Global Partners LP (GLP) 2008 Q4 法說會逐字稿

Good day everyone, and welcome to the Global Partners Fourth Quarter and Year-End 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. Eric Slifka; Chief Operating Officer and Chief Financial Officer, Mr. Tom Hollister; Executive Vice President, Treasurer and CAO, Mr. Charles Rudinsky; and EVP 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 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 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, let me turn the call over to our President and CEO, Eric Slifka.

Thank you, Edward. Good morning everyone, and thank you for joining us for our fourth quarter conference call. I will begin today's call with my perspective on our fourth quarter and full-year 2008 financial results. Tom will comment on the numbers, and afterwards we will be happy to take your questions.

We concluded the year with a strong Q4 performance and, in so doing, delivered solid operating results in 2008, particularly given the unprecedented market challenges we faced during the year. We posted 2008 EBITDA $58.1 million, just 5% below the record $61.1 million we reported a year earlier, after adjusting for the $14.1 million gain on the sales on the NYMEX investment.

In addition, we generated distributable cash flow of $34.1 million with a 1.2 times coverage ratio over our annual distribution of $1.95. We achieved these results despite extremely volatile commodity prices throughout most of the year including a mid-year spike that drove prices to record highs.

The price of a barrel of ultra-low sulfur diesel jumped more than 170% from $64 in January '07 to a high of $173 in January '08 before falling back to $52 near the end of the year. Significantly higher commodity prices in 2008 contributed to higher financing costs, opportunistic switching by dual fuel commercial end-users, increased energy conservation, and strained credit throughout the refined products supply and distribution chain.

The combination of higher prices and greater conservation decreased demand for distillates and residual fuel leading to lower volumes. Excess inventories in the marketplace combined with the declining forward product pricing curve early in 2008 eroded margins and intensified competition. To top it off, temperatures in 2008 were 4% warmer than normal further weakening the demand environment.

Our 2008 results also were affected by two events specific to Global, both of which we have mentioned previously. The first was a train derailment in Vermont, which interrupted supply to our Burlington terminal in late 2007 and early 2008. The other was our strategic decision to convert our Albany, New York, and Burlington terminals to ethanol. Although we were temporarily disadvantaged during the conversion process, the work was completed in a timely and successful manner.

Our ability to adjust and optimize our operations in response to the extreme conditions of 2008 underscores the benefits of product diversity, the flexibility of our business model, and the value of our terminal portfolio.

Looking at our terminal portfolio, 2008 marked the first full calendar year of results, including the acquisitions of the refined petroleum product terminals from Exxon Mobil. These assets are performing ahead of plan. These are primarily gasoline terminals.

For both Q4 and full-year '08, higher gasoline product line offset declines in both distillates and in residual fuels. Gasoline accounted for 31% of our wholesale net product margin for full-year '08, compared with 9% for '07. During Q4, we expanded our storage capacity with the opening of the 23,000 barrel terminal in Rhode Island that represents the completion of our deep-water marine facility in the port of Providence.

We also strengthened our business through a number of actions we took early last year including the frequency of our intra-day pricing, effectively controlling purchases at inland storage terminals during abrupt changes in price, improving our overall margin management, and carefully managing credit lines. In addition, we implemented a number of cost reduction initiatives that reduced full-year SG&A expenses by approximately $3.4 million, or 7%, to $42.1 million.

Our solid performance in 2008 also highlights the effectiveness of our hedging strategy. In the face of volatile prices which at times moved up or down more than 10% in the course of a single day, our conservative approach to managing commodity risk running a substantially hedged book regardless of market conditions held us in good stead.

In recent months we have begun to see an improvement in our business environment. First, commodity prices have dropped significantly from a year ago, leading to lower financing costs and less pressure on credit lines for our customers. Second, we are experiencing a favorable forward product pricing curve. Third, temperatures year-to-date in the regions we serve have been colder than normal which bodes well for the weather sensitive fuels in our product portfolio. And finally, during the past year, we have improved our management of both daily and intra-day price volatility.

As part of our overall strategy, we adjust and reposition our terminal network opportunistically to capitalize on changes in the marketplace. Toward that end, Global is taking advantage of several exciting opportunities. Recently we signed a long-term lease of approximately 100,000 barrels of storage on the north shore of Long Island, expanding our already strong presence on the island to three waterborne locations. We also are leasing approximately 160,000 barrels of capacity at a terminal facility in Philadelphia.

In addition, we are adding capacity at our Albany terminal. In 2008, you may remember that at our new Burlington terminal we brought back into service approximately 200,000 barrels of capacity that was not being utilized by Exxon Mobil. We are continuing that expansion program in Albany this year with plans to bring back into service three tanks totaling approximately 300,000 barrels.

Based on the improvements I noted in our business environment and our expansion opportunities, we are optimistic about our prospects for our business in the first quarter and in 2009. Even in these challenging economic times, refined petroleum products remain essential to heat homes and businesses and to power automobiles and equipment. Global Partners is an integral part of the energy infrastructure gateway to the Northeast, positioning us to capitalize us on opportunities in the future. Now let me turn the call over to Tom for his financial review.

Thank you, Eric. Let me comment on the numbers. Our total volume was up 8% this year, driven by increases in gasoline sales due to our 2007 acquisitions. As we mentioned last quarter and as Eric mentioned a moment ago, these acquisitions are performing ahead of plan. Distillate and residual fuel volume was down significantly from last year, due to conservation. In addition, again as Eric mentioned, some dual fuel commercial end-users of residual fuel, opportunistically switched to natural gas.

At the net product margin level, gasoline results were up $25 million, nearly offsetting a combined $28 million of declines in our distillate and residual fuel net product margin. As Eric mentioned, we tightly managed expenses this year with SG&A down $3.4 million despite an $800,000 increase in bank fees. At year-end we had 222 full-time employees, down about 4% from our head count of 232 at the end of the first quarter of 2008.

Operating expenses were up $4.1 million year-over-year in 2008 due to the impact of the terminal acquisitions we made in 2007. As we pointed out in this morning's news release, this number benefited from a favorable $2.8 million adjustment of an environmental reserve in the fourth quarter. This relates to the environmental cleanup at our Albany terminal which we purchased from Exxon Mobil in May 2007.

The remediation estimate for this site was $7.9 million on our September 2008 balance sheet. The liability has now been reduced to $5.1 million on our December balance sheet based on current estimates of the remedial action work plan. Interest expense was up this past year by $3.4 million, primarily due to higher product cost.

Before turning to the balance sheet, I want to mention that maintenance capital expenditures this past year were $2.1 million, which is a little under the $3 million to $4 million range we would typically expect to spend annually. Our assets continue to be highly liquid with nearly 80% in current assets. In terms of our debt it is important to remember that we have only $71 million of long-term debt related to our terminal operating infrastructure, compared with a net worth of $143 million. This is comparable with the long-term debt you see on the balance sheets of other MLPs.

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. The key point for investors to understand is that as of December 31, $362 million, or 84% of our total debt of $433 million, is related to inventory financing with the remaining $71 million, or 16%, being more classic long-term debt.

At year-end we had $162 million of assets primarily related to fixed forward sales of heating oil in the course of this winter to our customers. We are pleased with the overall performance of our customers in fulfilling their obligations, although we did slightly increase our reserve for credit losses at year-end by $300,000.

We are well capitalized. As I mentioned our book net worth was $143 million at December 2008, this is at year-end. While this was down from a year earlier the decline was related to non-cash charges, that included marking to market our interest rate protection, higher depreciation expense, and a change in our pension liability.

It is also important to remember that our distributable cash flow since going public in 2005 has exceeded distributions by approximately 1.5 to 1. The excess distributable cash flow of more than $40 million during this period has been reinvested in the business, strengthening our liquidity and financial condition.

Echoing Eric's earlier comments, we are optimistic about what we see in the first quarter in 2009. Our business model and risk management practices continue to hold us in good stead. Now let me open the call to questions. Operator?

(Operator Instructions). Our first question is coming from Barrett Blaschke with RBC Capital. Please state your question.

Good morning. Just a few quick ones. First of all, given the lower commodity price environment that we are seeing today, can we kind of assume that that is going to results in lower working capital needs going forward as long as that maintains itself?

Barrett, the lower commodity prices towards the end of the year did reduce our financing expenses compared to the first half of the year. I am not going to make a forward-looking projection but factually rates are down and that clearly in the fourth quarter reduced our borrowing costs.

Okay. Did you see any demand destruction in volumes for the quarter because of the weaker economy?

Yes, I think -- Barrett, it is Eric -- looking at gasoline and if you look at the national statistics on that gasoline demand was up approximately 3.5% for the year and on distillates it was off approximately 6%. So, I think a low price environment is helpful but, I am very cautious.

Okay. And, one final one and that is, I know you guys are very acquisition driven for your growth and I wondered, just for your own analysis just what kind of multiple are you seeing these days in the acquisition market, when you are looking.

We are always out there looking for potential assets and potential projects. I think it has been busy with not a lot getting done. I think buyers and sellers are eyeing up what they are willing to put up with and live with. But, I think at some point transactions will begin to happen again.

Just to follow up on that, is there a disconnect between buyers and sellers as to what is realistic at this point?

Well, apparently not in the pharmaceutical industry. I would say in most other markets whether it is homeowners or our business, I think that obviously the higher costs of financing are affecting what buyers are willing to pay and I think a lot of sellers are still wishing they had values that they had just a year ago. I think they are coming closer in proportion but we will have to see.

Okay. Thank you.

Our next question is coming from Darren Horowitz with Raymond James. Please state your question.

Morning guys. How are you? First question on commodity prices, and really kind of dovetailing off of what Barrett just asked, but looking at the fuel switching aspect of it, taking a deeper dive into the relationship of your crude derivatives and natural gas, can you quantify any impact that fuel switching to natural gas has had on your distillate volumes?

I think if we are just talking about heating oil customers, residential hearting oil customers, changing over to natural gas I actually believe those numbers are not much different than they have historically been and customers have said it has been around 1% on a conversion rate per year. Maybe at one point it was a little higher than that, but there is also sort of a barrier, capital barrier, to making that change over and given the current economic environment, I think that is a tough expenditure for a residential homeowner to make.

Sure, so even if gas prices track meaningfully lower as we go throughout the course of this year, you probably still have a bit of insulation to your volumes, or kind of like a base-load consumption. Is that fair?

Darren, I think we have commented on a number of occasions that the impact has been more in the commercial side, and that is the residual fuel/dual fuel switching customers, and, because particularly in '08, gas was advantaged. We saw a lot of switching and it affected our results significantly. On the consumer side, for the reasons Eric mentioned particularly in a tough economy, on a heating oil side for people to switch to natural gas is a big cost. And, there have been moments when those two BTU comparisons have come closer or back into equanimity. So, that side is much lower.

Yes, the commercial side is really the focal point for my question, because I am trying to get my arms around what the incremental fuel switching has been as gas prices have essentially collapsed here in the last couple of months. All right, I'll switch gears. Eric, a bigger question for you, just looking at distributable cash flow, you guys had great excess cash flow [this coverage] obviously a seasonally strong quarter and likely to continue into the first quarter as well.

When you put the pieces of the puzzle together obviously your working capital has come down as really a metric as what has happened in the crude oil price environment. Your leverage has certainly been manageable, especially if commodity prices continue this way. So, as you progress throughout this year, can you give us your thoughts on enhancing distribution or further delevering the balance sheet, or what are you going to do with that retained cash?

I don't want to make any forward comments here, but over the past three years our coverage ratio has averaged about 1.5 times. This past year, which we have discussed, began in a very difficult fashion, and this year our coverage was 1.3. We think that the investors should look at that and take a lot of comfort in that we have these coverages. So, I think directionally that is how we feel about our coverage ratios.

Okay. And, Tom, just a quick housekeeping question for you, and I apologize if I missed it. What was your total reserve for credit losses that you have set aside --

It is close to -- the reserve at the end of the year is $3 million.

Okay.

Darren, it was up about $300,000 from September.

Right, okay. Thank you very much, guys. I appreciate it.

Our next question is coming from Brian Zarahn with Barclays Capital. Please state your question.

Good morning. Can you provide the volumes in the wholesale and commercial segments in the fourth quarter?

Well, we don't disclose volumes in the wholesale area, nor the commercial area. We do disclose sales dollars and net product margin, by product group within the wholesale group, but volumes we do not disclose.

You're saying they will be in the K, but you will not disclose them now.

You will in the K, you will see sales volumes and product margin by wholesale, but for competitive reasons we don't disclose the volumes.

I meant sales volumes in terms of gallons.

Yes, we don't disclose volume metric information.

Okay. I thought that the Qs and the Ks did provide that information.

The K will give you sales dollars by product group in the wholesale group, and a combination in the commercial group.

In terms of thousands of gallons, you don't provide that data?

No, not by product.

Brian, that's not a change. For competitive reasons we don't break out the volumes by product type.

In aggregate.

We give an aggregate -- we give a split between commercial and wholesale, but not by products within wholesale.

No, that was my question, was an aggregate. In the third quarter, I thought you had an aggregate of 752,000 gallons. I'm asking for the fourth quarter number.

Fourth quarter wholesale volume, 3.3 billion gallons.

Okay. Looking at gasoline --

I'm sorry. That was the year. I'm sorry, it was 943 million gallons, wholesale volume.

Okay, that was my question.

Sorry, Brian, misunderstood.

Okay. In terms of gasoline demand, things seem to be stabilizing nationally. How are things looking in the year-to-date?

Certainly the month to month figures that come out from the EIA data would lead you to believe that gasoline demand is stabilizing given the lower price environment.

Can you provide the CapEx in the fourth quarter total, not just maintenance?

It will take us just a moment, but yes. Brian, it is going to take us just a minute to find it.

I can get that offline, it's fine. Thank you.

Operator, how about other questions while Chuck is checking?

Okay. Our next question is coming from James Jampel with HITE Hedge Asset Management. Please state your question.

Hi guys. Thank you so much for including employee figures. Are those going to be in the K also starting now?

Hold on one sec. Are the employee figures going to be in the K?

Yes, they had been in the past. Full-time employees has been in the K the last several years. I mentioned for the first time how it changed in the course of the year from the first quarter up to now. A number of investors had been curious about that and we think it will be a good practice going forward.

So, the change you quoted on the call here was from when to when?

That was from the first quarter. And, the point was we had a difficult first quarter as I think most of you remember. And, management took action and reduced our head count by about 4% between then and year-end. We think that is a good measure of what we are doing with the business and we look forward to explaining each quarter in the future.

I see. So it is a nine month change.

It is a nine month change, correct.

Okay, I got it. And, on the environmental reserve, the decrease there, you are including that in distributable cash flow for this quarter?

Correct. That was an adjustment of our margin in the operating business because the liability, which would have been a cash payment, has now been reduced. But the answer is yes.

So, it all falls into this core, it's like a lump --

Correct. That change in estimate --

And, it is not sustainable --

No, that estimate, and that is why we highlighted it is because it was an event this quarter related to that specific item.

I see. Okay, so would it be fair to back that out if we were looking at DCF for the quarter --

Well, it depends if -- analytically, if you wanted to say apart from that adjustment what would distributable cash flow have been, you can make that deduction.

I see. Okay, thank you.

(Operator Instructions). Our next question is coming from [Gil Alexander] with [Darfell Associates]. Please state your question.

Good morning. Could you give us your Capital Expenditures for '09 and Depreciation Expenditures for '09?

Well, we can't -- we won't -- we can't make forward-looking statements for 2009. We can give you those numbers for 2008 which will be in the K which we will file shortly.

Right. The depreciation number you gave, what is the CapEx number?

The CapEx number this past year is, offhand, close to $12 million. I can't remember the number exactly. Just under $12 million.

Would there be a tendency that that number would come down in '09?

I can't comment on that.

Okay. And, I assume your Board wants to maintain the dividend where it is?

Well, I -- again, I don't want to make forward-looking statements but it is our interest and we believe our duty to run this company on behalf of our owners. Our first duty is to protect that distribution. In this difficult year, this past year, we think we did with 1.3 times coverage. I think that obligation is shared by our Board but none of this should be construed as a prospective intention.

I want to thank you, and good luck.

Our next question is a follow-up from James Jampel with HITE Hedge Asset Management. Please state your question.

I just want to emphasize that the high coverage ratio, at least for us, is important and given what is going on in the economy, delever, whatever you can do to get the debt down, just as we see things that have lower debt trading better. And, I think in this environment, anything that can make this the safest business in the world would just be appreciated.

Thank you, James.

At this time we have reached the end of the Q&A session. I will now turn the conference back over to Eric -- I'm sorry, over to management for any closing remarks.

Before Eric comments, we have not put our finger yet, Brian, on that fourth quarter CapEx number. We will call you offline, but it will be in the 10K.

Okay. Thank you everyone for your time. We look forward to keeping you updated for our progress in '09. Thanks again.

Ladies and gentlemen this does conclude today's teleconference. Thank you for joining us today, you may disconnect your line at this time.