Superior Plus Corp. (SPB) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to Superior Plus 2024 Second Quarter Results conference call. [Operator Instructions] Now I will pass the call over to Adam Kurnik, Director of Corporate Finance and Investor Relations. Please go ahead.

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 Allan MacDonald, President and CEO; and Grier Colter, EVP and CFO. For this morning's call, Allan and Grier will begin with their prepared remarks, and then we will open up the call for questions. Listeners are reminded that some of the comments made today may be forward-looking in nature and are based on Superior's current expectations, estimates, judgments, projections and risks. Further, some of the information provided refers to non-GAAP measures. Please refer to Superior's continuous disclosure documents available on SEDAR+ and Superior's website for further details. Dollar amounts discussed on today's call are expressed in U.S. dollars unless otherwise noted. I'll now turn the call over to Allan.

Thanks, Adam. Good morning, everyone, and thank you for joining our second quarter results call. When -- we made an 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. Certarus 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 Certarus 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 longer-term aspirations in 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, RNG. When we acquired Certarus, we knew that market verticals would not necessarily evolve evenly quarter-over-quarter. However, our acquisition of Certarus 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, Certarus has enabled Superior to become the largest player in the over-the-road CNG 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'm 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 Certarus 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 Grier to give you some comments on the quarter's financial results. Grier?

Thank you, Allan, 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 Certarus acquisition, which we closed on May 31, 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 U.S. 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 noncore 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 Certarus 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 are 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 Certarus. 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 are 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 Certarus 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 3.8x, an improvement from 3.9x at 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 3.7x by the end of 2024 with a longer-term objective of 3.0x. We are confirming our adjusted EBITDA guidance of approximately $500 million for 2024. While we expect the Certarus 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 CAD 0.18 per share. And with that, I will turn the call over for Q&A.

Thank you. [Operator Instructions] One moment for our first question that comes from Gary Ho with Desjardins.

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, U.S. Propane and Certarus? And are there any bigger operational initiatives kind of driving the second half strength worth highlighting?

Gary, it's Allan. Let me start and then Grier will finish. We're maintaining guidance. I mean, short answer is yes. We've got -- we've been working really hard, as you know, on looking at opportunities in the propane business, and we are very optimistic and we continue to add new customers and to improve the efficiency of the business. And 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 I want to let Grier talk about sort of a little bit of a ladder on how we get from here to there.

Yes, sure. So if we -- our target of $500 million, obviously, we'll see a little bit of headwind on the Certarus result. As I say, I think if we look at the second quarter, this business missed by kind of $7 million-ish, right? 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. So overall, for the year, we think Certarus 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 Allan 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. 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.

And then maybe second question, specifically on Certarus. 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 how much of your, let's call it, 760 average MSUs were underutilized in the quarter? I'm trying to get a sense if we exclude those, how much better would the unit economics look year-over-year?

Yes. 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 -- of the miss, as I say, there are different components and some is temporary. But if we're talking about the competition part of this, it's a very high percentage of this impact was the pricing dynamic versus utilization. So they were highly utilized.

And then, Grier, while I have you, just a number -- quick numbers question. You guys used to disclose an adjusted operating cash flow figure, which backed 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?

Look, for sure, Gary, I mean when you look at the EBITDA and you look at our growth and maintenance capital, the interest, the dividend, you can see it's relatively neutral right now. And as we continue to talk about our plans for the business, whether we're talking propane or Certarus, I think it will become clearer to the market what our plan is. And -- but 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. We've got in our plans. We see sufficient cash flows to support the growth of the business through CapEx. Support our deleveraging 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, like as we continue to unveil our plans for the future and our confidence in growth of the business is, I think, it will become clear to the market.

Our next question comes from the line of Daryl Young with Stifel.

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 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.

Well, it's really -- I mean, that's a really tough one, but what I'd say, hey, Daryl, by the way, sorry, it's Allan. When you think about the MSUs in the market, a lot of our competition is based in West Texas, and that's really their home market and their focus areas. So number one, you've got a higher concentration in a lot of these companies. They're -- 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 the 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 the other -- and especially in the busy winter seasons. So I wouldn't necessarily make that lead.

So when you look at -- I know it's pretty early still to be talking 2025, but when you look at that period, does this cause you to reassess the growth rates for Certarus or do you see enough -- with time, enough end market development outside of oil and gas that you could still sort of continue the growth rates at a high return metrics?

I think that's more it. Predicting 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 Certarus, the beyond the well site strategy, which has continued to reduce our reliance on our home market, if you will, the origin of the company. The RNG business doubled over the 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 Certarus 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. And that's, 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 is really working hard on it. And so far, 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 we have a bigger presence in those emerging segments than anyone. And I give the team full credit for the work they did in the foresight they had to make that a reality.

Our next question comes from the line of Robert Catellier with CIBC Capital Markets.

I just wanted to continue addressing the competitive situation. Maybe you can just describe to us what your competitive response has been on 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.

The volume in West Texas is really -- continues to be really attractive. And 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 contract opportunities that were a little lower than what would work for us and the customer return. And so people are recognizing that Certarus, 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 or 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 is -- obviously, that presents a bit of a challenge. But we're looking at every opportunity to say, okay, where is 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 a long -- in terms of long haul. And the reality is in September, October, November, the world is going to be changed. And the capacity is going to be much smaller than it is today. We know the activity is going to heat 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.

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 1/3 of them or something like this are sitting in West Texas right now, they're generating average or above-average returns for the portfolio. So it's still a really good space. It's just -- 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 generate higher returns. But not all markets would generate higher returns. It's not like these are the lowest and it's an issue, like, it's still a great area. This is a great spot for us to generate some of our income, and we do have very good returns. I just wanted to add that point.

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 and providing MSUs on schedule and on budget?

Rob, can you -- you're just asking about the number of MSUs?

Yes. The actual number of MSUs. Yes, I think you took the full year number down by 5 units, which is less 1%.

I think maybe it's the average that we're talking about. So that -- so here's what I would say, and if I don't answer your question, just ask me again. But 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. So -- and we kind of thought they would occur relatively evenly. So we're a little bit behind. I mean, we kind of thought they would be slightly back-end weighted, but not this back-end weighted. So we're -- yes, we're still wanting to take these MSUs. Obviously, that's a lot to get delivered in the second half of the year. If they get delivered, we'll certainly take them. There's probably a chance that some of them maybe slipped into 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 yes, 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. And -- we're just -- we are a little bit behind on that, though. So, yes, hopefully, that clarifies it.

And then 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 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 sort of bring back dividend growth over time? Has anything changed in your outlook there?

No, nothing changed. I mean as Grier was saying, we're very comfortable with 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 and 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.

Our next question comes from the line of Patrick Kenny with NBF.

Maybe starting with Canadian propane. Just curious what regions across the country you're experiencing the greatest success on the customer acquisition front? Maybe just some color on the main drivers of this growth. And as well, where you might be seeing the biggest opportunities in terms of further cost savings and margin expansion?

With regard to Canadian propane specifically, you mean?

Yes.

Or generally speaking?

Yes, Canadian propane.

Well, Canadian propane, the difference between Canada and the U.S. is largely Canada is more commercial and industrial. Where we -- we're focusing our sales efforts in that vein, although there's some consumer component to that, too. I would say our biggest successes have come with working with the sales organization to better understand costs. So we're working on profitability, understanding where we're investing our capital. There's been some collaboration between the Canadian propane business and Certarus around industrial customers, which has helped. So it's -- this is a really boring answer, and I apologize, but it's very much blocking and tackling to say, okay, are we managing the interface with our customers well? So recently, we've just made some adjustments with our internal sales support so that we're able to give more valet service or concierge-type service to our industrial accounts. It's about managing our profitability to make sure that we're not in a losing position when it comes to be generating return on our capital. And it's about where we're prepared to look for opportunities and where we're investing to grow that business and supporting our sales organization. So it's less about organic segment growth like we're not adding new segments or looking at different geographies. I'd say more -- we're looking to improve our density. So really capitalizing on where we have existing assets, so they're disproportionately able to contribute a return. It's about where we have pricing flexibility by really understanding our costs and then being smart about where we're targeting. So like I said, that was going to be a boring answer. It's really basic stuff, but I think I got to give the team credit. They've made a lot of effort in the last couple of quarters to really manage our customer base better and it's starting to pay dividends.

And then maybe on the U.S. side for propane, and there's a bit of a follow-up on the capital allocation question. But any updated thoughts around perhaps high-grading your focus in the U.S., any noncore sale opportunities that could help accelerate your path towards reaching your leverage target?

No. I mean, sorry, when I know it was a bad answer so. Our plans right now are not -- we're not looking at any dispositions in the U.S. We're really pleased with our footprint. We've got some opportunities to rationalize some assets, which you'd normally expect when you have grown by M&A. I think we're in the right markets. I think we're very underpenetrated. There's an opportunity to take share from a competition set that I think we're very, very well poised to go up against. We've got great opportunities in terms of rightsizing our pricing to be more aggressive on the acquisition front. And we've got great opportunities to retain our customers better than we have in the past. So I think the asset base in the U.S. is really attractive to me, and it's underutilized. So we're -- we've got full designs on growing that business aggressively, and we think there's a lot of unrealized value there.

And then last one for me just on Certarus. And perhaps a bit of an offset to the higher competition. I know that the cost of natural gas is a flow-through in general. But I'm just curious from a timing perspective, if the current weakness in NYMEX and AECO pricing might be a bit of a short-term tailwind for margins at least through Q3 and perhaps into Q4?

Are you asking this from a competitive standpoint and like a market positioning and pricing? Are you talking about like the way that contracts work and having either complete flow-through or having kind of fixed-price nature contract?

Yes, more on the contracting front. And I know that on the propane side of the business, there's a little bit of a lag in terms of flowing through the pricing. So just wondering if there's a similar dynamic within Certarus?