Q1 2021 Sunoco LP Earnings Call
Greetings and welcome to Sunoco L. P. As of Q1 2021 the earnings call. At this time all participants are in a listen only mode of.
Question on rates, especially with all of the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now let's turn the conference over to Jos.
Scott, Chris Shaw, Vice President of Investor Relations of Treasury. Thank you 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, Dylan, Brian Hall, Chief Financial Officer, and other members of the management team there.
Remind you 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 on 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 Sunoco LP website for a reconciliation of each financial measure.
I will now turn the call over to Dylan to discuss the first quarter of results.
Thanks, Scott, we delivered solid first quarter results in the challenging commodity environment for the first quarter of 2021. The partnership recorded net income of $154 million.
Adjusted EBITDA was $157 million compared to $209 million in the first quarter of 2020.
Volumes of approximately $1 8 billion gallons exhibited a normal seasonal pattern, but the sequential decline of approximately 4% from the fourth quarter year over year volume declines were approximately 8%.
The fuel margin was 10 three cents per gallon.
The 711 makeup payment totaled $18 $5 million this year and contributed roughly a penny of the total of $10 three P. P. G. This quarter.
I will elaborate further on our fuel margin in his remarks.
Moving on to expenses, our total operating expenses were $100 million in the first quarter up slightly from the $96 million in Q4 2020, our increase of approximately 4%.
These expenses are down approximately 30% from the $143 million in the first quarter of 2020 and are largely a reflection of our cost reduction initiatives.
As the year progresses and volumes improve we expect some incremental expense related to this additional business.
First quarter distributable cash flow as adjusted was $108 million yielding of current quarter coverage ratio of 1.25 times on a trailing 12 months coverage ratio of 135 times.
On April 22nd we declared an 80 255 cents per unit distribution.
The same as last quarter.
As we continue to maintain a stable and secure distributions for our unit holders.
Leverage at the end of the quarter was four four times, which we expect the decline toward our four point or target as the year progresses.
Our 2021 full year EBITDA guidance is unchanged from what we originally provided in December 2020.
For the full year 2021, we continue to expect adjusted EBITDA of between 725 of $765 million, we expect annual fuel margins between 11 and 12 cents per gallon.
We also reiterate our annual guidance for fuel volumes in a range of seven to five to $7 75 billion gallons total operating expenses between 440% of $450 million and maintenance capital of $45 million.
Next I want to spend a few minutes on growth capital. Our original full year 2021 guidance was for at least $120 million of growth capital and today, we are providing a more precise four year guidance number of $150 million with approximately $40 million to be spent on the announced Brownsville terminal.
So let me take a step back here and go into a little more detail on the brownfield project.
Earlier today, we announced an exciting milestone for Sunoco with the construction of our first Standalone organic terminal project in Brownsville, Texas.
We have historically frame of our capital allocation process from a build versus buy perspective.
In this case, we were able to develop on organic projects that meets all of our criteria for capital investment and a very strategic area for our partnership.
Carl will give you all some additional insight on the strategic importance of this project. The first let me wrap up with how we see this project fitting within our three pillar of capital allocation framework.
First upon completion. This project is expected to be immediately accretive to distributable cash flow supporting color one of maintaining a stable unsecured distributions and our target coverage ratio of one four times.
Second the capital for this project is coming from retained cash flow.
And we expect to end the year right around our target leverage ratio of 4.0 debt to EBITDA.
At this leverage level, we have no need to the direct additional capital to debt Paydown, which when prudent is pillar number two.
And so the third with the strong returns are on this project. This fits the final pillar, which is to pursue disciplined investment in our growth opportunities.
Sonoco remains on solid financial footing with the strong base business and exciting growth opportunities with.
With that I'll now turn the call over to Carl to walk through some additional thoughts on the Brownsville terminal fuel gross profit on expenses.
Thanks, Neil and good morning, everyone.
I want to start today by sharing some additional thoughts about our Brownsville project that we announced this morning.
We're very excited about the opportunity and flexibility that this project gives us the.
The Rio Grande Valley is an important region of our business.
As <unk> already talked about we have begun construction on a terminal that we will have 560000 barrels of storage.
And throughput capacity of over 50000 barrels per day.
This project highlights of the synergies between our fuel distribution and terminals businesses.
We currently have a large fuel distribution footprint in the valley and our new terminal will provide supply flexibility that will strengthen our existing domestic business enable us to grow our domestic sales and provide a platform for us to participate in the growing export fuels market into Mexico.
As deal on also mentioned this project fits well into our capital allocation strategy.
We expect our EBITDA build multiple on our $55 million project cost to be in the mid to high single digits.
In addition, the project enhances the stability of our overall business and cash flows.
Finally, we expect the terminal to be in operation less than 12 months from now.
Next I'll share some thoughts on our first quarter results.
Dylan share that our fuel volumes in the quarter were off about seven 5% from last year.
With all of the noise from COVID-19 last year, comparing to 2020 volumes isn't as meaningful so we plan on continuing to use 2019 as our benchmark as we go through the year.
On that basis, we were down a little more than 9% from 2019 volumes, which is a little better than last quarter.
We've seen even better volume performance in the beginning of the second quarter as we're off around 7% relative to 2019 levels.
As far as performance across our various geographies we've.
We have seen general improvement throughout our entire network.
A promising sign is that some of the areas linked to tourism and travel like Florida are doing even a bit better than our average.
For the rest of the second quarter, we expect improved volume performance to continue.
And that the second half of the year will be better than the first.
Now turning to margins.
The first quarter was challenging with the continuation of what we saw over the last two months of the fourth quarter and.
And incredibly consistent climb in our bond prices with an increase of <unk> 75 per gallon from the beginning of the quarter to the peak in mid March.
This followed a nearly 40 cent per gallon increased during the last two months of the fourth quarter.
The last time that our bond prices moved over a dollar a gallon in a four to five months period was in early 2011.
Last quarter I shared that our floor margins in these types of environments will be higher in the post COVID-19 world due to higher breakeven margins.
Cited a range of nine five to 10 cents per gallon being a reasonable floor, excluding onetime items.
So if we exclude the 711 catch up payment our base margins were near the bottom end of that range, which reinforces the resilience of our portfolio and the continuation of higher breakeven margins.
As we look forward I still feel confident that 11% to 12 cents per gallon fuel margin is appropriate for the full year 2021, as we expect more traditional volatility to return to the commodity environment.
We've seen that happened since mid March and margins have recovered off the Q1 lows.
Before I turn it over to Joe I'll, just wrap up by stating that we continue to focus on what we can control.
Gross profit optimization growth of our core business and delivering on our expenses with that I'll turn the call over to Joe.
Okay.
Thanks, Carl Good morning, everyone. We delivered a solid first quarter, we saw our seasonally adjusted fuel volume trends continue to improve while on the margin side. We continue to have attractive margin, even within a challenging commodity environment. The combination of higher industry breakeven with our ability to control costs and optimize.
Fuel gross profit allows us to minimize the downside and also allows us to capture the upside when the commodity market supports it.
Quarter after quarter, we have proven the durability of our business.
Looking forward the second quarter is off to a good start our bond prices continue to rise however, with more normalized volatility as opposed to the first quarter.
On the volume side, we expect fuel volume to continue to increase based on seasonality along with an increase in economic activity.
With the first quarter in the books and early readings from the second quarter, we expect to deliver on our full year 2021, adjusted EBITDA guidance.
Moving on to growth, we see attractive growth opportunities in both field distribution and midstream starting with midstream the Brownsville terminal project is both strategically and financially attractive.
The terminal is within a geography, where we have a materials steel distribution network, thus, creating financial synergies.
It also provides us the capability to export finished products into Mexico, We expect Mexico to continue to be a major importer of finished products and the brownfield terminal is in a great location to capitalize.
And finally, and importantly, it meets our financial criteria.
On the field distribution of side, we continued to organically grow our business.
We have put ourselves in a position to self fund the vast majority of our organic growth will continue to look for acquisition opportunities in both field distribution and midstream we will do this with financial discipline protecting the security of our distribution, while also protecting our balance sheet operator that concludes our prepared.
Remarks, you May open the line for questions.
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Our first question comes from the line of Theresa Chen with Barclays. Please proceed with your question.
Good morning, Thank you for taking my questions.
In terms of the Brownsville project can you talk about the just a little bit more about the history of its development of why now.
As we think about the mid to high single digit EBITDA multiple.
What are the parameters.
Terms of execution of risk about that will it be in any part underpinned by third party commitments for example.
Hi, Theresa good morning, it's Carl.
We've been contemplating this project for a while and felt like now was the right time to do it and the project is really.
Kind of based on three pieces of our business. So so the first one that kind of underpins. The foundation is our current fuel distribution footprint.
We already sell a lot of fuel in the.
The market on both direct to our customers and 711 has a lot of volume in that market.
And in adding in the additional supply flexibility of having our own terminal, where we can bring product in on the water really kind of provides the base for that fuel distribution footprint and that is the base of the economics for the terminal, but we also as Dylan mentioned.
We looked at this from a build versus buy there are obviously other other terminals in that market and we looked at the options of of maybe.
Acquiring some of those assets versus building ourselves and the economics were just stronger for us to to go. This path and then you think about growth I think due on nine both mentioned, we think there's opportunities for incremental <unk>.
Domestic sales.
Based on our added supply of flexibility and then clearly we're excited about the opportunity to.
To build the business going into Mexico.
Sure.
By our estimate there are about 1000 trucks, a day of product crossing the border from the Rio Grande Valley into Mexico today, and we're not really participating in much of that at all so we think thats an opportunity to work with partners.
As well as a cell.
The direct into that export market.
Got it.
In terms of that specific market on what is your view on net Mexico recently passed feel permit the performance given their effort to curtail of private foreign competitors in favor of strengthening our own state owned enterprises.
Yes, obviously thats.
We've been watching quite a bit and.
For us having a U S asset on the border supported by a strong U S business is a good way for us to two.
Half of that support underneath and then still go into into the Mexican market and we think there.
<unk> talked to a number of potential customers already on Mexican companies, and as well as PMI or pemex themselves.
To try to partner with them and we think that's the best approach.
As we as we build out of business going into Mexico.
This is Joe I think the one other thing to add to that is.
Anybody who's tracking kind of the evolving Mexican regulation of about prioritization versus kind of grow into other direction with <unk>.
The strong consideration and the fact that the.
We wanted it hard asset right on the border and Brownsville, I think gives us the opportunity whichever way the politics of Mexico goes where at the word we're right on the border. So if we if we have the legislation goes in the direction of where we can take our trucks per rails or whatever and some ex.
We can do that if the regulation goes in the direction, where that becomes increasingly more difficult than we can easily partner with with pemex or anybody else for them to pick it up on the border from us So we like that Optionality.
That makes a lot of sense. Thank you.
Lastly, just in terms of the pricing product prices for a good portion of the first quarter and recently.
Clearly a lot of this likely has to deal with the elevated RIN costs and can you just remind us how <unk> impacts your business are you the blender of record from most of your volumes and in light of the Supreme Court currently previewing. The SRU case, what do you think is going to happen with the 2021 RVO.
Yes, I'll take the last part first in that I don't know that I have any.
On the Crystal ball, that's better than other market watchers on exactly what the RVO is going to be for this year, but.
I will reiterate and we've said in the past that <unk> prices are really baked into the wholesale margins and I E.
<unk> seen more volatility and movement in Rins over the last call it six months or so than we'd seen for a number of years.
But as we look at our results, we still feel that way that that.
Whether rins prices are 40, or whether they're over $1 50 like they are today.
We see that not having a large impact on our overall all in margin.
Thank you.
Thanks Teresa.
And once again as a reminder, if you'd like to ask the question. Please press star one on your telephone keypad.
Our next question comes from the line of genre. The Jpmorgan. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question.
So on the 711 makeup payment I know you won't get into specifics on the contracts, but just high level.
Of the prepayment were about $13 million last year, and really that only had colgate hitting volume.
At the end of March 2020, So now we have of full year of COVID-19 related volume Boston translating into only 18 5 million of entertainment. So I guess I'm just trying to figure out why that number isn't it.
Double what it was last year, just given the magnitude of the loss from the demand being so much larger than this year.
Sure John.
On the way that I would think about that is that clearly seven of 11 volumes were off.
The 711 volumes that we supply to them were off consistent with everybody's volumes were off but I think I have stayed in the last few quarters that we didn't see the volume we supplied to them off as much as the rest of our customers. So I think you are comparing the 18 five to the a little under 13 from last year.
That's what I would read into that is is that the volume we supplied to them was not off as much as maybe the rest of our business.
Okay understood. Thank you and then I wanted to see on the trends of developing on the J C. Nolan.
Okay.
I assume youre starting to see the volume come back of the rebound in prices.
Much of of ineffective that have on the overall volume declines in either direction.
Yes, youre right that as we've seen.
Over the last couple of months and you guys can track this as well you see some of the rig count coming up debt.
I would call it some slow and steady increase in our diesel business out there.
It's that.
That combined with our other business out there.
Hello.
<unk> more than the average of our entire portfolio, but we have seen steady progress and I think with the.
With crude prices, where they are and looking like the.
<unk> been there for a while now and I think most people view them.
Staying at the at least kind of where they've been for a while longer but we would expect that steady rise continue.
Okay. Thank you.
Yeah.
And with that there are no further questions left in the queue and I would like to turn the call back over to Mr. Scott <unk> for any closing remarks.
Well, thanks again for joining us on the call. This morning as always if you have any additional questions. Please feel free to reach out to me. This concludes today's call have a great day.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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