Global Partners LP (GLP) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Global Partners Fourth 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 Executive Vice President and General Counsel, Mr. Edward Faneuil.

At this time, I would like to turn the call over to Mr. Faneuil for opening remarks. Please begin, sir.

Good morning, everybody. 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 financial results and our outlook in 2010. Tom will then comment on our financials in a bit more detail. Afterwards, we'll take your questions.

2009 was a terrific year for Global Partners. After factoring out a one-time $14.1 million gain that benefited our results in '07, we delivered record net income, distributable cash flow and EBITDA in 2009. We achieved these results even as we invested in infrastructure expansion, technology and personnel to further grow the business.

Full-year net income increased 62% to $34.1 million. EBITDA rose 15% to $66.7 million, and distributable cash flow increased 33% to $45.4 million.

We capped the year with a strong fourth quarter, improving our gross margin 18%, and posting net income, EBITDA and distributable cash flow that approached the excellent results we delivered in Q4 of 2008.

Two items to keep in mind when looking at our Q4 results -- in Q4 2009, we benefited from a $1.5 million gain, resulting from a freeze to our pension plan. In Q4 '08, our results included a $2.8 million benefit resulting from a favorable adjustment of an environmental reserve.

Effective margin management was one of the consistent themes of 2009. And our performance demonstrated that success. Combined gross profit grew 25% for the year to $149.8 million, reflecting a 23% improvement in our wholesale margin and a 30% increase on the commercial side.

These increases speak to our ability to optimize our storage network to better predict and manage customer demand, and continue to leverage opportunities in the marketplace.

As I noted during our investor day in June, we have the opportunity to add margin value in a variety of ways, as we move product in and out of our system. Whether it is adjusting our terminal configuration, capitalizing on market inefficiencies, negotiating costs within our freight operations, or optimizing vessel movements, we make a conscious effort to maximize our margins while adding value for customers through competitive pricing, differentiated products and outstanding service.

So while macro-issues such as the economic climate, energy conservation and competition affect wholesale and commercial volumes within our business, our strategy plays an integral role in those numbers as well. As we said in this morning's earnings release, our goal is not just to move barrels, but to optimize the volume and margin balance to enhance returns.

Along with working to grow the business in 2009, we also focused our time, energy and resources to position Global Partners for the future.

Specifically, we invested in expanding our natural-gas marketing efforts by initiating a sales presence in New York State. We launched an offshore bunkering service out of Boston Harbor and leased terminals on Long Island, as well as in Philadelphia and Linden, New Jersey.

This morning, we announced a terminal and rail-expansion project at our Albany location that will add 180,000 barrels of ethanol storage. The project, which we are developing jointly with Canadian Pacific Railway, includes modifications that will enable our Albany terminal to schedule the delivery of 80 car trains of ethanol. This project also will connect our terminal to Canadian Pacific's adjacent Kenwood Yard Rail Facility.

Our logistically advantaged facility in Albany creates a low-cost delivered-supply source of ethanol for our own use, and also serves the market's growing need for this important alternative fuel.

During our 2009 Investor Day, we also talked about the strategic rationale of having multiple supply options at our terminals. The expansion project we are undertaking in Albany is a good example of this. CP has single-line-haul capability from the US Midwest to water on the US Eastern Seaboard. The adjacent rail access creates an additional revenue opportunity for Global, and further enhances our operating efficiencies.

The total expected cost of this project to Global is $5 million. We expect the project to be operational before the end of the year, and to be a high-return investment for the Company.

In a complementary project unrelated to the initiative with CP Railway, we also are converting two distillate storage tanks to gasoline storage at the Albany facility. These initiatives will increase the total storage capacity of our Albany terminal to approximately 1.2 million barrels, up from 737,000 barrels when we acquired the terminal in May of 2007.

Before I conclude, let me briefly update you on our planned acquisition of three refined-petroleum-product terminals from Warex Terminals Corp, which was announced in late 2009. As we discussed previously, the Federal Trade Commission is reviewing the transaction, which remains subject to this review and other customary closing conditions.

We're continuing to cooperate with the Commission during this lengthy process. And the transaction will not close in the current quarter. It's always possible that the FTC could oppose a completion of the transaction as currently structured, or would require changes that we might not find acceptable. In either case, we don't believe a failure to acquire the Warex terminals would have a material adverse affect on our overall operations.

Beyond that, we will make no further comments about the acquisition until the Commission has completed its review.

As we have said, we pursue all acquisition opportunities with a disciplined and careful approach. We are focused on transactions that are strategically important to our business and accretive to unit holders. Although we typically do not comment on acquisition possibilities, the acquisition market is as active as we have ever seen it, and there are a number of potentially interesting opportunities.

In summary, 2009 was a great year for Global Partners, as we delivered record operating results across our key financial metrics, while continuing to invest in the business. The strength of our terminal assets, the depth of our marketing expertise position us well for growth. In addition, we believe the recent organic projects and other initiatives under development will add significant value for unit holders as we move forward.

We are encouraged about our outlook for 2010. With that, now let me turn the call over to Tom for his financial review.

Thank you, Eric. Let me begin by echoing Eric's comments about our fourth-quarter and full-year results, which reflected both our success in enhancing our margins, as well as some favorable market conditions.

We were on much firmer footing in 2009, with gross profit up 28%; and, consequently, we normalized portions of our core selling, general and administrative expenses. In addition, as Eric mentioned, in 2009, we invested significant time, energy and resources to position Global for future growth. For the year, SG&A expenses increased by $19 million to $61 million, from $42.1 million for 2008. This increase is somewhat overstated, as we reduced SG&A expenses in 2008 by 9% from the previous year to bare-bones levels in the midst of a challenging period with a lot of uncertainty and volatility in the marketplace and the economy in general.

The majority of the SG&A increase is variable and controllable by management, including project-development costs, due diligence on projects and potential acquisitions, and also incentive compensation. Bad debt and collection activities were also higher than normal in 2009.

We increased head count by 38 employees during the year, 30 of whom are in revenue-producing positions in areas such as our natural-gas business, staffing our new Commander terminal, and sales people across our marketing territories.

The increase in overhead positions was in select areas such as technology, project management, and credit. At this time, we do not expect further increases in SG&A spending in 2010.

Operating expenses were $35 million in 2009, essentially flat with 2008's results, after netting out the $2.8 million benefit related to the environmental-reserve adjustment that Eric mentioned earlier.

Interest expense decreased by $5.6 million to $15.2 million in 2009, due to lower product prices reflected in the carrying values of our inventories.

I also want to note a recent consent from our bank group to permit capital expenditures in 2010 of up to $20 million, an increase from the existing cap of $10 million. This flexibility gives us room to more rapidly pursue and develop some of the organic projects that Eric highlighted.

Our balance sheet remains liquid, with 76% of our total assets in accounts receivable and inventory. The balance sheet is also real and tangible, with only $28.6 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 long-term debt related to our terminal-operating infrastructure, compared with a book net worth of $157 million at year end, which is $14 million higher than a year ago. 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 December 31, $463 million, or 87%, of our total debt of $534 million is related to inventory financing, with the remaining $71 million, or 13%, being classic long-term debt.

On the December 31 balance sheet, our working-capital borrowings of $463 million supported inventory of $466 million and receivables of $336 million, a more-than-adequate pool of short-term assets available to repay the working-capital debt.

As I discussed on our third-quarter earnings call, analysts and investors should be thoughtful when calculating our debt-to-EBITDA levels, as well as our enterprise value, compared to EBITDA.

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. When Global's bankers measure our debt-to-EBITDA leverage, they basically look at the $71 million used to finance the purchase of terminals back in 2007, compared with our 2009 EBITDA of $67 million, for approximately a one-to-one ratio. That is very low, and very conservative.

One notable change on the December 31 balance sheet is $3 million of fixed forward contract assets, compared with $162 million as of December a year ago. As you remember, the rapid rise and fall of commodity prices in 2008 was challenging in many ways for everyone in the energy industry. And it stress-tested our risk-management processes.

We weathered those challenges successful and emerged, we believe, a better company.

In the case of those fixed forward assets, we collected more than 99% of the money associated with those contracts.

We continue to manage our financial affairs prudently. For example, our interest coverage this past year, as it is measured by our bankers, which is EBITDA over interest expense, is approximately four times -- a very strong ratio. In addition, our distribution coverage in 2009 was 1.7-to-one -- again, a very strong ratio for the Company.

It is also worth noting that, in December, our unit holders approved an amendment to our partnership agreement. The amendment replaced the terms "operating surplus," and "adjusted operating surplus" with the widely recognized industry term, "distributable cash flow," as the metric to measure our ability to fund distributions from earnings, and to test whether the subordinated units are entitled to convert into common units.

With that, we are ready for your questions.

Thank you. (Operator Instructions). Our first question comes from the line of Darren Horowitz with Raymond James. Please proceed with your question. Your mic is now live.

Good morning, guys. How are you?

Good. How are you, Darren?

Good. Good. A couple questions for you, Eric -- the first, on your core business.

Can you give us a little bit more insight into wholesale-volume trends? Obviously, you saw a seasonal sequential up-tick here, and now you're in what typically is your strongest quarter. So can you just give us a little bit more color on how volumes are tracking now relative to the year-ago quarter, and what you expect going forward?

Yes. I mean, I think, directionally, what we've been trying to focus on is, "How do we optimize our model to give highest returns to the unit holders in the Company?"

And, specifically, what do I mean by that? We continue to look harder and harder into every single gallon that we sell. And we focus on making sure that we're measuring it accurately to make sure that every gallon that goes out has the highest or best possible margin on it. And that, in fact -- basically, we're so focused on those sales that the net profit for the Company on those gallons that go out the door has been very positive for us.

Okay. Switching over to the commercial segment, what else can you do there in order to continue to drive margins higher? I mean, obviously, that business has a lot of external pressures against it -- conservation, et cetera. Is there anything relative to what you've done in the past where you can continue to extract maybe greater margins?

I think we've got the right team in place, and that's really the key there. And they continue to really hit the streets. It's another business that, literally is, "Get your shoes out on the ground there, and try to get in and see as many customers as possible."

Okay.

The key is we have a really good team managing it. Once again, it comes down to managing margins. And that's what we've become really, really focused on, and we're doing a great job of it.

Sure, okay. On the ethanol-expansion initiative with Canadian Pacific Railway, you mentioned that you expect this particular project to have a very high rate of return.

Yes.

Can you give us a little color there?

I think "high rate of return" was as much color as you're going to get.

Okay. I was hoping you could quantify it for us -- maybe even Tom could step in there and shed some color.

Our CEO is always right, Darren.

That's a good answer, Tom.

Last question for you -- and this is something that very much intrigued me -- when you mentioned that the acquisition market is as bright as you've ever seen it, and you look at your asset base geographically, where do you think you could get the best bang for an incremental dollar allocated toward acquisitions?

We're going to continue to focus on acquisitions that are really strategic to the Company, because I think those are the ones that we can be the most competitive on, and those are the ones that will have the most value for the Company and for the unit holders.

Okay. Thanks for the time, guys. I appreciate it.

Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Brian Zarahn with Barclays Capital. Please proceed with your question. Your mic is now live.

Good morning.

Good morning, Brian.

Hey, Brian.

Following up on Darren's question on the M&A market -- given there's a lot of activity, what's the risk of too many bidders going in there, and then making these deals not attractive for you?

Well, I think if it's really strategic to us, I believe that we're advantaged. Right? So, at the end of the day, that's the key for us. I think if it's an acquisition that is possibly outside of our market -- I don't want to say that I'm disadvantaged, but, certainly, I don't have all of the same tools to put to work on those types of acquisitions.

So I'm really -- anything that's in the market, I'm really not too worried about in terms of being competitive on.

I guess in terms of the majors -- have announced plans for lots of mid-stream asset sales. And you've done deals with majors in the past. How do you view the landscape with them?

I think the majors are going to continue on a path of divesting of their downstream assets. That's what we've seen for the last, really, decade. But they've still got a lot of assets to get rid of. And I think it's just going to take some time, that's all.

I guess on -- if you can, on the Newburgh acquisition -- can you give us a rough sense of when you expect the reply from the FTC?

It's really in the FTC's hands.

Okay. I guess turning to the quarter -- on wholesale volumes -- they declined more than I expected. Can you give us a sense of how much of that was margin-focused, versus conservation, versus weather?

Well, Brian, there's a series of factors. There still is some conservation in the market. The national statistics, as you know, have shown declines both because of the economy and conservation. In addition, as Eric mentioned, we're focused on -- through our entire supply chain -- making sure we manage our margins. And that starts with the first -- the cargo loads we buy, to when it's sold at the [rack] or delivered to the customer.

And, meanwhile, of course, we don't want you to misinterpret this. It's our intent to be as competitive and service-oriented for our customers as we can. But a fair portion of it is being conscious about maximizing the sales of those gallons which are most profitable.

And finally, can you provide the CapEx for the quarter?

For the quarter --

Or for the year -- either one?

Hang on just one --

For the year, it was $9.1 million; and for the fourth quarter, it was $1.1 million.

Okay. Thank you.

You're welcome.

Thanks, Brian.

Thank you. Our next question comes from the line of Barrett Blaschke with RBC Capital Markets. Please proceed with your question. Your mike is now live.

Hey, guys.

Hey, Barrett.

How are you?

Good. How are you?

Morning, Barrett.

I just wanted to touch on -- with the FTC issue that you are having with the Warex acquisition -- does that come into play a little bit, as you look at your -- at the acquisition possibilities that are in front of you now?

Barrett, I think -- let me -- I think what you're asking is -- the FTC, looking at Warex as a specific -- they're looking at that as a specific matter. We don't believe that that limits our ability elsewhere to do other transactions.

Okay. That's what I was wondering. Thank you.

You're welcome.

Thank you. Our next question comes from the line of David Schechter with Perspective Capital Management. Please proceed with your question. Your mic is now live.

Good morning, guys. Congratulations on a great quarter and a great 2009.

Thank you.

The distribution has remained the same now for nine quarters. What is the policy overall for any kind of cash-flow-to-distribution ratio? Or how do you decide, going forward, given how well the Company is performing on a cash-flow basis -- how and when to raise the distribution?

We continually review that with the Board. We do have a conservative posture to our distributions, and we continue to reinvest in our business and really try and do the right things for the unit holder in the long run.

Is there a specific attempt to hold on to cash in order to take advantage of some of this M&A opportunity?

I think that would be one way you could look at it.

Well, that's why I asked. How many shares were bought back in 2009, and how many are left to buy under the existing approved program?

David, we bought, in the course of the year, to satisfy long-term incentive plans for managers and directors -- I'm not sure I know off-hand what that number is. So I'll have to handle that offline.

Okay. All right, terrific. Well, thank you again -- absolutely fantastic performance. And I'm a proud shareholder.

Thank you.

Thank you, David.

Thank you. (Operator Instructions). Our next question comes from the line of David Silver with Hugo Neu Corporation. Please proceed with your question. Your mic is now live.

Good morning, Eric and Tom. Congratulations on your year and your margin management.

Thank you, David. Good morning to you.

Could you comment on the dynamics and the specific products that contributed to distillate and gasoline margins being up meaningfully, and residual margins down?

Well, I think, David, as background, the old residual-fuel business, sadly, as we mentioned in our Investor Day, is a declining business, from a volume standpoint, although margins have widened to some degree to offset it. Still, if you track wholesale resid, you see declining -- the only good news about it is it's less significant to our business.

On the wholesale side for gasoline and distillates, they each have their own dynamics. And one thing we're proud of is that the gasoline margins widened. And we think that's because we're getting better at sourcing, managing, and supplying gasoline. It's a much more significant product to us.

Okay. Thank you.

Our next question comes from the line of Edward Falkenberg, a private investor. Please proceed with your question. Your mike is now live.

When interest rates go up, I was interested in how you will respond. Obviously, you'll have to recover a higher margin. And in the past, have your competitors responded in the same manner?

No, it's a good question. In our case, just as a reminder, we have about $200 million of interest-rate [collars] in place to protect us from an interest-rate increase. But separate and distinct from that -- one of the positive aspects of our industry is that all the marketers have the same interest costs -- increases or decreases, depending on interest rates -- and the industry has been pretty good, over time, of passing that through as part of the time-value of money in the margins.

It's not perfect or immediate. But within a -- often, within a quarter, people will react. So, happily, historically, that's been a positive for this industry.

"A positive" in the sense that you recover more when interest rates go up?

Correct. Margins will widen when -- when prices go up, for example, or interest rates go up, which causes a larger interest burden, the industry has been -- I mean, because people have to make some money, the industry has been pretty good at passing on those cost increases -- reflected in the interest cost.

Thank you.

Thank you. At this time, we have reached the end of the q-and-a session. I would now like to turn the conference back over to Mr. Eric Slifka for any closing or additional remarks you may have.

Thank you for joining us this morning. We look forward to keeping you updated on our progress in 2010. And that concludes today's call.

Ladies and gentlemen, this does conclude our conference call. Thank you for joining us today, and have a wonderful day.