Sunoco (SUN) Q4 2021 Earnings Call Transcript

Sunoco (SUN 0.61%)
Q4 2021 Earnings Call
Feb 16, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greeting, and welcome to Sunoco LP's fourth quarter 2021 earnings conference call. [Operator instructions] please note this conference is being recorded. I will now turn the conference over to your host, Scott Grischow. You may begin.

Scott Grischow -- Treasurer and Vice President of Investor Relations

Thank you, and good morning, everyone. On the call with me this morning are Joe Kim, Sunoco LP's president and chief executive officer; Karl Fails, 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, future operation, and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic.

Actual results to differ materially and the partnership undertakes no obligation to update these statements based on subsequent event. 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 certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP website for reconciliation of each financial measure.

Before I turn the call over to Dylan, I want to briefly cover the results for the fourth quarter of 2021. The partnership recorded net income of $100 million, compared to $83 million in the fourth quarter of 2020. Adjusted EBITDA was $198 million, compared to $159 million in the fourth quarter of 2020. The partnership sold $1.9 billion gallons in the fourth quarter, up 3% from the fourth quarter of last year.

Fuel margin for all gallons sold was $0.12 per gallon, compared to $9.02 per gallon a year ago. Total fourth quarter operating expenses of $123 million were higher on a year-over-year basis. Fourth quarter distributable cash flow as adjusted was $143 million, compared to $97 million in the fourth quarter of 2020, yielding a coverage ratio of 1.7 times. The coverage ratio for the full year, 2021 was 1.6 times.

Finally, on January 26th, we declared an $82.55 per unit distribution consistent with the last quarter, the durability of our business in the history of delivering results continues to support a stable and secure distribution for our unitholders. I will now turn the call over to Dylan to discuss the full year results and our outlook for 2022.

Dylan Bramhall -- Chief Financial Officer

Thanks, Scott. Before I walk you through our 2021 full year results and accomplishments, I'd like to make a few comments on a recently announced acquisition of the 23,000 barrels a day transmitter facility in Huntington, Indiana. This acquisition represents another really exciting opportunity to continue to build out our midstream asset base with a low risk, solid return deployment of capital. Our strong distribution coverage and balance sheet continue to allow SUN to invest in these types of opportunities, which will contribute additional value to our stakeholders for years to come.

Now, shifting over to our full year 2021 results and accomplishments, we recorded adjusted even of $754 million, above the midpoint of our 2021 guidance range and up 2% from 2020. Distributable cash flow as adjusted was $542 million, up 5% versus the prior year. We improved our already strong distribution coverage ratio to 1.6 times, up from 1.5 times in 2020 and 1.3 times in 2019. Our balance sheet and liquidity position remain strong with leverage at the end of the year, 4.17 times and availability on our credit facility of approximately $930 million.

Finally, our strong financial position allowed us to take advantage of a diversified set of growth opportunities in 2021, including the acquisition of 9 refined products terminals and the construction of a greenfield terminal in Brownsville terminal. With all of these accomplishments as the backdrop, we enter 2022 to continue to deliver strong results. In December, we provided guidance for 2022 adjusted EBITDA of between $770 million $810 million. Underpinning this guidance are the following assumption, fuel volumes in a range of 7.7 billion to 8.1 billion gallons.

Annual fuel margin between $10.5 and $11.5 per gallon. Total operating expenses between $490 million and $500 million. Maintenance capital of $50 million, in growth capital of approximately $150 million. The free cash flow generating capability of our operations allows us to focus on the pillars of our capital allocation strategy.

First, to maintain stable and secure distribution for our unitholders. Second, to protect our balance sheet through debt, pay down one prudent and third, to pursue disciplined investment in our growth opportunities, like the acquisition, which we announced today. We will be financially disciplined with the target coverage ratio of at least 1.4 times and a target leverage ratio of 4.0 times. So no quotes, consistent financial results throughout commodity cycles have become a hallmark of our partnership, and we expect 2022 will bring more of the same.

With that, I'll now turn the call over to Karl to walk through some additional thoughts on volumes, expenses, and our outlook for 2022. Karl. 

Karl Fails -- Chief Operations Officer

Thanks, Dylan. Good morning, everyone. We delivered another strong quarter supported by continued strength in margins and expense discipline. In addition, the contribution from our recently completed acquisitions have been in line with our expectations.

Volumes for the quarter were up 3% from last year. We did see some weakness creep into the end of the quarter as a result of the omicron variant spreading in the United States. This carried over into the beginning of January, but in the last couple of weeks we have seen volumes returning. Turning to margins.

In the fourth quarter, we delivered strong margins of $0.12 per gallon. Our strongest margin quarter in 2021. Increased volatility contributed. While, RBOB prices were flat from the beginning to the end of the quarter.

There was over a $0.50 per gallon spread from low to high during the quarter. In addition, we continue to see the benefit of higher break-even margins, including when volumes soften near the end of the quarter. That same market dynamic has carried into the beginning of this year. Turning to 2022, we expect another year of solid growth, and we are confident in achieving our EBITDA guidance despite potential impacts to volumes from the omicron variant, high crude prices, supply chain and labor issues, and general inflation, all of which we considered when we issued guidance.

With respect to volumes, first quarter volumes are typically the lowest of the year, primarily due to the lower number of days in the quarter. I mentioned earlier some impact from omicron. Again, I would remind everyone that if volume weakness were to sustain for a period of time, that we would expect it to be offset to some extent by higher break-even margins, as we've experienced for the last two years. As mentioned on last quarter's call, we have implemented strategies to deal with longer supply chains.

Even with those adjustments, supply chain challenges did contribute to lower than guided capital spend in 2021. But the lower 2021 capital spend does not impact our 2022 guide. Continuing with the subject of capital, the $150 million growth capex guidance provided in December will be primarily focused on expanding the fuel distribution business with some capital spent on our midstream operations. This includes the completion of our Brownsville terminal, which remains on track for commissioning by the end of the first quarter.

We're excited to bring this organically developed asset in service with our strong domestic demand, as well as the export opportunities from this strategic location. In addition, we're thrilled to announce another meaningful expansion to our midstream portfolio with a deal to acquire a 23,000 barrels per day mixed processing and terminal facility in Huntington, Indiana, for $190 million. The facility is the largest transmix plant in North America and has onsite product storage of approximately 750,000 barrels. The transaction is consistent with our strategy to grow and diversify our operations through the expansion of our midstream business and will be immediately accretive.

By the second year of operation, our acquisition multiple including synergies will be below seven times. We expect to close the acquisition late in the first quarter or early second quarter, subject to customary regulatory approvals. Let me spend a minute and explain why we are so excited by this deal. First, many of you will remember that we entered the transmix processing business over five years ago with the purchase of operations in Euless, Texas, and Birmingham, Alabama.

Those assets have been a solid contributor for us over the last five years and integrate well with our fuel distribution business. Margins are solid and transmix volumes have been even more stable than the related gasoline and diesel volumes. The Gladieux plant in Indiana is strategically located at the crossroads of [Inaudible] Midwest pipelines and trucking route and will build on our existing transmix operations. When you match up the strong underlying business with our proven operations track record, the synergy with our fuel distribution business and the attractive purchase price.

This deal is a great follow up to our new star acquisition we did last year. I will wrap up by stating that we were off to an exciting start to 2022 and as expected, we'll continue to focus on delivering results for our stakeholders through our proven recipe of gross profit optimization, delivering on expenses, solid and efficient operations, and growing our core business. Joe.

Joe Kim -- President and Chief Executive Officer

Thanks, Karl. Good morning, everyone. We delivered very strong results in 2021. We came into the year financially healthy and we finished the year stronger than where we started.

A few financial highlights from last year. We delivered record EBITDA, DCF. Our business remains highly resilient, and our capital expenditures continue to provide incremental EBITDA and DCF growth. Our LTM coverage ratio is now around 1.6 times, while our leverage ratio continues to decrease toward our 4 times target.

Year-after-year, we continue to deliver on our guidance and demonstrate the resilience of our business model. Looking forward, we expect to have another good year. We're about a month and a half into the new year. Karl provided some insights into volume and margin environment we're currently experiencing, factoring in the impact of the omicron variant.

We're learning to live with the virus, and we expect our volume to continue to grow as the year progresses, as you think about our business for 2022, keep in mind the following; The first quarter is performing and the profitability range that we expected when we provided guidance back in December. Underlying the first quarter as well as the rest of the year, industry break even continued to be high. We're seeing this play out as the market is passing on price increases to the rack and street. There will be times when short term margin pressure exists.

However, we believe the floor on overall margin is higher than historical averages; And finally, we have a proven track record of optimizing gross profit in both headwind and tailwind environment. We also have a proven track record of managing overall expenses. Bottom line, we expect to have another good year. Moving on to growth, we continue to strengthen our business by growing our midstream assets.

With the future edition of the Gladieux acquisition, and the start-up of the Brownsville terminal, we continue to vertically integrate our business. Terminals are a critical part of the field distribution value chain, and owning these asset helped us vertically integrate and capture a larger portion of the overall fuel distribution margin. If you look at our midstream acquisition as a project, they've all been part of an integrated play, the pure distribution business helps keep the terminals at a higher utilization rate in the terminals, provide our full distribution business, or their ability to grow. Financially, we executed these transactions that very attractive valuations, especially after adding synergy.

On the fuel distribution side will continue to grow organically as well as capitalize on acquisition opportunity. Let me close by stating that our current and future growth plans will build on our history of maintaining financial discipline, which means protecting the security of our distribution while also protecting our balance sheet. Operator, that concludes our prepared remarks. You may open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Theresa Chen with Barclays. Please proceed with your question.

Theresa Chen -- Barclays -- Analyst

Good morning, and thank you for taking my questions. I'd love to ask a couple more questions of clarification on the economics related to the Gladieux acquisition. So maybe, first going back to that 7 times multiple with synergies. Can you share with us what the LTM multiple was and from there to get to getting to 7 times? Are you primarily looking at cost synergies as if you're paying a third party terminal right now, you can take those volumes and put them through your captive system? Or are they part revenue related? Will you be able to sell additional products as a result of this acquisition?

Dylan Bramhall -- Chief Financial Officer

Yeah. Thanks for your question. Let me start off a little bit about the economics and I will let Karl walk through a little bit more detail on the synergies there. Yeah.

That seven or sub seven, once we get full synergies up and running here, there's only a very modest amount of synergies really getting us there. We're not too much higher than that on a multiple basis, right out of the gate. But the synergies really are is a bit of a mix of the various activities that we undertake on these and so forth. Karl, you want to give a little more detail on this.

Karl Fails -- Chief Operations Officer

Yeah, sure. Thanks, Dylan. If you look at it, Gladieux was operating as a separate company, so there clearly are some expense synergies will get just by folding that into our operation. The transmix business is really a regional business where you have transmix that is aggregated through the supply chain, a mix of gasoline and diesel, and then the transmix plans to separate it back out.

So this really serves the Midwest part of the country, and it's a good fit for us. There are some commercial opportunities where, as Joe mentioned in his prepared remarks, having physical assets is a good fit with our fuel distribution business, and provides a platform for us to grow. We already have some Midwest business, though not as much as in Indiana, so this should be a good opportunity for us to grow that.

Theresa Chen -- Barclays -- Analyst

Thank you. And I'd also like to follow up on some of Joe's comments about the first quarter outlook. I understand that, demand has bounced back and remains resilient, although we are in what seems like a relentless upward tape on wholesale gasoline prices, which typically is inversely correlated with your margins. But, I also understand that break-even margins the floor is higher as a result of the dynamics that you've discussed.

I was wondering in the first quarter, you typically get that annual 7-Eleven make up payment. And since it reflects 2020 and I'm sorry, 2021, and that's over now. Can you share with us how much you expect from that and what kind of boost to the CPG that could be?

Joe Kim -- President and Chief Executive Officer

Yeah. Sure, Theresa. On the 7-Eleven, as you pointed out, we get that makeup payment at the end of the first quarter and if it's really related to overall volumes, so I would say it will be closer to the payment we received in 2020 than the one we received last year. As far as your comment on overall first quarter outlook, the only thing I'd add to what Joe and I said in the prepared remarks is, clearly the the market provides some headwinds as it rises, but there has been a decent amount of volatility along the way, which I mentioned, contributed positively in the fourth quarter.

So that helped us with with some of our gross profit optimization strategies, deliver more solid results even in the face of some of those upward movement. 

Theresa Chen -- Barclays -- Analyst

Thank you.

Operator

Our next question comes from Gabe Moreen with Mizuho. Please proceed with your question.

Gabe Moreen -- Mizuho Securities -- Analyst

Morning, everyone. If I can just follow up on the transmix acquisition. Can you just talk about contractually how that's structured in terms  of fee based versus commodity and commodity sensitivity?Appreciating that you maybe had naturally further downstream. And then also from, I guess, the transmix supplier standpoint, how long do the contracts run with? I think some of these pipelines and is there any competition in the area? 

Karl Fails -- Chief Operations Officer

Yeah, Gabe, thanks for the questions. But the transmix processing business is, I'd say you take a margin on the processing, it's not really a fee based, but it is really stable because most of the transmix that we purchase, we purchase at a discount to gasoline and diesel. So when you're actually purchasing the product on a pricing structure tied to what you're going to make, you can imagine how that provides more stability. As far as as competition, really, there are, call it, about a dozen transmix processing plants across the country, and sometimes transmix is processed in refineries with other feedstocks.

And so I think naturally, the business has built up to where you have these plants spread out and situated, where transmix aggregates. So in theory, yes, there can be competition. But really, this is this is the premier Midwest transmix operation. 

Gabe Moreen -- Mizuho Securities -- Analyst

Great. Understood, and then maybe if I can just follow up in terms of asking -- on fuel margin for 4Q ticked up pretty nicely relative to prior quarters. Is there anything going on there in the numbers?

Scott Grischow -- Treasurer and Vice President of Investor Relations

Yeah, Gabe, this is Scott. Yeah, what's going on there is really the contribution from the new star acquisition. So all of the terminal [Audio gap] flowing into that, which we're not there in the first quarter.

Gabe Moreen -- Mizuho Securities -- Analyst

Got it. OK. Thanks, guys.

Operator

[Operator instructions] Our next question comes in the line of John Royall with JPMorgan Chase. Please proceed with your question.

John Royall -- J.P. Morgan -- Analyst

Hey, good morning, guys, thanks for taking my question. Most of mine have been asked, so just one follow up on the 7-Eleven makeup payment. But you guys are pretty clear on the expectations for this quarter. I'm just thinking into next year.

So the 1Q '23 payment, given that your volume guidance remained below pre-pandemic levels, and you've got some acquisitions in there, I think it's fair to assume from the guidance that we should be seeing a payment next year as well that [Inaudible] 

Scott Grischow -- Treasurer and Vice President of Investor Relations

Yeah, John. I think that's a reasonable expectation.

John Royall -- J.P. Morgan -- Analyst

OK. That was all I have. Thank you.

Operator

Our next question comes from Selman Akyol with Stifel. Please proceed with your question.

Selman Akyol -- Stifel Financial Corp. -- Analyst

Thank you. Good morning. I just wanted to follow up on the acquisition. As I sit there and look at it.

Your tankage there. It's like 30 times plus your through put is, is all of that? Does it have a high utilization as you look back over the last 12 months? Or are you thinking you might be able to increase utilization on the tankage for your distribution?

Dylan Bramhall -- Chief Financial Officer

Yes, Selman,. I think you look at tankage associated with transmix processing in the terminal associated with it, there's some there's some of that where you're going to aggregate, and maybe even segregate some different flavors of transmix, maybe segregated by sulfur content. So that uses some of the tankage and the rest of the tankage. Yeah, as you point out, is really on us commercially to be able to optimize and I'd stay, I won't necessarily comment as much on the previous operation, but clearly we feel that's a strong suit of ours is being able to take advantage of commercial opportunities.

And like I said earlier, hopefully grow our fuel distribution business to all things being equal. Yeah, I think we're going to find value in that. 

Selman Akyol -- Stifel Financial Corp. -- Analyst

All right. And then just one little thing there. Is there also a room there for expansion that if you want to increase your tankage there?

Dylan Bramhall -- Chief Financial Officer

There's some room, if that makes sense.

Selman Akyol -- Stifel Financial Corp. -- Analyst

Good. All right, thank you kindly.

Dylan Bramhall -- Chief Financial Officer

Thanks, Selman.

Operator

Our next question comes from Elvira Scotto with RBC Capital Markets. Please proceed with your question.

Elvira Scotto -- RBC Capital Markets -- Analyst

Hey, good morning. Just one question from me. Just a love your thought on, with gasoline prices high, overall inflation, pinching the consumer would love your thoughts on, how you think about potential demand destruction? And I know, the break even margins are higher, volumes go down for SUN, but just broader macro thoughts around that.

Karl Fails -- Chief Operations Officer

Yeah, Elvira. This is Karl, I'll share a few thoughts. On gasoline prices and maybe inflation in general, the first when you already commented on is that in many ways, the inflationary pressures are passed through in that they increase the break-even margins. And for our business, our business model, it really provide stability.

The other component from our standpoint is, it really is looking at it on a relative level. And so we think about the size and scale that we bring to the table really enables us in the face of those to maybe even capture a little bit more margin than some of the competitors. As far as the macro push I'd say, in the macro look in the short term. We don't see a big impact on demand, but clearly higher prices, history has shown that higher prices can change discretionary travel or choices like that.

We haven't seen a lot of that. In fact, we think there's some demand as we go into the spring and summer, just like we saw last year. That's what we're expecting. But the real answer there is, how long and how high the sustained prices are.

Still, my crystal ball is not perfect in that area, but we haven't seen anything the short-term.

Elvira Scotto -- RBC Capital Markets -- Analyst

Great. Thank you very much. 

Karl Fails -- Chief Operations Officer

You bet. 

Operator

Our next question comes from Ned Baramov with Wells Fargo. Please proceed with your question.

Ned Baramov -- Wells Fargo Securities -- Analyst

Hey, good morning, thanks for taking the question. Now that you've operated the new star in [Inaudible] assets for a few months, could you maybe talk about potential investment, opportunities, in and around these assets? 

Karl Fails -- Chief Operations Officer

Sure, Ned. This is Karl, again. You heard me mentioned on last quarter's call that if anything we had identified maybe a few more opportunities since we gained ownership than we initially had planned on. That's still true.

I'll say there's there's no sizable or material investment or opportunities there. They're all incremental on the margin, but generally positive relative to what we originally assumed.

Ned Baramov -- Wells Fargo Securities -- Analyst

Got it. And then just one clarification on the transmix deal. Is the transaction immediately accretive or accretive in the first year of operation? 

Karl Fails -- Chief Operations Officer

Yeah, it's immediately accretive, I guess, I had to come in right out of the gate. We're kind of some 8 times multiple force energies and so we're going to start picking up accretion day one on this acquisition.

Ned Baramov -- Wells Fargo Securities -- Analyst

Great, thank you, that's all I had.

Operator

We have reached the end of the question-and-answer session. I will now turn the call back over to Scott Grischow for closing.

Scott Grischow -- Treasurer and Vice President of Investor Relations

Thanks for joining us on the call today. As always, please feel free to reach out with any questions. Have a great day.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Scott Grischow -- Treasurer and Vice President of Investor Relations

Dylan Bramhall -- Chief Financial Officer

Karl Fails -- Chief Operations Officer

Joe Kim -- President and Chief Executive Officer

Theresa Chen -- Barclays -- Analyst

Gabe Moreen -- Mizuho Securities -- Analyst

John Royall -- J.P. Morgan -- Analyst

Selman Akyol -- Stifel Financial Corp. -- Analyst

Elvira Scotto -- RBC Capital Markets -- Analyst

Ned Baramov -- Wells Fargo Securities -- Analyst

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