Tenon Medical Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Magellan Midstream Partners First Quarter Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded, Thursday, May 4, 2023. It is now my pleasure to turn the conference over to Aaron Milford, CEO.

Operator

Please go ahead.

Speaker 1

Hello, and thank you for joining us today to discuss Magellan's Q1 financial results. Before getting started, we must remind you that management will be making forward looking statements as defined by the Securities and Exchange Commission. Such statements are based on our current judgments regarding the factors that could impact the future performance of Magellan, but actual outcomes could be materially different. You should review the risk factors and other information discussed in our filings with the SEC and form your own opinions about Magellan's future performance. We are pleased to report that Magellan began 2023 with strong financial results that exceeded our initial guidance.

Speaker 1

This beat primarily related to higher than expected commodity profits as improved location differentials in our markets resulted in higher sales prices And we simply had the opportunity to blend additional volumes during the quarter. Refined transportation revenues were similar to our As we expected long haul shipments to continue early this year in both the Mid Con and West Texas regions as our extensive pipeline network Headline refined shipments may have been lighter than some expected as supply disruptions also impacted the more volatile volume on our supply push South Texas Pipeline segment as well, which has a relatively nominal impact to actual revenues. Bottom line, Overall demand remains solid in the core markets served by our refined products pipeline system. I'll now turn the call over to our CFO, Jeff Holman, to review a few highlights from our Q1 earnings, then I'll be back to discuss our latest outlook for the year before answering your questions.

Speaker 2

Thanks, Aaron. First, let me note that I'll be making references to certain non GAAP financial metrics, including operating margin, Distributable cash flow or DCF and free cash flow, and we've included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures. Earlier this morning, we reported Q1 net income of $274,000,000 compared to $166,000,000 in Q1 of 2022. At a high level, the year over year increase primarily resulted from higher product margin, In part due to mark to market adjustments on commodity hedges in the current period as well as improved financial results overall from our core Fee Based Transportation and Terminal Services. Adjusted earnings per unit for the quarter, which excludes the impact of Commodity related mark to market adjustments was $1.32 which as Aaron just mentioned exceeded our guidance of $1.20 DCF for the quarter increased to $313,000,000 up nearly $48,000,000 from last year, All free cash flow for the quarter was $281,000,000 resulting in free cash flow after distributions of $68,000,000 A detailed description of quarter over quarter variances is available in our earnings release.

Speaker 2

So as usual, I'll just touch on a few highlights. Starting with Refined Products. 1st quarter operating margin of $337,000,000 was $101,000,000 higher Driven largely by the mid year 2022 increase in our tariffs of about 6% on average. In addition, as Aaron mentioned, the current period continued to benefit For more long haul shipments, which move at higher rates. Over the past few quarters, you've heard us talk about refinery outages and how they benefited us by driving incremental long haul shipments on our system, thanks to the extensive connectivity of our pipeline network.

Speaker 2

This quarter, we again saw a higher proportion of long haul shipments overall compared to Q1 2022, driven by supply disruptions in the Mid Continent and West Texas regions. But we were also impacted by supply disruptions in South Texas, Which decreased our transportation volumes in that area. This disproportionate decline in volumes on a more Supply driven South Texas portion of our system, which as a reminder moves at a lower rate and in general can experience more volatility And contributing to a higher average rate. To put that phenomenon into context, the South Texas volume contributes around 10% of the total volume on our system, at only around 1% of the total transportation revenue. Excluding the South Texas volumes, total refined products volumes on the rest of our We're essentially flat year over year.

Speaker 2

Product margin, the largest variance for the quarter, increased between periods as a result of favorable results from our gas liquids blending activities, which saw both higher margins and higher sales volume, as well as the recognition of unrealized gains on commodity hedges compared to losses in the Q1 of last year. Our realized blending margins increased year over year to nearly $0.75 per gallon versus closer to $0.40 per gallon in the prior year period. Sales volumes increased in part because Higher blending margins like those we experienced during the quarter generally make More Blends profitable, but also as a result of the dedicated efforts by several of our teams, particularly our operations, engineering and commercial organizations to continually improve our processes and identify efficiencies that allow us to capture Additional blending opportunities. Turning to our crude oil business, 1st quarter operating margin increased to $109,000,000 up $6,000,000 from the 2022 period. Longhorn volumes averaged a little over 225,000 barrels per day, Down from about 235,000 barrels a day in the Q1 of 2022 due to lower marketing affiliate shipments, partially offset by higher third party committed volumes.

Speaker 2

Even with lower volumes, Longhorn revenue actually increased slightly as the margin we earn on 3rd party barrels is higher than the margin we realized on marketing affiliate barrels. Volumes on our Houston distribution system increased versus the prior year period, shipments related to our HOU joint futures contract that was launched early last year. Similar to what we discussed on the refined side, These shipments move at a lower rate than long haul volumes. So this increased HTS activity resulted in a lower average rate for the segment overall. In addition, terminal throughput fees increased in part as a result of higher dock activity in the quarter as we continue to experience an increase in export demand.

Speaker 2

Crude oil product margin increased versus the prior year period due to higher contributions from crude oil marketing that we've seen since mid-twenty 22 as well as favorable mark to market adjustments on futures contracts in the current quarter. Moving on to our crude oil joint ventures. BridgeTex volumes were just over 140,000 barrels per day in the Q1 of 2023, Down from nearly 285,000 barrels a day in 2022 due to lower volumes from committed shippers, emphasizing again the importance to take or pay commitments from quality counterparties that ensure that we get paid regardless of our customers' short term logistics decisions. For the full year, we now forecast BridgeTex volumes Average 140,000 barrels per day, in line with the activity we saw in the Q1. Saddlehorn volumes increased to a record level of more than 240,000 barrels per day compared to approximately 220,000 barrels per day the year before As a result of higher shipments from both committed and committed shippers, we currently expect this trend to continue as well and are updating our outlook on silo volumes to an average of 240,000 barrels per day for the full year.

Speaker 2

Moving beyond the individual segments, the only other item I want to highlight from our quarterly results is G and A, which decreased between periods. You may recall that in the Q1 of last year, we had incremental G and A expense related to our former CEO's retirement. This expense, of course, did not recur in Q1 of 2023, But that positive variance was mostly offset in the current quarter by increased compensation across the organization as well as an increase in technology costs, primarily related to our ongoing automation and optimization efforts. Moving on to liquidity, balance sheet metrics and capital allocation. First, in terms of liquidity, we continue to have our $1,000,000,000 credit facility available and at quarter end had no borrowings outstanding on our commercial paper program.

Speaker 2

As of March 31, the face value of our long term debt remained unchanged at $5,000,000,000 with a weighted average interest rate on net debt That was about 4.4%. Our leverage ratio at the end of the quarter was 3.1 times for compliance purposes, which still incorporates the gain we realized on the sale of our independent terminals last year. Excluding that gain, leverage would have been about 3.4 times. As for capital allocation, our strategy remains the same as we continue to take a balanced approach Using a combination of capital investments, cash distributions and equity repurchases, all while remaining committed to the financial discipline we are known for. During the Q1, we repurchased 1,200,000 units at an average price of $53.65 per unit For a total spend of $64,000,000 bringing the total repurchases since inception to more than 27,000,000 units for over $1,300,000,000 representing 12% reduction in units outstanding.

Speaker 2

We continue to see unit repurchases as an important focus of our ongoing capital allocation And continue to expect free cash flow after distributions to generally be used to repurchase our equity. Of course, as we are always careful to note, the timing, price and volume of any unit repurchases will depend on a number of factors as detailed in our earnings release. Additionally, we remain committed to a strong balance sheet, solid investment grade credit rating And our long standing 4 times leverage limit, which we believe remains appropriate for Magellan given the nature of our assets and the stability of our business model. With that, I'll turn the call back over to Aaron.

Speaker 1

Thank you, Jeff. For the full year, we have increased Our DCF guidance by $40,000,000 to $1,220,000,000 for 2023. This increase primarily relates to our higher financial results during the Q1 as well as Magellan's updated view on the upcoming mid year tariff adjustments Over the last few quarters, we have indicated our intention to be especially thoughtful our approach to tariff increases this year in light of the unprecedented level of allowable increases provided by the index in the current inflationary environment. We have been and will continue to be very methodical in that assessment, with our most recent analysis leading us to conclude the Incremental adjustments are warranted for the value proposition offered by our unique pipeline system. As a result, We currently expect to increase our refined products rates by an all in average of approximately 11% on July 1.

Speaker 1

We are still finalizing our rate decisions and so do not plan to break out the components of the 11% average rate increase today, but we'll provide more detail on our index and market based rates at a later point this year. For our commodity activities, We've continued to hedge our gas liquids blending with nearly 60% of our fall activity hedged at an expected margin in excess of $0.50 per gallon. Considering our strong year to date results, our guidance currently expects an average margin of nearly $0.65 per gallon for the year, which compares favorably to the $0.50 we generated last year and our 5 year average margin of $0.45 per gallon. Coupled with our planned 1% annual distribution growth per unit this year, we expect distribution coverage in excess of 1.4 times, resulting in $250,000,000 of free cash flow after distributions that can be used to reinvest in the business, $120,000,000 in 2023 $40,000,000 in 2024 on expansion capital projects already underway. The 23 spend is $10,000,000 higher than we projected last quarter, primarily related to a new investment we just added for enhanced rail connectivity At our Refined Products terminal in the Denver area.

Speaker 1

This investment is supported by a take or pay customer commitment and expected to generate an EBITDA multiple better In the 6 to 8 times range we generally target. And as always, we continue to assess new opportunities to further expand Magellan's footprint With logical bolt on projects, while maintaining our long standing commitment to capital discipline. With that, operator, we are now ready to answer questions.

Operator

Thank you. The first question comes from Theresa Chen of Barclays. Please go ahead.

Speaker 3

Hi. Thank you for taking my questions. First, I'd love to ask about the updated guidance. Just given the strength in the Q1 as well as the Stated tariff increase as of July 1, it seems that it would imply even a higher annual earnings A bump than what is currently reflected in the new guidance, taking into account the seasonality of your assets and such. Is this a result of Conservatism or just how should we think about the cadence through the year?

Speaker 1

So if you think about the guidance update, the primary buckets Or drivers of that current update are what you mentioned, it's the outperformance in the Q1. And then we expect additional incremental rate increase in our refined products business to be Round numbers $15,000,000 of DCF that was not in our initial guidance. So that adds up to the 40. So at this point, it's 1st quarter performance, what we expect to have to be different than The pipeline tariff and then the rest of our business we're still expecting to pretty much perform as we expected. So that's the Formula at this point.

Speaker 3

Got it. And as we think about the refined product Blended tariff for the Q2, understanding that it has been elevated for the last two quarters due to refinery downtime across your footprint. We're actually seeing, I'm sure you well know, evidence of a lot of unplanned downtime in PADD 3. And that's typically where you source a lot of your products. So how should we think about the quarter to quarter change in that Tariff, as we move into Q2 before the inflation kicker comes in on July 1.

Speaker 1

Well, on the quarter to quarter change, it's we're shipping longer haul barrels, so that drives that average up as you mentioned. A lot of those were planned turnarounds. And you're right, you're seeing some more unexpected things that are happening, which generally It's still beneficial for us. So I'm it's too early to predict that it's going to be higher quarter over quarter 2Q over 1Q because of those disruptions. But it is a generally, the disruptions are positive for our business.

Speaker 1

I would say in the Q1, just if you're trying to think what might unplanned or planned turnaround kind of look like. If you look at the Q1, we think The refinery turnarounds may have contributed $4,000,000 or $5,000,000 of incremental value to us. So if you annualize that, that's sort of a potential for a year. And I don't think we're necessarily out of that band. The issue for us in trying to guide and plan for it is, it's unpredictable and where it shows up matters.

Speaker 1

But That hopefully will give you a sense of the magnitude at least in the Q1, and maybe give you a little bit of a guidepost for what the full year Or what the Q2 might could benefit from if we see unexpected things happen.

Speaker 3

Okay. And if I could just Ask a follow-up to that last point. So we've seen over 1,000,000 barrels per day of closures since the Q3 Of 2019, in domestic refining capacity, would you expect that your refined product tariffs should benefit structurally as a result That this volatility should continue?

Speaker 1

As a general trend, yes, we've talked about it in the past. And as refineries close, Demand doesn't typically change in markets as rapidly. So for us, we should experience some structure We'll benefit from that through time. But markets are they move around a lot. Supply patterns change.

Speaker 1

So it's often difficult for us to predict if Refinery closes in one area, where is it going to come from or what other things might happen. But structurally, given the breadth of supply in our system, It's usually most efficient for the market to adjust to a closure by using our system.

Speaker 3

Thank you.

Operator

Thank you. The next question comes from Jeremy Tonet of JPMorgan. Please go ahead.

Speaker 4

Hi, good afternoon.

Speaker 1

Good afternoon, Jeremy.

Speaker 4

I Just wanted to kind of go into the products business a bit more and just given some volatility In the economic environment, the backdrop moving forward here, just wondering any updated thoughts you can share with us on product demand trends as you And if we do go into recession or things get worse, just how you think about the sensitivities there?

Speaker 1

So as we think about recessions, our refined products business has shown itself through the decades really Being really resilient, so it's not like if we move into a recession, we would expect drastic changes in our Volume and the demand as we see it today is remaining very healthy. The one product that we move that maybe more sensitive to recession And then others is diesel versus gasoline. Diesel seems to be a little more economically sensitive than Gasoline, which is driven by daily consumer behavior and that seems to be fairly static through time even in recessionary environment. So gasoline is less Sensitive diesel is a little more sensitive. But when you put it all together, we just really have a resilient business.

Speaker 1

And I wouldn't expect there to be A dramatic decrease if we enter a recession. And I would also note, we've got history that shows us that once you get on the other side of that recession, it comes back very quickly. We're watching the recession potential, but I just don't see a material impact On our business or volumes, as a result of it.

Speaker 4

Got it. That's helpful. Thank you for that. And maybe pivoting a little bit here, just towards BridgeTex, we saw A bit of a step down there. I was wondering if you could just kind of remind us, I guess, what the contracting status is there, what the outlook for BridgeTex is at this point in time?

Speaker 1

Right. So as we think about contracts, the contracts that exist today extend for another 3 years as we So we've got contracts in place for the next 3 years and it's about 65% of the total capacity of the line that's committed. So we've got strong contracts, great customers. So from a cash flow perspective, we feel very comfortable. The volumes Or lower and that's just the decision of, as Jeff mentioned, committed shippers making different decisions with their marginal barrel.

Speaker 1

Most of the shippers frankly, not just ours, but really everyone out of the Permian have multiple commitments. In some cases, those commitments exceed what they're actually producing right now. So they have to make a decision where do they move Their marginal barrel and where it's best for them to do that. I think you're seeing a bit of a Corpus Houston dynamic still present, where if it's an export barrel that you're most Interested in, you probably still prefer Corpus for now to do that. We think that dynamic will change through time.

Speaker 1

None of us know when, But as Corpus fills up, Houston becomes the next logical market for those barrels. So through time, we think that Houston from our perspective is still going to be a preferred market. But as we sit here right now with continuing low differentials, Shippers are just trying to maximize the value given the deals they've already struck, so to speak, with their marginal barrels and that's the phenomenon that we're dealing with.

Speaker 4

Got it. That's very helpful. And just one last one, if I could sneak it in here. Just, you talked about As far as the 11% tariff increase kind of evaluating the system and determining that was appropriate to do, I was just wondering what variables Change in the analysis between I think it was 8% that have been discussed in the past and now 1%. Just wondering if there was any changes in your mind that kind of drove that decision?

Speaker 1

I think it's really just, as we continue to look at the markets that we serve and we look at The value proposition we offer to our shippers and customers. We did some work obviously before we provided the 8%, But that work continues. And as that work continues, we continue to refine it. And as we reach different conclusions, We'll make different decisions and that's really the result of where we're at now is just continue that work. And I would reiterate that work is focused on what is our value position to our customers, what are the market dynamics that are happening, what we expect to happen and we've just learned more.

Speaker 1

We just that's it. So, that's driven a higher increase in our tariffs and we're comfortable doing it, Primarily because we don't think we're negatively impacting the overall value proposition of what our pipeline provides our shippers and customers. So it's really just The passage of time and better information and more information, frankly.

Speaker 4

Got it. That's helpful. I'll leave it there. Thanks.

Operator

The next question comes from Keith Stanley of Wolfe Research. Please go ahead.

Speaker 5

Hi. Thank you. Just sorry to beat the dead horse on the tariff hike. So 11% hike, even if you did the ceiling raise on the regulated side of 13%, I think. That's about a 10% increase in the market based areas, which is pretty high versus what you've historically done.

Speaker 5

And Aaron, based on your commentary, it sounds a little like what you're saying is the market's evolving, the value of your system And its sort of breadth and unique attributes are getting valued more highly in the market. And so put another way, you kind of have a little more pricing power And how you're looking at your network these days, is that a fair characterization?

Speaker 1

I probably wouldn't put it in the context of pricing power, Keith, but I think what we're figuring out and what we're seeing is that The value proposition we offer our shippers and customers is extremely high. When you look at the markets that they want that they can get supply from, you look at the markets They want to go to, you look at the optionality of the system, you look at the way we can handle the barrel store and move them, the just in time nature of our system, that's highly valuable to our shippers. And when you also look at the markets and the competitive dynamics in the markets, They have options and alternatives, which they can certainly choose, but we think we have the best alternative for most of our shippers. And we think even at the higher rates, It's still a really good deal for them. And so I wouldn't call it pricing power.

Speaker 1

I think it's just it's really just the value of our system to our shippers That we think this tariff increase even end market based rates, when looking at the alternatives people have, we think it's superior. And so we can be a little more aggressive on the rates maybe than we have been in the recent past because again, We don't feel like we're harming our value proposition to our shippers.

Speaker 5

That's helpful. Separate question just on the updated guidance. Just I'm not sure if you said this, but what are are you still Using the same assumptions for oil prices and for mid con gasoline basis in the updated guidance? Thanks.

Speaker 1

Yes, they're staying, but roughly the same. They're not dramatically different. I know the market has been volatile of late, especially on the crude side, but The sensitivities we give you are the sensitivities, but when you look at the year, we haven't seen a need to dramatically change Our overall assumptions, I think we mentioned $80 per So barrels sort of underpinning our guidance, that's probably closer to 75 as we look forward. So it's not drastically different, But it's a little bit different, but the assumptions generally are consistent.

Speaker 5

Thank you.

Operator

There are no further questions at this time. I'll turn the call back over to Mr. Milford for any closing remarks.

Speaker 1

Thank you for your time today. We're pleased with the strong start to 2023 and remain confident in Magellan's future, not only in our increased guidance for the year, but our ability to generate Significant cash flow and create investor value for decades to come. On behalf of our company, we appreciate your continued support of Magellan and look forward to seeing many of you at the EIC Investor Conference in Florida in a few weeks. Thank you.

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