Global Partners LP (GLP) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Global Partners Third 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. Thomas 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.

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, please 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 with my perspective on our Q3 results, and our outlook for the balance of 2009. Tom will then comment on our financial results in a bit more detail, after which we'll be happy to take your questions.

We delivered a solid financial performance in the third quarter, posting year-over-year gains in gross profit, net income and distributable cash flow. Although product volume was off slightly, margins increased due to good margin management, and the benefits of our product diversity.

For the quarter, gross profit increased approximately $3.3 million, to $29.3 million. Net income more than doubled to $2.1 million. EBITDA was roughly flat at $10 million. And distributable cash flow increased 20%, to $5 million.

2009 product volumes were flat on a year-to-date comparison through September, and were down 7% in Q3 of '09 versus Q3 of '08. The reduction in volumes occurred largely in our wholesale business, reflecting both further energy conservation and overall competitiveness in the refined petroleum-product industry.

While our wholesale-product volume finished lower in the third quarter, our commercial business was a bright spot. Commercial volume, which includes our emerging natural-gas business, bunkering and sales to towns, municipalities and businesses, increased 22% in the third quarter, over the same period a year earlier.

Gross profit was 13% higher in the third quarter of this year than Q3 of 2008. On prior conference calls, we have talked about our emphasis on margin management.

Our margin-improvement initiatives includes steps such as increasing the frequency of intraday price changes at our rack locations, controlling customer purchases at inland storage terminals during abrupt changes in price, capitalizing on advantageous purchasing opportunities, and being selective about the overall price points of our products.

We continue to actively pursue acquisitions and organic projects. As we announced last month, the FTC has initiated a review of our planned purchase of three refined petroleum-product terminals from Warex Terminals Corp.

We are continuing to cooperate with the commission during this process. As a result of the FTC review, the transaction will not be completed in 2009. We plan to make no additional comments about the acquisition until the FTC has completed its review of the transaction, which remains subject to the FTC review and various other customary closing conditions.

In terms of organic projects, we recently launched an offshore bunkering operation off the East Coast of the United States. We have a 3,000-metric-ton barge that provides 24-hour re-fueling services to the cargo and container vessels that travel through and around the Port of Boston.

This anchorage represents another customer touch point for Global that enables us to expand the value-added services we provide to customers and further distinguish the Global brand. I should point out that, in addition to Boston, we operate bunkering facilities in Portland, Maine, Providence, Philadelphia and Baltimore.

Recently, Global was awarded certification as a BQ-9000 marketer for the National Biodiesel Board. Much like ISO 9000 for manufacturers, BQ-9000 certification followed an independent audit of our biodiesel-handling procedures. We are one of only 18 marketers nationwide, and three in the Northeast, to receive this designation, which ensures that our quality-control standards have passed the National Biodiesel Accreditation Program's rigorous review-and-inspection process.

Let me close by saying that our solid financial performance thus far in 2009 positions us for an excellent year. We are entering one of our stronger quarters in great financial and operational shape. Now, let me turn the call over to Tom, for his financial review.

Thank you, Eric. As you have heard, gross-profit momentum led to solid third-quarter results. Eric took you through most of the quarter's financial highlights, so let me give you a sense of where we are, from an earnings perspective, year to date.

Gross profit of $108 million reflects a 28% increase from $84.2 million for the same period a year ago. Net income of nearly $22 million is up more than 160%, from $8.4 million over the same period in 2008. EBITDA increased 30%, to $45.9 million, from last year's $35.3 million.

Distributable cash flow of $30.3 million was 66% higher than 2008, when we generated nine-month DCF of $18.2 million. It is worth noting that these excellent nine-month results were, in particular, driven by our record operating results for the first quarter.

To give you more of an annual perspective on where Global is today, let's look on a rolling four-quarter basis, through September 30. During that 12-month period, we earned net income of $34.6 million, record EBITDA of nearly $69 million, and record distributable cash flow of more than $46 million.

While the higher gross profit has fueled much of our success this year, keep in mind that another contributing factor is that, on a year-to-date basis, lower product prices resulted in a $4.5 million drop in interest expense in 2009 versus 2008.

In our wholesale business, our net product margin was up 24% through September 30, compared with the same period in 2008. Residual oil was the only product in the wholesale category with a lower margin for the year-to-date period. In that category, the $614,000 decline in net product margin reflected the impact of the economic environment, competitive natural-gas prices, and increased conservation.

Elsewhere in the wholesale segment, distillate net product margin increased 41%, while gasoline net product margin rose 7%. We carefully manage expenses. For the third quarter, operating expenses were up only $237,000, or 3% from a year earlier. We are consciously investing in the business, however, so SG&A expenses are up approximately $3.4 million in the third quarter, compared with Q3 of 2008.

The higher SG&A spending in the third quarter included areas such as diligence on expansion projects, information systems, our natural-gas initiative, marketing and product promotion, and incentive compensation.

We also increased our bad-debt reserve by $365,000, which represents the third consecutive quarter of a significant year-over-year increase in that line item. We are comfortable with where our reserve stands today.

We selectively increased our head count to 255 employees at September 30, up seven people from June 30. Turning to the balance sheet, total assets at September 30 are down about $35 million, or 4% from year end, reflecting, in part, lower accounts receivable as a result of lower product prices.

Inventory levels, however, on an absolute-dollar basis, are up from a year ago, driven by an increase in barrels and storage, as we have been buying and storing distillate inventory at favorable prices as a result of the contango market. The balance sheet remains very liquid, with 77% of our total assets classified as Current. The balance sheet is also real and tangible, with only $29 million, or 3%, of total 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 $147 million, up about $4 million from year end. This is comparable with the long-term debt you see on 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.

A key point for investors to understand is that as of September 30, $368 million, or 84% of our total debt $439 million, is related to inventory financing, with the remaining $71 million, or 16%, as classic, long-term debt.

On the September 30 balance sheet, our working-capital borrowings of $368 million supported inventory of $420 million, and receivables of $196 million, a more than adequate pool of short-term assets available to repay the working-capital debt. With that said, I think that some investors and analysts misunderstand Global's debt picture. Let's look at our debt in two ways.

First, let's compare the multiple of debt to EBITDA. Bankers tend to focus on this ratio, as it has to do with debt-paying capacity. The bigger the ratio of debt over EBITDA, the more leveraged is the enterprise; the smaller of the ratio, generally, the better.

As background, our bank group, like most commercial bankers, look at working-capital borrowings as self-liquidating financing. The natural turnover or liquidation of inventory and receivables is the source of cash necessary to repay the working-capital borrowings. By contrast, long-term debt or funded debt used to finance fixed assets is paid back over time from cash generated from earnings, as measured by EBITDA.

Therefore, when Global's bankers measure our debt to EBITDA, they only look at the $71 million used to finance the acquisition of terminals back in 2007. They calculate our debt-to-EBITDA as $71 million in debt, over approximately $69 million of trailing 12-months EBITDA, for a one-to-one ratio -- very low and very good.

They disregard the working capital of debt. If working-capital borrowings are included in the ratio, it jumps to 6.3, which is much higher, and, they would say, misleading. Second, investors in MLPs look at a similar, but different, ratio. It is a measure of relative value. But, again, due to Global's working-capital levels, it should be calculated with care, or it can be misleading. The ratio is so-called enterprise value, compared to EBITDA.

For this purpose, we are defining enterprise value, or EV, as the Company's market cap plus long-term debt. Market cap is, of course, calculated as our total number of outstanding units, multiplied by our unit price.

The idea is to look at the value of the Company, market cap plus debt, as a multiple of EBITDA. The higher the multiple, the higher the relative valuation, when comparing one company to another. When you include our total debt of $439 million, plus a market cap of approximately $300 million, you get a ratio of approximately 10.7. This is how Global is sometimes displayed in industry comparisons, but it is misleading on the high side.

When performing this calculation using only our classic long-term debt of $71 million in the ratio, you get EV-to-EBITDA ratio for Global of 5.4 -- a comparatively low valuation, and only one-half the previous calculation of 10.7.

So what's right? Well, perhaps the middle ground is to include some portion of our working-capital debt in the calculation. A portion of our working-capital borrowings appears as a current liability -- $113 million on September 30 -- and another portion appears as a long-term liability -- $254 million on September 30. The long-term portion is what we believe will be outstanding at all times, for the next 12-month period.

So a middle ground in calculating enterprise value would be to include the long-term portion of working capital. So the numbers would be $300 million -- market cap -- plus $71 million -- infrastructure, long-term debt -- plus $254 million -- the long-term portion of working-capital debt. And take that and compare it to the $69 million of EBITDA. On this basis, you get a ratio of 9.1.

The key point of this discussion on debt is to make sure that investors, bankers and analysts recognize that Global's debt picture is very different from most MLPs. The vast majority of our debt is self-liquidating, working-capital financing, as opposed to funded debt to be paid back over time. With respect to distribution coverage, our ratio stands at 1.8 to 1, for the trailing four-quarter period ending September 30, providing us with an ample cushion for our distributions.

What I'd like to address next is the proposed amendments to the partnership agreements that we announced last week. Changes to the partnership agreement are always complex. And it is worth taking some time to make sure that everyone understands what is being proposed.

I would remind you that our management team along with our independent directors believe that the changes are in the best interests of our common unit holders. The first change we are proposing is to substitute the metric of distributable cash flow for the metrics of operating surplus and adjusted operating surplus.

These existing metrics are used both to measure the ability to pay distributions from earnings, and to test whether or not the subordinated units can convert into common units. As many of you who follow MLPs are well aware, distributable cash flow is the metric most commonly used by MLPs to measure their ability to pay distributions. In essence, it's a measure of free-cash flow generated during a specific period.

The old metrics are not as good a measure, we believe, in that they are influenced by, among other things, changes in inventory levels and their associated commodity prices. Consequently, adjusted operating surplus, for example, tends to overstate our ability to pay distributions during falling commodity prices, and understate our ability to pay distributions during rising commodity prices.

We believe that substituting distributable cash flow for the existing metrics is a change that is consistent with the original concepts of the partnership agreement, and will be a better measure of the partnership's ability to pay distributions from earnings, and to test whether or not subordinated units can convert into common units.

Incorporated under the existing definition of operating surplus was a concept regarding working-capital borrowings. The concept was that distribution should not be funded through borrowings. In order to assure that working-capital borrowings were not used to fund distributions, there was a requirement that working-capital borrowings be substantially repaid at least once a year.

Using the new metric of distributable cash flow, such a concept is no longer necessary, as distributable cash flow is not impacted by borrowings, only by what is earned during the period. As a result, this change in definitions will permit the partnership to remove the requirement from our bank facility to repay working-capital borrowings at least once during each calendar year.

We believe this is a significant improvement for unit holders, as the previous requirement could potentially force the partnership to liquidate inventories at inopportune times, or to seek other, more expensive forms of financing to repay working-capital borrowings. While we believe these two changes are positive and in the best interest of common unit holders, we are proposing two additional changes that are also in the best interests of common unit holders.

First, we propose to remove the possibility of early conversion of the subordinated units. Without the proposed amendments, it is possible that 25% of the subordinated units will convert as early as December 31, 2009. After the proposed change, the earliest that the subordinated units could convert is December 31, 2010, which is consistent with the existing provisions of the partnership agreement.

Secondly, we propose to raise the minimum quarterly distribution, or MQD, from $0.4125 per quarter to $0.4625 per quarter. I'll remind you that our current distribution is $0.4875 per quarter, so the higher MQD will not have any impact on current distributions. It would, however, provide some additional downside protection in the unlikely event that the distribution was reduced to the MQD, and also makes conversion of the subordinated units subject to a higher test.

We realize that we can't answer everything in a forum like this. We encourage you to read our definitive proxy. In addition, please feel free to call us. Now, let me open the call to questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes from the line of Brian Zarahn, with Barclays Capital.

Please proceed with your question. You mic is now live.

Good morning.

Good morning, Brian.

I appreciate the color on the proposed changes to the partnership agreement. On the acquisition, can you give what the timeframe would be for a decision on the Warex terminals?

Essentially, Brian, it's going to be left to the -- to, really, the FTC, and we just know that we're not going to be able to close it this year.

Would the first half of next year be reasonable, or --?

Look, if we were in control, that -- I mean, we hope we can close as soon as possible, but it's really going to depend on the FTC and their timing.

Okay. If, for some reason, that does not go forward, do you have other opportunities to replace those terminals?

We are always looking for assets and deals. And the pipeline is full, and it's very busy.

Okay. Looking at the quarter -- the margins improved, but there was, for me, an unexpected decline in wholesale volumes. Can you talk a little bit about that?

Yes, I mean, essentially, year to date, we're flat. For the quarter, it was off 7%. On all the products, there continues to be some conservation. And there's a lot of people that are unemployed.

So there's more in distillate, less gasoline?

Right. Well, it's -- I would argue it's really across the board.

Okay.

One of the other things, too -- just to add in -- I think there's also been a slight change in the sort of credit environment that's out there, compared to last year. So I think it's also a little bit more competitive. I also think that as we continue to focus on margin management within the company, if we don't think we're making enough money on a sale, we're going to walk away from it.

Understood. And can you provide the CapEx in the quarter?

Sure. Maintenance CapEx for the quarter was $1 million; and $3.6 million for the nine months. Expansion CapEx was $700,000 for the quarter; and $4.4 million for the nine months. So that would bring total CapEx to $1.7 million for the quarter and $8 million for the nine months.

Okay. Thanks, guys.

You're welcome.

Thank you. Thanks, Brian.

Thank you. Our next question comes from the line of Darren Horowitz, with Raymond James.

Please proceed with your question. Your mic is now live.

Hey, good morning, guys.

Hey, Darren. How are you?

Good, thanks. Eric, first question -- when you look at the benefit that the commercial business contributed to gross margin in the quarter, how should we look at further margin enhancement through a lot of the internal initiatives that you guys have outlined? And can you give us some more color?

Well, let me talk a little bit about some of the commercial segment. We think we've got a really great team in place. We're bolstering that team with more bodies to go out and sell. And we're very positive on the outlook for that business line. That answers one question. Brian, what else do you got?

Well, a couple different things, actually. One question dovetailing off of Brian's initial question -- can you give us a sense for how wholesale volumes are tracking so far in the fourth quarter, on a year-over-year basis -- just an approximate percent?

Yes, I can, on the fourth quarter. But I do think the economy and the unemployment level is having an effect. But it's not only that. It's also, in fact, due to the way we're refocusing our business --

Sure.

-- as profitable as possible on each gallon that we sell.

Okay. Switching gears over to the offshore bunkering service that you just launched -- can you give us some more detail there, specifically, quantifying any associated cost to ramp up the business, and also your targeted return on capital spent?

It's been something that we've been working at for a while. Essentially, we have a barge that's available to us for it. We have the right permits in place to do the business, and it's a unique business. And we think it puts us in a great position.

Darren, it's Tom. Happily, the upfront costs are not all that meaningful. It's mostly variable, because we can call for this barge on an un-formal charter arrangement, as we need it. It's a complex and difficult thing to do, so it's not as if anybody can jump into it. But it did not require major upfront expenses.

Okay. Is this a business that you think -- that said -- you could grow significantly, over time? Or is this just kind of a one-off, overall strategic enhancement?

It's got great optionality for us. And we'll figure out how big we think we can make it over time.

Okay. And, then, Eric, if I could -- just one final, big-picture question -- you mentioned the pipeline for growth via acquisition being relatively full. Can you just give us a sense, geographically, if you had to add incremental tankage capacity today, what area would it be in?

I would tell you that it's any waterborne facility -- we have a high level of interest in. And that, really, could be sort of anywhere. But our main focus -- East Coast, Gulf Coast, are areas where I think we could really bring competitive advantages to the table.

Okay. Thanks for the color, guys.

Thanks, Darren.

Thank you.

(Operator Instructions)

There are no further questions at this time. I would like to turn the call back to Mr. Slifka for any additional remarks he may have.

Thank you for your time, and we look forward to keeping you updated on our progress. That concludes today's call. Thanks.

Ladies and gentlemen, this does conclude our conference call. Thank you for joining us today. You may disconnect your lines at this time, and we thank you for your participation. Have a wonderful day.