Global Partners LP (GLP) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Global Partners Fourth 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 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 would like to turn the call over to Mr. Faneuil for opening remarks. Please, go ahead, sir.

Good morning, everyone, and 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 statements.

In addition, such performance is subject to risk factors, including, but not limited to those described in Global Partners filing 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 statement 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, let me turn the call over to our President and Chief Executive Officer, Mr. Eric Slifka.

Thank you, Edward, and good morning, everyone. Overall, I am pleased with our results and accomplishments for 2010, as we posted record gross profit and distributable cash flow. EBITDA, at more than $72 million, exceeded last year's results by nearly $6 million. We also moved 87 million barrels of refined petroleum products, up 7% from 2009, and more than any other year in the Company's history.

2010 was a busy year for Global Partners. We completed two strategic acquisitions that have been smoothly integrated into our operations, the acquisition of the former Warex Terminal facility, along the Hudson River in Newburgh, New York, and the purchase of 190 Mobil stations and a related wholesale fuel supply business here in New England.

The combination of the retail gas stations and related supply business secures vertical downstream demand that further anchors our gasoline business and gives us an annuity like revenue stream, logistical advantages, and improved purchase, sale, and supply options. As a follow-on activity to the Mobil transaction, we have contracted to supply other Mobil distributors in New England with more than 150 million gallons of branded and unbranded fuel annually.

In 2010, we also completed, in concert with Canadian Pacific Railway, a major ethanol and rail expansion project at our terminal in Albany, New York. This project was fully operational in the fourth quarter. As an enhancement to the project, we also completed the installation of a marine vapor recovery system for dockside loading of ethanol and gasoline barges and expanded the rack for additional gasoline and ethanol sales. This multimillion dollar expansion positions us as a premier, cost effective supplier of gasoline and ethanol in the Northeast.

These initiatives reflect Global Partners' strategic focus. First, we have diversified the Partnership from its historic roots in residual fuel and heating oil to a leader in transportation fuels, which today, comprises the majority of our total volume. Our acquisition in Newburgh, which is largely a transportation fuels facility, added 950,000 barrels of storage to our asset base.

Second, we have broadened and vertically integrated our product offerings, as demonstrated by the Mobil transaction and our increasing presence in the ethanol market. Our system wide ethanol capacity increased more than 30% over the past year to approximately 600,000 barrels. We have greatly enhanced our inbound and outbound logistics for ethanol. Our expanded presence allows us to acquire and transport ethanol efficiently by barge, rail, and truck.

Third, the transportation fuel volume associated with the Mobil assets, rent generated from the dealer operated sites, and volumes put through the Newburgh facility each represent diverse new cash flow streams. We believe that these will translate into year-round income for unit holders as we go forward.

These initiatives have enabled the Partnership to increase its cash distribution to unit holders in each of the past two quarters. The quarterly distribution now stands at an annualized rate of $2.00 per unit.

In an otherwise solid year financially, we faced a challenging fourth quarter. As we stated in our SEC filings in early February, Q4 net income EBITDA and DCF were negatively impacted, due, in part, to adverse market conditions and fewer advantageous purchasing opportunities, primarily in our distillate business. This resulted in a decline in our wholesale distillate net product margin of 32% to $22 million. The decrease was offset by strong performance of our gasoline business.

Wholesale gasoline net product margin was up more than 180% to $16.3 million in the fourth quarter and 59% for the year, to nearly $65 million. Commercial and other net product margin grew more than 300% for the quarter. These results, which are directly related to the acquisitions and organic projects we completed last year, helped to propel 2010 gross profit to $167 million and DCF to $46 million. We believe that these initiatives will benefit unit holders over the long term by generating positive returns.

Looking ahead, while adverse market conditions and fewer advantageous purchasing opportunities are factors that have affected our business in the first quarter, we do not believe that they are long-term in nature. Our logistical advantages and supply expertise enable us to compete effectively within what we expect to be a continuing environment of high commodity prices and price volatility. We are encouraged about the outlook for our business, particularly, as the earnings potential from our new assets become more fully realized.

From our vantage point, the market for potential acquisitions remains very active. In addition to continually evaluating acquisition opportunities, we have several organic projects under development, including gasoline blending and bringing into service in Albany an additional 230,000 barrels of storage capacity that can shift between distillates and gasoline. With that, let me turn the call over to Tom for his financial review.

Thank you, Eric. Let me share some further insights into the numbers. As Eric mentioned, we've reported a record gross profit of nearly $167 million, up approximately $17 million from our 2009 gross profit of approximately $150 million. Given our transportation fuels emphasis, including our recent acquisition of the Mobil retail stations and related supply business and the Newburgh terminal facility, it should come as no surprise that gasoline drove this improved result. Our wholesale gasoline net product margin for the year was up $24 million from a year earlier.

The fourth quarter marked our first full quarter of operation with the Mobil assets and related supply business. While we don't break out specific acquisition results, the Mobil contribution is evident in our fourth quarter wholesale gasoline net product margin, which increased $11 million from the same period in 2009, as well as in our commercial and other net product margins, which, together, contributed an additional $13 million in net product margin versus the fourth quarter 2009. We were very pleased with the performance of these assets in the quarter, and the integration of the assets from Mobil to Global proved to be seamless.

The picture was not quite as bright in our distillates business, where adverse market conditions and fewer favorable buying opportunities negatively affected the quarter's results. As Eric noted, our fourth quarter wholesale distillate net product margin was down 32%, year over year, to $10.3 million. As Eric mentioned, while negative factors in the refined products market continue to affect our business, we don't see these issues as long-term.

For the full year, EBITDA, at $72.4 million, was up nearly $6 million from $66.7 million in 2009. We achieved this, despite the fact that 2010 was 10% warmer than normal and 11% warmer than 2009. Incidentally, 2010 EBITDA would also be a record for the Partnership if we adjusted 2007 results to exclude the one-time $14 million gain that occurred that year from the sale of NYMEX shares and seats.

The comparatively small increase of $600,000 in distributable cash flow was affected by higher borrowings costs for the acquisitions and increased working capital borrowings associated with higher refined petroleum product prices and higher levels of inventory. It is worth noting that our full year 2010 results included $1.8 million in increased acquisition costs related to Mobil and Warex, while in the fourth quarter of 2009, a year ago, we benefited from a $1.5 million gain, resulting from a freeze to our pension plan. Adjusting for these items, full year 2010 DCF would be $47.8 million, or approximately 9% higher than the adjusted 43.9 DCF in 2009.

Turning to expenses, due to the acquisitions and projects, total costs and operating expenses in 2010 were up $18.3 million from 2009, including a $7 million increase in depreciation and amortization related to the new acquisitions and the Albany rail project. Headcount at year end was 286 people.

For those unit holders who are interested in keeping track of gross receipts, the per unit amount for 2010 was $382.40. Please keep in mind that this figure pertains only to units held for the entire 12 months of the year.

Let me now turn to the balance sheet, where the most significant change from 2009 is the almost 60% jump in total assets of $620 million to $1.7 billion. This is related to two items. First, a $263 million increase in net property and equipment, primarily reflecting the new assets from our two acquisitions, and second, $338 million more in accounts receivables and inventory. The dollar increase in receivables and inventory is due primarily to higher refined petroleum product prices.

We financed the increase in assets on the balance sheet with net equity proceeds of approximately $202 million from three secondary offerings in March and November of last year and February of this year. The rest of the expansion of the balance sheet has been financed by borrowings from our committed bank facility and increased trade payables. As a result of the equity offerings, our common units now enjoy increased liquidity and higher daily trading volume.

Similar to other MLPs, our sponsor and general partner has held a large share of subordinated units. As we will disclose in our 10-K, the necessary conversion tests have been satisfied, and all subordinated units have converted to common units.

During the month of February, we exercised an accordion feature under our committed bank facility and increased the working capital revolver by $100 million. Although utilization under the working capital revolver, including loans and letters of credit, was less than $600 million at year end, we believe the $100 million increase in borrowing capacity is prudent, in light of the recent increase in product prices. As a result, we now have a total committed bank facility of $1.250 billion, consisting of a $900 million working capital revolver and a $350 million acquisition and general corporate purpose revolver. As has been the case with our past two financings, our 21 member bank group committed 50% more than was required for this increase.

In summary, 2010 was an eventful year. Our Mobil and Warex acquisitions, as well as our Albany ethanol rail project, have been integrated smoothly into our operations and contributed to the year over year increases in gross profit, EBITDA, and distributable cash flow. Overall, despite some of the market turbulence we have been experiencing, we believe we are very well positioned for the future. With that, we'll be happy to take your questions. Operator?

Thank you. We will now be conducting a question and answer session. (Operator Instructions) Thank you. Our first question is from Darren Horowitz with Raymond James. Please, proceed with your question.

Good morning, guys. How are you?

Morning, Darren.

Eric, now that you guys are two-thirds of the way through the March quarter, I'm just trying to get a sense for the magnitude of impact that reduced purchasing opportunities in the distillates business is going to have on the March quarter gross profit, relative to what you guys realized in the fourth quarter. So, any color there would be appreciated.

Darren, good question, but obviously, we can't answer. The quarter isn't ended. We have seen some difficulty in the supply markets, interestingly, more in gasoline than distillates, and it has affected us so far, but we can't give you an estimate at this point.

Okay. Looking beyond, and this kind of builds off what you said in the prepared commentary, what gives you confidence that this is going to improve, and is there any sense of timing as to when tangible improvement actually materializes?

Hey, Darren, we've been in the business a long time, and market conditions really come and go, but the key is, I think, the partnership is really in a good position to perform over time, and as you look through our comments throughout this call, we're very comfortable with the position that we're in. It doesn't mean that at moments in time, we don't think that we might have some headwinds, but the bottom line is we like the position that we're in.

Sure. Tom, recognizing that the fourth quarter operating expense did reflect some regulatory and startup expenses that were one-time in nature, if you were to back that out, is it fair to assume that the OpEx run rate pro forma for the required assets should be somewhere around $17 million a quarter?

Darren, two points. First is, the actual one-time expenses were in the third quarter, as opposed to fourth, and the fourth quarter is a full run rate of Mobil and Warex and the Albany rail.

So then, the $18.9 million is the fair run rate for, what we could say, the next couple quarters?

I don't want to give you a forward-looking statement on it, but it is a full run rate with those operations.

Okay. Final question from me, Eric, and you mentioned this briefly in your prepared commentary. As it relates to the acquisition landscape, could you just outline for us what opportunities you see, possibly, over the next six to 12 months, developing? Is there -- is it more on a region by region area, or is it more on a products mix basis?

It's really all the above, right? I mean, there are assets for sale throughout the region, throughout the country. We look at everything that's available. Obviously, as I've said in the past, the assets that are most strategic to us, I think, we'll be able to be competitive on, when we put our bids in. The assets that are in other places, where it's not as strategic, I think those are going to be a tough road for us to be the high bidder and win.

Okay. Thanks, guys. I appreciate it.

Thanks, Darren.

Our next question comes from Ron Londe with Wells Fargo. Please, proceed with your question.

Yes, thank you. We all recall the problems that you had a few years ago, in one of the quarters, where gasoline and oil prices spiked significantly, and I'm sure you're alluding to your challenging quarter coming up, in that vein. Can you give us an idea of what you learned back then and how you've changed your operation to deal with that kind of situation, as it comes up currently?

Sure, Ron. Actually, I think, as you know, the -- we're almost price agnostic to the -- in terms of where -- how high prices are, although it does put some credit in the -- credit strains in the system that we'd rather not see, so we prefer lower prices. It depends more about how the markets are behaving. The futures market -- what the cash buying opportunities are. And we -- at the time, I remember going through a list of things we have done, which are still in place in the Company, in terms of managing the volatility, the way we keep our hedges in place, watch our margins per customer, how we price at the rack, and so forth. We're very careful about it.

Okay. The Chairman of Exxon was on yesterday, saying that he thought, as gasoline prices approach $4.00 a gallon, that there would be a lot of demand destruction. Are you seeing any demand falloff at your stations, given where we are in the pricing scheme right now?

Yes, we haven't materially seen any changes yet. I don't think -- as I look back, the economy and where the economy is, it's just as important, right, as price. The thing about gasoline is it is a staple. People have to use it. They have to use it to get to their jobs, so it's really hard to conserve, right? And you could look back at the last price spike that we had, and I do -- I think people are concerned about the price -- the high prices, but it's also very hard to conserve.

Last year interest expenses are around $22.3 million. Given higher prices and your expansion of your working capital, where do you think your run rate for interest expense will be for 2011?

Well, we, as you know, Ron, don't want to -- or, don't make forward-looking specific comments. What I can say is that the fourth quarter had the full fun rate, under our acquisition facility for the acquisitions, and in addition, sort of full working capital borrowings. If you were trying to calculate it, you would net in the equity proceeds, which would take down your borrowing amounts, but then again, you'll see increased working capital borrowings, if prices remain high or go higher. I don't know if that helps, but --.

Okay. Thank you.

(Operator Instructions) Our next question is from Barrett Blaschke with RBC Capital Markets. Please, proceed with your question.

Hey, guys, just kind of out of curiosity here, as I'm looking at the interest expense, can you give us a little bit of an idea here, what was the impact of the upswing in crude oil prices versus what was the impact of the additional assets, kind of a normalized run rate there?

Yes, I can't, offhand, Barrett, break it exactly between the two, but those are the two key items, because, as I mentioned, I -- our net fixed assets were up about $263 million, year over year, mostly in the second half of the year.

Okay.

And then, I think it's $330 million, $340 million on working capital assets, although trade payables, interestingly, were up by $200 million, so we leaned on the trade more.

Okay.

But it's a combination of the higher prices for working capital and the new assets.

Right. Okay. Thank you.

Yes.

At this time, we have reached the end of the Q&A session. I will now turn the conference back over to Mr. Eric Slifka for any closing or additional remarks.

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

And that concludes our conference call for today. Thank you for joining us.