Sprague Resources LP
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good day, ladies gentlemen, and welcome to the Sprague Resources LP Second Quarter 2018 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce President and CEO of Sprague Resources, Mr. David Glendon. Please go ahead, sir.

[David Glendon:]

Thank you, Andrew. Good afternoon, everyone, and welcome to the Sprague Resources Second Quarter 2018 Conference Call. Joining me today are Gary Rinaldi, our Chief Operating Officer and Chief Financial Officer; Paul Scoff, our Vice President and General Counsel; and John Moore, our Vice President and Chief Accounting Officer. Some of today's call will include forward-looking statements, which we believe to be reasonable as of today's date. Actual results may differ because of risks and uncertainties that are difficult to predict. Please refer to our 10-K for an extensive list of risk factors, which could affect performance. We also describe our business using certain non-GAAP financial measures. Reconciliations of those measures to comparable GAAP are available in our non-GAAP quarterly supplement, which is posted to the Investor Relations section of our website. Sprague's second quarter results were in line with our expectations, as adjusted gross margin increased by 22% and adjusted EBITDA by 88% over 2017's comparable period. The acquisitions completed in 2017 drove most of the increase. We continue to expect full year adjusted EBITDA to be in the range of $120 million to $140 million. For nearly 150 years, Sprague has enjoyed a successful history of adapting our products and services to the evolving energy needs of commercial customers. More recently, these shifts have trended towards renewables, including our biofuel and windmill component handling activities. In the second quarter, we recognized 2 additional milestones on this journey. First, in May, Sprague worked with New York City to initiate the first significant East Coast trial of renewable diesel fuel, a low-emission drop-in fuel, with superior performance characteristics relative to petroleum diesel. Also, in the quarter, Sprague went live with the first of its kind solar installation, utilizing the surface area of a petroleum tank to generate electricity. The use of thin-film solar panel technology offers potential new markets for solar power. And Sprague sees both potential for operating cost reductions and new commercial opportunities. While these nascent efforts may not be large cash generators in the near term, it positions us to reap the benefits of innovation in the energy sector by leveraging our infrastructure and customer franchise. In July, the board of our general partner increased our distribution for the 17th consecutive quarter to $0.6675 per unit, representing a 2% increase over the last quarter and 10% over last year's second quarter distribution. Now I would like to turn the call over to Gary for a detailed review of our second quarter results. Gary?

[Gary Rinaldi:]

Thank you, David, and good afternoon, everybody. As David mentioned, we continue to benefit from our recent acquisitions, which contributed to the solid performance in the second quarter. Adjusted gross margin of $50 million improved by $9 million or 22% over the prior year. All of our business segments posted strong quarterly adjusted gross margin gains relative to 2017. Second quarter adjusted EBITDA of $9.3 million reflects an increase of $4.3 million or 88% over 2017 levels. The increase in adjusted gross margin was partially offset by higher operating expenses related to the recent acquisitions. SG&A cost decreased by $1.1 million as an increase in employee-related costs were offset by a reduction in M&A expenses and incentive comp as well as lower consulting professional fees. We continue to forecast adjusted EBITDA for 2018 to be between $120 million and $140 million, and given realized acquisition synergies and a company-wide focus on cost management, we are revising down our forecasted SG&A expenses to be in the range of $88 million to $93 million for 2018. Cash interest of $7.9 million in the second quarter increased by $2.2 million over the prior year. The increase was the result of higher borrowing costs, increased debt levels related to the acquisitions and higher commodity prices. This was partially offset by hedges on the fixed portion of our floating rate debt. We continue to expect cash interest to be in the range of $28 million to $33 million for 2018. In the second quarter, cash taxes were $1.6 million lower than the prior year, primarily due to year-over-year timing differences at Kildair. We expect cash taxes for the year to be approximately $5 million. Maintenance CapEx increased in the second quarter by $800,000 to $3.5 million, with tank and dock work at our Bronx and River Road terminals as well as technology infrastructure CapEx comprising the majority of the year-over-year increase. We expect maintenance CapEx to be at the low end of our previously issued guidance of $13 million to $16 million. Distributable cash flow of negative $2.4 million improved by approximately $600,000 for the second quarter versus the prior year. This was primarily driven by stronger adjusted EBITDA and a reduction in cash taxes, partially offset by higher cash interest in the maintenance Capex. This level of DCF is in line with our typical second quarter results. Now for a discussion of our business segments. Refined Products sales volumes grew by 13% over the prior year, driven by an increase in distillate sales. Incremental diesel volumes from the Coen Energy acquisition as well as more supportive weather were the primary drivers. The uplift in volumes and an increase in unit margins resulted in $29 million of adjusted gross margin for Refined Products, an increase of 20% over the second quarter of last year. Natural Gas sales volumes declined by 9%, primarily due to a loss of some higher-volume, lower-margin accounts and increased competitive intensity. However, adjusted gross margin increased by $2.5 million or 97% to $5.1 million. This was partially driven by executing on supply optimization opportunities as well as a favorable quarter-over-quarter fair value adjustment of our forward derivatives position. In our Materials Handling business, adjusted gross margin improved by 11% or $1.5 million in the second quarter. On our last call, we discussed how Kildair transitioned its asphalt marketing business to a Materials Handling play under a long-term throughput arrangement with take-or-pay minimums. In addition, increased heavy lift and furnace slab deliveries at our Searsport terminal also contributed positively to the quarter's results. These gains were partially offset by timing differences at asphalt and pet coke activity. But before I open the call for questions, and given his pending retirement tomorrow, I would like to congratulate and thank John Moore, our Chief Accounting Officer, for his distinguished 20-year career at Sprague. John has led the accounting functions for this entire period, first as controller, and for the past 7 years, as the company's Chief Accounting Officer. John's contributions over the years have been extraordinary and an important factor in Sprague's overall success. And we wish him and his wife, Julie, all the best in the next phase of their lives. Congratulations, John. With John's departure, I am pleased to welcome Kory Arthur as our Vice President and Chief Accounting Officer. Kory has an extensive background in accounting and finance, and has been with Sprague for over 10 years. Kory has served in a variety of roles with Sprague, most recently Managing Director Investor Relations and Internal Audit. Kory's experience and leadership qualities make him well suited for his new position, and I am delighted to have him take on this critical role for the company. At this point, I'd like to open up the call for questions. Thank you.

[Operator:]

[Operator Instructions] And our first question comes from the line of Jeremy Tonet with JPMorgan.

[Charles Barber:]

This is Charlie in for Jeremy. Just turning back real quick to last year's acquisitions, excluding the Capital Terminal. How are these assets just kind of ramp to expectations? And when we kind of expect full contribution -- full EBITDA contribution for each of these assets?

[David Glendon:]

Thanks for the question, a good one. I think, in general, the acquisitions contributed as expected with a one exception being the one you noted, the Capital Terminal, which took a little bit while longer to get going and is ramping up to speed as we speak. So generally speaking, they're all collectively on track, and we expect the Capital to just be about a 6-month delay or so relative to the initial expectations.

[Charles Barber:]

Okay. I had another question just on CapEx. You noted in last call, you expected a little bit of a more normalized level this year. I think guidance is, I think, it was $8 million to $13 million, in that range. Any reason to think that you could be on the higher end of this kind of in the back of half of the year? Or is it kind of still little too early to tell?

[Gary Rinaldi:]

Yes. Thank you. The guidance range is $8 to $13 million, and there's no change to -- for the last part of the year versus what we've talked about in the past. The expansion capital is really related to some of the transactions that we did last year

[Charles Barber:]

Okay. That's fair. And last one just on -- Material Handling has, obviously, done pretty well year-to-date. Just kind of curious, how ratable this first half performance is and kind of expectations for the remainder of the year?

[Gary Rinaldi:]

Yes. Sure. You're right; Materials Handling had a strong year, coming off a strong first quarter. We had another strong quarter in second. And we're expecting that to continue for the rest of the year as far as the run rate. And the more significant drivers relate to the asphalt marketing conversion. That's a Materials Handling play at Kildair. In addition, the asphalt volumes at our River Road and Providence terminals related to the expansion capital projects of the last year. And we've got the year-over-year positive activity related to heavy lift in Searsport, which is structural steel, and then [indiscernible] a number of our terminals, and then Kildair's heavy fuel oil storage contract. So expect the second half of the year to continue on the pace that the first half has been on.

[David Glendon:]

And just one thing to add to that, as Gary's talked in the past, the Kildair conversion to Materials Handling comes at the expense of Refined Products. So there's a shifting of the margin associated with our previous asphalt activities at Kildair from Refined Products to Materials Handling.

[Operator:]

[Operator Instructions] And our next question comes from the line of Private Investor, Mr. David Rothschild [ph].

[Unidentified Analyst:]

My question is, and I'm not an expert in reading this, but it looks like your distributable cash flow for the quarter was a negative $2.4 million. Is that something we need to be concerned about? Or is it just typical in your second quarter?

[Gary Rinaldi:]

No. Thank you for the question. It's in line with our normal second quarter results. In fact, our second quarter results were actually stronger than our typical second quarter, but the distributable cash flow, as you correctly said, was negative, which is not atypical. The second quarter is the lowest quarter that we have typically each year. It's a seasonal issue.

[Operator:]

And our next question comes from the line of Robert Balsamo with B. Riley.

[Robert Balsamo:]

Just wondering if we can get just a little clarification on the Refined Products margin, they were down a bit. I was wondering if you can just elaborate on the drivers there. And how much, obviously, the removal of Kildair impacted that? So are we looking at a better run rate? Or are there other factors driving that margin for the quarter that might move towards the end of the year?

[David Glendon:]

Yes. So let me just check, Robert, because I think at least as we're looking at our Refined Products results relative to the second quarter last year, and most of that came from the addition of the Coen Energy acquisition this year. So the rest of the business is relatively flat year-over-year. I'm not sure what the reference is to [indiscernible].

[Robert Balsamo:]

I was looking at it like a margin per gallon kind of -- I guess, it's more of a calc that I do. I'm not sure. I was trying to see if there was a little bit of pressure on margin. I thought there was a comment in the release on that as well.

[David Glendon:]

I don't believe so, Robert. Again, I'd be happy to take it off-line if there is something that you're seeing that we can respond to directly.

[Operator:]

And I'm showing no further questions. So with that, I would like to thank everyone for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.