Sprague Resources LP

Good afternoon, ladies and gentlemen, and welcome to the SPREG Resources LV Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If you should require further assistance, please press star zero on your touchtone phone. 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.

Thank you, Ditamara. 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 SPRAG 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, Axel 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 primacy. 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 acknowledgement that others may be better suited to supporting Sprague in the next phase of its development. As the Axel 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 a 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 pass 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 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 distributions of 66.75 cents per unit equal the 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? Thank you, Dave, and good afternoon, everyone.

Before we review the financial results, we're happy to report that Sprague successfully sold its Oswego New York terminal to an asphalt marketing customer in the second quarter. The transaction prices completed an attractive multiple with the proceeds used to pay down the company's acquisition debt balance. And now a discussion of our financial results. SPREG'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 decreases attributable 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. SPREG'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 overtime. SG&A expenses decreased by $2.3 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 of $6.7 million decreased by $1.7 million, or 20% below the prior year, which was primarily due to lower borrowing rates. SPREG 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 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, SPREG'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, SPREG's fully-adjusted EBITDA target remains unchanged at $105 billion 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 a strong contango market structure in 2020, which affords very 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.