Sunoco LP (NYSE:SUN) Q4 2022 Earnings Call Transcript February 15, 2023
Operator: Greetings, and welcome to the Sunoco LP’s Fourth Quarter and Full Year 2022 Earnings Conference Call. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Grischow, Senior Vice President of Investor Relations and Treasury. Thank you, sir. You may begin.
Scott Grischow: 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’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 certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP website for a reconciliation of each financial measure. I’d like to start the call by looking at some of our fourth quarter and full year 2022 highlights. Adjusted EBITDA for the fourth quarter was $238 million compared to $198 million a year ago, an increase of 20%. The partnership sold 2 billion gallons in the fourth quarter, up 5% from the fourth quarter of last year. Fuel margin for all gallons sold was $0.128 per gallon compared to $0.12 per gallon a year ago. Total fourth quarter operating expenses were $138 million, an increase of $15 million from the same period last year.
Fourth quarter distributable cash flow as adjusted was $153 million compared to $143 million in the fourth quarter of 2021, yielding a coverage ratio of 1.8x. Our coverage ratio for the full year 2022 was 1.9x. On January 25, we declared an $0.8255 per unit distribution, consistent with last quarter. The stability of our business and history of delivering results continues to support a stable and secure distribution for unitholders. Finally, on November 30, we completed the acquisition of Peerless Oil & Chemicals, Inc., an established terminal operator and fuel distributor within Puerto Rico and throughout the Caribbean. Now shifting over to our full year 2022 results and accomplishments. We delivered adjusted EBITDA of $919 million, up 22% from last year.
Distributable cash flow as adjusted was $650 million, up 20% versus the prior year. We improved our coverage ratio to 1.9x, up from 1.6x in 2021 and 1.5x in 2020. Our liquidity position and balance sheet remains strong with availability on our credit facility of approximately $600 million and leverage at the end of the year of 3.8x, below our target of 4.0x. Finally, our strong financial position allowed us to take advantage of a diversified set of growth opportunities in 2022, including the acquisition of Gladieux Energy and Peerless Oil & Chemical. With all these accomplishments as a backdrop, we enter 2023 poised to continue to deliver strong results. And I would like to take a moment to reaffirm our 2023 adjusted EBITDA guidance of between $850 million and $900 million.
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Underpinning this guidance are the following assumptions: steel volumes of approximately 7.8 billion gallons and fuel margin of approximately $0.12 per gallon, total operating expenses of between $525 million and $535 million, maintenance capital of approximately $60 million and growth capital of at least $150 million. Our strong distribution coverage and balance sheet continued to allow Sunoco to invest in growth opportunities, which will contribute additional value to our stakeholders for years to come. Stable base business, combined with the contributions from acquisitions and organic growth will continue to generate free cash flow and allow us to focus on the 3 pillars of our capital allocation strategy: first, to maintain a secure distribution for our unitholders; second, to protect our balance sheet; and third, to continue to pursue disciplined investment and growth opportunities.
Sunoco’s consistent financial results throughout various macroeconomic environments have become the hallmark of our partnership, and we expect 2023 will bring more of the same. With that, I will now turn the call over to Karl.
Karl Fails: Thanks, Scott. Good morning, everyone. Our team delivered yet another great quarter, supported by continued margin strength, consistent expense discipline and solid operations from both our core business and our recent investments. Starting with volumes. We were up about 5% in the fourth quarter versus the fourth quarter of last year and flat with the third quarter of this year. We have continued to see improved volume performance relative to prior years as we have realized volume contributions from our capital deployed, both organic and through acquisitions. With respect to margins, margin performance over the last few years continued in the fourth quarter. There are a few consistent themes that contributed to these margins.
First, the fourth quarter began with a strong margin tailwind from dramatic price declines during the third quarter. Second, if we look at overall price movement during the fourth quarter, both gasoline and diesel futures ended the quarter about where they started, but there was significant price volatility during the quarter, which supported margins. In addition, we continue to see the benefit of higher breakeven margins. And finally, the investments that we have made over the past few years are contributing to the bottom line. Specifically, we had 1 month of our Peerless acquisition as well as a full quarter of our New York Harbor blending operations. If we look at the entire year, our financial performance was a tale of 2 halves that clearly supports the asymmetric risk profile of our business that we have discussed before.
In the first half of the year, we were able to demonstrate solid results during the headwinds of rising commodity prices, while the second half continued to show our ability to capitalize and deliver upside during favorable market conditions. All the while maintaining expense and capital discipline in any market environment. In regards to expenses, we did see an uptick in the fourth quarter from the third quarter. This is primarily due to the closing of our Peerless acquisition on December 1 and other employee expenses. Expense management remains one of our core strengths. And as we always have been, we remain committed to achieving our 2023 expense guidance. As we look forward into all aspects of our 2023 business, we expect another strong year.
As we sit here today, we don’t know exactly what the overall economic conditions will be or where our product prices will go. We do have much more confidence that breakeven margins will remain elevated and that commodity markets will remain volatile. As our business has shown over the past few years, regardless of the market condition, we expect solid results. Our portfolio of organic investments and acquisitions continues to deliver on expectations. We are especially excited about the 2023 opportunities provided with our most recent acquisition of Peerless. While we have only operated the business for a little over 2 months, our synergy capture is ahead of schedule and we expect the business to outpace our original deal assumptions. More broadly, we are confident that we will continue to be successful in deploying capital, whether through organic growth or additional transactions.
Before turning the time over to Joe, I will wrap up by stating that we are off to a very good start to 2023. And as expected, we’ll continue to focus on delivering results for our stakeholders through our proven strategy of gross profit optimization, delivering on expenses, solid and efficient operations and growing our core business. Joe?
Joseph Kim: Thanks, Karl. Good morning, everyone. We delivered a very strong year in 2022. We came into the year financially healthy, and we finished stronger than where we started. I’d like to point out a few financial highlights from 2022. Our business remains highly resilient within various macro environments. Our capital deployment continues to provide incremental EBITDA and DCF growth. As a result, we delivered a record year for both EBITDA and DCF. Our LTM coverage ratio is now around 1.9x, while our leverage ratio continues to stay below our 4x target. Looking forward, we expect 2023 to be another strong year. We provided guidance back in December. We’re about 1.5 months into the new year, and we’re off to a very good start.
As you think about our business for 2023, keep in mind the following: regardless of one’s future outlook, we have a proven track record of performance through periods of economic and geopolitical volatility. Our portfolio of income stream and our ability to execute on our strategy has allowed us to deliver solid to strong results quarter after quarter. We will build on our history of strong expense management, coupled with effective and responsible capital deployment. On the subject of growth, we will continue to look for value by and investment opportunities to strengthen and vertically integrate both our midstream and fuel distribution business. All this built on keeping our balance sheet strong. Bottom line, we expect to have another strong year in 2023.
Operator, that concludes our prepared remarks. You may open the line for questions.
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