Sunoco LP (SUN) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sunoco LP third-quarter 2014 earnings conference call.

(Operator Instructions)

This conference is being recorded November 6, 2014. I would now like to turn the conference over to Clare McGrory, Senior Vice President, Finance and Investor Relations. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and thank you for joining us. As I'm sure you're aware by now, Susser Petroleum Partners, LP changed its name to Sunoco LP on October 27, and we changed our ticker symbols to SUN, trading on the New York Stock Exchange.

Before we began our prepared remarks, I have a few of the usual items to cover. A reminder that today's call will contain forward-looking statements. These statements are based on management's beliefs expectations, and assumptions. And, may include comments regarding the Company's objectives, targets, plans, strategies, costs, and anticipated capital expenditures. They are subject to risk and uncertainties that could cause the actual results to differ materially, as described more fully in the Company's filings with the SEC.

During today's call, we will also discuss certain non-GAAP financial measures. Please refer to yesterday's news release for a reconciliation of each financial measure.

Also, a reminder that the information reported on this call speaks only to the Company's view as of today. So, time sensitive information may not -- no longer be accurate at the time of any replay. You'll find information on accessing the replay in yesterday's news release.

With me on the call this morning are Bob Owens, Sunoco LP's CEO; Mary Sullivan, our CFO; and other members of our senior leadership team. I would now like to turn the call over to Bob.

Thank you very much, Clare, and good morning, everyone. I'm really happy to be with you for our first earnings call under the Sunoco LP name. I'd especially like to welcome those of you that are joining the partnership call for the first time, or are new to the Sunoco LP story. And, also welcome all members of the investment community, the entire ETP, ETE family.

For the third quarter, our team delivered really solid results once again. Along with executing on a number of strategic initiatives. Mary and I are going to walk you through the highlights of the third quarter operating results in just a bit.

But first, we'll recap the strategic activities that we've completed or made progress on since our last call. And we -- I would say we've been a bit busy since that last call.

On August 29, ETP closed on its purchase of Susser Holdings and the GP of Susser Petroleum Partners. As Clare noted, we affected a change to the -- to Sunoco LP and changed the ticker symbol to SUN, Monday of last week.

The change in name and ticker symbol, that decision was intended to align the partnership's legal and marketing name with the iconic brand name, Sunoco. I'll also note that the SUN ticker symbol began trading on the New York Stock Exchange in 1925 and continued for 87 years until ETP's purchase of Sunoco in October of 2012. We're very excited to have it back.

We've assembled a great senior management team for the new partnership. It's comprised of an excellent blend of legacy Sunoco, MACS, and Susser experience. This team will drive the transformative strategy of the Company, including drop downs from ETP and other gross activities, as well as continuing operational execution that both businesses have achieved over the last several years. We're making good progress on the integration of Susser into Sunoco and we are on pace to achieve the synergies that we announced to the market at the time of the transaction.

Through our actions since closing on the acquisition of Susser by ETP, we also have demonstrated our commitment to the transformative growth strategy for Sunoco LP, which, in the near term, we expect to be largely driven by the planned drop down activity by ETP of the balance of legacy Susser retail and fuel marketing business into Sunoco LP as well as the legacy Sunoco businesses. We also plan to continue to evaluate and pursue other attractive acquisition opportunities. Witness our recent announcement of Aloha Petroleum, which I'll talk about a little bit more in a minute.

In early October, Sunoco LP closed on the first drop down of assets from Energy Transfer Partners. Sunoco LP acquired Mid-Atlantic Convenience Stores, LLC from ETP in a transaction valued at approximately $768 million.

The assets owned by Mid-Atlantic Convenience Stores include both the MACS locations, and the Tiger Market locations. MACS being greater Washington DC area and Tiger Market primarily in the Nashville Tennessee area.

The combined asset package includes approximately 110 Company operated convenience stores and 200 dealer operated locations as well as consignment locations in Virginia, Maryland, Tennessee, and Georgia. The package features compelling convenience store offerings in very attractive markets with leading motor fuel brands including Sunoco, Exxon, Mobil, and Shell.

If you listened to the call this morning, or read our previous announcements, it's clear that ETP intends to drop down the remainder of the retail segment to Sunoco LP over the next few years, that includes approximately 5600 additional sites both Company operated and third-party operated that today remain at ETP along with Sunoco's other businesses including supply, trading, manufacturing, commercial businesses. While we expect the drop downs from ETP to Sunoco LP to be the main growth source in the near term, we also continue to evaluate acquisitions and will pursue those opportunities with these other criteria.

In late September, we announced the planned acquisition of Honolulu-based Aloha Petroleum, which is expected to close before the end of the year. Aloha Petroleum is the largest independent gasoline marketer and one of the largest convenience store operators in the state of Hawaii. The Company also has an extensive wholesale fuel distribution network and six fuel storage terminals on the islands.

We're really excited about this opportunity for a number of reasons. First, as I said, the -- Aloha Petroleum is a market leader in Hawaii with high-quality assets on the four primary islands.

Hawaii itself is attractive. The economy is strong and it's growing at a faster rate than mainland United States and clearly has an attractive tourism industry.

This also presents an opportunity for us to enter an attractive market with an integrated platform, including convenience stores, storage terminals, and broad distribution network. It was a chance to buy a complete system and, that system is attractive, in that, the bulk of the activities are MLP qualified.

In addition to what I've discussed before, we've also make significant progress growing our capital structure and increasing liquidity. To provide greater financial strength and help facilitate the drop-down strategy, as well as other growth activity.

We closed on a new five-year $1.25 billion revolving credit facility in September, that was a significant increase of $850 million from the previous facility. And, we also successfully completed an $8 million unit equity offering for $359 million, net of proceeds, on October 27. We feel awfully good about those two initiatives and particularly the equity offering. We consider the choppiness of the market during that time period when we were very close with the response we got.

As we've indicated in the past, we expect to finance the drop downs from our parent through a combination of debt and equity. And, I'd like to now turn the call over to Mary Sullivan, who will cover highlights of the partnership's third-quarter performance. Mary.

Thanks, Bob. Good morning, everyone. Looking first to a few key highlights of the third quarter for Sunoco LP. We were very pleased to deliver a 5% quarter-over-quarter increase in the quarterly distribution. This is our sixth consecutive increase and it represents a 16.4% increase over the third quarter 2013 distribution level. Adjusting for the additional 12 million units issued in October, and the unusual items impacting distributable cash flow, we noted in last night's earnings release, coverage remains strong at 1.2 times for the quarter and the trailing 12 months.

From an operations standpoint, the partnership delivered a very solid 17% year-over-year increase in gallons sold and a 19% increase in total gross profit. Excluding the impact of charges related to the various M&A activities, and $2.3 million of non-cash charges related to fuel inventory, EBITDA increased by 15% to $17 million and distributable cash flow increased by 9% to $14.8 million.

The inventory adjustment primarily resulted from our conversion from average cost to LIFO accounting for fuel inventories during the month of September to conform with the ETP's accounting policy. As I mentioned, gallons grew by 17% over last year, reflecting primarily the contribution of Gainesville Fuel which we acquired in September 2013.

Additionally, we're supplying an additional 69 Stripes and Sac-N-Pac stores versus a year ago and we continue to see growth at existing sites. Average fuel margin for all gallons sold on a weighted average basis increased slightly to $0.038 per gallon from $0.037 per gallon a year ago, excluding the impact of the fuel inventory valuation adjustment.

Bob touched on the financing activities we've completed over the past six weeks. We utilized our new revolver on October 1, to fund $556 million of the MACS acquisition, along with 4 million common units issued to ETP. Then in late October, we sold 8 million units to the public in our first follow-on offering since our 2012 IPO. Net proceeds of approximately $359 million were used to pay down the revolver.

As of October 31, we had approximately $438 million drawn on our revolver, plus about $11 million of standby letters of credit, leaving us just over $800 million available on the revolver. With the issuance of new units to ETP, and through the public offering, we increased units outstanding from $22 million to approximately $34 million, common and subordinated units.

Also during the third quarter, we completed sale-leaseback transactions for eight new build Stripes convenience stores for a total of $35.2 million. We've already completed an additional 4 stores in the fourth quarter for a total of 25 new Stripes stores purchased and leased back to date.

We expect to purchase approximately 28 to 33 new Stripes stores for full year 2014 and this is reflected on our growth capital spending estimate for full year 2014 of $150 million to $170 million, excluding the acquisition costs of MACS and Aloha. Through September, the partnerships CapEx spending is a total of $106 million of which, about $0.5 million is classified as maintenance CapEx, and the remaining is for expansion projects.

I'd like to spend just a few minutes on the MACS and Aloha businesses we're adding to the partnership during the fourth quarter. We filed historical financials for MACS along with pro forma information on October 21.

Using the data for the six months ended June 2014, half-year adjusted EBITDA is shown at about $38 million and keep in mind that MACS acquired 40 Tiger Mart stores in May of this year. So the MACS six-month numbers only include two months worth or about $2.4 million of EBITDA from Tiger Market.

In the MACS acquisition, we acquired two different companies from ETP that had already been split into their qualifying and non-qualifying components. As a reminder, the wholesale distribution of fuel is generally qualifying, but the sale of fuel at the retail level or inside convenience store items is not. And, we expect about 70% of the MACS EBITDA to be qualifying income.

We are using our taxable entity Susser Petroleum Property Company or PropCo, as we call it to hold the non-qualifying business. Since PropCo's been purchasing the new Stripes stores, they are throwing off significant tax depreciation and generating NOLs. Therefore, we're not currently expecting significant cash tax leakage from the MACS acquisition.

We still anticipate closing on the Aloha Petroleum acquisition later this year. We also included the historical financials for Aloha in our October 21 filings, which reflect half-year adjusted EBITDA of approximately $15 million. We expect the majority of this income to also be qualifying.

When both MACS and Aloha are completed, and fully reflected in Sunoco LP's results, we expect our adjusted EBITDA to about triple, based on the historical performance. This should also result in a significant increase to distributable cash flow. Our board of directors will evaluate future distribution rates, in light of this additional class flow, as well as the potential impact of additional drop downs as contemplated by ETP.

And, that concludes our prepared remarks. Operator, we're ready to take any questions.

Thank you, ma'am.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Abhiram Rajendran with Credit Suisse.

Hello, good morning.

Good morning.

Good morning.

Just a couple of quick questions. On the M&A side, could you talk to little bit about your thought process on Aloha? If that was a one-off type of opportunity, or if you think there will be more opportunities like Aloha coming down the pike? Whether it's in the Texas area or in other regions, if they're attractive. Just any color there would be helpful.

Yes, I think the way I would answer that question is that we will continue to look at opportunities as they present themselves. We will look at a lot more than we will pull the trigger on. Clearly, our focus right now is primarily around executing the dropdown activity that's been announced both by our parent ETP as well as by Sun LP. But we will always be open to growing distributable cash flow and look at interesting activities.

If you kind of use Aloha, maybe, as a lens of what was attractive there. First, an attractive market, very attractive set of assets. And an opportunity, we feel, to add value and increase income.

Okay. Great. And then just another one from me.

With all of the recent volatility and movements in crude prices, and maybe this is more appropriate for the retail part of the business. Could you just give us some idea on how to think about how that affects gross profits there? Either short-term or on a more intermediate-term basis?

Well, I would answer it this way. If you look at margins by the different classes of trade which are included in all of our activities, year in/year out they remain remarkably stable with reversion to the mean, typically. Over the short run, what we see is during times of declining crude prices, we see margin expansion. During times of crude increases, we see margin contraction. 2014 has not been an exception to that.

What is interesting this time, and will remain to be seen with this step change we've seen in commodity pricing with crude and then across the entire complex, is essentially the tax reduction that the retail consumer has received. And it will be interesting to see what that does to demand. Some early indicators, if you look at new car sales, the shift has been pretty dramatic and awfully quick given how long we've seen some of these new prices. We take that as a positive.

The second point I would make on the lower crude prices is that this reduction in price for fuel, results in additional dollars in the pockets of our convenience store customers. And we have good opportunities for them to go ahead and spend some of that money. So we think it will be constructive for our convenience store business.

Great. That was my follow-up question. So appreciate the color.

You bet.

Mr. William Florida with Advisory Research.

Please go ahead with your question.

Yes, thanks for taking the question. Congratulations on the progress so far.

I just want to confirm my understanding. I think Mary mentioned that you might have as much as three times the EBITDA based on the new assets that you've acquired. And my understanding is that those assets came in early in October. Does that mean that you would have, for the next quarter, nearly one full quarter of EBITDA from those new assets?

Hello, Bill. This is Mary.

The MACS assets came in October 1, so we do have a full quarter in Q4 of the MACS assets. However, that tripling of EBITDA also was pro forma for Aloha, which has not closed yet. We expect to close before the end of the quarter, but obviously not a full quarter worth of cash flow from that acquisition.

Okay. But if everything goes as planned, it would be probably two out of the three months where you'd have all of the assets in the portfolio, if I understand?

It's going to be depend on when we get to closing on that one. We've not closed it yet. And I would expect it a little bit later in this quarter.

Yes, I misunderstood. Yes, that's obviously the second month of the quarter. Okay. Thank you very much.

Sure.

(Operator Instructions)

We'll take our next question from Jed Cairo with BeaconLight Capital.

Hello. Thanks for taking my question and congrats on all the good deals.

Thanks.

I just wanted to try and sort through some of the disclosure. Based on the pro forma numbers and based on the IDR disclosure, it looks like your distributable common distribution is approaching $3.00. I just wanted to confirm that I'm looking at those numbers the right way.

And as a follow up, I want to get a sense of now that we're nearing the high splits or into the high splits, how you think about the growth potential for this business over the next couple years as you drop down the remainder of the assets and look to new M&A opportunities. Thank you.

Hello, Jed.

In terms of the future distribution, I think it's a little too early to opine on what our Board will set over the next few quarters on that distribution. Certainly, we are on a strong trajectory with that cash flow. And I would expect to see a lot of that reflected in the distribution as well.

Yes, I'll take the second part of that in terms of how we're thinking about growth relative to where we may be in a split schedule.

I think that how I would answer that question is this. If you look at typical MLPs and the multiples that assets trade at, and you contrast that to the retail industry and historical multiples that have been paid there. You layer on top of that the makeup of the retail industry, where almost 60% of the convenience stores in the United States are operated and owned by individuals. We think there remains a significant opportunity for roll-up there, and we plan to participate in it. And we think we're well-positioned to do it.

Okay, thank you.

Thanks, Jed.

Mr. Ned Baramov with Wells Fargo.

Please go ahead with your question.

Good morning.

Good morning.

So mostly housekeeping items. Number one, on the growth CapEx increase, you did note that one of the drivers is obviously the higher expected numbers of stores. But could you maybe touch on the expansion projects that you noted that are included in the revised CapEx outlook?

The biggest piece of the growth CapEx today in Sunoco LP, kind of legacy Suss P if you will, is the purchase of the Stripes stores. There are certainly some other growth activities going on in that business in terms of acquiring new dealer locations. And other projects to grow that other wholesale cash flow.

In addition to that, the Aloha acquisition would be on top of that, as well as the MACS growth. But the vast majority of the growth CapEx to date is involved with the Stripes store purchases.

Got it.

And, then my second question is on the disclosure in the press release. There are obviously results related to a predecessor entity and a successor entity. So I just wanted to confirm that there is no change in margin metrics or anything else going on there. Obviously, excluding the inventory method change.

Right, no, that's correct. Let me just talk about that a little bit.

With the acquisition by ETP of Susser Holdings, there was purchase accounting applied at the Susser Holdings level, which then was pushed down to Sunoco LP. And so that is what's causing the predecessor/successor presentation for accounting purposes. We've tried to give you some of the key metrics. And you'll see a little bit more in our 10-Q when it gets filed of more of a combined quarterly presentation.

The one thing I would mention on the LIFO implementation that was implemented in September, there were some non-cash valuation adjustments related to that. And that is running through the gross profit dollar line. We have pulled that out in calculating the cents-per-gallon margins that we've provided. So that we're trying to give you apples to apples.

That's helpful. Thanks, Mary.

Mr. Bob Owens, Chief Executive Officer, there are no further questions at this time. Please continue.

Great, thanks very much.

I want to thank everybody for joining us on the call this morning. 2014 has been a terrific year for our businesses, really, across the board. And as we look at 2015, we believe that the Sunoco LP is well on its way, with a clear path in front of us, to transform into one of the leading wholesale and retail marketing platforms in the country. With tremendous scale and diversity of both geography and types of business.

The iconic Sunoco brand has been around for more than 125 years. And we will continue rolling it out in the Southwestern markets as we grow our MLP. We erected the first Sunoco sign at a new Stripes location in Cleveland, Texas, a suburb of Houston, just a few weeks ago. And our Texas customers will be seeing more of these before the year is over.

Stripes core market in Texas -- Jamie Welsh said that our acquisition of Susser was a bet on Texas. And that's a bet that we like and we continue to feel, if anything, just better and better about it. Among the fastest-growing in the US in terms of population, job creation, and economic activity. And we believe that the highly successful Stripes c-store brand, Laredo Taco Company restaurant offering, can be exported beyond the current borders of Texas, New Mexico and Oklahoma.

The legacy Sunoco-operated stores and dealer locations are also well-positioned in extremely attractive markets along the East and Southeastern United States. We believe the new LP is poised to deliver strong growth in unit, along with their value over time.

I'd like to thank all the members of the new Sunoco team for their energy. I mentioned we've been a bit busy here the past few months, and that entailed a lot of hard work. I want to thank everybody for putting together such a strong organization and planting the seeds for what we believe will be very successful growth in the near and long term.

And we would like to also thank the legacy investors with Suss P and welcome all the new investors as well. Thanks very much.

This concludes our call.

Ladies and gentlemen, thank you for dialing into the Sunoco LP third-quarter conference call. This concludes the conference. If you'd like to listen to a replay of today's conference, please dial 1-719-457-0820. Or toll free 1-888-203-1112.

The Conference Center would like to thank you for your participation. You may now disconnect.