Global Partners LP (GLP) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Global Partners third 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 today 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, 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,

Good morning, everyone. Thank you for joining us. Before we begin, let me remind everyone that during today's call, we will 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 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 for our third quarter conference call. I will begin today's call by discussing Q3, and providing you with our distribution outlet for the fourth quarter. Tom will review the key items from our financial results, and afterwards, we'll be happy to take your questions.

Let me start by saying that we're pleased with our third quarter results, particularly given the challenging economy and substantially higher commodity prices we faced throughout much of the year.

Although our net income of $1 million is down from $2.5 million in last year's third quarter, that is largely a function of higher depreciation related to the ExxonMobil assets we acquired in 2007. And even with all the turmoil in the marketplace, we achieved gross profit of $25.9 million, and EBITDA of $10.1 million, both slightly higher than last year's third quarter, and distributable cash flow of $4.2 million, down slightly from Q3 of '07.

Our results speak to the versatility of our business model. From an operational standpoint, our product line and margin mix in Q3 this year were almost mirror opposites of our result in Q3 of '07.

Last year, as you may remember, we were able to offset tight gasoline margins in a challenging price environment by capitalizing on attractive buying opportunities in our wholesale distillates business. This year, it was the strong performance of our gasoline business that offset volume and margin declines in distillates and residual fuels.

In addition, our third quarter results clearly demonstrate the value of the terminals we acquired in 2007, assets that have expanded our geographic reach, and equally as important, diversified our product mix. For example, gasoline accounted for more than 50% of our wholesale net product margin in the third quarter of 2008, and represented a nearly six fold increase compared with our gasoline net product margin in the third quarter of 2007.

Our performance was notable in light of several industry specific factors that, as we discussed on previous calls, has hampered our results this year. First, higher oil prices through most of the first nine months of 2008 have prompted meaningful conservation, with people driving less, using less fuel for their businesses, and lowering their thermostats. The pricing environment in Q3 led to a slight year-over-year decline in combined product volume.

Higher commodity prices during the first nine months of this year also have increased our costs of carrying inventory. This is reflected in higher interest expense, which is up 47% year to date.

In addition, the price of natural gas over the first nine months has been more competitive than residual fuel, which has affected our wholesale residual fuel and commercial business.

Offsetting these negatives, however, are several positives. First, our ExxonMobil acquisitions are performing ahead of plan, and are providing global partners with a strategically significant and growing base of year round business.

In addition, commodity prices have dropped in recent months, reducing carrying costs on our inventory, and lessening credit pressure on our customer base. On September 2nd, for example, gasoline on the NYMEX was valued at $2.73 per gallon. As of October 31st, the price was lower by nearly half, to $1.44 per gallon.

Heating oil and residual fuel also have seen dramatic price decreases. It is certainly possible that fuel conservation among consumers and businesses will ease as a result of the price declines.

In fact, the recent drop in residual fuel prices has begun to alter the competitive landscape, making residual fuel more competitive with natural gas for commercial customers.

Also positive are the proactive steps we outlined on our last call, which have contributed to recent margin improvements. These steps include increasing the frequency of our intra-day price changes, controlling purchases at inland storage terminals during abrupt changes in price, being selective about increasing lines of credit, and overall margin management.

I also want to highlight the cost cutting initiatives we implemented earlier this year, which are yielding measurable reductions in SG&A expense. Year-to-date SG&A was down 8% from 2007 to $31.7 million.

The fundamentals of our business remain strong. I'd like to walk through some details to illustrate that point. We have been profitable in twelve of the thirteen quarters that we have been public. Our coverage ratio over the past twelve months has been 1.2 times our current distribution.

We have a healthy balance sheet and ample liquidity with our committed credit facilities. As of September 30th, we had $212 million available under our $750 million credit agreement, which is committed through April, 2011.

This month we added storage capacity with the opening of a 230,000 barrel facility in Southern Rhode Island. This site represents the second phase of our deep water marine terminal at the port of Providence.

We are optimistic about the future. As we've stated previously, it is management's intention to recommend to the Board of Directors that we maintain our cash distribution at $0.4875 per unit for the fourth quarter of 2008.

Regardless of the economic climate, people need to drive to work, companies need to distribute their goods over the roads, businesses need to fuel their operations, and individuals need to heat their homes. For millions of consumers and businesses across the Northeast, Global Partners infrastructure is a critical gateway that supplies those energy needs.

Consider that in the winter months, more that 50,000 homes in New England each day rely on us to supply heating oil to their retail distributors. Our terminal assets, financial strength, and 75 year history in this region give Global Partners a tremendous competitive advantage as we continue to focus on expanding our market reach. Now with that, let me turn the call over to Tom Hollister for his financial review. Tom?

Eric, thank you. I thought it would be useful to begin by discussing our distributable cash flow and coverage ratio.

Including the most recent quarter, our distributable cash flow for the trailing twelve months was $31.5 million, or 1.2 times our total distributions to $26.1 million over that same period. While this coverage ratio is lower than the 1.5 coverage ratio we had in 2007, it is sufficient earning power to cover our distribution, even taking into consideration the first quarter, in which net income was down significantly.

As we have said, historically we generate the majority of our net income in the first and fourth quarters. In Q2 and Q3, we typically make a little money, break even, or perhaps experience some losses. So we are entering what we generally consider our strongest quarters.

Despite these turbulent times, we are very comfortable with our financial position. Our balance sheet is tangible, liquid, and as we have discussed, substantially hedged. Nearly 75% of our total assets at September 30 is receivables and inventory.

Our receivables are diversified over a large customer base, and our write-offs in the past five years have averaged less than $350,000 a year with negligible write-offs in the past nine months. Our receivables typically turn within 10 to 20 days. Our inventory, which is held at the lower of cost or market, represents about 10 to 20 days of sales.

The primary remaining asset on our balance sheet consists of $162 million of conservatively valued fixed assets. These assets are highly desirable refined product terminals, primarily along the East coast.

In terms of our debt, it is important to remember that we only had $71 million of total long term debt, related to our terminal operating infrastructure, compared to the net worth of $148 million. This $71 million is comparable with the long term debt you see on the balance sheets of other MLP's.

The rest of our indebtedness is related to owning product inventory, and is borrowed under our working capital facility. Because it is a long term commitment from our bank group, some of our working capital facility appears as a long term liability, and the rest appears as a current liability.

A key point for investors to understand is that as of September 30, $397 million, or 85% of our total debt of $468 million is related to inventory financing, with the remaining $71 million, or 15% being more classic long term debt.

Our business model and risk management practices continue to hold us in good stead. As a wholesale distributor of refined petroleum products, we maintain a disciplined hedging program running a substantially balanced book in order to minimize commodity risk.

In light of the unsettled capital markets, it's worth noting that we have a very supportive 13 member bank group. Let me say that we are comfortable with the financial condition of these institutions, the names of which will be contained in our 10-Q.

As Eric mentioned, as of September 30, we had $212 million available under our $750 million of bank financing, which is committed through April 2011. This provides us ample liquidity to support our operations. Now let me open the call to questions. Operator?

Thank you. Ladies and gentlemen, we will now be conducting the question and answer session. (Operator Instructions). Thank you. Our first question is coming from the line of Darren Horowitz of Raymond James. Please go ahead with your question, sir.

Good morning, thank you. Eric, my first question on the distillate and residual fuels market. You talked about customer conservation potentially easing due to price.

If you look at the current pricing environment as it sits today, and you assume it stays flat through the fourth quarter, what do you think that does to volumes, because we would look at it and think that you might start to see some price sensitive demand actually offset decreases in RPP volumes. Is that what you're seeing as well?

Well first of all, I do think -- I don't want to estimate the forward business. But I think you're still in a price environment that's going to push some conservation. And as you sort of look back and look back at where we came out last year, I think you're going to continue to see some of the same. So --

Okay. If you -- let me ask -- let me build off that and ask a question as it relates to your gasoline business. Let's just say that you're in that customer conservation environment and it continues through the fourth quarter regardless of price. How much of an offset going forward do you think that increases in gasoline that project margin's going to have?

That's forward as well. But I think what you have to look at is the results that we had this quarter. And you need to look at the percentage of gasoline business that we're now doing, and the importance of that gasoline business to the Company's results. So I would look back at this quarter and say gasoline has become an important part of our business.

Okay, and then finally just one big picture question as it relates to liquidity. When you look at further enhancing your balance sheet, and you look at the inventory levels that you maintain, on a longer term basis, has there been any sort of discussion that you might want to hold less of an inventory given that more of your debt is pegged to your inventory, and that way you'd have more financial flexibility?

I think in terms of inventory, basically if the market allows us to hold it, and pays us to hold it, then we're going to do it. If it doesn't, we're going to reduce our inventories.

Thank you.

Thank you. Our next question is coming from the line of [Brian Zarin] with Barclays Capital. Please go ahead with your question.

Good morning.

Good morning, Brian.

You mentioned the ExxonMobil terminals exceeded your expectations. What drove that performance in the quarter?

Darren it's -- Brian rather, it's Tom speaking. It's the gasoline business and diesel being strong. And as Eric mentioned, those acquisitions are ahead of the plan, both for the quarter and from inception to date.

Was that more from the customers -- did you add more customers, or (inaudible) one customer?

You'll see it in the [queue] on either Friday or Monday that volume is up on the gas business. It's off obviously in distillate. So we're adding customers and also enjoying pretty good margins.

Okay. In terms of the credit crunch, is that impacting your customer base yet?

Actually we think that the decline in prices will actually ease credit pressure on many of our customers. Obviously in these times we're being very, very careful on counterparty exposure and all forms of credit risk management, certainly including our customers.

I guess maybe looking opportunistically, do you see over the next six months or so, maybe the M&A market getting more attractive, and looking to do a smaller bolt-on?

What I can do is I can tell you we look at all potential opportunities. And I would argue that there's still lots of opportunities out there to look at. And we're going to forge ahead down that path. So --

How has the market changed over the past three months?

In terms of what?

In terms of multiples and how far are they coming down.

It's more about -- because we look at the markets, (inaudible) here, it's more about just having opportunities of assets for sale so that we can buy them. And like I say, there's plenty out there. So --

Thank you.

To say the obvious, Brian, the capital markets have been pretty frozen up. And it's been hard, I think, for any company in the world to finance acquisitions in the last six to eight weeks.

Sooner or later, that is going to bring down seller expectations. We've seen some evidence of that. But my guess is that overall we won't see much M&A activity in energy or other businesses towards the end of this year. But it may loosen up early next.

Thank you.

Thank you.. (OPERATOR INSTRUCTIONS). Our next question is coming from the line of [James Chappell] with [Hite]. Please go ahead with your question.

Hi, guys.

Hi, James.

Can you talk a little bit about the SG&A line? It looks like SG&A was up from this quarter last year. What's going on, and do you see any more room there?

Thanks, James, it's Tom. It's up about $300,000 from the second quarter, and as you point out, roughly $1 million over last year. But remember last year, which you may not remember, we had a $400,000 roughly recovery in the context of some legal expenses on an insurance claim. So it's really up year-over-year about $600,000.

And some pieces of that are -- bank fees are up a bit, benefits and some other miscellaneous charges. As we said last quarter, we're obviously managing SG&A expenses tightly. But then again, we did obviously want to protect that to invest and grow the business.

So we, in terms of thinking about margins going forward, then that's maybe -- is that a line that we think might remain constant? Or what direction do you think it might be going?

No, I can't -- obviously heads towards forward looking projection, which I can't state, James. But I will say that year-over-year we'll continue to watch it very carefully.

And that doesn't mean, of course, we won't spend to invest in the business if we need to.

Okay, thank you.

Sure.

Thank you. (OPERATOR INSTRUCTIONS). Thank you. Our next question is coming from the line of Tom Kloza with Oil Price Info. Please go ahead with your question.

Hi guys. I just had a quick question related to the commodities downdraft here, and wondering if there's any potential exposure to some of the folks who might have panicked a little bit or thought they did the right thing back in the summer when heating oil prices were on the wholesale market $4 or so. I'm wondering if there's any risk attached to some people locked in at some very high numbers that could come back to haunt you or not.

Yes. Hi, Tom. It's Eric Slifka. I can tell you that what we always counsel our customers on doing is that when they sell fixed price, we ask them to go to their customer base and in turn get a commitment from them, and even go further than that and get earnest money up from them. And to sell fixed quantities and to be completely locked in so that they don't have risk.

The guys who have done that are going to be fine. On the other side of that, what we do believe is where there are customers who may not have done that, they're going to lose some of their retail accounts. But in whole, as long as they've tried to match their purchases up with their sales, that they're going to be in a good position. And they just won't make as much money as they thought or had hoped.

Okay, but you don't see a great deal of your customer base having locked in during the panic period when everyone thought the world was headed to $150 to $200 a barrel oil?

Yes, I think there are guys who did just that. But I think they have controls programs, right? And so the key is they have control programs, they have contracts with their customers. And I think that generally they're in good shape.

Now that doesn't mean their customers are happy. But the truth is, this is just a budgeting tool. Everybody turns this into buying at the right number. It's not about buying at the right number. This is about knowing what your costs are, knowing how much money you're going to have to spend on heat in the winter, and that's the reason for having fixed price.

Understood. I'm just curious -- you're not calculating that there might be any higher non-performance, let's say, than in previous summer, winters where we didn't get quite the volatility?

Tom we obviously -- this is Tom Hollister speaking -- watch this very carefully. If you look at our September balance sheet, you'll see a number of about $48 million, which is the fixed -- it's the difference between the spot price and the contract price of what customers have bought from us. And of course our sales to them are perfectly matched with the mercantile exchange, and we have an offsetting hedge.

It's interesting, if you look back at December '06, we had $66 million at that time. So it's not uncommon -- every year we sell forward to what we believe are responsible customers who have bids to municipalities or government organizations, or as Eric points out, they sell forward in match to their customers. And sometimes prices will go up, and sometimes they will go down. In 2006, that $66 million, which was on our balance sheet, we collected every penny.

I understand.

And again, it's our intent to collect every penny again this year. And we watch it very carefully.

Okay.

Thanks, Tom.

Thank you.

Thank you. There are no further questions at this time. I'll be turning the floor back over to management for closing comments.

Thank you all for your time. Let me remind you that Tom and I will be meeting with investors on November 20th at the RBC Capital Markets MLP Conference in Dallas. We look forward to seeing you there, and keeping you updated on our progress. That concludes today's call. Thank you.

Thank you. And this concludes today's conference call. Thank you for joining us today.