Superior Plus Corp. (OTCPK:SUUIF) Q2 2016 Results Earnings Conference Call August 10, 2016 10:30 AM ET
Luc Desjardins - President & CEO
Beth Summers - VP & CFO
Darren Hribar - Chief Legal Officer & General Counsel
Rob Dorran - VP, IR & Treasurer
Joel Jackson - BMO Capital Markets
Jacob Bout - CIBC
Nelson Ng - RBC Capital Markets
Patrick Kenny - National Bank Financial
Steve Hansen - Raymond James
Good morning, ladies and gentlemen. Welcome to the Superior Plus Q2 Results Conference Call.
I would like to turn the meeting over to Mr. Desjardins Please go ahead, sir.
Thank you, John. Good morning, everyone. And welcome to the Superior Plus conference call and webcast to review our 2016 second quarter results. I'm Luc Desjardins, President and Chief Executive Officer. Joining me today is Beth Summers, Superior Vice President and Chief Financial Officer; Darren Hribar, Superior Chief Legal Officer and General Counsel; and Rob Dorran, Superior Vice President, Investor Relation, and Treasurer.
For this morning's call, Beth will start by providing a high level review of our financial results, which we released yesterday after markets close. Afterwards, I will provide an update on specialty chemical, energy distribution businesses, and the sale of the construction product, distribution business announced yesterday. Before opening the call to the Q&A session, I will cover all of the above.
Beth, I'll pass it to you.
Thank you, Luc, and good morning everyone. I'd like to remind you first 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 refer to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see Superior's various financial reports which are available at superiorplus.com and on SEDAR.
Actual results could different materially from the forward-looking looking statements we may express or imply today. I would also encourage listeners to review the management's discussion and analysis posted on SEDAR and on our website yesterday which includes financial information for our second quarter as we won't go over each financial metric on today's call. This will allow us to move more quickly into the question-and-answer period.
Overall we are pleased with the second quarter results. Consolidated adjusted operating cash flow or AOCF before transition costs for the quarter were $27.2 million, an increase of $3.8 million compared to the prior year due to improved results from energy distribution and specialty chemicals.
AOCF per share before transaction costs was $0.19 per share which was modestly higher than the prior year quarter reflecting an increase in weighted average shares outstanding related to the equity issue which was completed in October 2015, and additional shares that were issued through our program.
Turning now to the individual business results. Energy Distribution EBITDA from operations for the second quarter was $16.9 million compared to $14.6 million in the prior year quarter, this is an increase of $2.3 million or 16%. Gross profit was modestly higher than the prior year despite a 9% decline in Canadian propane distribution volumes related to the continued decline in oil field activity.
Canadian propane average sales margins were $0.229 in the second quarter, an 18% increase compared to the prior year quarter due to ongoing price management and procurement initiatives.
U.S. refined fuels average sales margins were $0.081per liter in the second quarter down slightly from the $0.091 per liter in the prior year quarter. This was driven by increased competitive pressures in the commercial and wholesale segments partially offset by the appreciation of the U.S. dollar.
On the volume side, U.S. refined fuel sales volumes were 4% higher than the prior year due primarily to an increase in wholesale volumes related to improved gasoline rack sales and residential volumes related to the colder weather at the start of the second quarter.
Cash, operating and administrative cost decreased $1.3 million or 2% in the current year quarter due to lower wage in vehicle expenses related to the reduction in Canadian propane distribution sales volume. Decreased fuel cost as well as improved expense management.
Turning now to Specialty Chemicals. Specialty Chemicals EBITDA from operations for the second quarter was $22.3 million compared to $19.4 million in the prior year quarter. This was an increase of $2.9 million or 15%. The improvement EBITDA was driven by a decrease in operating expenses related to lower plan and Tronox-related cost.
Sodium chloride gross profit was consistent with the prior year as the decrease in sales volumes was offset by the impact of the stronger U.S. dollar on the translation of U.S. denominated sales and lower power cost. Sodium chloride sales volumes were modestly lower due to a decrease in volumes associated with the Tronox agreement and the reduction in the North American demand.
Chloralkali gross profits were lower than the prior year quarter due to a decrease in pricing for hydrochloric acid, caustic soda and caustic potash. This was partially offset by an increase in sales volumes and pricing for the chlorine, as well as positive impact of stronger U.S. dollar on U.S. denominated sales.
Hydrochloric acid volumes decreased due to the reduced demand from the oilfield segment. Specialty chemical gross profits were also impacted by the translation of U.S. denominated working capital, the weakening of the Canadian dollar in the quarter resulted in a realized gain on working capital of approximately $0.4 million in the second quarter compared to a realized loss of $1.6 million in the prior year quarter.
Operating expenses of $38.2 million were $3 million lower than the prior year. This was due to the decrease in Tronox related and plant operating expenses and was partially offset by the impact of the stronger U.S. dollar on the translation of U.S. denominated expenses and general inflationary increases.
Turning to CPD, EBITDA from operations for the second quarter was $12.2 million compared $13.5 million in the prior year quarter. Stronger results were due to continued improvement in the U.S. residential end use markets and the impact of the stronger U.S. dollar and U.S. denominated sales. These were offset by higher operating costs related to the system integration project. Yesterday we were pleased to announce the closing of this sale of CPD for cash consideration of US$325 million or CAD$428 million.
Turning to corporate and interest costs, corporate costs for the quarter was $3.8 million compared to $2.2 million in the prior year quarter. The $1.6 million increase was primarily due to higher long-term incentive plan costs related to the appreciation in Superior share price during the quarter. It should also be noted that corporate costs exclude one-time cost related to the terminated Canexus acquisition and the CPD divesture totaling $11.5 million.
On the debt management side, at June 30, the total debt to EBITDA leverage ratio before transaction costs was 3.3 times. This is within our 2016 target range of 3.1 times to 3.5 times. Due to the sale of CPD our pro forma debt to EBITDA leverage is approximately 2 times. We intend to use proceeds from the sale of CPD to redeem our $150 million, 6% convertible debentures maturing in 2018 and to pay down our credit facility. We also anticipate the spending addressed in September as we are below our 3 times debt to EBITDA.
Turning now to our updated 2016 guidance, which incorporates the divestiture of CPD, the period 2016 financial outlook of AOCF per share has been updated to $1.40 to $1.60 from previous $1.50 to $1.80 per share as provided in the second quarter of 2016. The updated 2016 financial outlook is due to the sale of CPD and reduced outlook for the specialty chemicals business for the third and fourth quarters of 2016.
I will now hand it back to Luc.
Thank you, Beth. Overall we are pleased with the Superior's operational performance for the second quarter. Superior continues to face headwind in the second quarter related to continue weakness in the oilfield activity. We're still able to demonstrate strong EBITDA from operations which were higher than the prior year due to improved results from energy distribution and specialty chemicals especially chlorate.
In the energy distribution business, the improved cost structure focused on pricing and the benefits from our procurement and supply initiative we're able to largely offset the volume decline from the oilfield sector. Looking ahead 2016 energy distribution EBITDA from operation is anticipated to be consistent with 2015. Canadian propane and U.S. refined fuel should continue to benefit from ongoing operational improvement and improved sales and marketing initiatives.
We continue to evaluate opportunities for acquisition for energy distribution platform. We’re targeting small medium size add-on acquisition at attractive multiple in Canada and in the Northeast USA. As noted during the quarter, energy distribution acquired the assets of Caledon Propane a family-owned business with operations in Ontario and Manitoba for approximately 6 times EBITDA. We anticipate achieving operational synergy of 1 to 1.5 time EBITDA to the integration of Caledon into our strong platform.
Turning to specialty chemicals, the chloralkali business continued to be negatively impact by the decline in the oilfield activity and lower caustic netback pricing. The sodium chlorate result improved due to lower operating expense and consistent gross profit. Gross profit was consistent even though volume decreased due to the reduction and lower margin of the Tronox volume. As noted in your earnings release yesterday, our North Vancouver plant suffered damage due to an equipment failure, on August 6. The facility has been shut down to a lower coal engineering team to assess the damage from the incident.
Superior is in the process of remediation and will assess the full extent of the damage in the days to come. Superior estimates that the facility will return to normal operating rate by the end of August. The impact on the 2016 results could be in the range of $0.02 to $0.03 per share depending of the extent of the damage and the time the plant is down and is included in our update guidance. We anticipate specialty chemicals 2016 result will be lower than 2015,our forecast for the business at the end of the first quarter 2016 for results to be consistent with 2015.
The reduction in 2016 forecast is due to lower than anticipated sodium chlorate and chloralkali gross profits in the third and fourth quarter of 2016. Sodium chlorate gross profit anticipate to be lower than previously forecast due to decreased sales volume related to pulp mill maintenance and reduction in export. The impact from pulp mill maintenance shutdown 2016 is however anticipated to have less an impact than the sales volume compared to 2015.
Chloralkali gross profit now anticipated to be weaker than previous forecast due to lower caustic netback, prices and lower caustic potash sales price and volume. We still anticipate improved results in the chlorate business compared to 2015, partially offset by continued chloralkali weakness in 2016.
Turning to divestiture of CPD as many of you listening to our call are aware yesterday we announced the completion of the divestiture of our CPD business for gross proceeds of approximately 428 million Canadian. This transaction is transformative for balance sheet and is the foundation for Evolution 2020 where we will focus on energy distribution and specialty chemicals businesses. With a strong balance sheet we will pursue accretive acquisition, expansion of our existing footprint as well as organic growth while maintaining our continuing focus on best class operation and customer service.
Through patient execution of our strategy to create value for our shareholder will receive an attractive valuation for CPD this reinforce my believe that we made the right decision in 2014 to be patient and continue to improve on the basic of the business. Lastly I would like to thank the senior management team of all the employees of CPD for their dedicated service while they were part of our group at Superior Plus.
With that said I would now like to open it up to any question that you may have.
[Operator Instructions] Our first question is from Joel Jackson from BMO Capital Markets. Please go ahead.
Hi, good morning, Luc and Beth. A couple questions, just to understand your AOCF guidance. So if I look at it, it looks like you’re being -- your midpoint of guidance is consistent with some of your commentary from a month or two ago when you talked about that CPD would have earned $0.17 AOCF if it stayed in Superior for the entire half year.
It looks like 150 is consistent yet you brought down your outlook for specialty chemicals. So are you actually guiding to right now that you feel the business - that the company will earn a bit below the midpoint of AOCF midpoint guidance?
No, I think we’re - when it comes to a guidance we always try to be in the middle. When we come out with a new guidance so everything that we’ve looked at plus and minus going forward we really felt that we're right in the middle going forward and I will ask Beth if she has additional comments to make in that regard?
Yes, Joel the best way to think about it to give you a high level sense about half in theories you want to think about the change we delinked with CPD and the other half with specialty chemical. So when you’re looking at this $0.17 that we disclosed previously that was just the EBITDA and that was half year.
So the closes in August and also when you look at going forward there will be impacts on interest cost because we will be as we talk the intention is to redeem the 150 million convertible debentures as well as pay down in the line on the credit. And in addition to that there’s also the impact on settling the associated hedges that were linked to the EBITDA CPD. So factoring all of those together the impact is a lot less than the $0.17 that you were referring to.
Okay, that’s helpful. Thank you. So then my second question is on propane Luc, you talked about that the growth for Superior here going forward maybe in the propane expansion. You talked about now wanted to target small and medium-size propane expansion in Canada and the Northeast.
Can you define for us what is small where the medium-size transaction and what is your risk appetite like for large propane expansion obviously the company has a history of doing large expansions and being successful and lengthy and contested competition reviews of propane mergers, ultimately you won but in light of SEC and Canexus results do you have the appetite here to pursue a larger propane expansion? And thanks.
So for us absolutely. When it comes to energy in Canada and US always have radar out to see what's available and what fits our industry in our business. And we have such a great platform in Canada it's been like improved so much over the years. We have a Northeast good position at States that’s why there is more propane growth in the Northeast USA.
So if there is a good size small medium or good-sized acquisition that comes our way we certainly want to look at it that’s the business we're in that’s where I think we’re marching to be best-of-class. So we will certainly look at everything that we see in our territory geographically Northeast USA or Canada that is one of our industry we're in absolutely.
And how would you define a medium acquisition, how big this medium go up to?
Yes, I think the reason why we talked about small and medium is there's more of those available, there's hundreds of propane company in Canada and the same in the Northeast USA. Two thirds of the propane business in North America is still in the hands of independent entrepreneur and most of them I would say having talked to maybe a few dozen don’t have succession.
So as become available just once to cash in, we were talking about small medium because we see more of that happening. But there's no doubt if it’s larger we’re going to look at is. So small be 1 to 5 million EBITDA, medium 5 to 25 and larger than that will be considered a larger opportunity.
Should we expect affirmative urgency in this or are you taking your time?
Although it's not us that dictates time, we follow the market opportunity. Anything that has to do with propane and the markets I talked about Canada or Northeast USA we’re going to look at and there’s still time for us, timing is something is available we’re going to look at it. And so we don't dictate timing it's the timing as when do they come available for sale.
Okay. Thank you very much.
Thank you. The next question is from Jacob Bout from CIBC. Please go ahead.
Good morning. I had a few questions on your guidance for chemicals for 2016.So I guess first off on caustic you know just listening to some of your competitors coming out of the US talking about a $20 price increase in July and maybe just talk a little bit about what you're seeing in the Canadian caustic market that’s different than the US?
Yes, I think to me they are big players and they haven’t done well as you know we’re reading their report but they talk about potentially having reached the bottom and maybe some increase could come in the second half. And I think it has - we haven't seen that yet I think the decline in volume yes it’s probably reached the bottom but when it comes to price movement we can’t see that happening at this stage and it might be, I think your point good Jacob and when you look at the big picture and the industry in general, but when you look at us we’re 1% of the industry and we’re very focused and Saskatchewan is like all oil, we’re 100% oil driven in Saskatchewan and large part of Port Edwards as well for back in U.S. markets.
So it might be because we’re skewed more toward that segment that we don’t see the market improving that much. Everything we read and hear is like you read and hear is like looks the bottom people who are saying that we've reached the bottom and potentially in the second half price increase.
We’re going to be very prudent to announce anything like until we see it and at this stage we don’t see it. So if you look at last year to this year Chloralkali for us has not been an improvement and chloride has been.
If you look at our bottom line as I would tell you in quarter two, we’re ahead of last year in vehicle, so net-net good chloride business Chloralkali nothing that -- lot’s of noise, lot’s of potential improvement, but we have not seen anything there.
Maybe just trying to chloride then, you are guiding toward a reduction in volumes, so it sounds like it's both domestic and in the export market but when you look at your competitor in the Canadian market, they’ve put out some pretty good numbers on chloride volumes and I am just wondering is there a market share issue going on there or how should we be thinking about that?
No, we feel pretty good and we’re very solid - we're very busy and there is no -- we’re in good shape. I think it has to do -- take last year to this year, it’s difficult to compare because you have Tronox volume that goes away.
Now it’s not that much of a impressible volume, so it hasn’t affect us on the bottom line, but a lot of it has to do with Tronox volume last year versus this year.
When it comes to our plant because the Tronox plant is closed and we were selling that volume, that goes away and then from our plant, we’re very busy. We have that hiccup that just happened in Vancouver.
So we’ll work out that this month and hopefully don’t lose too much volume for that particular event of North Vancouver issue, but net-net we’re busy. We’re pretty busy and it’s a better business than last year in chloride but they’ve thrown us volume out because that’s gone away.
Got you. And then on that North Van closure, what exactly happened there? Is there -- how should we be thinking about this on a go-forward basis?
So how -- you mean about Vancouver.
Yes, explosion of one piece of equipment which affected a few piece of equipment that are surrounding that. From our engineering team are there as we speak, we expect a lot of information tomorrow.
Big picture though, it’s not something that cannot be fixed quickly. We think it’s two, three week by end of month we can fix it.
Out of 24 lined that one that exploded two or three that are damaged that can be fixed quickly. This particular one we might have to pass over it and then use the other, but the rebuilding is question of a month. It’s not a long rebuild.
And we do with our engineering we can do all of the above internally. We do have some extra inventories as we build up in case there was a major effect on any of our production we always carry some cushion of inventory.
So that’s going to help for that period that we don’t have that equipment running and from being in a good position on chlorides and pretty much in all our plants to be sold out, in December every year as you remember quarter four where we negotiate contract, we have less than 5% contract to be renewed or around 3% or 4%. So we don’t see chloride in the next 24 months for us changing from a good position we’re in now.
So this was one of the cells that blew up or…
Yes, it’s a reactor, there is 24 of them and as you know chemical mix sometime can be fussy, very difficult to explain at high level engineering that this happened because the maintenance was always done, everything was clean and ready well operated.
So a bit of a surprise for top engineer. There they are now and no more in the days to come so. So a hick up that will last, let's say the rest of the month, after that back to business that equipment is not relatively built.
There is no safety issue, no employee getting affected and no environmental liquid being spread out. So that is most important and then after that from a finance and EBITDA the effect will be for just a few weeks for just that plant.
Last question here is just on the propane side, one of your competitor is talked about winning a rather sizable commercial propane contract. Just want to talk about if you could just give few comments on the competitive environment currently in Western Canada for some of these commercial contracts and how your market share sizes up for the remainder of the year.
So overall when you look at the oil field we lost half of our business and we’re pretty good size producer and seller in this industry in this segment and we’re growing all the other segments 5%. So it’s really, really good.
Now the oil field segment and the particular customer we have is really, really low margin so that’s why we don’t get too much pain by them having moved to more natural gas supply over the years and having moved to more supply but we still supply large accounts in that region, we’ve gained one recently.
The net of all that not much affect on the bottom line because when you don’t make a lot of money, you lose a bit of sales you don’t lose a lot.
Okay. Thank you very much, Luc.
Thank you. The next question is from [indiscernible] from TD Securities. Please go ahead.
Thanks good morning. Just wanted to touch on acquisitions, it sounds like you're going to be focused primarily on the energy side of the business just wanted to confirm that or are you still evaluating opportunities on the chemical side?
Yes, I think the work we’re doing now since the Canexus project was stopped, is really to reassess our business and do a two, three months of heavy lifting work and strategy to come to our Board in October and come to the market and all of you in November at our Investor Day, so that is what we see coming down the road.
Big picture, you're right. We see a lot more opportunity in energy. We’ve got a great business with good return on capital, good market position. So we’re well positioned and we see more of that happening.
When you look at chemical there could be that we look at internal project or project with customers, so they’re more of what we have on their table now is more small scale project for volume increase, but nothing major and we don’t see at this stage other big chemical that we would like to get into.
So we’re still in tune with the industry, but we’re not going to -- the chloride business made sense to get bigger in that and our accretion as you all know went away on us and to a point where we said we’re going to be disciplined and if we don’t make good project with good accretion we’ll walk away.
And we did that with CPD when we did not appreciate the value and now we got $128 million more. So we’re going to be very disciplined. We fall in love with deal, but we can fall out of love when the deal gets to a point where they don’t make sense.
It’s hard to think of large chemical at this stage. It’s very difficult. Can we think of energy U.S. and Canada are down, absolutely.
Just a couple follow-ups, in Canada can you confirm what your latest estimate of your market share in propane is?
You go by probably in the 30 range, so 33 across Canada depending on segment and market and industry.
Okay, and I guess now that you have CPD behind you, is there a case to be made for evaluating whether or not having the two unrelated businesses together under a corporate banner makes sense?
Yes, you're pretty quick, when it comes from evaluating, we went 3 to 2 in the past five years I’ve been here and we think we’ve built a good company and a solid foundation and we’d never have thought we would go to one and I don’t have that on our agenda.
In their strategic review that we have with the Board in October, we do consider all the plus and minus of every business, every industry. We never take away the fact that for shareholder value if something comes our way that makes sense, we have to consider it, but for us it will be business as usual.
And on energy we can see someone in that regard in Canada and U.S. When it comes to chemical at this stage we don’t see much acquisition and growth on acquisition, but there is project and there is opportunity to continue to make the business better and that’s what we’ll probably end up focusing on for the years to come.
Thanks very much.
The next question is from Nelson Ng from RBC Capital Markets. Please go ahead.
Great thanks. Just a quick clarification on the North Vancouver incident, so you mentioned that I think one of 24 lines I guess blew up, but is the facility still operating like is most of the lines still operating or is the entire facility shut down for the month.
Yes, so probably maybe a view that I've been around long time with [vehicle] from a health and safety and it’s really I think we could transfer ourselves best of class and investing in maintenance. We never deviate from that.
So immediately shut down the plant. There is no question about that. Assess properly what happened, understand what did happen and why and then do the clean-up and then realize could we -- should we start the plant for 100% secure employees in the area we’re in. So that’s absolutely, the first thing that comes without questioning is we close out plant.
Okay, That’s clear. And then you mentioned that you’ll mainly be drawing down on inventories to meet customer demands but if you have to buy product at higher cost to supply customers did you I guess insurance covering any part of the I guess business impact of supplying customers.
No, I’ll ask Rob to answer that because he has worked with insurance. I think there is some insurance but maybe Rob you can talk about which in a while.
Yes we have to wait and see how long the plant is down and what the impact is because we have a specific waiting period for our business interruption in insurance. It’s between 30 and 45 days.
Okay. So if everything gets resolved this month, then it’s not that likely that insurance will have a material impact?
There is an insurance for the equipment, so I think we have a deductible of $1 million so we’ll end up paying that as a capital and then the rest, the insurance should pay the rest.
And from a customers and inventory to your other question, we feel secure with the inventory we have and there is also a little bit of opportunity when we do export to if there is some that are less profitable to do less of that.
So I think for a couple of weeks of the plan closing, we don’t see impact with customers in North America. We see that we have probably enough inventory to cover everyone. If we have to buy some it will small, it will be in the 2,000 ton maybe, but not expected at this stage.
Okay. That’s great. And then just staying on chloride topic, you mentioned that part of the weakness in the second half was due to expanded pulp mill plan maintenance closures. Is this similar to what happened last year or is it different regions or is like a different situation this time?
No, there is a lot less than last year. We mention it because there is some and there are two plants that are moving which is good news for us and they're moving from paper to pulp.
So there will be good demand and for a long, long term because those two plants in North America favor decline that the fluff as you know representing somewhere around 80% of our chloride that we sell is a good business that’s not declining.
So compared to last year a lot less and like I said it’s difficult to look at number from the top line because of the volume of Canexus went away, cost of operating the Canexus cost went away. Net-net our plants are busy and our chloride business is good.
Okay. And then just one last question in terms of M&A like obviously the focus sounds like it’s in the energy services side and there is like a large near-term opportunity in Alberta but I was thinking are there like other than focusing on your existing geography which is Canada and the U.S. Northeast, are there opportunities to expand on the energy services side like elsewhere, are there any other geographies that you can expand to?
The Northeast markets U.S. is huge and we have a lot of room to grow in that market before going into other markets and you gain a lot from having a platform and acquiring business and bring them under your platform.
So we can do that in Canada, east to west because we’re everywhere and there is a lot of synergy when there is more opportunity when you're already in an area and get larger in that area.
So Northeast I would say there is plenty of independent and we could probably go bit more East, South and West but again staying within close to our big hub of the Northeast USA that would be the plan.
Okay. You mentioned that your market share in Canada is about 33%, what’s your market share in the U.S. Northeast?
Do you have that Rob. I would say about 10% to 12%, in the Northeast I would for people that are new with us on the call we do different – we’re all propane in Canada. Northeast I would say – and we’re 22% residential in Canada.
Northeast I would say we’re 60% residential so you get more effect when the weather change and two-third of the EBITDA on the residential was on that it’s now two-third propane good start, good turnaround and internal growth. I’ve talked about 5% internal growth in Canada beside the oil field we’re achieving that an minority issue as seen in propane as well.
We have a wholesale business and a commercial business so less margin big volume but most ability in that business. So the mix is very different. So apples with apples difficult to compare when you think of residential propane distribution we’re in the 10% range, so a lot of room to growth.
Okay, so just to clarify that 10% to 12% is on the propane side not seen outside right.
Yes, everything that’s not wholesale or commercial so that would include oil as well for residential.
Those are my questions.
Thank you. The next question is from [indiscernible] from Scotiabank. Please go ahead.
Thank you good morning. Few, still unanswered questions. First on the proceeds from CPD can you give us an idea of what will be the net proceeds after all [indiscernible] after potential cash taxes associated with it.
Yes, it will be roughly 400 million.
Yes, we had tax losses.
Great. Do you say the [indiscernible] deductible insurance is about 1 million.
Yes, we have to pay to the first million.
Okay. And on the hedging side can you give us the cost of canceling the CPD hedge book and would you consider canceling the whole position.
Okay. In order to address the CPD hedge it would be roughly settlement payment in the range of 15 million. That would reflect roughly 7 million from 2016 and 9 million from 2017, and yes, we are in the process of considering looking at potentially more hedges from 2017 and 2017 as well.
The real cost of doing it is very small. So you repay the amount and it comes back to you in your EBITDA. As a company would be $300,000 net of real cost to do that transaction.
Yes, it’s a settlement and then we’ll have it going, we’ll have that EBITDA coming back in the future but the cash payment would be in the range of that 15 million I said that’s correct. From a net cost perspective it’s relatively neutral.
Okay, prefect. And I know it’s a bit early but now post-CPD, how should we think of maintenance CapEx levels let’s say for 2017 and onward and what type of growth CapEx should we assume?
Yes, I think the best way to think about it is from the maintenance CapEx perspective in the range of 50 million and that’s with those CPD, right, going forward. And then summer growth absent any unusual items sort of run rate growth probably in the range of 15 million is a good number.
15 one five?
One five, yes.
Perfect. And lastly again it's a bit early but just curious on your chlorate contract negotiations coming for this fall. First, what would you have to do for renewal and will you have any visibility at this point you should we expect that you will be able to at least match your input cost inflation i.e. mostly electricity?
Yes, it’s very small I said earlier it’s less than 5% of our total volume I don’t remember year and in the last five years I’ve been here it was so small. So we kept contract in place for the next two years. And it will from what it comes back opportunity that we look at this week we’re – we look like we’re covering those costs.
Great. That’s it for me. Thank you very much.
Thank you. The next question is from Patrick Kenny from National Bank Financial. Please go ahead.
Thanks. Good morning, guys. First for Luc and big surprise here another question on your propane acquisition strategy. But I’m thinking more from a customer perspective acquisition multiples aside all else equal. Which customers do you believe you’re going to have the most value both for the customer and for shareholders, is it U.S. residential, Canadian commercial, oil and gas just want to get a better feel for your customer base picking order?
Yes, it’s a good question and it’s a complex one because I’ll get to it. What we've done over the years the problem that promoted and explained it well enough and that's why you get Canada US in this segment beside oil that has defined tremendously a good internal growth at better margin. So we’ve really developed by segment. Digitalization think of all of you when the you do your telephone bills it’s all simplified, digitalized you pay online gets your bill online. You have communication with the call center we’ve invest lots of money and time and effort and continuing to do so to really become easy to do business with, from residential customers.
Then you go to the another extreme in the oilfield and we're able to mechanic and their sensor that we installed on the big things and even small midsized thing under it’s big volume to measure by the minute what is the number like liquid of propane in each tank and get us to deliver on time not ahead of time and less frequently but never run out of gas for customer because of those sensors that we've installed everywhere.
So that's another segment where we've had value. And we know we did a test with some normal customer that they had 5% of downtime in the year in production because of those install that we did for them their number of downtime in that particular region which we can do everywhere became 0.5 has added value.
And there’s a couple of millions of costs our customer there’s an anchor when that happened and then you go to actually go on and on. It's like nonstop machine of marketing sales. So what we’re bringing to the table that's different and the States and Canada we are applying marketing if you want B2C approach to the B2B industry and that gives us touch point more glue with customer hopefully better margin year and there you can tweak. And keep on doing that forever you lose less customer, you gain more, you get internal growth, you get better margins. Hard to believe but we’re doing it and have been doing it for years.
And to a degree I think we have some added value with ERCO as well in chemical with the ERCO smart and some other technology and engineering expertise we have. And we’re going to try harder going forward to address those customer that we don’t have or as we haven't could do more for them and saving their money helping them to do things better.
So that’s where I call it you dichotomize the commodity. Yes, when we walked here 5 years ago we were selling propane but all the touch point and all the different things you can do for those different segment of customer, really gives you a winning combination and the best of flash business.
Beside, went from 80% of operating cost to 64% and probably a little bit of room there to go to 62% one day or 60%, time will tell and the President of our - propane business in Canada has a lot of expertise in this regard and is now looking at other tweaking of how do we service customers, simplify in one trial resolution, not 2, 3, 4 so they are redoing the call center with technology to do better with customer.
I think we are going to run out of time because I could go on forever because very passionate about that because it’s not just the cost even though we know we have to do the lowest cost and efficient, it’s also a business of marketing and developing internal growth. And then when you add acquisition and you bring them to your low cost platform and investing in technology equipment, digitalization, dichotomization you gain a lot. And we hope to do a lot of that going forward. Was that a bit too long for you, Patrick?
That's great, I realize it’s a bit of an open ended question but appreciate the color. And then maybe just lastly on the chemical strength, specifically the - cost for caustic potash. Correct me if I am wrong but is this the first time we have seen anything but stable demand in pricing from the food industry? Is this transient or has something else happened that you know might have shifted the market around Port Edwards to cause you know your outlook to change here for caustic potash?
Yes, it’s such a good question and we're - everything I have just talked about marketing sales, we are really shocked to see with the agriculture demand that was not what it was supposed to be in as [indiscernible] in this phase, actually affected us and Port Edwards as well as our commercial business and propane in the North East USA.
But that is what we are doing which is hope November we have more clarity for all of you in that regard. We just engage [indiscernible] that they are studying, goes to the end market, there are various segments and look through the end user and bring it back to distributors or producer and what does the market look like, where can we differentiate ourselves, how do we go about in the air co business and that has been done in the propane in the past to really understand each segment better.
We are 1% live business, and there is like dozens of segments that buys into that chemical and I can't sit here and say we really get it, in every segment in every way and I don’t like that, because we are best at marketing I think in what we do. So we are going to get that study then works and we will get clarity and then we will see, maybe we should focus more on the food business directly and do more business there.
How do we - we got hit so hard just because we are so big in the oil market, then why not develop other segment and if the oil market comes back maybe we don’t go back as much. We keep the volume to be spread out to different segment, so we are more solid and have less thus volatility of up and down. So a lot of work to be coming in that regard. I think by November we will have more clarity.
All right , that’s great. Thanks Luc.
Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.
Hi, guys, just a single from me. Just curious when you look at the M&A landscape for propane, you had good success growing your wholesale business in recent years, what are the opportunities if any in sort of the midstream transporter storage side of the business either domestically or in the U.S.?
I’m so glad you’re asking that because we’re not promoting it much because we are not – we’re looking at wholesale, it’s about 20% of our volume and it was their role 5 years ago, and we like to double up. And how do we do it, we are doing our sites in Canada, east and west, we are making them a little bit larger, doing some investment capital to position them better and then we are looking at, is there a small player independent that’s in the western USA or in an area that it would make sense for us to acquire and immediately get bigger in the wholesale business.
It's a good business with good return on capital, low assets, investment, its talent we have a great talent pool that does that for us. We scale that up, we certainly in our strategic plan we’re working on now, would love to do more of that and looking at it for sure. And they might be add-on acquisition in that regard if you could find something to acquire absolutely.
And just as a general proxy, is that considered as a medium sized acquisition I presume and also space something a larger scale I imagine?
No, for us it would be small, medium, I was talking with Joe's question on what's small 1 to 5, what’s medium 5 to 15. Small, medium, more medium because I don’t think there's too many small. So maybe medium. It's a barrier, we don’t want to go - I think we don’t want to go on a big scale other industry than propane.
Very helpful, thanks.
It’ll be medium.
[Operator Instructions] And there are no further questions registered. Please go ahead.
So, thank you. With no further questions, I'd like to conclude the call and thank you for your participation in Superior 2016 second quarter results call.
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