Sunoco LP  (NYSE: SUN) Q1 2020 Earnings Call Transcript

Sunoco LP  (SUN) Q1 2020 earnings call dated May 12, 2020

Corporate Participants:

Scott Grischow — Vice President – Investor Relations and Treasury

Thomas R. Miller — Chief Financial Officer

Joseph Kim — President and Chief Executive Officer

Karl Fails — Chief Operations Officer

Analysts:

Shneur Gershuni — UBS — Analyst

Spiro Dounis — Credit Suisse — Analyst

Gabriel Moreen — Mizuho — Analyst

Christopher Sighinolfi — Jefferies — Analyst

Sharon Lui — Wells Fargo — Analyst

Theresa Chen — Barclays — Analyst

John Royall — JP Morgan — Analyst

Presentation:

Operator

Greetings. Welcome to Sunoco LP’s 2020 — First Quarter 2020 Earnings Call. [Operator Instructions]

I will now turn the conference over to your host Scott Grischow. You may begin.

Scott Grischow — Vice President – Investor Relations and Treasury

Thank you and good morning everyone. On the call with me this morning are Joe Kim, Sunoco LP’s, President and Chief Executive Officer; Tom Miller, Chief Financial Officer; Karl Fails, Chief Operations Officer and other members of the management team. A reminder that 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, including expectations and assumptions related to the impact of the COVID-19 pandemic. 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. Before I turn the call over to Tom, I will review financial and operating results for the first quarter of 2020.

The Partnership recorded a net loss of $128 million. This net loss included a $227 million non-cash inventory adjustment resulting from the sharp decline in the price of RBOB during the quarter. Adjusted EBITDA was $209 million compared to $153 million in the first quarter of 2019. Fuel volumes totaled 1.9 billion gallons, down 2% from a year ago. First quarter volumes do not reflect the full quarter’s impact of shelter-in-place orders as these were not put into effect until the last two weeks of March for most of the states in which we operate.

Fuel margin was $0.131 per gallon, up from $0.099 per gallon for the same period last year. The year-over-year increase was supported by a favorable commodity price environment and a $13 million makeup payment under the fuel supply agreement with 7-Eleven. This payment reflects the shortfall over the last 12 months of the contract. As a reminder, we recognize any makeup payment under the fuel supply agreement at the end of the contract year, which ends on March 31st.

Total operating expenses for the quarter increased to $143 million, which includes an expected $16 million credit loss expense. The increase was primarily due to the financial impact of COVID-19 and lower oil prices on our energy services business. This was more than offset by an $18 million favorable legal settlement in non-motor fuel income. First quarter distributable cash flow as adjusted was $159 million, yielding a coverage ratio of 1.84 times and a trailing 12-month coverage ratio of 1.49 times. And on April 2nd, we declared an $0.8255 per unit distribution, the same as last quarter.

I will now turn the call over to Tom.

Thomas R. Miller — Chief Financial Officer

Thanks Scott and good morning everyone. We delivered strong results in the quarter, providing solid financial footing as we entered the second quarter. As stay-at-home orders were enacted in March, fuel sales fell off rapidly in the last half of the month and into early April but volumes have increased over the last few weeks. Joe will provide more context around second-quarter volumes later.

As Scott mentioned fuel margins were supportive in the first quarter and remained strong in April and into May. Given the uncertainty underlying the COVID-19 pandemic, particularly around how quickly the economy recovers, we are withdrawing our previous guidance on 2020 fuel volume, margin and adjusted EBITDA. We have also revised cost guidance.

We’ve taken a number of significant actions to reduce capital and operating costs. These are items we control. In March, we began adjusting our cost structure to weather the negative impact of COVID-19. We challenged ourselves to be more efficient than ever to offset lower fuel volume by evaluating the timing and need of every expense item in capital projects. As we announced last month, our projected 2020 growth capital was reduced to $75 million. That’s down over 40% from our initial guidance of $130 million. The majority of these savings come from reduced spend on organic growth. We also reduced our projected 2020 maintenance capital to approximately $30 million, down a third from our initial guidance of $45 million.

A majority of these savings come from the deferral of projects as appropriate. We have also taken aggressive steps to reduce operating expense by $55 million to $70 million between April and year-end. The majority of the cost savings have been identified. We are already executing on this plan. A portion of the savings is based on fuel volume. We provide a range for our operating expense reduction to reflect the possible variability in how demand rebounds. These actions will lower 2020 total operating expenses to between $460 million and $475 million, down from our December guidance of $515 million. This range includes $16 million reserve for expected credit losses reported in the quarter.

In total, these actions should save between $125 million and $140 million of cash. The swift and proactive step strengthened our financial position. As the economy recovers, we will continue to tightly manage operating costs and capital expenditures as we see sustained higher volume. As we start the second quarter, we have ample liquidity, $1.2 billion in availability on our credit facility and our next debt maturity is in 2023. In addition to our history of financial discipline, the combination of strong financial results over the past 12 months, taking early and decisive action to reduce costs and our stable income sources such as our long-term take-or-pay fuel supply agreement with 7-Eleven and lease income from our real estate portfolio puts us in a sound position. Joe will now provide his closing thoughts. Joe?

Joseph Kim — President and Chief Executive Officer

Thanks, Tom. Good morning, everyone. First and foremost, our best wishes go out to those affected by the coronavirus. I would also like to thank our employees and our field distribution partners for their dedication during these unprecedented times.

As Tom mentioned, we saw the impact of stay-at-home orders starting in mid-March. The peak of our volume decline occurred about a month later in mid-April. For the total month of April, volume was down roughly 40% on a year-over-year basis. The good news is that our volume is recovering. So far in May, our volumes continued to rebound showing a decrease of roughly 30% year-over-year. As economic activity continues to increase, fuel demand will be on the leading edge. Although the exact rate of demand recovery is still undetermined, I want to reinforce key factors that position SUN to meet the current challenge.

First, we started the year on very solid footing, both operationally and financially. Our strong first quarter results further added to our foundation. Exiting the first quarter, we have ample liquidity and our leverage and coverage ratios are outperforming our stated targets. Second, we took swift proactive measures in March. We reduced our capital plan by $70 million and we expect to cut expenses in the range of $55 million to $70 million. We have established a history of capital discipline and expense control and we expect to deliver on this guidance. And finally, it’s important to keep in mind that volume and margin must be viewed together. As I stated earlier, volume is down, but improving.

However, on a gross profit basis the current strength in our fuel margins has significantly offset volume decline. Our current margins are materially above our normal margin range as evident by our first quarter results and we expect this to continue. We believe margins will eventually revert to the mean but the current high volatility of crude prices has been supportive of higher margins. Our fuel profit optimization efforts have paid off in the past and we believe they will further enhance our financial stability going forward.

Let me close by saying that over the last few years we have built a resilient business model that can weather various headwinds. We have already taken and will continue to take appropriate actions to manage through this challenge to ensure a stable long-term future for Sunoco.

Operator, that concludes our prepared remarks. You may open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Shneur Gershuni from UBS. Please proceed with your question.

Shneur Gershuni — UBS — Analyst

Hi. Good morning, guys. Thank you today for the update. I was just wondering if I can start off with a few questions around your outlook and expectations. I appreciate that it’s extremely challenging to provide guidance in this environment, especially when you’re kind of focused on retail demand and so forth. That being said, I was wondering if you can talk about your margin a little bit or cents per gallon. Is there going to be some sort of parachute impact around margins? Can it actually benefit from the lower volume environment? I mean, would you see this with other retail oriented commodity sales that the margin actually expands in these types of environments? So I’m wondering if you can talk about your expectations and how you think this is going to play out.

Karl Fails — Chief Operations Officer

Sure. Good morning, Shneur. This is Karl. So, as Joe mentioned in his prepared remarks so far in the second quarter margins have remained above the normal margin range, probably at levels more consistent with those you saw in the first quarter. Going forward a lot of where the margin ends up will depend on the movement of gasoline and diesel prices and the pace of recovery in volumes. Joe mentioned our fuel gross profit optimization efforts that will help us.

As you look at the margins, eventually they will revert to the mean. But there are two factors that we think will provide some support to margins. First is consistent with what you mentioned, the entire industry is dealing with reduced volumes and one way to balance that is with a higher margin even while the prices are relatively low to the consumer. And then the second point that we think provides support is the volatility. So that allows the margin to be supported as well.

Shneur Gershuni — UBS — Analyst

Okay. So just to clarify, basically because prices are very low from a consumer perspective, the savings don’t get passed on as quickly. Is that the right way to clarify it?

Karl Fails — Chief Operations Officer

I think of it more as if you think about the single station operator and he is trying to manage his gross profit while his volumes are down, one way to help balance his gross profit is for him to take a little bit more margin.

Shneur Gershuni — UBS — Analyst

Okay that makes sense. And then, I appreciate the color about — talking about seeing some sort of a rebound and so forth or I don’t know if rebound is the right word, but certainly a move off the bottom in terms of volumes. I was wondering if you could parse it a little bit and give us a color around, like, states where or service territories that you have where lockdown orders have been lifted, has there been a surge and then a plateau and it comes back down? Any kind of color you can give us around the shape of the demand of this bounce off the bottom basically?

Karl Fails — Chief Operations Officer

Yeah. This is Karl again. What I would say is as you can imagine, the states that put in place the stay-at-home orders first, so maybe some of the Northeast states, at least for our geography, saw the earliest impacts on volumes. As various states have these restrictions, we have seen those local and state government stay-at-home orders being lifted have an impact on volumes. So, you can follow what’s happening with those governments and you would have the effect that you would expect.

I will say this, however, even states that have not lifted their stay-at-home restrictions, we have seen a positive trend in volumes since mid-April where the — probably the largest impact was felt.

So final — the final point I’d make is that we’ve created in our network a portfolio of wholesale distribution income streams that has diversity, both geographically and by channel. And so from our standpoint that portfolio approach has really helped us during these times. So even as some states may have been hit earlier, other states were holding up and as they’re coming back, the same — the opposite is happening.

Shneur Gershuni — UBS — Analyst

Okay. And just sort of to clarify, so what you’re saying in some of the states that still have shelter-in-place orders in place are still actually seeing increased volumes and then obviously the states that have started to remove restrictions have seen an uptick as well also. But with the ones that have actually removed the shelter-in-place orders and then there has been a subsequent uptick, is there a plateauing there or is that actually continuing to trend? Like are people running out, getting stuff that they couldn’t do before and then sort of going back to the pattern of sheltering in place when you look at it from volumetrically or is it actually continuing to rise there, but at a slower pace?

Joseph Kim — President and Chief Executive Officer

Shneur, it’s Joe. Good morning. So from our — what we’re seeing is, I think you hit it, even for the states that are regardless to have shelter-in-place or they don’t have shelter-in-place, we’re seeing within our overall network every week we’re seeing positive signs within our whole network. So that’s very encouraging for us. I think as far as whenever –obviously whenever a local or state government takes it off, we’re probably going to see a more exponential growth in our volume but overall we’re seeing it everywhere.

Shneur Gershuni — UBS — Analyst

All right. Perfect. I appreciate the color today and stay safe.

Joseph Kim — President and Chief Executive Officer

Thank you.

Karl Fails — Chief Operations Officer

Thanks.

Operator

And our next question is from Spiro Dounis from Credit Suisse. Please proceed with your question.

Spiro Dounis — Credit Suisse — Analyst

Hey. Good morning everyone. I’d like to maybe start off on M&A and the growth strategy here. Realize some things are probably on hold right now, understandably, but just curious maybe what your latest thinking is around moving into more traditional midstream. Have any of your parameters changed there, just given what we’ve seen play out? And is there an opportunity here to maybe pivot back to the roll-up strategy that you guys were pulling before or are the returns in sort of the contracting strategy, the organic strategy still really more compelling here?

Joseph Kim — President and Chief Executive Officer

Hi. Good morning, Spiro. It’s Joe. Hey, I think anytime there is a shock to the economy that we saw with the coronavirus, I think some companies will probably not make it while other ones that do come out I think some will come out relatively stronger than others. For Sunoco, we believe we’ll definitely weather the storm and we’ll come out relatively stronger than most. And — so we started this healthy. We had a really good first quarter, we added to our foundation and we will weather this and we will come out strong again. I think that’s going to create optionality for us in the future. So when that happens, our strategy has not changed. We’re going to — we have a really strong fuel distribution business. We’re going to continue to grow that, probably more on the organic side versus the M&A side, but we’re not excluding that. And we are definitely — our goal is to become a larger, more diversified MLP. And that means that we’re going to target, both from a organic and M&A standpoint, traditional midstream assets. But for today, and I think you mentioned in your question, the focus obviously is making sound prudent decisions and executing and delivering and that’s where we’re focused on right now.

Spiro Dounis — Credit Suisse — Analyst

Got it. Makes sense. Second one, just to follow up on the 7-Eleven contract, and maybe how the catch-up payments work. Again I guess if I’m understanding it correctly, it sounds like here in the second quarter, probably going to see the trough in terms of the demand impact. And so, it sounds like for the 7-Eleven contract specifically, we will see a negative volume impact there. It won’t be entirely shielded. And to the extent 7-Eleven, I guess, doesn’t make up those volumes in third quarter and fourth quarter, you would once again receive, in this case, probably an even larger payment in the first quarter of ’21. Is that the right way to think about, I guess, how we should think about second quarter and the impact there?

Joseph Kim — President and Chief Executive Officer

Yeah, that’s a good summary. It’s a — the take-or-pay is an annual gross profit take-or-pay with the contract year ending each first quarter.

Spiro Dounis — Credit Suisse — Analyst

Okay. So if we see things trough a little more than expected in the second quarter, not all is lost, we should expect that to basically — I guess could they recoup in third quarter and fourth quarter? Do you actually have to wait till first quarter of ’21 to see that one big catch up?

Joseph Kim — President and Chief Executive Officer

It depends on their volumes, but if we do sell them more volume we absolutely can recoup some of that in the third and fourth quarter and whatever is not met then will be paid in a makeup payment in the first quarter.

Spiro Dounis — Credit Suisse — Analyst

Okay, perfect. Thanks for the time [Indecipherable]

Joseph Kim — President and Chief Executive Officer

Thanks.

Operator

And our next question is from Gabe Moreen for Mizuho. Please proceed with your question.

Gabriel Moreen — Mizuho — Analyst

Good morning, everyone. I just had a question on expenses in general, just curious of the $50 million to $75 million. How much of that may be sustainable or is it really all just variable in terms of lower volume? And then I think I caught you saying something about credit, the credit charge-off this quarter. Can you just talk about what that was and whether that may be or not be an ongoing issue in the current environment?

Karl Fails — Chief Operations Officer

Yeah. This is Karl. I’ll start with the cost question and then I’ll let Scott answer the credit question. The way to think about our cost is if you — I’ll put it in the context a little bit, if you think about the last few years since we did the 7-Eleven deal, we’ve demonstrated a strong track record of expense management right-sizing after the 7-Eleven deal to limiting expense growth as we layered on acquisitions. So with that foundation we put together a pretty detailed plan that, as was mentioned in the prepared remarks, has already been implemented. And so you pointed out that you can think of that in two buckets. The first bucket is variable expenses related to volumes.

Our commitment is that as volumes come back that the expenses relating to those volumes are going to lag any top line growth. We’re going to control those expenses to make sure that top line comes back before the variable expense. But there are significant fixed expenses that are also part of that plan. We basically evaluated every project and program that we were doing for timing and necessity. We stopped, deferred some initiatives and challenged ourselves to be even more efficient. So really the way to think about that range is under any volume scenario this year we will at least deliver the $55 million. And if volumes are on the lower side of our scenarios, then we will be pushing or even surpassing that $70 million.

Scott Grischow — Vice President – Investor Relations and Treasury

Gabe, let me add one thing. The $55 million to $70 million, the vast majority of it is fixed. I think that’s the key point to take away. And secondly I look at the $55 million to $70 million slightly different. I really think it’s more $71 million to $86 million because of the $16 million of bad debt reserve that we took in the first quarter. So that’s why it came down to $55 million to $70 million, but the vast majority is fixed expenses that we are taking out of the business.

Gabriel Moreen — Mizuho — Analyst

Got it. And then just if you can — sorry, go ahead.

Scott Grischow — Vice President – Investor Relations and Treasury

Yeah, Gabe. This is Scott. And just on the $16 million in expected credit losses expense that we took, that was really related to the impact of COVID-19 on our business and our expectations around credit losses.

Gabriel Moreen — Mizuho — Analyst

Okay. So you reserve for what you expect on an ongoing basis. And then I wanted to follow up just in terms of [Indecipherable] in terms of gasoline demand hit on already on this call, but can you talk a little bit on diesel demand, the exposure in West Texas just kind of diesel demand in general and how it fits in your portfolio and what you’re seeing in expectations there?

Karl Fails — Chief Operations Officer

Yeah. This is Karl. I’ll hit on overall diesel demand first, then I’ll make a comment about West Texas.

Best way to think about diesel demand relative to the numbers that Joe talked about is that we saw the declines come a little later, or the declines in gasoline started pretty immediately when stay-at-home orders started in mid-March. Diesel didn’t really start to decline until probably the April time frame. And the numbers in terms of year-over-year were about 20% — 15% to 20% better than the gasoline numbers that Joe talked about.

As far as West Texas goes, we’ve clearly seen some impacts on our diesel business in West Texas as drillers have pulled back production with the lower oil prices. Our COAG business that you remember, we have a strong COAG business out there, has also had some impact, but it’s been very resilient.

Here’s how I — a couple of thoughts of color around that West Texas business. First, we’ve operated those sites for a number of years and so we know what bad looks like. If you think back to when crude fell dramatically in 2014/2015, we have not seen impacts to the degree that we saw in 2014/2015.

And the second point, which is most important is I mentioned earlier, we’ve intentionally taken a portfolio approach to our fuel distribution business. And in that portfolio, we’ve ensured that no single channel or geography has an overweight portion of that portfolio. So that’s true of our West Texas business. So well in this period of lower oil prices and lower demand that part of the portfolio is performing a little lower. It won’t materially weaken our overall [Technical Issues].

Gabriel Moreen — Mizuho — Analyst

Thanks, Karl. And then last one for me and maybe it’s a little bit of a sensitive question, but there’s no Force Majeure provisions in your contracts of any sort, and none of that is being claimed at the moment. It’s really all just on a variable basis here.

Karl Fails — Chief Operations Officer

Yeah, here’s what I’d say is, we have the relationships with all our contracting partners and we don’t typically talk about individual customers or suppliers. But we’ve continued to work with all of them and I guess I’d leave it at that.

Gabriel Moreen — Mizuho — Analyst

Okay. Thanks for the time everyone.

Operator

And our next question is from Chris Sighinolfi from Jefferies. Please proceed with your question.

Christopher Sighinolfi — Jefferies — Analyst

Hey. Good morning, everybody. Thanks for the time. I just had a couple of follow-ups here. Tom, I was hoping you could give me a little bit more color on the legal settlement that you flagged in last night’s release. I looked at the Q, but I couldn’t find anything. I just want to know sort of what that stemmed from and if there’s anything else out there that’s sort of pending that could influence future results?

Thomas R. Miller — Chief Financial Officer

Chris, we don’t talk about the exact details behind the settlement. My advice is that you view this as a one-timer in conjunction with the $16 million that Scott talked about a couple of minutes ago on credit. And right now, at this point in time, we don’t have anything on the horizon in terms of large legal settlement.

Christopher Sighinolfi — Jefferies — Analyst

Okay. And when you mean in terms of — in conjunction with the credit provisions, you just mean, view both as a one-time item not that they’re related to one another? Is that right?

Thomas R. Miller — Chief Financial Officer

Right. Yes, you’re absolutely, right.

Christopher Sighinolfi — Jefferies — Analyst

Okay. Okay, that’s helpful. And then I want to go back, Spiro had asked about the 7-Eleven contract and obviously you guys flagged last night the makeup provision from 2019 that occurred in the first quarter. Is there anywhere where we can track let’s say as we come into year-end, where they stand in regards to the volume agreement for that calendar period, just to have a better sense of maybe what might be coming in the first quarter, let’s say, 2021 just given how disruptive fuel volumes might be in 2020?

Karl Fails — Chief Operations Officer

Sure, Chris. Generally we will not disclose specific counterparty volumes. Obviously, as the year unfolds and we get more information, I think during each quarterly call, we’ll be able to provide a little more insight into where we’re in the quarter and how it might impact our business.

Christopher Sighinolfi — Jefferies — Analyst

Okay, okay, I’ll just wait for those then. And then I guess, Joe I appreciate your comments about the improvement in demand characteristics across the franchise both states that have relaxed their stay-at-home provisions and those that haven’t. I guess as you look at it I think Shneur asked the question, if it’s finding a new plateau, and you were saying it continues to improve.

Can you just give a sense and if you offered this in prepared remarks, I apologize where we are sort of right now versus maybe the year-ago period at this point for your system? And the same would be of interest, if you’re able to give us a sense for margin. Obviously, the margin strength that you guys posted in the first quarter, I’m imagining was anchored significantly by March. And I’m just curious, as we sort of come back down to reality as things stabilize where we are sort of at this moment in time, anything you could share on that would be helpful.

Joseph Kim — President and Chief Executive Officer

Sure Chris. So the impact started for us about mid-March and the demand decline started — peaked out at about middle of April. And we view our business more on a week-by-week type of numbers because any one day, there’s too much variability on a single day. So when it peaked out for us in mid-April, we were roughly at about 46% year-over-year decline. That was our peak. Since that point, and the comment I made to Spiro, we’ve seen pretty much every week a decrease in the amount of decline to the point where April ended up at 40%, roughly year-over-year declines for the Sunoco network.

Then we looked at the first 11 days or so of May and what we’re seeing right now is about a 30% year-over-year decline. So that kind of supports my statement that we’re seeing week-over-week. We expect the second half of this quarter, the back half of this quarter to continue to improve.

And as far as your second question about margins, our first quarter margins ended up north of $0.13 per gallon. And traditionally we’ve guided somewhere between $0.095, $0.105. So that’s materially above.

Obviously crude prices and RBOB came down very rapidly in March. But as Karl mentioned, he gave and I thought some very good commentary about how individual operators are maintaining gross profit with less margins. They’re getting more — I’m sorry with more margins they are offsetting the less volume. We see that continuing and on top of that, we believe that crude volatility even on a rising crude price, we think it’s going to remain volatile. And people that have followed us understand that that volatility had been a friend of ours when it comes to margins. So we think it’s going to remain volatile in crude prices. And that’s why we believe that margins are going to remain robust for the foreseeable future.

Christopher Sighinolfi — Jefferies — Analyst

Okay, great. If I could ask one final question, you do still have a small retail business retained in Hawaii. I’m just curious, I read a lot about what that state is doing to just sort of limit travel to the islands. And I’m just curious, any update just given that it’s a little bit different than the rest of your wholesale network — any update on that franchise and how you’re thinking about it?

Karl Fails — Chief Operations Officer

Sure. This is Karl. I guess the color I give is that the fuel volumes have fallen off, but are in — pretty in line with the numbers that Joe shared with you for overall volumes. And then consistent with some of the other convenience stores on the mainland, the convenience store business inside store has held up very well. I think in every sense of the word both from a government viewpoint and from a consumer viewpoint, those convenience stores have been essential businesses for the communities in which they operate.

Christopher Sighinolfi — Jefferies — Analyst

Okay. Guys, thanks a lot for the time and all the extra color this morning. I do very much appreciate it.

Karl Fails — Chief Operations Officer

You bet.

Operator

[Operator Instructions] Our next question is from Sharon Lui from Wells Fargo. Please proceed with your question.

Sharon Lui — Wells Fargo — Analyst

Hi. Good morning. Most of my questions have been asked and answered. But I just had one on rental income and whether you guys had to make any concessions or perhaps deferrals in base rent because of COVID-19?

Karl Fails — Chief Operations Officer

Good morning, Sharon. I’ll take that one, this is Karl. I think the way to think about how we’ve dealt with our customers to your specific questions on rent, I’ll maybe make it a little more general with how we’ve interacted and supported our customers. So there’s really been three things that supported them.

One is we’ve been pretty active in helping our customers access various government programs such as the Paycheck Protection Program, and many of our customers have already received funds from those programs which has definitely supported their businesses. We have — direct answer to your question, we have worked with some customers on a case-by-case basis to help them manage their cash flows. And that’s in our numbers and in our forecasts.

And my final thought is I already mentioned about Hawaii, I will make more general is that the essential nature of these businesses I think has also helped many of these operators. And as I take a step back, I’ve really been proud of how both our employees in our retail stores and particularly the employees of our fuel distribution partners, how they’ve really stayed in business and served the communities that they’ve been in and they’ve done a great job during these last couple of months.

Sharon Lui — Wells Fargo — Analyst

Thank you.

Karl Fails — Chief Operations Officer

Thanks, Sharon.

Operator

Our next question is from Theresa Chen from Barclays. Please proceed with your question.

Theresa Chen — Barclays — Analyst

Good morning. Appreciate all the comments related to volume. And I just wanted to follow-up on that, maybe get a more concrete framework as we look at second quarter. So you had one of your competitors pretty much guiding to 40% decline Pad 1 and another putting out guidance about roughly 25% in Midcon and granted those are more midstream infrastructure related, but I imagine the volume read through is pretty one-to-one basis on the wholesale side.

When you talk about April as a month being down 40% year-over-year, the trough being down 46% in the first 11 days of May 30% down, is that second derivative at this point very beneficial to you but that you would expect June to be much better than May, are we going to land in that mid-20% framework for that month or just generally how do you see all of second quarter shaping up given that we’re halfway into it at this point?

Joseph Kim — President and Chief Executive Officer

Good morning, Theresa. I think the way that you’re looking at it from this point in time is reasonable. We have no reason to believe that the trend line won’t continue to improve for us. As far as an exact number of what we think June is going to be, I think it’s a little too early for that, but the trend line is definitely going in that direction. If it was 40% in April, 30% so far in May, we see this recovery happening. But what we’re not prepared to do at this particular point in time is to give everybody an exact number of what May is going to end up, what June is going to end up, but the trends are definitely positive.

And I think a couple of points I want like to re-emphasize from some of the previous questions is some of the volume that we lost from 7-Eleven is just a timing issue from a gross profit standpoint. They’ll show up back on the first quarter of next year.

And also going back to Sharon’s question about real estate income, Karl mentioned that we have worked with our customers, but the results whenever on our — whenever we report our numbers, it’s going to be immaterial in 2020, it’s going to be immaterial in 2021. So if you add up our rental income business and you add up the 7-Eleven minus any timing differential, those are solid. That’s just the timing play for us. So I think we got a really good base of income that we start off with. And as the economy recovers, our volume is going to recover.

Theresa Chen — Barclays — Analyst

Got it. And then second question just on the distribution. So we’ve seen a wide range of both Midstream entities and also companies up and down, the energy value chain pair back their dividends either by force or less by force. And just thinking about this unprecedented time of uncertainty, if things don’t get better, how do you view your distribution amid all of this uncertainty and how many — if things don’t get better, how many quarters of pain would you be able to — or were you willing to summit before you really consider that?

Joseph Kim — President and Chief Executive Officer

Yeah, so I guess back in March, we put out that we’re maintaining distributions and the way we looked at it was from two perspectives, where we are today and what we think the future holds for us. So I think I’ve talked a lot about on prepared and everything else. We started off healthy in the first quarter, just made it healthier. So we’re starting at a really good place where our coverage is 1.84 times [Phonetic] for the quarter and on a LTM basis, we’re basically 1.5 times. So we’re starting at a very good pace. Looking forward, I think a few things that you should keep in mind. We took swift action on a proactive basis when it comes to capital and expense. And there’s about $140 million worth of cash preservation that we will see in 2020 versus original guidance that that we provided.

We looked at multiple scenarios, people talk about the different shape of recovery, the V, the W, the push [Phonetic] whatever popular terms that are out there on the rate of recovery. And as a management team, we took a — more of a conservative approach because we didn’t want to undershoot our proactive measures. So as we looked at various scenarios, we believe that as far as having a very reasonable line of sight to actually getting back to our pre-COVID levels, and that — while still keeping our distribution the same.

Theresa Chen — Barclays — Analyst

Thank you.

Operator

And our next question is from John Royall from JP Morgan. Please proceed with your question.

John Royall — JP Morgan — Analyst

Hey. Good morning, guys. Thanks for taking my question. So on capex, I know you don’t guide out beyond the current year, but would it be safe to say that due to some of the cuts this year, all other things equal, we could see some catch-up next year on both the growth and the maintenance side?

Karl Fails — Chief Operations Officer

Yeah, this is Karl. As you pointed out, we’re not providing 2021 guidance right now, but here’s how I would think about it. As Tom mentioned on the prepared remarks, most of our savings on the maintenance capital side was deferral or timing-related. So we’re going to have to do those projects, eventually we prioritize them and are focused on the most important project this year.

On the growth, that’s really going to be dependent on the business. And as Joe mentioned earlier, in terms of our strategy, our strategy remains the same. So it’s really where we see the opportunity and to what levels. So at the end of the year, we’ll provide more concrete guidance on what our growth looks like for next year.

John Royall — JP Morgan — Analyst

Great, thank you. And then on the fuel distribution side, I think Spiro touched on this a little bit, but this environment present an opportunity to get aggressive on M&A where maybe you’re seeing some targets come under the stress?

Joseph Kim — President and Chief Executive Officer

Yes, this is Joe. As I said earlier, first thing first for us, we’re going to manage this challenge and make sure that we return at or better than our previously stated targets, when it comes to coverage and leverage. And by doing that, I think that’s going to put us in a very good place. At that point, we’re going to have relative strength. And I think deals that are available today; I think they might even be better in the short run or mid-run. And then at that time, we’ll take a look at it, and we’ll take advantage of it.

John Royall — JP Morgan — Analyst

Okay. Thank you.

Joseph Kim — President and Chief Executive Officer

Thank you.

Karl Fails — Chief Operations Officer

Thanks.

Operator

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

Scott Grischow — Vice President – Investor Relations and Treasury

Well, thanks, everyone for joining us on today’s call. Should you have any additional questions or like clarification on any of the topics we discussed, our team will be available to take your calls. We’ll talk to everyone soon. Have a great week.

Operator

[Operator Closing Remarks]