Q2 2023 Sunoco LP Earnings Call
Greetings and welcome to the Sunni Coast L. P Q2, 2023 earnings call at this time, all participants are in a listen only mode.
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 is now my pleasure to introduce your host Scott Chris child.
Senior Vice President of Finance. Thank you Scott you may begin.
Okay.
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, Devlin brand Hall, Chief Financial Officer, and other members of the management team.
Today's call will contain forward looking statements that 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 reconciliation of each financial measure.
Nope L. P delivered record results for second quarter that demonstrates the earnings power of our business. The partnership generated adjusted EBITDA of $250 million compared to $214 million a year ago, an increase of 17%.
Fuel volumes for the quarter were $2 1 billion gallons up 5% from the second quarter last year.
Fuel margin for all gallons sold was 12.7 cents per gallon compared to $12.03 per gallon a year ago.
Total second quarter operating expenses were $137 million, an increase of $9 million from the same period last year.
This year over year increase was attributable to the Peerless and <unk> acquisitions.
During the second quarter, we spent $35 million of growth capital and $15 million in maintenance capital.
Second quarter distributable cash flow as adjusted was $175 million compared to $159 million in the second quarter of 2022, yielding a current quarter and trailing 12 months coverage ratio of one nine times.
On July 25th we declared an 84.2 cent per unit distribution consistent with last quarter. As you may recall, we increased our distribution by 2% last quarter and expect to evaluate future distribution increases annually in the first quarter.
Turning to the balance sheet at the end of the second quarter, we had $990 million outstanding on our revolving credit facility, leaving approximately $500 million of liquidity.
Leverage at the end of the quarter was three six times unchanged from last quarter.
Our results year to date support the strength of our business model and our firm belief that Sunoco LP offers a very compelling investment opportunity.
Our consistent results over the past few years threat or a variety of operating environments demonstrate our financial stability. This performance has allowed us that strengthened our balance sheet.
And maintained strong distribution coverage underpinning a sustainable and growing distributions to our unit holders.
Finally, we see a long runway of high quality investment opportunities that will enhance our existing operations and generate attractive returns for our unit holders.
With that I will now turn the call over to Carl to walk through some additional thoughts on our second quarter performance and recent growth initiatives.
Thanks, Scott and good morning, everyone. We delivered another strong quarter, demonstrating that our formula of profitably investing capital gross profit optimization.
<unk> expense discipline and solid operations across our business continues to deliver results.
Volumes were up about 5% in the second quarter versus the second quarter of last year.
If you take a step back and think about our volumes there are a few points worth making.
This quarter was the first quarter since the fourth quarter of 2019, where our volumes were above the 2 billion gallon mark for quarter one.
One of the big contributors to that growth was our capital investments that we've made both organic and through acquisitions.
In addition, we have also seen some data points in the second quarter that are encouraging on gasoline demand.
For the country as a whole and inside our network as well.
It definitely helps that retail gasoline prices were more than a dollar per gallon cheaper this quarter versus last year.
We've capitalized on these factors and grown market share, while maintaining strong fuel margins.
With respect to margins the margin performance in the last few years continued in the second quarter as we delivered margins of $12.07 per gallon.
Well the price of fuel fell slightly during the quarter, we continued to benefit from higher industry breakeven margins as well as continued volatility in the fuel markets.
Once you layer in our margin optimization strategies and growing volumes, our gross profit performance continues to be strong.
And the final point to remember is that our business is resilient enough to perform in various volume and margin environment.
Turning to expenses.
Controlling expenses remains one of our core strengths and we continue to demonstrate this in the second quarter as our year over year expense increases were almost entirely attributable to our business growth and recent acquisitions.
I also want to provide an update on our zenith terminals acquisition.
We closed on the 16 terminals from Zenith energy on May 1st and now have a few months of operations under our belts.
Our midstream team has done a great job of quickly integrating these assets into our portfolio.
<unk> building relationships with new customers and welcoming new employees to our team.
Overall integration is proceeding as planned and we expect to deliver on our expectations with the addition of these terminals to our asset base by.
By now our track record should speak for itself on our ability to appropriately value acquisitions deliver synergies and successfully integrate into our existing network.
Finally, a comment on capital.
We continue to efficiently spend maintenance capital on our assets as well as reinvest increasing amounts of growth capital back into the business.
The end result is accretive growth from these investments, which leads to increased distributable cash flow, which we can then reinvest while preserving a strong balance sheet.
Both maintenance and growth capital remain in line with our revised 2023 guidance we provided in May.
Before turning the time over to Joe I'll wrap up by stating that we will continue to execute 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 record second quarter, Scott and Karl have discussed the key details. However, there are a few items that deserve some additional commentary first our strong year to date results have been driven by a holistic combination of the following key drivers volume growth strong margins.
Disciplined expense management and a growth program that is delivering the expected returns.
Given our performance in the first half of this year and the continued strength of our business model, we are well positioned for another strong year.
Thus, we expect to be on the high end of our EBITDA guidance with the potential to surpass it.
And finally, we remain in a position of strength to further build on our three capital allocation priorities, providing Cherokee and growth of our distributions maintaining a strong balance sheet and capitalizing on growth opportunities bottom line, our business model continues to demonstrate resiliency and.
Deliver on growth and we expect this to continue 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 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. You May Press Star two if you would like to remove your question from the queue.
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.
Yeah.
Thank you. Our first question comes from Robert Moskow with Mizuho Securities. Please proceed with your question.
Hi, good morning, everyone.
But when you're twenty-three outlook you outlined 12 cents per gallon is kind of your base case for twenty-three on margins and I know that might be more of a floor in the current year, but when you characterize your outperformance. This year is a function of just lower volumes or do you think this might be you might be reaching some sort of equilibrium margin.
Based on your performance year to date.
Yes. This is Karl.
If you look at our margins and we talked about our guidance at the end of last year in the past, we've given a guidance range on both volume and margin and in December we really gave seven.
Seven 8 billion gallons and 12 cents, we thought that represented the fat part of the curve in terms of what was was possible clear.
Clearly in the first half year, we've trended above both those numbers on both volume and on margin.
If you look at the margin piece I mentioned in my prepared remarks, the big contributors to that.
And if you break that down you have higher breakeven margins due to the overall.
<unk> environment.
You look at the volatility in the fuel markets and then the other factor that can impact margin is the overall movement of prices and those first two factors, we don't see changing and as we look into the near future.
Again, my Crystal ball is not perfect, but but I don't see anything that would change.
The passive those factors clearly.
If you look at the movement of markets, we had a little bit of a tailwind in the second quarter with a with prices falling at the beginning of the third quarter, you've had kind of the opposite effect with with prices rising so that can impact margins as we've seen in the past, but the other two factors, we think will carry forward.
Into the end of this year and even into next year.
Great. That's helpful color and then for my follow up I'm wondering if you could provide an update on I know you touched it touched on it in your prepared remarks, but just how youre seeing that integration is coming along and maybe your overarching view on the market for midstream assets as an acquirer since transaction multiples seem to come down a little bit this year.
Yes, I'd be happy to talk about zenith and one of the points I tried to touch on in my earlier remarks really.
It gets to the point of.
Properly valuing acquisitions getting the deals done and closed and then integrating them and delivering on on the financials. That's really just become a core competency of what the team does and <unk> is just another example of that Oh, There's nothing you know outstanding to the upside.
The downside of zenith is Sean well and delivering but that can be true of the other acquisitions, we've done peerless in Gladieux and new Star and then others are going backwards.
So I'll, let Joe talk about the market.
Robert This is Joe.
I, probably sound like a broken record, but the M&A environment for us for us in the field distribution in the refined product market. It looks the same as like two years ago last year and looks the same right now.
Definitely.
I'd say a buyer's market.
And especially with our companies like Sunoco that brings a history of delivering our synergies. So you know when the right opportunities come up I think we're in a great position to capitalize on it.
Okay.
Great I appreciate the time everyone.
Thank you. Our next question comes from Selman <unk> with Stifel. Please proceed with your question.
Just kind of going back to the margin performance and you talked about a couple of the drivers that you expect to see going forward. So.
My question directly is.
Should we be expecting that to continue up higher and eventually get into the <unk> plus range 14, 14, plus range as you look out over the next several years.
Yes Selman.
Again, I don't know that were as.
As confident in terms of what are the absolute numbers are going to be I think it's fair to say that all of those factors.
They'll probably stay steady or increase over time, and then you'll have some quarter to quarter variability that relates to the movement of prices.
That's probably a fair assumption.
Okay Alright.
Alright, Thank you very much.
Yes.
Thank you. Our next question comes from Ned <unk> with Wells Fargo. Please proceed with your question.
Yeah.
Hey, good morning, Thanks for taking the questions.
Good to see quarterly volumes above the 2 billion gallon Mark again can you maybe just talk about volume trends in the first month of the third quarter.
Yes, Ned we agree we think we're very happy with our volume performance and kind of crossing that 2 billion thresholds was was a big deal to US I think really if you think about our volumes. There are three factors that contributed in the second quarter and I think continue to contribute in the third quarter.
First is acquisitions.
On a year over year basis, you have really the peerless volumes coming in that were included in the second quarter. This year and weren't included in second quarter last year.
There is also growth capital that we've spent are signing up new customers or renewing new customers or investing in our assets.
That we the real estate that we own our.
Our control, but then the third factor I E.
He's probably the smallest but I also don't want to under weighted in that there have been promising signs of consumer demand. If you look at.
The industry benchmarks, even the EIA data on a weekly basis might not be quite as reliable, but when you go back and look at the months leaves or Theres Opus reports for other sources of data.
Back in the first quarter, if you did have year over year comparison volte.
Volumes this year were still under our volumes last year in the first quarter.
That crossed over some time in April at least on the gasoline side and so since April we've seen.
Volumes this year beat our volumes last year, both from a countrywide industrywide standpoint, and also in our network and then there are some even promising signs where where maybe some of the maintenance capital or other investments that we've made in our assets, where we might our volumes are actually performing a little better than.
Some of the industry benchmark. So I think we're happy with the volume performance in all of those areas.
Yeah.
That's great. Thank you and maybe any any update on additional growth opportunities around the Puerto Rico acquisition.
Yes, I think I'd build off some of my comments I think last quarter Ned again in the overall portfolio of our company that that's a relatively small piece.
Of our income, but it does represent that.
<unk>.
This strategy and the business model that we've put together in in mainly the domestic U S works in other geographies, where these combination of midstream assets and fuel distribution and intense focus on expenses and spending capital intelligently inefficiently.
<unk> growth so.
<unk>.
The team there had already been doing a good job for many years I think we've brought more capital to bear and a little more process and scale and so again nothing there is going to be material from the overall company performance, but from from that asset it's performing as we expected and there are additional growth opportunities in <unk>.
<unk> Islands and other parts of the Caribbean.
Great. Thank you that's all I had.
Thank you as a reminder, please press star one to ask a question at this time.
Our next question comes from John Royall with Jpmorgan. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
So we've we've seen volumes looking like they're recovering nicely, but we don't have all the visibility on the X acquisition side, let alone on the 711 side. So.
So to the extent you're willing to disclose my.
My question is are we out of the period of makeup payments for 711 should we expect next March that there won't be a make a payment or maybe that's a better expectation to just think about it a smaller one year over year.
Yes, as it directly relates to two 711, I won't give too much detail on their volume. So I'll leave it to them I think it just given the pattern of where we are and where we've been the last few years I think probably the idea of a a slightly smaller makeup payment is where.
I'd I'd, probably put my money right now versus our versus going the opposite way.
As far as our our overall volume performance.
I think the only additional comment I'd make that I think applies maybe too.
All of our customers is it's really about the overall gross profit performance. So we're in a good environment now where we've been able to deliver on both volume and margin, but I think.
My comments earlier is at least from our business model, regardless of what 711 volumes have with the take or pay or regardless of the passive volumes or margins.
Going forward.
Our business model will deliver.
Great. Thank you and then.
My next one is on the guidance and I don't want to read too much into anything and maybe maybe I am.
But clearly as you mentioned you're tracking well ahead of both fuel metrics then.
A pretty bad environment to get either down to that point estimate. So understanding you moved it up to the high end for EBITDA, but why not move the whole range up is there is there a realistic risk of hitting the low end or even hitting the midpoint for the full year.
Hey, John It's Joe.
We give guidance on an annual basis, because theres always going to be some level of quarterly.
Various with that said last December we gave guidance for the whole year and the bottom line of that was we expect the 2003 to be a very good year. When we gave that guidance and then you fast forward today and I'm reiterating that Sunoco is going to have a very good year.
Our practice has been whenever a material event happens.
For example, last quarter, we acquired Zenith and we provided guidance update and the situation that we're in today is that there is no material event and but our business model is performing highly effectively and delivering strong results and we expect that to continue so 2023.
Going to be a really good year for us our practice is not to.
Every quarter or two to provide guidance updates instead the way. We go about doing it is we expect to have a good year, we deliver on the good year and whenever December comes around.
And we provide guidance you should expect us to have another good year with all of that said.
I was careful in my prepared remarks by saying that we expect to be on the high end of our EBITDA guidance with the ability to to surpass it. So I think the takeaway from the market should be soon is having a really good year and we're really confident about our business on the back half of the year and we're really confident about our business on a going forward basis.
Great. Thanks for clarifying.
No problem.
Thank you there are no further questions at this time I would like to turn the floor back over to Scott for closing comments.
Well, thanks, everyone for joining us on the call. This morning, as always feel free to reach out with any follow up questions.
We look forward to talking to you soon.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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