Sprague Resources LP (SRLP) Q2 2019 Earnings Call Transcript

SRLP earnings call for the period ending June 30, 2019.

Motley Fool Transcribers
Motley Fool Transcribers
Aug 7, 2019 at 11:23PM
Energy, Materials, and Utilities
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Sprague Resources LP (NYSE:SRLP)
Q2 2019 Earnings Call
Aug 7, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to the Sprague Resources' LP Q2 2019 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host Mr. David Glendon, President and CEO. Sir, you may begin.

David Glendon -- President and Chief Executive Officer

Thank you, Valorie. Good afternoon everyone and welcome to Sprague Resources' second quarter 2019 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 Sprague 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-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.

In the second quarter 2019, Sprague generated total adjusted gross margin of $48.3 million and adjusted EBITDA of $9.7 million. The seasonal nature of our business generates lower results in the second and third quarters, but each our three commercial businesses performed in line with our expectations.

Also, our recent cost reduction efforts are bearing fruit. As we saw material reductions in our operating and SG&A expenses relative to the prior year, a trend which we expect to continue. Looking forward, I'm encouraged that market conditions are showing signs of improvement.

Notably, the distillate forward curve remains in modest contango for the back half of 2019. As listeners know, contango or carry structure makes storage assets like Sprague system more valuable. Recent closures and repurposing of Northeast refined product assets is also expected to make remaining terminal storage more critical.

We continue to follow congressional action regarding the reinstatement of the biodiesel blenders' tax credit and we're optimistic that something will get past this calendar year, which would provide significant opportunities for additional blending economics in our distillate business.

In the natural gas business, we expect lower pipeline maintenance programs for the remainder of 2019, enabling our logistic activities to potentially generate more optimization benefits.

Finally, while the convergence of sulfur specifications in Northeast heating oil markets limited our blending activities in 2018, we noted that this development would also facilitate the repurposing of tanks to alternative services and lower our working capital costs by eliminating the requirement to store multiple grades of distillate products.

In the second quarter, we converted several additional facilities to a fungible inventory position, enabling us to end the quarter with 40% lower distillate inventory levels than a year ago. These factors provide confidence in maintaining our 2019 guidance figures and support our current distribution base.

In July 2019, the Board of our general partner declared a distribution of $0.6675 per unit for the second quarter of 2019, reflecting a 2% increase over the Q2 2018 distribution.

Now, I'd like to turn the call over to Dave Long for a detailed review of our second quarter results. Dave?

David C. Long -- Chief Financial Officer

Thank you, Dave, and good afternoon everyone. Sprague's quarterly adjusted gross margin declined by 3% or $1.4 million to $48.3 million as compared to the second quarter of 2018. Sprague's refined products and natural gas segments experienced modest declines, while our materials handling business was flat relative to a year ago.

Sprague's second quarter adjusted EBITDA of $9.7 million increased by $0.4 million or 4%. As the modest decline in adjusted gross margin was more than offset by cost reductions. Operating expenses decreased by 5% or $1.2 million in the second quarter, primarily due to lower insurance, legal and employee related expenses.

SG&A expenses decreased by $0.7 million, or 4%, primarily due to employee related costs associated with our ongoing cost reduction initiatives, along with lower audit, legal and acquisition related expenses.

Net cash interest expense of $8.6 million in the second quarter increased by $0.7 million or 9%, due to higher interest rates on our floating rate debt. Sprague's cash taxes increased by $2.0 million to $1.7 million, while year-on-year quarterly maintenance capex, which included various IT and terminal related projects decreased by $1.4 million or 42% to $2.0 million.

Primarily due to higher interest expense in cash taxes, Sprague's distributable cash flow for the second quarter declined modestly to a negative $2.6 million, generating a quarterly distribution coverage ratio of negative 0.15 times. On a year-to-date basis, Sprague's distribution coverage ratio is 1.07 times.

At the end of the second quarter, Sprague's permanent leverage was 3.4 times, down from 3.6 times at December 31st, while our borrowing capacity under our working capital and acquisition lines is $274 million at quarter end.

With regard to 2019 guidance,, we continue to target full year adjusted EBITDA of $105 million to $125 million and intend to maintain distributions at current levels.

And now a discussion of our business segments. In refined products, sales volume declined by 8% for the quarter, primarily due to much warmer conditions in April relative to a year ago. Adjusted gross margin declined by $1.0 million or 4% to $27.6 million with higher adjusted unit margin realization in our delivered business somewhat offset the volume decline.

In natural gas, sales volumes for the quarter increased by 5% year-over-year, while adjusted gross margin declined by $0.4 million or 8% to $4.6 million. The higher volumes were due to the on-boarding of new customers, while the decline in unit margins was largely the result of higher pipeline capacity costs and competitive intensity.

In materials handling, the second quarter adjusted gross margin was $14.3 million. Sprague's U.S. material handling business increased slightly quarter-on-quarter, given seasonal timing of bulk deliveries, offset by reductions in heavy lift activity.

While Kildair's material handling business decline modestly given reduced activity associated with the exploration of the crude by rail contract.

At this point, I'd like to open the call for questions.

Questions and Answers:

Operator

Thank you.

[Operator Instructions]. Our first question comes from Jeremy Tonet of JP Morgan. Your line is open.

Charlie Barber -- J.P. Morgan -- Analyst

Hey, good afternoon. This is Charlie on for Jeremy. First question was just related to the Philadelphia Energy Solutions refinery. I'm just curious if you could talk broadly about kind of the implications to your business, specifically kind of looking toward third quarter of 2019 and maybe any structural changes longer term?

David Glendon -- President and Chief Executive Officer

Sure. Hey, Charlie, it's Dave Glendon. So, I would say, generally speaking, a couple of things. One is the market reaction to the PES closure has been pretty swift and actually even a little bit surprising in that how quickly the refined products markets have adapted to the absence of that capacity.

So I would say, generally speaking, the absence of that storage capacity and pad one, increases the short in pad one and therefore other storage should increase in value to accommodate that. But having said that, we have seen a remarkable ability for European, particularly gasoline, but also to some extent desolate cargoes to supplement the absence of that refinery capacity.

So I think if you turn to the colonial pipeline line space trade right around that, it did go from what had been negative values forever, to a positive value associated with colonial line space for about a week or so then it quickly reverted back to negative values as the European refineries started shipping product here. So I read today that we set an all-time record for gasoline cargos from Europe to the U.S. pad one over the course of the last month or so and again it's been surprising to me how quickly the markets have been able to react.

But generally speaking, I'd say as we go into the winter in particular, I would expect that this would lead to a slight increase premium and storage values in the Northeast of the U.S.

Charlie Barber -- J.P. Morgan -- Analyst

Great, that's certainly helpful. Turning to Appalachian thinking about what we've seen coming out of some other producers and thinking about common energy, curious to got any high level kind of thoughts on that business and kind of reactionary to what we're seeing coming from producers lately?

David Glendon -- President and Chief Executive Officer

Yeah. I would say that our activity in Coen and Sprague PA [Phonetic] confirms what we're hearing from the producers that the amount of fracing and drilling activity has taken up a notch down if you will. So we are seeing that impact on our Pennsylvania business and we've been in a process in that Pennsylvania business and trying to grow our additional commercial fuels business to supplement the energy field services business.

But no question energy field services remains -- it's growing certainly less quickly than we would have anticipated at higher commodity price levels even six months ago.

Charlie Barber -- J.P. Morgan -- Analyst

All right and then one last one from me, you've mentioned it in the opening remarks the biodiesel blenders' tax credit. I think you had sentiment about maybe a potential resolution by year end any other color there, any specifics you could mention?

David Glendon -- President and Chief Executive Officer

Yeah. I mean you can find people who are far closer to it certainly than I am, but we are watching it carefully and participating in it. There appears to be widespread by bipartisan agreement on the extenders being retroactively reinstated and passed on a go-forward basis. It -- the challenge I think has been finding a bill to attach it to, that gets widespread agreement.

So we've talked to folks on both sides of the aisle who remain supportive. You have got a lot of sponsors of the bill, but again finding the ability to attach it to the must pass legislation has been the handicap to this point in time.

Charlie Barber -- J.P. Morgan -- Analyst

All right, great. Thank you. That's it from me.

Operator

Thank you.

David Glendon -- President and Chief Executive Officer

Thanks, Charlie.

Operator

[Operator Closing Remarks].

Duration: 13 minutes

Call participants:

David Glendon -- President and Chief Executive Officer

David C. Long -- Chief Financial Officer

Charlie Barber -- J.P. Morgan -- Analyst

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