Global Partners LP (GLP) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Global Partners' Second Quarter 2009 Financial Results Conference Call. 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 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, 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 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 let me 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'll begin today's call by sharing my perspective on our results and our outlook for the remainder of the year. In addition I'll discuss our signing of a definitive agreement to acquire the Warex Terminal Facility in Newburgh, New York which we have announced in a separate news release this morning.

These have terrific access in a great location and we are enthusiastic about the opportunity to build on our presence in the Central Valley. Tom will then comment on our Q2 financials, intermittent or detailed, after which we'll be happy to take your questions.

By virtually every measure including gross profit, net income, EBITDA and distributable cash flow, we delivered a solid performance in the second quarter. As those of you who follow us regularly know, historically we generate the majority of our earnings in the first and fourth quarters of the year simply because of the colder temperatures and greater heating demand in the northeast between October and March.

But our future results underscore the significant inroads we've made to build a versatile supply, terminaling and marketing network with the potential to drive market enhancement and profitability across the entire year.

In the second quarter we reported gross profit of $27.8 million, up $5.1 million or 22% from Q2 of '08 and the highest ever for this quarter. Star margins within our wholesale and commercial segment throw graphic EBITDA of $8.6 million for the second quarter, up 26% from $6.8 million in the same period last year.

We also posted excellent results for the six-month period as net income grew almost 170%, EBITDA increased almost 42% and distributable cash flow is up 80%. All were record results for the first half of the year.

Our improving margins speak both to the favorable forward product pricing environment in the first half of 2009 and to our expertise in forcing and supply logistics. This is a point I discussed at some length during our investor day in Boston. As an organization who's history stands more than 65 years, we believe that we have a competitive advantage when it comes to locating the most cost efficient sources of supply.

We were one of the early companies to source product cargos from Latin America and Russia. International sourcing remains an important part of our business, one that adds value for customers and enables us to enhance the bottom land.

Looking at product volume, according to EIA statistics, national consumption of gasoline and distillates declined 1.5% and 10% respectively through the first five months of 2009. So we believe our product volume which was roughly flat for Q2 and 3% higher through the first six months of this year versus the same period in '08 is favorably bucking the national trend, highlighting the strength of our terminaling system and distribution network.

Our strategy has been to increase our focus on transportation fuels as a growth driver of our business. And we continue to make great progress for it. In the second quarter, gasoline was our largest contributor by volume.

In recent months we have completed a number of organic projects that, as of this month, have added nearly 900,000 barrels of storage capacity to our portfolio. As I noted on our Q1 call, these projects enable us to adjust our terminal network opportunistically to capitalize on changes in the market place. They include the 130,000 barrels at Commander Terminal on Long Island, 160,000-barrel facility in Philadelphia, and 300,000 barrels of outer terminal storage capacity at our terminal in Albany.

Along with these sites, we have recently leased 260,000 barrels of storage inland in New Jersey. Given these investments in the business, you will note that our Q2 and year-to-date spending levels are higher year-over-year, including select SG&A expenses such as system development expenses as well as staffing, our expanded natural gas marketing initiative.

This morning we announced another milestone event in our expansion strategy, the signing of a definitive agreement to acquire three gasoline and distillate terminals in Newburgh, New York. We are purchasing these assets which have a combined storage capacity of 950,000 barrels from Warex Terminals Corp., one of the northeast's largest independent distributors of gasoline and distillates.

Warex Terminals is a subsidiary of Warren Equities Corp., a privately owned holding company based in Rhode Island. As detailed in this morning's news release, although other options could be considered, we expect to finance the approximately $47.5 million transaction through bank debt.

The transaction is scheduled to close in fourth quarter of this year, subject to the receipt of certain regulatory approvals and various other customary closing conditions. This will be our second acquisition in Newburgh. You may remember that we first entered Newburgh in 2007 as part of an acquisition from Exxon Mobil.

Both our water born locations supplied by barge, truck and potentially rail. The Warex Terminals, which are adjacent to our existing Newburgh facility, give us the opportunity to attract new customers and expand relationships with existing accounts.

Global and Warex have entered into a long term throughput contract that allows Warex to use the terminal to service its existing business and conduct future wholesale activities. As with the other terminals we have acquired, we expect this transaction to be accretive to unit holders in the first twelve months of operation with improving returns over time as we realize the business potential of these assets.

Our growth strategy consists of acquisitions and organic projects. With respect to acquisitions, when we went public in 2005, our goal was to average $25 million in acquisitions each year. When completed, the Warex Newburgh terminal acquisition will be our third transaction in a little more than two years.

And since going public, we have averaged approximately $46 million in acquisitions per year. As I mentioned during our investor day, the acquisition pipeline remains very active given our reputation, expertise and successful integration history. I believe we have the opportunity to bid on many of the terminal assets made available for sale.

In summary, our outstanding performance thus far in 2009, positions us for a strong year. We have done an excellent job in selectively expanding our asset base for organic projects and a key acquisition that we believe will enable us to build on our operational and financial success.

On previous calls, we've highlighted the vital role Global plays in the energy supply and marketing infrastructure of the northeast. Let me put that into perspective. Last year we moved 85 million barrels of refined petroleum products through our system, the equivalent of approximately one day's demand for the entire world.

That is enough fuel to supply heating oil to 60,000 homes a day during the winter months, so 600,000 automobile tanks per day of fuel, or fuel 10,000 distillate trucks a day. The point is that we are a company with enormous opportunity ahead of us. We are financially conservative, strategically focused and enthusiastic about the potential of our business. Now let me turn the call over to Tom for his financial review.

Thank you, Eric. The lead story for the second quarter was our strong gross profit, as Eric mentioned, which drove record results for EBITDA of $8.6 million. This is up 26% from last year's EBITDA, which was then a record of $6.8 million for the quarter.

Net income of $978,000 compares favorably with last year's loss of $1.2 million. Distributable cash increased 46% to $3.3 million up from last year's $2.2 million. Although the primary driver of results with the gross profit, it is also important to note that interest expense was down $665,000 reflecting lower product prices per gallon.

But in our wholesale business the only product with a net product margin reduction in the second quarter was residual fuel which was down year-over-year by $940,000. This was not a surprise, however, as we have seen a drop off in demands residual fuel in recent years as a result of the economic climate, competitive natural gas prices and increased conservation.

With respect to the other products in our wholesale segment, distillate net product margin climbed 45%, and gasoline net product margin grew 16%, resulting 21% increase in total wholesale net product margin for the quarter.

Strong gross profit has afforded us the flexibility to increase our investment in the business. Operating expenses were up $366,000 or 4%, primarily due to our new Long Island Commander Terminal. SG&A expenses increased $3.1 million or 30%. As we mentioned in our last earnings call, SG&A expenses are for the most part variable and can be substantially controlled by management.

The higher SG&A spending occurred in areas such as information systems, marketing and product promotion, incentive compensation, diligence on expansion projects, our natural gas initiative as well as an increase in our bad debt reserve.

Headcount as of June 30 stands at 248 people, up 21 from March 31, largely related to the staff, near staff at our Commander Terminal, and additions to staff in our natural gas business. Turning to the balance sheet, total assets are down more than $300 million, nearly 30% from a year ago, driven by lower dollar levels in inventory and accounts receivable as a result of lower product prices.

Fixed forward contract assets are $9 million as of June 30, down from $162 million at year-end, reflecting the sale of these gallons in the ordinary course of business. The balance sheet remains very liquid with 70%, 76% of our total assets classified as current.

The balance sheet is also real and tangible with only $30 million or 4% of total assets classified as intangible. 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 to the net worth of $154 million. This compares favorably with the long-term debt you see in the balance sheet 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 June 30, $365 million or 84% or our total debt of $436 million is related to inventory financing. Yet the remaining $71 million of our 16% is classic long-term debt.

As I mentioned a moment ago, our book net worth was $154 million as of June 30, about $10 million from year-end. As a final comment, I would add that our distribution coverage ratio stands at 1.73 for the fourth quarter period ending in June of this year, providing ample cushion for our distributions. Echoing Eric's comments, we are financially conservative, strategically focused and enthusiastic about the potential of our business. Now let me open up the call to questions. Operator?

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). One moment please, while we pole for questions. Our first question is from Brian Zarahn with Barclays Capital. Please state your question.

Good morning.

Good morning, Brian.

Can you talk about how the acquisition will impact your product mix?

The terminal is approximately a third of gasoline storage. The primary focus for us on that asset is to attack the gasoline business, so that's where our efforts are going to be pushed towards.

Looking at the second quarter results, what drove the higher margins in distillate and gasoline, because volumes were down a little bit or flat?

Well I think as Eric mentioned in his remarks, I guess our talent or ability both in terms of logistics and freight and other operating matters which helped drive that margin as well as a favorable pricing market.

In terms of SG&A, you mentioned it's variable. Is this a reasonable run rate for the rest of the year?

That is a forward-looking statement prior to a target comment on that. I think the key point is that we will modulate our spending, obviously based on our earning power and attractive investment opportunities.

And you mentioned credit losses were a little higher in the quarter. Can you comment a little more on that?

Sure. My recollection in the fourth quarter, as we said, the check wasn't in under $500,000 or roughly in that quarter, so in two quarters we were going down to be set aside and combined about $1 million. Pardon me, I meant the first quarter, yes, so it's a little over $1 million for the first two quarters.

And that's because of economic conditions and a little bit of stress in the marketplace. But we think our reserve is more adequate. And I will say, of late, we're seeing people feeling better about their financial condition.

Thank you.

Thank you. Our next question is from [Emily Wang] with Raymond James. Please proceed with your question.

Hi, good morning. Congratulations on the quarter, guys.

Thank you, Emily.

Thank you, Emily.

My first question has to deal with the acquisition that you just recently announced. It's acquired for $47.5 million. Do you guys know what the EBITDA multiple would be on this?

We'll comment further on the acquisition in more detail, obviously when we get right around closing. But what Eric mentioned is that we expect it to be accretive in the first year and that the results will improve over time as we get the full earning power developed out of the asset.

Okay, just out of curiosity, I know that the terminals are in New York. How close are those relative to your current assets and, you know, what sort of costs do you guys foresee that you'll have to do to integrate these terminals?

The terminals are, you know, right next door to one another. They're on the same street. You know, I'm not sure that there's going to be all that many savings from combining the facilities. You know, we like the asset and that's why we bought it.

Okay, so in terms of cost energies, you don't really expect too many from them but rather just maybe increase overall utilization of the terminal facilities?

It just is more efficient for us.

Okay. Then my second question just kind of deals with the margins that happened this quarter. You know, you mentioned the logistics, and freight, and just, you know, good optimization of your asset base were reasons for the margin beat.

Do you see these similar trends to continue for the rest of the year, or is there anything that's happened, you know, in the beginning of this third quarter that would cause you to kind of deviate from that?

No, we can't answer on a forward-looking basis. But Emily, as you remember in our investor day conference towards the end of January we tried to point out that in our margins versus a sustainable continuous based margin from our business interties when things are a little more favorable or less favorable. But in general the basic core infrastructure meat of our business, both the volumes and analysis and margins we think are there year after year.

Okay.

Hey Emily, this is Eric, I'd like to add one more thing there. I mean, you know, essentially we focus on every gallon that we sell to maximize our profit and our margins and we continue to really concentrate on doing the best job possible there.

Okay. My final question has to deal with more longer term, your financing strategy. You know, given your revolver availability and, you know, more than 85% of it is just related to, you know, inventory and working capital.

You know, when you're looking to pursue these acquisitions, is there a certain threshold that you guys would like to keep your revolver at, you know, balancing between your working capital, inventory needs and then, you know, your acquisition financing?

Well, I think, let me come at it this way. The working capital requirements are sort of happily supported by our banks because (inaudible) and our inventory financing's quite comfortable, too. And as I mentioned, our only existing long-term debt is $71 million. As we mentioned, we intend to finance, we expect this transaction an additional $47 million in long-term debt. And we're comfortable with those levels.

I would say longer term we do expect and intend to have a proper balance of equity and long-term debt on our balance sheet. And most MLPs typically over time will finance large transactions in 50% equity and 50% debt. We will keep those proportions in mind.

Okay, great. Thank you so much, guys.

(Operator Instructions). Our next question comes from James Jampel with HITE. Please state your question.

Hi guys. I've got two questions. First, on the SG&A and the staff up related to natural gas marketing and others, do you see that as pretty much staffed up now, or is there more to do there?

I'd say in the case of natural gas teams we have the team now in place we want, at least for the moment.

Okay. And the second question is, as you look out at the acquisition market, do you see stronger possibilities for Global, sort of, Philadelphia North, or other places?

I think that there's, James, there's a lot of assets that are out there and available. The important thing is to make sure that they fit our strategy. And you know, we're going to continue to be on the hunt and look for the right transactions.

Okay, thanks.

At this time we have reached the end of the Q&A session. I will now turn the conference back over to 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.