Global Partners LP (GLP) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Global Partners Second Quarter 2007 Financial Results Conference Call.

Today's call is being recorded. With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Operating Officer and Chief Financial Officer, Mr. Tom Hollister. We also have Executive Vice President, Treasurer and Chief Accounting Officer, Mr. Charles Rudinsky, and Executive Vice President and General Counsel, Mr. Edward Faneuil.

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

Good morning, everyone. Thank you for joining us.

Before we begin, let me remind everyone that during today's call, we'll make forward-looking statements within the meaning of federal securities laws. These statements may include but are not limited to projections, beliefs, goals and estimates concerning the future financial and operational performance of Global Partners.

The future performance and financial results of the partnership may differ materially from those expressed or implied in any such forward-looking statement.

Such factors include but are not limited to those described in Global Partners' filings with the Securities and Exchange Commission. Global Partners 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, it is our policy that any material comments concerning future results of the operations will be communicated through press releases, publicly announced conference calls or other means that will constitute public disclosure for purposes of Regulation FD.

Now, allow me to turn our call over to our President and Chief Executive Officer, Eric Slifka.

Thank you, Edward. Good morning, everyone, and thank you for joining us to discuss our second quarter financial results, which were in line with our expectations. Our performance this quarter reflects three themes -- first, healthy volume increases throughout our system; second, changes in transportation fuel margins; and third, expense increases related to the expansion of our terminaling capacity and volume throughput.

Let's take a look at each of these points in more detail. To begin with, we are very pleased with the 36% increase in wholesale product volumes, which went from 462 million gallons in the second quarter of '06 to approximately 630 million gallons this year.

This increase reflects the momentum of Global's terminal expansion, which began in the second quarter of '06 with the acquisition of Refined Products Facilities in Macungie, Pennsylvania and Bridgeport, Connecticut, and continues with our recent ExxonMobil acquisition.

In fact, our higher volumes in Q2 take into account our first few weeks of ownership of the two New York and the one Vermont terminals we purchased from in May from ExxonMobil.

Turning to margins, our Q2 results were somewhat mixed as the strong performance within our wholesale distillates segment counterbalanced margin weakness in gasoline. Wholesale net product margin for gasoline was down approximately 5 million compared with the same period in 2006.

Gasoline margins were down for three primary reasons -- the return of margins to more historical levels, general margin pressure being seen across the marketplace and startup costs related to the acquisition of the former ExxonMobil terminals in Newburgh and Albany, New York, and Burlington, Vermont.

Let me just touch upon the first factor in a little more detail. As we discussed on our Q1 conference call, our '06 results benefited from some market dislocations that arose from the industry's use of ethanol [in] gasoline as well as from temporary inefficiencies laid into the market's introduction of specialty fuels such as ultralow sulfur diesel. Those inefficiencies were particularly evident in the second and third quarters of last year.

We estimated on last quarter's call that they added somewhere in the neighborhood of $6 million to our '06 earnings. Roughly $2 million fell in the second quarter of '06 and the other $4 million occurred in the third quarter. Since that time, the higher margins resulting from those inefficiencies have returned to historical norms.

It is important to note that Global has a diverse product mix, enabling us to offset compression in gasoline margins with a healthy margin increase of approximately $6.6 million in distillates. The drivers behind the increase were margin expansion, volume increases related to the addition of new terminals, including Macungie and Bridgeport, as well as volume expansion related to weather. The net effect of these pluses and minuses was a modest year over year increase in gross profit of approximately 5%.

On the expense side, expenses were up 20% year-over-year. This increase is directly related to the higher volumes from our expanded terminal capacity and the corresponding increases in headcount and equipment. We also made some investments in our IT infrastructure to maintain uniformity among all our locations as we add the acquisition assets.

For example, we are implementing an enterprise-wide system that provides us real-time access to information with inventory, pricing and sales by locations.

Overall though, the real driver here is the volume increase. While expenses increased 20% year-over-year, our terminal capacity has increased an even greater amount during that time period, growing approximately 25% from 6.5 million barrels a year ago to 8.1 million barrels following the completion of our May acquisition from ExxonMobil.

Complementing this acquisition, last month we signed an agreement to acquire two more refined product terminals from ExxonMobil for cash consideration of $34.7 million. These terminals, both located on Long Island, have a combined storage capacity of 430,000 barrels, bringing Global's total storage capacity to approximately 8.6 million barrels.

ExxonMobil has again entered into a long-term throughput contract with us to use these terminals. The addition of these strategic Long Island facilities solidifies Global's position as a major player in Greater New York refined product market. We expect this acquisition to close later this quarter.

Our financial strength continues to generate distribution growth for unit holders. Last month, the board voted to increase the quarterly distribution to 47.25 per unit for the three months ended June 30, '07, an increase of 8% year-over-year and 1.6% over the prior quarter. The distribution will be paid August 14 to unit holders of record as of the close of business on August 3.

Before turning the call over to our CFO and COO, Tom Hollister, let me summarize. Although we experienced some margin pressure this year, I am very pleased with our volume growth, market expansion and the integration of our recent acquisitions.

With that, I would like to turn the call over to Tom Hollister. Tom?

Thank you, Eric. And good morning, everyone.

Eric has commented on the key points related to the income statement. But let me add one more observation -- because the newly acquired assets will have a higher depreciation levels than our older terminal assets, we expect the difference between our net income performance and distributable cash flow to widen over time.

We estimate the annual depreciation cost from the three terminals we acquired in May will be a non-cash charge of approximately 5 to 6 million on an annualized basis subject to final appraisals.

As a non-cash charge, depreciation will lower net income but will not lower our distributable cash flow. We also expect a depreciation increase from the two additional ExxonMobil terminals on Long Island that we expect to close this quarter.

As for the balance sheet, book equity as of June 30 was approximately $163 million, which is more than double the partnership's equity since the completion of our initial public offering at year-end 2005.

With respect to the pending acquisition of the Long Island terminals, I also want to point out that the purchase price of the Long Island terminals is based on our projection of EBITDA for the project, with a price to EBITDA purchase multiple which is a low double digit multiple in the first year of operations, a high single digit multiple in the second year, with improving results expected thereafter.

Our expectation is that the first 12 months of operations will be slightly accretive. We expect those returns to increase over time as we realize the potential of these assets.

With that, we'll be happy to answer any of your questions. Operator?

Thank you. The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS)

Our first question will come from Barret Blaschke with RBC Capital Markets.

Good morning, guys.

Hi, Barry.

Hello. Quick question. What were the units outstanding for the quarter?

Barret, it's Chuck. We are still working on the weighted average units outstanding.

Okay.

As you know, we issued Class B shares in conjunction with the recent terminal acquisition from ExxonMobil. And it's a pretty complex accounting set of rules over the issuance and conversion of Class B shares. So we are finalizing those numbers with our auditors right now.

Okay. And the other thing was there was a line item, Environmental Portion, in the liabilities on the balance sheet. What was that?

Barret, that is in connection with the purchase of the ExxonMobil terminals. And, of course, we knew about this in the course of our almost 12 months of due diligence. It has been thoroughly investigated. A full remediation plan has been submitted to New York State by ExxonMobil.

Okay.

But the 8 million reserve, from an accounting standpoint, is our best estimate of the cost of the environmental liability as a conservative assessment.

Okay.

As you know, as a large terminal company, we have an awful lot of experience in managing environmental issues of this kind.

Right, right. One other, and that's basically I know the distillate margins were strong. I know we've started to see some backwardation in the oil market. Do you expect that to show up at all in any way in your results in the next couple of quarters?

Well, Barret, as you know, we can't make forward-looking statements. So I will have to beg off on that one.

Okay. Thanks guys.

Thanks, Barret.

[Wyatt McCormick], Raymond James, has our next question.

Yes, hi. Good morning. I was wondering if you could put some numbers behind the IT spending to help me better project SG&A going forward.

Again, we -- you will see those numbers in the Q but we don't break out any of our component spending separately from maintenance CapEx. But we will -- you will see those numbers in the Q when it's issued.

And do you have any estimate of when that will be out?

The normal filing should be tomorrow, by tomorrow at 5.

Okay, sounds great. Thank you.

[Brian Zaran] with Lehman Brothers has our next question.

Good morning.

Good morning.

Question regarding the idle storage capacity you are expected to bring online. What's the time frame for that from the terminals from the New York and Vermont terminals that were acquired?

Obviously, there are both permits and just getting into the assets and making sure that they are compliant, and that is just going to take some time. There is negotiation that we have to go through with the state in order to do that. So it is dependent upon -- it is really dependent upon those negotiations.

Okay. In terms of the D&A, you mentioned some guidance related to those New York and Vermont assets. Is it safe to - or is it reasonable to assume the recent acquisition, the Long Island assets, would have a comparable D&A impact per barrel -- like roughly a third of the 5 to 6 million you mentioned?

Well, you are talking about depreciation?

D&A expense, yes.

I am not comfortable estimating that proportion. Obviously, our purchase price is roughly a third. So that's some correlated effect.

But what I can say for the moment, at least it's not on the newly acquired assets -- and again, it is subject to the final appraisals -- but we estimate annualized, those will be about 5 to 6 million.

Okay. And one last question. On the IT infrastructure spending, can you discuss a little what you expect the benefits to be from that?

Better control of knowing exactly when our sales are, knowing exactly when customers are purchasing from us, knowing why customers are purchasing from us, allowing us to control our sales staff better by knowing exactly the detail of every gallon that they sell.

Okay. I have no further questions. Thank you.

Thank you.

We do have a follow up question that will come from Barret Blaschke. Please go ahead, sir.

One other one, and that's just what was the breakdown between the gross profit on commercial and wholesale volume?

Well, you will see it in the Q, Barret, but you will see some change in that number because of the ratio of wholesale now with the terminal acquisitions being predominately wholesale driven.

I know it typically was around about 90-10.

I can't -- it will be out tomorrow but it will be -- it will reflect a newer ratio now that the new terminals are predominately wholesale driven.

I was just saying that I know in the past, it's been about 90% wholesale, 10% commercial. So--

You are absolutely correct -- in the past.

So it is going to skew a little more toward wholesale?

Yes, because the new terminals are more wholesale driven.

All right. Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS)

We'll go next to [Noah Lerner] with [Hartz Capital].

Good morning, guys. A couple real quick questions. Somewhat of a follow up as well, in the SG&A $3 million increase -- you mentioned is increased spending in IT and obviously therefore increased depreciation -- are there any other major categories of expenditures that caused the SG&A to rise so dramatically?

The $3 million is total operating expenses. 2 million is SG&A is the rest is operating.

Okay.

In the SG&A, the expenses are up, call it roughly 20% and our terminaling capacity year-over-year is up 25%. So it is the natural staffing you would want to have in place to have both control and command of a larger effort, and pieces of this of course is the IT infrastructure, is one example.

But what we do feel now is that we have a good full complement of staff to manage both the newly acquired assets as well as the ones we expect to close later this quarter.

Great, thanks.

The other question I have is in the press release, there was mention of a next phase of growth and to help you capitalize on some organic growth opportunities. Can you put any color around those statements at all?

Noah, that was not in this press release, I don't believe. Are you referring to an older one?

No, the one I printed out this morning dated August 8, right above where it says "Financial Results Conference Call," it says, "The ExxonMobil terminals represent a substantial investment in our next phase of our next phase of growth, and over time, we fully expect these investments to generate solid returns and enable us to capitalize on organic growth opportunities."

I am sorry, I misunderstood. Okay. I think that the point is that we have a hub and spoke approach to our terminals. And any time we acquire a major terminal, it is not uncommon for us to lease out or rent neighboring inland terminals. And therefore you get the first lift from just driving profit out of those new terminals. And then you get sort of a second round as we expand and penetrate deeper into the neighboring markets.

Yes, I think - hey, Noah, it's Eric. I think the big difference here is when we buy these assets, we develop the businesses around the asset and through the asset, right? So we are actually building businesses around the specific locations that we've purchased.

Right. Just not assuming what was -- taking somebody's else business and slapping it onto yours?

Yes, I think -- well, the core point is that, obviously, we have the contractual (inaudible) ExxonMobil, and then in the core terminals, we'll be selling locally into those marketplaces in ways with many, many customers that ExxonMobil was not. So that is sort of the round one of building the businesses.

Okay.

And then the second round is the one I referred to.

Great, thanks a lot.

It appears we have no other questions.

Mr. Slifka, I would like to turn it back to you for closing remarks.

Thank you all for joining us today and have a good day. Thanks.

That does conclude our call. We would like to thank everyone for their participation. Have a great day.