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spk06: Hello, and welcome to the Sunoco third quarter 2022 conference call. At this time, all participants are listed in a remote. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Scott Grishow. Please go ahead.
spk05: Thank you, and good morning, everyone. On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer, Carl Fales, Chief Operations Officer, Dylan Bramhall, Chief Financial Officer, and other members of the management team. Today's call will contain forward-looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the partnership's future operations and financial performance. Actual results could differ materially, and the partnership undertakes no obligation to update these statements based on subsequent events. Please refer to our earnings release as well as our filings with the SEC for a list of these factors. During today's call, we will also discuss the non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the SNOCO LP website for reconciliation of each financial measure. I will now turn the call over to Dylan to discuss the third quarter results, our outlook for the remainder of 2022, and our recently announced peerless oil and chemical acquisition.
spk03: Thanks, Scott. We reported very strong third quarter results. The steep and persistent decline in commodity prices and continued volatility enabled strong margin capture. The meaningful capital that has been deployed over the past year is delivering strong returns and we continue to find new attractive opportunities to invest capital both organically and through acquisitions. Our balance sheet is strong with leverage below our four times target, and we continue to generate meaningful cash flow for redeployment. Sunoco's consistent financial results throughout commodity cycles and various macro environments are a hallmark of our partnership, and we expect a solid finish to 2022. Moving on to Q3 results, the partnership recorded net income of $83 million, an adjusted EBITDA of $276 million, compared to $104 million and $198 million, respectively, in the third quarter of 2021. Volumes were approximately 2 billion gallons, up about 1% year over year. Fuel margin was 13.9 cents per gallon versus 11.3 cents per gallon in the third quarter of 2021. The fuel margin benefited from some timing impacts that added approximately 1.3 cents per gallon. Total operating expenses in the third quarter were $131 million, up from $113 million in the third quarter of last year. This increase was primarily driven by our deployment of growth capital, namely the New Star and Gladio Energy acquisitions, and bringing the Brownsville Terminal into operation. Third quarter distributable cash flow, as adjusted, was $196 million, yielding a current quarter coverage ratio of 2.2 times and a trailing 12-month coverage ratio of 1.8 times. On October 25th, we declared an 82.55 cent per unit distribution consistent with last quarter. Leverage at the end of the quarter was 3.7 times, a decrease from the second quarter reflecting higher EBITDA and lower revolver borrowings. We expect to maintain leverage near our long-term target of 4.0 times as the year concludes. In Q3, we began gasoline blending operations in New York Harbor at our Linden Terminal, which contribute to some of the strength in the quarter. Earlier, I mentioned some timing impacts to fuel margin, which are primarily related to this activity. Due to commodity market structure and inventory balances, approximately $25 million of margin was accelerated from the fourth quarter, benefiting the third quarter. Therefore, from a margin perspective, it will make sense to look at the second half of 2022 in its entirety. As a result of the strong performance year to date and our expectations for the remainder of the year, we are again increasing our full year 2022 adjusted EBITDA guidance to $845 to $865 million, excluding the recently announced peerless oil and chemical acquisition. This $70 million acquisition expands our operations into the Caribbean and will be immediately accretive to unit holder value. An expected five to six times EBITDA multiple, including synergies, This transaction demonstrates our continued ability to deploy capital at attractive valuations while expanding and diversifying our core operations. 2022 is closing on a strong note and further demonstrates the continued effectiveness of our capital allocation strategy to enhance unit holder value. The three foundational pillars are one, maintaining a stable and secure distribution for our unit holders. Second, protecting our balance sheet through debt pay down when prudent, and third, disciplined investment, and growth opportunities. With that, I will now turn the call over to Carl to walk through some operational details underpinning our third quarter results, the remainder of 2022, and the attractive opportunity that we see in Puerto Rico. Carl?
spk02: Thanks, Dylan. Good morning, everyone. Our team delivered another very strong quarter supported by exceptional margin strength, consistent expense discipline, and solid operations from both our core business and our recent investments. Starting with volumes, we were up about 1% in the third quarter versus the third quarter of last year and flat with the second quarter of this year. As prices have fallen from mid-year highs, we have seen improved volume performance relative to prior years, which is an improvement from our second quarter commentary. While there are various factors that can impact volumes, Particularly on the gasoline side, we believe that the steep decline in prices during the third quarter contributed to this performance. As we look forward, the direction from here will depend largely on the trajectory of fuel prices and that of the broader economy. The good news is that regardless of the path that volumes take, we are confident that margins will support consistent cash flows as break-evens continue to provide a reliable volume offset and our margin optimization strategies deliver protection on the downside and benefits in favorable conditions as we experience this past quarter. On to margins, which were very strong in the third quarter. There are a few points worth highlighting. First, prices fell significantly during the quarter with RBOB decreasing over a dollar per gallon and diesel falling over 50 cents per gallon. As we have highlighted in the past, These conditions typically result in margin strength and this quarter was no exception. In addition to the fall in prices from the beginning of the quarter to the end of the quarter, there was significant price volatility during the quarter, which also provided positive support to margins. The final point that I will make is that the investments that we've made over the past few years are contributing to the bottom line. Two that I will highlight are the startup of a gasoline blending business in New York Harbor that Dylan mentioned, as well as better than expected performance of the assets we acquired from Gladio. In the past, we've talked about the asymmetric performance risk of our business during market movements, and 2022 is confirming this dynamic. In the first half of the year, we demonstrated solid performance during the headwinds of a rising commodity environment. And our third quarter results provide evidence of our ability to capitalize and deliver upside during favorable market environments. all while maintaining expense and capital discipline. Dylan shared our updated guidance for the full year, highlighting the outperformance of our overall business. If we step back and think about the third quarter, even considering the acceleration of margin from the fourth quarter, we delivered over $250 million of EBITDA. We have revised our guidance twice this year, both times moving up. The first revision came because of the Gladio acquisition. Today's revision comes as a result of outperformance in the second half of the year as we capitalize on what the market provides. Our portfolio of organic investments and acquisitions are delivering on expectations. We expect nothing less from the recently announced expansion of our midstream and fuel distribution businesses in Puerto Rico with the purchase of peerless oil and chemical. Peerless is an integrated business similar to Snoko's existing business and consists of fuel distribution through nearly 100 contracted service stations, almost all of which carry the proprietary EcoMax brand, as well as a terminal with 1.6 million barrels of refined product storage. The business has a deepwater port for import-export as well as a roll-on, roll-off barge dock that supports an export business to neighboring islands. Our growth strategy has been focused on adding fuel distribution and midstream income at attractive returns, particularly where there are synergies between the two. The peerless acquisition is a strategic fit with this approach for a few key reasons. First, the business has been a well-run and growing part of the Puerto Rican economy for decades. We expect consistent demand for traditional motor fuels in Puerto Rico over the long term. Second, The Peerless platform is well positioned for expansion both in Puerto Rico and in the neighboring Caribbean islands. Third, and finally, as Dylan mentioned earlier, at an expected five to six times EBITDA multiple after Synergies, the transaction is another example of our ability to deploy capital with attractive returns to our unit holders. We're very excited about this business and look forward to welcoming the Peerless employees to the Sunoco team. Before turning the time over to Joe, I want to reinforce the same foundation of our success that I've mentioned many times over the past few years. Solid business model enhanced with robust gross profit optimization, an intense focus on expenses, consistent and reliable operations, and a growth program that delivers results to the bottom line. We expect the Peerless acquisition to be another example of where this recipe will produce strong results.
spk01: Thanks, Carl. Good morning, everyone. We delivered a very strong third quarter. Although 2022 is not quite over, I want to provide some perspective on our performance this year. From a macro perspective, 2022 has been highly volatile. We experienced early year COVID spikes to record high fuel prices this summer to a gradual demand recovery this fall. Within these differing market conditions, our portfolio of income streams and our ability to execute on our strategy has allowed us to deliver good results quarter after quarter. As for the fourth quarter, we expect to have another good quarter. When you look at 2022 in totality, we expect to grow adjusted EBITDA by 13% year over year, using the midpoint of our revised guidance. We have also successfully integrated recent acquisitions and deployed organic growth capital that has delivered solid returns while maintaining expense discipline. We'll continue to source and execute on attractive opportunities to deploy our increasing free cash flow. All of this while growing our coverage ratio and maintaining a solid balance sheet. We expect more of the same in 2023. This December, we'll provide a new investor presentation, which will include our formal 2023 guidance. I'd like to preview a few key themes. We expect to have another strong year in 2023. Our proven track record of improving performance through periods of material turbulence and volatility are compelling investment attributes. Regardless of one's view on demand outlook, inflation and recession risk, and geopolitical uncertainty, we expect our stable portfolio of income streams to continue to deliver strong results in various scenarios. Operator, that concludes our prepared remarks. You may open the line for questions.
spk06: Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question today, please press star 1 on your telephone keypad. Our first question today is coming from Elvira Scotto from RBC Capital Markets. Your line is now live.
spk00: Hey, good morning, everyone. Can you provide maybe a little bit more detail on the guidance increase for the year? You did mention that $25 million of margin moved into the third quarter from the fourth quarter. You raised your guidance by about, I think, about $50 million. So can you just provide maybe a little bit more detail on what's driving that increase?
spk03: Yeah, good question. Yeah, so on the increase, you know, a lot of this is a result of what we're seeing with fuel margins here in the second half of the year. You know, I think in the prepared remarks made a comment about needing to look at Q3 and Q4 in totality because a little bit of the shift in earnings between the quarters there. But when you look at that as a whole, what we really see is the strong fuel margins that we saw building through the first part of the year have really been strong in the second half of the year. And so when we look at primarily the results of Q3 and what we see for Q4 around those, it made sense for us to bump the range up to the new 845 to 865.
spk00: Okay, that's helpful. And then can you provide a little bit of color on what you're seeing in terms of volumes, maybe what you saw in October volumes year over year and how that's trended versus maybe like September as well?
spk02: Sure, Elvira. This is Carl. I mentioned in my prepared remarks that, you know, we were seeing trends as you compared to last year or even back to 2020 or 2019, better performance in the third quarter than what we talked about in the second quarter. And that's continued into the fourth quarter. I mean, there's a lot of factors going into that volume performance. You know, we mentioned we felt there was some from the lower prices on gasoline in the third quarter. But, you know, it's hard to parse out exactly all the different factors. It depends on, you know, seasonality, overall economic picture, driving patterns. But, yeah, that better performance in second quarter has continued.
spk00: Great. Thanks. And then just the last one for me with respect to the peerless oil and chemical. acquisition. I think you mentioned that it's a five to six times EBITDA multiple after synergies. Could you maybe provide a little more detail on the types of synergies that you're expecting and, you know, any other quantification of synergies?
spk02: Sure. This is Carl again. Definitely, as we look at it, there are commercial synergies as we figure out how to integrate with the rest of our business in the southeast of the United States and the Gulf of Mexico. There are some expense synergies as well, but those come really from the utilization or taking advantage of our scale and overall services or contracts. We like the team that we are acquiring in Puerto Rico, and if anything, look to grow that team as we, I think I mentioned, the opportunity to expand both in Puerto Rico and into neighboring islands. So any expense synergies we get there will really be by leveraging our overall scale.
spk00: Great. Thank you very much.
spk06: Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Robert Moskup from Mizzou Hill. Your line is now live.
spk04: Hi. Good morning, everyone. Thanks for taking my question. Kind of want to start off at Linden. Can you just talk about the blending activities there? Is this just a natural extension of managing volumes at that terminal? And was this a capability you guys acquired in the NS acquisition? And aware that blending margins are strong right now, but how do you envision this being a part of the income stream going forward, maybe on a more run rate basis?
spk02: Yeah, sure. If you look at our Linden operation, when we purchased this back about a year ago, The terminal was full. We have, you know, we had a customer base that we were happy with, and the assets continued to perform over the last year. There was, you know, a changeover in some of the contracts there, and really there was plenty of demand for utilization of that terminal. We looked at it as an opportunity for customers you know, getting into this gasoline blending operation. It's something I've looked at for a number of years. The gasoline blending that we're talking about is a little more than just butane blending that I think people often talk about. It's really, you know, buying different components and blending that into finished gasoline. And much of the gasoline that we buy to sell in New York Harbor, we bought from other people that were doing that blending operation and So this was really an opportunity for us to lower our cost of goods sold and do that activity ourselves. We have the capability on our supply and trading team. So really, that's a little more detail on what we're looking at, and we think it should decrease our cost of goods sold on an annualized basis over the coming years.
spk04: Got it. That's interesting stuff. And maybe... You know, going back to peerless, in your transaction math, are you kind of assuming margins similar to the rest of your wholesale portfolio? Just curious what margins look like in Puerto Rico, which presumably has a different consumption profile compared to lower 48. And then you mentioned expansions not only in Puerto Rico, but in the Caribbean. So I guess what's driving the interest there? Is it just prospects for higher margins and maybe not as much lower hanging fruit in the U.S.? ?
spk02: Yeah, I think as we've looked at the peerless portfolio, you've heard Joe and I talk about that even in our existing business, we operate a portfolio of income streams, and you have some volumes that you sell at higher margins, and then you have some volumes that you sell at lower margins, depending on the customer base. And that exists on a smaller scale in the peerless acquisition. They They have their own proprietary brand of EcoMax stations that they sell to on the island, and that's a nice, stable volume, and that has been growing over the last number of years. But in addition, they sell to commercial customers and other industrial customers, and they currently have an export business where they load trucks loaded on what they call a row-row or a roll-on, roll-off, barge dock and then send that product over to neighboring islands. They've already done that. My comments are really we think there's opportunity to expand that beyond what they're doing today.
spk04: Got it. That's a great color. Thanks for the time, everyone.
spk06: Thank you. We reach into our question and answer session. I'd like to turn the floor back over to Scott for any further or closing comments.
spk05: Thanks, everyone, for joining us on the call this morning. I recognize it was a busy morning for most of you, so please feel free to reach out to me with any follow-up questions. Otherwise, we look forward to seeing some of our investors in a couple of weeks at the RBC conference here in Dallas. Have a good day, everyone.
spk06: Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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