Global Partners LP (GLP) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Global Partners First Quarter 2010 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, Chief Accounting Officer and Co-director of Mergers and Acquisitions, Mr. Charles Rudinsky, and Deputy General Counsel, Mr. Sean Geary.

At this time, I would like to turn the call over to Mr. Geary for opening remarks. Please begin, 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 for Global Partners may differ materially from these 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, allow me to turn the call over to our President and Chief Executive Officer, Eric Slifka.

Thank you, Sean, and good morning, everyone. We generated solid results in the first quarter, even in a challenging market environment. A year ago at this time, we were talking to you about record operating results aided by lower commodity prices, a favorable forward product pricing environment and colder than normal temperatures.

This year by contrast, the first quarter was marked by fewer favorable forward-buying opportunities, unseasonably warm weather and margin pressure in the gasoline market. In the gasoline market in particular, there were structural and logistical differences year over year in Q1.

Due to structural market conditions, we saw fewer attractive buying opportunities. Separately, an example of a logistical difference is that two east coast refiners experienced maintenance-related downtime requiring us to source and ship gasoline in less efficient, barge-sized quantities rather than larger and more cost-effective cargo-sized quantities.

This confluence of factors ultimately lowered our gross profit, which was down 10% to $45.4 million from $50.7 million in Q1 of 2009. Based on the nature of our business, our profitability may ebb and flow as a result of market conditions, which are always changing. But over time, our storage capacity and rateable demand provide us with a logistically advantaged market position providing an opportunity to offset any short-term market challenges.

Current initiatives such as our pending acquisition of three primarily transportation fuels terminals from Warex and our ethanol and rail expansion project with Canadian Pacific Railway reflect our strategy to expand our storage and supply transportation fuels.

These projects further diversify our product portfolio, enhance our operating efficiencies through higher asset optimization and increase the volume of transportation fuels put through our supply and terminalling system.

Now, let me update you on our two most recent initiatives. As we announced in April, our planned $47.5 million acquisition of three refined petroleum terminals from Warex is moving forward. After a lengthy review, the Federal Trade Commission concluded that no further action is warranted in its evaluation of the transaction.

These gasoline and distillate terminals located in Newburgh, New York, add meaningfully to our storage capacity and strategically complement our portfolio along the Hudson River. The majority of volume at these facilities is transportation fuels.

We expect to close on this acquisition by early in the third quarter. We anticipate these assets will be accretive to unit holders in the first 12 months of operation with improving returns over time as the business potential of these assets, valuable assets, is further realized.

About 80 miles upriver from Newburgh in Albany, we are making good strides on our multi-million dollar CP Rail project, which will add 180,000 barrels of ethanol storage capacity and rail access at our Albany terminal. As we have previously disclosed, our estimated cost of this project is $5 million.

Refurbishment of two petroleum tanks to store ethanol is underway. CP is in the process of constructing a rail car unloading facility at Kenwood Yard. This initiative remains on schedule to be operational later this year.

Our Albany facility is also the site of several other initiatives that provide significant flexibility in optimizing the use of the terminal. These include a dock expansion to promote logistical efficiencies, a continuing program to bring previously out-of-permit tanks back on line, the installation of a marine vapor recovery system to allow for loading and offloading of gasoline and ethanol at the dock and the conversion of two distillate storage tanks to gasoline. All of these projects expand our capacity, flexibility and efficiency.

Another new project that's taking place at our Chelsea terminal where we have converted a residual fuel tank to biofuel in advance of a Massachusetts mandate that goes into effect this summer. With Chelsea's waterfront location, we will be able to capitalize on barge economics for biofuel at that site, which positions us well competitively.

Before turning the call over to Tom, let me briefly address the topic of distributions. In April, the Board of Directors of our general partner declared a distribution of $48.75 per unit for the first quarter of this year. As we have said in the past, we maintain a conservative distribution coverage ratio given the nature of our business.

The decision to hold the distribution level has reflected both continued caution in what remains a challenging economic environment and the desire to maintain sufficient liquidity as we look towards some attractive potential opportunities to grow the business.

Recent examples include our pending Warex acquisition as well as our ethanol terminal expansion and rail initiative in Albany. The M&A market remains very active and may well present some interesting assets for us to consider in the quarters ahead. Having said that, the Board will continue to evaluate the distribution on a quarter-by-quarter basis.

In summary, we are continuing to enhance our terminal portfolio through strategic acquisitions and organic projects that we believe will further enhance our position as a leading northeast supplier of refined petroleum products. With the Warex acquisition slated for completion by early in the third quarter and our ethanol expansion project with Canadian Pacific Railway on track to be operational this year, we encouraged -- we are encouraged about our prospects for the second half of 2010.

With that, let me turn the call over to Tom.

Thank you, Eric, and good morning, everyone. As Eric mentioned, what's most evident in our results was the change in gross margin from a year ago and the change in wholesale product volume, which was down about 14% from the same period in 2009.

Weather was the primary driver of this change as temperatures were 12% warmer in the first quarter this year versus last year and 9% warmer than normal. In fact, 2010 saw the warmest March in the northeast in 30 years.

While we have in recent years increased our seasonal transportation fuels -- our non-seasonal transportation fuels business, weather continues to affect both our distillate and residual oil product lines, which in the first quarter of 2010 made up roughly half of our volume.

Despite the reduction in distillate volume due to the warm weather, we managed to hold our wholesale distillate net product margin essentially unchanged from a year earlier. The net product margin in our commercial business was also similar to the first quarter of 2009 despite a 10% decline in volume, again reflecting weather conditions.

However, our wholesale gasoline net product margin was up $5.4 million from the first quarter a year ago largely as a result of significant margin pressure and less favorable buying opportunities, as Eric mentioned, compared with last year's first quarter.

Turning to expenses, we are generally pleased with our expense management in the first quarter. Operating expenses of $8.7 million were up less than $200,000 from a year ago, reflecting the addition of our Commander Terminal.

SG&A expenses were down $1.5 million, or 8%, to $16.6 million. This decline is more significant when you consider that this year's first quarter SG&A included approximately $1 million of one-time expenses associated with the Federal Trade Commission's review of the Warex acquisition.

Our staff stands at 250 people, up from 245 at year-end. Interest expense was up nearly $300,000, or 8%, due to higher year-over-year petroleum product prices and to a lesser extent higher distillates inventory.

As a summary comment regarding the income statement, I think it is important to note that with slightly colder weather and excluding the FTC expenses, I believe we would have matched the DCF we achieved in last year's first quarter, even setting aside the first quarter's difficult gasoline market.

Our balance sheet has never been stronger. Our book net worth now stands at $248 million, a threefold increase over our capital position shortly after our initial public offering in October 2005. With nearly 75% of total assets in accounts receivable and inventory, our balance sheet remains highly liquid. It is also real and tangible with only $28 million, or 3%, of total assets classified as intangible.

In April, we completed a secondary offering that generated roughly $85 million in net proceeds, which we used to reduce the indebtedness outstanding under our credit agreement. This provides us with the additional financial flexibility to pursue strategic acquisitions in organic growth projects.

When the Warex transaction closes, which we expect to occur by nearly -- pardon me, by early in the third quarter, we intend to borrow $47.5 million under the acquisition facility to fund the purchase. Therefore, after the acquisition of the Warex terminals and adjusting for the proceeds realized from our equity offering, our projected indebtedness related to our fixed assets will be approximately $78.5 million compared with a book net worth of $248 million at March 31.

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 of March 31, $341 million, or 83%, of our total debt of $412 million is related to inventory financing. To be specific, our working capital borrowings of $341 million support inventory of $443 million and receivables of $268 million, thus inventory and accounts receivable are more than twice the amount of our working capital borrowings and certainly a more than adequate source of repayment for those borrowings.

As I have mentioned previously, analysts and investors should be thoughtful when calculating our debt to EBITDA levels as our enterprise value -- as well as our enterprise value compared with our EBITDA.

Our banking group, like most commercial bankers, looks at working capital borrowings as self-liquidating financing. As I mentioned a moment ago, 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 ratio, they basically look at the $71 million of non-working capital borrowings compared with 2009 EBITDA of $67 million for approximately a one-to-one ratio. That is very low and very conservative.

Similarly, Global's enterprise value to EBITDA is distorted on a valuation basis if working capital borrowings are included in the calculation. The point is that our self-liquidating working capital borrowings do not directly compare with borrowings of other MLPs, which consist of what you would classically call long-term debt.

So in summary, we posted solid results in light of the gasoline market challenges and unseasonably warm weather. We generally managed expenses efficiently and exited the quarter with a strong balance sheet. As Eric mentioned, with the planned integration of Warex and the expected completion of our CP Rail project we are encouraged about the second half of the year.

With that, we are ready to take your questions. Operator?

Thank you. (Operator Instructions). Our first question comes from the line of Darren Horowitz with Raymond James. Please, proceed with your question.

Good morning, guys.

Good morning, Darren.

Eric, a couple of questions for you. First, regarding the structural issues that impacted the wholesale business in the first quarter, can you give us any insight into any lingering effects and maybe a little bit more color on where wholesale margins and volumes are tracking currently and also any detail as to what you can continue to do to provide some offset to that?

Yes, I mean I think some of those that occurred in that quarter are -- were one time such as those refineries being knocked out. I think also that there will be opportunities -- there will be favorable opportunities that will give us a chance, you know, to make up some of that money over time.

Okay. Switching gears over to the Warex acquisition, can you quantify the magnitude of either EBITDA or cash flow accretion that you expect during the first 12 months of operation?

Darren, we have not been specific as you know, and I don't think will at this point. What we can say, is that out of the box it's accretive and like our other terminal acquisitions, the full power will come into play over a couple of years. But we are very enthusiastic about the earning power.

Okay. Final question for me. Eric a little bit more color on just how attractive you think the M&A market really is and also if you could, maybe provide some insight geographically as to where you believe you can generate the greatest synergies by adding capacity.

You know, I think assets that are located within our existing geographic footprint, you know, probably provide us with the highest opportunity and the highest return, you know, and as we've stated it's very busy out there. There's quite a bit going on.

Thank you, I appreciate it.

Thank you. Our next question comes from the line of Brian Zarahn with Barclays Capital. Please proceed with your question.

Good morning.

Good morning Brian.

It sounds like the declining gasoline product margin was more margin related than volume related, is that fair?

That's correct Brian. Although we don't release it. Gasoline volume was actually up quarter to quarter.

Okay. And is there any impact of sort of the general weak refining market on your margins? It sounds like your supply costs may be rising due to that?

I'm not sure I understand the question.

You said that down time at refineries in the northeast have increased your costs of gasoline.

We just -- specifically we are talking about logistics there right. So instead of taking in cargos, which you can essentially source cheaper, because they are lots of volume on a tanker. You are putting that on a barge and the cost of supplying that is -- on a barge out of New York is higher than cargos.

Okay. And in terms of gasoline volumes. It was mentioned that they are up year over year. How are they looking in the second quarter so far?

We can't talk forward. But I think if you looked at your national statistics out there, what they'd say is that gasoline demand looks, looks pretty good, so year on year.

Okay. And then I guess regarding CapEx, can you give us the CapEx for the quarter?

Sure. We had maintenance CapEx of about a $0.5 million in the first quarter. And expansion CapEx of $1.4 million for a total of $1.9 million.

Ok thanks Chuck. And then on Warex, do those terminals have ethanol binding capabilities.

They do, they have 100,000 barrels of ethanol storage.

Okay. And this finally, pro forma for the Warex acquisition. What's your total storage capacity?

It's -- total company wide you mean?

Yes

It'll go from 9.3 from year-end to 10.2 million barrels.

Okay, thanks guys.

Hey, Brian?

Yeah?

One more thing I want to add. You know, when you look at our total ethanol storage capacity, we have approximately 430,000 barrels today. We are converting another 180,000 barrels of tankage up in Albany, and the acquisition -- the Warex acquisition will give us another 100,000 of ethanol capacity. So, and the reason I'm pointing that out, is you know, we're making and putting a lot of effort into expanding our ethanol capacity.

So your total ethanol storage capacity will be around 630,000, after Warex?

Almost 700,000 right? So 430,000 ethanol would be another 100,000, 530,000, 600,000 almost 700,000 after Warex, plus the two tanks we are converting up in Albany.

In Albany. Okay. Got it. Thank you.

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

Morning guys.

Morning Barrett.

Just a quick question. I was wondering if you are seeing any changes in the home heating oil market in terms of any additional slippage to gas -- to natural gas heating, or is that still holding relatively steady?

It's still sort of the same as it's been in terms of the conversion to natural gas. You know, I mean there's real barrier to entry there right? So it's hard for that to happen. I'm not going to say that it's maybe not a little but more. But you're not talking about you know, 5% or 10% type of conversion numbers, so.

Is that a direction that makes sense for you guys to grow over time into more of the natural gas market to kind of be the supplier of all product I guess?

Well, that's one of the things that we think. And our customers -- there are some customers who burn whether it's resid and nat gas, or distillates and nat gas. So for us we think it's a natural extension to what we already do.

Okay. And are you seeing any types of opportunities, I guess in the M&A front in that business as opposed to kind of what your classic or traditional business is?

We have.

Thank you.

Thank you. Our next question comes from the lines of -- line of James Jampel with Hite. Please proceed with your questions.

Hi guys. You mentioned that the head count was I think up quarter over quarter but SG&A was down. So I was wondering if you could speak a little bit about that and whether this new lower SG&A run rate minus the Warex money is sustainable.

I think what I said in the last quarter is it can -- and I'll repeat now James is -- and by the way I think it was you who asked us to reveal each quarter the head count number, which I think is a good idea, because it is over time an indicator at least of part of your run rate on SG&A. But in our case, a lot of our SG&A apart from head count is very controllable and variable.

And last year, we thought we invested wisely in a lot of looking -- forward-looking projects which included some SG&A expending. This year, we expect it to be certainly no higher than last year, for SG&A for the year.

Okay thanks.

(Operator Instructions). We appear to have no further questions at this time. I'd like to turn the call back over to Eric Slifka for closing comments and additional remarks.

Thank you for joining us this morning. We look forward to keeping you updated on our progress in 2010. That concludes today's call. Have a nice day everyone.