Sprague Resources LP
Q1 2017 Earnings Call Transcript

Published: 8 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sprague Resources LP Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the anticipated remarks, we will host a question-and-answer session and our instructions will follow at that time. [Operator Instructions]. As a reminder, this conference may be recorded. It's now my pleasure handing the conference over to Mr. David Glendon, President and Chief Executive Officer. Sir, you may begin.

[David Glendon:]

Thank you, Brian. Good afternoon, everyone, and welcome to Sprague Resources' First Quarter 2017 Conference Call. Joining me today are Gary Rinaldi, our Chief Operating Officer and Chief Financial Officer; John Moore, our Vice President and Chief Accounting Officer; and Paul Scoff, our Vice President and General Counsel. Some of today's call will include forward-looking statements. While Sprague believes these statements to be reasonable as of today's date, future results are subject to many risks and uncertainties that are difficult to predict and outside of Management's control. Any forward-looking statements we make are qualified by the Risk Factors in our most recently filed SEC Form 10-K and future filings with the SEC. Sprague Resources LP undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. You can find a discussion of our use of non-GAAP measures as well as reconciliations between these measures and their most comparable GAAP figures in our earnings press release on Form 8-K with the SEC as well as additional disclosures and reconciliations in the Investor Relations section of our website. I'm pleased with Sprague's performance in the first quarter. Despite challenging weather, our total adjusted gross margin improved 5% and distributable cash flow increased more than 6%. As we've been doing for the past 147 years, Sprague is continuing to expand an energy in logistics platform that offers customers with products and services they need to grow, resulting in value creation for our unit holders. From the fuel needed to heat and run a business or home, or power fleet of vehicles, or handle and deliver their raw materials, more customers are relying on Sprague as a result of our successful acquisitions and investments in organic growth. Our acquisition strategy is contributing to each of our business segments. While many of our peers are focused on balance sheet repaired, we closed four transactions so far in 2017, representing more than $140 million of invested capital, financed without a follow-on equity. The global purchase added 4,000 customer locations, 8 billion cubic feet of annual gas demand and 1 billion annual kilowatt hours of electricity contracts while allowing us to again leverage our supply and logistics capabilities to capture additional value from these assets. LE Belcher and Carbo both had storage capacity in key markets and strengthened our marketing opportunities. Carbo in particular secured significant gasoline throughput agreements with branded majors in the greater New York City market that will increase our ratable cash flows and further mitigate the impact of weather on our business. Nearly half of the consideration for the Carbo acquisition was in Sprague units, a strong testament of the seller's optimism in our future success. And capital is probably my favorite three-corner bank shot so far. The purchase not only solidifies our position in the Providence Harbor, allowing us to make an expansion capital investments and optimized storage at our legacy Providence terminal, but improves both asset's ability to generate more ratable contractual cash flows. This initiative demonstrates the creativity that Sprague continually employs to optimize all assets in its network in response to changing market dynamics. Integration efforts on all these transactions are proceeding extremely well with the LE Belcher, Capital and Carbo activity substantially complete. We are grateful to welcome each terminal's experienced operators who quickly embraced Sprague's safety culture, resulting in a smooth transition. All natural gas integration efforts present additional systems complexity, the majority of the global customer base will be migrated to Sprague applications within the next month with the remainder transitioning later this year. Sprague's capacity and appetite for additional acquisitions remains strong and will continue to aggressively pursue opportunities to strengthen and expand our geographic footprint in serving more customers. At the same time, we're making investments in products and services that further improve the customer experience. In the coming months, we'll be rolling out a number of enhancements to Sprague Real-Time, a proprietary online sales platform to simplify the online purchasing process, provide greater flexibility and enhance our customer's ability to manage their business. In New York City, we're working with our customers to assess their location's compliance with health, safety and environmental regulations. To better-align with the needs of some of our natural gas customer segments, we intend to expand our product to offering later this year. We're also investing in our sales management process to improve lead generation, sales funnel visibility and close rates. Each of these initiatives will strengthen our customer relationships and support organic growth and the continued execution of these priorities provides confidence in our ability to maintain a healthy growth trajectory. I'll now turn the call over to Gary for a review of our quarterly results. Gary?

[Gary Rinaldi:]

Thank you, David, and good afternoon, everybody. I'm pleased to report on the first quarter of 2017 financial and operational results for Sprague. We continue to deliver on our previously issued guidance while increasing distributions at a double digit rate and maintaining strong distribution coverage. Sprague's adjusted gross margin for the first quarter of 2017 was $90.4 million, an increase of $3.9 million or 5% compared to the prior year. Strong natural gas performance during the quarter was partially offset by lower adjusted gross margin in materials handling and modestly lower refining product results. Adjusted EBITDA improved $1.9 million to $47.3 million for the quarter. We are reiterating our 2017 guidance for adjusted EBITDA of $115 million to $130 million for the quarter. This incorporates the results of the first quarter, contribution from our recent acquisitions and expectations to grow distributions at a similar pace. Sprague's operating expenses for the quarter remain unchanged at $16.8 million despite the addition of the three acquisitions that closed midway through the quarter. Incremental expenses related to the acquisitions were offset by cost reductions, and repairs and maintenance, insurance, [indiscernible] stock pile expenses in our based business. OpEx for 2017 is expected to range between $69 million and $74 million. SG&A expenses increased by $2.2 million to $26.3 million as higher employer related cost including incentive comp and expenses related to the three first quarter acquisitions were partially offset by lower audit professional consulting fees. SG&A expenses for 2017 are projected to be between $90 million and $95 million. Cash interest increased nominally by $100,000 for the quarter to $6.1 million, reflecting additional borrowings related to the recent acquisitions. For the year, we expect cash interest to total between $25 million and $29 million. This reflects expected saving from the recent amendment to our credit facility and as a reduction of $1 million to the previously issued guidance. Maintenance CapEx decreased modestly by $100,000 to $1.5 million for the quarter. For the year, maintenance CapEx is expected to range between $14 million and $17 million inclusive of the impact of the four recent acquisitions. Since the IPO, Sprague has invested nearly $40 million in expansion CapEx and is continuing significant investments in organic growth projects which this year will total between $19 million and $22 million. At our River Road and Providence terminals, asphalt conversion projects are under way in support of materials handling contracts, while East Providence were converting stores to support a branded gasoline throughput agreement. Each of these initiatives are backed by long-term agreements with credit worthy counter parties and will increase ratable cash flow while generating attractive returns. And at the recently-acquired LE Belcher terminal, we're investing in biodiesel blending capabilities in upgrading to the terminal automation systems will be made at both LE Belcher and Capital. Distributable cash flow for the quarter improved $2.4 million or 6% to $40.1 million. While we've increased distribution to the double-digit pace, our distribution coverage remains strong at 2.7x for the quarter and on a trailing 12-month basis average of 1.6x equals that of a year ago. Sprague's ability to capitalize on accretive transactions remains strong. At the end of the quarter, liquidity in our working capital facility was over $150 million, while the acquisition line liquidity was approximately $250 million. We recently closed on the Carbo transaction for consideration of $70 million whilst adjustments for working capital and other customary items. Total consideration for Carbo is comprised of $10 million in cash and $30 million in Sprague units at closing with the remainder in cash paid ratably over 10 years. Because of the favorable deal structure, we're able to execute on the highly-accretive transaction while utilizing only $10 million of our acquisition facility, preserving liquidity for additional transactions. We ended the quarter with our permanent leverage ratio of 2.6x at the low-end of our target range of 2.5x to 3.5x. With regard to our credit facility, I want to note that we recently closed on an amendment that extended the maturity to April 2021. In addition, there's a material reduction for the pricing grid for the acquisition facility delivering substantial interest savings and there are increases to both the CapEx and acquisition baskets as well as other support instructural changes. A $1.6 billion credit facility with an additional $470 million with available accordions provides us with ample liquidity to grow and demonstrates the confidence that our lenders have placed in Sprague's future. Now turning to the business segments. In our refined products business, sales volumes for the quarter decline less than 1% of 473 million gallons. The decrease was the result of warm weather in the northeast during the peak heating months of January to February with degree days for the two months period, more than 15% below normal. Refined products adjusted gross margin declined $2.2 million to $39.5 million for the quarter as marginally lower sales volumes comprising with the 3% reduction in adjusted unit margins. Although heating degree days in demand recover during March, unit margins compressed as fellows [ph] aggressively countries pricing in an effort to liquidate inventory coming out of the heating season. In addition, the seasonal change over from winter to summer grade gasoline typically provides an uplift unit margin in the second quarter. Last year, market conditions shook at the timing of this margin uplift to March, adding to the year-over-year decline. Despite these challenges, refined products results were partially offset by adjusted gross margin increases in transportation fields in asphalt, demonstrating improved diversification in our cash flows and lessening dependents on weather. Sprague hosted excellent natural gas results in the first quarter with sales volumes up 7% to 20.2 billion cubic feet, primarily as a result of the global acquisition. Adjusted gross margin rose 24% to $38.6 million as three primary drivers combined to generate the out performance. First, constraining northeast pipeline capacity resulted in higher contracted unit margins which Sprague has uniquely positioned to benefit from, given our role as both supplier and marketer across 15 states. Second, in similar-to-refined products, mild weather early in the quarter was offset by an improved environment in March, offering our supply in logistics themes more opportunities to optimize our assets and earn incremental margins compared to a year ago; and finally, global's contribution during the quarter as well as continued strong performance from last year's saint [ph] acquisition for the cap stone under quarter's outstanding results. In our materials handling business, adjusted gross margin of $9.9 million was down $1.5 million compared to the prior year. A reduction in heavy lift activity related to window projects was the primary driver of the decrease. This was partially offset by the improvement and dry block activity led by higher salt handling given the increased winter storm activity during the quarter, compared to the year ago. To conclude, David and I are proud of Sprague's accomplishments since our IPO in 2013. Through periods of extreme price volatility in weather, we have generated outstanding returns to our unit holders, successfully executed and integrated nine acquisitions totaling over $400 million and invested nearly $40 million in organic growth projects. Sprague's strong balance sheet, low permit leverage, high distribution coverage, ample acquisition liquidity and supportive credit facility positions us for continued growth well into the future. This concludes my remarks. Let's open up for questions.

[Operator:]

Thank you, sir. [Operator Instructions] Our first question will come from the line of Robert Balsamo with FBR. Please proceed.

[Robert Balsamo:]

Hi. Good afternoon. I was wondering if you could just go on to little more detail on the impact of the recent acquisitions and seasonality, and I you mention that it's going to produce the weather impacts but I would imagine you would still see some seasonality, for maybe capital, terminals verses less so in the Carbo, can you talk a little bit about that, you have expectations for a 2Q, 3Q, as they begin to contribute.

[Gary Rinaldi:]

Yes, happy to talk about it generally Robert, as you correctly noted that our acquisition philosophy has been driven by both, great opportunities but also a desire to reduce our weather dependency and I would say of the four we completed this year, two set quite well into that pattern. As you noted Carbo, is primarily transportation fuels, primarily gasoline which is the rate of all business; and with the capital terminal acquisition we're actually converting that to a gasoline based throughput terminal which will again lessen the weather dependent. So historically capital would have been more weather dependent but with the major capital investment we have ongoing there both in the gasoline throughput conversion, as well as the asphalt -- associated asphalt activity at our legacy providence terminal, that one will local lot more like a ratable business on a go forward basis once but construction is complete. With respect Ellie Belter [ph] that is a more traditional Sprague-like asset with about 80% of the business -- heating oil business and about 20% of the business of a diesel centric business which is -- which is more ratable. And the global natural gas acquisition will mimic the natural dynamics of our existing global -- our existing natural gas business which is again relatively weather sensitive.

[Robert Balsamo:]

That's great, thanks for that color, and then just very quick on the materials handling. Expect -- how do we think about this moving forward, is this a reduction in woodmill activity or is it something that you might see -- you know, come back a little bit or how do we think about that moving forward?

[David Glendon:]

Yes, Robert thanks. On the wooden mill activity outside, there is a couple of things in play; one is timing differences. Typically majority the wood mill activities affect in third, fourth quarter. In 2016 there was a significant amount of activity in the first quarter, okay; so that's almost the entire of variance in the first quarter. Having said that our overall mill activity will be down in 2017, we had a number of projects coming out of '14 into '15 which had a bit of positive impact to '15 and '16 results or coming to the end of those projects, there is couple of projects we've got for '17 but it'll be down to '17. However, there's a number of RFPs out and there is additional RFPs coming for both Maine and Massachusetts, for both land-based projects, as well as ocean-based projects and we're optimistic that we'll be successful in getting some of those contracts which should materially impact in a positive way; '18, '19 and '20. Having said all that from materials handling in general, as you -- I'm sure you know, there is about 30 products that we handle, different demand pattern, some are up, some are down; windmill activity will be down a bit in '17 but there are other products that will be up; asphalt for instance, you've got the big expansion capital projects River Road in Providence, salt is up. So we're actually expecting windmill -- I am sorry, materials handling margins for 2017 to be either at or modestly above last year.

[Robert Balsamo:]

Great, that's it for me, thanks for the color.

[Operator:]

Thank you [Operator Instructions] Our next question will come from the line of Lynn Chin with HITE, please proceed.

[Lynn Chin:]

Good after noon, thanks for taking the question. For the refund product margin, I believe that the declining crude price should help you to improve the margin but I guess maybe even in terms of too high and end of February, so the margin was compressed [ph]. I was just wondering do you think this try to continue given the even turn liable now?

[David Glendon:]

So I think Lynn you're correct in falling crude prices generally benefit margins but that's particularly true in gasoline retail, so much less true in this business although there's a modest impact but what we saw transpire in the first quarter given the weather, the absence of supported weather is all suppliers were amply supplied with inventory over the course of the quarter, and everybody's looking to move that inventories as you get out of the -- out of the winter season. So there is significant additional rack margin pressure given that everyone's well stocked with inventory given the demand was down, that was the primary dynamic. So I don't expect that if you look at our average in the margins on annual basis or an annualized basis I think you'll continue to see continuation of the trend we've experienced.

[Lynn Chin:]

Great, thank you. And talk about gasoline, given you are a recent so you are adding this gasoline business now. What do you -- what do you see there a current dynamic further gasoline margin? I know, first of all, declining comprising helpful but we also heard from other companies report that we also have a high inventory for gasoline, so the margins also compress.

[David Glendon:]

Yes, I think that's true in rack marketing of gasoline recall that the two acquisitions we've made Carbo and Capital are really throughput terminals, which is a little bit different than -- than the gasoline marketing business, these are truly a toll road collection of these or allowing branded majors to put gasoline to the facility. So those a lot more like a very typical MLP structure that's throughout-oriented Lynn; it's not a significant gasoline marketing business for us.

[Lynn Chin:]

Great, thank you. Appreciate it.

[Operator:]

Thank you. Our next question will come from line of Mike Gyure with Janney. Please proceed.

[Mike Gyure:]

Yes. I think you mentioned in your comments some potential changes to the -- the sales force or some of the I guess the proposal or plans that you are working in out there. Can you span on that maybe a little bit more.

[David Glendon:]

Sure Mike, good question. So we've been in the process of implementing sales forces over the last six months or so and we've just gone live in the last couple of months in both the refined products in natural gas business, and I think we're very encouraged by the additional visibility providing into both the that growth opportunities as well as the channel management and the conversion rate. So it's been a recent admission of profit again like many companies I'm sure you're familiar with, we're seeing real leverage from the system and the enhancement ability it provides.

[Mike Gyure:]

Thank you very much.

[Operator:]

Thank you. Our next question will come from line of Jeremy [ph] with JP Morgan. Please proceed.

[Unidentified Analyst:]

Yes, this is Charlie for Jerry. Just wanted to follow up on back on the province terminal, I believe you said that you would potentially do the $8 million conversion on internal storage capacity for gasoline ethanol services, I just wanted to see what's the timeline behind that was, if that still expected.

[Gary Rinaldi:]

Yes we already are working on that and that'll be in 2017 and we would expect that the project would be completed and sometime in the third quarter, early in third quarter and -- and should be ready to go at that point.

[David Glendon:]

And a little bit more color in that, yes the $8 million associated with the capital permanent conversion to gasoline and ethanol service in $3 million of our capital investments associate with the asphalt conversion, our legacy Providence [ph], the two are intimately related. And as we also described at the front end with the capital terminal that's our long term throughput arrangement that ramp up over a period of about three years or so, so we do expect the live in the third quarter but the volumes will continue to grow over the next few years.

[Unidentified Analyst:]

Great thanks, and then just on the Carbo acquisitions, I was just looking through the slide that you put out and so on some of the -- Where it's being supplied from like the warrants portion and I saw Buckeye pipeline; is there any color behind the kind of supply contracts coming from Buckeye there or departure or truck business?

[David Glendon:]

I'm not sure it is Buckeye connected facility, the vast majority that of the volume going through there is supplied via the Buckeye terminal that has the ability to retrieve product be a partition and truck as well but really it is -- the refine products are coming in via the Buckeye pipeline and the ethanol is being supplied via a Barge [ph].

[Unidentified Analyst:]

Okay great thanks.

[David Glendon:]

You're welcome.

[Operator:]

Thank you ladies and gentlemen this concludes our question and answer session for today. We'd like to thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody have a wonderful day.