Q2 2021 Sunoco LP Earnings Call
Greetings and welcome to Sunoco L. P second quarter 2021earnings conference call. At this time all participants are in a listen only mode. A 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. Please note. This conference is being recorded I will now turn the call over to your host Scott Russell 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, Dennis <unk>, Chief Financial Officer, and the other.
Other members of the management team today's.
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.
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.
I'll turn the call over to Glenn to discuss the second quarter of results.
Thanks, Scott in the second quarter Sunoco continue to showcase the strength of its business model with strong financial results in a period of increasing commodity prices for.
For the second quarter of 2021 of the partnership recorded net income of $166 million adjust.
Adjusted EBITDA was $201 million compared to $182 million from the second quarter of 2020.
Volumes were 193 billion gallons the sequential increase of approximately 10% from the first quarter as the reopening trend in the U S took off of Q2.
Year over year volumes increased approximately 28%.
Fuel margin was 11, 3 <unk> per gallon versus $13.05 per gallon in the second quarter of 2020, which Karl will hit on further in his remarks.
Operating expenses in the second quarter were up slightly compared to the first quarter at $102 million versus $100 million and were up from $97 million in the second quarter of 2020.
Second quarter distributable cash flow as adjusted of $145 million, yielding of current quarter coverage ratio of 167 times and the trailing 12 months coverage ratio of 141 times consistent with our long term target of 1.4 times.
On July 20, <unk>, we declared an $82.55 per unit distribution. The same as last quarter, we continue to maintain a stable and secure distributions for our unit holders, which remains the number 1 pillar of behind our capital allocation strategy.
Leverage at the end of the quarter was $4.2 7 times, which we expect to continue to decline towards our 4.0 target as the year progresses.
Our 2021 full year EBITDA guidance remains unchanged from the original guidance, which we provided in December of 2020.
For the full year 'twenty, 1 we expect adjusted EBITDA of between 725 and $765 million.
Operating expense guidance is unchanged at $440 of $450 million and while we expect higher second half operating expenses were trending towards the low end of the 4 year range. We continue to expect maintenance capital of approximately $45 million target growth capital expenditures of $150 million from 2021.
Next I'd like to spend a few minutes on the meaningful expansion to our midstream business that we announced yesterday.
To recap, we announced 2 terminal transactions that will not only help diversify and strengthen our core fuel distribution business, but will also provide a platform for growth in the markets served by these assets.
The neustar assets consist of a largely of refined product terminal 7 of which are on the east coast and 1 is just south of Chicago.
These assets of approximately $14.8 million barrels of storage and our access via pipeline truck rail and marine vessels.
We expect for $250 million of purchase price to result in the sub 7 times multiple unexpected EBITDA, including synergies and the second year of ownership.
The caito terminal as the gasoline and distillate terminal with 140000 barrels of storage located in Salisbury, Maryland is accessed via truck marine vessels.
We expect the $5.5 million purchase price to result in a sub 6 times multiple unexpected EBITDA, including synergies in the second year of ownership.
Both of these transactions are expected to be immediately accretive to unit holder value.
The second quarter as strong.
The acquisitions demonstrate our commitment to maintaining sunoco solid financial footing and increasing value to our stakeholders through our strategy of disciplined capital investment.
With that I'll now turn the call over to Carl to walk through some additional thoughts on the announced acquisitions fuel gross profit and expenses.
Thanks, John Good morning, everyone.
I want to start today by giving you some more insight into our important expansion of the midstream business that we announced yesterday.
As we shared in the past our midstream growth strategy is to focus on opportunities of both diversify our operations and integrate effectively with our overall business during.
During the past 9 months, we've added of Marine terminal in Albany, New York area.
We are making great progress on our Greenfield Brownsville terminal.
And are now, adding 9 more terminals to our portfolio.
The Salisbury, Maryland terminal that we are purchasing from Kato of oil is in a niche market that fits well with our fuel distribution business.
The new star terminals will be fantastic conditions.
Lindon is the core asset we're very excited to have a highly profitable operation in the New York Harbor market with great flexibility and connectivity.
The Baltimore in Jacksonville terminals will strengthen our business and facilitate additional growth in our fuel distribution business in these important markets.
Andrews Air Force base in Virginia Beach are key assets that support our military.
The Blue Island facility, just south of Chicago will be our first terminal in the Midwest.
We're looking forward to welcoming the employees from these acquisitions to our team.
If you step back and look at the evolution of our business over the past few years, we have demonstrated that we are able to add terminal assets to our portfolio.
Operate them, well capture synergies and grow our fuel distribution business in the relevant markets.
Bottom line is with our combined fuel distribution and midstream strategy, we have proven that we can add value.
Next I will share some thoughts on our second quarter results.
At a high level, our strong results were underlying by better volume performance.
Margin returning to our guidance range, even with the generally unfavorable and rising market and continued discipline on expenses.
Starting with volumes, we were up about 28% from last year, but the more relevant comparison continues to be performance relative to 2019.
Looking at it through that lens, we were down about 6% from 2019 volumes meaningfully better than last quarter.
We've seen similar volume performance at the beginning of the third quarter.
As we look at volume through the back half of the year it feels as though the pace of closing the gap to 2019 has slowed a bit.
But we remain optimistic as overall economic strength in the U S continues.
Turning to margins the second quarter showed improvement versus the challenging first quarter.
Even though prices rose another 25 cents per gallon or so in the second quarter the increased volatility coupled with our continual margin optimization strategies resulted in our margins rebounding and returning to our full year 2021 guidance range.
As we look forward I still feel confident in that 11% to 12 cents per gallon fuel margin is appropriate for the full year 2021.
As we expect similar volatility to persist in the commodity markets through the back half of the year.
The final piece of our strong financial performance with continued expense control and discipline.
As Dylan mentioned earlier, we expect second half expenses to be higher than the first half with full year expenses trending towards the lower end of our guidance range.
Some of the higher spending in the second half of the year is due to timing and some of it is related to our decisions to defer bringing costs back into the business with the challenging start to the year.
As the margin environment has improved we are more comfortable returning some of our expenses to a more sustainable level going forward.
Before I turn it over to Joe I'll wrap up by stating that we will continue to focus on what we can control and what drove this quarter's great results gross profit optimization growth of our core business and delivering on our expenses Joe.
Thanks, Carl and good morning, everyone. We delivered a very strong second quarter fuel volume grew roughly 10% versus the first quarter of this year, while our fuel margins remained very healthy the.
The combination of higher industry breakeven with our ability to control costs and optimize gross profit allows us to minimize the downside.
Still capture the upside when the commodity market supports it.
Quarter after quarter, we have proven the durability of our business.
Looking forward the third quarter is off to a good start for.
For the month of July our box prices have been volatile.
Within the volatile commodity environments, we have a proven history of delivering attractive margins.
As for volume the start of the third quarter has seen a moderation of volume growth as compared to the growth we experienced from the first to second quarter.
We still believe that there is upside but as of today, we foresee similar volume in the third quarter to what we realized in the second quarter.
With the first half of the year in the books and early readings for the third quarter, we expect to deliver on our full year 2021 of adjusted EBITDA guidance.
Moving on to growth, we're very excited about the expansion of our midstream business through the 2 announced acquisitions.
Strategically these acquisitions helped diversify and vertically integrate our business, while providing a more enhanced platform for fuel distribution growth.
Financially we executed these transactions at very attractive valuations, especially after adding synergies.
In addition, the Brownsville terminal project is on budget and on time, we expect the terminal to be up and running in early 2022.
On the field distribution side, we continue to grow organically. However, we will also look for acquisitions.
For both organic growth and acquisitions will continue to build on our history of maintaining financial discipline, which means protecting the security of our distributions while also protecting our balance sheet.
Operator that concludes our prepared remarks, 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 1 on your telephone keypad.
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Your first question comes from Theresa Chen with Barclays. Please go ahead.
Good morning, Thank you for taking my questions.
So I just wanted to delve a little bit more.
The year economics related to the terminal of transactions.
And completely understand that per.
The prepared comments you have the tissue.
EBITDA targets that you expect to achieve once everything is up and running and under your jurisdiction, but looking back to pre pandemic levels of what was.
What would it have been comparable to the sub 7 times for the new start coming off the sub 6 times on 2019 numbers.
Hey, Theresa.
Definitely.
If you kind of look at M&A activity, even if you go back to 2019 and 2020. The activity has definitely picked up this year and I would characterize what we're seeing today definitely a buyers market versus a seller's market, which is obviously good for us. So I'm not sure. If I can tell you if it's changed the turn or 2 or whatever.
But I will say that the valuations for buyers like us, especially strategic sort of bring synergies to the table has definitely become a better environment for us and I think this project this acquisition per new store as well as the the.
Of the caito indicates that hey, we're buying it at an attractive multiple and then we're also able to bring it down another turn or 2.
Got it and in terms of the thinking about bringing it down another turn of our true.
I think about this.
From your perspective is the idea that previously these terminals of it were underwritten by third party shippers.
Shippers and now you're bringing your own volumes and perhaps taking the volume offset some 1 of the system what about the wife Hughes.
Is that how it's going to work going forward and if so what is the breakdown that you would expect between third party and your own captives operations.
Hi, Theresa this is Karl I'll take that if you think about the kind of synergies that we bring to the table. It's a piece of exactly what you said, where we're able to move our volumes into terminals that might not be as utilized as the were there is some.
Cost savings as we integrate into our broader network and optimize.
Some of those costs as far as third parties. Our model is we're happy to half of third parties in our terminals and we think there is.
Opportunities.
For us in fact, we have many suppliers and customers in our current terminals and we expect that to be true in these new star assets. The nice thing that we bring to the table is if for whatever reason.
We lose the customer we have our own volume to backstop that and so so the predictability of the income streams and some of these assets is even higher.
With us owning them.
That makes sense and Carlos maybe if I can just turn to Europe.
Existing operations and the third quarter outlook on volume in particular is interesting I think the comp.
You made about the third.
Third quarter.
Volume growth not the.
The volumes being flattish from where the second quarter of laws and in light of you know.
It seems that the broader macro economy continues to recover it in light of the flattish expectation is that result.
In our structural trends that youre seeing.
The in a work from home or uncertainty related to the Delta can you just parse out like what our lives that volume expectation going into the 3 Q.
Sure I'll take a shot at it I don't know that we have any specific insight into which variable is more prevalent or results in a change in demand more than other variables. Because there are lots of things happening. The only other color I'd add is I think if anything we saw.
Longer and quicker volume recovery in the second quarter than we probably anticipated going into the quarter. So.
In our statement that third quarter might be flat to second is starting from a stronger position than we originally anticipated so.
You put those things together and we're still very comfortable with the full year volume guidance that we gave.
Got it thank you very much.
Your next question comes from Spiro <unk> with Credit Suisse. Please go ahead.
Hi, This is Chad on for Spiro just 1 from me.
1 of the assets you acquired in the transaction is located in the Midwest I was wondering if you could expand on the opportunities you see with that asset.
And maybe expanding the business in that region.
Sure sure Chad. This is Carl we already have a good Midwest business from our fuel distribution standpoint, and that's been an area of focus in the last call. It 3 to 4 years of trying to find opportunities to grow there.
A lot of our business is is centered around Ohio.
And this terminal is a little further west than that closer to the Chicago market and Chicago.
Nice fungible market, we can supply.
The product from <unk>.
From local refineries or from from the Gulf Coast.
So having a terminal in that market, we think adds additional flexibility and optionality for us to growth.
Okay understood. Thanks from the time guys.
Once again, if you would like to ask a question. Please press star 1 on your telephone keypad your.
Your next question comes from Michelle piano with UBS UBS. Please go ahead.
Hi, good morning.
The cost front I think you guys know the trends towards the lower end of the guidance for the year, but at the same time, there's kind of been a lot of cash.
Pressed around.
Question of around inflation, just wondering how sustainable you see those these cost trends as we think about cost heading into next year.
Yes, Michelle this is Karl again.
We have seen inflation, we're not immune just like everyone else.
And we've factored that into our our comments on the guidance going forward as John and I. Both mentioned, we do expect cost to be up in the back half of the year, a little bit relative to the first half of the year and as we sit right now we think the.
Minus the acquisitions that we announced yesterday would ship.
You can adjust for debt and our cost level in the back half of the year should be closer to sustainable from a of going forward basis.
Understood. Thank you and then just a quick question on kind of what was the drivers behind the increase in your non motor fuel sales results this quarter.
On the on the non motor fuel sales typically is made up for us probably the biggest variable in that is we still have.
The store sales out of the low hall, and Thats off the New Jersey Turnpike and we also have credit card revenues credit card revenues is really a function of crude and gasoline prices to all things equal the higher the price of commodities the more credit card fees. We have so that's probably the biggest variable and secondly, kind of the kind of similar to what <unk>.
<unk> mentioned on the <unk>.
On the second quarter ramping up a little bit quicker than we anticipated, but overall, we think the year is going to play out the way we guided in December is the.
Convenience store sales in Hawaii on the New Jersey, New Jersey Turnpike of also increased at a good rate force.
Okay. Thank you that's it from me.
Your next question John Royall with Jpmorgan. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
So this is the relatively big bite on the terminal acquisition relative to your acquisition activity over the past couple of years. So I was just wondering ultimately how large you envisioned the midstream business growing.
Relative to the distribution business do you have of targeted split in mind of between the 2 or is it really of more dependent on kind of the opportunity set that exists.
Hey, John I think you've captured on the backside I think is going to be driven on the opportunities that exist. We want to grow both of our business and I think the right way to think about it is not separately, but together, it's not an either or decision for us is really an integrated strategy for us where by adding terminals, where what we're really doing is vertically.
The grading and capturing a bigger portion of the of the field distribution margin and I think of an important thing of that Carl mentioned and I think it's worth reiterating as they work together the by.
By having terminals.
Field distribution business, we can keep our terminals.
Whenever we lose the third party customer we can fill it with their own volume and Conversely by having terminals like in the Midwest. It gives us more more points of supply, where we can grow our field distribution business. So.
We look at it as 1 kind of combined strategy, it's really on a geographic by geographic level. So the way that will grow is going to be really dictated by the kind of a combination of a valuation and realizable synergies.
The acquisition opportunities organic growth opportunities to come out where the valuation is right and we have a lot of synergies than we're probably going to be in a really good position to create value by doing it.
Okay. That's really helpful. Thank you and then.
The rest of the line, we're asked I'll just I'll just add.
1 is more housekeeping.
Just to clarify the 4 times leverage target.
Does that include the effect of the acquisition debt pro forma for the pre synergies EBITDA and the cash out for the acquisition.
Yes, yes.
I think as we look out and we look at the funding for this acquisition here.
Clearly, we have ability to put it on a revolver these revolver and operating cash flow, but we are we are evaluating some other some other alternatives as well without being too specific.
To make this acquisition kind of leveraged neutral on its own.
I will say, though there are no plans to issue common equity to fund any of this acquisition.
Okay. That's helpful. Thank you.
Your next question Elvira Scotto with RBC capital markets. Please go ahead.
Hey, good morning, everyone.
Quick question I know you touched on the inflation question, but are you seeing anything in terms of labor issues labor shortages.
Good morning Elvira.
Again like I said earlier, we're not immune to inflation and we haven't been immune to some of the labor challenges that we've all seen and heard about so whether we have our own trucking fleet.
We have.
Some of our own.
The employees that staff, the New Jersey Turnpike and convenience stores in Hawaii. So.
Yes, we've seen some of those those same challenges and then I think even in our professional staff and were.
Looking at options and we've already pulled the trigger on some changes to make sure. We are fully staffed and meet our strategy and I think the important point for a company like ours.
Joe and I have talked about before as you factor in inflation.
And what that does is we have some rising costs.
What the end result of that for us in our industry is breakeven margins go up so in reality companies like us are able to.
Take those increased costs ended it ends up increasing the breakeven margin. So we stay covered and in fact of large.
Companies that has the scale that we do.
Generally ends up on the favorable end of that because of those breakeven margins are set by smaller and less efficient operators.
Thanks, That's super helpful and then.
The next question is just around M&A it looks like you've done.
A few acquisitions on the terminal side, but can you talk about what youre seeing on the field distribution side you know what.
Does the M&A market look like in that in that area.
Of course, Joe.
The market really hasnt changed that much.
The wind back to let's say 17, or 18, where we did I think 4 of 5 during that time period and you look at what the market looked like of 19.2020 was obviously not the unappropriate kind of run rate market, but the opportunities that we see today is very similar to $17.18.19, the owner.
The difference from the Snow Coast perspective is we still have a good pipeline of organic opportunities. So we're going to continue down that path of doing organic project that we've been very happy with the result at the same time, we're definitely looking at that.
The fuel distribution acquisitions, and most likely if you like I mentioned earlier on to the previous caller that it's going to be the integrated strategy. So now we have more terminals and if there are organic opportunities around these terminals. So obviously, we're already looking at that if any M&A opportunities pop up around these terminals the that might be.
An additional factor for us to accelerate that but bottom line. The valuations are synergies from a few years ago remained exactly the same I think the opportunity about as far as the quantity remains rest of the same but we're more focused on organic but at the same time, we will look into fuel distribution acquisitions.
If the valuation of driving the right geography.
Great. Thank you very much.
I will now turn the floor over to Scott for closing remarks.
Thanks, everyone for joining us on the call today feel free to reach out to me with any questions. This concludes today's call have a great day.
Thank you for your participation you may now disconnect your lines.
Okay.
Yes.
Okay.
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