Sunoco LP (SUN) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Sunoco LP Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Scott Grischow, Senior Director of Investor Relations and Treasury. Thank you, Mr. Grischow, you may now 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. They may include comments regarding the company's objectives, targets, plans, strategies, costs, anticipated capital expenditures and anticipated timing for the completion of the announced and prospective retail divestment transactions. 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 this quarter's news release for a reconciliation of each financial measure. Please note that the operating results, assets and liabilities that are part of our retail divestitures have been moved into discontinued operations. As such, the results presented on today's call are based on continuing operations unless otherwise noted. Additional detail on the results of operations associated with all discontinued operations will be included in our Form 10-Q for the quarterly period ended June 30, 2017, which will be filed later today.

Also a reminder that the information reported on this call speaks only to the company's view as of today, August 9, 2017, so time-sensitive information may no longer be accurate at the time of any replay. You'll find information on the replay in this quarter's earnings release.

On the call with me this morning are: Bob Owens, Sunoco LP's Chief Executive Officer; Joe Kim, President and Chief Operating Officer; Tom Miller, Chief Financial Officer; and other members of the management team.

I'd now like to turn the call over to Bob.

Thanks, Scott. Good morning, everyone, and thank you for joining us. This morning, we will review the financial and operating results for the second quarter, along with other recent activities.

I'd like to begin my comments by providing brief updates on the status of the various sales processes currently undergoing -- or ongoing. First, on the sale of approximately 1,110 company-operated convenience stores and the trademarks and intellectual property of the Laredo Taco Company and Stripes to 7-Eleven, which we announced on April 6. Sunoco is currently in typical and customary regulatory discussions with the Federal Trade Commission. And we expect the transaction to close by the end of the fourth quarter of this year.

Regarding the sale of Sunoco's West Texas assets. We're in the process of completing advanced stage discussions with final bidders at this time and we would expect the deal to close by the end of the fourth quarter of this year as well. We are seeking to maximize unitholder value in this transaction. And we're cognizant of the tradeoff between higher upfront cash and a purchase price and EBITDA retention via a long-term fuel supply and/or rental income.

Finally, the sale of approximately 100 of Sunoco's retail assets to NRC, which we announced at the beginning of the year. That process is ongoing as well. NRC has sold or are under contract to sell approximately 35% to 40% of the initial 100 sites and is actively marketing roughly 20% more, including active sites, land bank and excess land. As a reminder, approximately 30% of the original 100 sites migrated to 7-Eleven and another 10% migrated to our West Texas sales process.

So in summary, we remain on track to substantially exit the company-operated retail convenience store space within the continental United States by the end of 2017. As these are active processes, we are limited in what we can say. And we will provide any meaningful updates as is appropriate at the appropriate time.

Now turning to the partnership's results for the second quarter of 2017. Overall, the commodity environment in the second quarter provided a favorable backdrop for our business with strong fuel margins, particularly in our retail segment. Also our sites in the oil-producing regions of Texas again saw much improved operating trends continue from the first quarter.

In the second quarter of 2017, the partnership recorded a net loss of $222 million, including a $320 million charge related to assets held for sale. This compared to net income of $72 million a year ago. Now Tom will cover the quarter in more detail a bit later in the call. Total adjusted EBITDA was $220 million, an increase of $56 million from last year, mainly due to strong retail fuel margins, which increased retail adjusted EBITDA by $43 million from last year to $127 million.

Distributable cash flow as adjusted was $158 million, an increase of $66 million compared to a year ago. The combination of higher adjusted EBITDA and lower maintenance capital expenditures of $7 million compared to $24 million a year ago contributed to the increase. Sunoco's distribution for the second quarter remain unchanged from the first quarter of 2017 as well as from a year ago at $0.8255 per unit. This distribution resulted in a 1.53x coverage ratio for the second quarter and 1.03x coverage ratio on a trailing 12-month basis.

Now looking at operational performance. Starting with total fuel volumes, where it came in at 2 billion gallons. That's an increase of 3% versus last year. Retail gallons were 650 million, an increase of 9 million gallons or 1% as a result of acquisitions over the last 12 months. Wholesale gallons of 1.4 billion increased 4% from last year. The total weighted average cents per gallon margin of $0.162 increased $0.024 from a year ago due to higher margins in both retail and the wholesale segments. Wholesale cents per gallon were $0.101 compared to $0.088 a year ago. And retail cents per gallon was $0.292 compared to $0.24 a year ago.

Sunoco's wholesale business typically does not experience the same quarter-to-quarter fluctuations in gross profit cents per gallon margins as the retail business, which we view favorably as it speaks to the fairly consistent ratable nature of the wholesale business. Further, we believe the partnership's financial results will become even more stable when incorporating the contribution from the 7-Eleven fuel supply agreement.

Merchandise sales, including the contribution from discontinued operations were $608 million. That's an increase of 5% from last year. Merchandise gross profit margin of 32.1% decreased by 0.4% compared to last year and the second quarter margin was 0.5% higher than the results achieved in the first quarter.

Turning to total retail same-store results, starting with fuel. Total retail same-store gallons declined by 2%, in line with market trends. Same-store merchandise sales increased 1%. Our approximately 140 retail stores in the oil-producing regions of Texas are primarily located in the Permian Basin with the remainder in the Eagle Ford. The market has improved notably over the last 6 to 12 months with rig counts in the Permian up roughly 2.5x to end at 379 as of last Friday, additionally WTI prices hovering around $40 to $50 per barrel since early December.

In the second quarter, same-store merchandise sales for our 140 sites in the oil-producing region increased about 9%, getting progressively stronger throughout the quarter. And same-store fuel gallons for these same sites also increased 9% with particular strength in the diesel gallons. As a reminder, our stores in the oil-producing regions turned a corner in the first quarter with same-store merchandise sales and same-store fuel volume up approximately 2% and 1%, respectively. We are seeing the strength in these regions from the second quarter carry over into July.

Moving on to updates on some other operational items. We remain on schedule on the Indiana Toll Road, where we reopened the first of 4 retail plazas in April and another in June. In early 2016, our Aloha Petroleum, our Hawaii business, entered into a store development agreement with Dunkin' Donuts to build and operate 15 Dunkin' Donuts restaurants over an initial 8-year term. The first location opened in late July. It's a freestanding drive-through near the Honolulu Airport. And Aloha expects to open the next 2 stores later in this year.

Now before I turn the call over to Tom, I'd like to speak briefly about the management changes currently underway at Sunoco. We announced that Boyd Foster, Executive Vice President of Manufacturing and Distribution; and Cynthia Archer, Executive Vice President and Chief Marketing Officer, will be retiring from the partnership at the end of the year. Also Brad Williams, Executive Vice President of Operations for the West Retail Network, will be joining 7-Eleven upon the closing of our transaction. I'd like to personally and publicly thank Boyd, Cynthia and Brad for their many years of service and dedication to helping grow Sunoco into the company it is today. And we would like to wish them all success in the future.

And as previously announced, I will be retiring at the end of 2017. We have a deep and talented leadership team here at Sunoco. To that end, Joe Kim has been appointed President and Chief Operating Officer and will guide Sunoco on its next chapter.

With that, I'll turn the call over to Tom, who will discuss financial highlights for the quarter.

Thanks, Bob, and good morning, everyone. Before I discuss the financial results for the second quarter, I want to address a couple of items around the sale of our continental U.S. retail business. We estimate the combined tax impact of the 2 deals to be a little more than 20% of gross proceeds. We won't know the effective tax rate until we reach an agreement for the West Texas assets. To a large extent, the tax rate depends on the mix of cash proceeds and ongoing cash flow.

Regarding the use of proceeds, our first priority will be to reduce debt to a level between 4.5 and 4.75x our post-transaction adjusted EBITDA. The after-tax cash proceeds from the 7-Eleven transaction should more than cover debt reduction. Once we address leverage, we will focus on addressing our distribution coverage. Our long-term distribution target is 1.1x. There's a tradeoff between reducing equity and ongoing EBITDA.

If we repurchase equity, we would need to redeem the $300 million perpetual preferred securities held by Energy Transfer Equity before we could buy back any common units. The preferred units could be redeemed at 101% any time during the first 5 years and at par after that. Given the ownership profile of the LP unit, we would expect ETP to participate in any unit repurchase activity.

In terms of our senior notes, the 7-Eleven agreement requires us to either have the noteholders agree to modify various indenture covenants, these consents require a simple majority vote for each series, or we could retire the notes using the call feature in our $600 million 2020 note and the make-whole provision for the other 2 notes, both of which have a face value of $800 million. Additionally, we will be required to obtain waivers under the credit facility and Term Loan A.

Let's move to the partnership's liquidity position. Sunoco ended the quarter with a total debt-to-adjusted EBITDA, calculated in accordance with our credit agreement, of 5.97x, down from 6.31x at the end of the first quarter. Total debt on June 30 was $4.4 billion, including $825 million drawn under the credit facility. We also had $20 million in standby letters of credit, leaving the unused availability of $655 million at the end of the quarter. Our weighted average cost of debt on June 30 was 5.1% while our current quarter coverage ratio was 1.53x and 1.03x on a trailing 12-month basis.

Starting this quarter, we have classified the operating results, assets and liabilities associated with our assets to be sold as discontinued operations. For the quarter, continuing operations revenue was $2.4 billion, an increase of 13%. Gross profit was $165 million, a decline of 27%, driven by wholesale inventory valuation adjustments. And net income for the quarter was $34 million compared to $57 million a year ago.

For the quarter, discontinued operations' revenue was $2.2 billion, an increase of 17%. Gross profit was $398 million, an increase of 16%. Motor fuel sales gross profit was $188 million, an increase of 26%. Merchandise gross profit was $191 million, an increase of 5%. GAAP net loss was $256 million compared to net income of $15 million a year ago. A $320 million impairment charge on assets held for sale drove the loss.

Adjusted EBITDA for the quarter was $220 million, an increase of $56 million from a year ago on higher results in both the retail and wholesale segments. Second quarter adjusted EBITDA from our retail segment was $127 million, an increase of $43 million from a year ago. This increase primarily reflects higher margins and higher gallons. Retail margins averaged $0.292 per gallon compared to $0.24 per gallon a year ago. Merchandise gross margin was 32.1%.

Now turning to the wholesale business. Second quarter adjusted EBITDA was $93 million, up $13 million from a year ago primarily due to increased gallons sold and higher CPG. Wholesale margins increased to $0.101 per gallon from $0.088 a year ago. We recognize that our business has transformed over the past 2.5 years. We've had a number of reporting periods outside our $0.06 to $0.08 per gallon guidance range. We are currently assessing wholesale CPG guidance, understanding that 7-Eleven will make up approximately 25% to 30% of our wholesale volume. We will provide you updated guidance at a later date.

Within the wholesale business, it is important to note that we own real estate for about 470 dealer and consignment sites at the end of the second quarter. These owned sites provide a stable, qualifying income cash flow. Going forward, we will consider opportunities to buy company-operated sites and quickly convert them to dealer sites while maintaining ownership of the property.

We are excited about the opportunities to grow this business into new areas across the midstream arena. Because of the changed nature of our business, our legacy reporting structure of wholesale and retail segments will no longer provide the best representation of our business. As such, we are currently assessing options regarding the new operating and reporting segments. We will announce something on this front at a later date.

In the second quarter, we invested $33 million in capital, consisting of $26 million of growth capital and $7 million of maintenance capital. We expect 2017 growth capital expenditures of approximately $150 million and approximately $80 million of maintenance capital. Obviously, our total reported 2017 capital will depend on when we complete these transactions. Longer term, we will fund any capital spending, including acquisition opportunities, to maintain our leverage and coverage targets.

Operator, that concludes our prepared remarks. You may now open the line for questions.

(Operator Instructions) Our first question is from Andrew Burd of JPMorgan.

Nice quarter, and big congratulations to you, Bob. You'll be missed. First question is for Tom. In the past, you've talked about synergies and cost savings initiatives. On the P&L this quarter, you reported $40 million of G&A and $46 million of OpEx. How much of the planned synergies are already reflected in the second quarter run rate? Or maybe a better question is what's remaining ahead? And will the incremental savings impact the G&A or OpEx or both?

Well, let's start with G&A. As you said, we were $40 million. And if you multiply that by 4, that was $160 million. We think we'll be below that. We think we're already below that in the cost that had previously been allocated between wholesale and retail, due to GAAP rules, have been allocated or charged all to the wholesale segment. On operating expenditures, we think that $46 million is probably light. I don't really have a feel at this time how much that's going to go up.

Great. And then probably another question for you, Tom. Appreciate that you're not going to be disclosing the terms of the 7-Eleven supply agreement, definitely not before it closes but probably never. That said, any context you could give us right now would be helpful. And maybe the way to frame it is that historically, Sunoco used a $0.03 to $0.04-ish gallon for affiliate barrels back when you did that. And then you've, in the past, quoted a third-party wholesale distribution indicative margin of about $0.06 to $0.08. Is it fair for us to assume that 7-Eleven would probably be somewhere between those two ranges? And kind of if not, why not?

Yes, Andy, this is Bob. I would answer it. As we've said in the past, clearly this is a confidential agreement we have with a very large customer. But I think if you look at the range that we've previously given people of $0.06 to $0.08 and if you assume that a large customer might enjoy a favorable term, but being around that range, I think we wouldn't argue with you.

Our next question is from Theresa Chen of Barclays.

I'd like to echo Andy's congratulations to Bob. Thank you for everything. Want to start on the negotiations for the 200-plus West Texas and New Mexico sites. Can you give us any like early indication of what kind of valuation you're expecting? And then related to your comments about retaining EBITDA versus getting a higher purchase price, can we expect that the majority of these stores will enter into a similar agreement as you did with 7-Eleven?

Theresa, this is Joe. First thing I'll say is we're in the middle of negotiations, so I don't think it would be the right time to talk on details about it. But I think I'll echo what Tom said in the opening remarks that we're looking at this as the best way to create value for us. And that might mean taking more cash upfront or retaining more EBITDA on the backside. So I think by the third quarter call, we can talk in more detail about it. But for now, for negotiation purposes, I think I'll just leave it at that.

Got it. And in terms of the margin update and segment reorganization update that will be disclosed at a later time, should we expect that later time to be before the transaction closes? Or do you want to get everything done, and then talk about those 2 items?

Yes, Theresa, this is Bob. I think it's unlikely it will be before the close. So we've got -- as Joe said, we're in the middle of negotiations. For the balance, depending upon the deal we strike that, that will obviously enter into the weighted average margin. And I know we've frustrated the market by outperforming in the wholesale segment quarter-after-quarter here. And it's frustrating for us as well. But let us get through these negotiations, we do the arithmetic and give you better guidance going forward.

Got it. And then on the point of the sustainability in margins and such, just given the upward trend, Bob, from pretty much all of July, can you help us calibrate how much of a margin impact we should see this quarter versus Q2?

Well, we don't talk about margins while we're in the middle of a quarter, Theresa. What I would tell you to do is when we look back 10 years, we revert to the mean generally.

(Operator Instructions) And the next question is from Ben Brownlow of Raymond James.

I don't know if I would classify the outperformance in wholesale as a disappointment. So that was definitely better than expected for a number of quarters. The retail CPG -- just one quick clarification. On the retail CPG that was reported, the $0.292, I believe that included discontinued ops. Do you have what that fuel margin was on a continuing ops basis?

No. Look, when you think about it, what we've moved into discontinued ops are all, within the continental United States, the company ops. What would remain would be Aloha Petroleum. And we're in the middle of deciding exactly how we're going to segment reporting going forward, but more to come on that.

(Operator Instructions) Okay, we have no further questions in queue at this time. I would like to turn the conference back over to Mr. Owens for closing comments.

Okay, thank you, operator, and thanks, everyone, for joining us this morning. And we look forward to catching up in person at the upcoming investor conferences actually starting this next week with the Citi Conference MLP/Midstream Infrastructure event that will take place in Las Vegas. Thanks very much.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.