sertaris, or do you see enough, with time, enough end market development outside of oil and gas that you could still continue the growth rates at high return metrics?
Alan
Yeah, I think that's more it. Predicting in the oil and gas segment is something that I don't think I'm ever going to be capable of doing, but we've long had a strategy at Sertaris, the beyond the well site strategy, has continued to reduce our reliance on our home market, if you will, or the origin of the company. The RNG business doubled over last year. Some of the new hubs we've opened have been greenfield. We're looking at emerging segments like backup power and power generation. And those opportunities are going to be continued at the forefront. So the business development function at Zoteros is incredibly important. And you always want to have that in balance with opportunities that exist in the traditional segment, whether it be Texas or other oil and gas markets, because historically, as you can see from the results, have been incredibly lucrative. So it's a continuous balancing game to say, well, we don't want to walk away from opportunities that present the chance to generate a maximum return for these investments, but you also don't want to be exposed. So year over year, you're seeing a little bit of that normalization. And like I said in my opening remarks, we expect volatility in this segment. I mean, it's emerging, it's growing, and unfortunately, it's not going to grow at the rate that we happen to predict we're going to add MSUs sort of 18 months in advance. We're okay with that. But we're going to be very, very mindful in terms of our business development plans for Q2 and Q3 next year that we're continuing to build the business for the long term, developing new segments, participating in high growth segments, and capitalizing on opportunities to generate the most return we can. Constant balancing act, but the team's really working hard on it. And so far, you know, with a little bit of a bump in Q2, I think we've done an incredible job of really maximizing every opportunity that's been presented to them. And, you know, we have a bigger presence in those emerging segments than anyone. and I give the team full credit for the work they did and the foresight they had to make that a reality.
Q3
Okay, that's good, Keller. I'll get back to you. Thanks very much.
Alan
Thanks so much.
Operator
Thank you. Our next question comes from the line of Robert Cattelier with CIBC Capital Markets. Please proceed.
Robert Cattelier
Hey, good morning, everybody. I just wanted to continue addressing the competitive situation. Maybe you can just... Describe to us what your competitive response has been in West Texas. It seems like, given the utilization rate, there was some response on price. But I'm curious if you've actually moved some of the MSUs out to more profitable regions.
Alan
Hey, Rob. It's Alan. You know, the volume in West Texas continues to be really attractive. when you see sort of a pricing fluctuation, which is not uncommon in that part of the world, there's always going to be a reaction to the team. And I think we've seen a couple of things. One, some of that price-related competition is being challenged with operational and safety issues. And in more than one instance, we've had you know, contract opportunities that were a little lower than what would work for us and the customer return. And so people are recognizing that Soteris, because this is our core business, our reliability and safety record is very, very strong. And that does command a small premium in the market. So we're seeing some of that. The other potential is, okay, well, diversifying into greenfield opportunities Our opportunities outside of West Texas, we're working equally with the team on. We were talking to them just this morning in terms of some opportunities in other parts of North America that are actually performing really well. Our ability to repurchase the fleet in a 30-day period and generate new contracts, obviously that presents a bit of a challenge. But we're looking at every opportunity to say, okay, where's the best place for us to have the fleet and continue to maintain relationships with customers that are very, very important to us in these periods. This isn't all dollars and cents in a 30-day period. We have customers that have relied on us for a long time that have been with us from the beginning, and we need to be there for them because we're thinking about it in terms of the long haul. And the reality is in September, October, November, the world's going to be changed, and the capacity is going to be much smaller than it is today. We know the activity is going to eat up, and we want to maintain those customer relationships. So it's always a balance, but yes, we're looking at every opportunity that's on the table right now.
Soteris
Maybe I'll just add, Rob, it's Greer. The economics in West Texas are still really good, right? So if you look at where these MSUs are in the kind of stacking order of where all the MSUs are, so if we say roughly a third of them or something like this are sitting in West Texas right now, they're generating... uh, average or above average returns for the portfolio. So it's still a really good space. Um, you know, it's just, it's, there's, there is more competition in that space. Right. But for us to move it, there's certainly, there are markets where we can move some of these MSUs to, to generate higher returns, but you know, not all markets would generate higher returns. It's not like these are the lowest and it's a, it's an issue. Like it's still a great area. This is a, is a great spot for us to, to generate, you know, some of our income and, uh, we do have very good returns. I just wanted to add that point. That's a good point.
Robert Cattelier
Thanks. That's a helpful response. Just looking at the MSU outlook, though, it looks like it was tweaked slightly, nothing serious, less than 1%. Can you describe the situation in the supply chain in providing MSUs on schedule and on budget?
Soteris
Rob, you're just asking about the number of MSUs?
Robert Cattelier
Yeah, the actual number of MSUs. Yeah, I think you took the full year number down by five units, which is less than 1%.
Soteris
I think maybe it's the average that we're talking about. So here's what I would say, and if I don't answer your question, just ask me again. We're obviously, like we originally said, we would buy roughly 140 of these. I think we're about 41 or something year to date, and we kind of thought they would occur. you know, relatively evenly. So we're a little bit behind. I mean, um, we kind of thought they would be slightly backend weighted, but not this backend weighted. So we're, yeah, we're still, uh, wanting to take these MSUs. Um, obviously that's a lot to get delivered in the second half of the year. Uh, if they get delivered, we'll certainly take them. There's probably a chance that some of them may be slipping to next year, come right near the end of the year. If you recall last year, we had about 50 that came in the last week of December. But, yeah, as I say, we're still counting on the 140. We've still got them ordered, and to the extent that they come, it'll just be more back-end weighted. So that's the number you're talking about, just having that. If they came later in the year, the average for the year would be lower, but you might end up with the same number. That's what it is. But, yeah, certainly we're a little bit behind. We would love to have those MSUs. We can put them to work and generate great returns. So that is still our goal. We're just – we are a little bit behind on that, though. So, yeah, hopefully that clarifies it.
Robert Cattelier
Yeah, thank you for that. And then the last question, I just wanted to revisit the capital allocation question. We've talked about this in the past, but what are your current thoughts on, you know, how you're weighing the merits of maintaining your current capital allocation strategy as opposed to an alternative like reducing the dividend to accelerate the deleveraging and, you know, sort of bring back dividend growth over time? Has anything changed on that? Your outlook there?
Alan
Hey Rob. No, nothing's changed. As Greer was saying, we're very comfortable where we're at from a cash position. We've got line of sight within the business for incremental opportunities. We're able to fund the growth that we foresee in the business. I think there's opportunity to reduce the requirement for capital within the propane business. increase its contribution to the bottom line. So our long-term vision hasn't changed in terms of our ability to reach our goals around the leverage to fund the growth of the business and certainly that enables us to support the dividend.
Robert Cattelier
Okay, thanks everyone.
Operator
Thank you. Our next question comes from the line of Patrick Kenny with NBS. Please proceed.