Q1 2022 Sunoco LP Earnings Call
Greetings and welcome to Sunoco Lp's first quarter 2022 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
Key pad.
Minder This conference is being recorded.
My pleasure to introduce your host Scott, Chris Shaw, Vice President of Investor Relations. Thank you. Scott 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.
Karl fails Chief operations Officer.
Alan Graeme Halder, Chief Financial Officer, and other members of the management team.
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 <unk> website for reconciliation of each financial measure.
I'll now turn the call over to Dylan to discuss first quarter results and our outlook for the remainder of 2022.
Thanks, Scott before I walk through our first quarter results and accomplishments I'd like to start by thanking our employees for their efforts in delivering excellent financial results. This quarter again, it's one of the most difficult macro backdrops in recent history.
The team did an outstanding job of executing on our strategies in the face of a rapid increase in oil and gas prices, which resulted in the partnership reporting one of its strongest first quarters on record.
Moving on to M&A, we closed on our third acquisition in the past six months with the addition of the Gladieux energy assets to the Sunoco portfolio on March 31 2022.
This acquisition demonstrates our continued commitment to expand our midstream asset base with low risk solid return on capital deployment.
As a reminder, we expect a sub seven times EBITDA multiple on this investment, which combined with our ability to finance with a mix of low cost revolver borrowing and cash from operations results in very strong accretion to our unit holders.
Regarding guidance the 2022, adjusted EBITDA of between $770 million and $810 million provided in early December excluded the impact of the Gladieux energy acquisition, and we remain confident in that range for the legacy Sunoco business.
We are adding $25 million to this range to reflect the acquisition, which results an updated guidance of $795 million to $835 million.
Now shifting over to our first quarter 2022 results. The partnership recorded net income of $216 million.
Adjusted EBITDA was $191 million compared to $157 million in the first quarter of 2021.
Volumes were approximately $1 8 billion gallons, an increase of 1% versus the first quarter of 2021.
Fuel margin was $12.04 per gallon versus $10 three per gallon in the first quarter of 2021.
Fuel margin results include the benefit of the 711 makeup payment of $13 million.
Total operating expenses in the first quarter were $124 million up from $100 million in Q1 of last year and essentially flat to Q4.
This increase was primarily driven by the new Star terminal acquisitions.
And some additional costs that we reinstituted over 2020, one that had been temporarily caught during the onset of the Covid pandemic.
First quarter distributable cash flow as adjusted was $142 million, yielding a current quarter coverage ratio of 163 times on a trailing 12 months coverage ratio of 166 times.
On April 26, we declared $82 55 per unit distribution consistent with last quarter.
We continue to maintain a stable and secure distributions for our unit holders, which remains the number one color behind our capital allocation strategy.
Leverage at the end of the quarter was $4 three five times, which includes a significant increase in working capital associated with higher commodity prices for our fuel inventory.
We expect leverage to trend down toward our target throughout the year and could see an acceleration of this deleveraging if commodity prices decline from current levels.
In early April we closed on an amended and restated $1 5 billion credit facility.
The maturity date was extended out five years to April 2027, now substantially similar terms as the previous facility.
First quarter strong results. The recently closed acquisitions and the successful extension of our revolving credit facility demonstrate our commitment to maintaining Sunoco solid financial foundation and to increase value to our stakeholders through our strategy of disciplined capital investment and balance sheet management.
With that I'll now turn the call over to Karl to walk through some additional thoughts on our first quarter performance and recent growth initiatives.
Carl.
Thanks, John Good morning, everyone.
We delivered another strong quarter supported by continued strength in margins and expense discipline.
As Dylan mentioned commodity prices in the first quarter were highly volatile.
In addition, the dramatic horizon prices created significant headwinds for the first quarter.
Put it in perspective, both gasoline and diesel futures reached all time highs during the quarter and hovered around prices not seen since 2008.
From beginning to end gasoline futures were up 96 cents, a gallon and diesel futures were up 136 cents a gallon. Despite these.
These challenging market conditions, the first quarter again showed the resiliency of our business model.
Volumes for the quarter were up about 1% versus first quarter of last year.
As I mentioned in our last earnings call. There was some omicron related weakness in January with volumes returning in February .
We saw some volume weakness in March but are starting to see early signs of seasonal pickup in demand in April .
Looking at margins in the first quarter, we delivered strong margins of 12 four cents per gallon even in the face of the record price increases across the quarter that I already shared.
There are a few key contributing factors worth mentioning.
The first is the 711 makeup payment that occurs annually in the first quarter.
Second industry breakeven margins continue to stay elevated, especially in the face of rising inflation.
Finally, our gross profit optimization strategy continues to be part of our day to day business, which particularly helps us in volatile market conditions.
A few years ago, we introduced our hypothesis that our business model exhibited asymmetric risk to market movements.
Well, we are not immune to market dynamics. This quarter continues to show that our optimization strategies are able to counteract some of the effects of challenging market conditions like rising prices.
And then when the market provides favorable conditions with falling prices, we were able to capitalize and deliver to the upside.
I also want to add a few thoughts on expenses.
As we have discussed many times efficient operation and expense control is part of our DNA.
This year, we face headwinds on expenses with the impact of higher fuel prices and overall inflation.
Much of this impact was contemplated in our guidance given in December some was not.
The most important thing to keep in mind is that higher costs are generally pass through and contribute to higher breakeven margins.
As we use our size and scale to remain efficient. This can even be an advantage for us relative to other players in our space.
Moving on to Brownsville, we're excited to share that our terminals operational and commercial sales commenced in late March.
There will be a natural ramp in operations over the next 24 months or so.
We're excited to bring this organically developed asset into service with our strong domestic demand as well as the export opportunities from this strategic location.
We're also pleased with the closing of our <unk> acquisition at the end of the quarter.
The integration is going well and although we are early in the process. The business is performing as expected.
This is another meaningful expansion to our midstream portfolio.
As a reminder, the acquired assets consist primarily of the largest transmits processing facility in North America located in Huntington, Indiana.
As well as the associated refined product terminal.
We also acquired a long term operating lease in which we will operate Buckeye partners Indianola transmits facility outside of Pittsburgh.
As with all our midstream acquisitions, while we like the Standalone business. We are most excited about the combination of these assets with our fuel distribution portfolio and are looking forward to growing our presence in the Indiana market.
Before turning over to Joe I will reiterate the strength of our underlying business. We are off to a strong start to the year and we'll continue to focus on delivering results for our stakeholders through our proven recipe of gross profit optimization tight expense control solid efficient operations and growing our core business Joe.
Thanks, Carl Good morning, everyone, we delivered a strong first quarter dividend.
<unk> learned and Karl have walk you through the key details. However, there are few items I would like to further highlight.
On the volume side every quarter presents a unique set of challenges, but this quarter had more than most.
The volume recovery that we saw last year subsided at the beginning of the quarter due to a massive increase in Covid cases.
As cases start to go down and volumes start to recover a rapid and material increase in fuel prices became evident in every street corner.
The short and long term impact of higher prices is still to be determined.
The pace of continued volume recovery will center around a few key questions first.
Along with higher prices remain second how is the overall economy performing and finally, how many more workers will return to a more traditional pre COVID-19 commuter schedule.
Even with all of these questions. We do expect fuel volume to increase as the year progresses as a result of typical seasonality.
We expect margins to remain healthy given higher industry breakeven.
A key to Sunoco, earning power has been our ability to optimize fuel gross profit and control costs.
This has allowed 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 and looking forward, we expect 2022 to be another strong year.
Moving on to growth, we continue to strengthen our business by growing our midstream assets.
With the addition of <unk> and the startup of the brownfield terminal, we continue to vertically integrate and provide a more enhanced platform for fuel distribution growth. We will continue to look for attractively valued midstream assets with material synergy opportunities.
On the fuel distribution side will continue to grow organically and also look for attractively valued acquisition opportunities.
Let me close by stating that our current and future growth plans will build on our history of maintaining financial discipline, which means 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.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Q1 moment. Please while we poll for questions.
Okay.
Thank you. Our first question comes from Theresa Chen with Barclays. Please proceed with your question.
Good morning, and thank you for taking my questions.
First I wanted to ask about the near term margin outlook and understandably you had.
Very strong results in the first quarter. Despite the unrelenting upward move in wholesale gasoline prices for most of the quarter now that we moved into.
Second quarter and that pattern.
The pattern seems to be more normalized with volatility some increases and decreases depending on the day.
Would you expect the margin to be.
Better than first quarter or how should we think about that.
Hey, Theresa good morning, this is Carl.
I mentioned in my prepared remarks to a few different factors that really contributed to our first quarter margin.
And.
So first is the 711 makeup payment.
Second is really the our base gross profit optimization strategy thats really across the whole fuel supply chain and really as we've talked about before volatility.
Really our size and scale help us take advantage of that volatility and thats generally constructive.
And then the third is the higher breakeven margins.
We look forward into the year.
Some of those pieces are still relevant and some of them maybe not so much we're not going to have a benefit of a makeup payment from 711 in the second or third quarter.
I think the trend on the breakeven margin is going to continue with.
Inflation and other factors and then the gross profit optimization and volatility as you've said I mean, it's going to be hard to mimic the volatility that we saw in March but April was had its own volatility and we're starting may with some movements. So my crystal ball is perfect in terms of.
What the market conditions are going to be.
Got.
I think our system and our ability to take advantage of that is going to remain so which of those outweighs. The other in terms of where the margin is.
Not sure, but those factors and in our ability to take advantage of.
Is is how we look at it through the year.
And as we've talked before margins are these things that we have guided to on an annual basis there'll be some quarters that are stronger than others, but we think overall strength of our business will.
Way out.
Got it and sorry, if I missed this but what do the central gallons have been without the 711 attainment in first quarter.
I don't have the math I don't know Scott if you have that I think it's probably around 70 points. The exteriors 70 point right.
Got it.
And.
And just looking at the volume side of things and clearly the demand picture has remained Brazilians absence.
The impact of Covid current Joe's prepared.
Comments, but going forward as we're seeing the escalation in gasoline prices are you seeing any softening as far as that demand response to higher prices and when do you think will kind of reached that inflection point of demand elasticity and then similarly are you seeing any substitution along the octane car vessel itself.
Hey, Jason This is Joe as far as let me let me answer the second question first.
It's only been roughly about probably about 30 days or so so it's still a pretty short period of time whenever.
When March when prices started hitting record gasoline prices. So I'll, probably try to give you some insight by kind of looking back or separate in our crystal ball, probably look back at history and see if thats applicable on a going forward basis. So if you kind of think back to 2008 gas.
Gas prices were roughly sitting somewhere between $3 50, and $4 and when that happened.
We saw demand destruction happened winter for prices hit that $4 Mark back in 2000, and 2008 and during that time period, where we did see we saw some volume go down and we saw people trading down from premium down to down to a regular unleaded. So I think if you use that.
Kind of a point in time I think it has some potential applicability going forward one of the things to keep in mind about the 2008.
Prices sitting somewhere around $4 and above if you inflation adjust that that's more like a 525 price in today's environment and the one other factor you got to think.
Think about as you.
If you think about inflation and you also think about the efficiency of cards have improved since 2008. If you look at it kind of on a 20 year average of dollars per miles driven for an average American British sitting somewhere in the <unk>.
The kind of midpoint of that average the other big factor and I alluded to in my prepared remarks is the economy matters. In 2008, we saw high prices, coupled with the recession and the recession combination of $4 plus gasoline in recession is what really had really had volume going down so.
As I said in my prepared remarks this early.
The the effects of higher prices the economy and I think the commuter schedule is also an important element all those are playing out but with all that said I do believe that our volume is going to increase throughout the year. If you look at our most recent numbers.
Somewhere around mid April through today, we have seen a volume increase.
That started happening around this time, so those are some encouraging signs.
Thank you for the thorough answer.
Okay.
Thank you. Our next question comes from Spiro <unk> with Credit Suisse. Please proceed with your question.
Thanks, operator, good morning, guys.
First question is on M&A actually just thinking about funding future deals for the rest of the year. We look at your liquidity I think you guys are fine there no issues, but leverage has been ticking up kind of after these last few deals and Don I know you mentioned sort of a natural path to delevering as the year goes on but just curious is your expectation.
Spectation that you would prefer to sort of Delever first before getting more active again or is that not necessarily a gating item yet.
Yes, I think it's more of the latter at this point I will never take anything off the table I would say.
Youre absolutely right in the prepared remarks, I mentioned that we expect some deleveraging through the year.
I think if you look at our look at the guidance and then.
Depending on what happens with commodity prices that could be a bit of a tailwind as well.
And then we expect.
It probably lower lower inventory levels, a little bit from where they are today.
So all of that can lead to lower leverage I will say that right now when we look out at M&A, we're probably going to be a little bit more critical in our analysis and a little more selective there but for the right deal.
Don't think where we're at from a from a leverage standpoint, our liquidity standpoint would keep us out of the market.
Got it okay. That's helpful. Thanks Alan.
Second question, just looking for an update on J C Nolan and how that's running it sounds like demand has kind of been moving higher in that basin, but we're also seeing more competition to mute move fuel there as well. So just curious how youre thinking about the performance of that pipeline and the competitive dynamics going forward.
Yes Spiro.
I've talked about before how our west, Texas business and our diesel demand has lagged the recovery in the rest of the country and I'd say in the last three to four months theres been some catching up out there as you would expect with these higher oil prices activity.
In drilling and fracking has increased and we've seen that in the in the pipeline volumes. So I wouldn't say, we're quite back to where where the pipeline was in the first if you remember that pipeline started up at the end of 2019 and it was just ramping up.
In the first quarter and kind of in full operation of the first quarter 2020.
And then the Covid demand impact occurred we're not quite back to those volumes, but we've had a few days and weeks back to those volumes. So it has been promising.
Got it helpful color as always thanks for the time guys.
Yes.
Thank you. Our next question comes from Gabe Moreen with Mizuho. Please proceed with your question.
Hey, good morning, everyone. I know this shouldn't really have much of a bottom line impact, but just curious what sort of income tax stuff flowing through the Tcf find was it seemed like it was related to a prior transaction.
Yes. This is bill and absolutely it's related to the.
The 2018 return that included the divestiture of the retail assets to 711.
So in the first quarter, we filed an amended <unk>.
<unk> state income tax returns related to that 2018.
And with this updated returns.
We had some increase in tax basis that resulted in about a $40 million refund.
And so what you are looking at there on the distribution on the DCF reconciliation is.
Is that that refund that cash tax refund, but since that related to the M&A transaction.
That's where you see that line item that you don't normally see where it backs that back out. So we're not taking credit for that in DCF. The only other place you see that showing up is.
On the balance sheet, that's part of the increase there in the current asset line as well as we have we have a receivable on that we will expect to receive that cash in later this year.
Got it. Thank you and then maybe if I could just ask one broader question on industry breakeven I mean.
So just related to that Carl mentioned there are costs.
Costs are increasing throughout some of your anticipated somebody you didn't can you talk about kind of what you did and didn't anticipate and what youre seeing.
Some unexpected pressure, whether it's pass through or not and then.
I assume look relative to smaller wholesalers sonoco, clearly cheaper cost of capital, but I'm just wondering if youre seeing do you think theres pressure on others with these high commodity prices.
Is that there's a potential to raise industry breakeven as a result, if gasoline stays where it's where it currently is.
Yes Gabe.
I'll give you example of some some of the.
Cost pressures that we anticipated things like wage increases and an increase in some of our service partners, we baked that into our assumptions and we haven't seen anything there.
Thats that.
We did not anticipate.
An area of cost that we didn't necessarily have baked into our original guidance would be.
Credit card fees, so obviously.
We pay.
For credit cards to be processed some of that is is pass through with our customers our wholesale customers, but we pay that four seven.
70% to 80 sites that we company operate right on the New Jersey Turnpike in Hawaii, we pay those fees now those are generally going to be covered in margins.
But those are often based on the absolute price of the fuel.
Since it's a percentage fee and so we didn't necessarily anticipate that we were going to have the retail prices that we have this year.
All things being equal we prefer the prices be lower than they currently are.
So that's an example of an expense that we didn't anticipate in our guidance, but that will be pass through.
And that impacts higher breakeven margins.
And then building onto your second question, Yes, we think.
Our size. This is another example of our size and scale that where it benefits us as we are able to.
With withstand.
Inflationary pressures or periods like this where capital gets tight the working capital requirements based on the higher prices are higher and we're able to withstand that where maybe some smaller competitors in the marketplace.
Struggle with that and that will put upward pressure on the breakeven margins.
Thanks Carl.
You bet.
As a reminder, 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.
Our next question comes from John Royall with Jpmorgan. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question.
So just back on the Opex just looking at your.
Guidance.
<unk> will take about a quarter of the high end of the guidance range.
I know, there's a variable component with volumes moving up throughout the year.
<unk> also got this acquisition that you bumped up the EBITDA guidance, but you didn't move the opex.
As well as the pressures youre talking about so.
Interpreting this correctly.
Maybe that that Opex guidance is biased upwards, but it could be offset.
The margin is that kind of what's the messages.
No you didn't move the guidance numbers for anything with EBITDA. So just wanted to make sure I understood that.
Yes.
You're right we did not move any we did not we only updated the EBITDA guidance and so.
The Opex guidance is now is out sale.
That said I think as we look at it obviously theres going to be some opex related to gladieux.
I think.
You pointed to some of the seasonality I think some of the seasonality that we see in Opex.
We've taken out of the business a little bit we've done some things.
To smooth out some things with some changes in.
We accrue for items, so that we don't get some of the Lumpiness there.
And then the last one I'll touch on really is what you hit there you noted is that some of it's more of a pass through.
Margin in things like credit cards.
Carl talked about there and so.
It kind of put that altogether and you know like I said, we're not we're not updating guidance, but I think that should that hopefully gives you a little bit of clarity in how we're looking at opex going forward.
Yes, yes understood. Thank you and then just wanted to 711 makeup payment payments this year I think with smaller than last year.
So volumes.
You've got volumes codependent in the right direction and I think we all hope that.
That way.
Just the question is.
No you won't get too granular here because it has to do with the contract just trying to think through how much growth, we would need to see from here.
For that contract to kind of not be underwater anymore and that you're thinking about these these payments anymore or are we sort of getting close there or are we still.
Have a little bit to kind of dig out.
Yeah.
Yes.
How I think about it and you already touched on it I, probably I'm not going to give you a clear answer and here's why is it's really at seven elevens discretion and choice on how they manage that overall our relationship with 711.
Good as it's ever been and they're a great partner and we really like the contract but.
One of the things we got out of that contract is a guaranteed gross profit on an annual basis and one of the things. They got out of the contract has some flexibility to manage that volume the way that it makes sense for them and their business and so so some of that makeup payment is really driven by the <unk>.
<unk>, just theyre, making I wouldn't necessarily give it as a read through on industry wide volumes.
So I would expect we're going to be in a similar to slightly smaller range, but again I don't want to take any of the flexibility or give too much guidance on what seven elevens plans are.
Understood.
You don't mind, if I could just sneak a third one in there.
Guys are just.
Such a huge player in gasoline and I just wanted to get your view on.
The waiver of the ETF team clarifying Ben do you expect that to be.
Have any real impact on your business or is that just.
Maybe not as impactful as politicians may want us to think of it.
Yes, <unk> is a product that is going to continue to grow.
In demand, but it's starting from a really low base.
If you dissect.
The one pound waiver, it's really only available on conventional gasoline market. So so that already says that that limited to a certain geography.
And then I think there've been some retailers and wholesalers that have offered 15 with some success and there are others.
Who have have offer it and it hasnt really.
Taken off as much and then the other thing with today's prices one of the things that <unk> that makes it interesting is that even when you adjust for the lower Btu content. It is still a cheaper fuel which in today's market is.
Makes it more attractive, but we still haven't seen a huge demand.
Pick up for that and then.
From our perspective.
It's not clear whether the margins on that are going to be any better or may be even worse.
E 10 so.
That's how we're looking at it from our view is is even though it's a pretty small base. We're looking at ways that we can sell and offer more <unk> for our customers and as that demand picks up that will become a bigger part of what we sell it's just not material right now.
Okay. Thank you guys.
Thank you. Our next question comes from Ned Bearable with Wells Fargo. Please proceed with your question.
Hi, good morning, Thanks for taking the question.
You reaffirmed gross Capex guidance for 2022, and this is after a fairly light.
Q1 spending budget so maybe.
If you could if you could just talk about the cadence of Capex for the remainder of the year.
And go over some of the larger items that could bring capex above the 150 million threshold.
Yes, I'd say I wouldn't read through anything in particular Q1 has traditionally been a lighter capital quarter for us for a multitude of reasons.
And we still are comfortable with the $50 million of maintenance spend of $150 million.
Of growth capital.
If you look at the larger projects I mean, we're finishing up the.
Back half of the brownfield projects is a component of that growth Capex and then the vast majority of the rest of the growth is is on signing up new fuel distribution customers.
Thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to Scott, Chris Shaw for any closing comments.
Well, thanks, everyone for joining us on the call. This morning, as always feel free to reach out to me with any follow up questions. We'll see everyone. Soon.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
Yes.
Yes.
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