Q1 2024 Sunoco LP Earnings Call
Greetings and welcome to the snooker Lp's first quarter 'twenty 'twenty four earnings 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 is now my pleasure to introduce your host Scott <unk> Senior Vice President Finance and Treasurer. 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, Karl fails Chief.
Speaker Change: <unk> Officer, Dylan, Brandon Hall, Chief Financial Officer, Austin, Harkness, Chief Commercial officer.
Speaker Change: Other members of the management team.
Speaker Change: 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.
Speaker Change: Please refer to our earnings release as well as our filings with the SEC for 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.
Speaker Change: It's been a busy and exciting start to 2024 for the Sunoco team and I'd like to begin my comments by reviewing some of that activity.
Speaker Change: First on March 13th we completed the acquisition of two liquid fuels terminals located in Amsterdam, Netherlands, and pantry be Ireland from Zenith energy for 170 million euros.
Speaker Change: Then on April 16th we completed the divestiture of 204 convenience stores across West, Texas, New Mexico, and Oklahoma to 711 for approximately $1 billion.
Speaker Change: Just last week, we closed on the acquisition of Neustar energy in a transaction valued at approximately $7.2 billion.
Speaker Change: The completion of these strategic transactions will not only increase the partnership's stability, but will also strengthen our financial foundation and position us for future growth.
Speaker Change: Now turning to our first quarter results for 2024.
Speaker Change: Sunoco delivered a record first quarter with adjusted EBITDA of $242 million compared to $221 million a year ago, an increase of 9% as Karl will discuss later this quarters results demonstrate that our continued focus on gross profit optimization in our field distribution business.
Speaker Change: This helped grow our fuel gross profit dollars over time.
Speaker Change: In the first quarter the partnership sold over $2 1 billion gallons a record volume for the first quarter and a 9% increase from last year.
Speaker Change: Fuel margin for all gallons sold was 11 seven cents per gallon compared to $12.09 per gallon a year ago.
Speaker Change: Fuel margin results include the benefit of a $25 million 711 makeup payment.
Speaker Change: Total first quarter operating expenses were $142 million, an increase of $15 million from the first quarter of last year. The vast majority of this year over year increase can be attributed to additional operating expenses from grass, including Dizziness, North America terminal acquisition and transaction costs related to acquisition and diverse.
Speaker Change: Stitcher activity in the first quarter of this year.
Speaker Change: In the first quarter, we spent $27 million on growth capital and $14 million on maintenance capital.
Speaker Change: First quarter distributable cash flow as adjusted was $176 million compared to $160 million in the first quarter of 2023.
Speaker Change: On May 3rd we declared an 87.56 cent per unit distribution, a 4% increase over last quarter. This increase demonstrates continued confidence in our business and our ability to deliver value to our unit holders through distribution increases.
Speaker Change: Turning to the balance sheet at the end of the first quarter, we had approximately $870 million of liquidity remaining on our revolving credit facility.
Speaker Change: Average at the end of the quarter was three seven times unchanged from last quarter and below our long term target of four times.
Speaker Change: In anticipation of and in conjunction with the closing of the New store acquisition. The partnership recently completed several financing transactions.
Speaker Change: First on April 30th we issued $125 billion in senior notes in a private offering the proceeds from this offering will be used to fund the repayment of new stars credit and receivables facilities and redeem discharged preferred equity and subordinated notes.
Speaker Change: The reduction in interest expense from this refinancing activity will generate at least $50 million in additional cash flow annually.
Speaker Change: Second on May 3rd we entered into a new 1.5 billion dollar revolving credit facility, which matures in 2029.
Speaker Change: This new credit facility is fully unsecured and will simplify soon it goes capital structure and enhance our credit profile moving forward to that and that's the Moody's and S&P upgraded snow cause long term credit ratings over the past week further demonstrating sunoco has enhanced scale and stability and improved financial profile.
Speaker Change: Now that we have closed the new store acquisition I want to share an update on our 2024 guidance.
Speaker Change: We plan to issue more detailed outlook on or before our second quarter earnings call, but as a starting point we wanted to provide the following perspective on consolidated 2024 guidance.
Speaker Change: We now expect 2024, adjusted EBITDA to be in a range of 1.46 billion to $1.52 billion.
Speaker Change: This increase reflects the combination of our reaffirmed adjusted EBITDA guidance of 975 million to $1 billion for the legacy Sunoco business. Additionally.
Speaker Change: Additionally, the increase includes a contribution of approximately 480 million to $520 million of adjusted EBITDA from the New Star acquisition.
Speaker Change: The expected contribution from new start reflects a prorated portion of the 2024 adjusted EBITDA guidance, the New Star management team provided in February.
Speaker Change: This revised 2024, adjusted EBITDA guidance excludes transaction costs and synergies, which we will also provide more detail on.
Speaker Change: On or before our second quarter earnings call with that I will now turn the call over to Karl to walk through some additional thoughts on our first quarter performance and recent transaction activity.
Karl: Thanks, Scott good morning, everyone.
Karl: This quarter continued the strong performance in our base business and highlighted the continued progress of our growth strategies.
Karl: As we have stated many times the key to our gross profit optimization strategy in our fuel distribution business is to look at the combined fuel gross profit rather than evaluating volume or margin separately. This is important as we look at our Q1 performance.
Karl: First our volumes continue to substantially grow.
Karl: In the first quarter, there was a 9% increase compared to the same quarter last year. This.
Karl: This period marks the fourth consecutive quarter, where we surpassed 2 billion gallons in.
Karl: In terms of total U S gasoline and diesel demand our growth continues to exceed industry averages showcasing that our investments are yielding tangible results, while always keeping our gross profit optimization strategy front and center.
Karl: Second margins continue to be strong from a market standpoint, we faced some fairly consistent upward movement in gasoline prices throughout the quarter, which provided the typical compression that happens during similar market conditions.
Karl: Another factor impacting our overall margin is that some of our year over year volume growth has come in channels that have added incremental fuel gross profit and EBITDA, but at margins below our overall average.
Karl: This is really an impact on our portfolio mix not an indication of market conditions.
Karl: Overall higher breakeven margins and overall volatility continue to provide support to margins and we expect that to continue for the foreseeable future.
Karl: When you put it all together we had record first quarter EBITDA, our fuel gross profit continues to trend upwards and our outlook remains strong.
Karl: Earlier, Scott mentioned, the three transactions that we've closed in the last few months.
Scott: Let me give you some insight into the West, Texas, and Europe transactions and the impact to our overall business outlook before I discuss the exciting new store acquisition that we closed last week.
Scott: The divestiture of the West Texas business to 711 was completed at an EBITDA multiple in the high teens.
Scott: We are a growth company and we're not in the business of selling off parts of our business. So let me give you some insight into how these fit into our strategy.
Scott: By selling the West, Texas business, we lost some volume and gross profit dollars in our reported margin will drop as the margin of the West, Texas business was well above our average.
Scott: If you do the math the change in mix reduces our reported fuel margin by a bit less than half a cent per gallon on a go forward basis.
Scott: What we gained from the transaction. However was a significant amount of capital that we could redeploy at lower multiples and building our business and increasing stability.
Scott: Bottom line. After this transaction, we are less exposed to west, Texas retail margins are base fuel distribution business remains strong and we expect fuel gross profit to continue to grow.
Scott: The acquisition of the Siemens terminals in Europe was completed at a synergize to EBITDA multiple in the mid single digits.
Scott: There are strong assets based in strategic locations.
Scott: Much of the integration is already completed and we're looking forward to the benefits of having these assets in our portfolio as well as our new team members that have joined us in Europe.
Scott: Adding the European terminals provides us with additional opportunities to optimize our supply cost, particularly on the east coast and deliver increased value to our customers. Further these terminals can serve as a platform for future growth.
Scott: Turning to new Star, we're very excited about the increased stability and diversification that these assets will bring to our portfolio and the many growth opportunities that they will provide the integration.
Scott: <unk> process is well underway and we are looking forward to working together with our new team members to grow the combined business.
Scott: Our plans are on track to deliver above our synergy floor of $150 million per year.
Scott: We have made great progress on identifying the expense savings that will come from the combination and expect to achieve north of $100 million in expense synergies annually.
Scott: We are still digging into the commercial opportunities and working to quantify what those will yield.
Scott: In particular, we have begun an evaluation of our crude business to determine how we can unlock additional value to improve their performance and profitability of the assets.
Scott: This evaluation is in the preliminary stages, but the initial work is promising and we look forward to sharing more detail on our overall synergy outlook on or before our next earnings call.
Speaker Change: Before turning the time over to Joe I will wrap up by emphasizing that we are off to a strong start to the year and we will continue to focus on delivering results for our stakeholders through our proven strategy of gross profit optimization tight expense control solid and efficient operations and growing our business.
Scott: Joe.
Joseph Kim: Thanks, Carl and good morning, everyone over the last four months, we completed a series of strategic transactions to strengthen sign for the future. Let me provide some perspective on these actions and also talk about our business as a whole starting with our legacy business. We had a record first quarter reporting the highest first quarter EBITDA.
Scott: <unk> and DCF results in the history of the partnership our legacy business is strong and we're confident that it will remain strong for the foreseeable future.
Scott: Obviously, the closing of the New Star acquisition resulted in us revising our full year guidance, but I think it is important to note. If you back out the Neustar acquisition for this year, we fully expected to deliver on the guidance that we provided back in December of last year, even after the EBITDA loss, resulting from the west Tex.
Scott: This divestiture and the European terminal acquisition.
Scott: Regarding the West, Texas divestiture, we got a highly attractive sales multiple edits are take or pay contract. The net proceeds after tax and other expenses is roughly $800 million. This.
Scott: This is more than the $750 million that we noted in January.
Speaker Change: As for the New store acquisition, let me start off by publicly welcoming the new store employees to the Sun team. We're excited to work with all the talented people and also to add great assets to our overall portfolio.
Speaker Change: When we announced the transaction in January we detailed the strategic rationale and the highly attractive economics for months later, we're even more confident that we are better positioned the company for the future.
Speaker Change: This acquisition makes us larger and more diverse while also providing more growth opportunities.
Speaker Change: Financially is highly attractive with a greater than 10% accretion in the third year following close.
Speaker Change: Regarding our balance sheet, we stated back in January that we expect to be at our long term target leverage of four times within 12 to 18 months, we're well positioned to deliver on this target.
Speaker Change: As for the recently announced 4% distribution increase we're confident in the resiliency and growth potential of our business is secured distribution is one of our capital allocation pillars and the decision to increase had to meet the following criteria stay.
Speaker Change: Stay above our target coverage ratio protect our balance sheet remain a growth company and finally, a clear path to additional distribution increases over a multiyear timeframe.
Speaker Change: We're confident that the answer is yes on all of these factors. Let me wrap up we entered 2024 from a position of strength and after a series of strategic moves we're a stronger company going forward. We will continue to execute on our strategic focus of improving stability enhancing growth and maintain a strong balance sheet.
Speaker Change: Resulting in more compelling investment going forward operator that concludes our prepared remarks, you may open the line for questions.
Speaker Change: Thank you.
Speaker Change: At this time, we'll 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 that Youre line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Speaker Change: We ask that you limit your questions to wanted to follow up so that others may have an opportunity to ask questions. You may re enter the queue by pressing star one.
Speaker Change: All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.
Speaker Change: One moment please poll for questions.
Speaker Change: Our first question comes from Theresa Chen with Barclays. Please proceed with your question.
Theresa Chen: Good morning, and thank you for taking my questions.
Theresa Chen: Realize we're going to get much more detailed look at the financial outlook later on but I was hoping you could talk about how you see the fruit of all assets in particular fitting within your organization pro forma on how you're planning to further commercial lifetime and if there were any complementary or synergistic opportunities with <unk>.
Theresa Chen: Keith critical assays and how all that comes together.
Theresa Chen: Okay.
Keith: Yeah. Thanks Teresa I appreciate the question I mentioned in my prepared remarks that we've started to dive into those and I can add a little bit more color to that kind of on our initial thinking so.
Keith: So first is we like the stability and diversification that the crude business provides you know specifically the Permian system that we just acquired is located on excellent acreage and I was fortunate to have a set of high quality customers and as we look at those cash flows going forward, we expect them to deliver.
Keith: Our stable cash and returns going forward.
Keith: As far as my comments on looking for how to unlock additional value really as we sit here today, all options around the table, including but not limited to the possibilities of joint ventures or other commercial arrangements.
Keith: I think maybe the only option not on the table is contemplation of a sale like I said, we like the assets and that stability they provide.
Keith: You asked about ETE, clearly working with E T on creating additional value is an option.
Keith:
Keith: This work is still pretty preliminary and we don't have any additional details to share right now, but I think as Joe and I have talked and we've had questions on crude even from the first announcement any changes or arrangements, we make different than just us operating them as is will be because it adds additional view.
Keith: Value beyond what we've already assumed.
Speaker Change: Thank you so much.
Keith: Thanks.
Keith: Our next question comes from Spiro.
Spiro: With Citi. Please proceed with your question.
Spiro: Thanks, operator, good morning team I wanted to go back to the synergies quickly if we could.
Spiro: When the deal was announced that <unk> always talked about $150 million run rate by the third year, probably just mentioned I think hitting a $100 million or so of cost savings annually. So I was just hoping you guys could sort of reconcile those comments and whether or not that $100 million is kind of still in that sort of three year time frame.
Speaker Change: Yes, Spiro I think so if you dial back to what we initially said, we said 150 it would be a combination of expense and commercial we didnt really break down initially what we thought that was and then we said we'd achieve that by the third year of our comments today are really I think the more clarity.
Spiro: We're we've done enough work to be able to provide us on the expense side as far as what the total number is and what the commercial is and any updates to our original cadence I think that's the evaluation. That's ongoing that we hope to provide you know in the next couple of months, but again the most important thing is.
Keith: You know everything we've dug into we should be at or better than what we originally assumed.
Keith: Great.
Speaker Change: Question, maybe going to M&A.
Speaker Change: Scott as you had pointed out very busy start to the year and certainly a lot of initiatives. How do you from here. So curious you know maybe what your appetite is on future M&A from here, either bolt on or larger scale or maybe as your focus at this point entirely just an extra.
Speaker Change: Extracting synergies and absorbing these deals.
Joseph Kim: That's fair it's Joe.
Scott: Obviously, a high priority is integrating and realizing the synergies and getting back to our leverage target for the <unk> acquisition, but equally a high priority for us is optimizing and delivering on our legacy fuel distribution business and the third high priority is continued growth which includes M&A is it easy.
Joseph Kim: To do all three no, but that's how we're solving for we're solving for a growing unitholder value and we think we can do all three.
Speaker Change: Understood I'll leave it there for today, Thank you gentlemen.
Speaker Change: Okay.
Speaker Change: [noise].
Speaker Change: As a reminder, if you would like to ask a question.
Speaker Change: Star one.
Speaker Change: Our next question comes from Elvira Scotto with RBC capital markets. Please proceed with your question.
Elvira Scotto: Hey, good morning, Thanks for all the detail.
Elvira Scotto: Going back to I know, we'll get a little more on new starts I'll hold off on questions there, but I'm Gonna Zenith acquisition, you did mentioned that you could see some future growth opportunities. There can you provide.
Elvira Scotto: Any kind of additional detail there would these be growth opportunities again outside the U S or.
Elvira Scotto: How are you thinking about that.
Elvira Scotto: Yeah.
Elvira Scotto: This is Carl you know if you think about how we've talked about to the terminals in Europe and then maybe even if you go back to our acquisition, we made little over a year ago in Puerto Rico.
Carl: Really the criteria we use to look at that is do they have stable cash flows are there strategic fit.
Elvira Scotto: What kind of synergies do we think we could extract with our base business or kind of what kind of right to win do we have with our existing fuel distribution business and then potential for growth. So our Puerto Rico hit on that we feel confident that these two assets are that we closed on a.
Elvira Scotto: A couple of months ago in Europe fit that we are open to additional international expansion if it meets that criteria.
Elvira Scotto: Now with that possibility of growth you can expect us to continue to have the same level of discipline that we've applied either whether it's on the M&A side or on the organic growth capital side.
Speaker Change: Okay, great. Thank you very much.
Speaker Change: Okay.
Speaker Change: Our.
Speaker Change: Question comes from Selman <unk> with Stifel. Please proceed with your question.
Speaker Change: Hey, guys. This is Tim on for Selman I appreciate the color on the West, Texas divestiture to 711.
Tim: So just curious as you look out at the rest of your footprint do you see any more similar opportunities to make these sorts of transactions.
Elvira Scotto: Hey, Ken this is Joe.
Joseph Kim: I think Carl did a really good job on his prepared remarks talking about how all of that divestiture fit into the bigger picture of us moving forward, but I'll reiterate what he said we're a growth company. This was a unique opportunity for us to do a highly attractive acquisition with Neustar and have a very defined path to get our leverage down to that.
Elvira Scotto: Right right level.
Elvira Scotto: So I don't see any other divestitures in our future.
Elvira Scotto: Yeah.
Speaker Change: Got it understood and then shifting to the distribution growth of 4% was a nice step up but just wondering how you guys think about this longer term with new star and just curious if the 4% was made with or without Neustar in mind.
Speaker Change: Yes, let me try to answer it in two parts I guess first and foremost we're confident about the resiliency and the growth potential of our business on a going forward basis, and that's evidenced by the 2% increase we did last year in the 4%. We did this year as far as establishing a number on an outward outward years.
Speaker Change: I think it's too early.
Speaker Change: We have the flexibility, we like the flexibility to assess market opportunities and will properly allocate our capital.
Speaker Change: Using the same strategy that we have right now and obviously your last question was new star contemplated.
Speaker Change: With our 4% distribution the answers of course, yes, that's part of our business going forward.
Speaker Change: Like the accretion I think anytime you're talking double digit accretion that's a big number of we're confident we're going to deliver on that.
Speaker Change: Got it. Thank you guys for the time.
Speaker Change: Our next question comes from Robert Moskow.
Robert Mosca: Please proceed with your question.
Robert Mosca: Hi, good morning, everyone.
Robert Mosca: Just wondering if you could talk about the puts and takes around.
Robert Mosca: The margin expectations.
Robert Mosca: It sounds like there might be a couple of drags in the form of more low margin volumes in the West Texas sale.
Robert Mosca: I wanted to check whether into 12 and a half guidance still holds.
Robert Mosca: When do we think about it more holistically in terms of volume and margin.
Robert Mosca: Yeah. This is Carl I talked in my prepared remarks that really we look at it from an overall fuel gross profit so I'm going to hand, it over to Austin Harkness, our chief commercial officer. He can he can dig a little deeper there yeah, hey, Robert in terms of a macro view.
Austin B. Harkness: As Carl shared in his prepared remarks, we haven't seen any fundamental shift in the volume or margin picture right. So our view going forward is from a macro standpoint volumes for 2024 are going to continue on the trend that they've been on recently, which is roughly flat for refined products.
Austin B. Harkness: And the margin picture remains elevated right. So break evens remain high we continue to see volatility in flat price all of which paints a fairly constructive picture for the margin environment.
Robert Mosca: If you take a step back and look at our first quarter results. As a reminder, we we manage a portfolio of income streams across different sales channels.
Robert Mosca: And the way to think about our first quarter results is the market gave us an opportunity to sell more fuel.
Robert Mosca: Above our historical run rate volume at a pool margin that was below our historical run rate margin all resulting in a fuel gross profit number that ultimately allowed us to deliver a record first quarter EBITDA and as Karl mentioned, we really do optimize around fuel gross profit versus solving for.
Robert Mosca: Any volume or CPG margin number independently.
Robert Mosca: So as you think about the future and going forward. There's a couple of things I would share. One is we manage the business on a long term basis right. So we take a 12 month view, recognizing theres going to be volatility on a quarter to quarter basis, whether it's impacting to volume or margins independently.
Robert Mosca:
Robert Mosca: Separately as Carl mentioned in his prepared remarks.
Robert Mosca: The West, Texas divestiture accounts for about 50 points of enterprise margin right. So you have to account for that along with the fuel gross profit associated with it I would reiterate.
Robert Mosca: Joe's comments that that's a deal that we're very happy with given the multiple that we were able to transact at and our ability to quickly redeploy that capital to highly accretive M&A.
Robert Mosca: All that said fundamentally we're a growth company.
Robert Mosca: And I think our track record and our forward view is very much that we will continue to grow fuel gross profit in the long run multiple years in the future.
Speaker Change: No understood.
Speaker Change: Thanks for your time today everyone.
Speaker Change: There are no further questions at this time I would now like to turn the floor back over to Scott for closing comments.
Scott: Thanks, everyone for joining us on the call. This morning, as I said before it's been a busy exciting and strong start to the year for the partnership. Please filter feel free to reach out if you have any questions I wanted to discuss anything thanks.
Scott: Thanks, and have a great day.
Scott: Okay.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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