Global Partners LP (GLP) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the Global Partners third quarter conference all. Today's call is being recorded. With us from Global Partners this morning and the President and Chief Executive Officer, Mr. Eric Slifka, the Executive Vice President and Chief Financial Officer, Mr. Thomas McManmon, the Chief Accounting Officer Mr. Charles Rudinsky and the Executive Vice President and General Counsel, Mr. Edward Faneuil.

At this time, for opening remarks and introductions I would like to turn the call over to Mr. Faneuil. Please go ahead sir.

Thank you. Good morning everyone and thank you for joining us on our third quarter conference call. Global Partners recently completed its initial public offering on October 4th. So this marks our first conference as a public company.

Before we begin I would like to remind everyone that during today's call we will make forward looking statements as defined by the private securities litigation reform act of 1995. These statements may include, but are not limited to projections, beliefs and estimates concerning future financial and operational performance of Global Partners.

The future performance and financial results of the company may differ materially from those expressed or implied in any such forward looking statements. Such factors include but are not limited to those described in Global Partners filings with the Securities and Exchange Commission.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements that may be made during today's conference call. With regulation FD in effect, in the future it will be our policy that any material comments concerning future results of operations will be communicated through press releases, publicly announced conference calls or other means that will constitute public disclosure for purposes of regulation FD.

I will now turn the call over to our President and Chief Executive Officer, Eric Slifka.

Hey, thank you and good morning to everyone. Welcome to our inaugural financial results conference call. We became a publicly traded limited partnership with the closing of IPO in October.

I would like to thank everyone who participated in the offering and say that we are excited about sharing Global Partners financial success and future opportunities with all of you.

Turning to the agenda for today's call, I will begin by briefly reviewing our Q3 financial results, then give you an overview of Global Partner's history, business model and strategy for sustained growth in the coming quarter. Tom McManmon, our Chief Financial Officer will take you through the numbers for the most recent 3 and 9-month periods and then we'll take your questions.

Let me start by saying we had an outstanding third quarter. Our gross profits increased 54% form the third quarter of '04 to 19 million on sales of 855 million, reflecting strong margins across both the wholesale and commercial segments of our business. On October 4th we completed our IPO generating more than 100 million in gross proceeds to global partners through the sale of approximately 5.6 million common units after the exercise of the underwriters option.

As we noted in this mornings news release, we had about 4.2 million in special charges related to our offering and those expenses resulted in a net loss of 2 million for the third quarter '05. In order to give our investors a sense of our true performance in Q3 and an apples to apples comparison we've adjusted our bottom line to exclude those charges. Adjusted net income was 2.2 million for the third quarter of '05. This represents and improvement of 4.4 million from the same period in '04. We think that's a heck of a performance.

Now, I'd like to give you some background on Global Partners. We are a third generation business with a rich history in the refined petroleum industry. We have deep roots in New England and we've had a record of financial success. My grandfather Abraham Slifka started the business in the 30's as a one truck heating oil supplier in eastern Massachusetts. Today our business is based a few miles outside of Boston in Walthea (ph), Mass.

I'd like to emphasize the Global Partners is not a propane company. We are a terminal and marketing company that owns, operates and leases terminal facilities. The margins we garner are greater because we make our money, not only on a throughput and towing basis, but on a throughput plus marketing basis. As a result, our business model produces strong and stable cash flows.

Global sells approximately 70 million barrels of refined petroleum products each year, making us one of the largest wholesalers in New England. The diverse products mix we distribute includes gasoline, residual oil, and bunker fuel which powers ships and barges, and distillates such as diesel, home heating oil and kerosene. Distillates were about 52% of our total sales volume through the first 9 months of '05 with gasoline accounting for roughly 33% and bunker fuel and residual oil 15%.

In New England, Global Partners has a significant portion of the residual oil market and a major share of the home heating oil market. Our terminal network for refined petroleum products is one of the largest in New England. It encompasses 16 bulk terminals and a storage capacity of 5.9 million barrels, predominantly in the North East. We also have throughput or exchange agreements with approximately 6 additional bulk terminals and 32 inland storage facilities. The bottom line is we have ample capacity for growth.

Just to provide some perspective on the market demand for refined petroleum products, the energy department - the Department of Energy projects the US consumption will increase at an annual rate of 1.6% over the next 2 decades from nearly 21 million barrels a day this year to more than 28 million barrels a day. Because we own and operate terminal, global has a competitive barrier to entry that will give us a tremendous strategic advantage, both on a cost of supply basis as well as on a marketing basis.

New England also lacks a pipeline infrastructure, which limits potential competing distribution channels. In addition the regents - the region has an absence of spare natural gas capacity which restricts the ability of customers to switch their fuel sources. Indeed, 50% of households in New England use heating oil as their primary source of heating energy. Households mainly using home heating oil represent about 8% of the heating households nationwide.

Our business is divided into 2 segments, wholesale, which accounted for about 86% of our total volume in the first 9 months of '05 and commercial, which accounted for the remaining 14%. The key take away here is that within these segments we have a diverse product offering and a broad customer base. In fact, our largest customer accounted for less than 5% of sales through the first 9 months of '05.

Historically our operating results are strongest in the first and fourth quarters of the calendar year, coinciding with the winter demand for products, particularly home heating and residual oil.

Let me give you a snapshot of our business as illustrated by the percentage breakdown of our quarterly net income in '04. The first quarter of '04 accounted for 66% of the yearly total. The second quarter accounted for 8%, the third quarter was negative 13% and the fourth quarter represented 39% of annual net income.

Our third quarter '05 results demonstrate our success in implementing a number of growth initiatives designed to offset the historical seasonality in our business. For example, we have partnered with a major supplier of unbranded gasoline in a program aimed at targeting new geographies.

In our bunker business, we have added several new port locations and this business has a stable quarterly demand profile. We have also expanded the percentage of heating oil products sold on a fixed forward basis as take or pay contracts. In addition, we have grown our motor diesel product sales by 6% from last year.

Global Partners has also been particularly successful in managing, or more accurately minimizing commodity risk. We use the NYMEX, the New York Mercantile Exchange, to hedge potential delivery and supply risks associated with products that we market, including gasoline and number 2 heating oil. To reduce our exposure to price fluctuations for residual fuel, we employ derivative contracts with large financial institutions and other contact parties with established credit profiles.

Another factor that sets Global Partners apart is our world-class support functions, particularly the supply relationships we have established with major energy companies and our rigorous credit management practices. It is worth noting that in each of the past 5 years, credit losses represented less than 0.005% of sales. This speaks to our ability to successfully manage trade credit exposure through various preapproval procedures and to focus on primary and secondary sources of repayment.

Looking ahead, Global is focused on 3 growth drivers. First, organic growth opportunities achieved by attracting new customers through superior service, wholesale marketing arrangements and bunkering operations.

Second, Bolton (ph) acquisition opportunities where we seek to expand our geographic reach into adjacent markets and leveraging our customer and supplier expertise and third, step-out acquisitions which will enable us to expand into new markets, add physical assets, leverage relationships with the oil managers and use our marketing expertise to maximize profitability and returns.

An important ingredient in our success has been and will continue to be our strong balance sheet, which will help to lower our cost of capital for future acquisitions and business marketing activities.

And with that I'd like to turn the call over to Tom McManmon to discuss our financial results. Thomas?

Thanks Eric. This morning I will walk you through our operating results for the 3 and 9 months ended September 30 and talk about some of the items that affected our EBITDA and net income. I'll also comment briefly on our plan for distribution of available cash and then we can take some questions.

Because this is our first call I thought it'd be helpful to point out some of the metrics we consider important in evaluating our operating performance. The first is net product margin, which we define as sales minus product costs. We use net product margin to gauge consistency and trend analysis.

The next measurement is gross profit or sales product costs - less product costs and terminal depreciation allocated to the cost of sales. Another key metric is operating expenses, or those costs associated with the operations of the terminals used in our business. Operating expenses include lease payments, storage expense, maintenance and repair, utilities, taxes, labor and labor related expenses. We also look closely at SG&A, including marketing expenses, salaries, benefits, pensions, retirement plans, discretionary bonuses and other fees that will be outlined in our 10Q.

An important measurement used by the refined products industry is Degree Day, which is based on the deviation in the average temperature from 65-degrees Fahrenheit. Each degree of temperature above 65 is counted as a cooling Degree Day while each degree below 65 is considered a heating Degree Day.

The final metric I want to mention is EBITDA, which is used to evaluate a range of factors. EBITDA is defined as income before provision for income taxes, depreciation and amortization expenses. EBITDA should not be considered an alternative to net income as a measure of operating results or to total cash flow as a measure of liquidity.

Turning to the results of the operations. Sales for the 3 months ended September 30, 2005 increased 28% to $854.9 million from the year ago period. While the total volume fell by 17% this was offset by a significant increase in prices. Gross profit increased 54% to 19 million for the most recent 3-month period, up from 12.3 million in the comparable period of '04.

For the 9-month period ended September 30, 2005, sales increased 27% to $2.8 billion. While gross profit was up approximately 21% to $61.8 million. Looking at sales by segment. Wholesale products accounted for 91% of our sales in the third quarter of '05, comparable to the same period a year ago. The commercial segment comprised 9% of sales in the third quarter of '05, up from 8% in the comparable period of '04.

For the 9 months period in '05, the wholesale segment totaled 90% of sales compared with 89% in the prior year. commercial sales were 10% and 11% in '05 and '04 respectively.

Actual heating Degree Days in the third quarter of '05 totaled 42, which compared with 64 in the third quarter of '04, a 34% variance. However, the Degree Days are not a significant metric for Global Partners in the third quarter. They are a significant metric in the first and fourth quarters but actually have a pretty diminimous effect in the third quarter.

Net product margin for the third quarter of '05 increased 53% to 19,400,000 from 12,700,000 in the third quarter of '04. Looking at the 9-month comparison from '05, net product margin was 63 million, a 20% increase from the same period of '04.

Operating expenses in '03 were 40 - 4.7 million, down 2% from a year ago's period. While operating expenses for the 9 month period increased by the same percentage to 14.6 million.

Selling general and administrative expenses for the third quarter of '05 increased 3.9 million or 51% to 11.6 million. Through the first 9 months of '05 SG&A increased 6.1 million, or 26% to 29.4 million. As we noted in this morning's news release, the increase in SG&A was due primarily to the payment of approximately 3.1 million as management bonuses for services rendered by certain officers and employees in conjunction with the organization of Global Partners LP.

In addition, bonuses, executive salaries, owner related expenses increased by 2 million. Legal consulting and banking services and fees increased by half a million and an additional 400,000 was incurred for the expansion of our marketing operations. All of these expenses, approximately 4 million, are non-recurring.

Amortization expense remains unchanged at 400,000 for the comparable 3-month period ended September 30th. Through the first 9 months of '04 amortization expense increased by 800,000 to 1.2 million as a result of costs related to the formation of Global Partners.

Interest expense increased $1,600,000 year over year to 3.2 million for the third quarter of '05. As a result of market price increases for products and expenses related to the formation of Global Partners. Through the first 9 months of '05, interest expense rose 4.4 million to $7.2 million. This includes the interest on the term debt of approximately $1.6 million, which was subsequently repaid by the public offering.

Including the 3.1 million in one time items I mentioned a moment ago and a 1.1 million charge for the termination of an insurance policy, the net loss for the third quarter of '05 was $2 million. This was an improvement of about 7% over the comparable period a year ago. Including the aforme - excluding the afor - excluding the aforementioned items adjusted, net income totaled 2.2 million for the third quarter of '05 and 12.5 million for the first 9 months of '05. EBITDA totaled 2.1 million for the third quarter of '05 and 18.4 million for the 9 months ended September 30th '05. If I exclude the one-time items I mentioned earlier, EBITDA for the quarter ended September 30th '05 was 6.3 million. A substantial improvement over the same period last year. in fact, the improvement was greater than 1200%.

Total capital expenditures for the 3 months period ended September 30th '05 was 411,000 it was down 12% from 465,000 in the comparable period of '04. For the first 9 months of '05 total capital expenditures decreased 20% to a million from a million three for the first 9 months of '04.

In connection with the completion of our initial public offering, Global Partners and certain affiliates entered into a 4 year senior secured credit agreement in the aggregate principal amount of $400 million. Last week we announced that signing and amendment to our revolving credit facility raises our borrowing limits to $500 million. The agreement, which was agent and arranged by the bank of America provides us with significant financial flexibility, including a $450 million facility for working capital purposes, $35 million acquisition facility, and a $15 million revolving credit to be used for general partnership purposes.

Now let me spend a moment on our plans for distributions of available cash. As we outlined in our S1, we intend to pay a minimum quarterly distribution of 41.25 cents per unit, or $1.65 per year on all common and subordinated units. To the extent we have sufficient cash from operations after establishment of cash reserves and the payment of fees and expenses.

We expect to pay the first distribution within 45 days following the end of each quarter beginning with the quarter ended December 31, 2005. The unit holders of record on the applicable record date, the minimum quarterly distribution for the period ended December 31, 2005 will be adjusted to reflect the length of time from the closing of the Global Partners initial public offering on October 4th, 2005.

That concludes my remarks now I'll turn this back to Eric Slifka.

Thanks Tom. So sum up, Global Partners had an exceptional third quarter with strong margin improvements in both segments that drove a 6.6 million increase in gross profit.

We completed our IPO in October and now enter what has historically been the strongest 2 quarters for our business. Global has built a rich and successful history in the refined products industry. We begin life as a publicly traded limited partnership equipped with solid fundamentals, a proven business model and a focused growth strategy.

With that I'd like to open the call for any questions. Sarah?

(Operator Instructions)

Your first question comes from Jon Freeman with Raymond James.

Afternoon guys, good quarter.

Hi.

Thanks Jon.

First question I had, when you all were talking about your growth outlook going forward and you touched on organic experience and acquisition opportunities to expand your geographic reach, you also mentioned you said step-out acquisitions, I'm wondering if you could just kind of elaborate on what you meant by that.

I think, I think when we talk about step-out acquisitions, really what we're talking about is finding terminal acquisitions that are available that are in different market geographies, that major independents or independent terminal owners may have that they're selling and as you are aware, there is a plethora of those assets that are out there and that are available.

Okay. I'm trying to get a sense of going forward on the outlook for your margins and kind of how much is you all's like substantial margin expansion has been due to kind of a higher commodity price environment that may be made it a little easier to push margins higher, do you think that the margin outlook, you can hold those pretty steady despite kind of obviously commodity prices have come down quite a bit recently?

Yes, I think, I think as we look at commodity margins and high prices, at least for the moment here, and what you've seen in our last quarter numbers we expect that to hold. Clearly, I don't know what the future is going to be, so I'm not sure it would be right for me to comment here but at least we've been comfortable with where we are and the amount of business that we in fact have contracted for in the future.

Jon, I might - this is Tom McManmon and I might just comment that looking backwards, which I think we can all do with a great degree of clarity, we have seen a very definite margin expansion in the last 9 months. And we also have seen higher interest costs, which in fact have all been passed along to our customers and our customers have accepted them willingly with additional margin expansion. So I think you're seeing a, at least historically going backwards, a somewhat of a little bit of a shift in margin expansion where the margins have been fairly consistent over the years.

You know I think - just to further Tom's comments there. There is no question that there is an interplay between your interest costs and your margins, right, so those 2 move in an accordion like fashion. I'm not sure they move exactly step for step but we like the position that we're in now.

Okay, that's helpful. On the distribution policy, maybe you all could talk about kind of what type of coverage you would feel comfortable with going forward?

I think we indicated when we were out on the road show and other times, that we are seeking a conservative level of 1.1 to 1.15 coverages and I would say that that policy has not changed.

Okay, last question I had was you mentioned that obviously the trade card exposure hasn't been an issue for you all and obviously we've seen substantial weakness with few heating oil retailers over the past few months. Just interested if you all could kind of elaborate on what steps you all take to kind of ensure payment with some of the lower credit quality customers.

We - yes, this is Tom McManmon, as a matter of corporate policy, we underwrite each individual account as if it were a bank loan. We look to secondary sources of repayment we have better than 60% of our customers on electronic funds transfer drafting at the present moment. We seek to continue to increase that process where we have access directly into their checking accounts. We basically require statements from our customers on an annual basis. That don't have statements we get tax forms. We take guarantee - where appropriate we take guarantees, letters of credit, mortgages, and we in fact try to understand our customers business.

One of the great advantages of Global, we grew out of a retail business, is that everyone in the management team has managed retail heating oil companies or retail gasoline and in fact retail gasoline and retail heating are - represent a good sized chunk of our customer base, so we understand the businesses right down to the nuts and the bolts. We're also not afraid to take over a company, if there's a problem, put it back in shape and sell it. We have no such companies in our portfolio at the present time. Effectively, when you do all that, if you do it one, essentially one decision at a time, then I think you can put yourself into a position where you can protect yourself.

Having said that, there are certainly people in the retail heating oil business who have required revisions of their credit policy and a number of large companies at the present time where not offering any open credit to but we're still supplying. We have a strategic network which makes us a preferable supplier under a lot of circumstances and people are willing to work with us in order to get access to our terminal network. But we're very comfortable with our credit position but we are very, very aware of and vigorous about the pursuit of it.

Our credit department I think is excellent and in fact, is, is one of our strengths.

Great, thanks guys. That's all I had.

(Operator Instructions)

And at this time there appear to be no further questions.

Once again everyone, I would like to thank you for joining us this morning. We look forward to continuing to update you on our progress, thanks again. Have a good day.

This concludes today's conference call. You may now disconnect.