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Executives

Grant Billing - Chairman and CEO

Wayne Bingham - CFO

Jay Bachman - VP of Investor Relations

Analysts

Jacob Bout - CIBC

Superior Plus Corp. (OTC:SUUIF) Q1 2010 Earnings Conference Call May 5, 2010 5:30 PM ET

Operator

At this time, I would like to welcome everyone to the Superior Plus first quarter results conference call. (Operator instructions)

I would now like to turn the conference call over to Mr. Grant Billing, Chairman and Chief Executive Officer.

Grant Billing

Thank you very much for joining our first quarter results call. With me today I have Wayne Bingham, our Chief Financial Officer; and Jay Bachman, our Vice President of Investor Relations. And we look forward to talking about our first quarter, and we also are introducing our 2011 outlook that we provide each year. So look forward to providing that information for you.

First quarter was, as some people would view, either really simple or very complicated. But the real events that impacted us obviously in the first quarter was the very, very warm weather that we had in Canada; by many accounts; the warmest on record since they start keeping records. But 16% warmer than the prior year, which reduced our margins and our volumes, particularly in the propane and heating side, resulting in 12% of lower propane volumes which translated into basically $15 million hit on our EBITDA. So a very significant hit based on the weather.

The other impact that the weather had was on the supply side. When you've get an awful or an excess supply in the marketplace, we had to place that supply and deal with it. Probably another $2 million hit from that. Now, in the U.S. Northeast, and people may find this amazing, but was actually only 6% warmer than the prior year. So we felt pretty good about that compared to Canada, only probably had an impact of $3 million or $4 million on us.

So overall in the Energy Services side, a very significant impact on our results due to the weather in the first quarter. And maybe somewhat surprising to people is in the Specialty Chemicals business in our chloralkali facility. We've talked about our potassium products, and one of the things we use for those potassium products is deicing. And while there were some deicing in December and January; in February, there was virtually none.

So that also hurt us from our sales on the chloralkali side, and that's probably $5 million to $10 million there as far as decreased production and sales on that product. So overall, weather was a very significant impact on our businesses as we look at the first quarter.

Looking at the recession and the impact on our business, certainly we are seeing improvement in our businesses, as we look and compare to the third or the fourth quarters of 2009. We are seeing a gradual improvement. However, when you're comparing to the first quarter of 2009 where the economy was still stronger than what we saw as it was still on its way down, we did see a negative impact compared to 2009. But that's of, in my mind, less relevance, because we can't see the improvement as we look in each of our businesses, and I will talk to the outlook for each of our businesses as we move along a little bit further.

The other impact that had an impact on us was, of course, the Chile earthquake, which we've talked to people about. We are very fortunate. That was a very severe earthquake. But there was very little damage to our facility or our major customer, CMPC, and to their facilities. And we've been able to bring our facility back up after being down for about five weeks at a cost repair of about $1.5 million. So our people there, they did just an outstanding job in the repair and dealing with very, very dramatic situation. Fortunately, none of our employees were injured; so felt pretty good about that.

And then in Construction Products Distribution business, the acquisition of SPI was done in late 2009. So we saw some positive improvement in that, partially offset by the economic recession where we are starting to see improvement, but compared to the first quarter 2009, still lower.

We're in that situation now where we're still comparing to an old quarter. In 2009, where we still had better activity levels and pricing and those kinds of things, and we are lower in the first quarter of 2010, but better than we were seeing in the latter part of 2009. So starting to see those improvements.

As a result of all those things, you can see that our cash flow is $0.53 versus $0.69 last year, so certainly a significant impact. And our EBITDA contribution on a combined three businesses was $76 million versus $80 million, not a significant drop, but you have to remember of course we had the acquisitions which did add significant EBITDA to the cash flows. And you can see in the MD&A where we have identified those cash flow contributions from the acquisitions as we went forward.

So all in all, a very challenging quarter for us, given the weather and as we work through the recession.

So just looking at the rest of 2010, as we look at the Energy Services business, really our outlook has been adjusted by the impact of the first-quarter weather. When we look at the underlying fundamentals of our Energy Services businesses, we feel good about how it's going. We are seeing improvements as we come out of the recession with our customers. It's a slow recovery.

And as we've described before, our Energy Services business and actually probably all three of our businesses, we were a bit slow in feeling the recession, and we're going to be a bit slow in feeling the recovery.

And if you think about the businesses and you look at some of the various parts of it in the Energy Services side, we probably are seeing the normal recovery that everybody else is reading about in most of our businesses and most of our customers, not all of them. So we're probably recovering a little bit slower than you read about in the newspapers on that side.

Specialty Chemicals, of course, has been more significantly impacted, particularly on the chloralkali, the chlorine and the caustic part of the business. The chlorate business has recovered quite nicely. Pulp has recovered quite nicely. Pulp volumes and prices are pretty well back to levels now that they were pre-recession. And our volumes on the chlorate side are strong again and are showing good strength as we go through the rest of the year. There is some to-ing and fro-ing going on in the marketplace, but all in all, feel like that's feeling pretty good as we come out of it.

On the chlorine and caustic, we're now starting to see improvements in volume. And we have seen, as an example, two price increases, one just recently on the caustic side, and we'll start to see the benefit of that as we go through the year; and some discussion around the chlorine side of potential price increase there. So those are all good signs that our customers are recovering, that things are becoming a little bit tighter on the supply and demand side, which is going to result in improved results for us as we go forward.

Now on the potassium side, we're starting to get into the agri market, as they start to come through. So we'll be seeing improvements as we look into the second, third quarters in particular and then through the year.

So the Port Edwards plant is running well now, and we're able to produce the product that we need. And now our challenge, of course, as we talk to people about as to really get the sales up to the full level of production capacity, and we are signing up new customers on a regular basis. There is quite a significant, as an example, in the food industry testing protocols that have to be done, which we would all want, to ensure that it's safe and appropriate for use in food situations. So that has been going well, and we're now getting more customers on that side as well. So we are seeing clear signs of the recovery in those parts of our business.

And on the building products side, everybody gets to read that one in the newspapers. So it's pretty easy. We're certainly seeing recovery on the residential side. Building starts in Canada in particular are up and showing good strength.

The bad news for us is that when you start a house, you don't need the drywall until probably six to nine months out. So it'll be the middle to later this year when we start to see the benefit in our business from the housing recovery, but we are seeing good strength pretty well across Canada as we go forward.

On the commercial side, that of course is really taking a hit over the last several quarters, and we're really going along the bottom in 2010. It was stronger in 2009, weaker in 2010, but the recovery is clearly coming in 2011 as we're starting to see more bidding on new projects, and that's the clear sign, particularly in Canada.

The U.S. is a little more troublesome, because they have more bigger and deeper financial problems that caused problems from the commercial point of view. But certainly commercial is driven primarily by our Canadian business, but also has an impact in the U.S.

On the insulation side, it's shown good stability as we've gone through this. Industrial insulation is in good demand, softened a little bit, but starting to see good bidding activity. So we're expecting that's going to show good strength coming out of 2010 and through 2011.

So you can see that overall we've adjusted our outlook for 2010 to $1.75 to $1.90. And as I mentioned, it's just a pure list of the reduction for the first quarter. Our outlook for the rest of the year really hasn't changed other than we are expecting normal weather and not the kind we have had.

When we look at 2011, once again, if you take where we are for our 2010 guidance and add back the weather impact for the first quarter, you basically get to where we're talking about for 2011. We continue to see a modest recovery from the recessionary impact as that impacts all of our businesses. And we would expect that our adjusted operating cash flow per share will be in $2 to $2.20 range as we look forward into 2011.

We continue to see good opportunities to grow our businesses organically in the U.S. northeast where our integration is coming along fine of our three businesses that we've acquired, and we're building the platform that will be able to add additional tuck-in opportunities on to as we go forward. So we're pleased about our progress there.

In Canada, most people recall, we've been working very diligently at upgrading and modernizing our systems and processes. The last big leg of that, and that was a very significant one, was the upgrade of our ERP system, and that took place in early April, and it's going quite well for a very major ERP upgrade. So we're pleased with that.

And we now feel we've really got the platform in place in Canada now that we can leverage off to go for and move forward with our growth program that has been quite successful in the sales and marketing side in Canada. And now we've got the platform to be able to drive down our costs, improve our productivity on that side of this and to really augment and improve on our customer service experience to help grow our business in Canada.

So we're feeling very good about the Energy Services growth opportunities as we grow forward both in Canada and the U.S. And in the Specialty Chemicals side, we're continuing with our productivity improvement programs and working diligently to complete the sales programs for Port Edwards and expect that to be completed by middle to late of this year. So we see that as providing good leverage.

And we're also working hard in South America. Our major customers, CMPC in Chile, who is one the top two or three in the world in pulp production, purchased a major current producing mill in Brazil and is looking at a very significant upgrade and modernization and expansion. So we are working closely with them to help them with that in any way that we can and see some good opportunities for us.

And of course, in the building products side, we continue to look at tuck-in opportunities on the insulation side and in the walls and ceiling side, done a couple of little moves in walls and ceiling side over the quarter and looking at a couple of other opportunities now. So we continue to be optimistic and see some good opportunities as we go forward.

So those would be the comments I would make on the quarter and 2010 and 2011. But with that, we'd welcome any questions that anybody might have on the phone.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jacob Bout from CIBC.

Jacob Bout - CIBC

A question on the Port Edwards side. Maybe you can talk a little bit about the production volumes you're seeing there versus the sales volumes.

Grant Billing

Yes, of course, when we don't have the sales, we don't produce. So they really do match up pretty well. We don't create a lot of inventory in this kind of business. So we basically produce what we can sell. The capacity of that plant is now just over 100,000 ECUs, and we've been producing at probably about 90 to 95 more recently. Wayne, have you got any better updated number there?

Wayne Bingham

Yes, probably 85 to 90.

Grant Billing

So that's kind of where we've been at. Before, of course, we expanded, we were used to run around 70,000 ECUs. So we're up over where we were before, but we're not fully sold out yet and expect to get there later this year.

Jacob Bout - CIBC

And then you talked about price increases. How efficient is the sodium chloride and chloralkali market with the Canadian dollar? Is it essentially a step function with the Canadian dollar or actually getting price increases over an above which you would expect to see with a higher Canadian dollar?

Grant Billing

The Canadian-U.S. dollar doesn't run the impact the chloralkali business, because it's all done in U.S. On the chlorate side, though, it does, because we do produce in Canada and south of the U.S. Now our management philosophy has been that we hedge that risk out. So as an example, we've hedged out our Canadian-U.S. sales basically 100% for 2010 and probably 80% for 2011 and 70%. We have kind of a sliding scale.

And the whole idea there is that typically what happens over a two or three-year period is that when the exchange rate moves up or down that there is an adjustment in the U.S. pricing and the Canadian pricing to bring it into equivalency over time. So the hedging strategy is really one around providing the time legs of all things to come into balance. And it's worked really quite effectively over the last five years for us. So we found good stability in our overall pricing for chlorate. But for the chloralkali side, our client is very competitive itself in the Midwest. And so there is no real currency impact.

Jacob Bout - CIBC

So this chloralkali then is tightening of the market in your mind?

Grant Billing

It's a tightening of the market primarily, and most of the chloralkali is produced in the Gulf Coast. So they have freight disadvantage. They can't get to the Midwest, but they do have a free disadvantage. So it is the tightening and the economic recovery which is creating the tightening.

Jacob Bout - CIBC

Just turning to Chile, you suggest that the Chilean operations are up and running. What had to be fixed there?

Grant Billing

What happened was there were some risers under the south and they collapsed. It wasn't a huge problem. We had to raise the south, put a new riser underneath and then replant it. But there was a lot of (inaudible) cells. I think it's 36 cells. And everyone had like coming hundreds of bolts that (inaudible) going in and out there. So there's a lot of work, but not a lot of expense necessary other than labors, not inexpensive. And when you've got 50 or 60 people working out plant, trying to get things done, it's not the most efficient way to do it. But you need to do it and time is money.

Jacob Bout - CIBC

And as far as your end markets there, I mean you're able to fix your plant. For those you're selling it to, will they be able to ramp up in a similar timeframe?

Grant Billing

Yes, that's what I was saying. Our major customer, CMPC, they didn't have too much severe damage, and they were able to repair theirs, and they're up running at virtually 75-85 capacity at this point in time.

Jacob Bout - CIBC

And just turning to the Construction Products side, you are stating that you're seeing a recovery, but yet your guidance is down. I'm just wondering what has changed in the past three months?

Grant Billing

Basically the change that we've made from a guidance point of view is one that the recovery, as you would see and just reading the economic reports, is slower than what people had expected, particularly on the commercial side. And you'll recall I said that we're really bumping along the bottom on the commercial side. So we just felt we should be probably a little bit cautious on what we're going to see from a commercial point of view this year. It was a pretty small adjustment, but that's really what it was.

Operator

(Operator instructions) Your next question comes from (Jerry Hashman from Hashman Capital Corporation).

Unidentified Analyst

It may sound like a little bit of a silly question, but there seems to be a piece out on Reuters this afternoon that you guys are going to halt paying the dividend. And I see that the stock has halted. I kind of tied up in the meeting later this afternoon. I kind of missed what's going on. Could you just maybe clarify what's going on?

Grant Billing

Well, there is certainly no halt in the dividend.

Unidentified Analyst

There's an erroneous piece of news going around on Reuters. I've known you for a long time, Grant. We haven't talked for a few years. I think the last time we talked was before you changed management. I think you were up in Cochrane. You were very kind to get back to me on a timely basis at that point.

So anyway, I apologize for silly question. But it seemed very strange to me, because you guys just re-instituted the dividend reinvestment program, then this stock halt comes, and I see this Reuters piece that you guys are going to quit paying the dividend to reduce debt. And I'm saying this doesn't make a whole bunch of sense.

Grant Billing

The reason the stock was halted was because we were doing our quarterly press release right near when the market was closing. So that's why they halted the stock. I have no idea where this other story came from, but there certainly is nothing factual to it.

Unidentified Analyst

Anyway, I'm sure there are lots of investors that may feel quite relieved that you clarified that. And I apologize for asking the question. But I'm seeing this on my screen, and you can't always believe what you see on the screen. So sorry to trouble you, and I appreciate your time, Grant.

Operator

And at this time, there are no further questions.

Grant Billing

Okay. Well, thank you very much. I appreciate everybody participating in the call, and thank you very much. If you do have any questions, don't hesitate to call us at anytime. We're all on the website and would be happy to help you with any questions you might have. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Superior Plus Corp. Q1 2010 Earnings Conference Call Transcript
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