Global Partners LP (GLP) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Global Partners second quarter 2010 financial results conference call. Today's call is being recorded. There will be opportunity for questions at 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, and Chief Accounting Officer and Co-Director of Mergers and Acquisitions, Mr. Charles Rudinsky; and, Executive Vice President and General Counsel, Mr. Edward Faneuil. At this time, I'd like to turn the call over to Mr. 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 for Global Partners may differ materially from those expressed or implied by 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 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, and good morning, everyone. We continue to make good progress on the strategic initiatives that we believe will help to shape the earnings power of our business, both near term and long term.

In June, we completed the acquisition of three primarily transportation fuel terminals from Warex Terminals Corp. These assets add 950,000 barrels of storage capacity to our terminal network in a prime, waterborne location.

In May, we announced a purchase and wholesale gasoline supply agreement involving 221 Mobil branded retail gas stations in New England. The agreement includes the purchase of 190 stations and the right to supply the 190 as well as an additional 31 stations. Recently, the purchase cleared a key regulatory hurdle, the early termination of the waiting period under the Hart-Scott-Rodino Act. The due diligence process is moving smoothly. And we now expect to close the acquisition by late in the third or early in the fourth quarter ahead of our original schedule.

Our Albany ethanol and rail expansion project with Canadian Pacific Railway is advancing rapidly towards a startup in late September. This project is part of a larger initiative that will expand our ethanol storage capacity and lower our cost of ethanol supply. Ethanol is the most widely used liquid biofuel in the transportation market. In the United States, virtually all the ethanol produced is blended into gasoline to meet federal guidelines.

Turning now to our second quarter results, our performance was about where we would have expected given the unusually warm temperatures and the high -- higher level of operating expenses associated with the ramp-up of our various acquisitions and projects. Tom will discuss the expense items with you more fully in a moment.

To provide some perspective on the weather, temperatures in the second quarter were 30% warmer than last year and 36% warmer than normal. Consequently, our distillate net product margin was down about $7 million or approximately half of 2009's result. By contrast, Q2 was good quarter for our gasoline products. Higher gasoline volumes drove a year-over-year increase of $7 million of 58% in net product margin. It was also a very nice recovery from the first quarter -- from the first quarter leading to a 7% rise in gasoline net product margin for the first half of 2010 versus the same period last year. These results further demonstrate the strategic shift of our business towards ratable, year-round transportation related fuels.

We are also pleased by the progress of our commercial business segment, which delivered an 18% increase in product volume in the second quarter. Overall, the gross profit was roughly flat with the second quarter of 2009 at just under $28 million as the weather-related reduction in distillate market was offset by an increase in our gasoline margin.

Due to the warm weather and higher expenses related to one-time items that Tom will describe, net profits were $2 million lower in the second quarter of this year versus the same period in 2009. However, EBITDA and distributable cash flow were off only $800,000 and $500,000, respectively.

Now, let me talk about our outlook for the business. We believe that the third quarter of 2010 will be weaker than Q2 of this year for the following four reasons. First, normal summer slowness associated with the sale of heating related fuels; second, higher SG&A related to effectively and efficiently integrating and managing the Warex acquisition and the CP Railway expansion project, and the pending Mobil acquisition; third, startup expenses related to the acquisition of the Mobil stations and supply rights; and, finally fewer favorable buying opportunities in the supply markets.

Having said that, we remain encouraged about our prospects for the fourth quarter and 2011. Aside from the fact that Q4 and Q1 are our strongest earnings quarters, we have a number of positive milestones in front of us. Our Albany ethanol and rail expansion project is scheduled to become fully operational in the fourth quarter. We expect improving results from the Warex Terminals as we further integrate them into our asset base later this year.

Our purchase of the Exxon -- of the Mobil stations and gasoline supply rights is on schedule to close late this quarter or early in the fourth quarter, broadening our reach and adding vertical integration to our transportation fuel supply business. Our recent investments in natural gas, though smaller in scale than other initiatives, are showing improving results. With that let me turn the call over to Tom.

Thank you, Eric, and good morning, everyone. As Eric mentioned, our Q2 gross profit was comparable to last year's second quarter results, even with this year's significantly warmer temperatures negatively impacting our distillate fuel volumes and margins.

Total volumes were up 1% for the second quarter to 736 million gallons from 728 gallons in the same period of 2009. While for competitive reasons we don't normally break out individual product volumes, it is worth noting that gasoline volume represented an approximately two-thirds of our total volume in the second quarter of this year. This compares to less than half of our total second quarter volume just three years ago underscoring the impact of the strategic initiatives that have transitioned our business mix towards more ratable, year-round transportation related fuels.

Total costs and operating expenses increased $1.2 million from a year ago. The increase was split evenly between SG&A and operating expenses. SG&A increased approximately $600,000 to $13.9 million, which included more than $1 million of one-time expenses. These one-time expenses included startup expenses related to the purchase of the Warex Terminals, final costs associated with the FTC review of our Warex acquisition, and other specific project spending. Operating expenses increased $666,000 driven entirely by the operating costs of the new Warex Terminals.

Headcount at the end of the quarter stood at 265, up 15 from the first quarter, and again, largely related to the Warex Terminals. Second quarter interest expense was up approximately 950,000 from Q2 of 2009, primarily due to higher commodity prices and slightly higher inventory levels as well as one month's borrowing costs for the Warex acquisition.

As a final comment on our income statement, it's worth noting that even apart from the one-time expenses, had the weather been normal, we would have been ahead of last year's result, both for the quarter and year-to-date periods.

Our balance sheet has never been stronger. For example, the ratio of total liabilities to net worth at June 30, 2010 was 3.4 to 1, compared with 5.7 to 1 at year-end 2009. Net worth as of June 30 was up $75 million from the year-end 2009 to $233 million. Working capital, inclusive of all working capital borrowings under our credit agreement, was up $52 million.

In addition, in May, we closed on a new senior secured credit agreement with our bank group. The four-year agreement increases total availability by $100 million, from $850 million to $950 million, with an accordion feature that enables the credit facility to be further increased by up to $200 million to a total of $1.15 billion.

In terms of our outlook, for the reasons Eric mentioned, while we believe that our Q3 results will be weaker than the second quarter based on the acquisitions and projects that we have discussed, we continue to be encouraged about our prospects for the fourth quarter and 2011. These initiatives demonstrate the partnership's strategic shift from its historic business, heating oil and residual fuel to lines of business with long term earnings potential. These include transportation fuels, ethanol and other biofuels, and natural gas.

Let me take a moment to review with you the return potential we see from our newest initiatives beginning with Warex. We acquired the three Warex Terminals in June for $47.5 million. Over time, we see the earnings potential of this acquisition in the high-teens largely as a result of the supply and distribution efficiencies of these assets.

Turning to our Albany ethanol and rail expansion project, which is being developed jointly with Canadian Pacific Railway, we are spending $5 million to add 180,000 barrels of ethanol storage, piping and handling equipment, and the marine vapor recovery system. As part of this effort, Canadian Pacific is constructing a railcar unloading facility in its adjacent rail yard.

Today, we receive ethanol at our Albany terminal from a third party, which charges us a terminal throughput fee after delivering it to their facility on two rail lines from the Midwest. We then barge it up the Hudson River to our terminal or transport it by truck. It's not very efficient. With the completion of our expansion project, Canadian Pacific will deliver 80-car unit trains of ethanol via a single line haul from the Midwest directly to our terminal for significant cost savings, one rail line versus two, no terminal throughput fee, and no barging costs.

In addition, we currently receive barge loads of gasoline at our Albany terminal. And then, we send empty barges back to New York Harbor. With the installation of the marine vapor recovery system, this will change. The new system will enable us to load ethanol across our dock onto these barges. Instead of sending back empty barges, we now will be able to cost effectively transport and supply ethanol through the global system, the third parties.

The combination of the supply efficiencies we gain through our expansion project and this back haul capability should position Global as a premiere cost effective supplier of gasoline and ethanol in the Northeast. We believe that our investment in the ethanol and rail expansion project will have an accelerated payback.

With respect to the Mobil assets, we estimated approximately half of the pre-overhead income will come from wholesale supply of gasoline to the 221 stations. This, of course, is our strategic capability. In addition, more than 20% of pre-overhead income will consistent of collecting rent from the dealers who will be operating 148 of the 221 locations. The remaining pre-overhead income, approximately 30%, is expected to come from sales at the 42 company-operated sites of gasoline at the pump and convenient store products. As we mentioned at the time of announcement, we plan to use a third party to manage those company-operated locations.

Incidentally, under IRS rules for master limited partnerships, all of the wholesale supply of gasoline and a good portion of the rent are considered qualified income. Sales to end users at the 42 company-operated sites as well as the remaining portion of the rent are non-qualified.

As we outlined on the May conference call announcing this transaction, we are acquiring these assets for a consideration of $200 million, plus the assumption of certain environmental liabilities. We continue to expect to finance the purchase of the ExxonMobil assets with borrowings under our revolving credit agreement with our bank group and/or access the capital markets.

Based on the purchased price, management has modeled an expected return on these assets in the mid to high-teens. And as we have mentioned, we expect the transaction to be accretive in the first 12 months of operations, with improving returns over time as the business potential of these assets is further realized.

In summary, our second quarter results were about what we would have expected given the unseasonably warm weather and the ramp-up costs of acquisitions and projects. Our balance sheet has never been stronger. And we are encouraged about the future. Our acquisition of the Mobil assets and supply rights is proceeding as planned. And we are on track to close ahead as schedule. Between this transaction, the recent closing of the Warex Terminals, and our CP rail project, we are well-positioned for growth as we move into the fourth quarter in 2011.

As we mentioned on our most recent call, our Board of Directors reviews the distribution on a quarter-by-quarter basis. And we expect that the Board will evaluate our distribution in light of the earning power of these transactions. This concludes our prepared remarks. And we'd be happy to take your questions.

(Operator Instructions)

One moment please while we poll for questions. Our first question is coming from the line of Gabe Moreen with Bank of America/Merrill Lynch.

Hi. Good morning, everyone.

Good morning.

Can you talk about -- I guess you mentioned in the release about some of the supply opportunities not being there. And there was something else mentioned in the first quarter. I'm pretty sure they must have been for different reasons this quarter, maybe you can provide some color as to what that was about?

In terms of supply, Gabe, we had more opportunities this past quarter to buy, actually, cargoes of gasoline. And if you'll recall in the first quarter, there were a couple of refineries that were down. And instead of supplying by cargo, we were supplying by barge. And that was less efficient.

Okay. Great. And then in terms of the timing around the Exxon startup expenses, if you can talk about maybe the timing, how long you think that those may last. I'm pretty sure you're not going to quantify them, and also maybe just qualitatively what some of those expenses related to. Are they just work force integration and stuff like that?

It is that kind of thinking. But I'm not ready today really to comment on the complete nature and amounts. It depends a little bit on the -- on when we close. As Eric said, we expect to close late Q3 or early fourth quarter.

Okay. And then, I guess just a big picture question, based on talking about Exxon, Warex, the ethanol project, nothing's really changed there in terms of your assumptions other than really -- it sounds like timing related to the Exxon potential acquisition close?

I think that's a factor.

Okay. Great. Thanks very much.

Thanks, Gabe.

Our next question is coming from Brian Zarahn with Barclays Capital. Please state your question.

Good morning.

Good morning, Brian.

Regarding the ExxonMobil acquisition, what's your comfort level regarding potential environmental liabilities?

Since our last call, Brian, even more extensively through the due diligence. And I think -- although we haven't completed it, if we have a good sense of it. And the estimate we've told you previously, about $1.5 million a year on remediation costs, which was included in our modeling. It's still standing true and accurate.

And given all the projects you have and the acquisition, you commented on during the call, it seems like you're -- you feel pretty comfortable about the distribution, if you're changing from your recent conservative posture.

It's not a policy change, but we will go to the Board to confer with them. The ExxonMobil's a large transaction, right? That's a big transaction for the company. And it's going to change the nature of our business. We also have Warex. And you have the ethanol project as well. And those will be coming all on stream, right? And those are changing the business. But clearly, the ExxonMobil deal is a large transaction for the company. And it's going to have some earnings power.

Thanks, Eric.

Thanks, Brian.

Our next question is coming from Barrett Blaschke with RBC Capital Markets.

Hey, guys. Just a quick question, I noticed SG&A backed off quite a bit here. Is this more of a seasonal shift that we're seeing or is this more of a run rate level?

SG&A, I think you're right Barrett. If you take out the one-time expenses, about $1.1 million is down from a year ago. And I believe I said in earlier calls, in the core business, we expect SG&A to be running this year certainly no higher than last year. Now, as we get into the second half of the year, bringing in these acquisitions, you'll see a bump. But it'll be offset presumably by -- in earning power of the overall transaction.

Okay. And then, on the interest expense side, it looks like that's creeping up a little bit. Is that just basically product costs at this point of carrying inventory?

It is. Yes, correct. Product costs because prices were up a bit. We were carrying a little higher inventory. And in addition, we picked up effectively one month's borrowing costs on the Warex acquisition. That closed June 1.

Okay.

We picked up one month.

All right. Thank you.

Thank you.

Our next question is coming from the line of David Schechter with Perspective Capital Management.

Good morning, guys, and congratulations on weathering, so to speak, a difficult quarter.

No pun intended there.

Yes, well pun intended. Tom, are you any more comfortable in giving any sense of timeframe on the comment modeling mid to high-teens on the ExxonMobil acquisition. Is that something you think you can achieve within the 12-month accretive period or at the end of that or is that something further out than that?

I think, David, I probably will stick to what we've said, which is accretive in the first 12 months.

With the mid of the high-teens returns, is that something that's--?

I think that's more of a second year--

Second year.

--target.

And in terms of the first year target, where would you see it?

I don't think I'd want to comment on that.

Okay.

Thanks, David.

Thanks a lot.

Our next question is coming from the line of James Jampel of Hite Hedge Asset Management.

Hello, gentlemen.

Hi, James.

Hi.

Hi. You mentioned in the press releases -- and this is following up on Gabe's question about fewer favorable buying opportunities in the supply markets in the third quarter. How should we think about beyond the third quarter in terms of this ability I presume to optimize where you get your products and the ability to use the greater scope of the organization given where Exxon and others to do -- to really optimize in the best way that you can given the scope of your operations?

When you look at the projects that we have going forward that is -- those projects -- in terms of the ethanol and in terms of Warex, that's followed by the optimization. And specifically, it's a simple as taking in by example larger barges than we could before Warex and that lowers our cost of supplying. We're going to look to see if we can even put it in shifts, and for that facility as well. And that was all reduced -- that all reduces costs and makes us more efficient. What we think we're really good at is taking advantage of the opportunities that present themselves because you own the assets. And that's really what we're focused on.

So is the lack of opportunities in Q2 and Q3, would you say that it's more just a locked thing? Do you expect them to present themselves in the future?

It's interesting. These things, James, balance out. The first quarter was awful. And business in gasoline came roaring back nicely in the second quarter. And one of the reasons we think Q3 will be weaker is so far we haven't seen those types of positive opportunities in Q3. Those are common. But the underlying volume will be driving through the system as well as the different products. Getting back to your original question, I think, it does position us even better to get supply efficiencies and better margins.

Okay. Thanks

(Operator Instructions)

Our next question is coming from the line of James Allred with Raymond James.

Yes, good morning. Could you guys provide me maybe a little more color on your maintenance CapEx going forward into the back half of this year with the additional new assets?

For maintenance CapEx, we've been quoting about $4 million annually. Warex may push that number slightly north of that, but not of any significant level.

Okay. Thank you.

You're welcome.

We have reached the end of the Q&A session. I would now like to turn the call back to Mr. Slifka for any closing comments.

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

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