Good day, and welcome to the Superior Plus 2022 second quarter results conference call. At this time, all participants are in a listen-only mode. After the speaker 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Rob Dorran, Vice President of Capital Markets. Please go ahead.
Thank you, Cherie. Good morning, everyone, and welcome to Superior Plus's conference call and webcast to review our 2022 second quarter results. On the call today from Superior Plus are Luc Desjardins, President and CEO, and Beth Summers, Executive VP and CFO. For this morning's call, Luc 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 SEDAR 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 Luc.
Well, thank you, Rob, and good morning, everyone. Thanks for joining the call to discuss our second quarter results. Safe to say we've maintained the strong momentum we generated in quarter one 2022 into quarter two. It's important to note that quarter two, along with quarter three, are seasonally slower quarters for business due to the lower heating load and typically together amount only approximately 10% of our annual EBITDA. Keep in mind that recently we've acquired Kamps and Quarles. If you look at a full year, we get 25% of the cost of those two businesses for this quarter, but only 10% of the sales. No doubt that you'll end up having for the timing of those acquisitions, you know, this is how it connects for quarter two and three. We're a full year, of course.
The full results are there, and the integration plan are going extremely well. Our quarter two results are a testament of our strength and our business in the face of rising costs due to inflation, but the volatility in commodity costs, which has driven some customer conservation. As we look to the balance of 2022, we're comfortable in our ability to manage the impact of inflationary pressures on our business by passing on these rising costs to our customers, which is evident in our average margin growth over the period of year to year. We saw the benefit of acquisition completed over the last year to higher volume quarter-over-quarter. However, we also saw higher operating expense in the quarter.
Based on their strong first quarter results and second quarter results, we are confirming and are very comfortable that our adjusted EBITDA guidance range of CAD 425 million-CAD 465 million is right on target. We're making great progress on the Superior Way Forward EBITDA growth initiative through acquisition, continuous improvement and organic growth. On June 1, we closed the acquisition and delivered fuels business of Quarles Petroleum, which expanded operations in the attractive Virginia market. We're excited about adding this established retail propane distributor to our strong base in the Eastern U.S. region. We also closed three smaller acquisitions in 2022, one in Ohio and two in South Carolina, for a total of CAD 12.9 million. So quite small, add-on acquisition. With these four acquisitions, we're on track to achieve the lower end of our previous stated. Excuse me for a minute.
Acquisition target, excluding the Kamps acquisition of $200 million-$300 million in acquired assets in 2022. We released our second annual sustainability report in June, which contains improved disclosure from an inaugural report and demonstrates our focus on prioritizing ESG in our operation. We believe Superior and propane as a product will play a significant role in the transition to a lower carbon and eventual net zero emission future. We have put an energy transition team in place to identify and develop opportunities in this space and recently hired a director of sustainability. We're working on various projects, mainly focused on lower carbon propane source, currently including renewable DME and hydrogen. Following the end of the quarter, we entered into an agreement with InEnTec to bring renewable DME to our customer base, providing a carbon-friendly enhancement to traditionally sourced propane.
InEnTec Plasma Enhanced Melter, PEM, gasification process will divert organic waste from landfill and convert into carbon friendly, clean burning DME, which can be effectively blended with propane and used as an alternative renewable fuel of its own. We're excited to enter this partnership where we will not only be able to provide carbon friendly fuel to our customer, but we will also be reducing the waste that is literally filling our country's landfills. According to EPA, organic material continue to be the largest component of municipal solid waste and also contribute to increased greenhouse gas being released into the atmosphere. We will now be part of the process of recycling that waste material by converting it into clean burning fuel and providing it to our customers.
We are in a strong financial position from a debt and leverage perspective following our recent common equity issuance or gross proceeds of CAD 288 million. The additional liquidity from the equity issuance and our stable cash flow from operations is expected to provide us with capital to continue our growth through acquisitions, investment in organic growth and continuous improvement projects. Having accelerated our acquisitions in 2021 and to start 2022, our focus in 2022 will be integrating and capturing the synergy from acquired businesses. I assure you we've had a review of those two larger acquisitions this week and everything is on plan and doing very well.
We still see a strong pipeline of acquisition opportunity in U.S. and Canada, so we are confident we will continue to acquire quality retail propane assets and achieve a Superior Way Forward target of CAD 1.9 billion. I think we're past about 40% of that target as we speak today. The price of acquisition, the valuation are coming down somewhat, which is good for us. Before I turn the call to Deb, I would like to make a brief comment on my planned retirement. As mentioned in quarter two press release, I will be formally retiring on July 31st, 2023. With our seasoned executive and strong team, Superior is well positioned for the future. The board has appointed a succession committee to find a new CEO for Superior and to address the transition.
I will work with the board to ensure a smooth transition as we continue to build on our operational momentum through the implementation of the Superior Way Forward initiative and drive shareholder returns. Very proud of what we've accomplished over those past 11 years, and we look forward to executing our plan for the ongoing benefit of all the stakeholders. I will now turn the call over to Beth to discuss the financial results in more details.
Thank you, Luc, and good morning, everyone. As Luc mentioned, Q2 is a seasonally slower quarter for our business as we exit the colder winter months, and our results are in line with our expectations. Superior generated second quarter adjusted EBITDA of $25.6 million, a $6 million or 19% decrease over the prior year quarter. This was primarily due to the impact from the CEWS benefit that was received in the prior year quarter and lower realized gains on FX hedging. The decrease was partially offset by improved sales volumes and higher average margins in our Canadian propane business and higher results from US propane and lower corporate costs. In addition, as Luc mentioned previously, with the Kamps and Quarles acquisitions, in Q2 we have 25% of the cost, but only approximately 10% of the volume.
This is all factored into Superior maintaining our guidance for the 2022 year. As you will have noticed, we updated our reporting segments in our Q2 financial statement, and we will be reporting the following three segments going forward: Canadian propane, U.S. propane, and wholesale propane. These segments are better aligned to the specific characteristics of our operations and will provide a higher level of detail with regards to those customer segments. The second quarter loss from continuing operations was CAD 85 million, an increase of CAD 48.9 million compared to the prior year quarter. The primary driver for the higher net loss was an unrealized loss on derivatives and foreign currency translation of borrowings, compared to an unrealized gain in the prior year quarter. Turning now to individual business results.
U.S. propane adjusted EBITDA was CAD 16.2 million, an increase of CAD 2.2 million from the prior year quarter, primarily due to contributions from acquisitions completed in the past 12 months and higher margins. US propane sales volumes of 246 million liters increased 16% compared to the prior year's quarter, primarily due to contributions from acquisitions, partially offset by an impact from unseasonably warm and inconsistent temperatures in Q2 and customer conservation stemming from the high commodity price environment. Canadian propane adjusted EBITDA was CAD 13.3 million, a decrease of CAD 8 million from the prior year quarter, primarily due to higher operating costs as a result of the impact of the CAD 7.8 million CEWS benefit recorded in the prior year quarter. Canadian propane sales volumes of 226 million liters increased 5%, driven primarily by commercial volumes.
Commercial sales volumes increased due to improved oil field demand and the impact from the lifting of public health measures associated with COVID. Wholesale propane adjusted EBITDA was CAD 1.8 million, which was consistent with the prior year as the impact of the Kiva acquisition was offset by weaker market fundamentals in California. Turning to corporate results, the adjusted EBITDA guidance and leverage.
Corporate operating costs were CAD 6 million, a decrease of CAD 2.2 million compared to the prior year quarter, primarily due to lower longer-term incentive plan costs related to the share price decline in the current quarter. Superior realized gains on foreign currency hedging contracts of CAD 0.3 million, compared to a gain of CAD 2.8 million in the prior year quarter, due to lower average hedge rates relative to changes in exchange rates and a decrease in amount hedged as a result of the sale of the specialty chemical segment. Superior's total net debt to adjusted EBITDA leverage ratio for the trailing 12 months ended June 30, 2022 was 3.7x , which is within our target range of 3.5 x- 4 x.
As Luc mentioned, we're maintaining our 2022 adjusted EBITDA guidance range at CAD 425 million-CAD 465 million, with a midpoint of CAD 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 will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question will come from Nelson Ng with RBC Capital Markets. Please go ahead.
Great. Thanks. Luc, congrats on your retirement plans.
Thank you.
First question is related to the renewable DME. I think similar to. I guess the question is last time when we talked about green hydrogen, you said the margins were pretty similar to propane. Is this arrangement similar to green hydrogen, where you essentially get supplied the DME, you distribute it, and the margins are similar as well?
Yeah. Very early to be 100% sure, but I am convinced personally, even before we get customers and what's the pricing for customers by the time the production comes on, very confident we'll have similar margins. We're into the added value business, and a lot of service revolves around the supplying tanks and fulfilling tanks and our technician work that they do. My expectation from what I've seen so far, the margins are gonna be as good. I'm even a bit optimistic that we can charge a bit more because it's green and there's a lot of customers are gonna want green propane. I think there's a premium for us that at least what we have as margin and maybe optimistically a bit more.
Yeah. No, the one thing that I'll just add, Nelson, is that we'll have the ability to blend the DME. We'll have the product. We'll buy the product, and then we will blend it with propane in addition to the ability to use it as a renewable fuel completely on its own. There's the two options.
Okay. There's probably limited CapEx you need to make for this, right?
Right. Large CapEx are not on our watch.
Yeah. We're buying the product.
Yeah.
No. I'm just thinking from an equipment perspective for blending and other things, and you're just gonna use the same propane trucks to make the deliveries, right?
It'll be the same propane trucks, but there will be a small capital requirement to have the equipment to do the blending.
With the same tanks.
Okay.
Yeah. No, it's the same tanks. It's just blending equipment.
Yeah.
Okay. Got it. Then, Beth, you touched on consumer conservation of energy due to higher prices. There's two questions, I guess. The first question is, for the average retail consumer, like, roughly what was the cost increase they saw year-over-year? I guess the second part of that question is, roughly what percentage decline in demand did you see from, like, versus, what you expected, assuming a similar temperature or weather?
Yes. On the first part of your question, from an overall cost increase on average that would be seen by the customer all in, it'd be roughly 20%. From a conservation perspective, that one there, it's you know at this point in time, we're seeing some impact, but it wasn't from a percentage perspective. I wouldn't even say it's necessarily 1%. I do think as we go forward with the higher prices, there is potential for us to see more impact from a conservation perspective. Luc, I'm not sure if there's something you wanna add.
Yes. You know, the theory from the beginning when all the energy price went up 20% is a lot, but it's a lot when you think of, you know, filling up your car with energy, oil and diesel and all the natural gas. Net, we thought that their customer is just saying, "Oh, Superior's charging me too much." If a case should go back over the years, something like that happen, "Oh, they're charging me too much. I'm gonna call the competitor," which is a lot of trouble to get the tank and make the change.
Today, I didn't expect that to come up would be an issue too much because everybody knows wherever you are today, you know that every energy cost has gone up so much that people are aware if not Superior gouging and increasing their margins too much. I think we have a path this year because it's known around every segment of customer that, wow, energy prices are really going up. One thing I can also confirm is from a. If there's a 1% conservation, I think it happens somewhat in quarter two, people might not take the fill, but when quarter three comes or four, they'll take. We'll have to fill up more. It might be that they put the thermostat down, and that affects for a small percentage of our customer.
I can assure you from a guidance point of view, I have zero worry that we will not recover that somehow and make the same type of profit.
Okay. Great color. One more question before I get back in the queue. So Luc, in terms of retirements, like what were the key factors that led to your decision to re-retire next year?
A couple of things. First, I'm very healthy, still full of energy, and second, I love work. I think I could have done before here, as you know, from being part of an equity firm. I've done other projects that are not CEO and son traveling, working for the days that you need to work. Maybe bringing the pace down somewhat. That was my first objective. When it comes to the company, you know, it's a tough decision because company is humming to the level that we can say, wow, you know, like we're. The two acquisitions we just did will improve the bottom line by 25%. You can sign that and put my name to it. It happens.
I think we're in a good spot from how we execute and the team in place and the operation effectiveness that's coming. We have continuous improvement every year. We keep our margin in a recession or whatever. It doesn't affect our industry as much as other. The team is there to really execute properly. When I thought of all that, what's the right timing? Many of you probably don't know I'm just 70 years old, so I'll be 71+ when this happens. I've offered the board. I said, "I'm telling you that I'm doing this, but at the same time, if a year becomes 14 months because of necessity or you already become 10 because you get to the new CEO person sooner, I'm flexible to help until the end, and I want this company to do well.
I still own a ton of stock." It was probably, maybe earlier than I would have expected, for my own, lifestyle. But, you get to a point and you say, "Well, maybe bring it down a notch from the passion drive and effort and work." It was all that.
Yeah. Thanks for the details, Luc. Congrats again.
Thank you. One moment for our next question. That will come from the line of Gary Ho with Desjardins.
Hi, Luc and Beth. Luc, congrats on retirement and, you know, the achievement you have had at Superior.
Thanks.
Maybe just a bit on that. You know, I know it's early in the process, but what would the board be looking for in terms of the next CEO? Is there any preference for, you know, internal versus external? Would you guys be looking in the U.S. as well?
That has not been decided yet. What happened is by me confirming with the board what I'll do and say, "Hey, a year," so it's like not tomorrow, lots of time. I hope we have a great year, and I wanna make sure we're humming on every aspect for the next, till I'm there and after. For them, they have to sit down and say, "Okay, let's look at the type of CEO we would want." They have not done all that work yet. Developing a profile, organizing a search, which, you know, will come in months to come. It's not a panic or a situation that demands a rush and make quick decision because I'm giving them a year.
They're really gonna take their time to look at all the angles, how to proceed, what's the profile, you know, and then come to those conclusions in the next three or four months, and then move on to decide what's the right CEO for this company going forward. None of that work has been done. But we wanted it announced. It kind of sounds a bit bizarre, but, you know, CEO of a company for nearly 11 years or plus, and then we said, "Look, you made that decision. It's clear. Let's announce right away." We're a public company. We don't want any shareholder out there to know a month later.
We've announced before all the work of preparing the succession, the profile and the type of CEO has been. The work is coming. We've decided to announce immediately as soon as I made my decision.
Thank you, Luc, for great color. Maybe this question is for Beth. You know, operating cost was higher, especially in the U.S. I know you said a part of it is due to the fixed cost absorption by the acquisition and part is from inflation. Just wanna see, you know, how would be the split between the increase between the two factor, trying to see, like, what the run rate could be going forward.
I think I missed the two myself.
Yeah. I'm just trying to.
Yeah.
Let me. I think I heard the question. It's just you're a little choppy from what we can hear. Are you asking?
Yes.
With respect to the incremental cost associated with the U.S. business, how much is due to acquisitions and how much is from an inflationary perspective or other cost increase perspective? Is that the question? Yeah, just trying to see, how much of the increase, attributable to each factor.
Sure.
We can look at the run rate going forward. Thank you.
Yeah. I mean, maybe the best way from an inflationary and a labor cost perspective where we've seen those impacts overall in the business for Q2, if you wanna think about it, the impact is somewhere. Like, it's in that $7 million-$9 million range. Predominantly or primarily, the rest of the cost increases would all be associated with acquisitions. A little bit for organic growth potentially, but the vast majority, I think it's reasonable to just sort of put it all in a bucket for acquisitions.
Thank you.
Go on.
Okay. Go ahead. Yeah.
No, I was just gonna say, so for run rate, you could think of the cost from that perspective, but remember a lot of the costs are variable in nature as well. The cost will still always be higher in Q4 and Q1 on an even run rate basis.
Yep. Thanks, Beth. I'll hop off the line.
Okay.
Thank you. One moment for our next question. That comes from the line of Joel Jackson with BMO Capital Markets. Please go ahead.
Good morning, Luc and Beth.
Good morning.
If we look at the rest of the pipeline for propane tuck-ins or acquisitions this year, are we pretty much done or at least done for what actually could impact 2022 earnings?
What could happen, Joel, is more small tuck-in and the returns are quite big, you know, when you do small tuck-in. That could happen. When it comes to a bit larger size, nothing this year. We really are focusing on the integration of the two, which is ahead of plan, by the way, of Quarles and Kamps, doing it faster and quicker than the 18 months we usually take. 'Cause we ended up buying them at the wrong timing, if you want, not for the next 10, 20 years, but for this year, you know, April, May, you'd rather buy something in November and you get the winter. So, we have...
This is giving us the opportunity to say, "Okay, this summer, let's go make this happen sooner and faster." There will be all hands on deck to integrate properly those two size company, small tuck-in, and then review for bigger, larger deals in the years to come. You know, we want to keep our debt down, and so it's not much coming in the next while.
Yeah, Joel, just as a refresher, I think with respect to your question, so if we did close an acquisition or we close acquisitions in Q3, we'll only get roughly 35% of the EBITDA, and that happens in Q4. As Luc's saying, as we're looking at it's not like there's nothing in our view from a materiality for this year or that would impact items.
Right. The kinda guidance, what's the guidance range now, which never includes future acquisitions, at least from a future acquisition perspective, you're kinda done for what can impact 2022. Does that make sense, what I'm saying? I'm asking the question.
That makes sense.
Yeah.
Based on what we know currently, yes. Yeah. Makes sense.
Okay. The other question I have is, you know, covering the stock or company for a long time, you know, we're kinda used to what Canadian propane margins are, you know. Good years, CAD 0.19 per liter, CAD 0.20 per liter. Not such good years, CAD 0.15, CAD 0.16 per liter, of course, profit per liter. Now that we've done the resegmentation, sort of it all changes. Can you talk about kinda now what the range is now for kinda, like, good dynamics for Canadian propane margins and when the dynamic's not as strong?
Yeah.
Yeah. I think, you know, including the segment, currently the way we're looking at it just assumes sort of leave the U.S. as it is. With respect to Canada, if you wanna think it based on the segment, you know, somewhere between CAD 0.25-CAD 0.30 would be the range. A challenging year, CAD 0.25. You know, a good year is CAD 0.30. Obviously, customer mix has an influence in Canada over where it sits within that range. Maybe, you know, the best way to think about wholesale now that we've separated out, typically wholesale, those volumes will generate around CAD 0.03 per liter.
Okay, that's very helpful. Okay, I'll leave it there. Thank you very much.
Thank you.
Thank you, Joel.
Thank you. One moment for our next question. That will come from the line of Ben Isaacson with Scotiabank. Please go ahead.
Thank you very much, and congrats, Luc. I'm sure it's bittersweet. Just two questions, if I may. Number one on organic growth. Should we be modeling an increase in volume slowly over time without meaningful acquisition costs? In other words, do we see in certain regions that volume is increasing or market share is increasing, that's not getting kind of taken back by some of the competitors, without any meaningful spend?
Okay. If you look at Canada, there's some good growth right now because we lost some commercial, 20% of our volume, which is less margin, you know, especially the oil field due to COVID. Right now you'll see for the next two years about 6% or 7% growth a year in that segment. From a residential, we've developed a lot of tools and we're getting internal growth in the range of about 3% in retail Canada. A lot of good success in Canada. Internal growth versus overall industry may be growing only 1%. In the States, we're equal to the industry growth, so we're flat. We're not gaining on internal growth. We've done a lot more work in the last 6 months to take all of the.
You know, the way we've built the business of innovation, development, and digitalization with customers internally, we do projects in Canada, we execute. We now have a service project in the works in Canada for orchestrating the distribution of the logistics and the digital system. Once we cover all the provinces in Canada, that's in the works. The machine is now rolling. It's work and we're starting with Maritimes. We'll cover all Canada then we'll go to the States. I want to, I guess what I'm saying is, the States have done a ton of work and a lot of work on acquisition integration number one, in dealing and servicing the customer day to day.
Then the marketing part that we have developed, the machine and the best tool in Canada is now this year have started to be applied in the U.S. business. There's a coordination between the best tools and the best marketing approach by segment, and we're now pushing that in the U.S. business. You'll see. I think I'm expecting that by next year, U.S. will come to more growth than industry growth. For the moment, it's not the case, but we haven't executed on our marketing, all of our marketing approach to the U.S. at this stage. That's why there's differential between Canada, U.S. growth.
That's helpful. Thank you. Just, my second question, transitioning from organic growth to strategic growth. Can you just talk a little bit about the Northern U.S. states and, what is the kind of long-term or midterm strategy there? The margins in that region, are they closer to the Eastern U.S. or closer to Canadian margins? How should we think about that opportunity set in terms of the timing as well?
The Northeast USA, the margins are good. They're, they would be in the average that we've discussed earlier.
Sorry. Just to be clear, Luc.
Yes.
What I really meant is entering the northern U.S. states. You know, the Dakotas and Montana and kind of anything south of the Canadian border.
You have the West Coast, I would say very good, and the East Coast, very good. The margin, when you get to middle USA, more co-op, more industrial, and less margin opportunity. That's the middle of the USA. That's why we kind of start in the east and west, and we are a lot of growth opportunity in those two, east and west segment. Middle, we're not doing that.
Just to be clear, the margin opportunity is probably lower in those Northern U.S. states, but presumably the volume opportunity must be quite good. I mean, they're all, you know, they all suffer through tough winters and therefore, you know, presumably would have higher propane use, especially in those rural areas. Is that fair to say? Higher volume, lower margin.
I think the fact that in the north you have a higher heating load, right, in the northern states, so that makes total sense that you would have more volume on a per customer basis on a like-for-like customer. I think as we look to those markets where the margins may be narrower, there's a lot of places, like in particular, if you think of the Canadian market, where you have very similar profiles when you start having the industrial type customers, et cetera. Your margins tend to be less from that perspective. I think as we look to those markets, there is at some point margin to be made or good business, but we wanna have a platform to try to build greenfield and build out the customers in that basis.
To date, with the opportunities and, you know, resources are always limited, it makes more sense for us where we do have platforms or where we know that there are stronger margins from a customer perspective for us to focus in those areas at this point in time. That's where, you know, as we're always talking about, we look to the coasts first.
Great. Thank you very much.
Thank you. One moment for our next question. That will come from the line of Robert Catellier with CIBC. Please go ahead.
Hey, good morning, everybody, and congratulations, Luc, on that decision. I have a related question. Oftentimes, when there's an important leadership change like that, it can prompt a broader strategic review at the board level. What is your sense that the board might undertake a strategic review to go along with their CEO search?
Yeah. We do the strategic review every year. We have one scheduled in October with the board. I can assure you that from a continuous improvement initiative, from having a good team in place in all the businesses and corporate, adding a strategy to do acquisition, which every time you acquire one, you improve it by 25%, there's no intention to change that. The strategy is clear, it's functioning. Like to trade at a higher multiple than we trade, you know. Having one business that is successful. We execute on what we promise, but that's probably one issue that hopefully the market will understand it one day, and we'll get the real value. From the strategy, from the execution, from the team, I don't see any change coming.
We just had our board meeting the last few days. None of that is on the agenda, and I don't see any change coming from a strategy.
Okay. You know, I know it's still quite early days, but have you had any traction with customers following the announcement of the Charbone initiative?
No, but it's too early, but it's a good question. I'm meeting with them in two weeks. They want to build multiple plants, and they have area and perspective of doing a lot more than one. We will be the distributor for the multiple plant they're gonna build. Actually, Canada and U.S., not just Canada. I'll get to know more as. I wanna visit their plant that they expect by September to be online producing in Sorel, Québec. I wanna go visit that. We don't know enough because it's too early, but at least we have something tangible happening before year-end. No big dollars to it, but it's starting. We'll have a marketing development plan that's in place to reach customers and see where it fits the best and the most.
We'll probably know a lot more in that regard next quarter.
Okay. Last question from me. As you're probably aware, the U.S. Inflation Reduction Act contains some provisions for an alternative minimum tax. I'm not sure if you've had a chance yet to assess if Superior would trigger any of those, that tax and, you know, what the possible mitigation strategies might be.
I think from our perspective, we're still working through, you know, some of the rules. Frankly, it's not just rule changes in the U.S., it would be anticipated rule changes that would be occurring in Canada and some of the other areas where we are. At this point in time, I don't think we can flag what we think the impact will necessarily be, but we are working through the process and with our various tax structures that we have in place and our corporate structures and what that impact would be.
Yeah, that's understandable. Thank you.
Sure.
Thank you. One moment for our next question. That will come from the line of Patrick Kenny with NBF. Please go ahead.
Yeah, good morning, everybody. Luc, congrats on your announcement.
You're the first analyst I met when I came to Calgary 11+ years ago.
That's right. Yeah. Hard to believe it's been, I guess, over six years since the head office was moved out east. But I guess, you know, in light of the upcoming transition and, you know, looking at the cash flow mix today being majority U.S.-based, not to mention most of the M&A opportunities are likely south of the border as well. Just curious if you think now is a good time to once again consider a new domicile for HQ and perhaps a U.S. listing at some point down the road. Do you still see Toronto as being the right place for the new CEO and the executive office over the long term?
Yeah. I can send it to a question earlier. I made the decision a year, could be a bit more if necessary. I'm there to help until somebody in place. None of those questions have been addressed by the board. What we ended up doing as soon as my decision was made is I told the public market immediately. It's like, okay. Now, they did work on. They always look at succession, but none of the discussion as to whether Toronto, the States, they were 55%-45% right now in the middle, so just a bit more in the States. None of that has taken place. They have a year, so it's not like, I guess, we could have worked differently if I am leaving next month, a different story.
No, being healthy and still passionate about doing some stuff and helping for this change. The whole work that the board has to do is, like, starting as of now and in the months unfolding, things will clarify, but I haven't heard of one question or one discussion of the last board we had this week about moving the head office, none of that. Now, if it's been six months, nine months, they start to think that way, don't know. For the moment, it's business as usual. Let's find a succession that's right for the future. All of their good questions are gonna be addressed, but in time. None so far.
Got it. Yeah, fair enough. Maybe just back to the business and the conversation around energy prices, and specifically the doubling of natural gas prices year over year. I'm not sure if you're seeing any residential or commercial pockets, you know, geographically where you're seeing a slowdown in switching or connecting into natural gas infrastructure. Also, you know, maybe on the industrial side, if you're seeing any customers choosing to stay on propane as opposed to, say, sourcing compressed natural gas supplies.
Beth, anything comes to mind on?
Well, I mean, I think, you know, from the initial part of the question, whether we've seen any change in the pace of activity of, you know, companies arguably, I guess, building the infrastructure for natural gas where they might choose not to. I can't say that we've seen any change in activity. Typically, if there's an entity or somebody close to natural gas, that would typically be the direction that they would go. I don't know that we've seen any fundamental change. I mean, the reality is, I mean, natural gas has increased a lot. All energy has increased. There could be instances perhaps where that starts impacting, but I can't say we've necessarily seen that at this point in time.
I think, you know, with respect to your question on compressed natural gas and what we're seeing, I mean, we have seen that there are some large industrial customers that certainly that works out to a good answer if there's a compressed natural gas hub somewhere close or near where those entities are. I mean, I think from that perspective, you know, that is still developing. I don't think we've seen any difference in that pace of development right now based on the cost of natural gas. Again, I do agree with you that pricing changes, and if it settles out and it's for an extended period of time, you would think it would have an impact on the economic decision that you'd make associated with either using, say, propane versus compressed natural gas.
I, you know, I think that'll take a little bit more time for that to fall under sort of.
Okay. Great. Thanks for that, Beth. One more if I could just, I guess, given the high yield market remains quite fickle these days, can you just remind us what other levers you might have from a liquidity perspective, you know, should you need to take advantage of, say, a new large-scale growth opportunity? Perhaps any update on just how supportive your two largest shareholders are right now with respect to remaining active on the M&A front in light of the, I guess, uncertainty surrounding inflationary pressures out there today?
Okay. I'll cover off the question around high yield and access to liquidity. You know, from a high yield market, you're correct. I mean, I think the market doesn't look the same as it did certainly when we were refinancing last year, and we did our notes. That being said, I think there's still access to that market if we chose to. There would be access from that perspective. The pricing would be a lot different than our current notes. I think, you know, the most obvious access to liquidity is our line of credit, which we're currently only 50% drawn. Just as a reminder, I mean, we did renew and extend that just a few months ago.
From that perspective, we do have access to a CAD 300 million accordion as well, just based on the current deal. I think from our perspective, you know, if there's something there that we wanna fund that, you know, people are supportive, certainly in all the discussions that we've had to date. You know, we're confident that we could go forward and find the liquidity that we require. Luc, do you wanna talk about the.
Yeah. Can I just add something?
Sure.
From M&A and Brookfield really like the activity of the acquisition, wanna continue. I alluded to it earlier that the acquisition, the valuation are down a bit, which is good for us. There's no acquisition that we intend to do is not gonna be bringing an internal rate of return that's good or better than the past ones. Hopefully a little bit better because the valuation comes down. In it, for us, we're, like Beth explained, kind of did a great job. She did a great job with Rob and the team to position us for the long term on interest rates, which is great. We're in a great position.
For all future acquisition, we see valuation coming down somewhat, and we see total rate of return as good or better for new future deals.
Okay. That's great color. Thank you very much.
Sure.
Thank you. One moment for our next question. That will come from the line of Matthew Weekes with iA Capital Markets. Please go ahead.
Good morning. Thanks for taking my question, and congratulations, Luc, on the planned, upcoming retirement.
Thank you.
I just wanna ask about maybe potential, you know, following the announcement out about the DME and with the, you know, hydrogen as well. If you could just comment on what the pipeline's like, you know, the kind of conversations you're having with, you know, additional parties on future opportunities for clean fuels, you know, distribution. In light of the climate bill that's been passed in the U.S. and maybe seeing increased, you know, growth in sort of renewable fuels side of the economy. Thanks.
Yeah, thank you. Great question. There is more discussion going on absolutely with for new project and additional project. I've talked to that effect earlier about Charbone, where they want to build many plants in Canada and some in the States, and we're the player that's gonna be organizing the logistics distribution to the end customer, who will own the customer, and we'll have good margins. The same with DME. A lot of work is getting done. This was first announcement, more to come. Very exciting. I think we'll be, as a large propane company, we'll be. I'd like us to be the lead player when it comes to modernizing our offer to customers to be more renewable, and that's what I think we're gonna make happen. More to come in that regard. Big time.
Okay, thank you. I appreciate the commentary. I'll turn the call back. Thanks.
Thank you.
Thank you. One moment for our next question. That will come from the line of Steven Hansen with Raymond James. Please go ahead.
Oh, yes. Good morning, everyone. Thanks for the time. Well, the data that you provided on the new segmentation is still a little bit limited. It does point towards some pretty significant swings in those wholesale margins. And Beth, I know you commented on sort of general ranges earlier, but just perhaps a two-part question focused on wholesale specifically is, you know, can you just remind us the one or two key drivers we should be mindful of here that drive that margin variance? I know we often talk about regional spreads, but I'm just curious what else we should be monitoring. Then the second part is, do you need to actually be in the wholesale business, given the lower margin profile and/or is there real strategic value to having that base load business as you serve your retail business as well? Thanks.
Okay. I'll touch the second part of the question first, which is when you're asking if there's value to be in that business, the answer is yes. We need those skill sets internally to ensure that we have security of supply. We're comfortable. The bulk of the activity that's done by that business is internal. The additional benefit that we have as we move into, as we did with California, by having that wholesale business, we also have links to the other retail businesses which are potential targets, and we have relationships with potential targets going forward. There is a benefit, and it is a way for us overall in the entire, I'm gonna say, the value chain, to also make the margin associated with that.
We have the highly skilled individuals doing that work, where if we're doing it internally, then it makes sense to also use that skill set, to supply the market and again, you know, have some incremental margin associated with that because we need the skill set to effectively run our current internal business. I think that's sort of the second part of the question. The first part around drivers, I think, you know, on average $0.03 when you look at that volume is a good number. There are levers within there, you're correct. One is just you selling the wholesale volume drives a certain amount of that margin, but it is the overall fundamental, fundamentals of the market, which you are right.
There's times where there's differentials in the market or inefficiencies in the market, where in particular, as I would have talked about in the past, it could be very much that based on weather patterns, pricing is a lot lower, and I'll talk about Canada right now, say in Edmonton. As a result of that in the East, because there's cold in the East in the winter, prices are quite high. You know, there's some arbitrage by buying out of Edmonton and then railing it to the East and using that product. That generates some incremental margin when that market efficiency is in place. There are also margins to be gained when there's basically differentials associated with the pricing that comes from an index perspective because we'll typically buy on index, either Conway or Mont Belvieu Index.
From there we will sell at rack pricing where there's differentials. The rack pricing would be, you know, Edmonton or Sarnia site pricing. What we typically will do, there are fluctuations depending on a year where those differentials are robust or if they are weaker or much more narrow, which you would have seen over the past. It just would have been embedded in that margin number you're looking at from Canadian propane. What we will do from a forecast perspective is typically the same way that we look at weather, and we'll layer in five-year averages. We will do the same when we forecast margins coming out of the wholesale business.
Let me add, Steve, a couple of points. First, and we've seen it, in difficult time with the rail blockage or weather being really extreme, who service the customer the best by a long, long shot is Superior. That's probably why, to a degree, we're getting more internal growth than the market overall. Not the main reason or the only reason, but it's certainly one of them. It's a great tool and a great tool that our competitors don't have to service customer properly. On top of that, when you look at the cost of to serve the space, the storage and the people in the office that does the work, your internal rate of return are very good because you have very low cost, you know, of doing that job of procuring and servicing.
The $0.03 is not a big margin, but if you look at the return on investment in that business versus others, it's a bit better than the rest of other business we have. It's like $0.03 doesn't show the reality here. It costs. We sell for $0.03, but it costs us $0.01 to, you know, to do that. Kind of a good return on investment and the margin are not the main factor. It's big volume and the low cost of the infrastructure to service such business.
That's a really good perspective. I appreciate that. Just one last one actually, if I may, is just around the opportunity on the oilfield recovery side. Is there anything you can do to gather or capture more scale or market share in that business that does appear to be relatively high growth here, at least in the relatively near term? I know you've already consolidated a large part of Western Canada, so I'm presuming you've got good exposure there. Just trying to think of anything you can do strategically to advance your position as that becomes a pretty high growth vertical here for the next couple of years.
Yes, on the customer to customer, it's hard to say because we like to. That cost to service is quite high and the margins are low. It's like not where we're happy to have those customers, we like to service them, but it's not where we would put a lot of time and effort on the service to build that business because we like to make better profits than that. There is a project of a 1,000-miles natural gas pipeline going into the West Coast to the ocean. We're even, they need gas and they need energy all the way to the 1,000- miles.
We won that contract, and it's gonna be a long-term contract with big volume, which by the way, more than half the contract is not even propane on our sales and margin that we make. It's to organize the sites for them on the line that they're building. Those are projects that are special, different, need additional type of scale, which we have in Western Canada to do a project like that. It wasn't a propane per se business. It's you have propane to give energy to those people that are gonna build the 1,000-miles, but we also offer a lot of other work that goes with that. Projects like that, we're in because we have the scale, the skill, and we've gained a good project in that regard.
There is some more I would say we'll probably maintain our customer base, and it's growing very well now, which is a good thing. It's been a long time due, so probably don't expect to win new customer as to answer to the feeling about that.
Okay. Very good. Appreciate the time and congratulations, Luc, as well.
Thank you. One moment for our next question. That will come from the line of Daryl Young with TD Securities. Please go ahead.
Hey, good morning, everyone. Just one quick one from me. With respect to the five-year plan, I don't think you've shared any per share metrics related to that growth objective yet, but I'm just curious if you have some internally you'd be willing to share related to maybe free cash flow per share or cash flow per share growth, or if you'd consider adding those.
I think maybe the best way to think about it is mathematically, you can just take the EBITDA and then divide it by the number of shares that are outstanding now. Right?
Okay.
Earnings per share, we wouldn't typically look at that because again, it gets somewhat skewed by the unrealized gains and losses.
Yeah, fair enough. I was just curious if there was
Yeah. No, no, I understand the question. I mean, that's. You're right, we haven't disclosed that, but mathematically, I think you can do it that way.
Okay. Sure. Yeah, just wanted to get a sense in terms of, you know, how much dilution may be contemplated as part of the strategy, and it sounds like you'd expect to keep the share count pretty tight from current levels.
Yeah. That's why I was saying looking at the current amount. Like, as we look at going forward to achieve that 1.9 over the next 4.5 years, you know, if that happens on an even basis, you know, our view in being within that 3.5x-4x, if we do that on average CAD 200-300 million a year, that, you know, from a liquidity perspective, we wouldn't have to look to equity.
Right. Okay. That's great. Thanks.
Sure.
Thank you. Speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Luc Desjardins, President and CEO. Please go ahead.
Thank you. As I wrap up this call, I'd like to thank our management and employees. Very proud of all the accomplishment to date of 2022. We're in solid position to deliver the 2022 adjusted EBITDA guidance. A Superior Way Forward initiative are in the works. Business as usual. Things are really humming properly. Wish you all the best and, looking forward to a good 12 months, with you all coming.
This concludes today's conference call. Thank you for participating. You may now disconnect.