Sprague Resources LP
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sprague Resources Q1 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I’ll now like to turn the conference over to your host, Mr. David Glendon. Sir, you may begin.

[David Glendon:]

Thank you, Valerie. Good morning everyone and welcome to the Sprague Resources first quarter 2015 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. Following my introductory remarks, Gary will review our financial results. We'll then open the call to questions. But first I'd like Paul to provide our forward-looking statement disclaimer and discuss our use of non-GAAP measures.

[Paul Scoff:]

Thank you, Dave. As a reminder, 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. We believe it is important for our unit holders to understand how Sprague’s underlying business is performing regardless of which way commodity markets move. Therefore, we adjust our GAAP results for the unrealized portion of our derivative hedges and report adjusted derivative hedges and report adjusted EBITDA and adjusted gross margin. You can find a discussion of our use of these non-GAAP measures as well as a reconciliation between these non-GAAP and their most comparable GAAP figures in our press release in the Investor Relations section of the Sprague website www.spragueenergy.com. Dave?

[David Glendon:]

Thank you, Paul. I’d like to start this morning with an acknowledgement that a year ago on this call I was both excited and apprehensive; excited to report exceptionally strong results in our first full quarter as a public company, but apprehensive that we'd established an impossibly high bar against which future quarters would inevitably be compared while I am delighted to report today that any performance anxiety was unfounded. Sprague’s first quarter adjusted gross margin and adjusted EBITDA, both set new quarterly records. Our distributable cash flow increased by 33% year-over-year and our coverage ratio for the quarter, 5.9 times, was even higher than what we achieved in the first quarter of 2014. These exceptional results have us well positioned to continue our strong distribution growth trajectory with healthy coverage ratios, while reducing our leverage within our target range. Last week, Sprague’s Board of Directors approved our fourth consecutive distribution increase and declared a cash distribution of $0.4725 per unit representing $1.89 per unit on an annualized basis. Compared to the distribution declared for the first quarter of 2014, we’ve grown our distribution by 14.5%, well above our previous guidance. Once again prolonged colder weather created the conditions for stronger demand and associated higher gross margins, but it was our team's execution that enabled our success under these challenging dynamics. You may recall the back-to-back snowstorms in New England, but the temperatures themselves were even more notable for their persistence. In the Northeast, total heating degree days in the first quarter exceeded last year’s total by 8% and were 19% higher than the long-term average for our region. Our operations, supply and marketing teams all needed to adapt to freezing harbors and waterways in places we had not seen ice before, and barge timing and subsequent supply availability required around-the-clock expert coordination. Vessel delays, high demand at snow removal were not enough to contend with the wider variety of distillate sulfur grades, mandatory biofuel blending requirements in several states and severely backwardated market conditions increased the complexity of supplying terminals. Through it all, however, and in contrast to many of our competitors, Sprague's employees once again proved their logistics metal and ensured that customers had access to product when they needed it. Performance like that strengthens and sustains our competitive advantage and highlights our conviction in the integrated supply, terminaling and marketing business model versus a traditional throughput-oriented approach. As we enter the second quarter and the pace of activity slows down a bit, we continue to focus on our integration efforts for the three acquisitions we made at the end of 2014. This work has highlighted the additional growth potential inherent in each; Metromedia Energy, Castle Oil and Kildair, all expand our offerings in either a new customer segment or geographic territory. Along with the increased customer reach though, comes perhaps an even larger opportunity to leverage our legacy Sprague assets and capabilities to enhance the returns on our investments. For instance, our Natural Gas team continues to hone the supply logistics in serving the former Metromedia customers. I've spoken at length about our team's scheduling expertise and the opportunity it affords us to earn incremental margin on sales in tight supply markets. This capability is now being extended over a volume base that is 30% larger and the anticipated result of our efforts will be additional margin realization above contracted margins through optimization of the portfolio. In Materials Handling, I am encouraged by the fact that we continue to discover opportunities at both Kildair and the Bronx in addition to our legacy facilities. Our network of waterborne terminals and the handling capabilities they offer are unparalleled among our peers there and offer an incredible opportunity to increase earnings with costs already incurred by virtue of operating the Refined Products business. Whether it is crude oil, road salt, asphalt or windmill components, there is demand for handling the raw materials this densely populated region needs to function and our terminals provide this gateway. In Refined Products, the Castle acquisition provides access to a new segment of customers, but also increases the efficiency of our existing operations in serving New York City area accounts. For example, control of this major terminal location in the Bronx enables more cost-effective servicing of the New York City Transit Authority diesel contract, our single largest volume account and a customer which I'm pleased to report recently awarded another five-year term to Sprague following a competitive bid process. And finally, the acquisitions bring with them the opportunity to cross-sell our services and meet customers' entire BTU requirements. For the first time in our company’s history, our sales teams have the chance to provide customers with liquid fuel, natural gas service and electricity supply options across our Northeast footprint. Our strategy of partnering with customers to guide them through an evolving energy landscape has not only stood the test of time, but is perhaps even more valuable to customers today as markets continue to be volatile and they seek the council and service of a trusted vendor with the physical assets and capability to deliver. Now, I’d like Gary to provide a more detailed review of our results.

[Gary Rinaldi:]

Thank you, David, and good morning everyone. As a reminder, our first quarter 2014 results other than distributable cash flow, now include Kildair. In addition, the first quarter of 2015 was the first full quarter of contribution from Castle Oil. As David mentioned, Sprague produced excellent results in the first quarter despite the onset of severe winter conditions beginning somewhat later in the quarter than what we experienced in 2014. Sprague's adjusted gross margin was $114 million in the first quarter of 2015, a new quarterly record which was an increase of 19% compared to the $96 million Sprague generated last year. Adjusted EBITDA 22% higher than the year ago quarter also set a record at $64 million. And our distributable cash flow increased by $15 million or 33% to $59 million, yet another record for Sprague. Sprague's operating expenses increased 12% or $2 million year-over-year to $19 million during the first quarter. The increase was largely due to operating expenses associated with our acquisition of the Castle terminal, partially offset by a reduction in boiler fuel costs, terminal maintenance expenses and lower costs at Kildair. Sprague’s SG&A costs increased $5 million in the first quarter of 2015 compared to 2014. The increase was primarily tied to expenses directly associated with the acquisitions of Metromedia Energy and Castle Oil. In addition, transaction related expenses also contributed to the year-over-year increase. Now, turning to our business segments. Refined Products sales volumes which included a full quarter of Castle activity, increased 138 million gallons or 23% compared to the first quarter of 2014. Net sales decreased 22% to $1.4 billion as a result of lower commodity prices year-over-year. The increase in total volume was driven by heating oil volumes associated with our Castle acquisition, although a rapidly declining price environment boosted our sales of wholesale gasoline. The additional loading capacity and supply flexibility afforded by our exclusive rack locations in New Haven and Providence also contributed to volume gains in the quarter. Refined Products adjusted gross margin increased $15 million or 29% to $66 million in the first quarter which was a new quarterly record for this business segment. As David mentioned, sustained cold weather conditions beginning in late January created logistical problems in many markets, but our commercial and operational teams were able to supply customers when others had difficulty, earning Sprague incremental volumes and improved unit margins year-over-year. In our Natural Gas business, first quarter volumes were 21% higher than last year, primarily as a result of the Metromedia acquisition while average selling prices were 10% lower, resulting in an increase of net sales to $147 million, 9% higher than the year ago quarter. Natural Gas adjusted gross margin decreased $500,000 to $35 million in the first quarter compared to the prior year. Despite colder temperatures in the Northeast, the region experienced less cash market volatility resulting in fewer optimization opportunities for our supply and logistics teams. Finally, Materials Handling adjusted gross margin increased $2 million or 26% to $10 million in the first quarter. The majority of the year-over-year increase resulted from Kildair's crude storage and handling activities. Also, Sprague's customers brought in shipments of liquid asphalt and windmill components earlier than expected in preparation for the summer construction season, adding to our improved performance. Turning to our balance sheet, I'm pleased to report that our strong performance in 2014, as well as the first quarter have enabled Sprague to complete six transactions, including four acquisitions over that period without stretching leverage beyond our long-term target, as well as maintaining adequate liquidity within our credit facility. Sprague's available working capital liquidity was $187 million as of March 31. In the acquisition facility, Sprague had $88 million of capacity at the end of the first quarter, yielding a permanent leverage ratio of 2.7 times adjusted EBITDA on a trailing 12 month basis. Please note that Sprague has $400 million in accordance, $200 million each for the working capital facility and acquisition line providing strong liquidity for growth opportunities in acquisitions. Also I want to remind listeners that we manage the business with a focus on Sprague's permanent leverage ratio due to the fact that our working capital needs fluctuate with our seasonal inventory load. Sprague's credit facility is also governed by leverage metrics based on permanent debt, recognizing that our working capital borrowings are backed by physical inventory and accounts receivable with the short cash conversion cycle. Our permanent leverage ratio of 2.7 times fits into the sweet spot of our long term target and we are pleased to have made such strategic acquisitions without the need to raise additional equity. In the fourth quarter of 2014, we paid down a portion of our acquisition facility with excess distributable cash flow and expect to do so again this year, which will create additional liquidity to finance growth opportunities. Sprague generated distributable cash flow of $59 million in the first quarter compared to $44 million for the first quarter of 2014, representing distribution coverage of 5.9 times for the quarter. Sprague’s maintenance CapEx was $1.8 million in the first quarter, a $500,000 increase year-over-year. The increase was driven by dredging activity at our Searsport terminal as well as project delays we experienced in 2014 that delayed expenditures until later that year. On a trailing 12 month basis, Sprague’s distribution coverage is 2.4 times. While seasonality is expected to result in coverage ratios lower than one times in the second and third quarters, the first quarter by itself delivered distribution cash flow equal to 1.4 times our full-year minimum distribution requirement. Our first quarter results put Sprague on solid footing for 2015 and today we are increasing our 2015 adjusted EBITDA guidance to between $105 million and $120 million. We expect maintenance CapEx to total between $7 million and $10 million for the year and assuming oil prices remain in their current range, we believe our cash interest expense will range between $23 million and $26 million. As for distribution growth, we continue to discuss quarterly increases with the Board and they remain supportive of our existing guidance to target similar $0.015 per unit increases for the next 12 to 24 months. Please note that this guidance is based on assumptions such as demand for our products and services, weather and changes in market structure and does not include any contribution from possible acquisitions. I will conclude my remarks this morning by recognizing some of the outstanding efforts of our employees. First, the results Dave and I discussed this morning would not have been possible without the efforts of our terminal operators, drivers and service technicians. These are the employees who brave the elements, ensure customers have access to the products and services they need when conditions are the worst. When the cold temperatures arrived this winter along with repeat severe snowstorms, our teams responded with safe operations that met our customers' elevated demand. As a testament to their commitment to safety in the midst of challenges, I am proud to report that our fleet team was recognized by the New York State Motor Truck Association as the safest within their class for the fourth consecutive year. The award is one of the highest honors bestowed in the state of New York. Second, I would like to thank the many employees who were able to process three transactions in the fourth quarter of 2014, keep up with this winter's elevated activity and still ensure that Sprague achieves Sarbanes-Oxley compliance in our first full year as a public company. Both David and I would like to congratulate and thank our employees for their outstanding efforts this past winter. This concludes my remarks and David would like to wrap up with some final comments before we take questions. David?

[David Glendon:]

Thank you, Gary. I'd like to thank all the employees who made the first quarter such a tremendous success and our unit holders for their ongoing support. Look forward to seeing many of you at the NAPTP Conference this month and I'm happy to now open the call for any questions.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.