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Edited Transcript of SRLP earnings conference call or presentation 7-May-20 5:00pm GMT

Q1 2020 Sprague Resources LP Earnings Call

Portsmouth May 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Sprague Resources LP earnings conference call or presentation Thursday, May 7, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

* Paul A. Scoff

Sprague Resources LP - VP, General Counsel, Chief Compliance Officer & Secretary of Sprague Resources GP LLC

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Sprague Resources LP First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, David Glendon, CEO. Thank you, and please go ahead, sir.

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

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Thank you, Chris. Good afternoon, everyone, and welcome to Sprague Resources First Quarter 2020 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-K, 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 in our earnings press release. Both of which can be found in the Investor Relations section of our website.

Before David discusses the quarter's results, I'd like to share my perspective on recent events and my appreciation for the efforts of my Sprague colleagues in providing essential fuel to service providers in the front lines. Like all companies and institutions, our first instinct and priority at the onset of the pandemic was ensuring the well-being and personal safety of our employees. And I'm pleased to report that our efforts have kept our employees and visitors to our facilities protected from the spread of the virus.

As an essential service provider in all of our markets, we've maintained the availability and flow of essential fuel and Materials Handling services, while practicing recommended distancing guidelines. Additionally, our fleet in New York City has not missed a beat in keeping the various emergency services and city agencies running and demonstrated creativity and commitment in finding innovative ways to fuel the temporary hospital facilities and EMT vehicles so critical to the region’s response to the pandemic.

Just as we did following 9/11 and Superstorm Sandy, Sprague employees rose to the occasion in providing much needed fuel to first responders and medical facilities and played our small role in supporting these heroes. While it's difficult to forecast precisely the pace of the recovery and ultimate extent of the demand disruption for fuel, there's no question that the latter part of Q1 saw unprecedented conditions in the oil markets. Between the rapid demand falloff, tied to stay-in-place orders and the supply shock from the OPEC+ dynamics, volatility exploded, creating both challenges and opportunities for Sprague's business.

In the short term, we do expect weaker results tied primarily to lower demand and unrealized losses on forward spread positions that we've layered in as the contango widened. Over the course of 2020, however, we anticipate that attractive contango structure will largely offset these challenges, given our extensive storage assets and demand profile. To put this in practical terms, we're not currently adjusting our previously provided EBITDA guidance range for the full year.

Regarding the receipt of the proposal to acquire all of the outstanding common units, the conflicts committee is currently reviewing the offer received by the partnership, along with its legal and financial advisers. We share correspondence with the conflicts committee so that its members are informed of the views of the common unitholders of Sprague regarding the transaction.

In fairness to unitholders and as required by the federal securities laws, neither the partnership nor the conflicts committee intends to discuss this matter with individual investors, but rather we'll communicate when appropriate through public announcements.

This quarter, the Board of our general partner declared a distribution of $0.6675 per unit, equal to the distribution in the first quarter of 2019.

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

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

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Thank you, Dave, and good afternoon, everyone. Sprague's quarterly adjusted gross margin decreased by 13% or $12.3 million to $83.1 million as compared to the first quarter of 2019. This decrease was largely attributable to considerably warmer-than-average temperatures, impacting both the refined products and natural gas businesses and unrealized losses on forward spread positions that had widened further from what was already attractive levels. I'll provide more detail of the underlying results of each business shortly.

Sprague's first quarter adjusted EBITDA of $42.4 million decreased by $8.5 million or 17% as compared to the prior year. Operating expenses decreased by 13% or $3 million in the fourth quarter, primarily due to decreases in employee-related expenses and, to a lesser degree, decreases in boiler fuel, utilities and insurance-related costs.

SG&A expenses decreased by $880,000 or 4%, primarily as a result of cost reduction initiatives completed in early 2019. Below the EBITDA line, first quarter cash interest of $9.8 million decreased by $623,000 or 6% below the prior year, which was primarily due to lower borrowing rates.

Sprague recorded $3.1 million for cash taxes in the first quarter, reflecting a year-on-year quarterly increase of $3.7 million, while quarterly maintenance CapEx increased by $1.3 million to $2.8 million. Maintenance CapEx was higher principally due to the timing of several IT and terminal-related projects.

Given the decrease in adjusted EBITDA and higher cash taxes and maintenance CapEx, Sprague's distributable cash flow for the first quarter declined by $11.2 million year-on-year to $28.2 million, generating a quarterly distribution coverage ratio of 1.6x.

At the end of the first quarter, Sprague's permanent leverage was 3.7x, while our borrowing capacity under our working capital and acquisition lines was $251 million at quarter end.

With regard to 2020 guidance, we continue to target full year adjusted EBITDA of $105 million to $125 million (sic) [$120 million].

And now a discussion of our business segments. In Refined Products, sales volumes decreased by 13% for the quarter, primarily in distillates, while adjusted gross margin decreased by $8.9 million or 20% to $35.8 million. These decreases were primarily driven by warmer weather conditions as well as unrealized mark-to-market losses on forward spread positions as the forward spread continue to widen after Sprague had already locked in future month-to-month gains associated with the strong contango market.

In Natural Gas, sales volumes for the quarter decreased by 7% year-over-year, while adjusted gross margin decreased by $2.5 million or 8% to $29.8 million. The volume decrease was primarily a result of warmer weather, while the average unit margin was comparable to the same period last year.

In Materials Handling, the first quarter adjusted gross margin was $15.6 million, $870,000 lower than the same period a year ago. The decline was principally due to the expiration of a crude-by-rail handling contract at Kildair in mid-2019, which was partially offset by higher wind mill related and salt handling activity at Sprague's U.S.-based operations.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a question from the line of [David Rothschild]. He's a private investor.

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Unidentified Participant, [2]

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Yes. I just want to give an opinion that I think the $13 buyout would be a rip off for your investors. I've always respected you guys. I've had your stock for many years, but that buyout is an extremely low price. So just my opinion as an individual investor.

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

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Thank you, David. As we indicated earlier in the call, we're providing any information we get from investors to the members of the conflicts committee and we’ll include your note.

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Operator [4]

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And our next question comes from the line of [Andrew Phillips with RGO Capital].

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Unidentified Analyst, [5]

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This is nitpicking a bit, but in your release, your official EBITDA guidance range is $105 million to $120 million. But I think in your remarks, it was $105 million to $125 million. Or maybe I misheard or maybe you misspoke, but...

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David C. Long, Sprague Resources LP - CFO & Principal Accounting Officer of Sprague Resources GP LLC [6]

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Guidance, Andrew...

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

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Yes, the official guidance is the $105 million to $120 million that's referenced in the earnings release this morning and consistent with what we provided, when we provided our full year results. So if we gave a different indication on the call today, apologies for that.

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David C. Long, Sprague Resources LP - CFO & Principal Accounting Officer of Sprague Resources GP LLC [8]

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Sorry, I intend to say $120 million.

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Unidentified Analyst, [9]

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Okay. No problem. And I just had a question about, again, if you could restate, I missed it. The role of the conflicts committee for unitholders.

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David C. Glendon, Sprague Resources LP - President, CEO & Director of Sprague Resources GP LLC [10]

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Yes. I'll let -- our counsel, Paul Scoff, is on the line. I'll let him answer that, if that's okay. Paul, are you there?

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Paul A. Scoff, Sprague Resources LP - VP, General Counsel, Chief Compliance Officer & Secretary of Sprague Resources GP LLC [11]

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Yes. The role of the conflicts committee is they are independent directors. And so as independents, they act completely separate from the Board, and they have hired their own legal firm and financial advisory firms to consult with and represent the best interest to the common unitholders in this process as they review the offer and go further with that. So that's just part of the process. It's the normal process, which is set up in this instance. And so that you have a completely independent view, it's not tied to any insiders or anything like that. So and again, we're pretty much blinded from the process at this point in time. And so until they have something to say and put it out in the public release, we really won't have any other information.

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Operator [12]

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(Operator Instructions) And at this time, I’m not showing any further questions on the phone line. So ladies and gentlemen, this does conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.