Q4 2019 Earnings Call

Greetings welcome to Sunoco LP fourth quarter full year 2019 earnings call. At this time, all participants are not listen only mode. A question then after session will follow the formal presentation.

What's your require a pretty aggressive since starting with our friends. Please press star zero on their telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Scott Rochelle, Vice President Investor Relations. Thank you may begin. Thank you and good morning, everyone on the call with me. This morning are joke M. Sunoco Lps.

President and Chief Executive Officer.

Tom Miller, Chief Financial Officer, Karl sale, Chief Operations Officer, and other members of management team reminded that today's call will contain forward looking statements subject to risks uncertainties and other factors that could cause actual results to differ materially.

Please refer to our earnings release as well as our filings with the FCC for list of these factors.

During today's call will also discuss certain non-GAAP financial measures.

Including adjusted EBITDA, and distributable cash flow as adjusted.

Please refer to the Sunoco LP web site for a reconciliation of each financial measure.

Before I turn the call over to Tom I will review 2019 fourth quarter and full year financial and operating results.

For the fourth quarter the partnership recorded net income at $83 million.

Adjusted EBITDA was $168 million.

Compared to fourth quarter 2018 of $180 million.

Deal volumes of 2.1 billion gallons were up 3% from a year ago and fuel margin was 9.9 cents per gallon.

Fourth quarter distributable cash flow as adjusted was $120 million, yielding a coverage ratio of 1.39 times.

On January 27th we declared and 82.55 cents per unit distribution the same as last quarter.

For the full year 2019, the partnership recorded net income of $313 million, an adjusted EBITDA of $665 million.

Compared to $638 million in 2018.

Full year 2019, distributable cash flow as adjusted was $453 million compared to $455 million a year ago.

Looking at our operational performance fuel volume for the full year 2019 totaled a record high up 8.2 billion gallon.

Up 4% from year ago, driven by the contribution from our 2018 acquisition organic growth and gross profit optimization never efforts.

Fuel margin was 10.1 cents per gallon, which was in the middle of our 9.5 to 10.5 guidance range.

Finally, total operating costs were down 13% or $75 million year over year.

This reduction and continued focus on cost controls ensures that growth in our gross profit falls to the bottom line I.

I will now turn the call over to Tom.

Thanks, Scott and good morning, everyone. We delivered strong results again in 2019, let me point out some of the highlight our 2019 adjusted EBITDA was up 4% from a year ago, and our distributable cash flow was essentially flat to a year ago.

We exclude one time items in both 2019 and 28 team adjusted EBITDA would have increased by 10% and DCF as adjusted would have increased by 7% year over year.

We sold record volumes with margins in the middle up our annual guidance range anchored by our profit optimization efforts.

Our focus on controlling expenses resulted in a 13% reduction in operating expense R.J.C. Nolan pipeline and terminal venture with energy transfer went into service in August we're pleased with the early result.

Our year end leverage of 4.6 times sits in the middle of our targeted range, a four and a half to 4.75 times.

We have steadily improved our trailing 12 month coverage ratio over the last few years with 2019 coverage of greater than 1.3 times and finally, we were successful in signing up new customers with long term contracts.

Quickly deliver added EBITDA.

We carried that momentum into 2020.

In December we provided guidance for adjusted EBITDA between 670 $700 million. This guidance is made up of the following fuel volumes of 8.4 billion gallons are better.

And no margins between nine and a half intended to have cents per gallon.

Leased income of approximately $145 million.

Total operating expenses of approximately $515 million maintenance capital of $45 million growth capital totaling $130 million.

Let's take a moment to discuss our perspective on capital allocation.

First our capital program continues to be critical component of our growth strategy, we will invest in attractive high quality growth projects. These growth projects take the shape of traditional fuel distribution investments similar to those we've made over the last couple of years and midstream projects.

Similar to the case the no one joint venture.

Fuel distribution projects, typically typically began to generate cash and less than six months.

Midstream projects take around 12 months to generate cash.

Bottom line.

Our growth capital spend quickly generate returns for our unit holders evident in our strong 2019 results and our 2020 guidance that's better than the results. We delivered this past year.

Next managing our business to a coverage ratio of at least 1.2 times, that's allowed us to comfortably self fund a large portion of our capital with that excess cash flow.

This self funding also allows us to remain within our target long term leverage ratio target.

All in our primary focus regarding capital allocation is to build a business was stronger and more stable cash flows that over the long run well create meaningful value for our unitholders.

The same time, we stay focused on capital discipline.

Targeting projects in opportunities with high returns that will allow us to live within our targeted financial metrics.

With that Joe will provide his closing thoughts Joe.

Thanks, Good morning, everyone. We delivered very strong results in 2019 over the last two years, we delivered record volumes combined with strong margin, while reducing our expenses and as a result, our EBITDA increased year over year.

Our coverage ratio is now around 1.3 times, which is a significant improvement from two years ago.

The same time really we remain at or below our targeted leverage range.

We continue to deliver quality results quarter after quarter, regardless, the commodity environment, our underlying business is strong.

Looking forward, we expect 2020 to be better than 2019, the first quarter is off to a good start.

Fuel gross profit is that's expected well expensive capital management remain tight.

Moving on to growth, we have successfully transitioning from an acquisition strategy within fuel distribution to one focused on organic growth. We will continue to increase our fuel distribution footprint by steadily growing the number of customers flying to smell cobranded.

For our midstream segment will utilize both acquisition and organic growth.

If the right acquisition at the right price presents the so we'll act on it.

Concurrently we are building, an internal pipeline or <unk> of organic growth opportunities. One example is a terminal project were evaluating in South Texas.

Let me give further in the process will provide more details.

These midstream investments are attracted to us for a couple of key reasons.

First their natural synergies with our fuel distribution business and second these assets provide ratable cash flow to further at the ability and diversification to our portfolio.

Let me close by stating that we expect 2020 to be another strong year. Operator that concludes our prepared remarks, you may open the lines for questions.

Thank you.

I would like to ask a question. Please press star one on your telephone keypad. They confirmation total indicate your line is in the question Q you May press star to if he would like to remove your question from the Q.

And for participants using speaker equipment, it may be necessary to pick up or has that before pressing the star. He is.

Our first question is from Sharon Lui with Wells Fargo Securities. Please proceed.

Hi, Good morning, Oh My question on your Opex for this quarter a it was down quite a bit just wondering if this may be a good run rate going forward.

And if so keep your guidance for a total expenses be up a bit conservative.

Well, you know <unk> quarter to quarter month to month Theres a lot of variants in our and our Opex. We gave you the number of 515.

And I think Thats the number you should work with.

If you if you really want to dig into what other Opex is I would look at what our rent NRG DNA is in sort of hold those flat you'll back out to to the other opex line.

Okay, Great and I guess during the quarter.

Oh, the worst few announcements and C store space I'm, particularly the spin off of Speedway, the TPM Empire merger and circle case sale. If its MLP interest just wondering if any of these developments impact how you to you I guess on this competitive landscape.

Good morning, <unk> Joe.

As a starting point I don't comment on other deals that's happening because I don't know the insight to that from a competitive position I think we're we're just the strong are stronger than we were two years ago from Africa, our competitive position. We've added over the last two years over 300 locations that are flying to snow co brand.

If you look back we were relatively flat or declining no from my five to 10 year perspective. So we're growing the brand we have a stronger balance sheet to continue to invest in Nebraska, I think we're better positioned today than we have been a tremendous into path.

Okay and just last question your latest thoughts on sums cost of capital one of your peers eliminate its I'd ours. Just wondering if that's just something that you would consider as well.

Yeah, let me start off by saying Theres no efforts being spent by neither Sunoco energy transfer on IDR elimination I think what you've got to keep in mind is you know two years ago. We completed the it's not 11 transaction, we laid out a plan and the strategy.

To create value for all our shareholders and we're delivering on that no quarter. After quarter. We've delivered quality result, and I think what's more important is that we feel very confident that we're going to continue to execute on this plan to continue to deliver value for all the stakeholders.

Great. Thank you very much.

As a reminder to star one any telephone keypad, if he would like to ask a question. Our next question is traveling cave Marine with Mizuho Securities. Please proceed.

Hi, guys. This is Rob on forgave looks like you were able to deliver pretty solid CPG in fourth quarter.

Despite a relative lack of volatility in wholesale fuel prices and given how the commodity backdrop has played out.

Thus far in first quarter I guess, how would you compare what you're seeing across your portfolio to what you saw the under 2018 in terms of falling commodity prices.

And you know with seasonality blunt any expected margin uplift given that the first quarter is traditionally your weakest quarter for margin.

Yeah, Hi, Rob this is Carl.

You thoughts for you you pointed out that.

We've seen different commodity environments. So you compare Q4 of 2018 to Q4 of 29 team obviously the tailwind we had from from steeply falling falling commodity prices in 2018 were beneficial to us, but you see our results in 2019.

And we also had very strong results in a different commodity environments. So one of the things. We've said is well quarter to quarter. There will be some fluctuation that that are based fuel distribution margins and gross profit are very stable and there are two things it really.

Underpin that first is our 711, a take or pay construct right. So about 25% of our volume is sold under that and even if we have some volume fluctuations that that EBITDA is very steady.

The second is our gross profit profit optimization efforts that we've put into place and so we're able to respond to different commodity environments and and really you know maybe take more volume in one quarter, a a little less volume in another quarter and continue to produce strong a fairly stable results.

Okay. That's a that's helpful and I'm just a quick.

Second question can you guys frame up how you're thinking about.

Distribution growth is your fundamentals begin to strengthen and particularly your thoughts around what it can mean to investor perception, given dormant IDR overhang.

No problem. This is Joe let me answer your question about distribution growth.

The market sentiment is pretty clear that but even if we did increase distribution and we built our coverage now over one three that are if we increased our distribution I don't think it's going to lower our cost of capital I think a better use of our of our excess cash flow is to use it for growth or for the balance sheet.

And that's our direction going forward.

Okay. Thanks, a lot I appreciate it guys.

We have reached the end of our question answer session I would like to turn the conference back over to Scott for closing remarks.

Well thanks, everyone for joining us this morning as always if you have any follow up questions feel free to reach out I hope everyone has a good day. This concludes todays call.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.