Global Partners LP (GLP) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Global Partners Second Quarter 2017 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; Executive Vice President and Chief Accounting Officer, 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, and thank you for joining us today. 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 crude oil market business cycle, demand for petroleum products, renewable fuels and logistics, weather, credit markets, the regulatory and permitting environment in the forward product pricing 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, publicly announced conference calls or other means that will constitute public disclosure for the 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. Our second quarter results underscore our ability to leverage our retail expertise and our position as a leading wholesale fuel supplier and terminal operator. Given the successful execution of strategic initiatives over the past year, the partnership is positioned with increased financial flexibility to pursue organic growth opportunities and M&A. Our GDSO segment continues to perform well, accounting for almost 78% of our second quarter combined product margin. The Gasoline Distribution portion of GDSO posted an 18.3% increase in product margin, benefiting from a decline in wholesale fuel prices in the quarter and higher volume at our existing sites. By contrast, wholesale fuel prices increased in the first 2 months of last year's second quarter. Product margin in Station Operations portion of GDSO was down about 12.2% year-over-year in Q2 '17, largely due to the sales sites. Product margin in the Wholesale segment declined about 5% from the second quarter of 2016. The decline was primarily due to less-favorable market conditions in gasoline and other oils and related products, partly offset by revenue related to a crude oil take-or-pay contract and a decrease in railcar lease expense. On the retail side, we continue our program to sell nonstrategic sites. Since the start of this divestiture program, we have sold approximately 50 of the NRC-listed properties for a total value of approximately $30 million, yielding a high single-digit EBITDA multiple. Keep in mind that in many of these sales, we have retained term supply contracts that increase the multiple. So while the divestiture program is generating additional capital to reinvest in the business, we are also maintaining fee-based recurring revenue that drives volume and margin. We continue to explore the potential sale of nonstrategic terminal assets and are working toward finalizing permits to expand our Oregon facility. We remain active on the M&A front and continue to focus on investments we believe will contribute to the partnership's future organic growth. Turning to our key financial metrics. Gross profit was up approximately 5% from the second quarter of 2016 to $135.4 million. Second quarter EBITDA increased 24% to more than $51 million from the same period in 2016, while adjusted EBITDA grew 22% to nearly $54 million. Distributable cash flow of $21.8 million was more than 50% higher than the same period in 2016.

Turning to our distribution, last month, the Board of Directors announced quarterly cash distribution of $0.4625 or $1.85 on an annual basis. The distribution will be paid on August 14 to unit holders of record as of the close of business on August 9, 2017. To sum up, we continue to successfully execute on our key initiatives, and our performance to the halfway point of 2017 bears that out. Looking ahead, we are focused on making investments that further enhance the value of our asset portfolio, increase our operational efficiencies and drive long-term profitability. With that, let me now turn the call over to Daphne. Daphne?

Thank you, Eric, and good morning, everyone. Turning to our second quarter results, combined product margin increased $3.3 million year-over-year to $157.8 million. The increase was primarily driven by improved product margins in crude oil in our Wholesale segment and in Gasoline Distribution in our GDSO segment. Operating expenses of $71.2 million, or $4.7 million lower, primarily due to the decreases in our GDSO segment relating to the sale of sites. In addition, last year's second quarter included $2.2 million in expenses associated with the cleaning and conversion of tanks to ethanol at our Oregon facility. Similar to the first quarter of this year, lower volumes and reduced staff at our facilities in North Dakota, also contributed to the reduction in operating expenses. SG&A expenses of $34.7 million were almost $2 million lower than last year, in part due to a decline in wages and benefits, professional fees and the absence of severance charges, partially offset by an increase in accrued incentive compensation. The increase product margin and lower expenses resulted in a $10 million increase in EBITDA from $41.3 million last year to $51.3 million in this year's second quarter. Adjusted EBITDA, which in this quarter excludes losses associated with sites sold or held for sale, was $53.7 million versus $43.8 million in the same period last year, an increase of almost $10 million. DCF was $21.8 million, an increase of $7.5 million from the comparable period in 2016. DCF, as defined by our partnership agreement, does not include adjustments for certain noncash charges, such as net losses on the sale and disposition of assets and goodwill and long-lived asset impairment charges. Our DCF results for the second quarter of 2017 include $2.4 million in such noncash charges, compared to $2.6 million in 2016. Excluding these charges, DCF would've been $24.2 million and $16.8 million for the quarter ended June 30 2017 and 2016, respectively. Interest expense was $21.9 million compared with $21 million in the year-earlier period. The increase was due to $1.1 million associated with the financing obligation recognized in connection with our sale leaseback transaction in June 2016 and a $600,000 write-off of a portion of our deferred financing fees associated with the amendment of our credit agreement in April 2017. The increase in interest expense was partially offset by lower average balances in our credit facilities for the second quarter of 2017.

Now let me take you through our segments in more detail, beginning with GDSO. Product margin was $122.5 million, $6.2 million higher than the same period a year earlier. The Gasoline Distribution portion of that product margin was up $12.3 million to $79.3 million, as a decline in the NYMEX price for 87 RBOB positively impacted our fuel margins, which increased from about $0.17 to $0.20 per gallon. Station Operations product margin decreased $6 million to $43.2 million, largely due to the sale of sites including the Drake site sold in August 2016.

Wholesale segment product margin decreased $1.6 million to $31.2 million, as crude oil increases helped to offset declines in other products. Crude oil product margin was $4.8 million, compared with negative product margin of $9.6 million in the second quarter of 2016. This $14.4 million improvement was due to a $10.7 million increase in revenue related to a take-or-pay contract and an $8 million decrease in railcar lease expense as a result of our early lease termination in December, 2016, partially offset by less volumes through our system. Wholesale gasoline and gasoline blendstock product margin decreased $8 million to $18.6 million due to less favorable market conditions in gasoline.

In other oils and related products, less favorable market conditions in this year's second quarter resulted in an $8 million decrease in product margins to $7.8 million. Commercial segment product margin decreased $1.4 million to $4.1 million primarily due to the sale of our natural gas marketing business. Total volume was down about 102 million gallons to 1.2 billion. The decrease primarily reflects continued weakness in the crude oil market and reduced activity in gasoline and gasoline blendstock. Despite the sale of sites in our GDSO segment, volume remained essentially flat year-over-year, in part, reflecting the retention of supply at the majority of sites sold as well as increased volume at our existing sites.

CapEx in the quarter was approximately $10.9 million, consisting of $7.3 million in maintenance CapEx, including $5.8 million related to our retail sites. Expansion CapEx of $3.6 million related to investments in our retail gas stations and in IT and related equipment. We continue to expect 2017 maintenance CapEx of approximately $35 million to $45 million and expansion CapEx of approximately $25 million to $35 million in 2017, relating primarily to investments in our gasoline station business.

Turning to our balance sheet. As of June 30, the partnership had total borrowings of $449.8 million under our $1.3 billion facility. Borrowings consisted of $200.7 million under our $450 million revolving credit facility and $249.1 million under our $850 million working capital facility. Our leverage, defined as funded debt-to-EBITDA, was approximately 4x at the end of the quarter, down from 4.47x at the end of the first quarter and in line with our targeted long-term leverage of 4x or lower. Over the last year, one of our key goals has been to strengthen the balance sheet. And along with the renewal of our credit facility in April, we have increased financial flexibility to execute on organic growth initiatives and strategic M&A.

Turning to guidance. For the full year 2017, we continue to expect to generate EBITDA in the range of $190 million to $220 million, which excludes the gain or loss on the sale and disposition of assets and any impairment charges.

Before I turn it back to the operator for Q&A, I wanted to let you know that next week, we will be participating in the Citi One-on-One Midstream Infrastructure Conference, and we look forward to meeting with investors there. Now we're happy to take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Ben Brownlow with Raymond James.

On a GDSO segment, the volume -- the higher volumes there, you commented, existing sites experienced higher volume. Can you just give us some color around the driver of that growth, given kind of what we're hearing across the industry and kind of weaker volume demand?

Yes, I mean -- I think it's just good focus on the sites that we have, the capital expenditures that we're putting into the sites. The fact that really one of the main drivers of the business too, at that retail is -- we feel, we really have the best locations, right, in the markets that we're in, and I'm not saying that's every single location. But the portfolio of assets that we bought over the years from the major oil companies in many instances are in fact the best corners. Right? And so I think it's really a combination of the assets plus some of the capital expenditures that we put into the sites plus just our marketing ability and the major step programs as well that are showing small returns as well. So there's good execution all around.

Yes, the only thing I would add -- the only thing I would add to that is just I think we talk about this -- we've talked about this in the past, and I would just reiterate, the way that we kind of look at things is, we look at these sites on a -- we look at our portfolio on a site-by-site basis when it comes to fuel pricing, and so we're always trying to find the right balance between volume and margin. And so from time to time, depending on market conditions, we may decide to optimize in a different fashion. So it is a very active management of that portfolio in our -- which can impact volumes and margin and such.

Okay. So it is a shorthand way of saying that you were a little bit more aggressive on pricing, given the fuel margin -- strong fuel margin backdrop to capture some incremental volume?

Not necessarily because we don't apply the same strategy to every site, right. So it literally is a corner-by-corner approach. I only point it out just because it is a little bit of a fluid process. And so while -- and it depends on the approach that we take to each individual site, really. So I just mentioned that -- I mean, Eric's comments stand and are -- are spot on. I just add that in as additional color.

Okay, that's helpful. And on the Wholesale volume, the decline there, can you just give a little bit more color around kind of the fundamentals and the backdrop on that?

Well some of that decline in the Wholesale was really to do in the crude segment, where there's just lower activity. I mean certainly last year, with the challenged market and we had some volume that we were moving and it's -- this year, it is less volume that we are moving or selling out through this system. And then, the other decrease is just really in gasoline and gasoline blendstocks and not any material impact on the company from a margin standpoint. That in of itself did not have a material impact, it's just less activity.

Okay, great. That's helpful. And just one housekeeping for modeling purposes, Daphne. If you have the breakout of the number of sites in the GDSO segment by company op, commission, leasee and dealer?

Yes, so 239 company operated, 269 commission agent, 237 leasee dealer and 698 contract dealer for 1,443 total.

Our next question comes from the line of Selman Akyol with Stifel.

So I guess first of all, just in terms of thinking about your guidance. You didn't raise it even though we're kind of 6 months in. You take the midpoint and kind of apply it to the back half, looks like you're guiding down compared to what you have been doing. Can you give any comment around that? Any color?

Yes, I mean -- I think at this point, we stand firm with our guidance, gave obviously a big band at the start of the year and basically affirming that at this point in time.

Okay. Your SG&A, is that a good run rate on a go-forward basis?

Yes, I think that SG&A -- I want to just look quickly for the last quarter. I think last quarter, we were at sort of $37 million, now it's $35 million. I might suggest both are perhaps a little bit light, only in terms of timing of investments and some of the IT assets aboard the business, some HR personnel and systems to support GDSO, and timing of additional marketing programs so maybe a little bit light.

Okay. And then last one for me. Is there just any update or any color, what's going on in -- with your terminal in Oregon?

Essentially, there was a PUC meeting, and the PUC approved the sale of the tanks to Global. And essentially, there are a lot of detailed processes that have to take place there in order to sort of expand that facility. But we're focused on it, getting closer, really trying and then to market it to customers. We don't have a customer there yet other than the existing business that we're currently doing. But I would say, it's positive news out of the state and out of the utility.

Our next question comes from the line of David Schechter with Perspective Capital.

My first question is, in terms of -- sort of a follow-up to the first question in your volume gains. Is there any indication that you picked up market share in the areas served by your GDSO segment?

Yes, I think, I'll just kind of reiterate what I had ended that last question with. And I think there is -- we take whatever approach we feel is -- gives us the optimum balance between volume and margin. So we don't get too focused on volume. I mean obviously, more volume is good, but we're really trying to optimize margin. And so if that comes with additional volume, that's great. Is it -- at time sure, when we grow volume, I would say that we're taking market share from someplace. But there may be times where we may decide to take a different margin approach or difference approach to that balance in the business. So again, it is a little bit of a fluid process, it's corner-by-corner. So I wouldn't -- on a prospective basis, I wouldn't read too much into that. I think, as Eric said, we have what we believe to be high-quality assets, good real estate, we continue to invest in programs and marketing and technology. And we're going to keep doing that with the intention that we will, long term, be able to grow that business.

Yes, so even leaving aside the pricing strategy, we've all seen a lot of gas stations close. I just wondered whether or not you've seen yourselves pick up market share and part because of that as opposed to your pricing strategy?

Yes, David. So I don't think I can get that direct correlation. But I think what I would say is, it's important to make sure that you've got the best real estate in the market, right? And if you have good real estate and you have competitive facilities and you have clean operations and good execution and you continue to focus on trying to drive that business, I do think that you -- that leads to better volumes, right? But you've got to be very focused on it. I just think it's hard to say, I got a direct great correlation. If -- to delve into that even a little bit further, I am sure that there are locations where somebody closed a site. I'd have to go dig into it and go site-by-site. But I'm also sure that there are instances where we just have the better sites, and we've been able to get a little more traction in volume, right?

The second question is regarding the status of the 6 tank sales that you announced last quarter, earlier this year. What's your sense of the time frame now? Is the -- when we, shareholders, might hear about a transaction regarding that?

Yes, we're working through that now. I think we've received multiple bids for the assets, some are interesting and some don't meet our threshold. So we're working through that now. As far as timing, that'll be -- our goal will be to get the interesting ones closed as quick as possible. But I'm not sure I can handicap that timing at the moment.

But you think it would be by the end of this year, though?

It will be our goal. We'll try to work through this process as quick as possible but tough to say.

Our next question comes from the line of Lin Shen with Hite Hedge Asset Management.

So you noted in the press release that your improved financial position allows for more organic growth and potential M&A. Could you just give a little bit more color on what you're working on there? Is this more kind of block and tackle around expanding the retail network? Or is it something else?

That, I think -- we try to see the M&A deals that are out there. We try to look at everything. And then obviously, we try to select only those that sort of fit us in the past. But we'll look at everything from tanks and terminaling to retail, and it's -- I'd say we're more likely to do businesses or buy businesses or entities that are already in the areas that we do business today. It's harder for us to go out and -- unless it's a very scaled transaction, go out and go into completely different, totally different businesses, right. It's likely that those are going to be competitive processes that I -- I'll have a difficult time adding a lot of value to. So those would be harder, But certainly just gas station ownership and companies that are broad and there's lots of them and so there's a lot of opportunity to buy those, take ownership. But those companies are few and far between, but we try to look at everything, right.?

Great. And then could you give more color maybe on where you want to see the balance sheet before you'd start thinking about raising the distribution again?

Lin, I think, as you know the board set that distribution on a quarterly basis. And I think at this point in time, obviously, we've got our leverage in a good spot, But we've talked historically about the balance between any cash flow that you might generate that's excess and reinvesting in the business in some hybrid term projects.

Okay. So there's no sort of firm boundaries that you're yet to cross. You're kind of there, but you're balancing that versus investment opportunities?

Yes. Look that investment opportunity could be an M&A acquisition, that investment opportunity could be ways in building NTIs, right? So there's good uses for the capital to grow the business, right?

There are no further questions at this time. I would like to turn the floor back over to Mr. Slifka for closing comments.

Thank you for joining us this morning, and we look forward to keeping you updated on our progress. Everybody, enjoy the rest of the summer. Thanks

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.