Sprague Resources LP (NYSE:SRLP) Q4 2019 Earnings Conference Call March 5, 2020 1:00 PM ET
David Glendon - President and CEO
David Long - CFO
Conference Call Participants
Ladies and gentlemen, thank you for standing by, and welcome to the Sprague Resources Q4 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today, David Glendon, President and CEO. Thank you. Please go ahead, sir.
Thank you, Dylan. Good afternoon everyone and welcome to Sprague Resources fourth 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-K, 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.
Before David provides a detailed review of our results, I'd like to offer some commentary on developments in 2019 and our perspective on the current market. While we're disappointed that we haven't experienced the environmental factors that create outsized opportunities for our assets and logistical capabilities, I'm pleased with the progress we're making in adapting the business to challenging market conditions.
Notably, we are able to achieve year-over-year growth in adjusted EBITDA through a determined emphasis on realizing cost efficiencies. While adjusted gross margin declined by $5.7 million versus 2018, adjusted EBITDA increased by $3.5 million, and distributable cash flow by $3.7 million.
Throughout our 150-year history, Sprague has successfully served the evolving energy needs of commercial customers across business conditions, political and social climates, and commodity markets, and I'm confident that our team will successfully navigate the current market dynamics.
We have taken an aggressive approach to costs over the last year, and we will continue to focus on opportunities for further reductions. And, while our products are essential drivers of economic growth, there's clearly an increase in premium on reducing the carbon intensity of these fuels.
Sprague has long been a leader in the introduction of clean fuels into the northeast markets. And we're committed to expanding that position in the current -- coming years. We are now offering a blended bioheat that produces less lifecycle emissions than natural gas, with no requirement for infrastructure investments.
The recent three-year extension of the biodiesel tax credit now allows us to expand this offering across more terminals in our system and drive additional greenhouse gas reductions. We continue to innovate with our solar tank program and expect to go live in the second quarter on an installation in our Albany facility, which is expected to provide 100% of our power needs at that terminal.
Finally, at our Searsport, Maine facility, our strong position in handling windmill components is expanding in order to keep up with the demand associated with the promise of northeastern offshore wind projects.
While these exciting clean fuel development initiatives each offer compelling medium-term prospects for Sprague and our customers, it's the steady investment in innovation in our core business that will drive a better return profile in 2020 through productivity growth and new margin opportunities.
Our proprietary natural gas pricing tool has significantly expanded our quoting capabilities and generation of multiple offers to customers, yielding robust customer acquisition metrics. We recently completed the replacement of our conveyor system at the Portsmouth facility, facilitating more efficient bulk handling operations.
At Kildair, the expiration of a major crude handling contract has been effectively offset by growth in the other third-party storage business. And we recently received the necessary permits to convert storage tanks in the Bronx to long-term asphalt contracts. We've consolidated operations at our two Portland facilities and continue to explore options to realize gains in 2020.
In January, the Board of our general partner declared a distribution of $0.6675 per unit for the fourth quarter of 2019, which is flat to the previous quarter. Notably, the owner of Sprague's general partner agreed to receive common units, representing limited partner interest in Sprague in lieu of cash in respect of the incentive distribution rights payable in connection with the distribution for the fourth quarter.
Finally, we're currently restructuring our credit facility and expect to reduce our interest cost burden with the new facility that is rightsized to our current requirements.
Now, I'd like to turn the call over to Dave Long for a detailed review of our fourth quarter and full year results. Dave?
Thank you, Dave and good afternoon everyone. Sprague's quarterly adjusted gross margin increased by 6% or $4.1 million to $72.5 million as compared to the fourth quarter of 2018. While adjusted gross margin for the full year decreased by 2% or 4 -- $5.7 million to $267.9 million, the increase in our year-on-year quarterly results was attributable to improvements in our refined products and natural gas businesses, which were partially offset by a decline in our materials handling business. I'll provide more detail on the underlying results of each of these businesses shortly.
Sprague's fourth quarter adjusted EBITDA of $31 million, increased by $2 million or 7% over the prior year, while adjusted EBITDA for the full year of $105.5 million increased by $3.5 million or 4% over 2018.
Operating expenses for fourth quarter decreased by 11% or $2.5 million to $19.6 million and 4% or $3.7 million to $84.9 million for the full year. The year-on-year annual decline was primarily driven by decrease in people-related, transportation, and legal expenses. Similarly, SG&A expenses decreased by 3% or $2.7 million for the full year due to lower people-related expenses, sales commissions, and other related fees.
Below the EBITDA line, net cash interest expense of $9.6 million for the quarter was 6% greater than fourth quarter 2018. And cash interest for the year increased by 13% or $4.1 million to $37.2 million. The year-on-year increase in cash interest expense is principally attributable to higher borrowing rates. Sprague's cash taxes for the quarter of $1.4 million and for the full year of $4.8 million were lower by $0.6 million or 29% and $0.2 million or 3% respectively.
Maintenance CapEx for Q4 decreased by $0.1 million or 3% to $2.2 million, while full year spending also decreased by $1.3 million or 13% to $9.3 million. Maintenance projects included upgrades to storage tanks and IT applications.
Expansion CapEx for 2019 was down slightly to $6.5 million compared to $6.8 million in 2018 and included projects such as an upgrade of several tanks to asphalt handling and Sprague's Bronx terminal and finalization of the natural gas pricing tool.
Distributable cash flow for the fourth quarter increased by 32% to $19.9 million, while full year results were higher by 7% to $56.3 million. Sprague's distribution coverage ratio was 1.2 times for the fourth quarter and 0.8 times for the trailing 12 months at December 31st. At the end of the fourth quarter, Sprague's permanent leverage was 3.6 times, while our borrowing capacity and our working capital and acquisition lines was $269.2 million.
With regard to 2020 guidance, we are targeting full year adjusted EBITDA of $105 million to $120 million and intend to maintain distributions at their current levels.
Now, for a discussion of our business segments. In refined products, Sprague's fourth quarter adjusted gross margin of $44.3 million increased by 13% or $5 million. Our full year results of $150.1 million decreased year-over-year by 1% or $0.8 million.
Sales volumes decreased 3%, both on a year-over-year, quarterly, and annual basis. While the quarterly adjusted gross margin improvement was largely attributable to the reinstatement of the biodiesel blenders' tax credit for 2018 and 2019.
In natural gas, our adjusted gross margin increased by 15% or $1.8 million to $13.6 million for the fourth quarter. While for the full year, it decreased by 6% or $3.6 million to $54.3 million. The decrease in adjusted gross margin for the year is primarily due to warmer year-over-year weather, particularly in January, fewer pipeline capacity optimization opportunities, and competitive intensity in several key markets. Volumes for the quarter and the year were up by 1% and 3% respectively, due to an increase in the number of new customers.
In materials handling, Sprague fourth quarter adjusted gross margin of $12.7 million declined by 17% or $2.7 million. Despite this quarterly downdraft, full year results of $56.6 million decreased only by 2% or $0.9 million compared to the prior year.
The source of the full year decline was primarily the result of lower heavy lift activity following completion of the ethane cracker project in late 2018 and exploration of the crude by rail contract at the end of May 2019, with these declines partially offset by increased heavy oil throughput activity at Kildair.
At this point, I'd like to turn the call back over to Dylan to open it up for questions.
I show no questions in the queue at this time, sir. You may continue.
Thank you, Dylan and thank you everybody for joining the call today. We look forward to seeing you on calls going forward as well. Thanks again and have a great day everyone.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.