Global Partners LP (GLP) 2007 Q4 法說會逐字稿

Good day everyone and welcome to the Global Partners fourth quarter and full year 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; Executive Vice President, Treasurer and Chief Accounting Officer, Mr. Charles Rudinsky; Executive Vice President and General Counsel, Mr. Edward Faneuil. At this time, I would like to turn the call over to Mr. Edward Faneuil for opening remarks. 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 will be making 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 actual financial and operational performance of Global Partners may differ materially from those expressed or implied in any such forward-looking statement. In addition, such performance is subject to risk factors including but 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 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 the 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 Global Partners' fourth quarter and full year 2007 results. I will review our accomplishments in '07 including the strategic acquisitions and Province terminal project we announced during the year. Tom will discuss the key financial items from our results and discuss the issues affecting our near-term outlook. We will be happy to take your questions afterwards.

Overall, 2007 was a year of strong financial and operational achievement for Global Partners. The year included numerous financial highlights. Operating income improved 11% while adjusted EBITDA and distributable cash flow which excluded the $14.1 million gain on the '07 sales of our Nymex investment, increased 19% and 7% respectively.

To get an accurate picture of our net income performance it is important to understand the unique market dynamics that have influenced our financial results during the past two years. In 2006 we benefited from temporary market inefficiencies associated with the introduction of certain specialty fuels and market dislocations related to the use of ethanol in gasoline. These inefficiencies generated approximately $6 million of our $33.5 million of net income.

In '07, favorable buying opportunities in the residual fuel market accounted for approximately $4 million of our $32.9 million of net income as adjusted for onetime gains. From an operational perspective the theme of '07 was strategic asset expansion. As of year end, our total storage capacity increased to approximately 9.3 million barrels up 33% from the end of 2006.

In 2007 we purchased five refined petroleum products terminals from Exxonmobil in two separate transactions adding more than 1.9 million barrels of capacity to our terminal network. The first transaction was completed in May with the acquisition of terminals in Albany and [New Burgh], New York; and Burlington, Vermont that have a combined capacity of approximately 1.5 million barrels. In November, we completed the purchase of terminals in Inwood and Glenwood Landing, New York expanding our capacity by another 430,000 barrels. At each of these facilities Exxonmobil has signed termed throughput agreements.

We also began construction and refurbishment of a new 474,000 barrel deepwater marine terminal at the Port of Providence that expands our market share in Rhode Island and southeastern Massachusetts. The first phase of this new terminal was completed in January '08 with the opening of a new diesel and biofuels facility with 244,000 barrels of storage capacity. The second phase of the project is a 230,000 residual fuel terminal expected to open for business later this year.

Together these initiatives represent the three legs of our growth strategy -- bolt-on acquisitions, step-out opportunities and organic growth projects that broaden our geographic footprint and diversify our product offerings. Our new terminals in Long Island and Albany are examples of bolt-on acquisitions which expand our reach in markets where we have an established presence.

Adding assets and increasing our concentration in these areas enables us to leverage existing customer and supplier relationships to further build market share. Our terminals in New Burgh and Burlington represent step-out acquisitions which enable us to apply our marketing expertise to drive growth in new markets. And our new Providence facility constitutes an organic growth project that enables us to enhance service to existing customers and establish new relationships.

We have broadened and diversified our product offerings and geographic locations. From a product perspective, the acquisitions we announced in 2007 are evidence of our focus on expanding the contribution of products such as a gasoline and diesel fuel.

Gasoline accounted for approximately 43% of total product volume for the fourth quarter of '07 and 42% for the full year '07 compared with approximately 36% of total volume for the same period in '06. In addition, gasoline volume increased 71% in the fourth quarter to 396 million gallons while for the year gasoline volume increased 56% to 1.4 billion gallons.

In summary, let me say that the strategic steps we took in 2007 resulted in strong financial performance that enabled us to deliver distribution growth for unitholders. We're pleased we achieved the objective we established early last year, a fourth quarter '07 distribution that was 7% higher than the distribution paid in Q4 '06. We exited '07 at an annualized distribution rate of 195 per unit up from 182 at the end of '06.

Now let me turn the call over to our Chief Operating Officer and CFO, Tom Hollister, for his financial review. Tom?

Thank you, Eric, and good morning everyone. Eric has reviewed the highlights of the fourth quarter and the full year and I would like to point out some items on our financial statements. The first is our interest expense which is up 59% for the quarter and 46% for the year. Our higher interest expense was driven by borrowing costs associated with our new terminal, increases in product volumes and significantly higher refined petroleum product prices and a slight increase in underlying interest rates.

Another point we have made previously relates to a depreciation of our newly acquired terminals. These assets carry a higher level of depreciation compared with our other terminal facilities. Consequently on a year-over-year basis, depreciation and amortization more than doubled to $9.6 billion in 2007 from $4.5 million in 2006 and nearly tripled to $3.5 million in the fourth quarter of 2007 from $1.2 million in Q4 2006.

As a reminder because depreciation is a non-cash charge it has the effect of reducing reported net income and taxable net income for unitholders but does not reduce our distributable cash flow. Therefore, investors will continue to see a growing disparity between our net income and distributable cash flow over the next several quarters.

I also want to highlight that our twelve-month distributable cash flow which increased approximately 7% for the full year 2007 from the same period of 2006. That percentage increase would almost double if you factor out the $6 million benefit in 2006 for market inefficiencies and the $4 million in favorable buying opportunities realized in 2007 both of which Eric previously mentioned.

With respect to our balance sheet I want to highlight some key changes year-over-year. Our assets reflect increased property and equipment related to the acquisitions and a sizable increase in receivables and inventories which were driven by growth in product volumes and higher oil prices. Supporting these investments was a 55% increase in our partners equity to more than $160 million at year end 2007.

For those investors who are interested in keeping track of gross receipts, the per unit amount for 2007 was $513.90. Keep in mind that this figure pertains only to units held for the entire 12 months of 2007. Now I would like to spend a few minutes discussing our outlook for the first quarter of 2008.

As Eric outlined, we are continuing to make progress in advancing our product diversification strategy. Nevertheless, weather-related fuels are a component of our business. And the first and fourth quarters of the year still account for a larger percentage of earnings than the second and third quarters.

While it has not been our practice to give guidance, we think it is important at this time to provide investors with some insight based on our current business environment. As we noted in this morning's news release, we expect certain factors affecting our business to have a significant negative impact on our results of operation in the first quarter 2008 compared to the first quarter 2007.

These factors include unfavorable forward pricing and a bulk refined petroleum product supply market that has led to higher supply costs. In addition, volume is being significantly affected by warmer temperatures year to date compared with the first quarter of 2007 and compared to the normal average.

Volume is also being affected by higher oil prices and residual fuel prices. By way of example, at year end -- in the course of the year the price of heating oil increased more than 65% to $2.64 per gallon from $1.60 at year-end 2006. Residual fuel increased more than 100% to $75 and $15 per barrel at year-end 2007 from $37.25 at year-end 2006.

This higher price environment in prompting meaningful energy conservation and reducing the number of fixed-price sales. In addition, the price differential between oil and natural gas is contributing to conversion to natural gas.

Our terminal operating costs and to a lesser extent SG&A have increased as a result of our recent acquisitions. As we have indicated previously, we expect the results of operations from these facilities to improve over time as we build their productivity. In the interim we carry the full higher operating costs without realizing the full revenue potential.

In certain markets we are in the process of converting tanks to accommodate the higher percentage blends of ethanol. The downside of this effort is that we have to forego some near-term sales opportunities while the conversion of these systems is completed.

While this is a difficult environment, we are confident about the long-term opportunities for Global Partners. The strategic steps we have taken in recent year's have have enhanced our performance. We're well positioned in our target markets and we will continue to evaluate strategic volume opportunities as we go forward. With that, we will be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS) Barrett Blaschke, RBC Capital.

A little more on that pricing environment, guys? Just wanted a little clarification there. It the switching occurring mostly in commercial or more on the wholesale side or are you now seeing it in both markets?

I would say two things. Since the price environment is so high I think you have seen conservation as one piece and I think that you have begun at the retail level to see some switching. But to date I don't think there's been significant changes there. But there are pressures.

So it is more conservation than actual switching on the wholesale business?

It is both.

Historically as you know the conversion percentage from heating oil to natural gas has been pretty low. There are high costs to do it and at least in New England over the years typically new housing starts have offset that -- a conversion. But it isn't just the absolute high price. At this particular moment it is the spread between natural gas and heating oil which we believe or suspect will perhaps increase that conversion percentage.

Do you still have the issue of the supply of natural gas versus heating oil?

I'm not sure what you mean.

I know the infrastructure in parts of the Northeast it's a little light in terms of the ability to get the volume of natural gas and if you were to see a large amount of switching versus heating oil which has kinda been there and is more established.

Yes, but I think what Tom pointed out was that conversion at the residential level has a big upfront cost and that is going to act as a barrier and it's going to take time. And so even if they build to capacity you would have to still go into a homeowner's house -- they have to have a reason for wanting to take make a big capital expenditure. At this time I don't think people are going to be looking to do that unless they absolutely have to.

Basically the savings still are not there versus just being a little more -- turning the dial down five more degrees?

And I think the savings are going to have to be there over time too, right? Who knows over time?

All right, okay, thank you.

Darren Horowitz, Raymond James.

Good morning. On the margin front, what is your ability to pass through price increases, higher supply costs, specifically in the bulk refined market in order to try and preserve margins? Obviously when you're looking at this (inaudible) price environment it is moving exponentially higher than it has in years past. Is there a bit of a lag there for how you can kind of push through cost increases and try and hopefully negate some of that margin degradation?

Historically we have been price agnostic because when all is said and done, when you look at our income statements it is really cents per gallon that drive our business and we typically pass that through pretty effectively. The higher pricing environment has affected volume because of the switching as Barrett mentioned we'll stay on the commercial side and conservation.

Separately we have seen some degradation in the product, the bulk product markets which also make our supply costs higher is the trend we see in the first quarter. But historically our business has been a wholesale turnover business and our margins --ii are times they are squeezed or they are not squeezed. But passing on the pure price is not the core issue.

Okay. And just one quick housekeeping question. You talked about a lot of the transactions, the capacity expansion transactions that have closed over the course of '07. What is the appropriate run rate that we should use for DD&A on a go-forward basis?

Probably about historically we spent about $2 million on CapEx at the terminals. Obviously that number will be higher with the expansion of (inaudible) product terminals. We think somewhere around the $3 billion mark is appropriate.

Just to add to Chuck's comment, this past year you will the 10-K -- we guess Friday we will file it. The maintenance CapEx this past year was $3.8 million. It was a little bit higher than the number Chuck used.

One final question, because you addressed this in your prepared remarks as well as your written remarks, when you're talking about the reduction in number of fixed-price sales, can you give us a little bit more detail on the composition of sales you're experiencing now, the contract basis what kind of the general tone in the marketplace is right now for duration of contracts?

I think the bottom-line right is the consumer looks at the total price and the retail market looks at the total price and it says I don't want to buy it at price. Now of course had they done that as Tom had went through the pricing differentials the year on year they would have saved a lot of money. But there just hasn't been the demand for it. So that in turn means you end up selling what I will call spot at the rack everyday and that is the difference.

Just as a reminder we of course don't sell direct to consumers but their retail oil delivery suppliers typically will turn around and buy at a fixed-price forward from us. So that will reflect the consumer (inaudible)

Okay, thanks guys.

[Brian Zaran], Lehman Brothers.

Good morning. Is the guidance for Q1 the negative impact more on the volume side than on the margin side?

Yes.

I guess building off one of the prior questions, can you provide a little more color as to traditionally how the forward curve is able to be offset that you can pass along (inaudible) really matters why in this instance can -- our margin is being squeezed or it traditionally backwardation very negative for the wholesale business?

Traditionally backwardations suggest that markets are tight and if markets are tight it would cinch that people have less product to to sell. And if that is true then your margins should expand, right? And that traditionally is how you would look at backwardation. I think on the other side of that, you have warm weather and consumption trends working against that on the other side which I think is a little bit unusual.

Okay. So it is not the shape of the forward curve it is more just the combination of that and the weather-related issues?

Weather conservation in particular, too.

I think what Eric's is getting at is the relationship between the current or wet market and how many barrels there are around. Typically in a backward market it is pretty tight on supplies. This is a little bit different because you have a fair amount of product.

You mentioned your non-weather-related mix is increasing, higher gasoline volumes. Can you provide some kind of estimate of what percentage of EBITDA or cash flow is non-weather-related or just directionally how it has changed year-over-year?

I think we mentioned earlier that on a year-over-year basis a year ago it was about 36% both for the quarter and for the year and that was in '06. In '07 (inaudible) for the fourth quarter it was 43% of 42% for the full-year.

Is that volume or cash flow?

That is volume.

Looking at a higher level, your revenue streams -- at least directionally how can we look at the weather-related fuels versus the non-weather-related fuels on a cash flow basis or is it more we should just look at a volume basis?

When we release our 10-K tomorrow we do add a chart by segment that for our wholesale segment will breakout gasoline from our (inaudible) and residual fuel oils. So you will be able to get a little more clarity both volumetrically and for gross margin for the different product lines. However embedded in our distillate pool on-road diesel. We do not break that out separately for competitive reasons.

(OPERATOR INSTRUCTIONS) Adam Rosenberg, Zimmer Lucas Partners.

My question was assuming the refined product prices stay where they are in an extremely high oil environment, what do you think you will lose annually in terms of volume? Is kind of a 2% number a good number to use from conservation and people switching to natural gas?

Our comments on these particular factors are really restricted to the first quarter where we have seen some [acuteness] and as and as you know we typically do not give guidance but we thought at least for this quarter we wanted to give you some insight.

So what do you think roughly the difference was in terms of volumes that will be in Q1 '08 from the first quarter of '07?

I don't think we would want to go beyond today anything other than sort of the directional sense and insight of which way the market is moving.

Okay then assuming a higher refined product environment, do you think you will be able to begin passing along some of the higher costs through slightly higher margins? I know typically your margins don't necessarily reflect changing commodity prices. But if this environment is here to stay can you start passing that through?

Again I don't want to conjecture beyond the insights we shared for this first quarter other than saying this is a unique environment where you had almost a triple witiching hour of backwardation with pretty wet current markets, high prices particularly compared to natural gas and warm weather.

Okay, thank you.

At this time we have reached the end of the Q&A session. I would now like to turn the conference up back over to Mr. Slifka for any closing or additional remarks.

Thank you all for joining us today. We look forward to updating you on our progress going forward. Have a good day.

And that concludes our conference call. Thank you for joining us today.