Q2 2022 Sunoco LP Earnings Call
[music].
Greetings and welcome to Sunoco Lp's second quarter 2022 earnings 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.
Mind you. This conference is being recorded I would now like to turn the call over to your host.
Scott we're though.
Vice President Investor Relations and Treasury. Thank you you may begin.
Thank you and good morning, everyone on the call with me. This morning are Joe Kim Snowbelt, Pease, President and Chief Executive Officer.
Karl fails Chief operations Officer.
Hillenbrand Hall, 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 feature 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'll now turn the call over to <unk> to discuss the second quarter results and our outlook for the remainder of 2022.
Thanks, Scott the second quarter brought a continuation of sonoco strong financial performance with the resiliency of our business more evident than ever Sonoco is consistent financial results throughout the commodity cycles and various macro environments have become the hallmark of our partnership we expect the second half of the year will bring more of the same.
The free cash flow generation of our operations allows us to remain consistent in our capital allocation strategy and focus on our three pillars.
First to maintain a stable unsecured distributions for our unit holders second to protect our balance sheet through debt pay down when prudent.
And third to pursue disciplined investment in our growth opportunities like the recent acquisitions, we've announced in the past few quarters.
With leverage around our target level and strong distribution coverage, we were able to reinvest increasing amounts of capital back into the business through organic growth and acquisitions the.
The result is value accretion from these investments, which creates a positive feedback loop that leads to increased distributable cash flow and increase DCF per unit, all while preserving a strong balance sheet.
Regarding guidance in May we added $25 million to our previous EBITDA range to reflect the acquisition of Gladieux energy. We are reaffirming our updated full year 2022, adjusted EBITDA guidance of $795 million to $835 million and we remain highly confident in our ability to hit these numbers.
Now shifting over to our second quarter 2022 results. The partnership recorded net income of $121 million and adjusted EBITDA was $214 million compared to $201 million in the second quarter of 2021.
Volumes were approximately 2 billion gallons up 3% versus the comparable period of 2021.
Fuel margin was $12 three per gallon versus 11, three <unk> per gallon and total operating expenses were $128 million up from $102 million in Q2 of last year.
This increase was primarily driven by the new star in Gladieux asset acquisitions, and some additional costs that we reinstated over 2021 that had been temporarily caught during the onset of the Covid pandemic.
Second quarter distributable cash flow as adjusted was $159 million, yielding a current quarter coverage ratio of 183 times on a trailing 12 month coverage ratio of one seven times.
On July 26, we declared an 80 255 cent per unit distribution consistent with last quarter.
Leverage at the end of the quarter was $4 one seven times a decrease from the first quarter as we worked through the integration of the Gladieux acquisition and got down to a lower run rate inventory level. We.
We expect to continue to work this number down closer to our long term target of 4.0 times as the year progresses.
The second quarter's strong results demonstrate our continued consistent performance throughout any operating environment.
Our belief is at Sunoco to financial stability and distribution yield make our equity a very compelling value proposition during these volatile times.
With that I'll now turn the call over to Karl to walk through some additional thoughts on our second quarter performance and recent growth initiatives.
Thanks, Joanne and good morning, everyone.
We delivered another solid quarter supported by continued margin strength and expense discipline.
Starting with the market commodity prices in the second quarter continued the extreme volatility that we saw in the first quarter.
From beginning to end, our Bob gasoline futures were up around 50 cents, a gallon and from peak to trough, we're up over one dollar a gallon.
Diesel futures were even more volatile with a similar 50 plus cent per gallon rise through the quarter.
But up over a $1 50 gallon from peak to trough.
During the latter half of the quarter, our Bob and diesel future prices eased, which contributed to some much needed relief to customers at the pump.
Which has continued into the third quarter.
Just like the American consumer Sunoco prefers a lower price environment.
But despite the high prices and challenging market movements in the second quarter is yet. Another example of the resiliency of our business model.
Volumes for the quarter were up almost 3% versus the second quarter of last year.
If we go back to the beginning of the year volumes were depressed in January due to the effects of almond crop.
But they improved compared to last year and the back end of the first quarter.
Then with the run up in prices beginning with Russia's invasion of Ukraine, we started watching for demand impacts.
We added volume with our Gladieux acquisition at the beginning of the second quarter that counteracted any losses.
As we ended the second quarter and have started the third quarter. We continued to see some minor reductions in volumes consistent with other published data.
Well, we obviously watch volumes closely the last few years have demonstrated that regardless of demand trends margins will adjust and we will deliver on our gross profit expectations.
On the subject of margins in the second quarter, we delivered strong results of $12 three per gallon.
This is one more period of strong margins, even in the face of dramatic price increases across the quarter.
These margins were supported by the same factors that we've talked about in the past.
Industry break evens are continue to stay elevated, especially in the face of rising inflation.
Our gross profit optimization strategy that is part of our day to day business, which particularly helps us in volatile market conditions.
I've talked in the past about the benefits of volatility on our margins in this quarter was another example of that.
It is also worth pointing out that while we continue to talk about our resilient business model. This has not happened by accident.
Starting with the divestment of much of our retail network almost five years ago.
We continued to adjust and refine our business portfolio to strengthen and solidify our results.
Many of these changes have been visible with our acquisitions.
Building up a stable transmits processing business and increasing our footprint and product terminals.
And some of these changes are more behind the scenes as we fine tune and adapt our fuel supply strategy and evaluate our various sales channels and move sites from one channel to another when it makes sense for both us and our customers.
So in addition to a track record of good financial results.
We've also established a track record of adapting and improving our business as markets and external factors change.
I also want to provide some updates on our Gladieux acquisition in Brownsville terminal ramp up.
We now have a quarter under our belt with Gladieux and it has confirmed what we liked about the business.
The employees have been a great addition to our team and the assets are performing as we expected.
Brownsville continues to ramp up.
In addition to our own fuel distribution volumes that we move to the terminal on startup.
Some of our third party partners have now moved into the terminal and are ramping up their volumes.
So overall, we expect to deliver on our expectations with both of these additions to our portfolio.
Yes.
On expenses Dylan shared that we were up sequentially in the second quarter, primarily as a result of our <unk> acquisition.
In addition, when we compare to last year. There are some items like credit card fees that are higher than the current market condition.
But are generally pass through and don't impact our EBITDA.
We've also talked about expenses that we brought back into our business in the second half of last year.
Primarily investments in our workforce these.
These are all included in our outlook for the year.
The same expense diligence that we've demonstrated during the last few years is still in place and will be into the future.
Before turning over to Joe I will reiterate the resiliency of our underlying business.
We will 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 as we start the second half of 2022.
Joe.
Thanks, Carl and good morning, everyone. We delivered a very strong second quarter Dylan and Karl have walked you through the key details. However, there are a few items I want to emphasize.
We've seen record prices for both gasoline and diesel this year prices have retreated since the June high point, but it remains above the average price over the last decade.
The demand recovery that we expected this year has been affected by higher prices.
However for the second quarter, we did see an increase versus last year.
Looking forward, we expect fuel volume for the second half of this year to be similar to the first half.
As I stated on our last call the longer term impact of higher prices is still to be determined.
Fuel demand will center around a few key questions.
How long with higher prices remain how many more workers will return to a more traditional pre COVID-19 commuter schedule and finally, how is the overall economy performing.
Even with all of these questions. We expect 2020 to be another strong year for sonoco.
Margins should remain healthy given higher industry break evens and continued volatility. In addition, we will continue to actively manage all aspects of our business to optimize for expected and unexpected conditions.
Over the last five years, we've demonstrated our business can delivered consistent results and disciplined growth and evolving market conditions.
That's the foundation, our core business remains strong and resilient and more importantly, we expect this to continue.
Within various macro volume scenarios, we expect to optimize gross profit and deliver attractive results.
Also we have prudently invested over the years and has resulted in EBITDA growth, while growing coverage and lowering leverage.
We expect our growth strategy to yield attractive return opportunities in the future and we 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.
In uncertain times, we expect Sunoco to be one of the most resilient performance in this sector. Operator that concludes our prepared remarks, you may open the line for questions.
Thank you at this time, we'll 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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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the sarkies one moment. Please while we poll for questions.
Hi, first question comes from Gabe Moreen with Mizuho. Please proceed with your question.
Hey, good morning, guys congrats.
Congrats on managing all the volatility out there I had a question on.
Given that volatility.
Whether youre seeing any other wholesale smaller wholesale distributors, having a more difficult time navigating the environment.
Or does that maybe shaking anything out from an M&A standpoint has always just curious on thoughts on M&A in general.
Hey, Dave It's Joe.
Let me take those questions in two parts as far as other wholesalers I think probably the thing to keep in mind as we've mentioned it on previous conference calls about higher breakeven. So the higher breakeven should be helping the overall industry as a whole with higher margins.
For demand recovery trend line that we're seeing with that said I think it's like with any other industry. The more efficient operators are going to do better in those environments and less efficient operators are going to do worse and with our scale. We are definitely on the most sufficient operator from field distribution standpoint, so overall for the sector at higher breakeven is going to help.
Everybody, but some people are going to win more than others as far as on the M&A side, what we're seeing is something pretty similar to what we saw last year, both for fuel distribution and midstream I still believe it's a buyer's market, especially for strategic separating synergies to the table. After sonoco, we're in a good position.
So when the right opportunity comes up at the right price I think we are in a very good position.
The act upon it.
Okay.
Thanks, Joe and then maybe if I can there was some discussion about reintroducing some of the investments that you may have or costs that you may have scaled back due to COVID-19 I'm, just wondering kind of where you are in that process what are the current.
Quarterly run rate on expenses.
So a lot of the I guess fluctuations from credit card fees, whether that's a good run rate.
Yes, Gabe this is Carl and I think I think you hit the nail on the head that that minus some of the costs that are generally pass through that might adjust with the market like credit card fees, Yes, I think I think we're at a good run rate and <unk>.
One of the things that I think we've done well is is we brought some of those costs back but we've also added.
Whether it's through growth capital or through acquisition right. We put a lot of money to work right. So we still think even as we continue to grow that we'll be able to stay efficient very efficient on the expense side.
Great. Thanks Carl.
Yes.
Our next question is from Elvira Scotto with RBC capital markets. Please proceed with your question.
Hey, good morning, everyone. I was wondering if you I know you touched a little bit on a demand destruction, but maybe how does the.
July volumes look versus the year ago, or maybe the previous month and just sort of what's your what youre seeing here at the start of the third quarter.
Hey, Joe.
Volume I think I'm going to work a little bit backwards on this because I think the path that we've been on this year is interesting is that if you look back to 2021, there was momentum on the volume recovery in the US Then we enter into January and then we have a coker spread happened in the U S. Obviously that depressed.
Then after the.
The COVID-19 spread mitigated we started to see year over year growth in volume and in March the Ukraine more breaks out and then high prices enter the market and we start seeing demand go back down again. So if you if you kind of put all of that to perspective, the second quarter, our best ever.
Estimate for U S demand, we think is probably down about 5% on a second in the second quarter heading into July and August we're seeing that same trend line kind of play out on what happened in the second quarter.
For Sunoco.
Specifically I think the thing to keep in mind is that is that regardless of how what's demand recovery scenario plays out I think our history has shown that we're going to deliver consistent gross profit if demand goes up we're going to we're going to enjoy the benefits that if demand goes down breakeven is are going to go up and we're going to balance that off with higher margins.
So that's kind of where we stand right now.
Great that makes sense. That's helpful. And then can you talk a little bit about our labor I know them you know in the past that had been.
Got it.
Tightness in the market, but just curious if you're starting to see some loosening in the labor market and then specifically for Sunoco.
Yeah <unk>. This is Carl I think.
I mentioned in my prepared remarks, we've made some investments in our people and I think some of that is is us starting even back going back into last year.
Any changes, whether it's in wages or targeting a certain areas and beefing up our our staffing to make sure that we dealt with that since we've made those changes I think we're in a good position and we're comfortable I mean on the one hand, we think that we're a good.
<unk>.
Good employer and have a lot to offer to people come work for us.
And we've been able to I'd say for the last six six months or so we've been in a good spot there.
Great. Thank you and then just my last one.
I know you talked about some of the things that you've been.
Some of the changes behind the scenes such as fine tuning your strategy and sales channel can you provide a little more detail around around those comments.
Yes.
I mean, well.
We've talked about this in the past that we really operate a portfolio.
<unk>.
Income streams and through our different sales channels.
It's really an opportunity for us to look at and optimize maybe be have a higher weighting in some geographies and one sales channel than another.
<unk>.
We would actually love to share a lot more detail about our sales channel, but we think that that how we manage those as one of our competitive advantages and one of the reasons why we don't provide more detail on individual volumes and margins in those channels. So I don't know that I can give you a lot of number.
In specifics, but I can I can give a couple of examples we control a lot of properties ourselves.
And so one of the things we do is we work with our customers.
We have various whether it's.
Dealer operation or we've talked about our commission agent model and.
That's one example of we'll work with our customer.
And maybe changed from one of those to another that's mutually beneficial. So those are the kind of things would that I mean, when we talk about sales channel optimization.
You know there are others, where we're maybe it might make sense for us to move from a dealer model to a distributor model. Those are couple of examples.
Great. Thank you very much.
Net.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question comes from John while with J P. Morgan. Please proceed with your question.
Hey, guys. Good morning, Thanks for taking my question.
Just had a follow up on the inflation and Opex side, I know you've spoken to it a little bit but.
<unk> it looks like a pretty.
The modest amount of growth over the first quarter, given how much volume growth you've had in an acquisition being being layered in as well. So just wondering if there are some efficiencies that you've captured or anything else you can speak to on the Opex side.
I expected a little bit more growth in <unk> than what we actually saw.
Yes, John Thanks, Good question here no.
No the really from two <unk> to <unk> that amount is really entirely going to be related.
Through the acquisition in fact, a little bit more than that so you are seeing.
You are seeing some benefits there are just a little bit of a little bit of optimization and efficiencies are running through there as well like Carl said I think as we've gotten.
We've gotten to this point here integration is going great on both the acquisitions and when we're seeing the efficiencies we hope to see there and I think we are like you said absent some of these.
Some of these items like credit card.
<unk> with volumes and pricing at a pretty good run rate here now with the second quarter numbers.
Great. Thanks, that's really helpful and then just.
Looking at your balance sheet leverage.
Its rationing down relatively quickly it seems like.
It could continue to if the environment stays strong you don't have any major M&A.
Can you just talk about how your strategy might change when you get to the four times.
I don't think you have much desire to raise the distribution. So how do you think about the uses of cash once you're at your leverage target.
Yes, I think right now we're.
We're leaning into growth.
The leverage target and with strong coverage.
As I said in the prepared remarks, we are increasing amounts of capital to redeploy into organic growth and M&A.
And the returns that we're able to see right now in the market.
Both from both from what we're seeing in the M&A market as well as the organic opportunities. We have are providing really strong returns and so.
I think that's where that's where we lean into is that we see that providing the best benefit and the best value long term to our unit holders.
Yes.
Great. Thanks very much.
Our next question is from Ned <unk> with Wells Fargo. Please proceed with your question.
Hey, good morning, Thanks for taking the questions.
You reaffirmed your growth Capex guidance for 2022.
And it seems like this is after a fairly light spending in the first half of the year could you maybe talk about the cadence of Capex in the second half of the year.
Yes, you bet.
If you look back at our last.
Probably two or three years.
We've been back weighted on both our maintenance and our growth capital and I think that's.
Due to two reasons one it's intentional on our part we think it's prudent for us to to.
To have more capital in the back part of the year.
Really was to our advantage in a year like 2020, when something very unexpected hit it was very easy for us to control our capital we didn't have too much overly committed and we were able to adjust that spending. So that's one it's just kind of a management preference that will back weight our capital and then two part part of it is just the nature of our biz.
<unk> in the cycle of you think about on the organic side.
On the growth side, sorry, a lot of our capital is spent to sign up new customers on seven to 10 year contracts and just that natural cycle often leads to us are spending more money in the third and fourth quarters and in the first and second quarter. So we're still comfortable.
We're going to hit those numbers that we share.
That's great. Thanks, Thanks for the color and then a question on some of the acquired New Star assets. I think you previously noted they could be.
Potentially trending lower than your original expectations given the.
The higher exposure to storage.
It does not farewell during periods of backwardation could you provide an update on your expectations there.
Yes Ned.
I think we are really still happy with our new star assets in.
Don't see.
US trending below those expectations.
Yeah, the storage market is tough and in backward dated market like we have but we have really good assets. We have really good commercial team and so we're yes, we're still feeling really good about those assets.
This is Joe I'll go even stronger than Carl we're very happy with the X.
We had high expectations for the new store asked us and were delivered on it and that's actually see more upside than downside even based on our on our original what's the economics that we put out.
That's perfect. That's all I have today. Thank you.
Thanks.
We've reached the end of the question and answer session I would now like to turn the call back over to Scott <unk> for closing comments.
Well, thanks, everyone for joining us on the call. This morning as always if you have any questions feel free to reach out and we will talk to everyone. Soon have a great day.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.