Sprague Resources LP (SRLP) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and welcome to the Sprague Resources LP Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your speaker host today, Mr. David Glendon, President and CEO of Sprague.
David Glendon: Thank you, Tamara. Good afternoon, everyone, and welcome to Sprague Resources Second Quarter 2021 Conference Call. Joining me today is David Long, our Chief Financial Officer. 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 and our earnings press release, both of which can be found in the Investor Relations section of our website. A lot has changed at Sprague since our last quarterly call, and I'd like to use this opportunity to offer some perspective on those changes, and the implications for our investor base. As listeners know, Axle Johnson was Sprague's sole or controlling shareholder for 50 years. Throughout that time, we benefited from their support through a variety of market conditions and energy transitions, and could always count on their patient long-term approach and shared values of safe responsible operations and customer privacy. We're grateful for the experience of working with and for the family and for their unwavering commitment to Sprague's success. An important element of that commitment to our long-term sustainability was the acknowledgment that others may be better suited to supporting Sprague in the next phase of its development. As the Axle Johnson portfolio evolved away from its historical industrial and natural resource centric model, Sprague became more of an outlier with internal growth projects subject to heightened scrutiny. As we've gotten to know the Hartree team, it's become apparent that while they share the same core values, they also possess the vision to reinvest and build on our strong foundation in adapting to new energy market dynamics. They believe in the opportunity to leverage our unique assets, logistical expertise, and customer franchise to exciting new energy products and services, while capturing the value in the long tail of our traditional offerings. The timing of our transition to Hartree's majority ownership aligns well to the dynamic shifts occurring in the broader energy markets. Clearly, while fossil fuels will continue to play a critical role in driving economic prosperity and growth, we're also seeing widespread enthusiasm for reduced carbon intensity of energy sources. Whether it's liquid renewable fuels like biodiesel, and renewable diesel, or increased reliance upon solar or wind sources, we believe that Sprague is very well positioned to capitalize on these trends, just as we have in every energy transition over the last 150 years. In heating oil markets, we've seen several Northeastern states recently passed legislation mandating higher use of renewables, which Sprague's extensive infrastructure and experience is well suited to serve. We're adapting our terminal distribution system to provide higher bio blends and other lower carbon fuels. In solar, we're looking to expand our first in the world solar tank experience to evolve from merely displacing our own energy use, to constructing larger scale generation systems that can support customer energy transitions. In wind energy, our Searsport terminal is positioned to be a critical part of the infrastructure, serving the burgeoning offshore market. Additionally, we're exploring the prospect of utilizing some of our tankage at terminal locations for conversion to digesters for renewable natural gas production. All of these opportunities highlight the ongoing value of our infrastructure and our experience in presenting compelling investment prospects. And I'm excited to capitalize on the growth potential in the business with Hartree's support and additional expertise. Given these attractive investment prospects, our Board continues to evaluate the distribution policy, to more effectively balance current income and a sustainable growth trajectory for the business. While no specific levels have been determined for forward quarters, I do expect we'll make cuts to current distribution levels in order to fund compelling growth projects with cash from operations and maintain higher coverage levels. Additionally, given our current relatively low permanent leverage, we believe we have ample room in our credit facility to execute on attractive acquisition opportunities that may present. We also expect to execute additional sales of assets exhibiting limited growth prospects to provide further liquidity for growth projects. Please note that, we recently announced Q2 distribution of $0.6675 per unit, equal to prior quarters. So any potential change would be effective with the third quarter's distribution in early November. Now, I'd like to turn the call over to Dave Long for a detailed review of our second quarter results. Dave?
David Long: Thank you, Dave, and good afternoon, everyone. Before we review the financial results, we're happy to report that Sprague successfully sold in Oswego New York terminal to an asphalt marketing customer in the second quarter. The transaction price is completed at an attractive multiple with the proceeds used to pay down the company's acquisition debt balance. And now a discussion of our financial results, Sprague's quarterly adjusted gross margin decreased by 40%, or $26.4 million to $38.8 million as compared to the second quarter of 2020. This decrease was attributable to losses in our refined products, natural gas and materials handling businesses, and I'll provide more detail of the underlying results of each business shortly. Sprague's second quarter adjusted EBITDA of $3 million, decreased by $25 million, or 89% as compared to the prior year. Operating expenses increased by 4%, or $0.7 million in the second quarter, primarily due to increase in stockpiling expenses and employee over time. SG&A expenses decreased by $2.2 million, or 12%, primarily as a result of a decrease in incentive compensation, and to a lesser degree audit and legal costs. Below the EBITDA line, second quarter cash interest was $6.7 million decreased by $1.7 million or 20% below the prior year, which was primarily due to lower borrowing rates. Sprague recorded $0.7 million for cash taxes in the second quarter, which was down by $1 million or 58% year-over-year. Quarterly maintenance CapEx was higher by $2.2 million to $3.5 million. Maintenance CapEx was higher, principally due to incremental investments in dock and tank repairs at several Sprague's terminals. Given the decrease in adjusted EBITDA and increase in maintenance CapEx, Sprague's distributable cash flow for the second quarter decreased by $24.9 million year-over-year to a negative $7.7 million, generating a quarterly distribution coverage ratio of negative 0.4 times. At the end of the second quarter Sprague's permanent leverage was 3.7 times while our borrowing capacity under our working capital and acquisition lines was $101 million at quarter end. In terms of forward guidance, Sprague's full year adjusted EBITDA target remains unchanged at $105 million to $120 million. And now a discussion of our business segments. In Refined Products, sales volumes increased by 10% for the quarter. Adjusted gross margin decreased by $25.7 million or 49% to $27.2 million, which was primarily due to weaker year-over-year market structure to purchase store and hedge inventory. We'd like to remind listeners that there was strong contango market structure in 2020, which affords for a considerable value in carrying higher inventory levels in Q2 of last year. In Natural Gas, sales volumes for the quarter increased by 5% year-over-year while adjusted gross margin decreased by $0.5 million or 21% to negative $2.7 million compared to the same period a year ago. The increased volume was primarily attributable to improved economic conditions given the return to normal post-pandemic conditions, while gross margin was lower given warmer temperatures and lower price volatility leading to fewer supply optimization opportunities. Materials Handling the second quarter adjusted gross margin was $12.7 million 2% or $0.2 million lower than the same period a year ago. The decrease was principally due to lower tank rent demand for third parties at Sprague's Canadian operation. At this point I'd like to open the call for questions.
Operator: The first response is from Bob Affe .
Unidentified Analyst: Hi, Bob Affe from an investor in Richmond Virginia. Can you tell me if any executive officers or management sold any of the stock of the partnership after July 15th?
David Glendon: We'd have to check the Form 4s, which are publicly available. Speaking personally, I do have a 10b5-1 program in place, which has very limited selling on monthly basis, which has just expired with this month. So specifically, under that program there would have been 3000 units sold. But I'm not aware of any other executive team sales.
David Long: Yes, I certainly didn't have any sales as CFO. So.
Unidentified Analyst: Okay. Given the overall nature of your earnings release and I apologize for my raspy voice. But given the overall nature of your earnings release, why did you not preannounce?
David Glendon: I'm sorry, why did we not preannounce?
Unidentified Analyst: Yes. Why did you not preannounce because you would you certainly would have had a sense of what the situation was as far as the earnings for the quarter prior to the end of the quarter?
David Glendon: Yes. Well what I'd say Bob is these earnings are entirely consistent with what we'd expect in a normal trajectory in the business. So I think certainly comparative to last year, where we had the contango that manifested itself in the middle part of the year. That was an outlier year in terms of the trajectory of earnings over the course of the year. If you look back at the history of this business, first quarter and fourth quarter generate the vast majority of the earnings and second and third quarters we usually weaker in many cases negative. So I think there's no reason to preannounce given that it was entirely consistent with expectations for the trajectory of the business.
Operator: Thank you. Your next response from David Rothchild .
Unidentified Analyst: Thank you. I'm also a shareholder been so since 2014. Your earnings announcement said you're going to provide more information on the anticipated change of the distribution and I haven't heard any guidance on that. Do you have just a ballpark range? Well it will be at least $1 a share or $1.20 a share. Do you have any minimum level what you think it will go down to, or is it going to get sliced down to a dime or $0.20? I mean I mean I'd like to get some guidance whether to hang on or dump the thing?
David Glendon: No I can appreciate the desire to have more granularity on that. We're certainly not going to provide specific guidance at this point in time because as you know it is a Board discussion that's held quarterly. But I hope I provided some perspective on it, which was really the potential magnitude of any distribution cut will be tied to growth capital investments that are exciting opportunities for the business. So if you look at the last several years, you can see that we haven't invested substantial amounts of growth capital in the business. And we do see opportunities along the lines of what I talked about. And those will be the driver. Again the Board conversations will continue up to and through the third quarter announcement.
Unidentified Analyst: Well it sounds like the new general partner is not willing to support you as much as the old one was? That's sort of I'm hearing from...
David Glendon: Yes. Boy, if you heard it that way then I've misspoken, because I think it's exactly the opposite of that. I think the new general partners very supportive of reinvesting in the business, as opposed to maximizing their own cash take out of the business. So while – look, we had a great sponsor and owner before, who is very supportive of the business, but I'm equally excited if not more so about the prospects, under the new majority owner who sees exciting opportunities to reinvest and grow the company.
Unidentified Analyst: It'd still be nice to have some minimum level what you guys are thinking just some rough guidance?
David Glendon: Yes. I'm sorry again that's going to continue to be a Board discussion. So again I don't see us in the camp of others who have made huge cuts to distributions. But again we're going to continue those discussions and provide that guidance once those decisions are made.
Unidentified Analyst: Okay. Well obviously the market doesn't like the news today on your stock. Thank you.
David Glendon: Thank you.
Operator: Your next response is from Eric George . Please go ahead.
Unidentified Analyst: Hey gentlemen. Your new partner, I believe paid about 16.5 for their position on a per share basis. Is that right?
David Glendon: That for the LP units, that is correct. So they purchased the Axle Johnson Holdings, which included the GP position and they attributed some of the value to the GP.
Unidentified Analyst: And that was about what, three or four months ago?
David Glendon: End of May is when that transaction closed.
Unidentified Analyst: Okay. So that's to an informed buyer and seller that's what it's worth? I never understood what the hell it was doing at 28. So -- and I'm not long in the stock. So I'm just -- I'm trying to get an idea of where maybe to do that? And I like the 16.5 number. I may be hoping for -- maybe being greedy here, but I would think at that level barring a disastrous cut being the yield would still be competitive.
David Glendon: Yes. That will be to your determination to make as to what you find compelling.
Unidentified Analyst: How is the materials handling doing? Is that still lagging a bit, or is it -- do you see it going forward? With all the stuff going on, I thought it would be, that would be in better shape?
David Glendon: Yes. Well you've seen the materials handling is down a touch. Some of that is candidly just timing-related issues, depending on when cargoes land. Just to respond specifically to the windmills, there's a lot of enthusiasm and potential projects on the drawing board for windmills off of the East Coast, but there's very little physical activity right now associated with that enthusiasm. So, I think that will be a longer developing opportunity. I think, it's potentially a very exciting opportunity for us. But I don't think, you're going to see offshore wind components handled for a little bit of time. We have continued to handle some onshore components. But really that activity hasn't grown as much as an enthusiasm for offshore. The other two things that have happened in Materials Handling, which caused a slight downdraft, David referenced the sale of the Oswego terminal, which was a material handling asphalt terminal. So with that sale, there'll be slight downdraft in the asphalt activity system-wide, although it was a very attractive sale for us. And also with the contango coming out of the markets, some of our incremental tank leases at Kildair have not been replaced. But again, that's -- overall that's a very ratable business and you'll continue to see that over the course of the full year.
Unidentified Analyst: Thank you.
David Glendon: You are welcome.
Operator: Your next response is from Louis Government . Please go ahead.
Unidentified Analyst: Thank you. I was just wondering, if the Board has had any conversations that you can share with us about whether a going private element is in the works or it might be in the works as we've seen in some other situations fairly recently?
David Glendon: No, there have been no board conversations at least -- there's only been one board meeting with the new majority owner and that was not a topic of conversation at that time.
Operator: We have a follow-up question from Bob Affe . Go ahead.
Unidentified Analyst: Yes. In your comments, you mentioned that you had a credit facility for acquisitions and opportunities given that you have that credit facility, why it reduced the distribution?
David Glendon: We do have the credit facility. Obviously, we have leverage targets associated with that as well. And we tend to think of that credit facility as there to support potential acquisitions, as opposed to ongoing or recurring growth CapEx. So again, we're going to balance all those factors as we contemplate or as the Board contemplates appropriate distribution levels. But no, I think it's not lost on anybody that our coverage ratios have been relatively tight or under one at points on the last couple of years. And so we think it's both appropriate to reinvest and have appropriate coverage levels going forward.
Unidentified Analyst: Is your credit facility for term debt or for revolving?
David Glendon: It's a revolving credit facility.
Operator: There are no further responses in the queue at this time.
David Glendon: Okay. Thank you everyone. I appreciate the time.
Operator: Ladies and gentlemen, this concludes today's conference. Thank you for participating. You have a wonderful day and you may all disconnect.
