Q1 2023 Sunoco LP Earnings Call

Greetings and welcome to the Sunoco Lp's first quarter 'twenty to 'twenty three on this 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 call is being recorded it is now my pleasure to introduce your host it's caught ratio as VP finance and Treasurer. 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, Carl sales Chief Operations Officer.

<unk> <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 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'd like to start the call by looking at some of our first quarter highlights Sunoco delivered a record first quarter with adjusted EBITDA of $221 million compared to $191 million a year ago, an increase of 16%.

The partnership sold one 9 billion gallons in the first quarter up 9% from the first quarter of last year.

Fuel margin for all gallons sold was $12.09 per gallon compared to $12.04 per gallon a year ago.

Fuel margin results include the benefit of the 711 make a payment of $24 million.

Total first quarter operating expenses were $127 million, an increase of $3 million from the same period last year.

We spent $29 million of growth capital in the first quarter and $8 million in maintenance capital.

First quarter distributable cash flow as adjusted was $160 million compared to $142 million in the first quarter of 2022, yielding a current quarter coverage ratio of one eight times trailing 12 months coverage ratio of one nine times.

On April 24th we declared an $84.02 per unit distribution, a 2% increase over last quarter.

We plan to evaluate future distribution increases annually in the first quarter.

Balancing our financial metric targets and investment in growth opportunities.

Turning to the balance sheet at the end of the first quarter, we had $800 million outstanding on our revolving credit facility, leaving approximately $700 million of liquidity.

Leverage at the end of the quarter was three six times down from three eight times last quarter.

Finally yesterday, we completed the acquisition of 16 terminals from Zenith energy.

Located across the East coast and Midwest. These terminals have connections with the colonial Buckeye Laurel and energy transfer pipelines.

The partnership expects the acquisition to be accretive to unitholders in the first year of ownership.

Okay.

Strong results and cash flow generation over the past few years has allowed us to continue to execute on our capital allocation strategy.

Leverage at or below our long term target and strong distribution coverage, we are able to reinvest capital back into our business through.

Through our organic growth and acquisitions. The result has been increased distributable cash flow per unit that enables us to increase distributions to our unit holders.

Now cause financial stability distribution yield and growth prospects make our equity a compelling value proposition.

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.

Thanks, Scott good morning, everyone.

Our team delivered yet another strong quarter supported by continued margin strength consistent expense discipline and solid operations across our business, including our recent investments.

Starting with volumes, we were up about 9% in the first quarter versus the first quarter of last year.

Even though industry volumes remained lower than last 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 strong margin performance over the last few years continued in the first quarter as we delivered margins of $12 nine per gallon.

I will point out a few items that contributed to these margins.

Some are consistent with prior discussions, namely higher industry breakeven margins as well as continued volatility in the fuel markets.

Specifically for this quarter. We also received a 711 makeup payment that occurs annually in the first quarter, which contributed over one cent per gallon to our reported margin.

Moving on to our growth yesterday.

We closed on our second acquisition in the past six months with the addition of 16 terminals from Zenith energy.

We are excited about the combination of these assets with our fuel distribution portfolio and are looking forward to growing our presence in each of these markets.

The majority of these terminals overlay, our existing footprint, providing synergies with our fuel distribution portfolio.

The remaining terminals provide us with new market opportunities to expand our fuel distribution reach.

After synergies, we expect a mid single digit EBITDA multiple on this investment.

This acquisition is yet another example of our ability to deliver growth that fits into our strategic objectives and deliver solid returns.

A comment on expenses.

You have heard me constantly talk about our ability to manage expenses controlling expenses remains one of our core strengths and first quarter expenses were in line with our 2023 guidance we provided in December .

Yeah.

We announced today, an update to that 2023 guidance.

We put a lot of thought into our guidance last December and we remain confident with those numbers. However, we want to include the impacts of adding the zenith energy acquisition to our portfolio.

The changes include.

Increasing adjusted EBITDA by $15 million to a range of $865 million to $915 million.

Projecting operating expenses of between $540 and $550 million, an increase of $15 million.

And increasing our maintenance capital spend by $5 million to approximately $65 million.

Before turning the time over to Joe.

I will wrap up by stating that 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 strategy of gross profit optimization tight expense control solid inefficient operations and growing our business Joe.

Thanks, Carl and good morning, everyone, we delivered a strong first quarter.

Carl have walked you through the key details. However, there are a few items that I would like to provide some additional commentary.

We continue to have confidence in our business model, both short term and long term.

Before this year started we provided guidance and we stated we expect to have another strong year.

Third of the way into 2023, our expectation remains the same.

Our base expectation has been enhanced by our most recent acquisition as a result, we increased our guidance.

These types of investments give us confidence that we will continue to deliver strong results year after year, Thus, we announced a distribution increase.

Over the last seven years, we have demonstrated our commitment to a secured distribution we.

We've never cut distributions, even through unforeseen in challenging economic environments.

Given that this is one of our key pillars, we're very thoughtful as to any distribution increase.

The decision to increase has to meet the following criteria.

Stay above our targeted coverage ratio protect our balance sheet remain a growth company and finally, a clear path to increase distributions again over a multiyear timeframe.

We're confident the answer is yes, but all of these factors operator that concludes our prepared remarks, you may open the line for questions.

Thank you.

Well now be conducting a question and answer session.

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One moment, please while with poll for questions.

And our first question comes from Gabe Moreen with Mizuho.

Hi, Good morning, guys, maybe if I can start off on the Zenith acquisition can you just talk about timing for getting to that mid single digit multiple post synergies.

And then also I'm just curious as far as integrating the assets how much you see being I guess Sunoco business versus third parties and also whether you are particularly excited about doing anything with any of the specific terminals from a growth standpoint.

Yes, good morning, Gabe this is Carl.

I think on the this acquisition our synergy capture is probably a little faster in the past we've talked about our synergies being captured on the first two years of operation I think by the end of the year, we'll probably be at our synergy run rate.

So so by the time, we get into next year, we should be in those mid single digits.

As far as the.

The asset profile I talked in my <unk>.

Prepared remarks about kind of a nice combination between overlay our existing fuel distribution portfolio and some new I'll just give one example of an area. We're excited about.

Not that this is the only place we're excited about but but the Selma North Carolina terminal in that asset mix is a good terminal and we have some business in North Carolina is just not quite as big.

As we'd like to be so so that's just one example of an area, but I think the whole network.

Our combination of as you mentioned.

Being able to put our own volumes in the terminals, but again I think we're a little different.

In.

Companies that have fuel distribution businesses with our terminals in that we welcome and love third parties in our terminals and I think have a good track record of purchasing terminals with with a large third party presence in keeping and growing that business with our third party customers as well. So I think it's going to be a good mixture of both.

Great and then if I could just follow up and general thoughts on the M&A market right now what Youre seeing out there should we expect additional deals through the rest of the year.

Hey, Dave This is Joe.

I think what I've said, probably for last two or three years is still highly appropriate today.

We see opportunities we see value plays.

We believe it's still a buyer's market, especially for companies that bring synergies to the table and I think our track record shows that we can buy stuff at attractive multiples.

Top of that as synergies and finally deliver on those results. So the market looks good for us and I think what we saw this year last year I think we will see you again this year.

Great and then maybe Joe you had mentioned kind of the different boxes, you need to check for those just the distribution increase.

I'm just curious as far as are arriving at the 2%. It seems like you would have a lot more latitude to maybe be a little bit more aggressive than the 2%.

How should we think about kind of staying at that level. What you would need to see I think to maybe accelerate to 2% growth rate and I assume when you say stay a growth company.

Out of that refers to giving yourself flexibility in the M&A market. So maybe you can speak to that too.

Yes, I think the way you would characterize as very last time is very appropriate.

Where we.

We want our pillars remain exactly the same secure distribution strong balance sheet and growth. So that's the 2%. It provides a lot of flexibility for us depending on evolving value creation opportunities that we see it gives us the ability to to to continue to do.

2% grow 2% put more into growth capital. If there is a opportunity on our balance sheet. So we like the flexibility and if you just look at I think I know where youre going with this if you just look at our coverage and looked at our history of our performance and our and our confidence in the future I think it does bring up the question is there a possibility for more.

But at the 2% that we said right now we're sitting in a really good position, where where it gives us the ability as our business continues to perform we could allocate that in different different fashions.

Got you thanks, Jeff.

Sure.

Our next question comes from Don.

Seattle.

Hi, This is Chad on for Spiro just one question for me just curious of the distribution growth commencing business change anything about the way the <unk> features into that song.

Hey, Chad This is Joe no I think I think like every company.

Have multiple stakeholders net's one of them they have been an incredibly.

Supportive GP and also a very patient so.

Our obvious goal is to create value for all our stakeholders and I think our track record shows we have done that and more importantly.

Going forward path, we intend to create value on a going forward basis for all our stakeholders.

Okay got it makes sense that's it from me. Thank you.

Our next question comes from Neil <unk> with Wells Fargo.

Hey, good morning, Thanks for taking the question you mentioned growth opportunities in and around the acquired <unk> assets could you maybe talk about the capex requirements around these opportunities.

And maybe the timeframe of the potential investments.

Yes, Ned in our updated guidance.

As I mentioned in my prepared remarks really those changes all had to do with the <unk> acquisition and so there is some maintenance capital that comes along with those assets, but there's not any material growth capital.

Necessarily associate.

Proceeded with these assets, which is why we didn't update our growth capital guidance.

Got it and then I guess on your on your <unk>.

The updated opec's maintenance Capex and EBITDA guidance ranges that does reflect the <unk> acquisition, but any change in how you think about volumes and margins for 2023.

Yes, as we sit right here I mean, we just finished four months of the year we have.

Eight months left and.

We still feel really good about the guidance that we put put together back in December .

If you look back at that rate, we modified how we gave guidance a little bit in that in the past, we gave volume and margin ranges, where this year. We just gave a kind of singular volume target in a singular margin target not that we expected that that was exactly where.

We were going to end up but we thought that that was a good midpoint. When you multiply those together for for our fuel gross profit and so as we sit here now.

We're still comfortable with that and don't think there's anything that would materially change that as I've talked in the past there might be a slightly different path. So if volumes are a little stronger than we assumed and margins are a little weaker or vice versa.

We still expect to come in the same range of gross profit and EBITDA.

Thanks for that that's all I had.

You bet.

Excuse me, ladies and gentlemen, if you would like to pose a question. Please press <unk>.

One.

And our next question comes from John <unk> with JP Morgan.

Hey, guys. Good morning, Thanks for taking my question.

So the zenith acquisition looks like its spread across some different geographies and kind of begs the question on that front.

Recognizing there is some interplay here with driving growth.

In the distribution business do you have a focus geographically at this point.

Maybe where you think you have some holes that you'd like to fill on the acquisition side.

Hey, John This is Joe.

I think as far as geographically.

It still comes down to I think some pretty basic criteria that we look at when it comes to acquisitions.

Stable linker, alright, that's one growth opportunities.

And so if an <unk>.

Synergies. So if you look at those three I think.

Layering on top of our existing geographies that could that could that would fit the criteria and also new geographies. When we did we did Puerto Rico, obviously outside our geography, but we thought it was stable income we saw growth opportunities and for more from kind of an administrative side. We saw synergy. So I think those are the probably the more overriding criteria.

Syria versus just being focused on a on one particular geography versus another.

That makes sense, thanks, Joe and then.

Maybe a higher level question you guys have had.

Good insights in the past on kind of a structural trends around gasoline demand in.

Miles traveled and how they are impacted by Covid and work from home dynamics.

Was wondering if you have any thoughts on are we permanently impaired.

Gasoline demand from sticky work from home dynamics, and then maybe if you stripped out acquisitions.

Or is your business today from a volume perspective kind of a same store sales relative to 2019.

Yes, John it's a really good question and I think.

Any of us in the industry have been thinking about that and looking at our own volumes over the last few years and I'd say for the most part our network is in line with the numbers you can see publicly where there is a.

Youre still off versus 2019 on the gasoline side and even off.

Versus last year and so.

Our strategy has been that one with the higher breakeven margins, we think that more than compensates on the overall gross profit side and then we feel like it's an opportunity for us to pick up market share whether it's through acquisitions like we did in the last 12 months with Gladieux in Peerless with criteria that <unk>.

Joe just talked about or whether through it's our organic growth capital or whether it's through.

Just commercial activity.

So you know as.

As far as the drivers behind that fuel demand.

Look at it by a lot of measures vehicle miles traveled is pretty close to what it was in 2019.

If you look back on the history last 15 years.

It's generally been an upward trend in overall fuel efficiency and so we've seen that pick up slightly over the over the last couple of years.

But I don't know that our crystal ball is necessarily a lot clearer than anyone else's on exactly what's going to happen. So.

For us, it's really about the stability of our portfolio, where even with different scenarios. We can put up predictable results and John I'll add a couple of things to that I think what Carl said is that if you look at our base business is probably tracking similarly, very close to the U S average, but obviously as evidenced by the number we put up.

In the first quarter our growth capital is working so we're outpacing the U S average materially as far as I guess the heart.

To your question about kind of overall U S trends.

I think theres, probably one data point I think the street's should probably consider as far as potential upside for overall U S volume.

One of the data metrics that we track is from a company called castle with a K and there the office security and access access company everybody has kind of a key card that allows you to office. They track the 10 biggest metro markets in the U S and the attractive from pre Covid to kind of two on a on a monthly basis.

Right now, we're still sitting 50% of pre COVID-19 level of people actually come into the office.

If you have if you may.

And assumption that more people are going to start that work for home is going to become less and people are going to come into the office more.

Think that does give you give the industry more upside when it comes to volume returning.

Yeah.

Very helpful. Thank you.

We are closing our question and answer question now I would like to turn the floor back over to Scott Shaw for closing comments. Please go ahead.

Thanks, everyone for joining us on the call. This morning as always if you have any follow up questions feel free to reach out to me. Thanks.

This concludes today's call. Thank you call you may disconnect. Your lines at this time. Thank you for your participation and have a great day.

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