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Edited Transcript of SPB.TO earnings conference call or presentation 14-Aug-19 3:00pm GMT

Q2 2019 Superior Plus Corp Earnings Call

CALGARY Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Superior Plus Corp earnings conference call or presentation Wednesday, August 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Beth Summers

Superior Plus Corp. - Executive VP & CFO

* Luc Desjardins

Superior Plus Corp. - President, CEO & Director

* Rob Dorran

Superior Plus Corp. - VP of IR & Treasurer

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Conference Call Participants

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* David Francis Newman

Desjardins Securities Inc., Research Division - Analyst

* Elias A. Foscolos

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Jacob Jonathan Bout

CIBC Capital Markets, Research Division - MD of Institutional Equity Research

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* Nelson Ng

RBC Capital Markets, LLC, Research Division - Analyst

* Patrick Kenny

National Bank Financial, Inc., Research Division - MD

* Raveel Afzaal

Canaccord Genuity Corp., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Superior Plus Second Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Rob Dorran, Vice President, Investor Relations and Treasurer. Sir, you may begin.

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Rob Dorran, Superior Plus Corp. - VP of IR & Treasurer [2]

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Thank you, Shannon. Good morning, everyone, and welcome to Superior Plus conference call and webcast to review our 2019 second quarter results. Joining me today is Luc Desjardins, President and CEO; and Beth Summers, Executive VP and CFO.

Today's call is being webcast and we encourage listeners to follow along with the supporting presentation, which is also available on our website. For this call, Luc will start with some opening remarks and then Beth will provide a high-level review of our financial results for the second quarter and our 2019 guidance. Following their prepared remarks, we will open up the line for questions.

Before I turn the call to Luc, I'd like to remind you that some of the comments made today may be forward-looking in nature and are based on Superior's current expectations, estimates, judgments, projections and risks. Further, some of the information provided refers to non-GAAP measures. Please refer to the second quarter MD&A posted on SEDAR and our website today for further details on forward-looking information and non-GAAP measures. I would encourage listeners to review the MD&A as it includes more detail on the financial information for the second quarter, as we won't be going over each financial metric on today's call. This will allow us to move more quickly into the question-and-answer period.

I'll now turn the call over to Luc.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [3]

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Well, thank you, Rob, and good morning, everyone. Thanks for joining us on this morning on the call. At our Investor Day 2018, we increased our goal for the Evolution 2020 EBITDA-from-operations improvement from a range of $50 million to $150 million up to $200 million to $250 million compared to our 2016 EBITDA from operations of $276 million. I'm happy to say we have achieved our Evolution 2020 goal ahead of plan, delivering a trailing 12-month EBITDA from operation of $497 million, which is an increase of $221 million.

We'll be rolling out our new strategy and plan following the completion of the Specialty Chemicals review process. We had another busy quarter at Superior, obtaining 2 tuck-ins early in the quarter and integrating the acquisition of NGL Retail East business. We've owned that business for just over a year now and have a good understanding of the different opportunities for improvement and growth. With the knowledge we've gained in the past 12 months and the progress in synergy, we've increased our run rate synergy target by 20% from USD 20 million to USD 24 million.

We have also announced we are considering the sale of our Specialty Chemicals business and the process is advancing as expected. As it is an active and confidential process, we're unable to provide much of an update at this time. The ERCO business is a well-run operation with a top-class management team and strong cash flow, which we expect will provide a good valuation. Even though we're considering the sale of the chemical business, we will continue to invest in the business and be good a steward up to until the potential sale is completed. In that regard, we've announced the planned closure of the Saskatoon sodium chlorate facility, which is a high-cost plant, and we have announced 2 planned expansions at Valdosta, Southeast USA and Buckingham, Quebec. The 2 expansion projects don't require a significant amount of capital and are expected to generate strong returns. The expanded capacity in these 2 low-cost plants will serve the business well in North America as well as additional export business that we are going to do across the world.

On the operations side of the business, we're pleased with the second quarter EBITDA of operations of $71.4 million, which was $21.7 million higher than the prior year quarter, primarily due to the U.S. Propane distribution business and the impact of IFRS 16. Excluding the impact of IFRS 16, the U.S. Propane distribution EBITDA was $5.8 million higher due to the contribution of NGL acquisition and the tuck-in acquisitions completed in the U.S.

In 2018 as well as our execution on the integration and [BMI] synergy on NGL, which are ahead of plan, our Specialty Chemicals EBITDA from operations, excluding the impact of IFRS 16, were higher due to increased sodium chlorate volume and pricing. Our team has done a great job executing on NGL integration and realized additional $3.8 million in synergy in the second quarter, bringing the year-to-date closer to $9.4 million. Based on the team's progress so far, we expect to exit 2019 with just $20 million of run rate synergy, and we expect to realize an additional $4 million run rate synergy in 2021.

As we previously communicated, the synergy we expect from supply chain efficiency, margin management improvement and the Superior way operational methodology that we're putting in place. As said in the past, we can often find at least 15% to 25% [then] opportunity of improving the bottom line of business we're acquiring in the energy field in North America.

Canadian Propane distribution business also had a good quarter with good contribution from California wholesale business, UPE and improved wholesale market fundamentals. We continue to face some challenging market conditions in Western Canada with the decline in the oil field and other commercial activities related to the oil field. Our strong performance, despite these challenges, speak to the strength and the diversity of our operations across different geographic lines of business.

We continue to see a tremendous opportunity to grow our Energy Distribution business, especially in the U.S. retail propane distribution market, as it's approximately 6x the size of the Canadian markets and highly fragmented.

So now I'll let -- I'll turn the call over to Beth to discuss the financial results.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [4]

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Thank you, Luc, and good morning, everyone. The second quarter results were in line with our expectations, and I'd like to highlight the second quarter is typically a lower quarter for Superior due to the lack of heating-related business. In addition, the NGL Retail East business is more seasonal in nature than our legacy propane business in the U.S. and Canada due to its higher concentration of residential heating customers and branch locations in the Southeastern U.S.

We had strong results from our operations and achieved adjusted EBITDA of $59.7 million, which was 39% higher than the prior year quarter, primarily due to increased EBITDA from operations in all Superior's businesses partially offset by increased corporate costs related to share price appreciation in the quarter and realized losses on foreign exchange hedging contracts.

The adoption of IFRS 16 had a $9 million impact on our second quarter results as expenses related to operating leases are now reclassified as a reduction in long-term liabilities. Excluding the impact of IFRS 16 and long-term incentive plan costs, adjusted EBITDA increased 27% compared to the prior year quarter.

Consolidated adjusted operating cash flow, or AOCF, per share before transaction and other costs, was $0.18 per share, which was $0.03 lower than the prior year quarter due to increased interest expense and the impact of higher weighted average shares outstanding. This was partially offset by the increase in adjusted EBITDA. Interest expense increased due to the higher average debt levels, which were higher related to financing completed in 2018 to finance the NGL acquisition.

Weighted average shares outstanding also increased due to the NGL acquisition financing. AOCF before transaction and other costs per share for the first 6 months was $1.38 per share or $0.21 or 18% higher than the prior year comparable period due to an increase in adjusted EBITDA partially offset by the increase in interest expense and weighted average shares outstanding.

We made further progress on our debt reduction in the second quarter. Senior debt credit facility EBITDA as of June 30, 2019, was 3.7x, which is 0.2x and 0.5x lower than leverage as of March 31, 2019, and December 31, 2018, respectively.

Due to the seasonal nature of our business, leverage ratios are typically lowest in the second and third quarters and increase during the fourth quarter related to higher working capital requirements.

Turning now to the individual business results. Canadian Propane distribution EBITDA from operations for the second quarter was $20 million, a $2.9 million increase primarily due to higher gross profit, realized synergies from the Canwest acquisition and the impact of IFRS 16. This is partially offset by lower oil field volumes. Gross profit increased compared to the prior year quarter primarily due to the contribution from UPE and improved wholesale market fundamentals.

U.S. Propane distribution EBITDA from operations for the second quarter was $12.8 million, a $10.9 million increase primarily due to contributions from the NGL acquisition and tuck-in acquisitions and higher average unit margins.

Canadian Propane distribution EBITDA from operations for 2019 is anticipated to be higher than 2018 due to the incremental synergies from Canwest, the full contribution -- or the full year contribution from UPE and the impact of adopting IFRS 16.

U.S. Propane distribution EBITDA from operations for 2019 is anticipated to be higher than 2018 due to the full year contribution from NGL and the tuck-in acquisitions, incremental synergies from NGL and the impact of adopting IFRS 16.

Turning now to Specialty Chemicals. EBITDA from operations for the second quarter was $38.6 million, an increase of $7.9 million compared to the prior year quarter driven primarily by the impact of IFRS 16 and modestly higher sodium chlorate gross profit. This was partially offset by lower chlor-alkali gross profit and higher freight costs. For the remainder of the year, we're expecting improved chlor-alkali market fundamentals, especially as it relates to caustic soda. According to industry reports, the Alunorte refinery in Brazil has been ramping up production and operating at 80% capacity in July, which should take some of the pressure off North American domestic competition for caustic soda as the refinery is a large caustic soda customer.

Specialty Chemicals 2019 EBITDA from operations is anticipated to be higher than 2018 primarily due to the impact of adopting IFRS 16 and increased sodium chlorate selling prices and sales volumes partially offset by lower chlor-alkali results.

Lastly, corporate results and the adjusted EBITDA and leverage guidance. Corporate costs were $3.5 million higher than the prior year quarter driven primarily by long-term incentive costs related to the share price appreciation in the quarter. Superior's share price increased 17% in the second quarter of 2019. Realized losses on foreign exchange hedging contracts were $1.3 million higher due to the Canadian dollar being weaker. Interest expense was $26.5 million, $15.1 million higher than the prior year quarter due to increased average debt and effective interest rate. Debt was higher due primarily to the acquisition of NGL and tuck-in acquisitions completed in 2018. Current cash income taxes were consistent with the prior year quarter. We're confirming our 2019 adjusted EBITDA guidance range of $490 million to $530 million, which implies a midpoint of $510 million. We're also confirming our senior debt and credit facility EBITDA leverage range for December 31, 2019, of 3.6x to 4x. With that, I'd like to turn the call over for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Patrick Kenny with National Bank Financial.

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Patrick Kenny, National Bank Financial, Inc., Research Division - MD [2]

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At the Saskatoon facility, with lower drilling activity in Western Canada, how sustainable are the chlor-alkali operations? And I would have thought that this part of the plant maybe would have been more vulnerable than the chlorate, just given the weakness in hydrochloric acid demand. Or is there something offsetting this weakness?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [3]

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No. The segment that we sell into, the oil market, is a good segment that's sustainable. So we're busy in chlor-alkali, [Western] Saskatoon. We're fully loaded for the rest of the year and expect to be sold out in the years to come. No effect there for us on the chemicals. And [I'm not sure if your] question also were talking about chlorate in Saskatoon, so if you can repeat that part.

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Patrick Kenny, National Bank Financial, Inc., Research Division - MD [4]

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Well, just -- so you cited higher electricity prices in Saskatchewan. Yet, I guess no province has experienced an increase in power prices over the past year or so like Alberta has, so I'm just wondering how should we be thinking about a potential shutdown at some point of the Grand Prairie facility because of high power costs.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [5]

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Yes. I think overall, the way to think about it is across our fleet, bill rates have increased roughly 7%. The impact of that sort of across would be somewhere between $8 million to $10 million, and that has been factored into our guidance and going forward, those increases. And just to respond or to add a little bit to Luc's response on the question on the chlor-alkali in the Saskatoon plant, one of the other key things to think about is we have less fracking demand coming out of that plant, so we weren't as impacted as those which would primarily be selling into fracking. In addition to that, overall, from specifically on the hydrochloric acid side, while oil and gas segment has been weak and was weak in Q2, other segments, such as food and steel, would be a really quick [study] for us.

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Patrick Kenny, National Bank Financial, Inc., Research Division - MD [6]

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And sorry, just specific to Grand Prairie, you don't see any risk of that facility being shut down?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [7]

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No at this phase -- no, not at this phase. We're looking good. As you know, the Saskatoon, we're now expanding, which is a debottleneck. It's not a big cost to expand. Buckingham, with the cost of electricity now increasing, we even have a grant from the government. They pay a good part of the expansion. And then at Valdosta, a more modern plant in the Southeast, a lot of demand. And with our export demand and our North American additional demand, we're -- [a good] business, where those 2 plants are going to make more -- much more money than Saskatoon, that's why we did this project.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [8]

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And one other the -- one other fact on the Saskatoon plant that factors in, we had very high electricity cost. In addition to that, there was also a fairly large capital investment that was going to be required. So it made more sense to expand our lower cost and rationalize the fleet and expand capacity in the lower-cost plant versus investing. And just to give you a sense of size from an EBITDA perspective, the Saskatoon plant EBITDA was roughly in the range of $3.5 million.

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Patrick Kenny, National Bank Financial, Inc., Research Division - MD [9]

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Got it. Last one for me if I could, just -- I know you're not commenting on the sales process, but just to clarify your prepared remarks there, the Saskatoon shutdown and some of the other macro factors are not causing any sort of suspension of the process at this point, I mean the process continues on as expected.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [10]

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As expected. And those projects are [just] an improvement for a potential future acquirer.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [11]

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Yes. I think one way of looking at it is the expansions, I mean they had attractive return profiles. They are our lowest-cost plants. So we are overall looking at optimizing that portfolio of assets, as I mentioned earlier, sort of regardless of what happened with the potential sale. So all these investments would help put us in a better position in the future.

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Operator [12]

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Our next question comes from David Newman with Desjardins.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [13]

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I know Jim Pattison is jumping into Canfor, but he did the pulp mill curtailments and closure. I'm just once again sort of talking about the sodium chlorate side. Last time, I think it was 2005 and '06, where I think it ultimately ended up with a distribution cut. How do you compared the current situation of curtailments and closures in BC to that period? And how is the recent pricing and volume trends looking overall?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [14]

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So chlorate right now looks better for us than it has a long time. We're going to be more sold out than we've been in the past. We've [leveled up] a market-taking sales approach for the last many years that are giving us opportunity to have additional business in America, and a lot more export and new contracts coming on the export side on the 2 continents are really good and really profitable. So we're in better a shape from a capacity utilization and margin today and going forward on chlorate.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [15]

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And did you get any sort of customer commitment or take-or-pay or whatever you might call it in Quebec or Georgia related to that? And how much of your mix is now export? I think last time it was like 16% is sort of exported. So is it -- any commitments that you're getting, are they more in the international markets as opposed to domestic? Or how is that playing out? I'm just thinking about expected returns on the investments.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [16]

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Both markets are growing for us. And then the export, in the next 3 years, we have additional contracts in Europe that will bring more volumes. So our 17% -- 16% to 17% today, going up a few points, of course, in the next 3 years with additional export contract that are in the next 3 years coming.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [17]

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Yes. I think just responding a little bit to the question before also with respect to the curtailments in BC. We haven't been directly impacted, so the majority of the various plant closures that have been announced weren't our customers. So we're actually still seeing -- from our perspective, we're very confident with our chlorate forecast. And we're actually looking at chlorate remaining stronger on a year-over-year basis for us. Yes.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [18]

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And the Vancouver plant, we do exports a lot. We have new business and new and better margins from our Vancouver plant just for export going forward.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [19]

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Okay. And then on the caustic market, I mean it looks like in Northeast Asia, I know you're not impacted by Northeast Asia but there's arbitrage that takes place. The Gulf has obviously got the Brazilian opportunity coming back and all that, which will take some pressure off you guys. But I mean are you in the camp that caustic will recover here or do you think we could be lower for longer? What are your thoughts on sort of the caustic markets overall?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [20]

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So I'll start and maybe Beth can add on. We have been very conservative saying caustic would come back. We heard all quarter 2 it's coming back. We never forecast that, we never believed it. Now we are. [Well fleet] is now 80% in July capacity. So they're on their move to go to 100%. We see that as a positive trend for us on caustic for quarter 4. And you're absolutely right that from the imports from Asia, we don't trust that. We're on the different scale of -- [where there are] 2 plants of selling, and those do not affect our margins.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [21]

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Yes. And to just provide a little color on our view for the remainder of the year from a numbers perspective. We have been conservative in our view of the market historically. And the way that we're looking at the remainder of the year from a caustic perspective with the various changes occurring in the market, we are assuming volumes will be down roughly 3% for the remainder of the year, and then the net backs would be down roughly 1%. So modestly lower.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [22]

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Good. That's good color. And last one for me, guys, it's just on California and maybe the U.S. in general. The retail market in California, is it a little more attractive? Are the margin profiles a little bit better on the retail side? And if you're -- and you're looking at the U.S. layout in terms of backfilling markets, where is the attractive opportunities for you guys on M&A?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [23]

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You're [still dividing] East Coast and West Coast. The California market, we've done our homework in the last year and looking very good. It's a good propane business. Solid. Sustainable. We've done a lot of study in that regard. So East Coast and West Coast are best market for margin opportunity. Some growth in the Northeast, absolutely some growth. So we're looking at those 2 markets, and we don't mind buying in one or the other.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [24]

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Maybe we can schedule some tours down there in January.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [25]

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Yes. This (inaudible) business. We supply -- we're the largest one now in the wholesale side in California. And I can probably make a long-term prediction, we'll be the largest distributor as well [in the U.S. market].

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Operator [26]

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Our next question comes from Nelson Ng with RBC Capital Markets.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [27]

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Just a quick one on Saskatoon. So you mentioned electricity costs and the capital investments required to keep the plant operating. Was demand ever an issue at that facility? Like I noticed that one of your peers had lower volumes quarter-over-quarter -- or year-over-year. So I was just wondering whether you've seen some of it -- any of that pressure in terms of demand.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [28]

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No. The decision was really around from -- the plant was running well, and we were selling all of the volume. So it wasn't a demand issue in particular. Again, it would be, as you look at our overall portfolio, it just made sense in light of that capital investments that needed to be made and the higher electricity cost to reallocate where the volume would be produced across the company.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [29]

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So you'll just kind of backfill supply from your other facilities to those customers that you're serving?

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [30]

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Yes. What we'll do is it'll take a period of time for the expansions to be completed. [I'm sure] at that time, we've made arrangements to ensure that we have procured supply in order to supply our customers.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Okay. And then just on those expansions, was the expansion -- so were they more, kind of, triggered by the shutdown of Saskatoon in terms of the timing? Or was there a specific demand where there's like customer needs you couldn't meet? I guess the question is why now, while you're kind of running a sales process versus last year?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [32]

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Yes. I think the #1 reason, we're intelligent people at a large company and we do our work, so we have to be good stewards of this business [until it's the last thing]we own and we end up selling it. And this made a lot of sense. We have a new contract for export to Europe, and those are coming in the next 3 years [before] volume, so we have to expand. When you look back -- I was thinking about that actually coming to work this morning. Every time I make a move, I always think I should have done it a year before. And we probably should have done it a year before, but with the extra CapEx coming to us as we find out in the years to come, it just made it so logical to just move on, shut down the high-cost plant that doesn't make much [of it], and 2 new [growth] that are going to make a lot more profit. So those are easy projects (inaudible) around the world. Those 2 bottleneck expansions are not, on the scale, difficult to do and not extremely very expensive with very strong return. Very strong.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [33]

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And you mentioned that Hydro-Québec would be funding a significant part of that facility. Is there like a rough number in terms of what that amount is in terms of subsidy?

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [34]

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Yes. [We're set] to roughly 40% of the capital investment.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [35]

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In the years to come, with no increase in electricity.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [36]

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Okay. Got it. And then one last question, it's more kind of big picture. In terms of tuck-in opportunities in the U.S., Luc, I think in the past you've mentioned that there are a lot of opportunities. Are you essentially -- I guess, based on the current balance sheet and your debt ratios, are you kind of putting a lot of opportunities on the back burner until a potential asset sale? And then after an asset sale, are you then going to ramp -- are you essentially just not doing a lot of potential transactions?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [37]

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No. We've announced a few and already this year, we're continuing to pursue everything we can pursue on the East Coast and West Coast. A lot of them are small and midsized, not that hard, so it's all -- we can do that on our own. And I understand your point, but we're talking about a small -- a short window here. If the process [goes and] executed to our prediction, that's going to be happening this year. So if there is a midsized or large acquisition, we're already in August, hopefully that timing would be more next year. So continuing our research and our meeting and our push to have a strong backlog, we haven't stopped that.

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Operator [38]

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Your next question comes from Jacob Bout with CIBC.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [39]

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I know you don't want to divulge a lot about the sale process for ERCO, but can you at least talk about what stage that you're at right now? Are you having active conversations, due diligence going on and that type of thing?

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [40]

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I think the way that we would respond to that question, or we will respond to that question, is that we kicked off the process at the time that we publicly announced that we were looking at the process and making an investment. And it will run sort of the way a normal process would run. And as a result of that, we would anticipate that we'll be in a position where we'll know what direction that we're going to be going forward in the fall.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [41]

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And then maybe going back to the capital allocation question. I mean, clearly, you've had some success here in lowering your debt, but maybe just talk a bit about how you're looking at tuck-ins versus paying down debt and then just remind us again what your target debt levels are. I'm really just trying to understand like your sort of ability here to step up some of these tuck-in acquisitions here over the next 6 -- 6 to 8 months.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [42]

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Yes. So from a long-term target, our long-term target hasn't changed. Our long-term target for leverage is 3x. And we've always communicated when we entered into the NGL transaction, that our plan was over that 24 months to 36 months being able to achieve that long-term target. So we -- that's been delivering in accordance with expectation. From an acquisition perspective, certainly there are effective returns as all of the

(technical difficulty)

transaction. And then when you look at our guidance for the year, that 3.6x to 4x, really the key items that are pushing us towards the bottom of the top end is the level of acquisition that we would be doing within the year. And I mean certainly, if your question is getting at, does it stop us from doing acquisitions, I think in the capital markets, there is always tools and ways and abilities to fund accretive transactions.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [43]

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Okay, that's helpful. And then on the chlorate markets, you talked a bit about the export. How much are you exporting right now? How much has that ramped up? How much of an opportunity is that for you?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [44]

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So about 17% of our production, and I wouldn't be surprised -- there are 2 things that are happening. The pricing is better. There is improvement in pricing. Well, if I had to predict the next 3 years, we'll probably get to 20% very quickly.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [45]

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And where would that have been, say, 1 year ago or 2 years ago?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [46]

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I know I go back a few years, it was about 30 to 40 -- 30,000 tonnes. And now we're around 85,000 tonnes.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [47]

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Yes. I think on a percentage basis, it was around 15%. So it's grown a little bit but not nominally. It's 15% to 17%.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [48]

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Depends on how many years we're talking about.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [49]

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[Agreed].

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [50]

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The exports when I came here, a few years later, they were doing like 20,000 tonnes to 30,000 tonnes. Now we're over 80,000 tonnes, going to 90,000 tonnes to 100,000 tonnes. We have capacity. You need equipment as well for export. We have capacity to go to 120,000 tonnes. So we'll be [around this way] up for the next 3 years.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [51]

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And then last question, just on your guidance. So you were talking about higher caustic pricing. How much higher are you looking for? And then HCl, are you looking for flat pricing or...

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [52]

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Yes. So from a caustic perspective, on a pricing perspective for the remainder of the year, we're actually looking at roughly a 1% decline. It would be what we're anticipating. For the -- and you asked about hydrochloric acid?

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [53]

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Correct.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [54]

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From a hydrochloric acid perspective, pricing, as we look at the back half of the year, I mean, it's going to be sort of in a similar range to what we're seeing now, which, compared to previous years, is 4% less, or pricing is 4% down.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [55]

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Okay. And then maybe just a follow-up there. So when we think about U.S. Gulf pricing, how does that relate to your key markets?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [56]

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A lot [less] because there's 2 factors. A little bit when they [can dock ship] to this big customer in Brazil, of course. And now that that's happening, we won't be much in their backyard in Port Edwards. So we sell to many different other segments that is not really -- we don't sell to the [PVC] world. So we sell to different segments that are more sustainable and more in our zone of where we're located. So there is an effect sometimes. There was an elastic (inaudible) of course because you have too much capacity from the Gulf. Now we got to go back to be more -- we will supply more from our local plant. So there is some -- we can [consider that] but it's not the main part of our business to have a (inaudible) [competitor].

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [57]

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Jacob, the way I usually like to describe it is it does influence but it tends to be muted. You don't get the full peak, but you also don't get the full valley. But because there can be some product that moves up further north and gets close to our plants, there is a muted influence.

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Operator [58]

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Our next question comes from Raveel Afzaal with Canaccord Genuity.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [59]

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Two questions. First of all, can you compare -- I mean, more of a macro question. Can you compare what operational expenses look like in North America for Specialty Chemicals versus internationally? What are the key competitive advantages here?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [60]

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I'll start and maybe you can add more numbers. When you're in North America, you have this low cost of natural gas. You think of China. They're never going to come here, never compete with us. China -- the cost of natural gas in America and the cost of electricity in Québec is probably the top of the world. So you have capacity to export and you don't have people coming in to this North American market. Because of that big factor, a large percentage of our cost [is our rate]. 70% to 80% of our variable cost is electricity or energy, sometimes natural gas. So you're in a good spot to export and you don't have import coming in. Does that make sense?

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [61]

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Absolutely. I mean, I thought -- absolutely. Outside of electricity, I was wondering if there are any other key competitive advantages that you'd like to highlight as well.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [62]

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No, that would be the key for the product, being that from a variable cost perspective, it's about 70% to 80% of the variable cost.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [63]

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Perfect. And then just my second question, given the international nature of these operations, can you talk about what type of precedent transactions you have seen for the Specialty Chemicals business internationally? If you can just highlight some of those transactions and what type of multiples you have seen for those transactions.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [64]

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That's a tough one to answer because we'd rather not go into -- give the direction or orientation to valuation at this stage.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [65]

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I thought I'd throw in a cheeky question there. Perfect.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [66]

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Okay, thank you. Thank you very much. Good try.

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Operator [67]

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Our next question comes from Elias Foscolos with Industrial Alliance Securities.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [68]

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I'll start with a high-level question. It's more again for clarification. Luc, just to confirm, strategically, you are looking at midsized acquisitions for propane along with tuck-ins at this point in time. Both options are kind of on the table, is that correct?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [69]

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Yes. Discussions are taking place on those 2 buckets, small and midsized, yes.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [70]

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Great. The next one has to do with Western Canadian propane weakness. Clearly, I can see that in the numbers and that does stick out to me. Is there anything you're doing to mitigate that? And are there any opportunities that might occur because of that? Just to open up that question.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [71]

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Good question. And if there's one -- now we run a business, there's always 1 or 2 over your head, so this one is sort of [follow] the oilfield. That is, the volume has come down quite a lot. We reduced cost already by $10 million internally and more to come in that regard. And we have -- in the year to come, we all heard about the natural gas big project in Vancouver, moving up from the West Coast and going to the West Coast to export. So this is something that is big volume. It's not for today, but we have this contract coming to us to help them organize all the way through the line to get to the water or to the ocean for export. We'll be the supplier of the energy for those workforce people. Whenever they set out a camp, they need energy and it's for a project that's going to be long-lasting. And these buildings are [large], so we're going to get some growth there. It's not happening now. It's a work in progress, but we'll get some growth there.

So we've got cost reduction. We have this project on the West Coast coming. It's a positive in time, a year or 2 from now. So not good enough if they're still negative on us on the oilfield, because we're a good-sized supplier there. And of course, we're going in on the rest of Canada, the results are good. Margins are good. Internal growth projects are good. And you know our story about the States, it's quite extraordinary when you think of -- we make acquisition and $90 million becomes $115 million plus another $4 million coming. I think that we have the business model to do well and grow the U.S. business.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [72]

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Yes. I think it shows the benefit also of the diversification that we have across Energy Distribution now, where there is this headwind that we're seeing in the West, but as Luc say, strong in the other areas.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [73]

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Yes. No, it's clearly very visible.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [74]

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Yes, for sure.

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Operator [75]

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Our next question comes from Joel Jackson with BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [76]

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You've raised the NGLs synergies by $4 million to achieve, I guess, next year, beyond achieving your original $20 million. Maybe go into some details how you'll get the extra $4 million next year?

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [77]

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Is your question what is the $20 million breakdown?

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [78]

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Extra.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [79]

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No. You added $4 million to it that you're going to get next year. Where do you get the extra $4 million?

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [80]

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Yes. The extra $4 million is really being generated. Now that we've had a chance to spend more time within the business and do the integration activities, we've identified that there's incremental opportunity around operations and overhead-type costs. So the best way to describe it is, when you're looking at it and we start applying the Superior way, there is just more opportunity in applying those operational efficiencies than we originally would have anticipated.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [81]

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Are you able to give an anecdote of something you found out that you could do that you didn't know you could do 6 or 12 months ago?

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [82]

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I think one of the easiest ways to think about it is, when we're looking overall at the consolidation of operating centers, et cetera, we had an assumption that we would have used. And the reality is there's more consolidation that can occur than we originally would have anticipated.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [83]

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And my last question is now that you're a little more -- you're a couple of months into the process to try to sell Specialty Chems or not sell it, is there anything that you've learned or come across the last couple of months that's made you think about the process differently, the assets, positively or negatively? Anything you can share that you sort of learned in the last little while?

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [84]

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No, I think as we go through the process, everything's proceeding as expected, and it would be expected in a transaction like this.

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Operator [85]

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Our next question is a follow-up from David Newman with Desjardins.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [86]

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Just a quick one. Beth, what's the sensitivity on the incentive comp to the share price? Maybe you can remind us. I'm sure it's somewhere in the filings but maybe just a reminder.

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [87]

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Well, the impact that would have been for the quarter is roughly $3.5 million. Are you asking just the sensitivity as the share price moves?

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [88]

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And you said 17%? It was up 17% in the quarter, right?

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [89]

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Correct. Yes, if you want to think about it, sort of a rough guide would potentially be if the share price was to appreciate $1, that's across all of the organizations, including all of the operational divisions, et cetera, it would have roughly in the range of $5 million impact.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [90]

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That's annualized, I assume?

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Beth Summers, Superior Plus Corp. - Executive VP & CFO [91]

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Yes.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [92]

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Yes.

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Operator [93]

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And I'm currently showing no further questions at this time. I'd like to turn the call back over to Luc Desjardins for closing remarks.

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Luc Desjardins, Superior Plus Corp. - President, CEO & Director [94]

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Before I wrap up the call, I want to thank all employees and management at Superior for a great second quarter, and we have good momentum in many ways. I think we've [outlined] properly and which we want to be as transparent, and you understand (inaudible) is not a positive thing for us, but everything else is. So in that regard, wishing you all the best. Thank you.

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Operator [95]

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Ladies and gentlemen, this concludes today's conference. Thanks for joining, and everyone, have a wonderful day.