Sprague Resources LP

Ladies and gentlemen, thank you for standing by, and welcome to the SPREAD Resources LP Q1 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star then 1 on your telephone. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker for today. Dave Glendon, President and CEO. You may begin.

Thank you, Tawanda. Good afternoon, everyone, and welcome to Sprite Resources' first quarter 2021 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 SPREG 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. I'd like to start today's call by recognizing the sustained efforts by coworkers throughout the company at maintaining health and safety protocols while providing essential fuel and services to our customers. Though we continue to experience episodic COVID cases in company locations, we haven't had any interruptions of service in any of our business lines or terminal facilities. Our teams have responded very well to the shift changes and remote practices necessary to keep each other and our customers safe, and we're grateful for their vigilance and flexibility. At the same time, we've maintained strong performance on the traditional safety and environmental metrics so critical to our business sustainability. On this broader topic, we've recently completed and posted our 2020 Sustainability Report, and I'd encourage listeners to review that publication to gain an appreciation for our performance on a wide range of ESG measures. On our last call, I discussed how our core business has generated a consistent distribution margin on the sale or handling of products, and that we're able to capture a significant uplift above the base margin when environmental or market features leverage our advantaged assets and logistical capabilities. In 2020, this took the form of the Contango market structure, enabling us to capture the value of our extensive storage assets. which more than offset the poor weather and significant demand destruction in transportation fuels and commercial usage of natural gas. In the first quarter of 2021, the uplift was provided by a more normal weather profile than we'd experienced the last few years. Refined products saw stronger heating oil demand, and our natural gas group benefited from the colder weather and associated cash price volatility. Listeners may also recall that our Q1 2020 results were negatively affected by unrealized losses on forward spread positions that we had begun to layer in to capture the contango opportunity. I'm also encouraged by the results of our ongoing efforts to manage our cost structure, with Q1 2021 operating expenses, SG&A costs, and interest expense all materially lower than 2020 levels, with the exception of higher accruals for incentive compensation. Looking forward, we're excited to see increased interest in renewable liquid fuels across our customer base and reduced carbon intensity of transportation and heating fuels. Use of higher biofuel blends or renewable diesel contributes an immediate reduction in greenhouse gases without any capital cost for customers, as would be incurred in a transition to equipment like electric heat pumps. and we expect to see both further incentives, mandates, and voluntary adoption of higher renewable fuel blends. We're encouraged by the recent moves in northeastern states towards low-carbon fuel standards versus poorly designed programs like the Transportation Climate Initiative, and believe that our extensive asset profile is well-suited to meet the need for increased renewable content in fuels. We're investing in the flexibility of our terminal assets to support higher blends, and I'm pleased to report that we recently received matching USDA grants for enhancements to two of our facilities. I'm sure that you've seen our recent announcement regarding the sale of Axel Johnson's controlling interest in Sprague to Hartree Partners. While we are blessed to have Axel Johnson as either the sole or controlling shareholder for 50 years, we're excited for this next stage in our development. and look forward to the additional capabilities that Hartree brings to the table in enhancing our business. We've had the pleasure of getting to know their team over the past year as an investor and have benefited from their insight and extensive network in commodity markets. They have shown a strong interest in deploying additional capital into growth opportunities in both traditional fuels and the burgeoning renewables market, and we're attracted to the breadth and depth of our platform. We expect the transaction to close on or before June 1st. The transaction is subject to certain closing conditions, and we do not anticipate issuing additional updates on the progress of the transaction prior to closing. Finally, this quarter, the Board of our General Partner declared a distribution of 66.75 cents per unit, which is equal to distributions in the first quarter of 2020. Now I'd like to turn the call over to Dave Long for a detailed review of our first quarter results. Dave?

Thank you, Dave, and good afternoon, everyone. SPREG's quarterly adjusted gross margin increased by 28%, or $23.1 million, to $106.2 million, as compared to the first quarter of 2020. This increase was attributable to gains in our refined products and natural gas businesses, which were partially offset by declines in the material handling business. I'll provide more detail of the underlying results of each business shortly. Sprague's first quarter adjusted EBITDA of $61.8 million increased by $19.3 million, or 46%, as compared to the prior year. Operating expenses decreased by 8%, or $1.6 million, in the first quarter, primarily due to decreases in stockpiling expenses. SG&A expenses increased by $5.2 million, or 26%, primarily as a result of an increase in incentive compensation and employee-related expenses, which were partially offset by a decrease in travel and promotional activities associated with the COVID-19 restrictions. Below the EBITDA line, first quarter cash interest of $7.4 million decreased by $2.5 million, or 25% below the prior year. which was primarily due to lower borrowing rates. Sprague recorded $1 million for cash taxes in the first quarter, which was $2.1 million, or 68%, year over year. Quarterly maintenance capex decreased by $0.8 million to $2 million. Maintenance capex was lower principally due to the timing of several IT and terminal-related projects. Given the increase in adjusted EBITDA and lower cash interest in maintenance capex, Sprague's distributable cash flow for the first quarter increased by $25.6 million year-over-year to $53.8 million, generating a quarterly distribution coverage ratio of 3.1 times. At the end of the first quarter, Sprague's permanent leverage was 3.2 times, while our borrowing capacity under our working capital and acquisition lines was $121 million at quarter end. In terms of forward guidance, SPREG'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 7% for the quarter, primarily in heating oil sales, given a 17% increase in heating degree days quarter over quarter. Adjusted gross margin increased by $15.2 million of 43% to $51 million, which was primarily due to higher volumes, inventory basis appreciation, and unrealized mark-to-market gains on forward positions. In addition, as Dave had mentioned earlier, we had reported some unrealized mark-to-market losses on forward positions in the first quarter of 2020, which reversed later in the year. In natural gas, sales volumes for the quarter increased by 3% year-over-year, while adjusted gross margin increased by $11.3 million, or 38%, to $41.1 million compared to the same period a year ago. The increases are attributable to colder quarterly temperatures and higher supply optimization opportunities. In material handling, the first quarter adjusted gross margin was $12.1 million, 22% or $3.5 million lower than the same period a year ago. The decrease was principally due to lower road salt and windmill handling activities and lower tank storage revenue at our Kildare facility. At this point, I'd like to open the calls for questions.

Thank you. Ladies and gentlemen, as a reminder to ask a question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. I'm showing no questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.