Global Partners LP (GLP) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Global Partners' Fourth 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, Miss Daphne Foster; Chief Operating Officer, Mr. Mark Romaine; 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 and renewable fuels, utilizations of assets and facilities, 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. We delivered results in 2017 that exceeded our full year expectations. Our full year results were driven by solid overall performance, highlighted by our Gasoline Distribution and Station Operations segment, which generated $28.4 million increase in product margin year-over-year.

Product margin also was up in our Wholesale segment as refined product throughput in 2017 increased for the second consecutive year.

In October, we acquired Honey Farms, which expanded our retail portfolio with the addition of 33 locations. As with our acquisitions of Warren Equities and Capitol Petroleum and consistent with our history as an acquirer, the Honey Farms transaction is another example of our success in integrating, optimizing and enhancing assets and growing market share. The Honey Farms acquisition is on course to be accretive in its first full year of operations.

Across our retail gasoline and C-store business, we've driven synergies and profitability by capitalizing on our scale and buying power. With an increasing number of retailers seeking to attract the traditional convenience store customer, we continue to invest in infrastructure to provide the highest-quality customer experience.

Through focused management and strong performance, we generated additional cash flow to invest in assets fundamental to our growth. Our objective remains to grow the business through M&A and improved operations.

Turning to our distribution. In January, our board announced a quarterly cash distribution of $0.4625 or $1.85 on an annual basis. The distribution was paid February 14th to unitholders of record on February 9.

Before concluding, I want to express appreciation to Chuck Rudinsky, who retired as EVP and Chief Accounting Officer in December after more than 30 years with our organization. Chuck joined us when we were private and played a key role in bringing the company public in 2005. During his tenure, he was instrumental in managing the accounting aspects of our growth and expansion as well as a key contributor in the evaluation and the integration of our multiple acquisitions.

We wish Chuck well as he steps away from full-time responsibilities. And at the same time, I want to welcome Matt Spencer, our new CAO. Matt joined Global as controller in 2012, and I know he will make an outstanding member of our leadership group.

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 this morning by providing additional color regarding 2 items in our fourth quarter 2017 financials.

During the quarter, we have recorded a one-time noncash tax benefit of $23.2 million related to the December 2017 enactment of the Tax Cuts and Jobs Act. The act lowers the corporate federal income tax rate from 35% to 21%, which resulted in our remeasurement of certain deferred tax assets and liabilities. We are still in the process of analyzing the impact of the act and, therefore, the benefit was recorded based on provisional amounts.

Also during the quarter, we recognized a loss in trustee taxes of $16.2 million related to a New York State tax audit of the Partnership's fuel and sales tax returns for the period between December 2008 and August 2013.

The loss consists of tax and interest without penalties. We intend to appeal and believe we have defenses to recover a majority of the tax and interest assessed.

Now let me review our fourth quarter and full year results and provide our EBITDA guidance for 2018. Combined product margin in the fourth quarter increased $3.1 million year-over-year to $179.1 million, due to significant growth in the GDSO segment, which more than offset declines in the Wholesale and Commercial segments.

Total expenses increased in the quarter, primarily reflecting investments in our GDSO segment. Operating expenses of $74.9 million were off $5.1 million from the fourth quarter of 2016, largely related to the Honey Farms acquisition in October and an increase in credit card fees due to higher Wholesale gasoline prices.

SG&A expenses in Q4 increased $2.1 million to $43.4 million, primarily relating to headcount and other expenses to support our GDSO business.

EBITDA for the fourth quarter was $41 million and adjusted EBITDA, which excludes the loss on the sale and disposition of assets, was $46.7 million compared with negative adjusted EBITDA of $14.4 million for the fourth quarter of 2016.

As you may recall, results for Q4 of '16 included the $80.7 million lease termination expense. Results for Q4 '17 were negatively impacted by the loss in trustee taxes.

Interest expense was $20.4 million in Q4 2017 compared with $21.1 million in the year-earlier period. The decrease was due to lower average balances on our working capital revolving credit facility, partially offset by an increase in interest rates.

DCF for the fourth quarter was $10 million and excluding the loss on sale and disposition of assets would have been $15.6 million, which also reflects the negative impact of the loss in trustee taxes.

Net income for the fourth quarter was $18.6 million. This result included the $5.6 million loss on sale and disposition of assets, offset by the $22.2 million tax benefit.

Now let me take you to our segments in more detail, beginning with GDSO. Comparing Q4 '17 with the same period in 2016, GDSO product margin increased $30.6 million to $142.3 million. The Gasoline Distribution contribution to that product margin was up $27 million to $95.9 million in the fourth quarter, reflecting fuel margins, which averaged $0.24 per gallon versus $0.17 per gallon in Q4 of 2016.

Station Operations product margin increased $3.6 million to $46.4 million, primarily due to the October acquisition of Honey Farms.

At year-end 2017, our GDSO portfolio consisted of 264 company-operated stores, 267 commissioned agents, 230 lessee dealers and 694 contract dealers for a total of 1,455.

Wholesale segment product margin declined $24.5 million to $32.2 million in the fourth quarter of 2017, primarily due to decline in crude oil and distillates.

Crude oil price margin was down $11.7 million to $4 million, reflecting less revenue from 1 particular crude oil contract customer, partially offset by lower railcar lease expense.

Crude oil product margin for both the fourth quarter and full year 2016 included revenue of $28 million, attributed to the absence of logistics nominations from that 1 contract customer. In contrast, crude oil product margin for the fourth quarter and full year of '17 included revenue of $10.9 million and $43.2 million, respectively, related to the absence of logistics nominations from that same customer.

With the railcar lease termination at the end of 2016, railcar lease expense declined and was $3.1 million in the fourth quarter of '17 versus $11 million in the fourth quarter of '16.

Product margin and other oils and related products was down $11.3 million to $10.5 million, primarily due to less favorable market conditions in distillates. Gasoline and gasoline blendstocks product margins was down $1.5 million to $17.7 million, also due to less favorable market conditions, primarily in gasoline blendstocks.

Commercial segment product margins decreased $2.9 million to $4.5 million due in part to the sale of our natural gas business in February 2017.

Total volume decreased approximately 129 million gallons to 1.2 billion primarily due to lower volumes of distillates in our Wholesale segment. Volume in our GDSO segment declined by just 5 million gallons to 400 million gallons in Q4 '17 versus Q4 '16, reflecting the retention of supply contracts with buyers at many of our sold sites as well as the addition of the Honey Farms portfolio.

CapEx in the quarter was approximately $18.2 million, consisting of $12.8 million of maintenance CapEx, including $10 million related to our retail sites. Expansion CapEx, excluding the Honey Farms acquisition, was $5.4 million in Q4, which related primarily to investment in our retail gas station but also projects at our terminal and in IT.

Let me touch briefly on our full year operating results. Product margin increased $29.5 million year-over-year, primarily due to the strong performance in the GDSO segment, but also the increase in our Wholesale segment. GDSO product margin increased $28.4 million, with higher fuel margins on especially flat volume.

That increase was partially offset by a decline in Station Operations, reflecting the sale of sites, including the Drake sites in August 2016.

Wholesale segment product margin increased $7.3 million, driven by a $20.4 million increase in crude oil margins, reflecting increased revenues from a take-or-pay crude oil contract and lower railcar lease expense.

Commercial segment product margin decreased $6.2 million, largely due to the sale of our nat gas business. Total combined operating and SG&A expenses were made approximately flat year-over-year. SG&A expenses in 2017 of $155 million increased $5.3 million, reflecting additional professional fees and incentive comp.

Operating expenses of $283.6 million declined $4.9 million in part due to the sale of sites in our GDSO segment, less activity at our North Dakota facility and $3.1 million in tank cleaning costs in 2016 at our Oregon facility in order to convert that facility to ethanol transloading.

Interest expense at $86.2 million was in line with prior year but reflects lower average balances on our credit facilities and lower interest rates due to the expiration of an interest rate swap, partially offset by full year of a financing obligation recognized in connection with our sale leaseback transaction in June 2016.

Adjusted EBITDA was $224.2 million in 2017 compared with $129.8 million in 2016 or $210.4 million without the lease exit and termination expense. DCF for the year was $108.3 million. Excluding the net loss on sales and disposition of assets and along with asset impairment, DCF for the full year would have been $121.6 million, which would have translated to a coverage of 1.9x.

For full year 2017, maintenance CapEx was approximately $34.7 million, $27.9 million of which related to our investment in our gas stations.

Expansion CapEx excluding acquisitions was approximately $15.1 million, which consists of $8.7 million in investments in our gas station business and the remainder, primarily related to investments in IT.

For full year 2018, we expect maintenance CapEx in the range of $40 million to $50 million and expansion CapEx in the range of $30 million to $40 million.

Turning to our balance sheet. As of December 31, we had total borrowings outstanding of $422.7 million under our $1.3 billion facility. Borrowings consisted of $196 million under our $450 million revolving credit facility and $226.7 million under our $850 million working capital facility. Leverage is defined in our credit agreement as funded debt-to-EBITDA, was a touch under 4x at the end of the fourth quarter.

Turning to guidance. For full year 2018, we expect to generate EBITDA of $180 million to $210 million, which guidance excludes any gain or loss on the sale and disposition of assets and any goodwill and long-lived asset impairment charges.

Furthermore, EBITDA guidance for 2018 excludes the recognition in the first quarter of a onetime income item of approximately $52.6 million as a result of the extinguishment of a contingent liability related to the volumetric ethanol excise tax credit, which tax credit program expired in 2011.

Based upon a significant passage of time from that 2011 date, including underlying statutes of limitation as of January 31, 2018, the partnership determined that the liability was no longer required.

This recognition of onetime income will not impact cash flow from operations for the year ending December 31, 2018. Let me provide additional commentary about our 2018 EBITDA guidance relative to our performance in 2017.

The primary factor driving the variance was the existence of particularly strong fuel margins in 2017 in our GDSO segment, which we did not build into our 2018 budget. As I pointed out earlier, fuel product margin in that segment was up $28 million year-over-year, primarily due to higher fuel margins. We have, of course, factored in a full year of Honey Farms, which we acquired in October 2017.

Regarding crude oil, the take-or-pay contract with one particular customer, which generated revenue of approximately $11 million per quarter in 2017 concludes at the end of the second quarter of 2018. But crude oil price margins in 2017 was burdened by the $13.1 million expense related to the termination of the Tesoro pipeline.

Additionally, crude oil railcar lease expense is expected to decline to approximately $6 million in 2018 from $11.3 million in 2017. While expenses will continue to reflect investments to support and grow our business, expenses in 2017 were burdened by the $16.2 million loss on trustee taxes.

Now let me turn it back to Eric.

Okay, we'll actually start with the Q&A.

(Operator Instructions) Our first question comes from Andrew Burd with JPMorgan.

A couple of questions. First, thank you, Daphne, for giving some color on 2018 guidance versus the actuals reported in 2017. Can you help us bridge the 2018 guidance versus the 2017 guidance that you provided at this time last year, which I think was a tad higher? I presumed Honey Farms and the lost crude customers somewhat offset. Were there any other kind of big, big factors helping us bridge last year's guidance with this year's guidance?

Yes, an interesting question because last year's guidance certainly didn't include the Tesoro pipeline expense that we ended up incurring inside of '17 as well as the trustee tax law. I think the simplest way to bridge it is really just to sit to how we landed in '17 and comparing that to what we provided for '18 guidance, which as I spoke to, was primarily the strong fuel margins with crude. For the most part, if you do that math, it's essentially a push with Tesoro pipeline expense reduction in the crude oil contract customer and a decrease in the railcar lease expense.

Okay, that's perfect. And on the trustee taxes, any color when we might hear about getting some of that back and how much of it?

No, I don't have any estimate at this point in terms of timing. We, as we stated, feel confident that we have the defenses to recover the majority of that tax and interest tax.

Okay, great. And then last housekeeping question. As SG&A ticked up in 4Q, and really kind of incrementally increased quarter-over-quarter throughout the year, which I presume somewhat is from GDSO growth. But what's the right way to think about 2018 G&A. Is the full year '17 number a better proxy? Or recent trends, third quarter, fourth quarter G&A number is more appropriate?

Yes, I think more the latter. I think as we continue to invest and support in our businesses, particularly the growing GDSO segment, I expect there could be a modest increase in SG&A in the '18 relative to the spend in '17. Obviously, we'll continue to invest in marketing-related expenses and loyalty and crude service, et cetera. And I think OpEx, obviously, with the acquisition of Honey Farms in the fourth quarter, should increase the full year Honey Farms and potentially some timing at projects at terminal.

Okay, great. And my final question, and this is really just kind of a big picture strategic question around highlighting the value of your entire gasoline business, not just GDSO, but also, obviously, the upstream integration you have on the Wholesale gasoline business side. Have you, at Global, ever considered reporting the Wholesale gasoline activities and GDSO together? I guess considering, first, that public market valuations consistently seem to value those businesses, especially the integrated business at greater multiples, than the Wholesale segment. And also, because generally speaking, I think there's some natural offset between wholesale and retail margins in periods of extreme fuel price volatility. So I'm just curious if that's something that you've looked into in the past or would be open to in the future.

Yes, this is Eric. So when you think about our sort of businesses, right, in one area, we own or lease terminals and then we supply those terminals. And we have third-party customers who throughput those terminals as well as selling our own, what I would say, unbranded fuels through those. But then we also have, on the other side, a retail business that generally have cost us around those terminaling facilities. And so the way I really think about our business is, we are a terminaling business, right, that has with it attached a component of supply and marketing as well as, obviously, throughput from third parties. And then we have a retail component. And so they're different businesses driven by different volumes and different margin pressures, if you will, and also different levels of investment. And because of that, they are broken out differently. Also, as part of that business is our Commercial business, which is generally a more delivered type business, but it's clustered in and around the terminals. Now as we look forward, what are we hopeful? We're hopeful that we can expand those businesses in a little bit asset-like way, so that we don't necessarily have to own and operate the terminals as well. But in terms of growth potential for the company, we will continue to look at terminals as well. And if the right terminal package comes up, or we think it fits our business model, we'll look to expand upon that. But we do look at our assets broadly as integrated, if you will, meaning, we like the connectivity between terminaling, supply, throughput as well as retail because it allows us to bring volume to those terminal assets, and we take this as, actually, as differentiator in terms of value that we can drive to our assets.

That's understood. That's very helpful to get your thought process on that. One quick follow-up on that. About what percentage of your Wholesale gasoline volumes are sold by your GDSO segment?

Yes, we break out in the K and Qs what gallonage goes to our GDSO segment from our terminals, and that's about 1/3 of the volume. So it's 480 million in 2017 of the 1.5 billion.

Yes, let me add just one quick one. We do believe that it's a real synergy between that business and the volume, say, to drive through terminals, and we do the think that's a competitive advantage.

Our next question comes from Barrett Blaschke with MUFG Securities.

I appreciate the color that you've given so far. Just a little kind of housekeeping follow-up, and that is, as we think about 2018 and growth, is this -- are we looking more for sort of Honey Farms type transactions at the focus today? Or is it on the other things, more on the terminaling side? And how do you sort of view growth at this point?

So I think the market is broader and deeper as it relates to retail. And so I think that there's a volume of deals out there that just continue to sort of be marketed. And so I think there's going to be more opportunity in the retail. That being said, we'll always continue to look at the terminaling as well, right? I just think that there's a lot fewer terminals than there are, obviously, gas stations or gas station chains, right? So I think, by definition, that's going to lead you to more consolidation at the retail, right, and a bigger opportunity.

Okay. One other thing is, we've heard from a lot of other midstream players that you're seeing more private equity activity bidding on assets. Are you seeing that in the gas station market as well? Or has it sort of stayed out of that?

I mean, I think there's a lot -- I think there's a lot of competition and a lot of cash available to put into transaction. And I think any business that a private equity shop would view as a platform-type business, they're going to chase because they think they can bring value to them, right? So I think you'll see them involved everywhere.

Our next question comes from Matt Niblack with HITE.

So in terms of -- in the last couple of years, there's been a lot of noise, there's been crude by rail on the negative side and then just really outstanding perhaps unusual margins on the retail business in 2017. And so the margins kind of banged up and down a bit. But if we look at your '18 guidance, is that sort of a good baseline, where kind of from there forward, the combination of expenses rolling off in the crude by rail segment as well as these growth investments, we should sort of see that as a baseline from which EBITDA on a secular basis will start to grow again

Yes, Matt, it's Daphne. Yes, I mean, I think that obviously, 2018, the guidance we provided is -- does not -- you can basically get the math in terms of where we think we're going to be in terms of crude. I think the expectation today is that we don't expect beyond that crude to become a significant contributor, as the markets stay as they are today. And certainly, on the retail side, we don't necessarily count on getting the same type of outsized fuel margins that we might have gotten in the back half of last year. Certainly hopeful that we will continue to not only expand that business but be able to capitalize on some of those opportunities that crop up. So I think it's a reasonable baseline, but as Eric talked about, we're certainly advocating in terms of opportunities that we want to take advantage of and that has continued throughout the business.

Great. And then there's been some discussion of this, but what's your thought on trying to -- how you can highlight the value that's in the sort of integrated, particularly, gasoline distribution business. I think a lot of us have been kind of staring at your valuation for a long time and seeing just a huge discount to what some of the comparables are out there. What's your thought on what you can do there?

I mean, I think -- look, I think, just generally, we are, I think, competitively advantaged in some markets and our ability to buy certain assets. And that's what's going to allow us to move forward. But I also think that we're well positioned to continue to consolidate markets. And if you ask me what I think our expertise is, it's being able to acquire and integrate assets into our business model into our existing footprint as well as outside of that footprint. But the existing assets that we have, we're -- we've got a lot of real estate, right? And we've got a lot of good real estate, too. And I think we have really strong cash flows that go through those businesses. So how the market chooses to value that, I mean, that will solve for itself, right? All we can do is execute and try to drive cash flow and do accretive transactions, right?

Our next question comes from Ben Brownlow with Raymond James.

Daphne, thanks for the color around 2018 SG&A outlook. I was wondering if you could do a similar type of discussion around OpEx. You mentioned credit card fees in the fourth quarter being one of the drivers for the increase in OpEx year-over-year. How should we think about -- or can you quantify the credit card fee jump and just how should we think about that run rate going forward?

Well, the primary increase fourth quarter-over-fourth quarter was Honey Farms. So we've got a lot of the company-operated sites, with 375 approximate employees, et cetera. So that was the primary increase. And then credit card fees was the secondary reason for the increase. And, therefore, going forward, in 2018, I can't predict where commodity prices are going to be certainly, and they do have an impact on credit card fees. But the OpEx should increase year-over-year because of a full year of Honey Farms.

Okay. So should we think of sort of a -- I mean, I guess embedded in your guidance, are you assuming sort of a low single-digit growth in the OpEx? Or is it more aligned with the increase that you saw in the fourth quarter year-over-year?

Probably more the latter.

Okay. Great. That's helpful. And on the Wholesale segment, with the distillates gross profit cut in half kind of year-over-year range, you mentioned less favorable market conditions. Can you just give a little bit more color around that and what you're seeing quarter-to-date?

Yes, this is Mark. So I think we -- to answer that question, we have to look back at the strength in 2016. So the distillate market has -- still has some pretty attractive contango opportunities in 2016, so we had a really strong Q4 as a result of that. And then in addition to that, we were able to recognize some decent biodiesel blending opportunities in Q4 of 2016. But neither of those market conditions occurred in Q4 of 2017, so that's where you get the delta there.

Our next question comes from Will Hardee with RBC Wealth Management. I'm sorry we have run out of time for questions. I'll turn the conference over to Eric Slifka. Please go ahead.

To summarize, following the year which we delivered strong results, we begin 2018 well positioned to execute on our growth strategy. Thanks for joining us this morning, and we look forward to reporting our results to you again next quarter. Thank you, guys.

This concludes today's conference. All parties may disconnect. Have a good day.