Superior Plus Corp. (SUUIF) Q3 2022 Earnings Call Transcript

Superior Plus Corp. (OTCPK:SUUIF) Q3 2022 Earnings Conference Call November 10, 2022 10:30 AM ET

Company Participants

Rob Dorran – Vice President, Capital Markets

Luc Desjardins – President & Chief Executive Officer

Beth Summers – Executive Vice President & Chief Financial Officer

Conference Call Participants

Gary Ho – Desjardins

Daryl Young – TD Securities

Matthew Weekes – iA Capital Markets

Joel Jackson – BMO

Steven Hansen – Raymond James

Robert Catellier – CIBC

Operator

Good day, and thank you for standing by. Welcome to the Superior Plus 2022 Third Quarter Results Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to turn the conference over to your speaker today, Rob Dorran, Vice President of Capital Markets. Please go ahead.

Rob Dorran

Thank you, Catherine. Good morning, everyone, and welcome to Superior Plus’ conference call and webcast to review our 2022 third quarter results. On the call today from Superior Plus are Luc Desjardins, President and CEO and Beth Summers, Executive VP and CFO. For this morning’s call, Luc and Beth will begin with their prepared remarks, and then we will open up the call for questions.

Listeners are reminded that some of the comments made today may be forward-looking in nature and are based on Superior’s current expectations, estimates, judgments, projections and risks. Further, some of the information provided refers to non-GAAP measures. Please refer to Superior’s continuous disclosure documents available on SEDAR and Superior’s website yesterday for further details. Dollar amounts discussed on today’s call are expressed in Canadian dollars unless otherwise noted.

I’ll now turn the call over to Luc.

Luc Desjardins

Well, thank you, Rob, and good morning, everyone. Thanks for joining the call to discuss our third quarter results. I’m pleased to say our results are in line with management’s expectations, and we’re maintaining our 2022 adjusted EBITDA guidance range. It’s important to note that quarter three is the seasonally slowest quarter for a business due to the lower heating load of this quarter, and particular it was negatively impacted by the timing of acquisitions completed in the past nine months.

We’ve acquired two pretty good sized enterprise, and we incur all the trusts associated with the acquired businesses, but the volumes are lower due to the lack of demand in the summertime and we have not yet had the timing to achieve all the associated synergies, which are coming in the next 18 months.

Our Canadian business was also negatively impacted by warmer weather, especially in Western Canada, as well as the lack of Canadian emergency wage subsidy of third quarter 2022.

So basically, I think there is, I think, an opportunity for everyone to understand that quarter three is so low in volume, and we’ve made those two acquisitions not a year ago, but not having the chance to have all the EBITDA that comes in quarter four and quarter one, which are going to be coming in the next two quarters.

So there is a disconnect there. No surprise to us. We’ve acquired those business at the right price. The synergy are tracking, they’ve been ahead of time because we started to work on it this summer, and there’s absolutely no surprise for us of this situation in quarter three.

As we look to year-to-date results in quarter four 2022, we’re comfortable in our ability to manage the impact of inflationary pressure on our business to increase price and cost saving initiatives. We saw the benefit of acquisitions completed over the last year through higher volume quarter-over-quarter. However, as I mentioned, we also saw higher operating expense in the quarter.

Our focus on being a perfectly energy distributor means that our third quarter results will emphasize the seasonality of the industry we’ll operate rate in, especially in our US Propane Distribution segment, which has mainly residential customer whose consumption is dictated by a degree day, which are very low in July to September. We’re making great progress in the Superior Way Forward EBITDA growth initiative through acquisition, continuous improvement and organic growth.

During the quarter, we made great progress on the integration of Quarles and Kamps acquisition ahead of the easing season, which will set up very well for synergy transition going forward. We also closed three small acquisitions since our last update in quarter 2, one in California, one in North Carolina and one in Ontario, Canada for total consideration of $29.9 million. With these three acquisitions, we have achieved a low end of our ’22 acquisition target range of $200 million to $300 million in enterprise value, excluding cash acquisition.

We continue to demonstrate our commitment to our dynamic capital allocation approach through our commencement of a normal cost issue bid in October 13, providing us at another level lever through which to return capital to shareholders. This does not mean we’re no longer evaluating M&A target. We will do acquisition, but we may also repurchase share if that opportunity to generate the appropriate returns. We are focused on creating long-term shareholder value who will only locate capital or both acquisitive opportunities.

I’ll now turn the call over to Beth to discuss the financial results in more detail.

Beth Summers

Thank you, Luc. Good morning, everyone. As Luc mentioned, Q3 is a seasonally slower quarter for our business, and the results are in line with our expectations. Superior generated third quarter adjusted EBITDA of negative CAD8.8million, a CAD21.8 million decrease over the prior year quarter. This was primarily due to lower adjusted EBITDA at our Canadian propane distribution and US propane distribution segment, higher corporate costs and a realized loss on foreign currency hedging contracts compared to a gain in the prior year quarter. The decrease was partially offset by higher adjusted EBITDA from our wholesale propane distribution segment.

The third quarter loss from continuing operations was $206.9 million, an increase of $171 million compared to the prior year quarter. The primary driver for the higher net loss was an unrealized loss on derivatives and foreign currency translation of borrowings, compared to an unrealized gain in the prior year quarter, higher selling distribution and administrative costs, income tax expense and finance expense, partially offset by higher gross profit.

The loss on derivatives and foreign currency translation of corralling compared to a gain in the prior year quarter was primarily due to the changes in the market price of commodities, the timing of maturities of underlying financial instruments and the changes in foreign exchange rates relative to the amount hedged.

Turning now to the individual business results. Our US Propane division adjusted EBITDA was negative $10.9 million, a decrease of $3.1 million from the prior year quarter, primarily due to higher operating expenses, partially offset by higher sales volumes from acquisitions completed in the last 12 months and higher average margins. Canadian propane adjusted EBITDA was $3.6 million, a decrease of $14.4 million from the prior year quarter, primarily due to higher operating costs and modestly lower sales volume than average margins.

Operating costs were higher, primarily due to the $8.2 million Canadian emergency wage subsidy versus — realized in the prior year quarter compared to nil proceeded in the current quarter. Sales volumes decreased by 3%, primarily due to lower commercial demand related to warmer weather in Western Canada. And the average weather in Western Canada for the three months ended September 30th, 2022, as measured by degree days, was 27% warmer than the prior year quarter. Average margins were lower primarily due to the impact from the sale of carbon offset credits amounting to CAD4.7 million in the prior year quarter.

Wholesale propane adjusted EBITDA was CAD5.1 million, which was an increase of CAD1.9 million from the prior year quarter, primarily due to the contribution from the acquisition of Kiva Energy, Inc.

Turning to corporate results, the adjusted EBITDA guidance as well as leverage. So, the corporate operating costs were CAD6.2 million, an increase of CAD5.2 million compared to the prior year quarter, primarily due to higher insurance costs, higher professional fees, and a lower long-term incentive plan recovery related to the share price decline in the current quarter compared to 2021 and the impact of inflation.

Superior realized losses on foreign currency hedging contracts of CAD0.4 million compared to a gain of CAD0.6 million in the prior year quarter due to the average hedge rate of foreign exchange hedging contracts compared to the weakening of the Canadian dollar.

Superior’s total net debt to adjusted EBITDA leverage ratio for the trailing 12 months ended September 30th, 2022, was 4.3 times, which is above our target range of 3.5 to 4 times. The higher leverage ratio was primarily due to the impact of the higher US/CAD rate on the US-denominated debt.

On a constant currency basis, using the rate as of June 30th, 2022, Superior’s leverage ratio at September 30th, 2022, would be 4.1 times. As Luc mentioned, we’re maintaining our 2022 adjusted EBITDA guidance range at CAD425 million to CAD465 million with a midpoint of CAD445 million.

For the fourth quarter, we anticipate average weather to be consistent with the five-year average for the US and Canada and the wholesale propane fundamentals to be consistent with the past six months.

With that, I’d like to turn the call over to Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Gary Ho with Desjardins. Your line is open.

Gary Ho

Thanks and good morning. Maybe just to start off with a question on your guidance. So, you’ve confirmed the range, that’s great to see. There’s only month and a half to go here. So, if you hit the five-year average RASM pattern, we should think about meeting the middle of that range and then vice versa for better or below. Is that how — still how we should think about that when we track the heating degree days for the balance of Q4?

Luc Desjardins

Yes. So as you know, historically, if we were not to be in the middle of the range, we usually tell everyone that we are just within that just because we feel confident today that the year — normal weather going forward, the year will be what it is and will be in the guidance.

October was better than anticipated in the state. And of course, very warm in Canada, but we’ve been around for me 12 years here and there’s many weeks to go, and the colder weather is already started off well. Any of you on the call that are west getting it. So, we’re confident as of today, we feel we’re in the range.

Gary Ho

Okay. Great. And then Luc, while I have you, I want to get an update on the CEO transition plan, maybe discussions with the Board and what they’re looking for your successes there?

Luc Desjardins

That’s the work in progress. They are not so far, but they’re looking internally and externally as we ended it and so that much over the last two, three months. So usually it’s a process, that usually takes six to nine months, I would say.

So there is a committee of the Board, three of the Board members that are on that. And there’s a regular fee action Board of accordingly as to how that’s venting no news at this stage, it’s somewhat early. So progressing normally, I think, for me because seriously, a project like that is at least six to nine.

Gary Ho

Okay. And then, my last question, you have announced your NCIB and executed a bit a bit recently, maybe for Beth, as we stand here today, how would you kind of rank the capital allocation priorities, buybacks, M&A and deleverage? And then just on the last part is leveraging, if rates stay at roughly $1.35 here when you will get back to that 3.5% to kind of four times target range.

Beth Summers

Okay. So a couple of questions in there, so from a buyback perspective, yes, we have the NCIB in place. As far as allocation of capital, as we consistently communicated, is a dynamic model. So we would look at what return make sense or what our view on, the returns are and how we allocate.

So when you ask me sort of to look at it into judge whether it’s M&A or buybacks, I mean that’s going to be on an individual basis. I think from the perspective for M&A, as you look out and Luc may want to add on to this.

M&A, as we look for the remainder of this year, in particular, typically, once you hit this time of year, you don’t have a lot of people at this point looking to sell. That will typically pick back up from a normal shape perspective back after you’re through the eating season. So that agro May into next year.

To your question on leverage and our target of the 3.5 to four times, I mean at this point, we would view ourselves at the end of this year being near the high-end of our 3.5 to four times. Synergies need to be or we’ll continue to realize those, which will have a positive impact from a leverage perspective.

And we’ve always said that 3.5 to four times range, well we’re moving forward in doing our acquisitions, we have that range just because it’s going to depend on the timing. We’ve had sort of very chunky where we’ve accelerated it been ahead of our targets and what we’re looking in that total, you may recall back from the Investor Day, the $1.9 billion in total.

We’ve been well ahead of the $250 million per year target. So I mean, as we look to get to that $700 million to 750 by the end of 2026 on EBITDA from operations, it could be chunky. So to answer your question, it’s really going to be dependent on the opportunities and how they present ourselves for when we’d be down towards the bottom-end of the range.

Gary Ho

Okay, great. Okay. That’s it for me. Thanks for the color.

Luc Desjardins

Thank you.

Operator

Our next question comes from Daryl Young with TD Securities. Your line is open.

Daryl Young

Hey, good morning, everyone. Just one quick one for me. And I just wanted to kind of reconcile your thinking around capital deployment, given where leverage is, and it seems like costs continue to march higher. I’m just wondering if it would make sense to hit pause on the M&A and the NCIB for a period of time and really focus on realizing those synergies and managing the cost profile?

And also speaking with respect to the pro forma EBITDA numbers and your net debt to EBITDA, I mean, with the Qs rolling off and the decline in that pro forma EBITDA number just seems like cost management could be a focus going forward?

Luc Desjardins

Maybe, I’ll start and let Beth add to that. So from an overall cost quarter-by-quarter, also difficult to be on the percentage always at the right amount, but overall costs are going up more than inflation. And we are capturing all of that into margin. So we are — not as greatest of not making our profitability due to cost increase on all of the aspects.

From an acquisition, to the point about the capital, the timing is to do tight deal on. We’re integrating them. I can promise you all the 25% improvement is on track. And then, a bit less deal, like a small one is happening at this stage. Let’s go through those two integrations. Let’s go through the fall winter season, which you name it, not much deal going on, and we’ll probably look at deals more on the second half of 2023 time, in summer.

So at this stage, probably a good timing that we’re not having another big crazy deal in front of us, because to make that interesting, we’re confident and we’re ahead of the game, actually. So the balance act of having done two good deals going down a bit, because going to our winter, we’re doing these two integration, we certainly have our leverage, I think, when we go to later in 2023.

Beth Summers

Yes. And maybe I’ll just walk through a little bit. From a leverage perspective, we’re at the end of the quarter; we are at 4.3 times just to walk through, sort of, some of the factors. So of the 4.3 times, there was a lot of volatility with the FX rate, right at the end of the quarter. So that’s where we balance it out. There is roughly a $97 million impact on our foreign-nominated debt, which has that 0.2 times impact, which would bring us down to the 4.1 times.

And when you really look at the EBITDA in Q3, you do have some individual impacts that were impacting the year-over-year reduction of the $22 million.

So just to talk through some of those, from an M&A perspective, where the US acquisitions are primarily heating load, then in Q3 we’ll have a negative impact. And so, there was roughly almost $7 million of negative impact, which is Q4 and Q1, where you’ll more than make-up for that, and you’re going to see the growth in that EBITDA, as well as achieving all of those synergies.

And obviously, the wage that would be impacted in the timing of carbon credits. There was $4.3 million of carbon credits in the Canadian business that we would have realized in Q3 last year. And this year, it will be more than likely moved into different quarters, so we’ll see that in Q4.

So again, looking at all of that from a leverage perspective, we do have that as one of our financial metrics, but we also balance that with the payout ratio. So from a payout ratio perspective, we do target that 40% to 60% range.

If you look at Q3 with the impact, we’re modestly above the 60%. But, certainly, when we designed that target, we have it, so there is a cushion. And again, that’s just overall to ensure that we have plenty of free cash flow to pay out dividends. And so from a dividend perspective to always ensure that we have a cushion in place.

Daryl Young

Okay. And maybe just one follow-up to something that we’ve said about pricing and pricing the gross margin to account for the cost. Where do you stand today on a competitive basis in terms of your price? And is there a risk if price keeps going higher that you maybe create a customer churn?

Luc Desjardins

No, it’s a very good question. We are doing now – regularly five regions as to where pricing of a market is. And we know that 80%, 90% is always one that is lagging or increasing the price according to new inflation cut, but the growth majority of our industry is increasing the price accordingly.

People — most people don’t want make less profit year-to-year. And we see our pricing is underlined by region, by market. Where are we? What can we get increase price with inflation in those business. So there isn’t a business loss. We’re actually growing market share in Canada, residential and commercial, very pleased with our marketing and sales approach. Not so much in the state, but still maintaining the same margin, same market position, market share. And so we’re analyzing that probably in [indiscernible] careful to do it the right way.

What we think we’ll see in 2023 — as much of that so far is probably observation [ph] a bit more, maybe 1% more in the winter time because people have less the money with what that’s having on the big deals, and a bit of help these days for how we go through the winter is paying price coming down compared to last year. So this is going to be a big help. So our customers really are going to be getting a reduction in price and that really shows well for the winter coming.

Daryl Young

Okay. That’s great. Thanks all. I will get back in the queue.

Operator

Thank you. And our next question comes from Matthew Weekes with iA Capital Markets. Your line is open.

Matthew Weekes

Good morning. Thanks for taking my question. I was just wondering on the increase in kind of the US dollar-denominated debt. I was wondering if there’s any offset if there’s an asset or if there’s any swaps or hedges or anything like that, or if that’s something you’d think about doing going forward?

Beth Summers

I think, we do have FX hedges, which you see disclosed. Those hedges are designed for the cash flows of the business as well as EBITDA of the US business. Offsetting the debt, no, it’s done at a current rate, and we have the business generated. So the view is we have a natural hedge arguably as we go forward for that long-term — the long-term debt.

And again, because it gets marked at the current risk, now and on an average basis your are our US EBITDA numbers in US earnings. I mean, they over time will be at the average rate. It’s just you have a large disconnect right now between the two — between the EBITDA and the impact on the debt.

But I will actually flag, which we don’t factor into our leverage calculation. We do have a vendor note, which actually matures prior to the long-term debt, and that’s $135 million if you include the accrued interest. So that would actually have a positive impact on leverage, if we reflected that in roughly 0.3 times. But again, that matures before the long-term debts. But because it’s not factored into typical covenant calculation, we don’t reflect that and how we disclose our leverage.

Matthew Weekes

Okay. Thank you. And my next question is just kind of on synergies and you disclosed kind of the amount of synergies you expect to get from acquisitions here. And we’ll probably see that more as we go through the winter heating season. But how does that compare to sort of your initial estimate? Sorry – is synergy capture pretty in line with what you initially thought when you were acquiring these businesses?

Luc Desjardins

Yes. So Kamps is perfectly as planned. And on Quarles, we have a bit more than the usual 25%, we always commit to. So looking good, when we do the smaller deal that they account for a lot, but they return or and the synergies are even higher, more than 30% range. So everything is as all the deals we’ve made everything is marching on accordingly. When we do our due diligence, we can easily take our approach and our dashboard of how the emerging opportunity are and having done it now hopefully – we’re not a lot of growth for us being – achieving or in plan because of our history or experience with our integration approach.

Matthew Weekes

Okay. Thank you. That’s it for me. I’ll turn it back.

Operator

One moment. Our next question comes from Joel Jackson with BMO. Your line is open.

Joel Jackson

Good morning, everyone.

Beth Summers

Good morning.

Joel Jackson

First question, if we – I know you’re talking about 2023 quite yet. But can you may be based on some of the acquisitions you’ve done this year or you haven’t achieved a full run rate of earnings or the synergies or some lagging synergies for deals you completed in the last few years. Like, how much more would you think EBITDA earnings go up in 2023 versus 2022, just based on normalizing full run rate of some acquisitions this year, plus some lagging synergies you haven’t achieved if you get my question, right?

Luc Desjardins

Yeah. This is not the time where we announced our guidance, but you’re right, that’s good as of now because we do those two deals and we have the synergy that we’ve even during the summer, we usually – when we acquired on that immediately the summer ahead of us, the ideal time to acquire this to do it forever. So yeah, we conduct and give you the guidance, but it’s positive and it’s going to be a good improvement over this year.

Beth Summers

Yeah. And Joel, maybe another way to think about it is if you look at the – what our calculation for the leverage ratio going back to the TTM, like you have pro forma adjusted EBITDA on a TTM basis of 468 million. That wouldn’t from there – that does include sort of Kamps and Quarles. So basically, that’s because most of the EBITDA comes in Q1 and Q4. So I mean, from there, you have incremental synergies which we’ll be achieving going forward.

Joel Jackson

Right Beth, just kind of getting out. Okay. So my second question is, can we look at margins here, if I look at the Canadian propane, US propane, wholesale propane, gross profit per liter, what might Q4 look like versus Q3? And then what kind of average should we be thinking about for 2023 going on?

A – Beth Summers

Sure. Okay. So Joel maybe I’ll talk about the US, first. So there was, I mean, obviously, an increase quarter-over-quarter of roughly CAD0.07 getting us to the CAD0.49 for the quarter. For the balance of the year, I think the best way to think about it is, again, looking at the range of US$0.30 to US$ 0.35 or CAD0.39 to CAD0.46. I think we anticipate for Q4 for it to be towards the high end of that range and what that would mean from an overall average basis for the year. Thinking about this ends like slightly better than 2021. And in 2021, it was US$ 0.325.

So from a Canadian propane perspective, very consistent quarter-over-quarter for the balance of the year, think of it in that range of CAD0.28 to CAD0.30, and that’s probably a good range for the total year as well or an average for the year at CAD0.28 to CAD0.30. And then wholesale, I think the best way to think about the wholesale business is basically the range of CAD0.03, which was sort of consistent quarter-over-quarter and also a relatively good number for an average for the year.

Q – Joel Jackson

But you’ve been hitting a lot better than CAD0.03 in wholesale, the last couple of …?

A – Beth Summers

Yes. It’s going to depend — yes, it’s going to depend, and you’ve got some FX in there as well. But CAD0.03 is a good for an average.

Q – Joel Jackson

Okay. Thank you.

Operator

Thank you. And our next question will come from Steven Hansen with Raymond James. Your line is open.

Steven Hansen

Yes. Good morning. Thanks for the time. Apologies if I missed it, but I was hoping you could perhaps speak to how you’re thinking about the somewhat volatile propane macro backdrop we’ve been seeing of late and what it might mean for your business this winter. Weather is always the key driver, of course, but I’m just thinking about some of the conditions around energy sorters in Europe, the big export pull we’ve been seeing from North America on propane, weaker grain drying season factors like that. And just how you’re navigating all those and whether you see this opportunity or risks or fairly neutral. Thanks.

A – Beth Summers

Sure. So — at this point, in our view, the fundamentals are actually pretty neutral. So the inventory levels have improved. They’re within three-year averages are in that range for both Canada and the US. The US has been well under three-year average for a period of time. Also, from a price perspective, like the prices have come down, so they are weaker, and that is linked as you’re flagging there to the crop drying.

Now I think the next indicator where you could get some volatility is if you have extreme cold weather impacting. Now — and I think if there is a hold obviously, the prices will typically strengthen, but if it’s weather normal, then I think it will likely stay within the range or that would be our view.

Now from a macro impact, I mean there’s certainly pricing around WTI crude, the conflicted Ukraine as well as potential COVID resurgent –resurgent certainly at a macro level. That could have some impact in the next four to five months. Now from our perspective, I mean, we will purchase fixed-rate supply where we have fixed price contracts. So from that perspective, we’re comfortable that we’ve got predictable margins. And then just to flag and I know everyone is aware, but just to flag, we do have the ability to pass through the increase in commodity costs. But again, the prices are down. They’re down roughly 30% now from where they were in Q1, Q2, the high.

Luc Desjardins

So I’ll give you just a bit more color. When you produce more natural gas and you export, you also produce propane as a percentage of your total production. And companies an export as much as natural gas. So you end up in America, this days having good inventory that are going up. Prices have come down to that point, which is always a good thing for us.

So we can maintain our margin, prices are coming down. We’re going to do some fixed price with customers and help them also, I mean, to pay to their previous question, nitration and customer taking less volume, it’s going to be a good year, because we’re going to end up giving them a discount, even though we keep the fact margin might be a bit better than the entries, but they’re getting a discount for the next six months for the winter to come on the previous price they paid by this past year. All good.

Steven Hansen

That’s great. That’s really good perspective, guys. I appreciate that. And I don’t mean to beat the dead horse on the capital allocation issue, but just wanted to circle back one more time on the idea around deleveraging versus M&A and even the buyback. I mean how do you feel about the opportunity set of just those three buckets? I’m just — I’m struggling a little bit because the multiple has gotten a lot cheaper, of course, of late for the equity. I know your pipeline has got good opportunities in it as well, but then you’ve got this debt paydown issue. It’s just striking is multiple priorities for the same set of capital. And I’m just trying to get a bit better sense for where you think the real priority is or if it’s just — if it is perfectly balanced. Thanks.

Beth Summers

Yes. I mean I think I can sort of kick it off. I mean, I think from an M&A perspective, as I mentioned before, we always see much less in Q4 and Q1 from an opportunity perspective. Again, from a share repurchase perspective, a very small amount as we were looking at that, and that’s when the returns make sense, and we think that our shares are undervalued and it does present a better return to us.

So I mean, I think it’s fair to say, we’re always balancing all of our various metrics and looking to deliver balance with payout ratio and the other pieces and then returns. We didn’t communicate what we were going through accelerated M&A that we were targeting to the 3.5 times to four times. So that hasn’t changed, and we will deliver basically as the cash flows come in.

Steven Hansen

Okay. That’s great. Thank you for the color, Beth. Thanks.

Operator

Thank you. And our next question comes from Robert Catellier with CIBC. Your line is open.

Robert Catellier

Yes, I just have a question on the M&A market. Have you seen the market valuations change at all in light of the cost pressures in the higher interest rate environment?

Luc Desjardins

I mentioned that in the last quarter, a good question. We’re — I believe price of acquisitions are going to come down. The last two late deal we did, we can see it. And not being in the market or a bigger deal now because of everything we chat about for 2023. The people like on the industry that just the years. They understand that generation valuation is not the same good-sized company that are formed industry, tenant US, Novos. And of course will always be to buy when we have a return of our expected. Otherwise, we don’t. But the trend is down for lower price overall for a independent company it is.

Robert Catellier

Okay. And then are you managing risks in the M&A process any differently in light of those — the inflationary environment and the higher financing costs?

Beth Summers

Yeah. I mean I think from our perspective, I mean, if you look at the increasing interest rates, better obviously has an impact on our weighted average cost of capital. So in looking in judging appropriate return model that does get factored in, and it will have an impact on the hurdles as we look at the businesses. So this gets back to as the underlying macroeconomic factors change, the expectation would be as things settle out, you’re going to have lower multiples just to ensure that we get the appropriate level of returns to ensure that we’re delivering what we need to from a shareholder perspective and a business return perspective.

Luc Desjardins

And there are two are equating for infant side they have the bigger situation and as they go through the market day to day every deal to dollar interest rates are higher, where interest rate well organized for the years to come. So they’re going to expect to be less to get their return as well.

Robert Catellier

Sure. I was also wondering just about maybe how you structure the deals in light of the volatility that’s out there, presumably some form of recession and whether you structure the deals to include more earnout rather than just a firm valuation?

Luc Desjardins

No, I think you end up things to the don’t quicker about. They rather give the cash and then move on. So I think its valuation much or not.

Beth Summers

Well, and just to sort of clarify your concern in that is flagging, that would get reflected in how we model. So that would be reflected in how we model the business and what we would anticipate or expect to see over the next four or five years. So we would factor in recessionary pressures and the potential impact that would have. But what I will flag, I mean, recall our business typically as well as the acquisitions we be making are pretty recession proof. If you look at historic and the values because they are typically related to heating load and people need to heat their houses, whether we have a recession or not.

Robert Catellier

Okay. Thanks everyone.

Luc Desjardins

Thanks.

Beth Summers

Thank you.

Operator

Thank you, and I’m showing no other questions in the queue. I’d like to turn the call back to Luc Desjardins for any closing remarks.

Luc Desjardins

So I’ll wrap up this call, I’d like to thank our management and employees. Very proud of all of our accomplishments today 2022. No surprise to us, will the game plan and in a solid position to deliver the 2022 adjusted EBITDA guidance. And to a few questions that was raised, we expect a good year in 2023. And thank you all for your participation, and we’ll see you next quarter.

Beth Summers

Thank you.

Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.

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