Q3 2022 Sunoco LP Earnings Call
[music].
Hello, and welcome to the Sonoco third quarter 2022 conference call at this time, all participants are in a listen only mode.
If anyone should require operator assistance. Please press star zero on your telephone keypad.
A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded its now my pleasure to turn the call over to Scott ratio. Please go ahead. 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, John <unk>, 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.
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 non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted please refer to the snow go LP website for a reconciliation of each financial measure.
I will now turn the call over to Dylan to discuss the third quarter results our outlook for the remainder of 2022, and our recently announced Peerless oil and chemical acquisition.
Thanks, Scott, we reported very strong third quarter results, the steep and persistent decline in commodity prices and continued volatility enabled strong margin capture meaningful capital that has been deployed over the past year is delivering strong returns and we continue to find new attractive opportunities to invest capital both organically and through <unk>.
Acquisitions.
Our balance sheet is strong with leverage below our four times target and we continue to generate meaningful cash flow for redeployment sonoco.
Sonoco is consistent financial results throughout commodity cycles, and various macro environments are a hallmark of our partnership and we expect a solid finish to 2022.
Moving onto Q3 results. The partnership reported net income of $83 million and adjusted EBITDA of $276 million compared to $104 million and $198 million, respectively. In the third quarter of 2021.
Volumes were approximately 2 billion gallons up about 1% year over year.
Fuel margin was $13 nine per gallon versus $11 three per gallon in the third quarter of 2021.
The fuel margin benefited from some timing impacts of added approximately $1 three per gallon.
Total operating expenses in the third quarter were $131 million up from $113 million in the third quarter of last year.
This increase was primarily driven by our deployment of growth capital, namely the new star in Gladieux energy acquisitions, and bringing the Brownsville terminal into operation.
Third quarter distributable cash flow as adjusted was $196 million, yielding a current quarter coverage ratio of two two times and our trailing 12 months coverage ratio of one eight times.
On October 25, we declared an 80 255 cent per unit distribution consistent with last quarter.
Leverage at the end of the quarter was three seven times, a decrease from the second quarter, reflecting higher EBITDA and lower revolver borrowings.
We expect to maintain leverage near our long term target of four point out times as the year concludes.
In Q3, we began gasoline blending operations in New York Harbor at our Linden terminal, which contribute to some of the strength in the quarter earlier.
Earlier, I mentioned, some timing impacts to fuel margins, which are primarily related to this activity.
Due to commodity market structure in inventory balances approximately $25 million of margin was accelerated from the fourth quarter benefiting the third quarter there.
Therefore from a margin perspective, it will make sense to look at the second half of 2022 and its entirety.
As a result of the strong performance year to date and our expectations for the remainder of the year. We are again, increasing our full year 2022, adjusted EBITDA guidance to $845 million to $865 million, excluding the recently announced peerless oil and chemical acquisition.
This $70 million acquisition expands our operations into the Caribbean and will be immediately accretive to unit holder value.
And the expected five to six times EBITDA multiple including synergies. This transaction demonstrates our continued ability to deploy capital at attractive valuations, while expanding and diversifying our core operations.
2022 is closing on a strong note and further demonstrates the continued effectiveness of our capital allocation strategy to enhance shareholder value. The three foundational pillars are one maintaining a stable and secure distributions for our unit holders.
Thanks, John Good morning, everyone.
Our team delivered another very strong quarter supported by exceptional margin strength consistent expense discipline and solid operations from both our core business and our recent investments.
Starting with volumes, we were up about 1% in the third quarter versus the third quarter of last year and flat with the second quarter of this year.
As prices have fallen from mid year highs, we've seen improved volume performance relative to prior years, which is an improvement from our second quarter commentary.
While there are various factors that can impact volumes, particularly.
Particularly on the gasoline side, we believe that the steep decline in prices during the third quarter contributed to this performance.
As we look forward the direction from here will depend largely on the trajectory of fuel prices and that of the broader economy.
The good news is that regardless of the path that volumes take we are confident that margins will support consistent cash flows as breakeven has continued to provide a reliable volume offset and our margin optimization strategies deliver protection on the downside and benefits and favorable conditions as we experienced this past quarter.
On to margins, which were very strong in the third quarter.
There are a few points worth highlighting.
First prices fell significantly during the quarter with our Bob decreasing over a dollar per gallon and diesel falling over 50 per gallon.
As we have highlighted in the past. These conditions typically result in margin strength in this quarter was no exception.
In addition to the fallen prices from the beginning of the quarter to the end of the quarter. There were significant price volatility during the quarter, which also provided positive support to margins.
The final point that I'll make is that the investments that we've made over the past few years are contributing to the bottom line.
To that I will highlight are the startup of the gasoline blending business in New York Harbor that Dylan mentioned as well as better than expected performance of the assets we acquired from Gladieux.
In the past, we've talked about the asymmetric performance risk of our business during market movements and 2022 is confirming this dynamic.
In the first half of the year, we demonstrated solid performance during the headwinds of a rising commodity environment.
And our third quarter results provide evidence of our ability to capitalize and deliver upside during favorable market environments, all while maintaining expense and capital discipline.
Dylan shared our updated guidance for the full year, highlighting the outperformance of our overall business.
If we step back and think about the third quarter, even considering the acceleration of margin from the fourth quarter, we delivered over $250 million of EBITDA.
We have revised our guidance twice this year both times moving up the first revision came because of the Gladieux acquisition today.
Today's revision comes as a result of outperformance in the second half of the year as we capitalize on what the market provides.
Our portfolio of organic investments and acquisitions are delivering on expectations. We.
We expect nothing less from the recently announced expansion of our midstream and fuel distribution businesses in Puerto Rico with the purchase of Peerless oil and chemical.
Peerless is an integrated business similar to snow because existing business and consists of fuel distributions through nearly 100 contracted service stations, almost all of which carry that proprietary eco Max brand as well as the terminal with one 6 million barrels of refined product storage.
The business has a deepwater port for import export as well as a roll on roll off barge dock that supports an export business to neighboring islands.
Our growth strategy has been focused on adding fuel distribution and midstream income at attractive returns, particularly where there are synergies between the two.
The Peerless acquisition as a strategic fit with this approach for a few key reasons.
First the business has been a well run and growing part of the Puerto Rican economy for decades.
We expect consistent demand for traditional motor fuels in Puerto Rico over the long term.
Second.
The Peerless platform is well positioned for expansion, both in Puerto Rico and in the neighboring Caribbean Islands.
Third and finally as Dylan mentioned earlier at an expected five to six times EBITDA multiple after synergies. The transaction is another example of our ability to deploy capital with attractive returns to our unit holders.
We're very excited about this business and look forward to welcoming the peerless employees to the Sunoco team.
Before turning the time over to Joe I want to reinforce the same foundation of our success that I've mentioned many times over the past few years.
Our solid business model enhanced with robust gross profit optimization and intense focus on expenses consistent and reliable operations and a growth program that delivers results to the bottom line.
We expect the Peerless acquisition to be another example of where this recipe will produce strong results Joe.
Thanks, Carl and good morning, everyone. We delivered a very strong third quarter. Although 2022 is not quite over I want to provide some perspective on our performance this year.
From a macro perspective 2022 has been highly volatile we experienced early year COVID-19 spikes to record high fuel prices. This summer to a gradual demand recovery. This fall within these differing market conditions, our portfolio of income streams and our ability to execute on our strategy has allowed us to deliver good results.
<unk> quarter after quarter.
As for the fourth quarter, we expect to have another good quarter. When you look at 2022 in totality, we expect to grow adjusted EBITDA by 13% year over year, using the midpoint of our revised guidance.
We have also successfully integrated recent acquisitions and deployed organic growth capital that is delivered solid returns while maintaining expense discipline.
We will continue to source and execute on attractive opportunities to deploy our increasing free cash flow.
All of this while growing our coverage ratio and maintaining a solid balance sheet.
We expect more of the same in 2023. This December we will provide a new investor presentation.
Which will include our formal 2023 guidance I'd like to preview a few key themes.
We expect to have another strong year in 2023.
Our proven track record of improving performance through periods of materials turbulence and volatility are compelling investment attributes.
Regardless of ones view on demand outlook inflation and recession risks and geopolitical uncertainty, we expect our staples portfolio of income streams to continue to deliver strong results in various scenarios.
Operator that concludes our prepared remarks, you may open the line for questions.
Thank you well now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys once again to ask a question today. Please press star one on your telephone keypad. Our first question today is coming from Elvira Scotto from RBC capital markets. Your line is now live.
Hey, good morning, everyone.
Can you provide maybe a little bit more detail on the guidance increase for the year.
You just mentioned that $25 million of margin moved into the third quarter from the fourth quarter.
Based on your guidance by about I think about $50 million. So can you just provide maybe a little bit more detail on what's driving that increase.
Yes. Good question, yes, so on the increase a lot of this is a result of what we're seeing that with fuel margins here in the second half of the year.
I think in the prepared remarks made a comment about needing to look at Q3 and Q4 in totality, because a little bit of the shift in earnings between the quarters, there, but when you look at that as a whole we really see is in strong fuel margins that we saw ability through the first part of the year have really been strong in the second half of the year and so when we look at.
Primarily the results of Q3, and what we see for Q4 around that it made sense for us to bump the range up today.
The new 845 to 865.
Okay. That's helpful and then.
Can you provide.
A little bit of color on what Youre seeing in terms of volumes may be what you saw.
<unk> volumes.
And how that's trended versus maybe like September .
Sure Elvira this is Carl.
I mentioned in my prepared remarks that.
We were seeing trends as you compared to last year or even back to 2020 or 2900, and some better performance.
The third quarter than what we've talked about in the second quarter and Thats continued into the into the fourth quarter I mean, theres a lot of factors going into.
Into that volume performance. We mentioned we felt there was some contribution from the lower prices on gasoline in the third quarter, but.
It's hard to parse out exactly all the different factors it depends on seasonality overall economic picture driving patterns.
But yes that that better performance in second quarter has has continued.
Great. Thanks, and then just the last one for me with respect to the Peerless toilet chemical.
Acquisition, I think you've mentioned that it's a five to six times EBITDA multiple after synergies could you maybe provide a little more detail on the types of synergies that you're expecting.
Yes.
Any other quantification of synergies.
Sure. This is Karl again.
Definitely as we look at it there are commercial synergies as we.
Figure out how to integrate with the rest of our business in the southeast of the United States and the Gulf of Mexico.
There are some expense synergies as well, but those those come really from the utilization or taking advantage of our scale and overall services or contracts.
<unk>.
We like the team that we are acquiring in Puerto Rico, and if anything look to look to grow that team as we I think I mentioned the opportunity to expand both in Puerto Rico and into neighboring islands. So so any expense synergies, we get there will really be by leveraging our overall scale.
Great. Thank you very much.
Net.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Robert Moskow from Mizuho. Your line is now live.
Hi, Good morning, everyone. Thanks for taking my question.
I don't want to start off at Linda and can you just talk about the blending activities there.
Interesting natural extension and managing volumes at that terminal and because this is a capability you guys acquired in the annex acquisition and.
Aware that blending margins are strong right now, but how do you envision this being a part of the income stream going forward, maybe on a more run rate basis.
Yes sure.
If you look at our Linden operation when we purchased this back about a year ago.
Terminal was full we have.
We had a customer base that we were happy with and the assets continued to perform over the last year there was.
A changeover in some of the contracts there and really there was plenty of demand.
For utilization of that terminal, we looked at it as an opportunity.
Four.
Getting into this gasoline blending operation, it's something I've looked at for a number of years the gasoline blending that we're talking about is a little more than just butane blending that debt I think.
People often talk about it's really both.
<unk> different components and blending that into finished gasoline and much of the gasoline that we.
We buy to sell in New York Harbor, we bought from other people that were doing that blending operation. So this was really an opportunity for us to lower our cost of goods sold and <unk>.
Do that activity ourselves, we have the capability on our supply and trading team and.
So really that's a little more.
Detail on what we're looking at and we think it should decrease our cost of goods sold on a on an annualized basis over the coming years.
Got it now that's interesting stuff and.
And maybe.
Going back to peer list.
Your transaction match are you kind of assuming margins similar to the rest of your wholesale portfolio. Just curious what margins look like in Puerto Rico, which presumably has a different consumption.
Profile <unk> lower 48, and then you mentioned expansion not only Puerto Rico, but in the Caribbean. So I guess, what's driving the interest there is it just.
Aspects for higher margins and maybe not as much lower hanging fruit in the U S.
Yes, I think as we've looked at that.
Peerless portfolio, you've heard Joe and I talk about that even in our existing business. We operate a portfolio of income streams and you have some volumes that you sell at higher margins and then you have some volumes that you sell at lower margins.
Depending on the customer base and that exists on a smaller scale in the Peerless acquisition. They they sell to they have their own proprietary brand of eco Max stations that they sell to you on the island and that's a nice stable volume and that has been growing over the last number of years, but in addition, they sell the.
<unk> customers in and other industrial.
Customers and they currently have.
And export business, where they.
They load trucks loaded on a.
What they call a railroader of roll on roll off barge dock and then send that product over to neighboring islands. They've already done that my comments are really we think there's opportunity to expand that beyond what they're doing today.
Got it that's great color. Thanks, Nick Thanks for the time everyone.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Scott for any further or closing comments.
Thanks, everyone for joining us on the call. This morning, I recognize it was a busy morning from Suvs. So please feel free to reach out to me with any follow up questions.
Otherwise, we look forward to seeing some of our investors and a couple of weeks at the RBC conference here in Dallas have a good day everyone.
Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.