Superior Plus' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 2.13 | About: Superior Plus (SUUIF)

Superior Plus Corp. (OTC:SUUIF) Q2 2013 Earnings Call August 2, 2013 10:30 AM ET

Executives

Luc Desjardins – President and CEO

Wayne Bingham – EVP and CFO

Jay Bachman – VP IR and Treasurer

Analysts

Jacob Bout – CIBC World Markets

Sarah Hughes – Cormark Securities Inc.

Patrick Kenny – National Bank Financial

Alex Syrnyk – BMO Capital Markets

Operator

Good morning ladies and gentlemen. Welcome to the Superior Plus Corp.’s Second Quarter 2013 Results Conference Call. I would now like to turn the meeting over to Mr. Luc Desjardins. Please go ahead, Mr. Desjardins.

Luc Desjardins

Good morning and thank you. Welcome to the Superior Plus 2013 second quarter results conference call. With me on this morning’s call is Wayne Bingham, Executive Vice-President and CFO and Jay Bachman, VP Investor Relations and Treasurer. Wayne Bingham will provide an overview of the second quarter results, after which I will provide an update on the strategy and the execution of our business initiative. So, I’ll now turn the call over to Wayne.

Wayne Bingham

Good morning everyone and thanks Luc. And welcome to everyone on the call for our second quarter conference call. I will make a few brief remarks on the results and then hand it back to Luc.

Our consolidated AOCF for the quarter was $0.24 per share compared to $0.25 in the prior year’s quarter and very much in line with management’s expectations. The current year’s quarter results were impacted by dilution of approximately $0.02 relative to the prior quarter as a result of the equity issuance in the first half of 2013. We continue to focus to pay down debt and execute on the overall debt reduction program. And I will touch on that a little later.

I will make a few brief comments on the individual business performance. Energy Services reported an EBITDA of $15.2 million compared to $16.1 million in the prior year’s quarter. And the Propane Canada operations margins were $0.0189 per liter compared to $0.186 in the prior quarter. Margins in U.S. are consistent with the prior quarter at $0.064 per liter.

Overall gross profit for Energy Services was $94 million versus $90.4 million in the prior quarter representing a 4.4% increase. As can be seen in the gross profit detail, in the MD&A the 10% growth at Canadian propane USRF and supply portfolio was partially offset by lower fixed price energy services.

In USRF we’re continuing to see higher efficient rates on the heating oil side, however, this is being offset by growth on the propane side where margins are significantly better. Overall volumes are up by 6% reflecting weather and gasoline and diesel demand.

Supply portfolio gross profit more than doubled due to [USD] pricing differentials for the quarter. Fixed price energy services GP declined by 50% representing lower residential volumes and related margins. The 2013 six months run rate for SEM is more indicative of future performance.

Turning now to Specialty Chemicals, the fundamentals in the chemical industry continued to be very good with a second quarter EBITDA of $25.1 million compared to $26.8 million in the prior year’s quarter. Chlorate volumes are consistent with the prior quarter. Pulp prices in the second quarter of 2013 are up approximately $20 to $40 a ton compared to the prior year’s quarter. Q2 2013 had some planned maintenance shutdowns for pulp mill customers. On the Chloralkali side of the business the demand and pricing for caustic and caustic potash remained solid while chlorine and HCL were somewhat softer. Reflecting on the price, like volumes, were up over the prior quarter.

Turning now to Construction Products. That division reported a Q2 EBITDA of $7.8 million compared to $6.1 million in the prior quarter. CPD had one-time restructuring charges of $0.5 million included in the first quarter of 2012 and the same amount in – sorry, in the second quarter of 2012 and the same amount in this quarter. US construction industry fundamentals continued to improve and in particular US housing industry, the CPD US GSD operations is benefiting from the housing fundamentals with quarter-over-quarter revenue growth of approximately 20%.

Turning now to debt management, our efforts to reduce debt continued in the second quarter and our leverage ratio as of June 30 is 3.5 times. On April 9, we redeemed the remaining 25 million of the 585 converts and we’ve announced the redemption of 69 million, 7.5% convertibles due December 31, 2014. And that will take place in the 30th September of this year. We currently have in excess of $400 million of capacity on our bank lines. We continue to take and will continue to take advantage of our opportunities to call off or refinance to redeem the overall financing costs.

On the CRA front, we will be filing our notice of appeal with the federal tax court in August, likely in the next week or so which will be a tremendous litigation process. And finally, and we have updated our 2013 guidance to $1.60 to $1.85 per share. The update is an increase of $0.05 to the bottom end of the range, reflecting solid year to date results and are confident in the second half of the year.

I’ll now turn it back to Luc.

Luc Desjardins

Thank you Wayne. We are pleased with Superior’s performance during the second quarter, the majority of our businesses realizing an improvement in EBITDA relative to the prior year. In addition, the results were consistent with our expectation. I’d also like to reiterate Wayne’s comment that we’re updating our financial outlook for 2013 of 1.60 to 1.85. We have increased the bottom end of our 2013 outlook by $0.05 per share, which we expect the solid result we have realized today as well as the confidence we have in our businesses for the remainder of the year.

We continue to feel positive about our businesses and are confident in the execution of our business plan over the remainder of 2013. We remain confident that our ongoing focus on improving the day-to-day operation of our businesses will continue to move forward, providing us with the foundation for future operational, financial improvement.

I would like to spend a minute providing more thorough updates in general of each business. In general, Energy Service business continued to have strong fundamentals. Demand for propane continues to grow at a modest rate and we have been largely successful in our U.S. business and growing our propane customer base to offset the ongoing attrition of our heating oil customer base. It is important to note that the contribution of our residential heating oil customer represents – the space that is represents less than 10% of the EBITDA of our total Energy Service business and therefore the impact of a decline while not ideal is not material to our business as a whole and the growth in propane in the United States compensates for that EBITDA decline.

In our Canadian operation, we have seen some modest weakness in their [oil] fuel related volume due to a slowdown in the oil in the first half of this year and gasification of certain oilfield sites. We have been successful though in drawing our large commercial and industrial account customer ways to improve sales and marketing activities which has largely offset the impact of reduced oilfield volume.

Superior and our customer continued to benefit from the reduced cost of wholesale propane, which we anticipate will be a theme for years to come giving the activity in the drilling of liquids rich natural gas combined with the limited infrastructure to transport the LNG to overseas markets. The low price environment is a positive for both our customers and for our business. The overall picture for margin continued to generally be positive and we continue to actively manage our pricing to ensure we are earning a fair margin for the goods and services that we are providing.

The fundamentals of our chemical business have been consistent over the last year and we anticipate that they will continue to be solid moving forward. Sodium chlorate sales volume and pricing continued to be stable, due in part to stability within the pulp market which has resulted in improved North America chlorate sales volume. Although we saw some modest softness in sodium chlorate in the second quarter, this was largely attributable to normal corresponding amendments.

The chloralkali portion of our chemicals business has been somewhat more challenging as pricing, particularly in recent quarters. Chlorine and hydrochloric acid pricing have been soft due to weaker than anticipated demand. Historically the pricing of chloralkali products fluctuate with change in supply demand fundamentals and in some case the impact of seasonality. But overall, Superior continued to like this chloralkali market particularly when you take into consideration the strategic advantage Superior enjoys because of our location and facility in Port Edwards, Wisconsin and Saskatoon, Saskatchewan. I will touch on our expansion of the hydrochloric acid production and why we continue to believe this project makes sense in a few minutes.

With respect to our Construction Product business, which has dealt with very challenging market condition over the last many years, we remain cautiously optimistic that the fundamentals within the business will continue to improve, albeit in a slow and measured manner. Recent indication in the U.S. suggests that new residential construction starts 2013 will be in the range of 950,000 starts. Although the residential market have seen continued improvement over the last year, the U.S. commercial and industry market, where by the way, we do a little bit more than 50% of our volume, continued to be challenging with slow growth condition anticipate for the near future. It usually follows the construction of residential a year or two later.

The Canadian residential market continued to be somewhat challenging, although the impact of our business has been somewhat mitigated by we don’t have significant exposure to Vancouver, Toronto condo markets and Superior continues to focus on improving its day-to-day operation. The restructure that we did last year and many reduction in sites in Canada and combining some of those sites have improved our business bottom line in Canada.

I’d like to spend several minutes to share with you the Superior focus from an operational perspective for the remainder of 2013 and beyond. As I have discussed in the past, 2012 is at the early stage of 2013 have been focused on initial implementation, of transforming Superior into best of class organization, through a number of business improvement initiatives. We have labeled this transformation Destination 2015. Now I want to reiterate to our shareholders that Destination 2015 is intend to deliver more than short-term improvement. It is intended to deliver mid-term and long-term operational financial improvement through the creation of a solid foundation and by instilling and promoting a culture of continuous improvement. So lots of people change and management change in 2012, process reorganization in system in 2013 and hope by mid-2014 and on, we’ll operate at a different cost structure in a more profitable company going forward.

Although we have realized some early success, as part of the initial implementation of Destination 2015, I want to reiterate that much work remains to achieve our goal. We remain committed and focused on not only navigating the complexity of running our business well day-to-day but that we also remain focused on executing the initiative that underpins Destination 2015. We are intently focused on ensuring we execute in a timely and true manner on the initiative that forms the basis for Destination 2015.

Although we anticipate we will realize reduction in our cost structure as we improve our underlying business processes, the focus of Destination 2015 is not short-term cost cutting but solid business that operates efficiently in the mid and the longer term. So expense and cost structure, but we can do better and many of our business is just – is ahead of us. We have not been able – and we should not address a major reduction at this stage.

I previously mentioned that 2013 was going to be an important year for Superior. Further to that, I would like to spend a minute to provide a bit more clarity on what does that mean in real life.

So for the Energy Service, we continue to become more customer centric in all aspects of our business, which means understanding our customer by segment, understanding cost to serve by segment, by customer and finding ways to differentiate our product and service which is allowing us to reduce our customer attrition going very well, and generate internal growth and better margin. So we are growing in the national account. As we said, we are going to hire some sales people and start to knock on those doors and senior management of all our business have relationship and connection and we’re not starting to get this commercial business improved as well as residential with less attrition.

As part of better understanding our customer we have continued to improve our sales and marketing function and have begun to see initial improvement. We have improved our customer retention rate and Canadian propane residential customer base. We have been successful in obtaining new customers in our commercial small industrial segments. As part of sales and marketing effort across all of our business, we will continue to focus on intelligent pricing, overall supply chain management, a big part of our task and improve all aspects of asset utilization.

More specifically, as it relates to procurement, at our energy business, we continue our effort to optimize our supply chain function which have done very well in the last 18 months by leveraging storage assets while procuring product in a cost effective manner. We continue to focus on developing an integrated procurement strategy in the energy business under the direction of GL and are optimistic because now we’ve understood our position and all the supply base in the U.S. business will continue to see benefit in both our Canadian and U.S. operation as the procurement, supply chain strategy continues to develop.

We continue to focus on implementation on implementation of that IT system. We currently anticipate and this is what really is slowing us down which we knew, so there is no surprise for us, that we have to mechanically reorganize our processes within the CPD business a lot in the energy Canadian business and we currently anticipate implementation of that system to take place on a phased approach beginning second half of 2013 with the completion of the whole project across the country by mid-2014. So for everybody on the line what that means bottom line is we are presently going to be working on the double system, double energy of people and effort until the summer of next year, then where process had been rebuilt, system is in place and we can be more efficient in many, many facet.

The phased approach has been visualized to minimize the disruption of the business during the busy eating season of the fall and winter. As the app system is phased in, we will be in a position to reduce our cost structure across the Canadian propane business as we are able to realize the benefit of the system such as improved operational integration, customer demand forecasting, improved customer service level, reduction in costs will be realized in the second half of 2014 and for 2015. We will look to remove costs in a prudent manner by utilizing the system in the manner it was intended while also ensuring we redesign our processes that were previously inefficient. That’s what we are doing full time. We are to have 50 people in the organization doing that every day. They have been at their task, they are part of that group for full year. I would also like to remind everyone that app systems are fuel distribution based system which is used by many companies in the propane industry in North America and it’s already been July via our US refined fuel business. So it’s the system that fits our business which was not the case before.

Operationally we continue to make progress and improving day to day operation without the potential benefit of a new IT system forecasting, understanding weather, when to go visit customer. But the [10 centered] programs which we launched six months ago continue to roll out and that resulted in an improved operational efficiency. We continue to assess the merit of additional utilization of this technology where it makes sense for Superior and our customers. We are installing it this year in 18% of our volume which will give us a better time to market and efficiency of delivering that 18% of the volume.

Additionally, the ongoing focus on improving overall operation and service technical utilization continue to prove successful which is due in part by the new regional operating structure which is all new and new regional manager, just about across the country was put in place late last year as well as improved talent across the entire organization. We are optimistic that we will continue to see improvement in this area to the short and medium term.

As it relates to our construction products business the focus 2013 and 2014 will be on assessment and execution of our comprehensive organizational optimization while much work was done in 2012 in improving our branch network and general operation which has resulted in an improvement in our margin and our inventory turn have improved tremendously. We’ve made the assessment that in order to become best in class business in North America in the construction product business. Additional work of integrating the operation and IT structure in the business on the North American bases is required. The review and integration will include all aspects of the business including a review of their processes and operation and our fabrication facility. So we not only just distribute but our C&I business for utilization in the States we have many oil – 14 actually sites that converts material for installation. Lot of capacity to improve those efficiency in those sites.

The execution of the internal initiative will provide the basis for switching role in the business by ensuring we have the structure, process and people to operate, procedures and price, our product and service, and service our customer no matter that is there. As it relates now to the salty chemical business, the focus 2013 and in 2014 will be and is on the execution of hydrochloric acid expansion and our project work in Saskatoon facility. All projects are currently on time and on budget. The Port Edwards project is anticipated to be in commercial production first quarter 2014 and the Saskatoon facility that’s second half of the 2014, more towards the end of 2014.

Although the market for hydrochloric acid has been recently weaker, Superior still view this project very positively. Superior does not upgrade its chlorine to HCL. Superior will be forced to be a price taker of chlorine which historically has contribution of approximately a third of what HCL add. In addition the impact on pricing, the transportation of hazardous drugs such as chlorine continue to come on their increased regulatory scrutiny. Superior anticipates that the transportation of chlorine will become increasingly more difficult and expense and therefore in addition to the financial benefit of this project Superior is mitigation the future potential risk associated with the transportation of chlorine. So those two project are reducing our capacity, a large amount of our capacity of chlorine in both of these plants. So we’re moving towards what the right direction for us.

Our Specialty Chemical business continued to focus on maintaining its standing as the best in class operator through ongoing efficiency projects. By improving the efficiency of our facility, we’re able to help mitigate the impact of higher electricity prices.

From a corporate perspective now, Superior will continue to focus on reducing our total debt with our short-term objective to reduce total debt to a leverage of 3 to 3.5. Lastly, we will continue to assess our talent across the entire organization to make sure we have the right people in key position to facilitate and lead the execution of our short and long-term business plan. Accountability for execution in all our 2013 initiative is a priority and it’s going very well. Every one of those initiatives are tweaking positively in the entire organization.

In conclusion, we continue to make progress on the transformation objective established as part of Destination 2015, but we understand that we have a tremendous amount of work remaining in order to meet our goal in becoming best of class organization. So work in progress, we wish we could do it faster, quicker. But doing it faster, quicker will give us hiccups and we need process operation people to be in place before we really move faster.

I’m confident that we will achieve this goal based on the commitment and active involvement I see from Superior leadership team and all of our employees. With that said, I would now like to open it up to any questions that you may have on all of our businesses.

Question-and-Answer Session

Operator

Thank you. We will not take questions from the telephone lines. (Operator Instructions) The first question is from Jacob Bout from CIBC. Please go ahead.

Jacob Bout – CIBC World Markets

Good morning.

Luc Desjardins

Good morning Jacob.

Jacob Bout – CIBC World Markets

I had a question on the turnaround story here. The removing of the costs and I’m surprised in the quarter that we didn’t see a little bit more and from what I’m hearing, when you’re talking about the IT system that you’re doubling the energy, it sounds like don’t expect anything in the near term. If anything, it may be – we might see margin compression as you double the energies on the IT side.

Luc Desjardins

Yeah, a very good question Jacob and I am not surprised because we’ve been at it for a year and a half. But not surprised at the question but I’m not surprised at where we’re at. The reason I’m saying that is we’ve done really tweaking properly less attrition in the market, developing new customers slowly but surely, improving our margin. We’re kind of doing a bit of an art of doing both. As we improving on some areas, because they are there, we just didn’t have the resource, we just didn’t have the focus. That’s tracking properly, that’s moving very positively. Good improvement and many, many KPI around those issues. Operationally, costs wise, I knew a year and a year half ago that when you rebuild and we’re doing it to a small degree at CPD but huge, huge degree here, we have the wrong system, we have the wrong processes, we didn’t have information properly organized and structured. And if you start to reduce costs prior to having your process and your systems aligned, clear and organized and training people, thousand people getting trained for a year across the country, if you do one before the other and I think that after 35 years of doing okay in improving businesses, you end up with a major hiccup and you pay for it for three, four, five years. It’s tempting – I know where the costs are, I know those millions are going to go away. It’s temping but we cannot go there. But if we go there, mechanically we are going to be slowly down – we’re going to do better if you want for 12 months and then we will be slow in improving the business and be having too many hiccups. So time out, it takes time, we have to be patient, we go at it, we review it every two weeks. We have top talent on the project, processes, reorganization totally, new talents are across the country, new talent, CPD, they have done some of that too, the new talent, reorganization.

So it’s kind of a what do you do first and I totally believe if you do that first, and you have to be patient, it takes two years, if you want to do it in a year, you say I know those costs are, they will go get them. We reduce costs, and then you kind of not better, you are not efficient for five years to go. Which has been the case of this company for five year prior to doing that. So it’s kind of a – you and we, everybody has to be patient because we don’t want to break the business or make it good short term, we want to make it sustainable, very solid for many, many, many years to come. And that takes effort, time, planning and what comes first we cannot do prior to something else. So it’s a huge undertaking and we have to start from scratch with new people and new focus, process reorganization. We have 50 people we took from the operation full time, don’t do your job, go do that, new leadership. [Eversmart] saw all the experienced people in North America to do such massive project, and that’s why it’s – we’re slowly but surely as you see every quarter improving the business but not massively because we are on break until we get our aims and arms around an efficient operation.

Jacob Bout – CIBC World Markets

So if we look forward over the next six month, 12 months, 18 months, what should we be looking for here? When do we actually – when can we start to expect the cost savings and what is the magnitude of those cost savings?

Luc Desjardins

The magnitude we have not talked about, so I don’t want to take the wheel on the call today. I think by second half of 2014 we are -- our processes are in place, reorganized, we have the system in place and we now can say okay, by those tools, I think those tools we can now become more efficient. And what I think would happen and I hope will happen that we start to see some growth which is great, 4% growth in propane base is more than the industry, as the sales marketing has been put in place and we have a great president in Canada that really understand what to do and he is doing it every day, Greg McCamus has organized that US propane growth and now he is doing a job here. So I think what you will see is a continuous improvement in some area, because we can do that and service our customer well. But the efficiency improvement, really second half 2014 and full year 2015, this is for Canadian energy.

The US, we corrected some cost procure in the US last year. So now we are arming properly. Talk about CPD, not the scale of energy in Canada but quite a transformation is taking place. Now 16 locations have been closed. We are now – the building are becoming that we have to renew in the States, we will slow down – we will shut more down but at low, low cost. Our price has improved somewhat with that initiatives going well. Our inventory turn went from 6 to – running rate is over 10, so that’s going well. And procurement is really – we need those two systems to talk to a cloud and one system for procurement data information to take in. Maybe I will ask Wayne if I missed something important on that question –

Wayne Bingham

We probably – we have Atlantic region on the docket for September 1. So we think we will get one or two regions on this year, the balance next year. So the full run rate will begin to appear in the back half of 2014. But I must say to Luc’s point, the other thing is from a risk management point of view, the downside on an IT project far exceeds the upside. I think everyone on the call knows the trouble at propane division got into in 2010. So we are being very, very cautious. We’ve expanded the testing on the system fivefold and that’s why there has been a delay – we do not want to go back to a situation like 2010 where we had issues. And it’s also being risk managed this year because we are just doing Atlantic region first. In terms of when you can see it and expected, we will get a little bit this year with Atlantic but back half of 2014 when we are all up and running we are going to start to see the real efficiencies from this.

Jacob Bout – CIBC World Markets

Maybe just moving on then, I guess from my perspective it would be helpful to get some type of target for you on a go forward basis but the other question – area that I wanted to dig into was just on the hydrocloroxide, there have been a number of announcements by your competitors on that side, and we effectively have gone from short market to now – it looks like we are going to be in an overbuilt market. And what’s your thoughts on a) do you think it’s going to become overbuilt, b) what are your options going forward here, at what hydrochloric price do you think about scaling up back and is there any thought about – do on a conversion to calcium chloride?

Luc Desjardins

And so maybe I will give the high level big picture and I will ask Wayne to or Jay, both of them to comment specifically. For us it’s very good because we do have a competitive advantage, in Port Edwards and many different segments of the demand for that product. And in Saskatoon for oil, we have [window wheel house]. Remember we do have the salt mine in our basement, so we don’t have to buy it, it’s a gain there. We don’t have to transport it, so that’s another gain. So we really are gaining from our position – specific position of those two operation. And by doubling the capacity we are getting rid of chlorine which you give away and don’t know what to do with, and there’s money selling it too.

So by doing that, the two growing project are bringing us to a much better product mix and getting rid of what the world doesn’t want and it’s very hazardous and it’s very cheap. So it’s a double effect, that’s why our sand dunes are secure and solid by doing that is we are gaining on both side. We hope the market in the fall get to be better than what it has been the last quarter. But the normal market and which is going to come back, we are in a good position.

Wayne Bingham

No, I think that’s spot on. I mean, Jacob, we are a caustic producer. That’s how we are going to find salt. So chlorine is the by-product as we try and move safely and economically at the best price we can get. So strategically what we are doing now, the way we look at is with HCL now we have two markets. One to move it is chlorine, one to move is hydrochloric acid. And the other point I’d make, we are on the purpose producer of hydrochloric acid, if we so schedule and design. Lot of hydrochloric acid comes in road, in that regard our relationships with suppliers are good and hydrochloric acid includes a cost spectrum, it’s not just cracking, but then in the food industry expects – so we are confident strategically this is the representative of the right thing to do and as Luc mentioned, when you look at the number of plants, we got a customer –

Jacob Bout – CIBC World Markets

What are you forecasting for pricing here over the next couple two years?

Wayne Bingham

I haven’t really got a forecast in mind – I mean at current pricing we are not anticipating a pop up, we expect to get a pop in the drilling side, that may put some pressure on the hydrochloric acid but I don’t think we see that right now, albeit with oil prices north of 100 that’s certainly a positive for the oil and gas community -- more the oil community I guess.

Jacob Bout – CIBC World Markets

Okay. I’ll leave it there, thank you very much.

Luc Desjardins

Thank you.

Operator

The following question is from Sarah Hughes from Cormark. Please go ahead.

Sarah Hughes – Cormark Securities Inc.

Hi guys. Luc, I guess first question for you. In your speech, you talked a lot about the work you’re doing on the propane side of things. In the residential market, have you seen – I know you’ve stopped on the attrition rate or at least slowed that down. What about new customer additions? Like where are you there? Have you seen any initial signs or is that kind of more of a 2014, 2015 story?

Luc Desjardins

There are some growth. I think we do have a good brand, so we get calls. People who didn’t get service well from us went away over the years, which has – that attrition, three quarter of it we stopped in the year of good work and marketing. And the then the very little growth but we do have a chance being a national player and being with a brand like Superior, I can’t remember the exact number, I mean 60,000 people call us every year. So we have new customer coming in and we’re a bit smarter as to talking to them and making sure they sign up. So we do have a three year specific objective, attrition we know we’re going to bring it down. It’s marching towards that. And we’ll do some more growth 2014, 2015. 2015 with internal growth being positive and the net being positive, more like the end of 2014 and more in 2015. A couple of area where we can do that, you’re talking more residential. There is still a lot of people on the oil and $107 oil and propane low fast.

We have a good game plan; we’ve done our sampling in the maritime and good game plan that over the years we can help customer to go from oil to propane in the States as well as in Canada. So we’re – that’s a gain of new accounts that we see potentially coming. And residential, we’re going to do more marketing when we have our act in order, we’re going to do more marketing. Commercial, national account we started, new sales team we have hired in the last seven, eight months, so new and we already saw some gains. Every manager in all of our businesses have some relationship like CPD, biggest suppliers are good propane buyer on a national basis. And I think I’ve said at different calls that we only sell to two big ones and there is 50 – they are not all big but there is 50 that are national customers. We are not going to go visit those 50 and usually they prefer to buy from one supplier instead of one per product. So that’s the advantage we have with the brand, which is good, a position across the country. Now a new investment in a team and marketing, professional people in marketing which was zero before. And all of that is going to get traction.

Sarah Hughes – Cormark Securities Inc.

And then moving to the construction in your opening statement, you talked about kind of the – you’ve done the branch closures in 2012 and then this year. Is this – you talked about kind of doing some more work on – I got the sense of more of a national focus. Is this new because previously you always talked about logistic and pricing and that type of thing. So is there a new initiative going on here?

Luc Desjardins

It’s a good point. So operationally speaking, I mean new location, done that last year, there is still some tweaking coming in the space. The reason we didn’t do it last year we can do it on the [cheek] if the – if we have a contract for building mid-2014, we’re not going to write a check for a year, we still breakeven plus, so we keep it that way and when it comes due, we just move our truck equipment to another location and hopefully so far we’re keeping the sales as well. So we’re doing it on the gradual versus a big price. On the initiative that have been put in place and the returns, tracking extremely well. Pricing, we’ve done some tweaking and it’s improving. I think that’s a point so far. It’s going to continue. And then supply it’s tougher because you have 116 locations, two systems, that’s happening somewhat but it will take another year or plus to really have all the data information, negotiate differently with suppliers, take – pick up 20 suppliers in one product that will go to two, three. All of that work will take time and we knew from the beginning that we can do it all in 2013, we knew that.

What is new is when we – there is other way to make money, another area and I don’t stop from searching for what else, so every year there is always going to be a new initiative or an improvement. What I find through analysis with the senior management of CPD was from a structure organization and time of effort of management we can reorganize and be a lot more efficient. So we’re now I’ve seen that, we’ve done our homework and this is part of the project that started a few months ago where we’re now looking at reorganizing our effort and our work and our time of management of different levels stand on what they do. And that’s going to help us; it’s more intangible than tangible even though there is physically people, an issue that comes with that. But I’ve seen that in the past and it’s surprising what happens to the alignment, the vision, the clarity when we can organize our structure somewhat and focus on – we have 116 location that all did somewhat procurement and manager spend maybe 20% all their time procurement. Don’t need that anymore. Go sales, good we got margin, go get to meet more customers, go visit your branch and make sure they operate at the right pace. So that 20% of time is now going to be done by a professional team that does procurement better on a North American basis than each individual at the 116 locations.

So that’s kind of effort and work is coming and we didn’t do that last year; we did other stuff.

Sarah Hughes – Cormark Securities Inc.

Okay, thank you. And then Wayne, on the chemical side of things, I’m just trying to get a sense that EBITDA obviously was down a bit this quarter. As we look into the back half of this year, should the performance be similar to 2012 in terms of what you did in 2012 or will it be a bit more similar to the second quarter, on a EBITDA basis?

Wayne Bingham

Yeah it was down slightly but I mean we had a in transit shipment I think going to Chile as well and results probably would have been closer to – closer last year. We had some pulp – we had some maintenance on some of the pulp side. So we’re sold out. I can’t – don’t really have what we did in the back half of last year in front of me. But it will be – if you take out 2012 performance, if you take out the payment we got from TransCanada, I mean that where – and you normalize for that for last year, that’s kind of where we are clocking with our growth.

Sarah Hughes – Cormark Securities Inc.

All right, that’s it from me. Thank you.

Wayne Bingham

Okay.

Operator

The following question is from Patrick Kenny from NBF. Please go ahead.

Patrick Kenny – National Bank Financial

Hey guys, just on your propane margin improvement initiative, just wondering if you can comment on what inning you think we’re in with respect to revisiting some negative margin contracts or implementing some pricing increases within some contracts.

Luc Desjardins

Very good point Patrick. It’s on my agenda for meeting in two weeks from now with the team at propane. Can we go get an extra quarter point? For the moment I would say I don’t see it. Efficiency will bring constant improvement but from a pricing – it’s a competitive account and big account or national account or commercial account I think we’ll see more customer – we’ll have more customer and develop more sales. Are they going to be at an average margin better than what we have today? Cannot say that. I’m suspecting probably not because we’re – addressed all the one that were too low or not been addressed and we’ve been – two customers that I know that we’ve let go because we want to wake up in the morning and do something free. So no, I think we’re – a good job was done, it’s solid now. It might change in the next three months when I come back to you because something we’re drilling down on this month actually. Not sure, so I would say it probably the best thing to do now is to think that’s it.

Patrick Kenny – National Bank Financial

Okay thanks for that. And maybe just a quick update Luc, on your initiative within the CPD to improve inventory turnover, if it were impact that’s having so far if any I guess on your working capital.

Wayne Bingham

Probably if you look at it since we started the process, we’ve probably taken – had an impact of 25 to 25 million working capital, part of that has been an absolute reduction, part of that as the sales have ramped on particularly the US GSD side. We haven’t had to increase working capital to meet that increased demand. So I think the team is still grinding it on and they have targets to improve. So I think on a going forward basis though as CPD comes back you are going to see – we are going to be able to hold the line –slight increases in working capital as the US economy continues to improve.

Operator

The following question is from Alex Syrnyk from BMO Capital Markets.

Alex Syrnyk – BMO Capital Markets

I just wanted to follow up on the construction products distribution segment and so I guess the new initiatives or some of the new things that you are looking at there, does that have an impact on your near term cost structure, I know in the quarter you mentioned slightly higher administrative costs. Now I am just wondering if that was reflective of maybe some of these –

Luc Desjardins

I am not sure Alex if I captured your question is, the change that we are looking at or the improvement and the reorganization to the degree of CPD, if that’s going to reduce our costs, it will because we are going to end up with a more flat organization and that will probably take 12 months. So more or better focus on management on what they do every day talk about part of the world going to a supply chain fee. And we are able to see that we have flattened the organization and add more focus and more time for regional measured to be in the region with their brands versus too much traveling, west, south, north. So that’s going to help the cost structure by next year.

Alex Syrnyk – BMO Capital Markets

I guess what I was trying to get after was whether I guess there was an additional cost to in the near term to you working on some of these new initiatives?

Luc Desjardins

No, not really. We are just working more hours. So it’s – system on CPD will have some additional cost because we have two good system but for communication on pricing and supply chain we need to be one, otherwise you have duplication of effort and time. And then we are taking – we have where work going on, we think we could drill through the cloud and that’s costly and they are complicated. That’s another reprocess engineering like energy not even close. There will be a cost to that capital but nothing too much.

Alex Syrnyk – BMO Capital Markets

Next question, on the USRF side you have been working on trying to I guess transition customers, heavy oil to propane and you mentioned I think in your opening comments that you continue to see some progress there. Could you give just a little bit more color on how you expect that to continue to unfold?

Luc Desjardins

With doing 4% growth in propane which is good and the margin also have been tweaked. And then the question I asked couple of months ago why not 8%, are we limiting ourselves, what marketing sales tools can we go about oil customer transferring to propane, looking at propane customer that are not well serviced by big supplier that are not customer centric or maybe what we look like is they go, and we have done there a big marketing study which was finished about a month ago, which really shows three avenues of potential growing propane at good price, not get volume, because you lower price, no, no, and those three marketing approach – because there are seven or eight but we are the three biggest ones. We are meeting 10 days from in Rochester to really start the program and address how could we get from fourth wave and we have now the game plan, took a long time to study the whole market, our positioning, how we service the business, lots of good stuff came out from that analysis and study. And now we are getting ready to execute and can we go from fourth wave, have not proven yet but we do have a game plan and it looks like it’s feasible.

So once we do that, just to go further we would be one of the good companies that’s oil and propane in the states that knows how to transfer oil to propane or get new customer of propane. This is not a very big marketing industry and not customer centric that much in the States and because we did great in the States – which is kind of the country where we were in Canada, it’s quite exciting. And of course when we see that and do it, we are going to take some of those learning curve and bring them to Canada as well.

Operator

There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Desjardins. Please go ahead.

Luc Desjardins

Thank you everyone. I understand the quarter two is never a huge quarter for us. You know that six months are much bigger than the other six months. So having said that for us, there was absolutely zero surprise this quarter. Things are marching properly at the right pace and very pleased with the lot of the KPI of every business is tweaking positively, very pleased about that, we’re just going to continue. And having said that, we will talk to you I guess during the quarter or next quarter. Thank you everyone for your participation.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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