Q2 2019 Earnings Call
Greetings and welcome to Sunoco LP second quarter 2019 earnings call. At this time all participants are in a listen only mode. A 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 I would now like to turn the conference over to your host Scott Grushow, Vice President of Investor Relations and Treasury.
Thank you and good morning, everyone on the call with me. This morning are Joe Kim cell therapies, President and Chief Executive Officer.
Tom Miller, Chief Financial Officer, Karl fails, Chief operations Officer, and other members of the management team.
A reminder, that today's call will contain forward looking statements are subject to risks uncertainties and other factors that could cause actual results to differ materially.
Please refer to our earnings release as well as our filings that the FCC 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 this and that's all P. website for a reconciliation of each financial measure.
Before I turn the call over to Tom I will provide an update on the JC know when diesel pipeline joint venture with energy transfer that we announced on our first quarter earnings call.
We signed final agreement on July 1st successfully commissioned the pipeline in August and completed our first deliveries to customers. This week.
As a reminder, energy transfer operates the pipeline for the joint venture, which transports do you still feel from Hubert Texas do they terminal in the Midland Texas area.
The joint venture splits the profits from midstream operation.
Both parties benefit there is sharing agreement on the marketing side capitalizing on the West, Texas Gulf Coast differential.
No peace cash investment is approximately $50 million.
$5 million up that is growth capital with the balance comprised of landfill and working capital.
I will now turn the call over to Tom who will cover this quarters financial and operating results.
Tom.
Thanks, Scott and good morning, everyone.
Again this quarter, we delivered quality result for the quarter. The partnership recorded net income of $55 million.
Second quarter 2019, adjusted EBITDA was $152 million compared to second quarter 2018 of $140 million.
Our second our second quarter leverage of 4.2 times was lower than last year's second quarter leverage of 4.5 times.
Second quarter DCF as adjusted was $101 million, yielding a second quarter coverage ratio of 1.17.
On a trailing 12 month coverage ratio of 1.35 as noted in the earnings release.
These results include a one time expense of $8 million related to a reserve for an open contractual dispute from prior periods.
If you remove this one timer adjusted EBITDA would have been $160 million.
DCF as adjusted $108 million.
Second quarter coverage would have been 1.26.
Trailing 12 month coverage of 1.37 and leverage of 4.16 times.
Another solid quarter no matter, how you looked at it.
On July 25th we declared an 82.55 cents per unit distribution.
The same as last quarter.
Looking at our operational performance fuel volume in the second quarter totaled a record high of over 2 billion gallons, that's up 4% from a year ago. It was driven by contribution from 2018 acquisitions organic growth in gross profit optimization effort.
Fuel margin was 9.1 cents per gallon.
Which was impacted by the aforementioned onetime expense as well as the mid June .
Philadelphia Energy solutions refinery fire.
Spot gasoline prices ran up in the response pressuring margins in the back half of June and into early July .
P. S is one of our largest suppliers on the east coast. However, given our size we have multiple other options with good longstanding suppliers.
All told without the onetime contractual dispute.
And the margin impact from P.S., we would have been toward the lower end of our 9.5 to 10.5 cents per gallon annual guidance.
On a run rate basis, our second quarter and first half numbers suggest full year operating expense below our $540 million annual guidance.
While we expect quarter to quarter fluctuations totaled 2019 operating expense, where we will be below our annual guidance, primarily due to the sale of Fulton ethanol plant.
That said the Fulton ethanol sale will also result, lower gross profit by essentially the same amount.
Moving to capital, we invested $31 million in the second quarter.
$25 million on growth capital and $6 million on maintenance capital.
We now expect 2019 maintenance capital to be around $40 million up from last year's $31 million.
Last year, we spent $71 million in growth capital. Our current growth capital projection is now up to $100 million, which includes $5 million towards the JC Nolan JV.
As we've discussed in the past we have strengthened our sales team and developed a strong pipeline of organic fuel distribution projects.
We would be comfortable exceeding $100 million in growth capital by investing in additional organic projects that deliver high returns with short paybacks.
Looking at the second quarter, our underlying business performed well, we continue to maintain a financially disciplined strategy focusing on things we control.
Expenses gross profit optimization and investing wisely. We believe this strategy will allow us to remain within our 4.5 to 4.75 times leverage target.
And our 1.2 coverage ratio target.
We believe the 2019 adjusted EBITDA guidance remains very reasonable.
I will now turn the call over to Joe for some closing thoughts Joe.
Thanks, Tom Good morning, everyone quarter after quarter, we continue to deliver quality results. Our second quarter performance is a good example of the resilience of our business, we faced an upward commodity price environment in both April and June .
Were also negatively impacted by the Pos refinery issues. Furthermore, we had a onetime 8 million dollar expense that Tom mentioned earlier.
Even with these headwinds we delivered another solid quarter.
Our underlying business remains strong and we expect that to continue into the foreseeable future.
We're building a business model twist and various headwinds yet at the same time our business model can also take advantage of polite tailwind like we saw in the fourth quarter of last year.
Looking forward the third quarter is off to a good start and more importantly, we expect to deliver on our annual guidance.
Moving on to growth the JC Nolan pipeline was placed into service this month.
Although the dollar amount is not an exceedingly large this is a prime example of our ability to create accretive growth outside of fuel distribution.
First last year, we have shifted personnel and dollar resources to build our midstream business.
And it's paid off with the acquisition of two terminals in December of last year and the completion of the KC Novan project.
We have temporarily slowed our fuel distribution acquisition. However, our pipeline remains strong when the right opportunity comes at the right price We'll act on it.
The balance the short term decrease in acquisitions, we have increased our good organic growth as Tom detailed earlier.
Let me close by stating we continue to establish a track record of delivering on our targets. We remain confident that we will continue to deliver in 2019 and beyond.
Operator that concludes our prepared remarks, you may open the line for questions.
Thank you 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.
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Our first question comes from the line of Sameer Gershuni with U.S. Please proceed with your question.
Hi, good morning, guys.
Maybe we can start off with your outlook for margins for the back half of this year as we sort of think about your full year guidance.
Our Bob's moving in the right direction this quarter any any color around your expectations for margins for the fourth Q.
Hi, Shneur this is Carl.
Yes, as you mentioned the fall in our bond prices definitely provides tailwind like we saw in Q4 of last year and Thats very constructive for US I think in general as we've talked over the last number of quarters, we look at.
We don't look at it.
Margins and volume separately, we look at them together with.
As gross profit I think our gross profit optimization efforts have yielded results in Q2. It was a little more towards the volume side, then the CPG margin side, but we're very.
Comfortable.
With our guidance as as Tom and Joe mentioned on our prepared remarks and.
And Q3 is shaping up nicely.
Okay scenario, so maybe ill add a little bit to that I think the way. If you look at 2018 and kind of look at what that by 2019. There are some similarities if you look at 18 on the first half of the year I think our average margin was somewhere just north of 9.8.
And if you look at this year, even with the $8 million in the refinery issue, we're averaging somewhere around nine and a half thats. The first half the year I think the important thing that Carl mentioned is that our volume is going to be up we're still going to do gross profit optimization and with our backdrop I think we're in very good shape for the back half of this year.
So that makes great sense guys I was wondering given the success that you've had with optimizations.
I was wondering if you can sort of give.
Sense to us what inning, you're in are we in the fifth inning are we in the ninth inning, just couldnt considering how long it's taking place and then I was also wondering as part of that if you can talk about.
The PS closure, whether that actually presents an opportunity to enhance your optimization opportunities as well.
I'll take this Carl I'll take the Pts.
Piece first and then I think Joe.
Might be able to comment on the other.
As far as PE Escos as we mentioned earlier I mean, they were one of our larger suppliers on the on the East coast.
I think we saw the market very quickly.
Find alternate supply coming coming into the Philadelphia area. So it's very well supplied I think what we saw is there was some impact.
We estimate probably in the $5 million to $10 million range.
Split between Q2, and Q3 as the the logistics costs of getting that supply where it needs to get needed to rebalance and that's still working through I mean from our standpoint, it was enough to notice, but not enough to be material. So.
We're the we're one of the largest shorts in that.
Part of the country and we were before we're still going to be a large.
Have a large demand for fuel and so yeah. As you stated I think it creates opportunities for us going forward.
As generic as far as the question about price optimization.
I think on the last conference call I mentioned that.
As far as our base business were pretty deep into it and I think the real opportunity for us is.
It's really when it comes to organic growth and optimizing the the gross profit on on those opportunities. So we're ramping up and also on future acquisitions, our ability to price optimize we believe with our scale and our brand we bring that to the table as far as our base business. It's a continuous process do I think that we have.
Other opportunities internally doing yes, we have some but using a baseball analogy, we're probably deeper into the latter innings when it comes to our internal base.
And just to paraphrase paraphrase the first comment so essentially two Q earnings could have actually been higher had it not been for for PS because of that higher expense is that what you are saying is part of the first part to your answer.
Yes, I think as we've stated I mean, we look at we look at our business as a whole. So so we think overall you know thats not a.
Forecasts that we don't think that we're going to hit our overall.
Guidance for the year on both EBITDA and coverage. It's just a statement that that was a headwind for us in Q2, and probably a little bit in Q3 and.
Right now there are other tailwinds in Q3 that should overcome that.
Okay.
Go ahead Sir.
No no go please finish.
I think that a little bit more depth to the PS issue.
No.
If you want to try to do an analysis internally.
Got to keep all variables eco what to PS impact us in the second quarter, and what that impact us in the third quarter.
We think it's somewhere between five to 10 million that kind of.
Lapped over both the second and third quarter in combination is so if you want to just call it right down the middle somewhere between two and a half to five each quarter and so it did have an impact on the second quarter as far as the third quarter, Yes, I had a little bit of leftover impact, but I think all of that is pretty much been worked out through the system and our optimism on the on the back half of this year factors that in and as you mentioned earlier the drop in our ball prices have definitely trumped over that variable.
Okay and one final question do you see an opportunity to take some capacity on Mariner East two x.
When it starts up as a potential solution to filling supply into the former PS market.
Yes, I think as we look at Philadelphia, I mean, the East Coast has always been supplied by pipe primarily from the Gulf Coast. It's been supplied by refineries in the area and its supplied with with imports from Europe or other parts of the world.
That's going to continue to be the case I'd say, we're always interested in looking at add pipeline opportunities.
Into certain markets, so depending on how that shapes out thats definitely something we'll look at.
Perfect. Thank you very much guys really appreciate the color.
Thank you.
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On that please lobby poll for questions.
Okay.
Our next question comes from the line of Ethan Bellamy with Baird. Please proceed with your question.
Hey, guys good morning.
With respect to the joint venture line in West, Texas could you give us some context on how big that market is if you think that pipe will impact the.
The spread from the Gulf Coast.
And then potentially if we see a big downturn in.
Oil and gas development out there does that put volumes at risk on the line.
Yes. This is Carl I'll I'll be happy to take that I think is as we look at the diesel demand.
In that area of taxes, there's definitely been diesel that's come in by truck in by rail and.
Pipeline economics should beat that everyday of the week and so were comfortable that the market can absorb the capacity of the 30000 barrels a day of the of the JC Nolan line.
Obviously as more supply comes in the market that can that can impact differentials, but we're you know we bake that into.
The as we looked at the JV with energy transfer.
Those economics, so we're comfortable with how that looks as far as to the downturn in in the Permian.
You know as we look at at that market and how it impacts our business.
We think there's a lot of upside it's never going to be smooth quarter to quarter as is.
Things happen is as takeaway capacity comes on.
As as crude prices move around but we think there is a lot of runway in that market.
And as far as downside.
From from our EBITDA perspective, we operated if you recall the.
West, Texas stores than we now.
Have a large commission agent.
Operators Commission agent with a large customer.
We operate in those as company operated stores during the downturn in 2015 2016. So we know what that looks like from an EBITDA perspective, and so we see a potential slowdown in the Permian more is limiting our upside not as a significant downside does this company.
Got it that's very helpful.
Should we view this as a template for future.
Transactions or.
Operability with in concert with energy transfer or is this more of a one off.
Hey, this is Joe.
I'll kind of play off their engineers comment earlier about kind of using a baseball analogy and I would say that as far as looking at mid stream traditional midstream organic growth projects. We are definitely in the first or second inning and the JC Nolan was kind of our first deal. So we're looking at vast opportunities that are out there either with energy transfer or without energy transfer and the way that we're looking at it is.
We have a billion dollar 8 billion gallon plus fuel distribution business. So working further upstream is going to create some synergy opportunities for us.
We feel confident that we're going to find other opportunities. The question for US is how many so let's say early stages, but we think there is definitely some opportunities for us to move further upstream.
Okay and last question since.
The last quarter, we've seen yet another.
IDR elimination from.
On your partnership peers.
Just got asked the question.
When you see that.
That more of a pressing concern.
All right.
Yes, I think what I've said in the past is that.
There is no there is no efforts being spent by energy transfer where sonoco, an IDR elimination.
You know we have a plan that we're executing we think that we can create value and as for currently we don't see I'd ours as a prohibitive for us growing given our excess coverage and our ability to stay within within our targeted leverage nothing right now were sent hovering somewhere around 4.2. So right now we don't see this as it prohibitive.
Alright, Thanks, a lot Joe keep up the good work we appreciate it.
Thanks Steven.
Our next question comes from the line of Jeremy Tonet with Jpmorgan. Please proceed with your question.
Hi, Good morning, this is Charlie on for Jeremy.
First of all was.
I just wanted to see if you had any color on.
Potential reinstatement of the biodiesel blenders tax credit just been hearing.
Some rumblings in the news on that Im curious if you had any color there and really how much of an impact that would be for sun.
Yes. This is Carl I would say.
You know our guests on whats.
What Congress is going to do there is probably as good as yours, we obviously see follow that in and look at that I would not say, it's a material.
Either way that goes for us.
Okay.
And then just wanted to follow up on on West, Texas here.
I just wanted to make sure I understand on the demand side I mean.
I guess your expectations there.
For the balance of this year and then maybe thinking more on 2020.
As you know.
The.
The differentials come in and there might be maybe.
Les Paul from.
On the trucking side I guess, it doesnt sound like its.
Maybe as much of a negative to you.
At least in the year and the near term.
Yes, that's right I think I think backing out a truck and rail diesel into into West, Texas is going to be beneficial to us and beneficial to the joint venture project project, we've entered into with with energy transfer and then as you look at the the production growth in the area.
For every frac or rig.
That is in operation you need diesel to run that.
So we're very comfortable and excited about the forward projections.
As it relates to diesel in our business in West Texas.
I wanted a little bit of commentary to Carl's comments.
I think in my prepared remarks, I said, our investments not exceedingly large is about $50 million. So I think the way to look at it from a sunoco perspective is.
We were paying pipeline tariffs to begin with now we're part of a joint venture. So now we've at least we are we are paying ourselves are picking up half of that the other half. There is some marketing exposure boat, we had that market exposure to begin with because we have the two under seven stores in the commission agent and we have other other diesel distribution in that market so from our standpoint.
The we flipped over some of our revenues into a more ratable pipeline.
Revenue for ourselves.
Okay, great. Thank you.
Our next question comes from the line of Sharon Lui with Wells Fargo. Please proceed with your question.
Hi, good morning.
Wanted to touch on I guess your guidance for gross Capex it looks like the opportunity set.
So a little bit more robust maybe if you could talk about some of the opportunities that you guys are exploring.
Sure Hi, Sharon this is Carl.
I'd say, yes, we mentioned that.
That part of that increase in the growth capex related to.
To about $5 million towards our contribution to JC no one the other portions of our contribution and JC known really calm is as investment in.
Working capital.
As far as the other growth in our growth capital right. It's in the same areas that we've talked about before I think.
Our on our fuel distribution side, our sales organization is really ramping up and so.
A lot of those projects are in signing up new customers are renewing other customers and expanding their business and then as Joe mentioned before we are.
We're spending time and money to to increase our opportunity set in the midstream world and so we have.
We don't have the next.
Project to announce but we're definitely working on that and Thats a component of our growth capital going forward.
Okay great.
And just a question on that one time charge.
Is it.
The impact potentially just isolated to this particular quarter, maybe you can give some color on that contract dispute.
No.
Pardon me this is Tom.
We really can't provide any any additional color. It is an open contractual suit as you said so.
We spent a lot of time looking at this and we feel were appropriately reserved on this.
Thank you.
Okay.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Scott for closing remarks.
Well, thanks again for joining us on the call. This morning feel free to reach out to me with any questions have a great day in this concludes todays call.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.