Q4 2020 Sunoco LP Earnings Call
Greetings and welcome to the Sunoco L P as 2024th quarter earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
He brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Scott <unk>, Vice President of Investor Relations. Thank you Sir you may begin.
Thank you and good morning, everyone on the call with me. This morning are Joe Kim Sunoco, Lp's, President and Chief Executive Officer.
Carl sales Chief operations Officer, Joe and Graeme Halder, Chief Financial Officer, and other members of the management team.
A reminder, that today's call will contain forward looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the partnerships future operations and financial performance.
Including expectations and assumptions related to the impact of the COVID-19 pandemic.
Actual results could differ materially and the partnership undertakes no obligation to update these statements based upon subsequent events.
Please refer to our earnings release as well as our filings with the SEC for a list of these factors.
During today's call. We will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted.
Please refer to the snow glow L. P website for a reconciliation of each financial measure.
For the fourth quarter of 2020, the partnership reported net income of $83 million adjusted EBITDA was $159 million compared to $168 million in the fourth quarter of 2019.
Volumes of $1 8 billion gallons were relatively unchanged from the third quarter, but remain down about 12% from levels seen a year ago.
Fuel margin was 9.2 cents per gallon.
And included approximately $8 million of one time write offs associated with prior period fuel tax and inventory related items.
Fourth quarter margin also included approximately $9 million of unfavourably related to inventory valuation and associated hedges.
For the full year 2020, the impact of this inventory valuation and hedging activity resulted in approximately $2 million of margin favorability.
Karl will elaborate further on our fuel margin in his remarks.
Fourth quarter distributable cash flow as adjusted was $97 million, yielding a coverage ratio of one one times. We ended the full year 2020 with a coverage ratio of one five times.
On January 28, we declared an $82 five five cents per unit distribution. The same as last quarter. The proven resiliency of our business and history of delivering results has allowed us to maintain a stable and secure distribution for our unitholders.
I will now turn the call over to Don to discuss the full year results.
Thanks, Scott we continued to deliver strong results from 2020, despite the challenges of the Covid pandemic and fully expect to continue building on our strong performance in 2021 and beyond.
First off I'd like to highlight some of our accomplishments for 2020 before walking through the 'twenty 'twenty one guidance that we unveiled in December our full year 2020 accomplishments include the following.
Adjusted EBITDA of $739 million, a record for selling it up 11% from 2019 levels.
Distributable cash flow as adjusted was $517 million also a record for Sun and up 14% from 2019.
We improved our already strong coverage ratio to one five times up from 1.3 times in both 2018 in 2019.
Our cost reduction initiatives resulted in total operating expenses of $448 million, which was a reduction of 11% from 2019 levels.
Our fuel margin increased 1.8 cents per gallon from 2019 to 11 nine cents per gallon.
We successfully refinanced our four and seven eight senior notes due 2023 with new four 5% senior notes due 2029, thereby lowering interest expense, while significantly extending the weighted average maturity of our debt.
For reference our nearest senior note maturity is now the 2026 senior notes.
And finally, we improved our leverage to 4.18 times, our 4.1 times when adjusted for total cash on hand from four six times at the end of 2019, our liquidity remains remained strong with an undrawn $1 5 billion revolving credit facility and $97 million in cash at year end.
With all of these accomplishments as the backdrop, we enter 2021 poised to continue to deliver strong results and.
In December we provided guidance for 'twenty 'twenty, one for adjusted EBITDA of between 725 and $765 million.
Underpinning this guidance are the following fuel volumes in a range of seven to five to $7 75 billion gallons.
Annual fuel margin between 11, and 12 cents per gallon.
Total operating expenses of between 440 and $450 million.
Maintenance capital of $45 million and growth capital of at least $120 million.
The free cash flow generating capability of this business allows us to focus on the pillars of our capital allocation strategy.
First to maintain a stable and secure distribution for our unitholders.
To protect our balance sheet through debt pay down when prudent and third to pursue disciplined investment in our growth opportunities.
We will be financially disciplined with a target coverage ratio of one four times, which is up from our prior target of one two times and a target leverage ratio of four times, which is down from our prior target of four five to $4 seven five times.
I'd like to conclude my remarks by stating that Sunoco established a strong financial footing early on in 2020 and this continues to carry through as we enter 2021 with.
With that I'll now turn the call over to Carl to walk you through some additional thoughts on fuel gross profit and expenses Carl.
Thanks, Bill and good morning, everyone.
Scott and deal and walk you through the numbers for the quarter and the full year.
I want to take a few minutes and give you a sense of how we view these results and what kind of insight they give us into 2021.
Let's start by talking about volume.
On the surface our fourth quarter results were very similar to the third quarter.
There are a few additional factors, though that we view as promising.
First during our last conference call.
Sure the volumes were off around 12% for October one.
When we moved into November and December we all experienced some additional restrictions on travel and business activity with the increase in Covid cases across the country.
Even with those additional restrictions our volumes held and we finished the quarter at about the same level relative to the prior year.
The second factor is around J C Nolan volumes.
Last quarter I explained that our J C. Nolan diesel volumes were off much more than the rest of our business.
We were also lapping the startup of the pipeline in the third quarter of 2019.
In the fourth quarter. This was an even bigger impact since we were comparing against a full period of pipeline operation.
Year over year, J C Nolan and volume reductions accounted for 3% of total volume for the fourth quarter.
So that would put our volume is down only 9% if you remove the impact of J C. Nolan.
My final thoughts on volumes provide some insight into one of the reasons for the solid performance, which is our ability to add new customers.
Starting last summer, we started ramping back up our growth focus on signing up new customers and we're starting to see that in our Q4 numbers and that will carry forward into 2021.
The bottom line is that we see our volumes continue to growth through the rest of this year, both from overall economic recovery and our own growth efforts.
Moving over to margins the market continues to support stronger margins.
Let me give you some perspective on our reported margins for the fourth quarter.
First we saw a challenging market environment with a fairly steady and relentless climb in our bond prices for most of the quarter.
If you look back at our history that would have likely resulted in margins close to nine cents per gallon maybe.
Maybe even dipping a little lower.
Fast forward to the post COVID-19 environment and the floor is higher.
Which is what our fourth quarter results look like after you account for the onetime adjustments and inventory timing impacts that Scott mentioned.
As we have stated before the higher breakeven environment for many industry participants both in the wholesale and retail channels helped support the higher margin floor.
As we look to the first quarter, we've continued to see a steady rise in our bond prices, putting pressure on margins and we still feel like a floor in the nine and a half to 10 cent range is reasonable for these tough market environments, excluding onetime issues in the quarter.
We already discussed some one time items for the fourth quarter and we expect a 711 catch up payment in the first quarter that will provide a boost to our base margins.
Finally, I want to provide some more color around our expense performance.
For the last few years, we've been extremely focused on looking hard at what it takes to efficiently run our business.
When Covid hit we took an even deeper look and made some tough choices.
Our expense performance in the third and fourth quarters show that we are able to operate at these levels.
There will always be some fluctuations in timing.
And there were a few favorable onetime impacts in the fourth quarter that brought the expenses down even a little further than our run rate.
But the takeaway is that we have continued to deliver on our expense commitments and are very comfortable with our guidance for this year.
Before I turn it over to Joe to share some closing thoughts I just want to reemphasize that the fundamentals of our business remains strong.
We continue to add volume to our network margins are solid and our expense focus falls directly to the bottom line.
Joe.
Thanks, Carl Good morning, everyone. We delivered very strong results in 2020, we came into 2020 financially healthy and we finished the year stronger than where we started while countless companies has significant financial difficulties. Our 2020 results demonstrate the resiliency of our <unk>.
Business model.
Last year, we delivered record EBITDA and DCF.
Over the last three years, we have steadily improved our coverage while at the same time decreasing our leverage ratio.
Looking forward, we expect to have another good year.
We're about a month and a half into the new year and both fuel volume and our BOP costs continue to rise.
Since early November both gasoline and diesel prices have steadily increased.
Over that time period, New York Harbor, our book has gone up around <unk> 75 per gallon.
As you know this is not the most conducive margin environment.
With that said there are other important factors to consider.
Industry breakeven or higher we're seeing this play out as the market continues to pass on price increases to the rack and to the street. However, the steady constant rise in costs does create a time lag, resulting in short term margin pressure.
Taking a step back there will always be some quarters, where the commodity environment provides noticeable headwind.
But there will also be quarters, where the commodity environment will be highly supportive of wide margins.
History has shown that run up some prices are followed by periods of more volatile are falling prices that provide margin tailwind.
When you look at our business beyond a quarter by quarter basis, we expect to have quality long term results.
On the volume side, we're seeing positive increases in volume excluding material regional weather events. We expect this to continue over the course of this year.
Finally, you can expect us to deliver on expenses.
Moving on to growth, we will continue to grow our fuel distribution business.
The opportunity set remains strong and we expect these organic and M&A opportunity to remain for the foreseeable future.
On the midstream side, we remain patient looking for the right opportunity at the right price.
We'll continue to look for highly synergistic opportunities while remaining financially disciplined.
Let me close by thanking our employees and our field distribution partners for their continued dedication and keeping sonoco strong and ensuring a stable long term future.
Operator, you May open the line for questions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your questions on the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Cheniere of issuing <unk> with UBS. Please proceed with your question.
Hi, Good morning, everyone glad to hear you guys are all safe and sound.
Just wanted to first start off let's start off with the CPG or margin.
Results from the quarter, if I just first to clarify I just want to understand correctly basically the the normalized margin is higher than what was reported because of the lumpy type of other items that you had during the quarter.
Is that kind of the message that you were trying to get across in your prepared remarks.
Yeah sure. Good morning. This is Carl I think Thats, a fair way to look at it which is which is why we share those onetime items.
Okay, perfect and so now when they think about.
The fact that when I when I adjust that back out you are talking over 10 cents here.
For the quarter.
Obviously, that's been a strong margin and net that's kind of been a story all year.
How should we be thinking that it kind of on a go forward basis, I know that you've sort of said you expect it to be higher and so forth, but is it more of a scenario that it stays at that level until volumes returned to a more normalized level and then we run the risk of market share type issues or competitors trying to.
Compete on market share and those margin start to compress.
Or where do you feel that the behavior has changed for the industry in general.
Yes, I think I think both of those scenarios that you lay out our possibilities.
We're as we look forward and we think about that in my prepared remarks, I talked a little bit about and Joe talked about we have these these impacts of the current market condition. So obviously in the fourth quarter and so far in the first quarter.
You have these these moving commodity prices and tighter margins I talked about a floor somewhere in that nine 5% 10% range.
Think that is applicable Intel volumes returned to 2019 levels and then after that we will see a one.
One of the things, we think about though is that there continue to be inflationary pressures.
That will continue to push on this breakeven so even once we return to 2019 volumes.
The breakeven might stay higher.
Okay.
That makes sense.
You get a sense that there could be a behavior change everybody is sort of seen the stronger margins or that's total speculation at this point.
I think it's probably too early to tell but I think it's a fair thought and we'll see how the market shakes out.
Okay, and then a follow up question.
Towards the end of your prepared remarks, you said that you had.
Some very good cost performance in <unk> and you did say that you implied that some of it was temporary in nature, but you got strong cost performance all year and you've made some difficult decisions.
As we sort of think about you know.
On a go forward basis, a return to some new normal level whatever that may be.
I would expect that there would be some variable costs that would come up as well too but are you able to handicap how much of the cost savings that you achieved during 2020 that you'll be able to permanently capture on a go forward basis.
50%, 80%, just some sort of handicap is equal net.
Yeah sure Hi, this is Don.
So I'm, giving you an exact number here, but one thing I kind of want to point out is when we look at expenses.
We put out guidance for annual level of quarters, Theres timing differences from individual quarters can be a little bit lumpy.
So obviously in the fourth quarter, we had really strong performance.
They had some timing issues that made that quarter, a little bit lower than what our what our real run rate would be.
I'll just point out we caught we cut significant costs in 2020.
And we expect most of that to carryover into 2021, even with our expectations for higher volume. So if you look at the guidance range of $4 40 to $4 50, that's a little over 110, a quarter and I think that will be fairly consistent through the year with a little bit of ups.
But as the variable cost increase but really if you look back at what we achieved in 2020, we expect the vast majority of that carryover.
Okay and then my question was more thinking about return to normal Saute thinking about 'twenty, two and I'm not asking for specific guidance, but are you able to capture most of those costs even into 'twenty two type of environment.
Outside of like a little bit of inflation related to.
Variable costs.
Yes. This is Karl the only thing I would add to what Dan said about 'twenty two is.
Once we return to 2019 volumes were clearly going to be below our 2019 expense level. So yes. The vast majority of it we're going to be on the carryforward.
Okay perfect. That's what I was looking for thank you very much guys appreciate it and stay warm and hope you maintain power.
Thanks, Shneur you too.
Our next question comes from the line of Theresa Chen with Barclays. Please proceed with your question.
Good morning, and thank you for taking my questions.
Yes, Chris it's Jeff.
Back on that day cents per gallon discussion and I understand that you mentioned the 711 makeup payment, which I believe makes up for any of the deficiencies related to your gross profit agreement.
But the volume having ramped up since the initial startup time, and 2020 being a pretty down year and as a result of the demand destruction net do you have any idea of what the boost will come first quarter 2021.
Yeah.
Yes, Hi, Teresa.
On 711.
We're not going.
<unk> disclosed details about their volumes.
But it is fair given all the factors you highlighted for 2020, we're anticipating that makeup payment to be higher than what it was last year.
Okay and to your comments about the nine and half the 10 cent a floor that does not and that would not include the makeup payment correct, which would have no associated volume with it.
That's right.
Okay.
Given that this quarter eight plus relatively noisy on the CPG from just with the timing differences and one time noise.
Is there any of that expected in first quarter of 2021 that we should watch out for.
I think 711 is the one item that we would anticipate in Q1, which is why we've called that out.
Okay, and then turning to volume so I just wanted to clarify some of your comments on it seems like things have been the underlying trend that has improved since october and but still not quite back to pre pandemic levels and clearly we've seen that the <unk>.
But there are conditions likely impacting volume.
Volume is across your footprint any way to triangulate, where that kind of shakes out as a baseline run rate from.
The 1.829 billion in fourth quarter at 22 first quarter 2021.
Sure. If you think about our guidance for 2021.
That seven and a quarter to 73 quarters that is pretty wide range right in that that represents somewhere between 5% and 12% off of our 2019 levels.
So we obviously reported.
12% down in from the fourth quarter and I provided some more context on that in my prepared remarks, as we've moved into the first quarter just to give you a flavor of our volumes were off around somewhere between 9% and 10% in January so that's a little better performance as it directly relates to.
To this this weather event.
Clearly that's had some impact in the areas, where we operate particularly because this.
This winter weather has been so extensive across our across the south and other parts of the country, but it really is a temporary demand event. So.
I wouldn't expect that that would change that run rate might have a little bit of an impact.
Particularly in Texas here this week, but.
Well, we should still firmly be within our volume guidance ranges.
Thank you very much.
Thanks Teresa.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Gabe Moreen with Mizuho. Please proceed with your question.
Good morning, everyone, maybe if I could just stick on the near term weather impacts here I'm. Just wondering if you can maybe help us frame.
So much refining capacity offline here sort of what's the impacts here are sort of on your supplies.
What impact that that'd be having on the business is that temporary and how do you look the refining capacity being down is really biased by demand being down on the other side. So its not a concern.
So if you can just talk us about kind of some of the supply interruptions that are out there in the market right now.
Sure I mean, I'll start off Gabe with.
You know as members of the community ourselves we've been living through some of these challenges. So first our primary focus is to try to get fuel wherever we can to support those who need it.
Obviously, there have been there have been challenges with terminal shutdown as you mentioned refinery shut down and some roads.
Challenged to move trucks on but here's what I'd say there are a couple of of impacts in the short term, obviously is providing upward pressure on prices and margins I mentioned.
With Theresa's question.
Had some demand impact that's a that's a temporary event.
The refinery shutdowns have clearly taken some supply off the table.
But if you look at our network.
We're the largest independent distributor of fuel in the United States and so we have a lot of different supply change a lot of different suppliers.
We have our own fleet of trucks, we use third party partners to move trucks around so.
In some ways. This is different than say a hurricane but in some ways. There are some similarities where we.
We worked through it and we have flexibility in our supply chains are clearly there's been some impacts will work through them over the next.
A few days.
<unk>.
From a overall market impact it really depends on how quickly these refineries come back up and whether the supply is offline for longer then we have the demand impact and that'll be reflected in the markets.
Got it. Thank you and then maybe if I can shift gears, a little bit to talking about sort of the.
Where the growth Capex is going this year, if there's anything in particular, you would kind of call out within <unk>.
The different buckets of growth Capex youre going to be spending in 'twenty one.
Yeah.
The number that we put out on growth Capex.
In our guidance the vast majority of that is really on our fuel on organic.
Both in our fuel distribution business.
A little bit in our midstream business, but it's primarily on the fuel distribution side, signing up new customers and.
Generally those are seven to 10 year contracts and we put a little bit of capital.
In upfront to help them rebrand their stations.
That's the majority of it.
Got it Okay, and then Joe you mentioned M&A and being patient.
Curious as always for your thoughts in terms of how you kind of characterize the M&A landscape at the moment.
And Gabe.
I think first thing is our strategy Hasnt changed.
First I think we're in a good position to.
Capitalize on any opportunities that come about secondly.
We're focused on both fuel distribution and our product terminals and we're going to approach it both from an organic and M&A standpoint. The question really for US right now is evaluating valuations and seeing where we have the most realizable synergies that's going to really guide us on which ones that we pursue as far as the overall landscape.
For obvious reasons, the chatter as well as real processes are significantly higher in 2021, and 2020 and again from our standpoint, we're in a good position, we're going to be patient I think highlighted in our financial discipline and whenever these opportunities come up and and we have.
We have significant synergies and we think the valuation is correct reflected in what what valuations are overall net will be in a good position to capitalize on it.
Got it thanks Bill.
Thank you Gabe.
Our next question comes from the line of Spiro <unk> with Credit Suisse. Please proceed with your question.
Hey, Good morning, guys. Just a few quick follow ups and maybe starting off with with Joe that last question, there and thinking about the financial discipline and funding that growth.
I think as I look at some of the math on what you guys have guided you get to the end of the year and you've got a little bit of wiggle room on free cash after the distribution.
But as you go sort of beyond.
The $120 million you'd more or less guided to it would seem like you're going have to lean on that balance sheet, a little bit more to fund growth beyond that or M&A beyond that so I'm just curious as you define financial discipline are being disciplined.
How are you thinking about leaning on that balance sheet potentially levering up a little bit this year, even if temporarily in order to achieve that.
Yeah, Hi. This is Dylan here, you know I think when we look at that leverage target.
We are we are still committed to the four times level.
That said there is a little bit of flexibility around that number not significantly but.
In periods, where there arent the opportunities there for growth will trend a little bit below that and opportunities where there are significant at times when there are significant growth opportunities.
Good attractive multiples that are very accretive to unit holder value and we may trend slightly above there so depending on what we're able to capitalize on this year.
Things that we plan on targeting being right around that four times.
Okay got it and I appreciate that and then sticking along this theme if we could.
Just thinking about the opportunity set out there.
December deal that terminal was fairly small in size. It sounds like it's pretty accretive I think within the first year in terms of scaling up and doing something larger are those opportunities out there at all and then just curious as you go to bid on these assets what kind of competition are you running into is private equity showing up is it others like yourselves just curious what that landscape looks.
Mike.
This growth was Joe.
I'll take the first part of your question about size again, I think we lay out our kind of our financial parameters.
I'll go back to valuation and and realized full synergy if there's a small amount like the ones we did.
Earlier this year closed earlier this year.
That's great too if there's if there's if there is a bunch of those out there we'll go out there and roll those up but if there's something bigger if it fits into our financial parameters, we will pursue those two as far as the.
Your question about competition.
Too early to tell because there hasnt there hasnt been.
Large significant transactions in the into more midstream space when it comes to product terminals.
With the landscape my my prediction would be that valuations are going to be more attractive to buyers than sellers as far as the number of.
Infrastructure funds and other participants I would believe that value.
Universe is probably smaller as far as strategics I think we're positioned as well as anybody because we have a natural short with our field distribution footprint and we talked about this in the past, we really do view fuel distribution and product terminals as really interlinked sectors. So the reason why.
We're looking at product terminals is because we got a huge.
Fuel distribution shortened thats, what the real synergies come from and I think we've shown over the last few years when it comes to being very disciplined on the expense side, we feel very confident that when it comes to SG&A synergies, we can deliver on that.
Got it okay. Thanks, So last one if I could quickly sneak it in.
Your general partner recently launched an alternative energy group.
Embracing energy transition in the ESG theme, you anticipate doing something similar or finding ways to work with them and that group on projects to maybe do more on renewable diesel or even purchase renewable power at some of your facilities.
Yes Spiro.
This is Karl I think.
We're.
Yeah.
Not necessarily part of what energy transfers announced but obviously just like in the past, where we've done commercial deals with them, even like the J C Nolan joint venture.
Or with other partners, we absolutely are looking at the landscape of different opportunities in the renewable space, but it will have to make sense for our for our business and be complementary to what we do so I think like renewable diesel would probably make more sense than us going into the power sector. For example, I'm not announcing anything here I'm just talking about.
Things in how we're thinking about it.
So yeah, it's always on our radar and we'll look for opportunities in the future.
Got it I appreciate all the color. Thanks, guys. If you will.
Thanks.
Our next question comes from the line of John Royall with Jpmorgan. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question.
Most of the volume were asked.
Just had one on the growth Capex.
You talked about it in kind of in nature, but in terms of the absolute level midweek.
Good weeks of $120 million it.
It looks like it's a bit high relative to increase in 2020, but if I average it with 2020, it's kind of roughly at 2019 level. So my question is.
Should we think about the 2021 guidance.
Having a lot of catch up in it from projects deferred into 2020.
Or is it more of a structural pick up in activity.
Hey, John It's Joe.
The way you should think about that.
We view.
M&A and organic kind of as one and the same they kind of compete against one another and if you kind of go back to let's say pre 2019 2018, we did a lot of distribution acquisition roll up opportunities. So that took a portion a larger portion of our capital as we fast forward to 2019.
2000, 22021, I've mentioned previous calls that that we have the organic growth capability that we didn't have two or three years ago. So they're competing against one another so if we find M&A deals in the pure distribution that is just as attractive or more attractive than our than our organic growth we have the flexibility to Dow.
Down our organic growth and flip over to an M&A strategy, but if we don't have attractive M&A opportunities in the fuel distribution, we'll just dial up our organic growth opportunities. So I think its flexible so going forward I think you can probably is the way to view us as that we have based on our free cash flow.
Within our financial parameters will come up with a.
A growth capital budget, but at the same time, we have the flexibility to scale it up per scale it down appropriately based on opportunities.
Great. Thanks, a lot of sense. Thank you.
Yeah.
We have reached the end of the question and answer session. Mr. Krish I would now like to turn the floor back over to you for closing comments.
Thanks, everyone for joining us today as usual if you have any follow up questions. Please feel free to reach out to me.
Thanks, and have a great day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.