Global Partners LP (GLP) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Global Partners Third 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. 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 cycles, demand for petroleum products, renewable fuels and logistics, weather, credit markets, the regulatory and permitting environment and 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 releases, 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 third quarter results reflect solid performance across our businesses. Product margin in the Wholesale segment more than doubled from last year's third quarter to more than $36 million, and the Gasoline Distribution and Station Operations segment performed better than expected.

We continue to pursue strategic acquisitions that drive volume and margin. In October, we acquired the retail gasoline stations and convenience store assets of Honey Farms for approximately $36 million in cash. The addition of Honey Farms expands our footprint in the Worcester, Mass. region and achieves larger economies of scale. We expect this transaction to be accretive within the first full year of operations.

At the end of September, our retail portfolio consisted of 1,435 owned, leased or supplied gasoline stations in the Northeast, Maryland and Virginia, including 234 company-operated convenience stores.

Looking at our key financial metrics, gross profit was up 13% from the third quarter of 2016 to $150 million. Adjusted EBITDA increased 23% to nearly $64 million. Distributable cash flow for the third quarter of 2017 was more than $32 million. Excluding certain noncash charges in both periods, DCF would have been approximately $35 million compared with about $19 million in Q3 last year, an improvement of 83%.

In October, our board announced a quarterly cash distribution of $0.4625 or $1.85 on an annual basis. The distribution will be paid on November 14 to unitholders of record as of the close of business November 9.

Turning to our guidance. The full year 2017, we expect to achieve EBITDA above the midpoint of our guidance of $190 to $220 million, which excludes the gain or loss on the sale and disposition of assets and any impairment charges. To summarize, we are pleased with our financial and operating performance through the first 9 months of 2017. We look forward to continuing to invest in our business and optimizing our retail and terminal assets.

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

Thank you, Eric, and good morning, everyone. Turning to our third quarter results. Combined product margin increased $15.1 million year-over-year to $172.3 million. The increase primarily reflected improved product margins in the Wholesale segment, with gasoline and crude oil driving the majority of that increase.

As you look at the P&L, keep in mind that last year's third quarter included a $121.7 million noncash goodwill impairment charge in our Wholesale segment as well as a $26.1 million long-lived asset impairment charge, primarily related to our crude oil transloading terminals in North Dakota.

Third quarter 2017 operating expenses of $70.3 million were essentially unchanged from last year. SG&A expenses of $40.1 million were up $3.4 million from last year's third quarter, primarily reflecting increases in professional fees, severance charges related to the sale of our natural gas business and accrued incentive comps. The increase in product margin drove the $12.2 million increase in adjusted EBITDA from $51.6 million to $63.8 million in this year's third quarter.

DCF was $32.3 million in Q3 this year. DCF, excluding certain noncash charges, such as net losses on the sale and disposition of assets and goodwill and long-lived asset impairment, would have been $35.3 million and $19.3 million for the 3 months ended September 30, 2017, and 2016, respectively.

Interest expense was $20.6 million compared with $21.2 million in the year-earlier period. The decrease was due to lower average balances on our credit facility, partially offset by a year-over-year increase in interest rates.

Now let me take you through our segments in more detail, beginning with GDSO. Product margin was $130.7 million, $6.2 million lower than the same period a year earlier, reflecting in part the sale of sites, including the Mirabito sites sold in August 2016.

Gasoline Distribution product margin was down $3.9 million to $84.2 million and Station Operations product margin decreased $2.2 million to $46.5 million.

Fuel margin averaged $0.205 per gallon, down from $0.212 in last year's third quarter, reflecting the change in our retail portfolio with the sale of some company-operated sites.

Wholesale segment product margin increased $20.5 million to $36.6 million. Weather-related supply disruptions was the primary reason for the increase in gasoline and gasoline blendstocks margin, which was up $8.9 million to $30.4 million.

Product margin and other oils and related products increased $3.2 million to $14.6 million, primarily due to improved margins in residual oil, which also benefited from weather-related supply disruptions.

Crude oil product margin was negative $8.4 million for the quarter compared with negative $16.8 million in the same period last year. The $8.4 million improvement reflected a $10.8 million in revenue related to a crude oil take-or-pay contract, with one particular customer and a $9 million decrease in railcar lease expense as a result of our early termination of a sublease in December 2016. However, crude oil product margin was negatively impacted by a $13.1 million expense associated with the acceleration and corresponding termination of a contractual obligation under our pipeline connection agreement with Tesoro related to the Beulah, North Dakota facility. The contractual obligation was accelerated due to a lack of crude oil movement through the pipeline. Absent that expense, our crude oil business performed as expected.

Completing our segment review, Commercial segment product margin increased approximately $800,000 to $5 million, in part due to an increase in bunkering activity.

Total volume decreased about 105 million gallons to 1.1 billion, primarily due to lower volumes of gasoline and gasoline blendstocks and crude oil in our Wholesale segment.

Although we had fewer sites in our retail portfolio in Q3 '17 versus Q3 '16, volume in our GDSO segment declined only 5 million gallons, as we retained supply agreements with buyers of many of our sold sites.

CapEx in the quarter was approximately $12.3 million, consisting of $9.2 million of maintenance CapEx, including $8.1 million related to our retail sites. Expansion CapEx of $3.1 million in Q3 related primarily to investment in our retail gas stations.

For full year 2017, we currently expect maintenance CapEx of approximately $35 million to $45 million and expansion CapEx excluding acquisitions of $20 million to $30 million, primarily relating to investments in our Gas Station business.

Turning to our balance sheet. As of September 30, we had total borrowings outstanding of $329.2 million under our $1.3 billion facility. Borrowings consisted of $190 million under our $450 million revolving credit facility and $139.2 million under our $850 million working capital facility.

Leverage defined as funded debt-to-EBITDA was approximately 3.7x at the end of the third quarter and in line with our long-term leverage target of 4x or lower.

Before I turn it back to the operator for Q&A, I wanted to let you know that on December 6, we will be taking part in the Wells Fargo Securities Pipeline, MLP and Utility Symposium. 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.

Congratulations on a very strong quarter. The guidance that you gave above the midpoint for the year on EBITDA of kind of a $205 million midpoint implies a pretty low fourth quarter EBITDA contribution in the $27 million range. And just given what you've seen over the past 3 quarters of that continued year-over-year growth in EBITDA and that kind of $60 million a quarter run rate, is there a headwind that's coming in the fourth quarter or some sort of shift? How should we think about that, looking at the fourth quarter?

Ben, it's Daphne. I think sitting here today, we are not seeing any headwinds. And I think we have chosen to just guide to above the midpoint, and I feel comfortable with that today. Certainly, we're only early in November, and we've got [a bit of a] ways to go before we conclude the quarter.

Understood. And the expense termination with the elimination of the contract with Tesoro, is there any sort of your residual EBITDA impact going forward? Or was that just a one-off charge?

One-off charge, and that's been fully disclosed in our public filings in terms of that obligation, which effectively was going to be through the end of '19 and it just accelerated because of lack of movement.

Okay, great. And one last one for me, and then I'll hop back in the queue. The GDSO segment -- any color around demand metrics or any sort of same-store sales trends you're seeing there? I know one of your peers sighted kind of along the East Coast just being a weaker spot for them.

Yes, Ben, this is Mark. I think, in general, I think we are pleased with our same-site performance, both on the fuel and the C-store. We don't get into the specific numbers, but generally of the fuel side, we track with the EIA or the DOE numbers, and I think that remains consistent. So those numbers are kind of flattish on the fuel side. And on the store, we still think there's a lot of opportunity to grow sales through our existing store operations. So we're fairly pleased with that.

Okay, great. And just one housekeeping on -- thank you for giving the company-operated site count. Do you have the commissioned, lessee and dealer count in front of you?

Sure. So company-op is 234; commissioned agents is 269; lessee dealers, 234; contract dealers, 698 for a total of 1,435.

Our next question comes from the line of Barret Blaschke with MUFG.

Just a couple of quick ones. One, any impact on your supplies or margins at all from the hurricane and the disruptions that happened in the Gulf? And second, with crude oil sort of creeping north slowly, is there any positive outlook for any part of your business as spreads start to pick up a little bit?

So first question with regard to the impact from the hurricane, we certainly did benefit from the increased margins and the supply -- as a result of the supply disruptions back in late August and into September. The market has normalized on the supply side of things. And supply up in the Northeast, although it did tighten up a little bit, was never severely disrupted, but certainly provided a benefit for us in Q3. With respect to crude spreads moving forward -- at the moment they have widened out. They look a little bit wider further up the curve. So that's -- directionally, that's positive. There's no prompt opportunity as a result of that, but we continue to keep an eye on that, and certainly that's one of the things as we look at some of the assets like Oregon and North Dakota, we're going to need a little bit of help from the market. So just -- with the spreads moving in that direction, it does prompt additional conversations, but there's nothing at the moment.

Is there a level that sort of triggers maybe I guess, either kind of more pressing conversations in -- around the Oregon assets?

I'm not sure there's a specific level because the market may be a little bit different for everybody, and in terms of cost to move through various different alternatives and then also what -- how a particular customer may view their market versus another. So I don't think there's a particular number that works. We're trying to stay as close as we can to the customer base so that when -- if and when the market gets in a spot where it makes sense, we'll be prepared to execute if the opportunity arises.

Our next question comes from the line of James Jampel with HITE Hedge.

Just a couple of questions. Can you talk -- remind us a little bit of how backwardation in the crude curve impacts your business?

So the backwardation in the crude market shouldn't impact us. We don't have a lot of crude inventory on hand. We have very little. We had some storage on the East Coast that we're out of now, and so we really reduced crude inventory. Really just as a part of declining operations in that piece of business. So backwardation in the crude curve in and of itself shouldn't have a meaningful impact. As it relates to market structure in general, you may be able to draw some correlation between crude spreads and product spreads, but I think it's easier to just focus on product spreads.

Okay, fair enough. And given what we've seen in the press about your refineries are going to have to change their slate to produce low sulfur bunker fuel, have you guys thought about at all what that means for you guys if anything?

Yes, I can't speak to what the impact is or what the initiative is on the refinery side. But our expectation is that we will continue to have opportunity in the bunkering market. We have some strategic assets and we have a customer base and an established business with pretty well-established operation. So I don't see anything -- I don't see any change to our business model in the immediate future.

Our next question comes from the line of Ned Baramov with Wells Fargo.

Could you talk about the Honey Farms transaction? Was this a competitive process? Also, are there any growth capital opportunities in and around these assets? And if yes, could you quantify those opportunities?

I mean, I think what I'd say is it was in fact a competitive process. We do think we bought (inaudible) right. We know that the assets really fit our business model. They fit our geographic footprint. We think there is absolutely an opportunity for us to streamline both the way that the fuel is supplied as well as the way the stores themselves are supplied and merchandised. And so the focus initially is going to be around executing on those sort of 2 major things as we own the assets over time. And then, obviously, in terms of spending capital and money, we look at all of our assets and we're going to try and make sure that we invest in the assets that give us the highest returns.

Got it. And then on your divestiture program, could you just provide an update, assuming that all remaining nonstrategic assets that you've identified are sold at the price you would ideally take? What does that mean in terms of approximate amount of proceeds to the partnership?

Hi, Ned, it's Daphne. So NRC who we engaged with last year to take on about 75 sites approximately at the beginning. We have added -- since then, we added about 20 sites as we continue to review our portfolio and assess how to best optimize the portfolio. We have sold just shy of 60 of those sites so far, about 6 or so in this quarter, 30 so far this year. Proceeds this year have been approximately $30 million or so, that actually includes the $16 million from the nat gas, so about $14 million. And in terms of -- for the most part, we -- for the majority of those sites, we do retain supply, so -- and we've been very pleased with the multiples that we would -- we have been receiving, which really are close to double digits and not just in the double digits after supply retention. So we've been very pleased with that so far.

Okay, great. And my last question, on maintenance CapEx, I think you have guidance for the year of $35 million to $45 million. Just looking at how it's been trending so far year-to-date, it would either imply a significant ramp in the fourth quarter or maybe that your guidance is a little bit aggressive. Could you comment on that?

Yes. I mean, I certainly am aware of that, but in talking to the team on what their plans are. There is -- their plans already get somewhere -- some -- a fair way there. This year, obviously, there's timing that is -- can impact us. But [in this] 10 seconds, that is what they're aiming to do.

Thank you. We have reached the end of the question-and-answer session. I would now 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. Thanks, everyone.

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