Global Partners LP (GLP) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Global Partners First Quarter 2009 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 Chief Accounting Officer, 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.

Thank you. Good morning everyone. And 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, please 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. I will begin today's call by sharing my perspective on our first quarter 2009 financial results. Tom will comment on the numbers, and afterwards we will be happy to take your questions.

On our Q4 call eight weeks ago, Tom and I discussed the events in our business environment that gave us reason for optimism in 2009. The factors that we highlighted -- lower commodity prices, a favorable forward product pricing curve, colder temperatures year-over-year and our own initiatives to better manage price volatility and product margin enabled us to get off to an excellent start in the first quarter.

On a year-over-year basis, first quarter net income more than doubled to $18.9 million. EBITDA increased 48% to $27.4 million and distributable cash flow grew 86% to $22 million. This was a record operating performance for the company.

Our performance in this year's first quarter was in sharp contrast with that of Q1 2008. Last year's results, you may remember, were adversely affected by a confluence of factors. These included warmer weather, higher energy prices that prompted meaningful conservation, as well as some fuel switching, unfavorable forward pricing that led to backwardation in bulk refined petroleum supply market and other one-time discreet factors.

Fast-forward 12 months. As I mentioned a moment ago, our business environment has changed dramatically and positively, enabling us to leverage our network of terminal assets and capitalize on our marketing strategies to drive margin enhancement.

Gross profit increased 42% year-over-year to $50.7 million in the first quarter of '09 from $35.6 million a year earlier. In particular, we saw solid margin improvement over Q1 of last year in bulk distillates and gasoline. Wholesale distillates net product margin increased by nearly $11 million to $33.9 million, while wholesale gasoline product margin was up more than $3 million to $11.8 million.

These increases were related to the effectiveness of our pricing strategies, colder temperatures and general market factors. While we believe that the macro economic climate continues to encourage conservation, our total product volume was up 5%, reflecting colder temperatures and our continued focus on marketing to our customer base. In addition, our bid business in commercial segments have enjoyed healthy demand and delivered strong results.

On our Q4 call, I highlighted three new projects that are part of our strategy to adjust our terminal network opportunistically to capitalize on changes in the market place. On the north shore of Long Island, we have begun operating the 130,000-barrel committer terminal under a long-term lease agreement. This is our third waterborne location on Long Island, a wonderful market in itself, but also a platform for expanding our business in the New York Long Island area.

Operations are also underway at a terminal facility in Philadelphia, where we are leasing 160,000 barrels of storage capacity. The third project is at our Albany terminal, where this summer, we plan to bring back into service three tanks totaling approximately 300,000 barrels. These initiatives continue the progress we have made in recent years to broaden our geographic footprint and diversify our product mix.

Our strategy to expand our focus beyond seasonal fuel, such as heating oil, to year round products, such as gasoline and other transportation fuels, has produced successful results. We are focused on further diversifying our overall book of business by increasing the contribution from an expanded set of energy products including natural gas.

Natural gas has been a small part of our commercial product mix for many years. Given the current market environment and the favorable demand outlook, we believe expanding our natural gas business creates opportunities to continue to generate profitable, long-term growth. Toward that end, we are building an experience team to sell natural gas for us throughout the northeast.

In summary, we are extremely pleased with our first quarter results and we're optimistic about the remainder of the year. The dynamics of the supply and demand environment create some ups and downs that are a natural part of our business. But our product diversity conservative approach to managing commodity price volatility and effective pricing strategies continue to serve us well. We are positioned to meet the demands of the regions we serve by leveraging our marketing expertise and our strategically located network of terminal assets.

As a final observation, the phrase, stress test, is popular in these turbulent times. If someone wanted to stress test our business model, it would be hard to dream up the scenario of the past eighteen months -- unprecedented absolute oil price increases, followed by rapid declines, never-before-experienced daily product price volatility, illiquidity and prices in the banking and financial markets, dramatic conservation of product usage and credit strains throughout the world economy.

No one looks forward to another stress test of this nature again. However, we believe that our fellow owners, as well as our bankers, suppliers and customers should take comfort that Global not only has persevered through this challenging environment, but has emerged as an even stronger and better positioned business. Now, let me turn the call over to Tom for his financial review. Tom?

Thank you, Eric. Let me comment on the numbers. As Eric mentioned, margin enhancement, favorable forward product pricing, colder temperatures and our effective hedging strategies drove a 42% increase in gross profit, which set the table for our record operating performance in the first quarter.

Our wholesale product margin was up 36% from the first quarter of 2008, as gasoline and distillate results easily offset a modest decline in residual oil margin. Commercial net product margin was up 89% with both distillates and residual oil contributing to the majority of the increase.

On the bottom line, we reported net income of $18.9 million, up $10.3 million from $8.6 million a year ago. Or on a per diluted limited partner unit basis of $1.40, more than double the $0.64 per unit we earned in the first quarter of 2008. Distributable cash flow was a record $22 million. And our coverage ratio for the four-quarter period ended March 31 was 1.7.

Turning to expenses, SG&A was up about $7 million in the first quarter of 2009. This increase is largely related to accrued incentive compensation of various types totaling $5.2 million and, to a lesser extent, a $722,000 increase in legal and bank fees and a $610,000 increase in our reserve for credit losses. These SG&A increases are, for the most part, variable and can be substantially controlled by management. At the end of the quarter, we had 227 full-time employees compared with 222 at year-end.

Operating expenses were $550,000, primarily reflecting our intentional non-renewal of a terminal lease in New Haven. Interest expense was down in the first quarter by $2.2 million, due to lower product costs and, to a lesser extent, interest rates. Taxes on our non-qualifying MLP business were up approximately $600,000.

Turning to the balance sheet, assets were down $132,000, or 15%, from year-end, reflecting the natural shrinkage of inventory and related receivables as we come out of the busy winter heating season.

Fixed forward contract sales decreased to $58 million on the March 31 balance sheet, 64% less than the $162 million at year-end, reflecting the sale of these gallons in the ordinary course of business. This number continued to shrink in April and early May. In general, we are pleased with the performance of this portfolio. However, as we have seen some credit strain on our customer base, we did increase our reserve for credit losses in the first quarter by approximately $600,000.

The balance sheet remains very liquid with nearly 75% of our assets classified as current. The balance sheet is also real and tangible with only $31 million, or 4% of assets classified as intangible.

In terms of our debt, it is important to remember that we only have $71 million of total long-term debt, related to our terminal operating infrastructure, compared with a net worth of $157 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. A key point for investors to understand is that as of March 31, $262 million, or 79% of our total debt of $333 million, is related to inventory financing with the remaining $71 million, or 21%, as classic long-term debt.

All of our debt is bank financing under a commitment that extends through April of 2011. Based upon our strong financial performance, interest rate and letter of credit pricing under our facility was reduced by 25 basis points in April of this year. this was an automatic adjustment under a grid pricing arrangement. For example, the interest rate on the working capital portion of our borrowings has been reduced from LIBOR plus 2% to LIBOR plus 1.75%. As I mentioned a moment ago, our book net worth was at $157 million at March 31, up $13.7 million from year-end.

Before making a summary comment, I want to note that this morning's press release mentioned that our Board authorized a common unit repurchase program. This program is aimed at securing units in anticipation of obligations to deliver common units under the partnership's long-term incentive plan to officers and employees and Directors over the next several years. Purchases may be modified, suspended or terminated at any time and are subject to price economic and market conditions.

So as a summary comment, we are performing well. We continue to have a strong and liquid financial condition. And as Eric noted, we continue to be optimistic about our outlook for the remainder of the year. Now let me open the call to questions. Operator?

(Operator Instructions). Our first question comes from Darren Horowitz of Raymond James. Please proceed with your question.

Good morning, guys. Congratulations on the quarterly results.

Thank you, Darren.

Eric, as it relates to the capacity initiatives that you outline, specifically those three tanks that you're looking to bring back in service at Albany, can you give us some color on any associated costs? And more importantly, is the capacity based by long-term contracts? Or are you going to use it [on the spot]?

Yes, it's $2 to $3 million, roughly, to bring them back into service. And they are not backed by any throughput contracts. The terminal, itself, was being run very, very tightly. So it's capacity that we're happy to bring back on and we think will give us existing leverage in the market place.

Okay. And from a product standpoint, what product are you targeting for these tanks?

Those products are going to be mostly likely distillate.

Okay. Shifting over to the margins, because you performed very, very well this quarter. As you look at further optimizing your asset base, how much more on the cost line can you achieve?

Well, Darren, let me think about that. The expense run rate, as we mentioned, was down for terminals because we exited a terminal in New Haven a year ago. We mentioned going into the commander facility on the north shore. That new lease for us -- we took over that new terminal last week -- will add some expense. But I think the run rate on terminal expense is pretty stable.

On the SG&A side, you saw that, from time to time, some of that spending is episodic -- or maybe the way to say it is controllable by management. I'd point out that our headcount is up 5 from year-end, up about 2%.

Right. Okay. Shifting over to the natural gas business that you're looking to expand in. Can you give us some more color there? Are you looking at just primarily storage? Or are you going to have a marketing arm on top of that and any cost expectations? I know it's early on, but anything that you're initially targeting as you ramp this initiative?

We're going to spend our efforts on marketing natural gas to the commercial and industrial sector. And we're going to ramp up in order to do that with people and sales people.

I would add there that we've been in this business in the past. It's a natural complementary sale to our commercial oil business. It will, for the moment, continue to be back-to-back purchases of natural gas. And I think our comments today are more about intentions than the results. But we're enthusiastic about this expansion.

Okay. And then, Tom, just finally, two quick housekeeping questions for you. You mentioned on the fixed forward contract sales that it shrunk further in early April and May. Where is that number in total right now? And then secondly, in aggregate, where are your total reserve for credit losses right now?

Normally, Darren, we don't make comments about numbers mid-quarter. But I would say -- and I haven't looked lately -- but that number is probably in the $30 million to $40 million range today on fixed forward. And what was your second questions?

It was the reserve. The accounts receivable reserve is at $3.6 million today.

And that's up from $2.6 million a year ago.

Sure. Thank guys. I appreciate it. Keep up the good work.

Thank you, Darren.

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

Good morning. I just wanted to ask, with natural gas prices sliding -- I know last year we saw a little bit of switching and, particularly on the commercial side, related to high refined product prices. Is there a flip side to that? Can natural gas prices go low enough that you see switching, there?

It depends, Barrett. As you know, the switching, we've seen in recent year, is in the commercial customer base. And a lot of that -- that's been pretty severe. That [will] turn a little bit more positive to the oil side in the course of this winter, but as you point out, natural gas is run down, again. So, yes, that pick up this past winter could certainly go back down again. But if you're driving on the retail home heating oil side --

That's relatively stable?

Yes, that's relatively stable. Well, you have some erosion over time, sure. But nowhere near the kind of change you see on the commercial side.

Okay. And as far as the demand conservation, are we expecting that to continue through this year and, kind of, as long as the economy remains weak?

Well, I think there's two pieces to that. Right one is demand conservation and the other is the economy. And gosh, over the last two years, there's been a lot of conservation from the customer base. And I don't think they can keep turning their thermostats down. And at this price level, I'm not sure you're going to see that. But if the economy continues to slide, I think people just have less available money.

Okay. Thank you.

Thank you.

(Operator Instructions). We do have another question from [David Shefter] of Perspective Capital. Please proceed with your question.

Hi, good morning, Tom and Eric. And great quarter. I came in the call very late and you may have said this, Tom, in your prepared remarks. But, the SG&A was up substantially. Where did that come from?

Yes, David, I did comment on it. I think it's fair to say more episodic and controllable by management. For example, our headcount was up just five people, or 2%. The vast majority of it was accrued incentive compensation at various times. And then a little bit for our reserve for bad debts, legal fees and other miscellaneous items.

So, in terms of going forward, it's more appropriate to model that kind of run rate to what we saw previously?

Let me just confirm that the spending this quarter was -- I wouldn't quite say one-time -- more episodic and controllable by Management so far. In effect, yes.

Thank you. Fantastic quarter. Thank you very much.

At this time, I would like to turn the call back over to Mr. Eric Slifka for any closing or additional remarks.

Thank you all for your time. We look forward to keeping you updated on our progress in 2009. That concludes today's call. Thanks.

Thank you, ladies and gentlemen. That concludes our conference call. Thank you for joining us today.