Sprague Resources LP

Good day and welcome to the Sprague Resources LP 4th Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your touchtone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. As a reminder, this call may be recorded. I would like to turn the call over to David Glendon, President and CEO. You may begin.

Thank you, Michelle. Good afternoon, everyone, and welcome to Sprague Resources' fourth 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 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. I'd like to start today's call by recognizing the continued outstanding efforts by coworkers throughout the company at maintaining a safe and healthy environment while providing essential fuel and services to our customers. While we, like all companies, have seen COVID cases impact our employees, we've seen very few instances of transmission in the workplace as we follow strict safety protocols. I'm particularly impressed with the resiliency and flexibility of our operations team in keeping all facilities open for our customers in the face of staffing challenges caused by quarantine practices. This commitment to one another's well-being has enabled us to maintain our impressive safety track record while delivering strong results. Before David provides a detailed review of our results, I'd like to offer some commentary on developments in 2021 and remind listeners of the core tenets of our business model. Our core business has generated a consistent distribution margin on the sale or handling of essential products to commercial and industrial customers in the Northeast and Eastern Canada. On top of the baseline margin, we often capture significant margin uplift when environmental or market factors leverage our advantaged assets and logistical capabilities. In refined products, this materializes when cold weather related demand stress translates to higher margin realization or a contangled market structure enables us to capture the value of our extensive storage assets. In natural gas, colder weather and cash market volatility generate logistical optimization opportunities, given our extensive customer franchise and available pipeline capacity. Our materials handling business, on the other hand, has been extremely rateable, underpinned by long-term contracts and healthy minimums. In 2021, it was natural gas' turn in the spotlight as global tightness in that commodity spilled into Northeast markets and provided opportunities for our team to leverage its ability to meet customers' gas requirements through multiple scheduling pathways. With a portfolio of approximately 15,000 commercial customers in the Northeast and decades of experience in navigating Northeast pipeline constraints, The SPREG team once again demonstrated what one of our covering analysts, back in the day when we enjoyed analyst coverage, characterized as a call option on Northeast gas market volatility. Given the continued difficulty in siting new gas infrastructure and the expected steady increase in near-term demand, we anticipate that we'll see further opportunities to leverage this expertise and grow the account base. As we enter our 152nd year in serving the evolving energy needs of commercial and industrial customers, my conviction grows even stronger that an all of the above energy strategy is required, and that Sprague is well positioned to capitalize on opportunities in both traditional and new forms of energy. Clearly, the recent price trajectory in both oil and natural gas highlights the global growth and demand as we emerge from pandemic-driven reductions and the need for increased production becomes clearer to all. The essential role that refined products played in power generation in ISO New England in January, when approximately 15% to 20% of power was generated by oil-fired generators, demonstrates the criticality of this resource and, by extension, spragues asset base in serving this essential need. At the same time, there's obviously increased attention and pressure on the carbon intensity of fuels at both the federal and state level, and we both support and expect those trends to continue. Sprague has long been a leader in the introduction of clean fuels into the Northeast markets, and we're committed to expanding that position in the coming years, whether it comes in the form of higher biodiesel plans, renewable diesel, or other low carbon liquid fuels being developed. We believe that renewable liquid fuels offer far greater efficacy as a heat source versus electric heat pumps, given the dramatically lower capital costs for consumers. We're pleased to see several northeastern states begin to recognize the potential of liquid renewable fuels to offer material, immediate reductions in greenhouse gas emissions relative to electrification, with its attendant high capital costs and consumer disruption. Sprague's extensive infrastructure and customer franchise is obviously well positioned to satisfy the increased demand for lower carbon liquid fuels. Finally, as I shared on our last call, we expect to invest in the provision of additional energy sources over the coming years, including the expansion of our solar tanks pilot into a broader distributed generation offering for our customers. We're also advancing efforts to participate in the substantial potential for offshore wind installations in the Gulf of Maine and expect to participate in trials of floating wind equipment in 2023. We also continue to explore prospects for production of renewable natural gas through the conversion of some of our tank infrastructure to digesters. We're thrilled to have a sponsor that brings considerable expertise and support to these initiatives as we position Sprague for the next stage in its evolution, serving the energy needs of commercial customers. In January, the board of our general partner declared a distribution of 43.38 cents per unit for the fourth quarter of 2021, which is flat to the previous quarter. Now I'd like to turn the call over to Dave Long for a detailed review of our fourth quarter and full year results. Dave.

Thank you, Dave, and good afternoon, everyone. As Dave highlighted, we were able to deliver solid results in 2021, particularly in our natural gas business. which performed well given supportive market dynamics in the Northeast US. Now let me review our 2021 fourth quarter and full year results. SPREG's quarterly adjusted gross margin increased by 2%, or $1.1 million to $71 million, as compared to the fourth quarter of 2020, while adjusted gross margin for the full year of $274 million was largely in line with the prior year. The consistent year-over-year results was a combination of factors whereby decreases in our refined products and material handling businesses were offset by comparable increases in our natural gas business. I'll provide more detail on the underlying results of each of these businesses shortly. Sprague's fourth quarter adjusted EBITDA of $27.5 million increased by $1.4 million, or 5% above the prior year, while adjusted EBITDA for the full year of $110.7 million decreased by $6 million, or 5%. Operating expenses for the fourth quarter increased by 15%, or $2.9 million, to $22.2 million, and for the full year increased by 5%, or $3.6 million, to $80.7 million. The year-over-year annual increase in operating expenses was primarily driven by an increase in insurance, utility, oil and fuel, and employee-related expenses. SG&A expenses of $21.3 million for the quarter decreased by 13%, or $3.2 million, while full-year SG&A of $82.7 million increased by 1%, or $1.2 million. The full-year increase was primarily due to higher insurance and incentive compensation expenses. Below the EBITDA line, SPREG's net cash interest expense declined on a quarterly and annual basis by 2% to $7.5 million and 17% to $28 million, respectively, principally due to lower net borrowing rates. Sprite's cash taxes of $2.7 million for the quarter were higher by $1.3 million, or 94%, while cash taxes for the full year of $5 million were lower by $2.8 million, or 36%. Maintenance CapEx for the fourth quarter and full year increased by $3.5 million, or 167%, to $5.7 million, and by $6.1 million, or 74%, to $14.4 million, respectively, and included projects to upgrade storage tanks, docks, and IT applications. Expansion CapEx decreased year-over-year by $1.5 million to $2.3 million. Distributable cash flow for the fourth quarter decreased by 52% to $8.1 million, while full-year results were lowered by 11% to $63.5 million. Sprague's distribution coverage ratio was 0.7 times for the fourth quarter and 1.1 times for the trailing 12 months at December 31st. At the end of the fourth quarter, Sprague's permanent leverage was 3.6 times, while our borrowing capacity under our working capital and acquisition lines was $171.8 million and $53.8 million, respectively, which we believe provides ample borrowing capacity to finance our near-term operating and growth needs. In terms of 2022 guidance, SPREG is targeting a full-year adjusted EBITDA of $105 million to $120 million. Now for discussion of our business segments. In refined products, Sprague's fourth quarter adjusted gross margin of $38.9 million decreased by 8% or $3.6 million, while full year results of $150.4 million decreased year-over-year by 12% or $21.2 million. Sales volumes for the quarter and full year increased by 13% or $49.9 million to $424.1 million and 10% or $137.9 million to $1.5 billion, respectively. The lower gross adjusted margins primarily result in substantially less attractive market conditions to purchase, store, and hedge oil inventory as compared to the strong container market of the prior year. In natural gas, the adjusted gross margin increased by 32% or $4.1 million to $16.7 million for the fourth quarter. while adjusted gross margin increased by 62% for $25.1 million to $65.8 million for the year. Volumes for both the quarter and the year were down by 10% and 1% respectively. The increase in adjusted gross margin was due to enhanced supply optimization opportunities, given increased price volatility in the Northeast US, as well as mark-to-market basis gains of our forward positions. The materials handling, SPREG's fourth quarter adjusted gross margin of $13.5 million was 3%, or $0.4 million lower than the same period a year ago, while full year results of $50.3 million decreased by 10%, or $5.9 million. The lower adjusted gross margins were primarily the result of reduced tank rental demand from third parties at our Canadian business, lower road salt and windmill component handling activity in the U.S., and a decline in asphalt handling activity given the sale of our Spiegel terminal in April 2021, which will partially offset a higher gypsum handling revenue given improved economic conditions. At this point, I'd like to open the call for questions.

As a reminder, if you'd like to ask a question, please press star then 1. If your question hasn't answered and you'd like to remove yourself from the queue, press the pound key. Again, that's star 1 to ask a question. To ask a question, that's star then one. I'm not showing any questions. I'd like to turn the call back over to David Glendon for any closing remarks.

Thank you very much, Michelle. Thanks to all for joining us on the call today, and we look forward to keeping you updated as the business develops. Have a great day, everyone.

This concludes the program. You may now disconnect.