Global Partners LP (GLP) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to the Global Partners first-quarter 2016 financial results conference call. Today's call is being recorded. (Operator Instructions)

With us from Global Partners are President and Chief Executive Officer Mr. Eric Slifka; Chief Financial Officer Ms. Daphne Foster; Chief Operating Officer Mr. Mark Romaine; and Executive Vice President 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.

Thank you. Good morning and thank you for joining us.

Before we begin, let me remind everyone that this morning we will be making 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.

Estimates for Global Partners' EBITDA guidance and future performance are based on assumptions regarding market conditions such as the continuation of a competitive crude oil market, business cycles, demand for petroleum products and renewable fuels, utilization of assets and facilities, weather, tenant markets, the regulatory and permitting environment, and the forward-pricing product curve, which could influence quarterly financial results. We believe these assumptions are reasonable given currently available information and our assessment of historical trends.

Because our assumptions and future performance are subject to a wide range of business risks and uncertainties, we can provide no assurance that actual performance will fall within guidance ranges. In addition, such performance is subject to risk factors including, but not limited to, those described in our 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 news release, public-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. Good morning, everyone, and thank you for joining us.

As we reported this morning, our financial results for the first quarter of 2016 were affected by tight crude differentials, significantly warmer temperatures, and rising wholesale gasoline prices. While weather and fluctuation in commodity prices are factors that are always present and may affect our performance in a particular quarter, the core elements of our business -- terminaling, marketing, and retail -- have been and remain fundamentally strong.

The particular challenge to global and current climate is the uncertainty surrounding the crude-by-rail market, crude differentials, and the fixed costs associated with that line of business including railcar leases and pipeline commitments.

Turning to our segment performance, wholesale segment product margin declined 51% in the quarter to $39.2 million from $80.1 million in the same period in 2015. Let me take you through the primary reasons for that nearly $41 million decrease.

About $17.7 million is attributable to a reduction in crude margin and lower crude volumes. Approximately $13.4 million of the variance is attributable to the very favorable market conditions in wholesale gasoline in the first quarter of last year that did not recur in Q1 2016. When you back out that nonrecurring event, wholesale gasoline margin in Q1 came in as expected.

Lastly, the segment was also negatively impacted by unseasonably warm weather. Temperatures in this first year's quarter were 26% warmer than the same period in 2015 and 12% warmer than the historical average. The impact of unseasonably warm weather decreased the margin in our weather-sensitive product pool by roughly $10 million.

In addition, weather was a primary factor behind the $4.7 million decline in our commercial segment. In our gasoline distribution and station operations segment, product margin was nearly $10 million higher in Q1 2016, primarily due to the acquisition of Capital Petroleum assets in June of last year. That said, retail gasoline margins were adversely affected by rising prices.

In summary, we estimate that the combination of warm weather and rising wholesale gasoline prices negatively impacted our results by approximately $18 million in the quarter. Typically, you do not get degree days back. Based on our experience however, retail fuel margin tends to average out over an annual basis.

Now let me update you on some of our current activities. We are using our storage capacity to capitalize on existing contango market opportunities. At our basin transload terminal in Beulah, North Dakota, we have entered into a two-year term lease agreement to lease 208,000 barrels of storage to a third party and have also signed a one-year agreement to lease track space.

At our Oregon facility, our tank conversion and dock construction project is on schedule to be completed in the third quarter. The tank conversion will allow us to utilize the terminal's 200,000 barrel storage capacity for ethanol transloading. The upgraded dock will enable the terminal to handle Panamax class ships.

These projects open new opportunities in the ethanol markets.

In terms of our strategic divestiture program, NRC Realty and Capital Advisors is coordinating the sale of 86 non-strategic gas station and convenience stores in the Northeast and Mid-Atlantic. This package of sites has received significant interest from prospective buyers. Final bids on the sites are due in late June.

We also continue to enhance our retail network. Several raves and rebuilds at new-to-industry sites are slated for opening this year. In addition, we currently have expanded our portfolio in Western Massachusetts with the addition of 22 lease sites.

Turning to our distribution. In April, the Board of Directors announced a quarterly cash distribution of $0.4625, or $1.85 on an annual basis, unchanged from the quarter of 2015. The distribution will be paid May 16 to unitholders of record as of the close of business on May 6, 2016.

Before closing, let me take a moment to congratulate our CFO, Daphne Foster, on her recent election to the Board of Directors. Since joining Global in 2007, Daphne has contributed in multiple areas. During her tenure we have strengthened our fiscal management, broadened our capital markets relationships, and enhanced our treasury function. The Board looks forward to benefiting from her strategic insights as our seventh director.

Looking ahead, we will continue to streamline our portfolio and assess our lines of business by further optimizing our assets. While we can't predict the timing of a recovery with respect to crude by rail, that asset base provides flexibility to move quickly as market conditions improve.

With that, let me turn the call over to Daphne for her financial review. Daphne?

Thank you, Eric, and good morning, everyone. Let me start with some color on our first-quarter performance.

Combined product margin was down approximately 19%, or $35.6 million, year over year to $154.5 million. As Eric noted, this decline was driven by warm weather; tight crude oil differentials; particularly strong performance wholesale gasoline last year, which did not recur this quarter; and rising wholesale gasoline prices, which negatively impacted margins in our GDSO segment.

SG&A and operating expenses, excluding amortization, declined $10.2 million, primarily due to $6.7 million in acquisition and severance-related costs in connection with a warrant acquisition in the first quarter of 2015, $5.1 million left in the crude incentive comp, and a $3.3 million decrease in various other expenses including professional fees. Together, these reductions more than offset the $1.4 million in severance charges incurred relating to the January 2016 reduction in workforce and a $3.5 million increase in operating expenses, primarily related to the Capitol acquisition. We expect the reduction in workforce to generate approximately $5 million in annual savings.

As a result of the lower product margin, despite lower expenses, first-quarter EBITDA of $42.6 million was down $29.3 million from the same period in 2015. In the first quarter of this year, we recorded a $5.5 million impairment charge related to assets classified as held for sale, approximately 28 retail sites, and recognized a $0.6 million loss on the sale of eight gasoline stations. Excluding these charges, adjusted EBITDA of $48.7 million was approximately $23.6 million less than adjusted EBITDA of $72.3 million for the prior-year period.

Interest expense increased $9 million to $23 million. The increase was due to the issuance of $300 million 7% bonds in June of 2015, the sale-leaseback accounting for capital and the resultant $2.4 million reclass from rental expense, additional borrowings to fund a portion of the acquisitions, and a $1.8 million write-off of the deferred financing fees associated with our elective reduction of our revolving credit facility.

Distributable cash flow for the quarter decreased $37.3 million to $16.4 million from $53.7 million a year earlier. Excluding the $6.1 million loss on the sites sold or held for sale, DCF would've been $22.5 million in this year's first quarter, as compared to $54.1 million in the first quarter of last year. TTM distribution coverage was 1.1 times.

Looking at our segments in more detail, in the wholesale segment our crude oil product margin decreased $17.7 million year over year to a negative margin of $2.4 million due to the tighter crude oil differentials as Mid-Continent crude oil did not discount sufficiently to make rail transport to the coasts competitive with imports. Additionally, logistics volume was lower due to declining volumes with one particular contract customer.

Our margin is also negatively impacted by fixed costs, which includes contracted barges, pipeline commitments, and railcar leases. The primary fixed cost in the first quarter was our railcar lease expense of $11.7 million that was allocated to crude oil, as compared to $11.6 million in the first quarter of 2015. Approximately two-thirds of these railcars were in storage as of March 31, 2016.

The future lease expense for these railcars is estimated at $33.6 million for the remainder of 2016; $45 million and $39 million in 2017 and 2018, respectively, with a significant reduction to approximately $20 million in 2019, after which the leases expire. The pipeline commitments for the full year 2016 are $13.1 million, reflecting the Summit Meadowlark connection to our Stampede facility and the Tesoro High Plains Pipeline.

Wholesale gasoline and gasoline blend stocks product margin was down 45% to $16.4 million, but as Erich mentioned, performed largely in line with expectations. In the first quarter of 2015 there were particularly favorable conditions in the wholesale gasoline market, including contango early in the quarter, followed by refinery problems which cause shortages in expanded margins. Also within the wholesale segment, other oils and related products, which include distillates and residual fuel, were negatively impacted by weather that was 26% warmer than last year, resulting in a $9.8 million decrease in product margin to $25.2 million.

Turning to our GDSO segment, product margin from gasoline distribution increased $3.7 million to $65.4 million, primarily as a result of the Capitol acquisition in June 2015. Fuel margins were negatively impacted by the rise in wholesale gasoline prices during the quarter. The NYMEX price for 87 RBOB increased $0.35 per gallon from the end of January to the end of March.

Our flat year-over-year cents per gallon fuel margin of approximately $0.18 in part reflects the addition of the Capitol sites and certain raise and rebuild sites on the Connecticut Turnpike streaming on. Year-over-year retail gasoline volume increased 6.6%, or 22.4 million gallons, in the first quarter of 2016, also primarily due to the Capitol acquisition.

Product margin from station operations, which includes rental income and C-store margins, was $42.9 million in the first quarter of 2016, $6.2 million, or 17%, higher than the $36.7 million earned in the prior-year period. The year-over-year increase primarily reflects the additional rental income from Capitol as well as smaller increases in C-store margin, rental income, and other revenue.

Commercial segment product margin, as Eric mentioned, declined $4.7 million in the quarter, due primarily to the warmer weather. Total volume for the first quarter of 2016 decreased 314 million gallons to 1.3 billion gallons.

Slightly higher GDSO volume was more than offset by a decrease in distillates volume wholesale segment due to warmer weather and a decrease in gasoline and gasoline blend stocks volume, also in the wholesale segment. The declining wholesale gasoline volume was due primarily to an elective change in supply logistics for a particular customer in early 2015 which did not have a material impact on product margins.

Our CapEx in the quarter was approximately $16.4 million, including $11.6 million in expansion CapEx and $4.8 million in maintenance CapEx. Expansion CapEx consisted of $5.3 million in ongoing raise and rebuilds and improvements at our retail gasoline stations and $5.5 million in costs associated with our terminal assets, including the dock expansion project at our Oregon facility which began in 2015. Maintenance CapEx included $3.9 million related to our retail sites.

Looking ahead for the balance of the year, we continue to keep tight control over our expenditures and expect maintenance CapEx for the full year to be in the $35 million range.

With respect to expansion CapEx, we have no material committed capital expansion dollars in 2016. We are completing certain raise and rebuilds, as well as other investments in our GDSO segment, and the dock expansion and related project infrastructure in Oregon. We expect expansion CapEx in 2016 to be in the $30 million range, approximately half of what we spent in 2015. Any additional expansion projects will be evaluated based on their returns and financing sources. New-to-industry sites, for instance, could be financed with build-to-suit leases.

Turning to our balance sheet, as of March 31, 2016, the partnership had total borrowings of $610.3 million under our $1.475 billion facility. Borrowings consisted of $275.1 million under our $575 million revolving credit facility and $335.2 million under our $900 million working capital facility. Our leverage, defined as funded debt to EBITDA, was 4.6 times and increases year-end, but well within our 5.5 times covenant.

Given the headwinds and uncertainty in the crude market, our priority is to position ourselves to manage through a longer period of challenging industry conditions. Our goal is to maintain a strong balance sheet with ample liquidity and we target long-term leverage of 4 times or lower. We continue to tightly manage expenses and capital expenditures.

As Erich mentioned, we are moving forward with our strategic asset divestiture program and we expect these asset sales to generate material proceeds that will enable us to reduce debt and reinvest in the business. In addition, our real estate portfolio provides us additional optionality with which to raise capital. For 2016, we affirm our outlook for EBITDA in the range of $170 million to $200 million.

Now let me turn the call back to Eric for his concluding comments.

Thank you, Daphne. In summary, we have a solid core business that should keep us on track to achieve our full-year EBITDA guidance. Our 11.3 million barrels of storage capacity in the Northeast is complemented by a portfolio of well-located retail gasoline and convenience stores. The combination of these assets creates a vertically-integrated network that services daily demand.

Now Daphne and I would be happy to take your questions. Operator?

(Operator Instructions) Selman Akyol, Stifel.

Thank you, good morning. I think on the last call you had 125 locations that you had identified potentially for sale. Is that still a good number in total? You got eight completed this quarter, a package for 86, and then should we just expect the rest over time?

Good morning, it's Daphne. Yes, you can see the 86 that we announced. The site sales that occur during the quarter and those held for sale actually are really not included in the numbers that we put out for the 125. Those sites that we have held for sale or we sold in the quarter are really just part of ongoing site sales, so additional sales could happen sort of one-offs or in bundled sales.

Okay. Then as I take a look at SG&A and you've got roughly $35 million in the quarter, if we adjust that for the $1.5 million severance, is that sort of $33.5 million a good run rate on a go-forward basis?

Yes, I think that's a reasonable run rate. Clearly, we expect to get, on an annual basis, sort of $5 million in savings related to that reduction in force in the first quarter. But that's a reasonable run rate.

All right. Then on the $6 million charge, was that a cash charge that you took? Was there a cash component to it?

No, that's a non-cash loss in (multiple speakers).

Okay, okay.

And impairment.

Then previously, if my notes are correct, maintenance was at $40 million, now $35 million?

Yes, brought that down a bit, yes.

I understand I guess sort of on the supply and logistics on the wholesale side for that particular customer it didn't impact your margin too significantly, but was there any more color behind on why they switched? It doesn't sound like you were too upset with the switching, given that there wasn't much margin in that [company].

In early 2015, no. This was just an elective change on their part; didn't impact us from a product margin standpoint, so really --. We continue to talk about it because it does impact volume, but are clear that it didn't impact our product margin in any material way.

All right, thanks so much.

Barrett Blaschke, MUFG Securities.

Just a quick question. As we start thinking about strategic asset sales, is it going to be limited to gas stations or could it expand beyond that?

Barrett, it's Eric. We will always look to optimize around our assets in the best fashion, so that's how we will view the portfolio of the assets that we own.

Okay. Then as we think about it, is it more geographically driven or is it just being maybe too dense on sites in a certain area if it is?

It could be anything. In some senses around the retail it's specifically what we consider to be nonstrategic for our own internal purposes and where we want to have some consolidation and different market presence. And that may be due to several factors. Then just to other assets that we would always look at and just be opportunistic with.

Okay. On the gas station, is there a good EBITDA average run rate that we could keep in mind if we see one of these being sold, how much of a contribution that is? And then also sort of a target multiple for these kinds of assets these days?

It's a little bit hard because it's sort of all over the board and some will ultimately end up being sold just as real estate. I think if you looked at multiples that were being sold in divestment processes throughout the retail market, those numbers, you know as well as I, depending on the assets they go anywhere from sixes all the way up to in the teens. It depends on the assets and where they are and what the quality of the assets are.

Okay, thank you.

Lin Shen, HITE Hedge Asset Management.

Good morning, thanks for taking my question. The first question is for the GDSO segment the margin is impacted by the rising fuel price in Q1. I'm just wondering in Q2 so far, do you see this trend continue?

Was the last part of your question was do we see it continuing? Sorry.

Yes, just so far, like in second quarter, do you see the trend continue because the crude prices continue to increase in April?

Just as a general statement, when wholesale prices go up, your margins tend to get squeezed at the retail, so who knows. In the second quarter, you could look at where it was on March 31 and where it is today and draw your own conclusions for that. But the general statement that when markets tend to rise, retail margins get squeezed is pretty true.

Got it. Then also I think you mentioned that you were able to sublease or lease your terminal and also the truck space in North Dakota for two years agreement. Do you see there's more opportunity for you to further sublease or re-contract assets over there?

Well, it wouldn't just be that asset. It would be any assets that we have. We're looking to optimize and get the best value out of that asset, and whether that's having us internally utilize that asset or having a third-party utilize it, we are always measuring sort of multiple avenues to try and get the greatest return for the Company.

Great. James?

It's James. Just a couple questions. I guess we've been seeing the data that gasoline demand is stronger than it's ever been. How does that affect you guys in particular?

Good morning, James. It's Mark. I think certainly the EIA has come out with numbers that would support growth in gasoline demand. I think we generally track with the EIA -- what the EIA sees and with those trends.

That being said, for us, with regard to volume, it's really not just about volume. For us, it's about volume and margin so we, literally, corner by corner try to optimize the volume margin equation. So we may not always track specifically to the number -- we may be higher, we may be lower -- but directionally, I think you can expect the same performance from our deck that you would see throughout the industry.

Okay. You spoke of your leverage being at 4.6 times, well within the 5.5 covenant. At what level do you see that sort of maxing out this year?

I'm not going to give an estimate going forward. I think, James, we've been clear that we have a lot of that asset divestiture program that we have underway and we expect to receive significant proceeds from that -- those actions, as well as continue to manage expenses and leverage should remain within compliance.

Okay, but I guess we can't say that we are at the max, though, at 4.6?

Sorry, we can't say that we are at the max at 4.6?

Yes, (multiple speakers).

I'm not going to predict where it's going to go. It all depends in terms of timing of obviously performance and the actions that we are taking today.

Okay. And I guess last one for me. In terms of the crude railcars in storage, is there any other option for them besides them being in storage? Or is that the best place to put them as you await the leases running off? Is there any other options that you guys are considering?

Yes, there is other options and we are and have been considering all of them. We have been chasing opportunity to repurpose the cars into other service. So we have moved some cars into ethanol service, some cars into biodiesel service and we continue to explore the possibility or the potential of moving cars into refined product service.

That being said, the market is -- the railcar market is oversupplied so the opportunities are few and far between, but we are looking to take advantage of any opportunity that presents itself. We have our supply team working hard on that initiative.

Okay. Thanks, guys.

Thank you. I would now like to turn the call back over to Mr. Slifka for any closing remarks.

Thank you for joining us. We look forward to keeping you updated on our progress. Have a great day, everyone.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.