Q4 2022 Sunoco LP Earnings Call
Greetings and welcome to the snooker Lp's fourth quarter and full year 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 keypad as a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Scott Michel Senior Vice President of Investor Relations and Treasury. Thank you. Sir 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, John Brian 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 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 certain non-GAAP financial measures, including.
Including adjusted EBITDA and distributable cash flow as adjusted please refer to the Sunoco LP website for a reconciliation of each financial measure.
Okay.
I'd like to start the call by looking at some of our fourth quarter and full year 2022 highlights.
Adjusted EBITDA for the fourth quarter was $238 million compared to $198 million a year ago, an increase of 20%.
The partnership sold 2 billion gallons in the fourth quarter up 5% from the fourth quarter of last year.
Margin for all gallons sold was $12 eight per gallon compared to 12 cents per gallon a year ago.
Total fourth quarter operating expenses were $138 million, an increase of $15 million from the same period last year.
Fourth quarter distributable cash flow as adjusted was $153 million.
Third to $143 million in the fourth quarter of 2021.
Adding a coverage ratio of one eight times.
Average ratio for the full year 2022 was one nine times.
On January 25th we declared an $82 five five cent per unit distribution consistent with last quarter. This.
The stability of our business and history of delivering results continues to support a stable and secure distribution for our unitholders.
Finally on November 30, we completed the acquisition of Peerless oil and chemicals, Inc, and establish terminal operator, and fuel distributor within Puerto Rico and throughout the Caribbean.
Now shifting over to our full year 2022 results and accomplishments.
We delivered adjusted EBITDA of $919 million up 22% from last year.
Distributable cash flow as adjusted was $650 million up 20% versus the prior year.
We improved our coverage ratio to one nine times.
From one six times in 2021, and one five times in 2020.
Our liquidity position and balance sheet remained strong with availability on our credit facility of approximately $600 million and leverage at the end of the year of three eight times below our target of 4.0 times.
Finally, our strong financial position allowed us to take advantage of a diversified set of growth opportunities in 2022, including the acquisition of Gladieux energy and Peerless around chemical.
With all of these accomplishments as a backdrop, we entered 2023 poised to continue to deliver strong results and I would like to take a moment to reaffirm our 2023 adjusted EBITDA guidance of between 850 and $900 million.
Underpinning this guidance are the following assumptions fuel volumes of approximately $7 8 billion gallons and fuel margin of approximately 12 cents per gallon.
Total operating expenses of between 525 and $535 million maintenance.
Capital of approximately $60 million and growth capital of at least $150 million.
Our strong distribution coverage and balance sheet.
<unk> two last naphtha to invest in growth opportunities, which will contribute additional value to our stakeholders for years to come.
A stable base business combined with contributions from acquisitions and organic growth will continue to generate free cash flow and allow us to focus on the three pillars of our capital allocation strategy first to maintain secure distribution for our unit holders.
To protect our balance sheet and third to continue to pursue disciplined investment in growth opportunities.
This consistent financial results throughout various macroeconomic environment have become the hallmark of our partnership.
And we expect 2023 will bring more of the same.
With that I will now turn the call over to Carl.
Thanks, Scott good morning, everyone.
Our team delivered yet another great quarter supported by continued margin strength.
<unk> expense discipline and solid operations from both our core business and our recent investments.
Starting with volumes, we were up about 5% in the fourth quarter versus the fourth quarter of last year and flat with the third quarter of this year.
We have continued to see improved volume performance relative to prior years as we have realized volume contributions from our capital deployed both organic and through acquisitions.
With respect to margins the margin performance over the last few years continued in the fourth quarter.
There are a few consistent themes that contributed to these margins.
First the fourth quarter began with a strong margin tailwind from dramatic price declines during the third quarter.
Second if we look at overall price movement during the fourth quarter, both gasoline and diesel futures ended the quarter about where they started.
But there were significant price volatility during the quarter, which supported margins.
In addition, we continue to see the benefit of higher breakeven margins and finally, the investments that we've made over the past few years are contributing to the bottom line.
Specifically, we had one month of our Peerless acquisition as well as a full quarter of our New York Harbor blending operations.
If we look at the entire year, our financial performance was a tale of two halves that clearly supports the asymmetric risk profile of our business that we have discussed before.
In the first half of the year, we were able to demonstrate solid results during the headwinds of rising commodity prices.
While the second half continued to show our ability to capitalize and deliver upside during favorable market conditions.
All the while maintaining expense and capital discipline in any market environment.
In regards to expenses, we did see an uptick in the fourth quarter from the third quarter.
This is primarily due to the closing of our Peerless acquisition on December one and other employee expenses.
Expense management remains one of our core strengths.
And as we always have been we remain committed to achieving our 2023 expense guidance.
As we look forward into all aspects of our 2023 business, we expect another strong year.
As we sit here today, we don't know exactly what the overall economic conditions will be for where product prices will go we.
We do have much more confidence that breakeven margins will remain elevated in the commodity markets will remain volatile.
As our business has shown over the past few years, regardless of the market condition, we expect solid results.
Our portfolio of organic investments and acquisitions continues to deliver on expectations.
We are especially excited about the 2023 opportunities provided with our most recent acquisition of Peerless well.
Well, we have only operated the business for a little over two months. Our synergy capture is ahead of schedule and we expect the business to outpace our original deal assumptions.
More broadly we are confident that we will continue to be successful in deploying capital whether through organic growth or additional transactions.
Before turning the time over to Joe.
I'll wrap up by stating that we are off to a very good start to 2023 and as expected. We will continue to focus on delivering results for our stakeholders through our proven strategy of gross profit optimization delivering on expenses solid and efficient operations and growing our core business.
Joe.
Thanks, Carl and good morning, everyone. We delivered a very strong year in 2022.
We came into the year financially healthy and we finished stronger than when we started.
I'd like to point out a few financial highlights from 2022.
Our business remains highly resilient within various macro environments.
Our capital deployment continues to provide incremental EBITDA and DCF growth.
As a result, we delivered a record year for both EBITDA and DCF.
Our LTM coverage ratio is now around one nine times, while our leverage ratio continues to stay below our four times target.
Looking forward, we expect 2023 to be another strong year.
Provided guidance back in December .
We're about a month and a half into the new year and we're off to a very good start.
As you think about our business for 2023 keep in mind the following <unk>.
Regardless of one's future outlook, we have a proven track record of performance through periods of economic and geopolitical volatility.
Our portfolio of income stream and our ability to execute on our strategy has allowed us to deliver solid to strong results quarter after quarter.
We will build on our history of strong expense management, coupled with effective and responsible capital deployment.
On the subject of growth, we will continue to look for value by and investment opportunities to strengthen and vertically integrate both our midstream and field distribution business.
All of this built on keeping our balance sheet strong.
Bottom line, we expect to have another strong year in 2023, 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.
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We ask that you limit yourself.
To one question and a follow up so that others may have the opportunity to ask questions.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Theresa Chen with Barclays. Please proceed with your question.
Good morning, everyone and congratulations on the solid consults.
My first question you have to deal with some of the demand commentary that Carl spelled out in his prepared remarks, I'm just curious to get a better sense of what is happening to our.
Base case demand across our baseline demand across your assets given the volatility and the EIA data as well as just macro headwinds that consumers are facing to help us think about how that evolves in the first quarter of 2023 and throughout the year that'd be very helpful.
You bet. Thanks Theresa Thanks for the question.
Just building on my prepared remarks, if we go back into call. It in the back half of last year.
And you look at the EIA data.
It had lagged the previous year I think a different parts of the year. It was it was close to where we were in 'twenty, one, but I think definitely in the back half.
On a seasonal basis that volume had kind of stagnated and I think that's that's continued as we've.
We've come into 2023.
We've talked about our crystal ball not necessarily being totally clear as far as demand going forward, but at least that's what we've seen in our network and it matches I think what the EIA.
Data has said.
As it relates to us and overall economic.
Situation I think really the mechanism of breakeven margins that we've talked about.
Kind of diminish.
Diminishes any impact on any volume slowdown that might be happening.
At least for our results and so.
If you look at the economy and there is talk of of some good low unemployment numbers and then maybe theres talk of recession and I think our perspective is that that we don't know exactly what the economy is going to look like from a macro perspective going forward, but.
From a volume and margin going into gross profit, we're very comfortable with what our business has yielded and I think the last three years has shown that because we've seen.
Various situations during those three years.
Thank you for the thorough answer.
And now that your coverage leverage free cash flow outlook and our.
Very healthy places can you talk about.
Your volition to do.
Something bigger than the bolt on acquisitions that you've been digesting over the past couple of years do you have.
Cyrus to get into a bigger weight other parts of the midstream value chain.
Just curious if this is Joe.
Yes, I think the simple answer is yes, I think the good news for US is that we.
We continue to financially healthier and healthier so from a capital allocation standpoint. The foundation remains exactly the same we're going to have secure distributions, we're going to protect our balance sheet and we're going to grow so with increasing.
Our free cash flow for us and it's going to give us even more opportunities, but as far as the way that we're going to look for acquisitions like we've done in the past. This number one where electric staple income two we're going to look for growth opportunities three we're going to look for for some synergy opportunities and finally, we're going to look for good value.
If it's a small acquisition, we're going to do that if it's a big acquisition that checks all four boxes will definitely give it to your attention.
Thank you.
Our next question comes from Elvira Scotto with RBC capital markets. Please proceed with your question.
Oh, Hey, thanks, good morning, everyone.
King.
And just to kind of follow up on that given the strength of your balance sheet and strong coverage. What are you thoughts on the post completion going forward I mean is there.
Net leverage or coverage I'd like to see.
It's a distribution increase.
A potential calling for Alex.
Elvira This is Joe again.
I think what's really positive for investors as you know.
Five or six years ago. There was talks about chatter about cutting distributions. Then you fast forward a couple of years later I think the discussion is distribution is very secure and volatile environments. Now we're talking about distribution increase so I think thats a positive very positive direction for all of our investors.
With all that said, what I've mentioned and Teresa The foundation is still exactly the same secure distributions strong balance sheet and growth. So as we increase our our free cash flow I think we're at the point, where we can have those discussions so at the appropriate time.
We'll make that determination and at the appropriate time, we will now start to history.
Great and then.
The other question that I had you talked about the Peerless acquisition and.
Wow.
The synergies are running ahead of expectations.
The acquisition itself overall running ahead of expectations can you provide a little more detail around that.
Can you talk about some of the additional opportunities that youthful directly as a result of that acquisition and then finally just on.
Proper about ethanol environment.
Sure Elvira this is Carl I'll talk about Peerless and then Joe can probably give you a flavor on the overall M&A environment.
If you look at our Peerless acquisition, it's really kind of a microcosm of our strategy right. It's a solid fuel distribution company.
That had vertical integration with midstream terminal assets.
That they had their own brand.
And they sold to commercial customers and so I think when we announced it last quarter and we talked about it just really fit in to our strategy.
Good thing is that.
The margins and the volumes are stable, but if anything I think.
Under the previous ownership they ran it really well, but there were some capital limitations and so I think as we look at the opportunity for growth and folding that into our overall capital plan.
We're willing to grow that both by signing up new customers on the island.
Hi.
Potential maybe even some smaller transactions on the island. They currently have a export business, where they are exporting to neighboring Caribbean Islands.
We can grow that and then there is even a possibility of us.
Expanding into a bigger presence in some of those neighboring islands building off the infrastructure, we have in Puerto Rico, So I think.
That gives you a flavor of the kind of growth that we're looking at as far as the base business and the synergies I think.
We look we've looked at M&A for a long time, and we definitely aren't necessarily conservative.
Overly conservative as we look at it but I think once we got ownership and got to know the team a little better it was even more solid than we expected and the business even more resilient with some of the price movements that happened and so I think that gives you a good picture of why we're excited.
This is Joe as far as kind of a more general M&A environment, the way I would characterize it as very similar to what we saw in 2022.
We still believe there's value buys out there, especially for strategic slides on that bring material synergies to the table. So I think a reasonable expectation is is that we see 2023 being very similar to 2022.
Great. Thank you very much.
Our next question is from Spiro <unk> with Citi. Please proceed with your question.
Thanks, Operator, hey, guys.
Two follow ups on kind of what you already touched on maybe just put a finer point on it but just looking at guidance now starting to look really conservative for 2023 and realize you've got a lot of year left to go but if I think about one of the biggest factors driving the difference in our model.
It is of course due to elevated margins that youre seeing so.
Just curious maybe you could touch a little bit more on what is keeping margins elevated right now in this market and what all of those factors could possibly here versus the year goes on to bring that down or is it looked pretty resilient at this point.
Experienced Joe let me take the first part of that on guidance and then ill turn it over to Karl talking about.
Margins as far as guidance, we just gave guidance in December so, we're a month and a half into the year and I think I stated it on my prepared remarks, Carl stated in his prepared remarks, we're off to a very good start and we finished up.
Fourth quarter very strong so.
A month and a half in.
Think of it as a bad habit for companies to update guidance every couple of months and we're not going to get into that habit.
As the year progresses more data if there's material change we'll provide guidance the revised guidance history, and we did that twice last year with upward guidance. So like I said I think you characterized it is very early but but understand your point.
Yeah, and as far as the margin strength goes Spiro.
I mentioned a number of factors in my prepared remarks, and some of those I think are quarter to quarter dependent but the majority of those as we look into the near future. We will continue saw kind of put them in those two buckets right.
The price movement that we saw down with prices moving dramatically down in the third quarter, and then carried a tailwind into the fourth quarter, yes.
We're going to have periods like the first half of last year, where prices are moving up and then we'll have periods like the second half where prices are moving down and you'll have some variation in margins based on that the.
The other factors that I mentioned, though related to.
Volatility of prices as well as.
Kind of overall higher breakeven margins and then the contributions of our our.
Capital deployment, whether its through organic or through M&A. Those are going to continue and so I wouldn't necessarily see a change in 2023 or even maybe in 2024 based on those so that gives us confidence as we look forward.
<unk>.
As Joe said, our business is strong we expect to have another really good year this year.
Got it that's helpful color second one.
Is it a little bit of noise around the first quarter, but just the 711 makeup payment it's kind of been a feature of last few years.
Sometimes it's harder to predict but just curious if you give us any sort of guidance on what that could look like in <unk>.
Sure Yes.
I'm always careful to not.
<unk> disclosed seven elevens volumes, but I think it's fair to say that we were expecting a higher makeup payment.
This year than last year, and so that'd be a fair assumption.
Okay got it and one more if I could sneak it in perhaps most importantly should I assume that next year's December analyst day will be in Puerto Rico.
We can talk about it.
Okay, Alright, and we'll stay tuned thanks guys.
Thanks Dara.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Ned <unk> with Wells Fargo. Please proceed with your question.
Hey, good morning, Thanks for taking the questions.
Is there a small leak on the call.
Pipeline in January I guess, one line was down for several days.
Could you talk about the potential impact to you.
And maybe touch on the volume trends in January and February .
Yes, so as far as the colonial outage it had no material impact on us I think the only other comment I'd make is our.
Our supply network is diverse enough and the supply team does a really good job of making sure we have optionality and we're tuned to the market. So clearly.
In an extended outage that would have an impact, but something like what happened it didnt really impact us.
As far as volume trends in in January and February I guess I'll build off one of my earlier answers Ned.
And stay kind of that at stagnation of volume that we.
Volume growth on a seasonal basis that we saw at the back half of last year has continued into the.
Into the first couple of months again, we don't think that that has a material impact on our overall performance and earnings but that's what we're seeing.
Got it and then my second one is on Opex I guess guidance was reaffirmed but expenses increased in the fourth quarter and you did note that this was partially due to the peerless acquisition, but just annualizing the fourth quarter Opex gets me to roughly $550 million I guess for 'twenty.
Could you talk about what gets you to.
And the high end of your guidance range.
Sure Ned.
For those of you who've been following us for a while Opex management is something that we take pride in and it's very important and core to what we do and so I'll talk about Q4, and then our 2023 guidance. So in Q4 I mentioned a couple of things.
In our in my prepared remarks, so there is a little bit of of Peerless in there and some other.
Kind of a catch up or onetime expenses for the year. If you look at the difference between where we ended the year in 'twenty, two and our guidance even the upper end of our guidance range for 'twenty three.
That is entirely explained by our Peerless acquisition.
So if you take a step back and think about that I don't know many other companies that are saying that they are flat year over year in this inflationary environment and so if anything we think that differentiates us versus.
Versus our competition.
Thanks for that Karl that's all I had.
Beth.
We have reached the end of our question and answer session I would now like to turn the floor back over to Scott, Chris Shaw for closing comments.
Well, thanks, everyone for joining us on the call. This morning as always if you have any follow up questions. Please feel free to reach out to me directly have a great day.
This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.
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