U.S. Markets open in 5 hrs 45 mins

Edited Transcript of SRLP earnings conference call or presentation 7-Aug-19 5:00pm GMT

Q2 2019 Sprague Resources LP Earnings Call

Portsmouth Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Sprague Resources LP earnings conference call or presentation Wednesday, August 7, 2019 at 5:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David C. Glendon

Sprague Resources LP - President, CEO & Director of Sprague Resources GP LLC

* David C. Long

Sprague Resources LP - CFO & Principal Accounting Officer of Sprague Resources GP LLC

================================================================================

Conference Call Participants

================================================================================

* Charles W Barber

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Sprague Resources LP Q2 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to your host Mr. David Glendon, President and CEO. Sir, you may begin.

--------------------------------------------------------------------------------

David C. Glendon, Sprague Resources LP - President, CEO & Director of Sprague Resources GP LLC [2]

--------------------------------------------------------------------------------

Thank you, Valerie. Good afternoon, everyone, and welcome to Sprague Resources Second Quarter 2019 Conference Call. Joining me today are David Long, our Chief Financial Officer; and Paul Scoff, our Vice President and General Counsel.

I'd like to remind listeners that some of today's call will include forward-looking statements. These statements are based on our current expectations, which we believe to be reasonable as of today's date, and Sprague does not undertake any obligation to update any forward-looking statements to reflect new information or future events. Actual results may differ significantly because of risks and uncertainties that are difficult to predict. Please refer to our 10-K for a list of risk factors, which could cause our actual results to differ from anticipated results and review our 10-Q, current reports and other filings with the SEC.

We also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to comparable GAAP measures are available in our non-GAAP quarterly supplement and our earnings press release, both of which can be found in the Investor Relations section of our website.

In the second quarter of 2019, Sprague generated total adjusted gross margin of $48.3 million and adjusted EBITDA of $9.7 million. The seasonal nature of our business generates lower results in the second and third quarters, but each of our 3 commercial businesses performed in line with our expectations. Also, our recent cost reduction efforts are bearing fruit, as we saw material reductions in our operating and SG&A expenses relative to the prior year, a trend which we expect to continue.

Looking forward, I'm encouraged that market conditions are showing signs of improvement, notably the distillate forward curve remains in modest contango for the back half of 2019. As listeners know, contango or carry structure makes storage assets like Sprague's system more valuable. Recent closures and repurposing of Northeast Refined Products assets is also expected to make remaining terminal storage more critical.

We continue to follow congressional action regarding the reinstatement of the biodiesel blenders' tax credit, and we are optimistic that something will get passed this calendar year, which would provide significant opportunities for additional blending economics in our distillate business.

In the Natural Gas business, we expect lower pipeline maintenance programs for the remainder of 2019, enabling our logistics activities to potentially generate more optimization benefits. Finally, while the convergence of sulfur specifications in Northeast heating oil markets limited our blending activities in 2018, we noted that this development would also facilitate the repurposing of tanks to alternative services and lower our working capital cost by eliminating the requirement to store multiple grades of distillate products.

In the second quarter, we converted several additional facilities to a fungible inventory position, enabling us to end the quarter with 40% lower distilled inventory levels than a year ago. These factors provide confidence in maintaining our 2019 guidance figures and support our current distribution pace.

In July 2019, the Board of our general partner declared a distribution of $0.6675 per unit for the second quarter of 2019, reflecting a 2% increase over the Q2 2018 distribution.

Now I would like to turn the call over to Dave Long for a detailed review of our second quarter results. Dave?

--------------------------------------------------------------------------------

David C. Long, Sprague Resources LP - CFO & Principal Accounting Officer of Sprague Resources GP LLC [3]

--------------------------------------------------------------------------------

Thank you, Dave, and good afternoon, everyone. Sprague's quarterly adjusted gross margin declined by 3% or $1.4 million or $48.3 million as compared to the second quarter of 2018. Sprague's Refined Products and Natural Gas segments experienced modest declines, while our Materials Handling business was flat relative to year ago.

Sprague's second quarter adjusted EBITDA of $9.7 million increased by $0.4 million or 4% as the modest decline in adjusted gross margin was more than offset by cost reductions. Operating expenses decreased by 5% or $1.2 million in the second quarter, primarily due to lower insurance, legal and employee-related expenses. SG&A expenses decreased by $0.7 million or 4% primarily due to employee-related costs associated with our ongoing cost reduction initiatives, along with lower audit, legal and acquisition-related expenses. Net cash interest expense of $8.6 million in the second quarter increased by $0.7 million or 9% due to higher interest rates on our floating rate debt.

Sprague's cash taxes increased by $2.0 million to $1.7 million, while year-on-year quarterly maintenance CapEx, which included various IT and terminal-related projects, decreased by $1.4 million or 42% to $2.0 million. Primarily due to higher interest expense and cash taxes, Sprague's distributable cash flow for the second quarter declined modestly to a negative $2.6 million, generating a quarterly distribution coverage ratio of negative 0.15x. On a year-to-date basis, Sprague's distribution coverage ratio is 1.07x.

At the end of the second quarter, Sprague's permanent leverage was 3.4x, down from 3.6x at December 31, while our borrowing capacity under our working capital and acquisition lines is $274 million at quarter end. With regard to 2019 guidance, we continue to target full year adjusted EBITDA of $105 million to $125 million and intend to maintain distributions at current levels.

And now a discussion of our business segments. In Refined Products, sales volume declined by 8% for the quarter primarily due to much warmer conditions in April relative to a year ago. Adjusted gross margin declined by $1.0 million or 4% to $27.6 million, the higher adjusted unit margin realization in our delivery business somewhat offset the volume decline.

In Natural Gas, sales volumes for the quarter increased by 5% year-over-year while adjusted gross margin declined by $0.4 million or 8% to $4.6 million. The higher volumes were due to the on-boarding of new customers, while the decline in unit margins was largely the result of higher pipeline capacity cost and competitive intensity.

In Materials Handling, the second quarter adjusted gross margin was $14.3 million. Sprague's U.S. Materials Handling business increased slightly quarter-on-quarter, given seasonal timing of bulk deliveries offset by reductions in heavy lift activity, while Kildair's Materials Handling business declined modestly given reduced activity associated with the exploration of the crude by rail contracts.

At this point, I'd like to open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Jeremy Tonet of JPMorgan.

--------------------------------------------------------------------------------

Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [2]

--------------------------------------------------------------------------------

This is Charlie on for Jeremy. First question was just related to the Philadelphia Energy Solutions refinery. I was just curious if you could talk probably about kind of implications to your business, specifically kind of looking towards third quarter of 2019 and maybe any structural changes longer-term.

--------------------------------------------------------------------------------

David C. Glendon, Sprague Resources LP - President, CEO & Director of Sprague Resources GP LLC [3]

--------------------------------------------------------------------------------

Sure. Charlie, it's Dave Glendon. So I would say generally speaking, a couple of things. One is the market reaction to the PES closure has been pretty swift and actually even a little bit surprising in how quickly the Refined Products markets have adapted to the absence of that capacity. So I would say, generally speaking, the absence of that storage capacity in pad 1 increases the short in pad 1 and, therefore, other storage should increase in value to accommodate that. But having said that, we have seen a remarkable ability for European, particularly gasoline, but also to some extent distillate cargoes, to supplement the absence of that refinery capacity.

So I think if you turn to the Colonial pipeline line space straight right around that, it did go from what had been negative values forever to a positive value associated with Colonial line space for about a week or so and then it quickly reverted back to negative values as the European refinery started shipping product here. So I read today that we set an all-time record for gasoline cargoes from Europe to the U.S. pad 1 over the course of last month or so. And again, it's been surprising to me how quickly the markets have been able to react. But generally speaking, I'd say, as we go into the winter, in particular, I would expect that this would lead to a slight increased premium on storage values in the Northeast of the U.S.

--------------------------------------------------------------------------------

Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Great. That's certainly helpful. Turning to Appalachia and thinking about what we've seen coming out of some of the producers and thinking about Coen Energy. Curious if you had any high-level kind of thoughts on that business and kind of reactionary to what we're seeing coming out of producers lately.

--------------------------------------------------------------------------------

David C. Glendon, Sprague Resources LP - President, CEO & Director of Sprague Resources GP LLC [5]

--------------------------------------------------------------------------------

Yes. I'd say that our activity in Coen or in Sprague PA confirms what we're hearing from the producers that the amount of fracking and drilling activity has taken up a notch down, if you will. So we are seeing that impact on our Pennsylvania business. And we've been in a process in that Pennsylvania business trying to grow our additional commercial fuels business to supplement the energy field services business. But no question that energy field services remains -- it's growing certainly less quickly than we would have anticipated at higher commodity price levels even 6 months ago.

--------------------------------------------------------------------------------

Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [6]

--------------------------------------------------------------------------------

All right. And then one last one for me. You mentioned it in the opening remarks, the biodiesel blenders' tax credit. I think you'd said too many about maybe a potential resolution by year-end. Any other color there? Any specifics you could mention?

--------------------------------------------------------------------------------

David C. Glendon, Sprague Resources LP - President, CEO & Director of Sprague Resources GP LLC [7]

--------------------------------------------------------------------------------

Yes, I mean, you can find people who are far closer to it certainly than I am about who're watching it carefully and participating in it. There appears to be widespread bipartisan agreement on the extenders being retroactively reinstated and passed on a go-forward basis. The challenge I think has been finding a bill to attach it to that gets widespread agreement. So we've talked to folks on both sides of the aisle who remain supportive. You've got a lot of sponsors of the bill, but again finding the ability to attach it to must pass legislation has been the handicap to this point in time.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(Operator Instructions) I'm showing no further questions at this time. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.