Sunoco LP (SUN) 2015 Q1 法說會逐字稿

Greetings, and welcome to the Sunoco LP first-quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Scott Grischow, Director of Investor Relations and Treasury. Thank you. Mr. Grischow, you may begin.

Thank you. Before we begin 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 the risks 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, including adjusted EBITDA and distributable cash flow. Please refer to yesterday's news release for a reconciliation of each financial measure. Also, a reminder that the information provided on this call speaks only to the Company's view as of today, May 7th, 2015, so time-sensitive information may no longer be accurate at the time of any replay. You'll find information on the replay in yesterday's news release.

On the call this morning are Bob Owens, Sunoco LP's Chief Executive Officer, and Clare McGrory, our Chief Financial Officer, and other members of our senior leadership team. I would now like to turn the call over to Bob.

Thanks, Scott. Good morning, everyone, and things very much for joining us here this morning. We'll review with you the results of the first quarter, in addition to that, talk about some more recent accomplishments and developments in our growth objectives.

So let me start with a few comments about the latest drop-down that we closed in April, as well as our continued growth plan. Sunoco LP acquired 31.6% of Sunoco LLC. That's the wholesale fuel distribution business. And we acquired that asset from an affiliate [of our] parent, Energy Transfer Partners.

This transaction is really important to us because it significantly expands our existing wholesale network in the Southwest and gives us new exposure to wholesale customers in 26 states from Maine to Florida and west of Louisiana where the iconic Sunoco fuel brand is very strong.

This initiative not only expands Sunoco LP's geographic exposure, but it also enhances our sales channel portfolio with additional branded distributors who supply fuel to independent retailers in our mix of customers.

Clare's going to come back in a minute with a few more details. But this is an important acquisition for the partnership because virtually all the income is qualifying, and we anticipate strong growth for the wholesale business into the future.

Now lets turn and talk about the first quarter. The partnership delivered solid first-quarter performance in the face of some challenging market dynamics with year-over-year growth in both the fuel gallons sold as well as gross profit.

This was driven by the first-quarter contributions from Aloha Petroleum which we acquired mid-December of 2014, as well as the MACS drop-down transaction that was completed in the fourth-quarter 2014.

I'm pleased to say that both Aloha's MACS' performance are exceeding our expectations. And in addition to diversifying the asset mix in Sunoco LP, they have created a great foundation from which to expand the retail business as we move forward.

And on that note, I'd like to highlight some of the key metrics for the first quarter, and we'll start with the strong distribution increase for the quarter.

As we announced, the first-quarter distribution of $0.645 per unit, this is an increase of 7.5% from prior quarter and up 28.5% versus a year ago. This reflects our continued progress on growing the partnership through acquisitions and drop-downs and our confidence in our position in the marketplace both today and in the future.

We'll talk more about distribution philosophy in a bit.

Adjusted EBITDA increased 179% over the prior year's first quarter, reflecting growth from the MACS drop-down and the Aloha acquisition, as well as organic growth and affiliated and third-party volumes.

Distributable cash flow more than doubled from a year ago to $29.6 million in Q1 2015.

Volume sold by the partnership to affiliates, which includes volume sold by the partnership to Susser Holdings for resale at Stripes and independently operated consignment sites, increased 9.5% year over year to approximately 304 million gallons. This reflects strong volumes from new Stripes stores and at our dealer-operated [Consigny] location.

Stripes remains our single largest customer with 663 sites as of the end of the first quarter.

Volume sold by third parties including independent dealers as well as commercial customers, increased over 50% to approximately 235 million gallons. Gross profit on these third-party sales increased 185% to $25 million or $0.097 per gallon, an increase of over 70% from year-ago levels.

We completed drop-down transactions for six Stripes stores during the first quarter for approximately $26 million and two more thus far in the second quarter for another $8 million.

As a guide, these eight sites produce annual rental income of approximately $2.7 million to the partnership in addition to the $0.03-a-gallon margin on fuel volumes.

For the remainder of the year, we expect a drop-down of about 25 to 30 news sites into Sunoco LP.

Merchandise sales totaled $47.5 million for the quarter which reflect a full quarter's contribution from Aloha Petroleum. While the partnership did not report merchandise sales in the first quarter of 2014, we can report that MACS and Aloha same-store sales, including -- excluding cigarettes, increased by nearly 9% from Q1 2014.

Our merchandise volumes delivered strong growth on a same-store sales basis. On fuel volumes, we showed growth in the MACS markets, but detected market fuel volumes were as expected, impacted by demand declines in the oil-producing pockets within Texas.

We're pleased to continue strong same-store sales growth in Houston and I-35 corridors. And the combination of those two things largely offset each other.

Narrower fuel margins impacted first-quarter adjusted EBITDA and DCF, as compared with the prior quarter. Falling oil prices in the last half of 2014 drove near-record fuel margins mainly from the MACS sites. Q1 2015 average margins resemble more normalized historic ranges, despite some volatility within the period.

I underscored this point last quarter, but I think it's worth repeating again. Over time our margins have proven to revert to the mean year in and year out. Although many other MLPs are hurt by low commodity prices, low oil prices, our business is generally agnostic to the absolute price of oil.

Additionally, we believe strongly that our diversity and channels [of] trade and geography, as well as asset mix, makes us a much more stable defensive investment during periods of stability -- or volatility.

And along those lines, stable long-term contracts support the wholesale business, and that factor will increase in the second quarter with our April acquisition of the portion of legacy Sunoco LLC business from an affiliate of our partner, which -- of our parent, which I discussed earlier.

Additionally, merchandise sales from SUN-operated convenient stores in some of the fastest-growing markets in the U.S. also help stabilize our overall business. We expect that stability to continue as we go through additional drop-downs, third-party acquisitions, or through organic growth within our current markets.

As noted earlier, our first-quarter distribution of $0.645 per unit represents a 7.5% increase versus the fourth quarter, and a 28.5% increase year over year.

We are really pleased that we're able to continue to provide strong distribution growth through this current market environment where many MLPs have frozen or even in a number of cases reduced their distributions because of the impact of commodity prices.

Sunoco's increase reflects our confidence in our growth strategy and our ability to weather volatility in commodity price environments across economic cycles. We will be focused in the near term on continuing to deliver distribution growth. It's in the top tier of the industry as we complete the drop-down strategy.

Long-term, we believe it's appropriate to target at least a 1.1 coverage ratio.

Finally, on Tuesday, the IRS released for comment the proposed regulations governing definition of qualifying income under section 7704 of the Internal Revenue Code. It's key determinant for MLP treatment.

We've received a lot of telephone calls on this. There's been concern expressed. From our review, both internally and externally, we couldn't be more pleased with the report because it just confirmed the qualified versus nonqualified status across all of our businesses. And remember, we have Propco, a captive C corporation in which we park all nonqualified activity, then dividend, which is qualifying, up for distribution.

So we feel good about the clarity that the proposed regulations provide.

Our current end user sales are structured in a corporate subsidiary, Propco, as I mentioned. And all wholesale and bulk sales are, in fact, confirmed as qualifying in the document. And we really hope this clears up any questions or concerns on the matter.

Now I'd like to turn the call over to Clare McGrory, who will cover additional highlights of the partnership's first-quarter performance. We'll follow that with answering your questions.

Thanks, Bob. Good morning, everyone. To add to Bob's comments on our latest drop-down closed on April 1, we acquired almost 32% of the Sunoco LLC wholesale fuel distribution business for total consideration of approximately $816 million.

We paid $775 million in cash and issued approximately 796,000 new SUN units to ETP valued at $40.8 million.

Sunoco LLC distributes approximately 5.3 billion gallons per year of [motor] fuel. As Bob pointed out, virtually all of the income from this asset is qualified.

We ultimately plan to acquire all the wholesale distribution business from ETP, along with the Sunoco and Stripes retail assets. We expect to complete at least one more drop-down this year, and are still targeting completion of the drop-down strategy by mid-2017.

We also continue to evaluate third-party acquisition opportunities and intend to maintain our commitment to expanding our portfolio with quality assets at the right price.

Let's look next at a few highlights of the first quarter, starting with the distribution. The 7.5% per unit increase in our distribution represents our eighth consecutive increase since the partnership went public in September 2012. This quarter's distribution increase mark's Sunoco LP's third consecutive quarterly distribution increase of 5% or more and it speaks to this business' ability to remain resilient during periods of commodity price volatility.

Our distributable cash flow coverage for the latest quarter was 1.2 times and 1.4 times for the trailing four quarters.

This quarter's distribution increase of 7.5% is supported by the first full quarter contribution from the Aloha acquisition. As Bob pointed out a moment ago, we expect to continue to deliver strong growth rates relative to the market, reflecting the drop-down activities and other growth initiatives.

Adjusted EBITDA increased substantially from $15.7 million in the first quarter of 2014, to $43.7 million in the current quarter, and distributable cash flow increased by $15.6 million to $29.6 million in Q1 of this year, reflecting the addition of MACS and Aloha.

Weighted average fuel margin for all gallons sold for the quarter increased from $0.040 per gallon a year ago, to a $0.088 in Q1, again reflecting the addition of MACS and Aloha.

As we described last quarter, with the addition of retail fuel and convenience store operation to what was previously a fuel distribution business, in addition to the higher gross profit contributions, we do incur higher expenses reflecting labor, maintenance, operating, and depreciation expense from those stores.

Looking next at our liquidity and recent financings. On April 1, we issued $800 million at 6 3/8 senior notes due 2023, at par, to a private offering that raised net proceeds of approximately $789 million.

Most of the proceeds were used to fund the purchase of our interest in the wholesale fuel business and the remaining proceeds were used to repay outstanding borrowings under our revolver.

On April 10th, we announced an additional $250 million of borrowing capacity on our revolving credit facility, bringing our revolver up to a total of $1.5 billion.

As of May 1, we had approximately $685 million drawn down and $12 million in outstanding letters of credit, leaving approximately $803 million of available capacity.

This level of liquidity provides us more flexibility to continue our growth strategy, which includes the next drop-down that we are working towards and also potential acquisitions of varying sizes, plus, our planned organic growth to increase our penetration in largely existing markets where we already have [strong scale in] marketing leverage.

We remain well within our leverage covenants with net debt to EBITDA of 3.9 times on the trailing 12-month basis, pro forma for full-year impact of acquisitions.

Our capital expenditures in Q1 were approximately $37 million, which includes approximately $3 million in maintenance capital. Of the expansion capital, $26 million was for purchase and sale leaseback for Stripes locations with approximately $5 million related to growth in the dealer business.

Excluding acquisitions, but including the additional capital spending related to the partnership's equity interest in Sunoco LLC, we expect maintenance capital for the full year of 2015 to be in the range of $15 million to $25 million and [growth] capital to be between $180 million and $230 million.

We believe we are well-positioned with our capital structure to execute on our drop-down plan, continue the organic growth within our existing footprint, and grow through strategic third-party acquisitions that will drive long-term unit holder value.

That concludes our prepared remarks this morning. Operator, we're ready to take questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) In the interest of time, we asked participants to limit themselves to one question and one follow-up question, and then re-queue. One moment while we poll for questions. Andrew Burd with JP Morgan.

So it seems like the drop-downs are well online for kind of a mid-2017, by the time the entire ETP retail segment gets dropped down.

After the first Sunoco LLC drop in MACS, it seems like you're well ahead of schedule if you continue at this clip.

Now that you've achieved some size and scale within the MLP, are you approaching the drop-down pace and size any differently? Or how can we think about it from here on out?

Yes, Andy. This is Bob. I would say that the direction we've given, the market, both from a SUN LP standpoint and a little bit earlier this morning on the ETP call, what we said is by 2017, our plan is to have it dropped.

Remember, we've got two publicly traded entities here. We are respectful of the unit holders in both instances. We have committees set up within the Boards, and we endeavor to make sure that it is positive for both sides.

So sitting here today, I'll tell you, we're on track. Both Board and both corporations are committed to executing the strategy. And we don't see anything in front of us that would alter that base.

The timing of it really is going to be a little bit digestion-related within SUN LP.

Okay. And is it fair to assume that the rest of the Sunoco [LLP] interest will be dropped next before the retail, or is that an unfair assumption?

We haven't given guidance there. I don't think that's an unreasonable assumption.

Okay. And then just kind of a follow-up about fuel margins. I think last quarter, Clare, on the call you mentioned that a rule of thumb for a normalized margin within Sunoco LP, at that point in time, was just under a dime.

How much of the slight shortfall, the $0.088 in the first quarter, was due to the seasonally weak first quarter versus rising fuel prices in February?

I'd actually put where we ended up in the quarter pretty close to our normalized rate, Andy. And it has, within that, it does have some stronger retail margins and some lower wholesale margins. We ended up about the right place.

To your point, though, if you were to look at each of the months, it was definitely a tale of a few different stories there because we did have continued declining oil prices in 1Q, but we had some of that reverse out in the back half of the quarter.

Okay. And so that's kind of where the $0.088 is kind of a good run rate as of the first quarter. But now that Sunoco LLC interest is in there, is that pulling the average down going forward? Or how should we think about that?

One, I would say 1Q, with the fact that Aloha generally enjoys higher margins than the rest of the business. 1Q was helped a bit by that, relative to what you'll see with LLC. I think you're still going to see it in the eight range, plus or minus.

Okay, great. And then --

But on a normalized basis.

Okay, very helpful. Thanks. And then last follow-up question is, in kind of the last month we've seen fuel prices rise generally nationally. How can we think about margins kind of so far this quarter, if you're willing to tell us anything there?

Well, as you know, we don't speak to current time periods. But I will tell you that if you look at the direction of crude oil pricing, we make good money at high crude oil prices. We make good money at low crude oil prices. It's the movement that affects us either from a margin contraction or expansion.

And when you look at the crude oil trends during the current time period, if you were to assume that all retailers might expect some contraction, I sure wouldn't argue with you.

Great. Thanks. I'll jump back in the queue.

Stephen Grambling with Goldman Sachs.

I guess sticking with some of the long-term targets, you mentioned the drop-down the time frame. But has anything changed as it relates to the $1 billion EBITDA target that you had previously outlined?

No. We're committed to growing. It's interesting, we'll watch how this time period plays out. But we made the point that we think our diversification, both geographic as well as by business line, positions us pretty well.

It's also our belief that there are other players out there that, perhaps, aren't quite as positioned as well, and we think we will see continued opportunity.

So we're committed to growing to the billion-dollar number and we plan to do that through a combination of internal and external activities.

So if I read you correctly, it sounds like maybe a little bit more margin pressure from a fundamental standpoint, but that also is opening up the opportunity for potential acquisitions?

Yes, I think that's a fair way to say it. This business overall, again, is very, very ratable for us, as well as our competitors, over time. But this kind of the current environment that we're in, we think could help create some opportunities.

That's helpful. And then I guess changing gears a little bit as a follow-up. I may have missed this. But can you provide the core run rate of gallons if you were to have consolidated the acquisitions and drop-downs in both periods?

Sure. So if you look at the ETP release, you'll see the total volumes really for this quarter for the combined business. And we can, on a pro forma basis, I'd say looking at the last year, probably looking at, on a quarterly basis, 1.5 billion gallons.

Yes. Remember there's some seasonality to that and we have moving as the asset mix changes. I think maybe if you'd like to discuss it in more detail probably offline, we can help add a little --

Yes, we talked about north of seven billion gallons --

Annually.

-- on annual basis.

Right.

That's still a good number to use, Steve.

Right.

Okay, that's helpful. Maybe I'll circle back. I'll yield to the floor. Thank you.

Thank you. Ben Brownlow with Raymond James.

You had commented on the Aloha and MACS exceeding expectations. And I think I heard correctly that same-store sales were up around 9%.

Just wondering if you could give some color around where exactly that's exceeding expectations and what's really driving what is a pretty impressive volume growth there?

Well, I would say this generally. Remember that this business is managed as a single business despite where the assets currently reside corporately today.

And as we have pursued an acquisition strategy, starting with the MACS acquisition then Tiger Management then Susser and then Aloha Petroleum, what we have worked very hard to do is to look at all of our supply chain activities on the one hand from a kind of margin management standpoint. And on the other hand, take a look at how we're going to market.

And we're attempting to take the best from each market and see if there are learnings that we can apply other places.

We're early in that, but the returns are good, early returns are good. We're pleased. And I would say that the additional color I would give you specifically with MACS and Aloha, those ticked all our boxes in terms of attractive acquisition candidates. First, they were strong assets. Second, they were in very attractive markets that were experiencing demand grows. And third, we were able to acquire them at financially attractive prices.

So when we go back and look at the results, what I would say is, early on we're seeing little benefit of the combination, but more importantly, those are good markets and we've seen volume grow.

So it sounds like it's a little bit more of a function of internal initiatives, capturing market share versus regional performance. Or is it more weighted towards regional?

I don't know that I would -- how exactly I would parse that. I would say probably half and half.

Okay. And just one last one for me. The fuel margins on the retail side were extremely impressive. And I was just -- it caught my attention to, given that that was characterized as more of a normalized run rate. And I know a lot of that's tied to the Aloha assets.

But just to clarify, should we think about that at least until other drop-downs are taking or other acquisitions maybe take place? Should we think about the sort of base run rate on retail fuel margins going forward in that $0.30 range?

There was a benefit from Aloha in there, and that will, as the other retail assets are dropped down, that will moderate a bit.

What I had indicated was, on a weighted average basis for the total fuel margin, where we landed, that ended up close to a normalized range, we talk eight, plus or minus. We did have higher retail margins than I would call normal, and slightly lower wholesale margins.

So I think normalized retail margins, I think over time they're going to be in the low 20s when all the drop-downs are complete.

Understood. Thanks for the color.

Theresa Chen with Barclays Capital.

My first question is in regards to the funding for the next drop-down. Given the current level of leverage you're carrying, which I understand is well within your covenants and you've recently expanded your revolver. But I imagine that for the next drop-down, funding wouldn't be primarily debt, as you did with the most recent one, and some equity would be needed as a result.

And in that regard, do you think you have any appetite to pre-fund that transaction between drop downs or do you think you'll do it in tandem with the next drop-down announcement?

Certainly a good question, Theresa, something we think about every day. The answer I would give you right now is, I think fair to assume that we wouldn't be repeating a debt-funded drop-down in our next drop-down. And we do believe that our future drop-downs will have a composition of funding from equity to the markets, equity to ETP. And, of course, we do expect more debt in the future.

I think, given where we are and given our liquidity and float, we will, there's no question, that the capital market is something that we're going to be looking to access on the equity side.

And I think we're going to be opportunistic as far as how we pursue that. And like any other company, if we determine that the timing and the value is right, then we would consider it at that time.

Thank you, Clare, for the color. Switching gears to, and as a follow-up to previous questions on third-party acquisitions, would you mind commenting on what the market looks like as of now, specifically to Bob's previous comment about how current conditions can facilitate the process, or something to that extent?

What kind of multiples are you seeing out there? Is the bid-ask narrow? wider? Any color at all will be much appreciated.

Yes, I would answer it this way. I think the basic driver here is how fragmented the industry is. And reading through some of the comments even post our earnings announcement last week, there were some questions around the wholesale distribution business.

We talked previously about the makeup of the retail convenience store industry. In both cases, very fragmented. In most cases family operated. And they have all the pressures that small businesses have, and many of them kind of get trapped.

And if you've got one convenience store, for example, and you start your family working in there, that can make awfully good sense. When you start getting up into numbers of 5, 10, 15, 20, then you've got to add all the infrastructure, and you don't have the ability to spread it out like we do, nor do you have the ability to take advantage of the diversification and types of income and geography.

So you combine those together. We still believe there will be opportunities. I'll tell you, we are looking at a number of different possibilities right now. We will look at a lot more than we will pull the trigger on. They'll have to tick the three boxes that I mentioned in the last call.

And with respect to the bid-ask and where multiples are, I think the market in 2014 was pretty [frothy]. I think that each deal is separate. Are I've not concluded anything to date right now to give you an answer on expectations. Sellers always want more.

We're only going to do a deal if it makes good sense for our unit holders. I know that's not answering your question exactly, but that's what I would tell you on it.

Understood. Thank you very much.

Thank you. (Operator Instructions) John Lawrence with Stephens.

It's actually Ben Bienvenu on for John. I wanted to quickly touch on the expenses, the higher expenses we saw in the quarter. As you look going forward, as you continue to drop-down more retail assets, do you think that expense structure as a percent of merchandise sales and gallons should be fairly consistent with what we saw in the first quarter? Or would you expect it to trend higher or lower on an annual basis?

Lower, so spread it out.

Yes, we would expect it to trend lower as you spread that out on the combined business. You're seeing there, too, some terminal expenses and all as well. But the bulk of the increase, I'd say, for versus last year, is on the retail operating side, given that's a business. And as a percentage that would trend lower over time.

Yes, we give some statistics in the ETP segment. And I think if you took a look at that, it would help answer a little more specifically what Clare just outlined for you.

Okay, great. Thanks. Shifting gears a little bit. You talked about the gallon performance in the Texas stores. I'd be curious to hear your commentary around the merchandise side and sort of what you're seeing with the consumer habits there.

Well, we still feel very good about the convenience side of business. We think that there is a very long runway as people manage one of their dearest resources is time. And we think convenience and convenience stores continue to be a really attractive business.

We think the structure of the business is attractive from a roll-up standpoint. When you look at the fundamentals, additionally, we're seeing some significant consumer behavior shifts where people are increasingly comfortable purchasing a wider array of products, specifically prepared food in convenience stores. There's a bit of a generational aspect to that. But overall it's growing.

And we're excited by offerings that have been developed, both within the Stripes stores with the Laredo Taco Company, as well as some of the initiatives that were currently underway in a Aloha, and on the ETP side of the business which will be dropped-down. Sunoco A-Plus convenient stores initiatives that they're in place there round thing.

So the growth has been exceeding GDP growth, and we expect that to continue.

Okay. Thanks. Best of luck.

(Operator Instructions) There are no further questions at this time. I would now like to turn the floor back over to Mr. Owens for closing comments.

Okay. Thanks very much, Operator. And I'd like to thank everybody also for joining us this morning.

I'll tell you, our management team here at Sunoco continues to really be excited about the growth prospects for our partnership and for the Sunoco brand overall.

We're moving at a pretty quick pace here. I believe our team has done a very good job of executing the integration of the companies while also continuing in the pursuit of growth. And I'm really grateful to them for their sustained energy in making that all happen.

ETP's remaining retail business and wholesale fuel distribution business continues to perform well and demonstrate the benefits of diversity, which I've talked about. And we think that really bodes well for the SUN LP partnership in the future, as we continue to execute on the drop-down strategy.

We're committed to growing valued and growing distributions for the SUN LP unit holders, both in the near term and in the long term.

The scale and diversity, both from a geographical standpoint and as well as across business lines, combined with the iconic brand, position us very well to build value in the near and in the long term.

SUN LP is on a path to be one of the leading wholesale and retail marketing platforms in the country.

Thanks very much for joining us. Thanks very much for your continued support. And that concludes our call this morning.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.