Global Partners LP (GLP) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Global Partners First Quarter 2008 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. (OPERATOR INSTRUCTIONS.) With us from Global Partners are President and Chief Executive Officer, Mr. Erik Slifka; Chief Operating Officer and Chief Financial Officer, Mr. Tom Hollister; Executive Vice President, Treasurer and Chief Accounting Officer, Mr. Charles Rudinski; and 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.

Thank you. 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 statements. 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 for our first quarter conference call. For today's call, we're going to begin by having Tom take you through the supply, demand, and operating factors that affected our business in Q1. Many of these are transitory in nature. He will also touch on a couple of items from our income statement and balance sheet. I will then share some perspective in terms of what these factors mean to the business over the long term, and the initiatives Global Partners is taking in this changing environment. Afterwards, we will be happy to take your questions.

Now let me turn the call over to Tom. Tom?

Thanks, Eric, and good morning, everyone. Let me begin by saying that our financial results were consistent with the expectations that we set forth in our fourth quarter 2007 news release and conference call in March. That is, we anticipated a significant negative impact on our results for the first quarter of 2008 from a confluence of factors, including warmer temperatures, unfavorable forward pricing in the bulk refined petroleum supply market, higher oil and residual fuel prices, and a widening disparity between oil and natural gas.

The events that affected our Q1 results fall into three categories--the demand environment, the supply environment, and specific operating issues.

On the demand side, the impact of higher energy prices led to meaningful energy conservation as consumers drove less, increased their use of public transportation, lowered thermostat settings, took smaller oil deliveries, and maintained less oil in home storage tanks.

Of course, conservation is much easier when temperatures are warmer. First quarter demand was also affected by warmer temperatures, particularly in January and February, which were approximately 9% warmer than normal, and also 9% warmer than last year. To give you a sense of the impact, January and February account for approximately 37% of the total number of annual heating degree days.

Demand was affected not only by conservation and weather, but also by the widening gap between the price of oil and natural gas. At March 31, 2008, on the New York Mercantile Exchange, the price of a gallon of heating oil was up 62% year over year. Residual fuel prices were up 59%. These are huge increases. By comparison, natural gas increased only half as much. On a Btu-per-gallon basis, natural gas is now far more competitive than it has been in the past. This has resulted in reductions on our commercial oil sales, as Eric will discuss, and may influence conversion to natural gas by residential customers.

Another demand-related factor was our consciously conservative credit policy. Because our credit lines and limits are dollar-based and not adjusted for price per gallon, in higher-priced markets, certain customers had to utilize open credit lines with other wholesalers in the first quarter. Eric will comment on this topic again in a few minutes.

In terms of the supply environment, our business is substantially hedged, but the combination of price backwardation and excess product in the market created a challenging environment in the first quarter.

In addition to these industry factors, two specific operating issues also impacted our results in Q1. The first is the implementation of an ethanol conversion program at our terminals in Albany, New York, and Burlington, Vermont. During the conversion of these facilities, we were unable to supply customers in both locations with ethanol-blended gasoline. I'm pleased to report that these facilities are now supplying customers with ethanol-blended gasoline.

The other operating issue is the October 2007 derailment of railcars in Vermont, which hindered supply to our Burlington terminal for several months. Full rail service to Burlington has recently resumed.

Perhaps it's an oversimplification, but one way to look at our business model is to recognize that the sale of transportation fuels creates a year-round basic business. In fact, our gasoline sales increased 154% in the first quarter from the same period of 2007. However, heating oil and other weather-related products, which account for a majority of our volume in the first and fourth quarters, continue to represent a significant contributor to our results.

Our Q1 reduction in earnings is hard to replace during the remainder of the year. Much like a retailer who loses sales over a holiday weekend, with bad weather, the business is difficult to make up in the same year. Remember, with the exception of '06, historically Global more or less breaks even or even loses money in the second and third quarters of the year because of the seasonality of the business.

As we outlined in last year's first quarter and also mentioned in today's press release, another item to factor into the year-over-year comparison for the first quarter is the favorable wholesale residual buying opportunities we capitalized on last year. We estimated that the favorable environment added approximately $4 million to our bottom line in the first quarter of last year. These opportunities did not present themselves in the first quarter of this year.

With all of this said, let me add a key point. Despite the difficulties of the first quarter, our distributable cash flow of $11.8 million was only $3.5 million less than the first quarter a year ago distributable cash flow of $19.3 million after taking into the effect of the approximately $4 million benefit we experienced a year ago.

Before turning it back to Eric, I'd like to point out a couple of specific items on our income statement and balance sheet. The first is interest expense, which nearly doubled compared to the first quarter of 2007, reflecting the combination of higher product prices as well as the new volumes associated with our recent acquisitions.

Operating expenses also increased significantly year over year, as Q1 marked the first full quarter in which we owned all five of the former Exxon-Mobil terminals which we bought in the two acquisitions. We offset some of this increase with lower SG&A expenses.

As a final point, I'd like to add that the size of our balance sheet has increased year over year, reflecting higher product prices and the effect of our acquisitions.

Now let me turn the call over to Eric for his thoughts on the quarter.

Thank you, Tom. Let me begin by talking about one of the strengths of the quarter--the successful execution of our strategy to create sustainable opportunities for growth by further broadening and diversifying our portfolio of transportation fuel products. This is best illustrated by the sizable year-over-year increases in gasoline product sales, volumes, and net product margins in Q1, the first full quarter in which we have owned the five refined petroleum product terminals we acquired from Exxon-Mobile in '07. Gasoline net product margin increased 400%. Sales grew 154%, and volume rose 76%.

To give you a sense of the strategic value that these acquisitions bring to our business, gasoline increased to 38% of total product volume in Q1 of '08, compared with 25% of total product volume in the same period of '07. In addition, gasoline accounted for 23% of combined net product margin in this year's first quarter versus just 4% in the same period last year.

Now let me elaborate on Tom's comments regarding some of the challenges we faced in thee first quarter and our focus on reducing our exposure to them. A few, like weather, are transitory by nature and simply part of the business. The same is true of price backwardation and excess supply. Again, these issues come and go, and we must continue to manage and mitigate those risks within the marketplace and capitalize on periods of opportunity.

Energy conservation also has a temporary element to it, though not entirely, at these price levels. We do expect people to keep their thermostats low, but they can't keep lowering them. We saw this in the late '70s and early '80s. There was a step change in lowering thermostats, but household budgets eventually adjusted, and demand rebounded and grew.

It is also hard to run your basement oil tank with low inventory, particularly when it gets cold. Nonetheless, at least for the moment, we're assuming that some conservation-based volume reductions will continue.

In addition to these temporary factors, let me touch on a couple other issues that Tom mentioned. The first was our decision to not raise credit lines to certain customers despite higher prices. We believed that we could win back the business immediately by raising credit lines due to the primacy of our terminals and the strength of our customer relationships. But our approach has been more balanced. Consistent with past practice, we will continue to judiciously and selectively raise credit lines, carefully weighing our tradeoff between higher volumes and credit risk.

Anecdotally, I can tell you that our conservative approach has served us well in recent months with no material credit losses. We are aware of instances where wholesalers significantly harm their business by extending credit to high-risk accounts.

The other point Tom made was natural gas competition. In recent years, this has definitely affected our commercial segment, which is primarily residual fuel. You can see the declining volumes in our 10-K and Qs. We would like to see this come back, and it could if the price disparity changed, but we are not counting on it.

With respect to homeowners, we anticipate some marginal increase in conversion to natural gas. I'd say "marginal" for a couple of reasons. First, natural gas companies really aren't able to compete for customers in many of the rural residential developments, because the gas companies do not have the pipes in the ground to supply these developments. It is in the urban markets where we are seeing some conversions taking place. The other issue is that converting to natural gas is very expensive, and the vast majority of homeowners won't change. Remember, heating oil volumes in the Northeast have remained remarkably steady for many years despite competition from natural gas, propane, and electricity in a variety of environments.

Now let me cover some steps we've taken to adjust to this environment. Specifically, we have adopted new pricing methodologies, tightened cost controls, and made adjustments in inventory management, all aimed at maximizing margins and taking advantage of new opportunities in what is an evolving marketplace. Over time, we tend to do well in changing marketplaces by seizing new opportunities.

Despite a difficult Q1, let me conclude with some key points about our business that should not be overlooked. First, our core business remains fundamental and necessary. People need to drive cars and trucks and to heat their homes and buildings.

Second, we continue to successfully execute a strategy focused on growth through product diversification and asset expansion. Transportation fuel products were a significant contributor to our business in the first quarter, and that growth occurred because of our acquisition of five terminals from Exxon-Mobil.

Third, these facilities are part of a portfolio of strategically located, attractive terminals that cannot be replicated. This is a critical differentiator for us in the marketplace.

Fourth, although our recent terminal acquisitions also were impacted by our challenging Q1, we remain excited by the positive performance and outlook for these recent acquisitions. They have broadened our geographic reach, increased the strength of our transportation fuels business, and brought us many new customers.

And finally, there is an active M&A market in the downstream refined oil market, perhaps the busiest I have ever seen in my 20-plus years in the business, and we continue to look at every opportunity.

With that, we'd be happy to take your questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS.) Thank you. Our first question comes from the line of Darren Horowitz with Raymond James. Please proceed with your question.

Good morning, guys.

Good morning.

My first question is on volumes. When you talk about seeing some conservation-based volume reductions going forward, can you quantify the incremental impact on volumes year over year if you normalize for weather, i.e., when you look at volumes, all else being equal, does it look like maybe conservation is having a 7% or 8% impact, or closer to 8% to 10% impact?

That's a very complicated question, because there are parts of demand reduction that are also affected not only by weather, but by one-time buying strategies by the consumers. And when you look at governmental stats, what I don't think the governmental stats reflect is the true reduction in demand. And it really depends on it by product. So I think we'd be guessing to say what we believe that reduction is going to be going forward. Do you understand why I sort of specifically phrased it that way?

Sure. No, that makes sense. I guess from our perspective, when we look at modeling your volume growth or the volume degradation year over year, obviously, the best that we can do from a heating degree day or a weather-related consumption basis is model normal weather.

Yes, and that's what we do as well, right? We model normal weather always, and that's why we consider that transitory.

Okay.

We think it's going to come and go.

Maybe a different way to ask that question is obviously, this quarter and last quarter, we can see year over year, to a certain extent, what impact these higher prices have had. I guess when you look at your volume run rate second quarter, third quarter, et cetera, to the tail end of this year, how much more incremental customer conservation do you think is going to impact volumes? Have you reached the point where the majority of those people have conserved? Are they getting to a point now where they're at extremely low inventory levels so that they may see some sort of unseasonable impact on your volumes as they ramp up in the September time frame?

Darren, these are great questions. Let me just say, although you didn't ask it, in the case of--this is Tom Hollister speaking--in the case of gasoline and diesel fuel, the transportation-related fuels, the popular press has captured the conservation that certainly is occurring. In our case, because these are new business lines for us that are expanding nicely, on the margin, is it affecting us? Yes, but in an absolute sense, no, because we're really pleased with those changing results.

But back to, and I think you're really focusing on perhaps residual and heating oil this past winter, and as Eric said--I'll try to give you some color and texture to this. For example, it's easy to turn your thermostat down when it's warm outside. The furnace in the basement works a lot harder when you're trying to keep the house at 60 degrees when it's 20 outside as opposed to 50. And so consequently, the warmth of this winter made it a little bit easier to conserve with the thermostat, we believe.

Another example is homeowners, when they got that first December to January bill, and it's a $700 to $800 bill and they were shocked. Some of them, for example, would call their oil company and say, "Don't come back until I call you." And they'd turn down the thermostat and run the tank in the basement as low as they could, and then when they would call the home, the retail delivery company, they'd say, "Only send us 100 gallons, while normally we'd take 250 gallons." So they ran down their tanks, they pushed down the thermostats, they did everything they could to run through this winter.

Again, as Eric said, in the '70s and '80s, budgets caught up once there was a step change. But if it's a colder winter, it's harder to conserve. It's hard also--you don't want to run the risk of running out of oil, so people, when it's colder, typically run their tanks up.

Having said all of that, it's hard for us to know exactly what portion of this conservation is a permanent step change, and it's going to be there for the next few years until budgets change, or to what extent consumers will continue to put on a sweater and a hat and gloves and walk around their homes.

Sure. Tom, I appreciate that. That is helpful. Switching gears over to the cost line, when you look at your OpEx year over year, as you pointed out in your prepared commentary, it's the first full quarter with the five Exxon-Mobil terminals. When we look at everything it encompasses, running that expanded asset footprint, is that $9 million per quarter OpEx a good run rate, or about 25% of your gross margin, if that's a better way to look at it?

Darren, as you know, we don't give forward-looking comments on line items such as expenses. But what we can say is that this is the first full quarter when the total operating expenses of all of these terminals are in place, and you can look at it as a factual matter. That's how much it cost to run them.

Okay. Let me ask the cost question slightly differently. From a conceptual standpoint, you did a great job on the SG&A line. When you look at rationalizing the equation further, how much more is there to go? Have you identified some areas where you can further get more efficient internally?

Derek, unfortunately, same response, which is I can't give you numbers or forecast. But what I can say in this environment, we've taken the kinds of steps you would expect management to take, looking at every line item in our expense run rate, whether it's headcount, insurance, professional fees, bonus accruals, insurance, every line item. And we're going to continue to run the Company tightly.

Okay. And then finally just one big-picture question. One of the things that stood out to me was your commentary about how attractive and active this M&A market currently is. Can you give us a sense for what opportunities do you think fit your expanded business model the best? And secondly, can you give us an update on your liquidity and how you look at cost of capital to finance such a transaction if it were to materialize?

I think when you look at what I'll call this midstream marketplace, there is a tremendous amount of opportunity, like I said, more than I've ever seen. I don't know if it's just a generational transition or if people thought that the values are attractive. But from my perspective, we would like very much to be able to get some stuff done. I don't know if that's going to happen. But there is quite a bit out there. Tom, you might want to talk a little bit about our capacities.

Sure. Darren, we have under our existing credit facilities committed approximately $14 million of acquisition-related debt unused, and another $50 million accordion feature available but not committed to us. The capital markets, as probably everyone on the call knows, are very different. The cost of capital is up, and that may influence prices on properties. We expect it will. We have a very supportive bank group, lots of supportive investors who'd like to help us if we find good opportunities. We're very disciplined, and we won't do things that aren't--have upside for our unit holders.

Thank you.

Thank you. Our next question comes from the line of Brian Zaran with Lehman Brothers. Please proceed with your question.

Good morning.

Good morning.

Could you provide the volumes for the first quarter?

We, our total volume will be approximately 1.064 billion gallons compared to about 900 million gallons in 2007. That will be more disclosed when we file the Q tomorrow.

Okay.

What you'll see, Brian, is gasoline is way up and on a percentage basis, (inaudible) being less significant because of the factors we mentioned.

Sure. I guess looking forward, it's hard to predict, but should we be, are we going to see the contribution from acquisitions partially offset the decline in the base business in 2008?

Well, we can't make a forward-looking statement. What we can say is that we are pleased with the progress and outlook of those acquisitions. And, as you remember at the time of the announcement, we talked about what types of multiples, purchase multiples we had in mind in the first year as well as in the second and third years.

Since you did have volume growth year over year, but the margins were less, should we be, is it reasonable to assume that this margin will continue through the year?

Okay, we'll go right back. That was before. But we talked a little bit about how to characterize the business, and sort of as a starting point, what you might want to do is, by example, take last year's results, factor up the capable buying opportunities we capitalized on in the wholesale residual fuel market for the first quarter, and then factor in the impact of our Hudson III acquisition. That's not a bad place to begin.

Okay. The distribution coverage remains strong. Do you have a target or reported distribution coverage going forward?

Brian, as we've discussed, we can't make forward-looking statements on distributions. We have said in the past, and continue to believe that we want to run our coverages conservatively for a couple of reasons. First is, we have had and continue to have, we think, great places to reinvest the business or make acquisitions to grow distributions over time. And then secondly, because we are an owner of commodities, and commodities will have periods like this first quarter, which was difficult compared to a year ago--we've had some widening spreads--we want to run it conservatively so we never disappoint our unit holders on distributions.

Thank you very much.

Operator; Thank you. Our next question comes from the line of Barrett Blaschke with RBC Capital Markets. Please proceed with your question.

Hey, guys. Just one kind of quick question, and this is with regard to the new terminals that came online, I guess. I guess, going forward, this used to be kind of the asset of choice that you guys have been getting into, and it looks like with additional gasoline and diesel volumes, this is going to maybe pull out a little bit of the seasonality? Is that a fair assumption?

Well, I don't know if it will pull out, but it will make the base numbers sort of better month to month. We're still going to have some seasonality, right? It's just that it becomes a bigger portion of your number, that's all.

Right. Okay, thank you.

Thank you. Our next question comes from the line of James Jampel with HITE Hedge. Please proceed with your question.

Hi, guys. I guess Darren actually asked my questions about the acquisition environment and your ability to finance, so no questions.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS.) Our next question comes from the line of Gil Alexander with Darphil Associates. Please proceed with your question.

Good morning.

Good morning.

Could you give us some color on the decrease in your gross profit margins between '07 and '08? And is it, how much does gas affect that?

Our gross margin was squeezed by the factors we mentioned earlier. For example, on the supply side, the backwardation of the market and the excess supply made it a pretty tight period. But the margin was also affected because demand was down. All of our competitors, as well as we, were pretty aggressive on pricing, and I think that squeezed margins. So it's a combination of both volume being down and margins being squeezed. As we said, a confluence of events.

And just to, can I just get housekeeping for several items? Your CapEx for this year, maintenance and depreciation expenses?

What we've typically, the way we typically handle that question is to say that, at least on a retrospective basis, including the new terminals, a decent run rate is probably $3 million to $4 million on maintenance capital expenditures.

All right. CapEx?

I'm sorry?

Your capital expenditures this year?

Well, we don't make--unfortunately, we don't make forward-looking statements. I can't give you a number on that.

And for depreciation, shall we just multiply it times four?

Yes. That's a pretty--the first full quarter, not unlike the operating expenses, it's basically, it's the full load now of all these terminals. So I think, Chuck, that's a fair (technical difficulty) on the new acquisitions. It's a good number.

And my last question, with gasoline more important to your business, how does it change the way your earnings flow if you looked at '07? Or how does it change the mix of earnings, how it changes? Or is it typically the same way you had it last year? Well, for the second and third quarter.

Just as a general statement, the demand for gasoline, compared to the demand for heating oil, is much flatter, and it's the same month to month. It's not exactly the same, but compared to heating oil, it's a lot flatter.

All right. Thank you very much.

Thank you.

Thank you. At this time, we have reached the end of the Q&A session. I will now turn the conference back over to Mr. Eric Slifka for any closing or additional remarks.

Thank you all for your time today, and we look forward to connecting with you later on. Thanks.

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