Global Partners LP (GLP) 2010 Q3 法說會逐字稿

Good day everyone and welcome to the Global Partners 3 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. 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 Executive Vice President and General Counsel, Mr. Edward Faneuil. At this time I would like to turn this 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 operation 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 statement that may be made during 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 call 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 Mr. Erik Slifka.

Edward, thank you, and good morning everyone. Q3 was a good quarter for us on several fronts. First, we successfully closed and integrated our acquisition of mobile gas stations and related supply business, a transaction that encompasses 190 properties here in New England, along with wholesale fuel supply rights at an additional 31 stations. Because we closed on these assets in September, they did not figure prominently intro our third quarter results. We are very enthusiastic about the potential of this business.

I am also pleased to report that we have completed our Albany Ethanol and Rail Expansion Project, which is up and running on schedule. On October 12 we received our first 80-unit rail car delivery with 5,500 barrels of ethanol shipped directly on a single rail line from the Midwest. We believe this will be a higher return opportunity for Global Partners.

Beyond supplying our own business, we are further investing in our Albany Terminal by installing a marine vapor recovery system for barge loading of ethanol and gasoline at the dock, and expanding the rack to allow for additional gasoline and ethanol sales. The supply efficiencies we gain in Albany position us to be a premier cost-effective supplier of gasoline and ethanol in the northeast.

You will recall that, on our Q2 Conference Call in August, we said that we expected the third quarter of this year to be weaker than Q2 based on several factors. 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, the CP Railway Expansion Project and the mobile station and supply business; third, startup expenses related to the Mobile acquisition; and finally, fewer favorable buying opportunities in the supply markets.

While in relative terms, the third quarter was weaker than the second, the results we generated in Q3 were better than expected. In addition to a record Q3 gross profit in EBITDA, our distributable cash flow exceeded last year's third quarter by 8%.

Our 2010 third quarter results were driven in part by 10% greater wholesale volume fueled largely by our gasoline business. It is worth noting that gasoline represented a large majority of our total volume in the third quarter. In addition, wholesale gasoline net product margin contributed a record $16.4 million to our gross profit, up 49% from $11 million in the third quarter of 2009.

In addition to volume our improved results are due to a variety of factors including our increasing presence in the gasoline market, the growing ethanol component of our gasoline business, our logistical and supply expertise, and favorable conditions in both the distillate and gasoline markets.

Last week we announced that, as a result of a coding error, we overstated our accrued tax liability for the first two quarters of this year requiring us to restate our financial statements for these periods. The restatement resulted in accumulative increase in net income, DCF, and EBITDA of approximately $6.6 million for the first half of 2010. Tom will expand on this more thoroughly in a moment.

Looking at our year-to-date results, we generated record gross profit of nearly $115 million through September 30, up 7% from nearly $108 million over the same span a year ago. EBITDA of $50.5 million and the distributable cash flow of $33.5 million also were records for Global, increasing 10% and 11%, respectively, over the prior year periods. These numbers are particularly impressive when you take into account the upfront costs, as well as time, energy, and resources that have been invested in our growth projects.

With respect to distributions, we recently announced that our Board increased our cash distribution to unit holders by $0.03 on an annualized basis to $1.98 per unit. The board will continue to review our distribution levels on a quarterly basis.

As I have mentioned in recent calls, we expect the board to review future quarterly distribution increases in light of the earnings power of the Warex acquisition, our Albany Rail Project, and our acquisition of the Mobile stations and related gasoline supply rights.

In summary, we are pleased with the financial and operational performance of the company through the first nine months of 2010. Based on our recent strategic transactions and projects, we believe that we are positioned to conclude the year on a strong note and enter 2011 with positive momentum. Now, let me turn the call over to Tom for his financial review.

Thank you Eric. Let me begin by talking about the restatement of Financial Statements for the first and second quarters of this year. We amended and restated these results to adjust for a coding error that resulted in our accrued tax liability being overstated by approximately $6.6 million in the aggregate, and a consequent understatement of sales and net income by an equivalent amount. No company is ever happy with having to restate a financial statement.

However, in this instance, there are some positives worth noting. The error was self-reported. Management discovered the coding error in a normal course controlled procedure. The error resulted in an overstatement of our accrued tax liability but did not contribute to an over or underpayment of taxes. Bills to customers were not affected. The error had no impact on our previously reported net cash provided by operating activities. The restatement had a positive effect on our previously reported financial results for the first half of 2010.

The net result of the restatement is that it increased our net income, distributable cash flow and EBITDA, by approximately $2.4 million for the three months ended March 31, and $4.2 million for the three months ended June 30. I should point out that the correction of the accrued tax liability resulted with the improvement in the restated gasoline net product margin.

We do believe that improvements in our gasoline business will continue in future quarters. For those of you who model our results, however, you should not simply straight-line the recent improved results into future quarters, because, as Eric mentioned, the gasoline and related ethanol market in the first and second quarters offered some unusually good buying opportunities and favorable market conditions. Separately, the distillate markets also afforded some good buying opportunities and favorable market conditions in the quarter.

Given that Eric discussed margins a moment ago, let me turn now to expenses. Operating expenses were up $1.7 million or 20% from a year ago, primarily due to the operating expenses related to our Warex acquisition, and to a lesser degree, a few weeks of operating costs related to the Mobile acquisition. SG&A expenses were up $3.4 million, or 24% from a year ago, primarily due to three items -- a 1.1 increase in bank fees and amortization of deferred financing fees largely related to our expansions of our bank facilities; a 1.1 increase in incentive compensation; and $840,000 of one-time closing costs connected to the purchase of the Mobile Stations and supply business.

Our head count was up four to 269 people at the end of Q3. The increase is related to the management of the Mobile assets. Please remember separately that approximately 500 employees, concentrated at the 42 company-operated sites, were assumed as part of the acquisition and hired by Alliance Energy, our third-party manager of the business.

Interest expense was up $2.1 million or 57%, reflecting the increased borrowings related to the purchase of the Warex Terminals, the Mobile assets, and also higher absolute inventory levels due to higher commodity prices. Depreciation and amortization expense was $6.1 million for the quarter, up from $4 million a year ago, largely due to the purchase of the Warex Terminals and the Mobile assets.

With respect to the balance sheet, assets are up approximately $345 million from year end, reflecting the approximately $230 million Mobile purchase, the $47.5 million purchase of the Warex Terminals, and $66 million increase in inventory levels for the reasons mentioned above. These new assets have been financed with $85 million net proceeds from our secondary equity offering in March, a $31.5 million assumption of environmental liabilities, and the rest with bank borrowings.

Last quarter I spent a fair amount of time discussing the Albany Rail Project, so I thought I'd spend a little more time with the Mobile Assets this quarter. As you may remember we have said on previous occasions that we expect to earn a mid-to-high teen return on the acquisition, based on a cash purchase price of $202 million. This return calculation is before financing costs, after estimated annual maintenance capital expenditure of $6 million, and estimates average annual costs of $1.5 million related to environmental liability.

Based on several weeks of operations we remain comfortable with our original mid-to-high teen return assumptions. The return assumptions are broken down into three parts as follows. First, as we have mention previously, approximately 50% of pre-overhead income comes from the supply of gasoline to the stations. We have assumed the volume will be slightly less than the actual annual average of 370 million gallons over the past four years.

Our margin estimates for gasoline supply are based on our analysis of recent year averages. Second, rental income, which comprises of approximate 20% of pre-overhead income, is assumed at current contract levels with some modest inflation adjustments expected over time. Third, the remaining 30% of pre-overhead income arising from sales at the 42 company-operated convenience store stations, of gasoline at the pump, and convenience store products, is based on like-kind retail pump margins and C store margins in New England.

Because the acquisition came at the end of the quarter, distributable cash flow from the assets was nominal in Q3 after $840,000 of one-time closing costs. In summary, 2010 has been a busy year for Global Partners and we have achieved several major operational and financial milestones over the year's first nine months. In the process, we believe that we have also added significantly to our earning power and long-term growth potential for the partnership. This concludes our prepared remarks, now we'll be happy to take your questions. Operator.

Thank you. Ladies and gentleman we will now be conducting a question-and-answer session.

(Operator Instructions)

Our first question comes from the line of James Allred with Raymond James. Please proceed with your question.

Hello. Good Morning. Going forward, how should we look at the long-term financing of the acquisition? Is this kind of something we should expect to see similar to your historical debt-to-equity mix, or do you plan to keep this on a revolver for an expanded period time to take advantage of low interest rates?

James, I think it's probably not appropriate for us to comment about any particular actions the partnership may take. As you know we try to capitalize it properly over time and we do have, we think, sufficient flexibility from our existing arrangement.

Okay, and then just any organic opportunities around the new assets in 2011 that you see?

Hey James. It's Eric Slifka. We are always reviewing our asset pool to figure out how to squeeze out every dollar out of them and we continue to do that. I highlighted a few projects in Albany that we continue to work on and that's a perfect example of it. Essentially, we're going to try and take advantage of every asset we that have and maximize its potential. By example, another project we are working on is gasoline blending in 2011, bringing the tankage on in Albany is one step, but it's also the Warex facility too as another potential. So those are the two areas we are looking at very closely and we think we have enough demand in those markets to blend our own products for consumption.

Okay. Thank you.

Hey guys, great quarter. It's nice to have the banker in your favor in monopoly terms. Quick question, just about distribution growth. At this point we've kind of seen the first increase in over two years. Is the board now looking at doing this on a regular basis or can you comment on that?

I think Barrett, that it is most appropriate to stick with our standard answer that management will be recommending distribution recommendations to the board at the end of every quarter. We have said we do think we are on the cusp of some increased earning power in our business, however.

Thank you.

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

Brian Zarahn; Good morning.

Good morning, Brian.

Given the reduced cash flow volatility from the gas station acquisition are you more comfortable with having a little bit lower distribution coverage versus your fairly high coverage from the past.

You know Brian, it's Eric. We've indicated in the past indicated what we thought right statics were on that. If we're truly moving forward and developing our asset base in very a healthy way, hopefully we'll have increases in our earnings power. Right? So, a good problem is chasing your coverage down. Right? I think that's always the goal, but we've got to produce results that'll allow us to do that.

More on a housekeeping item. Can you provide your CapEx for the third quarter.

For the three months ending September 30, we had a Maintenance CapEx of [1.2], and Expansion CapEx of $203 million which included the acquisition of $202 million.

Thank you.

(Operator Instructions)

Our next questions comes from the line of James Jampel with HITE Hedge Asset Management. Please proceed with your question.

Hi, guys.

Good morning, James.

Good morning guys. A couple questions here. You mentioned over the last quarter or two, or maybe it was just this past quarter there were fewer optimization or good buying opportunities for the non-service station business. I was wondering what types of conditions would you like to see in the future in the market that would likely cause there to be more opportunities.

It is interesting. I think for us it's having opportunity to buy products, cheaply, that are distressed if you will. It allows us to then take advantage of our logistics that we have in within the terminalling system. An example, we go back to Newborg, that would be being able to take in large barges at our docks. In that example we'd be able to make it two ways. You have an opportunity where somebody is selling something that is distressed and at a little bit lower price, but then on top of it you also have great logistics that you can put up against that purchase and you deliver it in, and then you have a lower cost going in. Those are the opportunities that we always look for that we like to take advantage of.

What would cause an asset to be distressed?

Somebody who has too much product or doesn't have enough bankage and has to sell it.

Do you think that type of situation is more likely or less likely in the future.

It swings back and forth. Sometimes the markets into an over supplied situation and sometimes it gets into an under-supplied situation. It literally swings back and forth month-to-month, and usually it takes a couple of weeks for it to play itself out. But that's it.

Okay, and the second question relates to the service stations. What types of initiatives do you have in place to enhance the profitability of the new assets. Is there anything that you're doing that the previous owners were not doing.

I think the good news is you had a very large company operating assets that were essentially at the end of their supply chain, albeit an important market. I don't think those assets were necessarily merchandised as best they could be, priced as good as they could be, and as we've taken over the assets we've reviewed how they priced at the street level. We're going into each store, we're looking at how we merchandise in those stores, and we think all those pieces play together and I think the goal is to beat what our estimates are and do a better job at running them. It was being operated by a very large company, who knew they were selling the asset, and we think that is an opportunity for us.

Last one, if I can add on here. You haven't mentioned the acquisition market.

The acquisition market is incredibly busy. I know I say that a lot. There has just been lots of stuff that has come up for sale recently.

So we shouldn't take your sort of omission of it from the general discussion that perhaps is less than robust from the past.

No, not at all.

Okay. Thank you.

(Operator Instructions)

At this time there are no further questions. I would like to turn the floor back to Mr. Slifka for any closing comments.

I'd just like to thank you all for joining us this morning. We look forward to keeping you updated on our progress. That concludes today's call. Thank you very much everyone.