Greetings, and welcome to Sunoco Second Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Scott Grischow, Senior Director of Investor Relations and Treasury.
Please go ahead.
Thank you. Before we begin our prepared remarks, I have a few of the usual items to cover. A reminder that today's call will contain forward looking statements. These statements are based on management's beliefs, expectations and assumptions. They may include comments regarding the company's objectives, targets, plans, strategies, costs and anticipated capital expenditures.
They are subject to the risks and uncertainties that could cause the actual results to differ materially as described more fully in the company's filings with the SEC. 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 this quarter's news release for a reconciliation of each financial measure. Please note that SUN has moved the operating results, assets and liabilities of our operations that are part of our retail divestitures into discontinued operations. As such, the results presented on today's call are based on continuing operations unless otherwise noted.
Also, a reminder that the information reported on this call speaks only to the company's view as of today, August 9, 2018. The time sensitive information may no longer be accurate at the time of any replay. You will find information on the replay in this quarter's earnings release. Last night, we posted an updated investor presentation to our website. Certain slides in that presentation will be referenced on today's call.
On the call with me this morning are Joe Kim, Sunoco LP's President and Chief Executive Officer Tom Miller, Chief Financial Officer Carl Thales, Chief Commercial Officer and other members of the management team. Before I turn the call over to Tom, I would like to first review some of the partnership's accomplishments and activities since the end of the Q1. On April 1, we completed the conversion of our 207 fuel outlets located in West Texas to commission agent sites. Later in April as part of the FTC resolution, we converted an additional 59 retail sites to the commission agent channel, 26 of which were acquired from 711 with the remainder being former Sunoco company operated locations. Turning to our 711 fuel supply agreement.
The 15 year take or pay agreement began on April 1 and the commitment included the first step up for the guaranteed growth volume component of 100,000,000 gallons. Remaining annual growth components will phase in each April with growth of 200,000,000 gallons in April of 2019 and 100,000,000 gallons in each of 2020 2021. We are pleased with the 711 supply agreement and the stable source of income the agreement provides. That said, I do want to note that while committed volumes are an essential metric under the supply agreement, the timing and quantity of fuel deliveries are a product of a number of factors, which includes 711's fuel strategy for optimizing gross profit through pricing and volume decisions. As a result, it is important to keep in mind that the de facto guarantee under the supply agreement is one of an annual minimum dollar margin, not a volume commitment.
In the Q2, Sun made a total of $260,000,000 in tax payments related to the 711 sale and we anticipate 2 additional payments, one payment occurring in each of the 3rd and 4th quarters. We believe the total 2018 tax impact will be approximately $480,000,000 Next, in late July, we closed on an amended and restated credit facility. The maturity date was extended at 5 years to July 2023. The credit facility size remains at $1,500,000,000 includes an accordion feature that provides flexibility to increase the credit facility by up to $750,000,000 subject to additional lender commitments. We were also able to improve our margin pricing in the new agreement, which will help reduce interest expense moving forward.
Turning now to our acquisition activity. We completed the Superior Plus acquisition in late April and closed on the Stanford Oil acquisition last week. As a reminder, the Superior acquisition included a 200,000,000 gallon a year fuel distribution business and 3 terminals with operations concentrated in the Upstate New York market. The Sanford acquisition is another example of the bolt on opportunities that we continue to see in the marketplace and includes a 115,000,000 gallon a year fuel distribution business to exploration, drilling and oilfield service customers. The acquisitions also bring material commercial and G and A synergies resulting in post synergy multiples of between 5 to 6 times for the Superior acquisition and below 5 times for the Sanford acquisition.
We funded both of these acquisitions with cash on hand and amounts available on our credit facility. We expect both acquisitions to be accretive to our unitholders in the 1st year. Before I turn the call over to Tom, I want to highlight the changes we made to the reportable segments in our financials. We renamed the former wholesale segment to fuel distribution and marketing and renamed the former retail segment to all other. The fuel distribution and marketing segment includes all fuel sales previously reflected in our wholesale segment.
The majority of rental income from the properties that we lease or sublease will also be included in this segment. The all other segment includes retail fuel The All Other segment includes retail fuel and merchandising sales from our remaining 76 retail locations, which includes our Hawaii business. Consistent with the former retail segment, the All Other segment also includes results from the Partnership's ethanol facility, credit card services and franchise royalties. I will now turn the call over to Tom.
Thanks, Scott, and good morning, everyone. Before I cover the financial results for the quarter, I want to reemphasize what Scott said regarding our recent acquisitions. Superior Plus and Sanford Oil demonstrate our willingness to make bolt on acquisitions in a financially prudent manner. Both acquisitions support our growth strategy outlined on Slide 10. In addition to the growth of our fuel distribution, the Superior acquisition provides the opportunity to buy terminals at an attractive multiple, while the Sanford acquisition expands our business in the attractive oilfield channels.
We manage our business as a portfolio of cash flows from our various channels. We see other M and A opportunities that fit within that approach. We will pursue those opportunities that deliver on our operational and financial parameters. Turning to the 2nd quarter results, the partnership recorded net income of $68,000,000 compared to a net loss of $222,000,000 a year ago. Adjusted EBITDA was $140,000,000 which includes $7,000,000 of transaction related expenses.
Our quarter end leverage, as defined by the credit agreement, was 4.5x. Last year's 2nd quarter leverage was 6x. Distributable cash flow, as adjusted, was $106,000,000 DCF coverage for the 2nd quarter was 1.24x and 1.14x on a trailing 12 month basis. Last year at this time, our trailing 12 month coverage ratio was 1.03. On July 27, we declared an 0.80 $2.55 per unit distribution, the same as last quarter.
Both coverage and leverage are materially stronger than last year as a result of the balance sheet restructuring afforded by the 711 transaction. As we look forward, we will manage leverage within a target ratio of 4.5x to 4.75x and a distribution coverage ratio of at least 1.1x. Our liquidity remains strong with $1,200,000,000 available on our revolver. Our weighted average cost of debt is 5.1%. Looking at our operational performance, total fuel volume in the 2nd quarter was approximately 2,000,000,000 gallons, a 6.5% increase over the 1st quarter.
We anticipate that volume will trend higher throughout the second half of the year, driven by growth in our organic fuel business, our recently acquired businesses and typical seasonality. For the 2nd quarter, fuel margin was $0.099 per gallon and $0.098 on a trailing 12 month basis. It is important to think about margin and volume together. We manage the business for long term gross profit, not margin and volume separately. We have seen quarters where volume was down, while gross profit was up and vice versa.
We expect to see that in the future. That said, Slide 8 shows how annual fuel margins tend to be stable, muting any short term volatility. Last December, we provided guidance for various expense items, and we continue to focus on controlling those expenses. If you look at Slide 5, we have provided updates for 2018. During the Q2, G and A expense from continuing operations was $34,000,000 in line with guidance.
When you remove transaction costs associated with closing out retail operations, we feel comfortable with $140,000,000 in 2018 in continuing operations. Rent expense totaled $19,000,000 Our 2018 run rate guidance remains at $75,000,000 2nd quarter other operating expense was $86,000,000 Although this implies a higher than guidance run rate, the first half of the year had non recurring expenses associated with the move of retail sites, both West Texas and FTC sites to commission agent sites. Excluding Q1 and Q2 operating costs to run these sites, 2018 other operating expense run rate guidance remained unchanged at $325,000,000 We feel good with these estimates even considering the additional cost associated with Superior Plus and Sanford. As we continue to make acquisitions, our G and A and other operating expenses will increase accordingly. In the first half of this year, we revamped our capital allocation and approval process.
Because of this process review, our capital spending was atypically low for the first half of the year. In the Q2, we invested $13,000,000 $11,000,000 of growth capital and $2,000,000 of maintenance capital. For the remainder of the year, we will spend on a more normalized basis, which leads us to lower our 2018 estimate for maintenance capital by $10,000,000 to $30,000,000 and growth capital by $25,000,000 to $65,000,000 I will now turn the call over to Joe for closing thoughts.
Good morning, everyone. As Tom stated, we had a solid second quarter. The underlying business is strong and we expect it to continue. Looking forward, the Q3 is off to a good start. In July, our margins were strong and our volumes continue to grow.
Last December, we laid out a plan and this year we executed on this plan. We fixed our balance sheet and we'll continue to show financial discipline. We expect to be within our guided leverage range. As for G and A, rent expense and OpEx, we expect to deliver on the guidance we gave back in December. We also stated a targeted coverage to be over 1.1.
We're well positioned to meet this target. The acquisition of Superior Plus and Sanford Oil are 2 solid examples of delivering on our stated growth plan. We're positioned for more. These immediately accretive acquisitions are the type of opportunities we'll continue to pursue in a fragmented marketplace. I'd like to close by referencing a statement I made a couple of quarters ago.
I stated that Sonoco LP is a show me story. As our plan continues to be proven out quarter by quarter, we will evolve into a proven execution story. I remain confident in our ability to grow and deliver on our stated financial goals. Operator, that concludes our prepared remarks. You may open the line for questions.
Thank you. Thank you. First question today will be coming from the line of Theresa Chen with Barclays. Please proceed with your question.
Hi. Thank you for taking my questions. First, can you give us an update on how the current quarter margins are trending? The wholesale gasoline price has seen some volatility quarter to date. And I think historically, you've been able to achieve good margins in this kind of environment given your scale and branding and just want to check that this is still consistent?
Theresa, hi, this is Carl. Yes, it's consistent. As Joe mentioned in his prepared remarks, so far in the quarter, both volume and margins are looking strong.
Great. And in terms of the new segments, how ratable is the gross profit in that all other segment?
If you look at our margins over the we've restated them on the slide where we've shown them the margin itself on a trailing twelve month basis, it's rather flat. And we may see some volatility quarter to quarter, but we believe over a long period of time, the margin itself, the CPG and therefore gross profit as volumes move rather slightly upward, we think that margins will remain stable.
Hey, Theresa, it's Joe. Let me just add a little commentary on that one. If you think about the other income area and I think you're referencing the area that's not fuel distribution, not rental income, but the other side. If you think about that, it is really made up of merchandise income, which is a moderate amount. If you think about we only have our Hawaii operation and our Turnpike operation up in New Jersey.
So that's a moderate amount. You don't see big fluctuations in that area. Then you have credit card income, which is a fee on top of a number. So that's a very fixed type of number. And then we have some we have our franchise revenue, where we're the franchiser for stores, which is a royalty on top of that.
Again, that's pretty stable. Then there's some miscellaneous other items out there. So I think I feel comfortable telling you that is a pretty stable other income.
Great. Thank you. And regarding the comment about keeping distributions flat in the slides, I'm guessing that excess coverage will be used partly fund deals instead of coming to the equity market. Just curious on how much do you think you can do on the acquisition front before needing equity?
We feel very comfortable with where we are right now in terms of as we look forward with the Superior and Sanford that we don't need to issue equity this year. And any I would be speculating if you want if you said how far out we can go, it would depend on size and cash flow. But we don't see any of that right now.
Got it. And lastly, in terms of your leverage, can you provide some color on what kind of adjustments can be made to EBITDA in the denominator? Just to give us a sense of how you plan to achieve your leverage guidance while still increasing borrowings to make that last two payments associated with the taxes with the 711 transaction?
That's a real fair question. For the rest of the year, we're going to have adjustments associated with 711 and as Superior and Sanford get added on a pro form a basis, we see that covering the $200,000,000 I guess it's $20,000,000 going forward this year and staying within our leverage target.
And Theresa, this is Scott. And moving forward, additional and future acquisitions, we're able to, per our credit agreement, able to add in on a pro form a basis the full year EBITDA contribution. So as Tom said, we'll get the benefits for the 711 fuel supply agreement as well as Superior and then moving forward the Stanford acquisition will also be an adjustment that we'll make to that EBITDA.
Great. Thank you very much.
The next question is coming from the line of Jeremy Tonet with JPMorgan. Please proceed with your questions.
Yes. Hi, good morning. This is actually Charlie on for Jeremy. I was just curious if you could touch on comments from Kelsey last week on the merger call. They had mentioned that they'd like to see you as more of a pipeline and refined products business.
I'm just curious how you think about those comments and how that
would make sense for some?
This is Joe. I think you have to start first off talking about what our overall goal is. Our overall goal is to be a larger and more stable income MLP. And with that, that means that we're going to have to do some smart growth. And as we look for opportunities, we're going to use financial discipline.
And an obvious area that we would want to go into is anything to do with refined products. We are the biggest we're one of the biggest markers of refined products out there and that gives us insight and capabilities. So with insight and capabilities, there's potential synergies. But yes, we want to become a more stable, more diversified MLP. And looking at some of the assets that mentioned last week makes sense for us, but that all has to be done with being smart growth and finding the right opportunity at the right price and making sure that we bring capabilities of synergies to the table.
That's great. Thanks. And then apologies if you touched on this, got on here a little late. Just looking at volumes year to date and looking at the guidance of $8,000,000,000 I'm just kind of curious thoughts on second half there and expectations.
Sure. This is Carl. I'll add a few comments to what Tom made on his prepared remarks. First, our Q2 volumes rose seasonally from Q1 in line with our expectations. The other biggest point to remember is that margin and volume are not independent variables.
As we look at our business and we manage it, we're managing it for both short term and long term gross profit dollars. So over the last half a year or so, we've taken a fresh look at how we manage that margin volume relationship and there are some times and places where we've traded off volume for margin with overall positive results. Specifically for Q2, as you think about it, we could have easily sold more gallons, but then not put up the gross profit number that we did. The last point I'll remind you of is that 25% of our gallons are sold to 711. And as Scott mentioned in his remarks, our take or pay with 711 is based on gross profit dollars, not volume.
That makes sense. Great. Thanks. That's it for me.
Next question comes from the line of Ben Brownlow with Raymond James. Please proceed with your question.
Hi. Thanks for taking the question. Just to be clear on your last answer to that, so that raised $0.09 to $0.10 per gallon, that's really not indicative of the long term expectation, just the first half of this year. And as we think about 2019, it's you're still kind of thinking more than $0.08 to 0.0 9.5 dollars per gallon range and kind of balancing that with volume?
So, Ben, this is Joe. That $0.09 to $0.10 I would say, obviously, if you look back to the first half of the year and you use our recast number, it comes out to $9,750,000 So I think we've achieved that for the first half. That is definitely looking out for the rest of 2018. And I foresee that continuing on. And so at a certain point, you always reevaluate the market, but we feel good with that 9% to 10%.
Okay, great. And just to and clarify on the financials, when you on the 140,000,000 dollars in adjusted EBITDA, that includes the $7,000,000 transaction expense, but there's also some discontinued ops layered in there. So is the number closer to that $170,000,000 mark when you exclude discontinued ops or just are there any other aspects of that, that I should be aware of?
No, I think last quarter, we took a we had a presentation that took you from 109, our reported number to 129. This time, we think you should just go from 140 to 147.
Okay, great. Thank you very much.
The next question comes from the line of Patrick Wong with Robert W. Baird. Please proceed with your questions.
Hey, good morning, everyone. Thanks for taking my question. Joe, moving back to your earlier comment, how would you characterize the refined products acquisition landscape compared to the consolidator roles on has traditionally played in the more fragmented fuel distribution sector?
So if you broke the 2 on and both of them are attractive to us. So let me start off by talking about more of the what we did for the first half of the year with the Superior and with the Sanford acquisition. What we talked about last year and what we're executing this year is that we think that there's a long runway of growth for these smaller type of acquisitions. And if you kind of take the example of the first half, we're talking about $100,000,000 a little bit over $100,000,000 for 2 acquisitions. And one of the things we talked about is, as we bring in our scale and our buying power and our infrastructure, we think that we can do these at a synergized multiple in the mid single digits and both of those are achieved.
With that said, we think there's we have a robust pipeline and we think there's more out there. The ideal situation would be is that we like to do this on a more ratable basis. And obviously, M and A and ratable don't necessarily go hand in hand, but we think our pipeline gives us a good possibility of continuing doing these smaller roll ups where we think they're going to be highly accretive. On the other side of the refined product, that's what I think Vin, you're referring to. The multiples typically trade at a higher number than the fuel distribution sector.
So this is where we're evaluating opportunities and we have to find the right opportunity for us to take advantage of.
Okay. That's great. Thank you. And then turning to the strong fuel margin you delivered this quarter. Can you help us understand any of the puts and takes that were in that number and if there were any one offs that we should be aware of?
I'm just wondering, if there was any outsized performance in Aloha or any of those other assets or is this just reflecting the recurring wholesale business?
Yes, this is Karl. I can make a comment on that. I think as you look at our fuel distribution margin, one of the ways we talk about is that we have a portfolio of various channels. I think we list those on Slide 8 of our presentation. And none of those channels are an outsized portion of our fuel gross profit.
So we typically don't break out the performance of any one sector. So I don't have one necessarily in the quarter that we can highlight. But I think the graph we have on Slide 8 shows that even with some puts and takes that might happen in one of those channels in a quarter that on that recast basis, we have a lot of stability in our margin.
Pat, this is Joe. Let me add one other additional comment on top of Karl's. If you look at that slide that Karl's referencing, income segment on a gross profit basis is greater than income segment on a gross profit basis is greater than 15%. If you were to pick out the biggest one, it's our rental income, which is incredibly the most stable one out of our group. So we have we've always said we take a multi channel field distribution strategies, because we don't want to be overweight in one particular channel.
And as we do organic growth and M and A growth, we're highly conscious of keeping this balance so that we can keep stability on an ongoing basis.
All right. That's great to hear. Thank you very much.
The next question is from the line of Barrett Blaschke with MUFG Securities. Please proceed with your question.
Hey, guys. Just a kind of a quick question. As we're looking at sort of a longer term picture, is it 4 to 4.75? Is that the goal for leverage over the longer term? Or is that more of a near term goal given that we've sort of seen the whole group shifting their leverage targets lower?
Right now, I think you said 4, it's actually 4.5 to 4.5.
I'm sorry, 4.5. Yes.
Yes, That's a long term goal that we want. We're going to try and stay in it quarter by quarter, but that could change based on strong margins, weak margins in any given quarter. But when we look over the long period, we see that quite achievable.
Okay. And then one follow-up
and that's
just any immediate impact you see to the from the roll up of ETP and ETE? And they own a lot of your units and your ADRs, is there anything we should be looking out for there?
I think Kelsey made his comments last week and I think I made some comments earlier this week just earlier here is that they're stronger entity. We have a very supportive and a very financially stable parent. They own they're our GP. They also own about a third of our LP units. So I think they have highly incentivized and we're aligned that they want to grow GP value along with LP value.
So I think we're highly aligned. We have we've had we get the benefit of having them and we feel very good about our long term future as a separate entity.
Okay. Thank you.
Our next question is from the line of Mike Guyer with Janney. Please proceed with your question. Yes. Can you talk
a bit longer term about some
of the growth capital expectations? I think your guidance is for $65,000,000 this year. How should we think about that going forward? Do you think that's kind of relatively the level with this new strategy or do you think that number is going to increase significantly? And I guess how you're looking at that?
This is
Joe. Let me kind of give you walk you through this year and then if I can give you some better insight, I think, this will help you look at on an ongoing basis. So Tom mentioned in his prepared comments that one of the things that we did at the beginning of the year is we took a hard look at all our maintenance capital and our growth capital and put in a, I would say, a far more rigid process to ensure that we're getting down on a maintenance capital basis. Do we have to do it? Is there a better way to do it?
Is there a cheaper way to do it? So that's what slowed down our program. And I think we're happy with the process that we have now. Same thing with the growth capital. As a new transformed organization, we took a look at our growth capital and projects we're doing and making sure that we have the type of returns that we're going to be satisfied with.
With that said, our new guidance for both for the rest of the year is $30,000,000 for maintenance and $65,000,000 for growth. On an ongoing basis, on the growth side, we think for the same reasons that we bring synergies to the table with like Stanford Oil and with Superior, that same logic plays out with growth projects too as far as signing up new customers. So our intent is to have that number grow year after year And we would like to get to the point, especially in the fuel distribution sector, where M and A might not be as ratable, but our growth capital from organic growth starts as there's an inflection point where that inflection point passes up the M and A side and we have that constant organic growth on a going forward basis. As we get on the later half of this year, we'll get we can provide more clarity of what that number might look like in 2019 and beyond.
Great. Thank you very much.
Thank you. Ladies and gentlemen, you've reached the end of the question and answer session. I would now like to turn the call back to Scott Grishow for closing remarks.
Well, thanks everyone for joining us on this quarter's call. As always, please feel free to reach out to me with any follow ups. And this concludes today's call.
You may now disconnect your lines at this time. Thank you for your participation.