Global Partners LP (GLP) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to the Global Partners second-quarter 2018 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 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, utilization 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, Mr. Eric Slifka.

Thank you, Eddie. Good morning, everyone, and thank you for joining us. We completed the first half of 2018 with a solid second quarter. We continue to execute on our strategy to expand our retail gasoline business with the July acquisitions of Champlain and Cheshire, which added 136 sites, including 62 owned properties. The locations of these stations in Vermont and New Hampshire allow us to leverage our terminal assets in Albany, New York, and Burlington, Vermont, and drive economies of scale.

The Champlain acquisition added 126 stations, including 37 company operated sites, consisting of both fuel and Jiffy Mart branded convenience stores; 24 owned or leased fuel sites; and fuel supply agreements for approximately 65 gas stations. The locations primarily market major fuel brands such as Mobil, Shell, Citgo, Sunoco and Irving.

The Cheshire acquisition included 10 company operated sites with fuel and T-Bird branded convenient marts. The deal pipeline within the retail gas station and convenience store market continues to be very active and we are always evaluating opportunities to expand our portfolio.

Last month, the board increased our quarterly cash distribution to $47.50 per unit or $1.90 on an annualized basis. The distribution will be paid August 14 to unitholders of record as of the close of business today, August 9.

In summary, through organic investments in strategic M&A, we are leveraging our expertise in acquiring, integrating and operating assets. We begin the second half of 2018 well positioned financially and operationally to expand our asset base and continue to execute on our growth objectives.

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

Thank you, Eric, and good morning, everyone. Let me begin this morning by discussing our recently completed 9.75% Series A preferred unit offering. We are pleased with this capital raise, which positions us to continue to take advantage of acquisitions and inorganic expansion investment opportunities.

A total of 2.76 million units were sold at $25 per unit, generating approximately $66.8 million in net proceeds, which we used to reduce indebtedness under our credit agreement. Distributions on the units will be payable quarterly at a fixed rate of 9.75% per annum, on and after August 15, 2023. Distributions on the units will accumulate for each distribution period at an annual floating rate equal to the three month LIBOR plus a spread of 6.774%.

Turning to our results, gross profit in the second quarter increased $13.9 million to $149.3 million, primarily driven by favorable market conditions in Wholesale gasoline and contributions from the Honey Farms sites within our GDSO segment. Combined product margin increased $12.1 million to $169.9 million.

Operating expenses increased $5 million to $76.2 million in the quarter, primarily reflecting the addition of 33 Honey Farms sites with associated headcount ads as well as real estate taxes, rent, utilities and maintenance expenses. In addition, credit card fees increased year-over-year due to higher gasoline prices.

SG&A expenses in Q2 increased $5.3 million to $40 million, reflecting in part increased marketing and promotional expenses as well as salaries and benefits to support our GDSO business. Professional fees and depreciation also increased year-over-year.

Interest expense was $21.6 million in Q2 2018 compared with $21.9 million in the year-earlier period due primarily to the write-off of a portion of our deferred financing fees in the second quarter of 2017 associated with an amendment related to the refinancing of our credit agreement, partially offset by an increase in interest rates.

Net income more than doubled in the second quarter to $6.4 million from $2.4 million last year. EBITDA was $53.1 million, $1.8 million higher than the same period in 2017. DCF was $21 million compared with $21.8 million in the same period in 2017. These results included a $3 million and a $2.4 million net loss on sale and disposition of assets in the second quarter of 2018 and 2017, respectively. Adjusted EBITDA therefore was $56.1 million compared with $53.7 million in the same quarter last year, up $2.4 million.

Turning to our segment detail, GDSO product margin in 2Q 2018 increased $3.1 million to $125.6 million. The Gasoline Distribution contribution to product margin was down $2.4 million to $76.9 million in the second quarter of 2018, primarily due to lower fuel margins, partially offset by an increase in product margins due to the Honey Farms acquisition.

The average fuel margin in the quarter was negatively impacted by rising wholesale gasoline prices during the first two months of the quarter and was $0.185 per gallon compared with $0.195 per gallon in last year's second quarter.

Station operations product margin, which includes convenience store sales, sale of sundries and rental income, increased $5.5 million to $48.7 million, largely due to Honey Farms.

At quarter end, our GDSO portfolio consisted of 256 company operated stores, 264 commissioned agents, 226 lessee dealers and 699 contract dealers for a total of 1,445. With the acquisitions of Champlain and Cheshire Oil in July, our total site count increases to approximately 1,580 with about 300 company operated sites.

In our Wholesale segment, the gasoline and gasoline blendstocks product margin increased $4.8 million to $23.4 million, primarily due to more favorable market conditions in gasoline.

Product margin from crude oil increased $0.6 million to $5.4 million, due in part to lower rail car lease expense and lower terminal lease expense associated with the expiration of a terminal lease in 4Q 2017, partially offset by a decline in volumes sold as crude-by-rail differentials continue to be challenged. Product margin from other oils and related products was up $1.8 million to $9.6 million, due in part to improved margins in residual oil.

In our Commercial segment, product margin increased $1.7 million to $5.8 million, primarily due to an increase in bunkering activity. Total volume increased by about 162 million gallons to 1.3 billion gallons. Volume in our Wholesale, Commercial and GDSO segments increased approximately 128 million gallons, 25 million gallons and 10 million gallons, respectively.

CapEx in the second quarter was approximately $17.6 million, consisting of $11.2 million of maintenance CapEx, including $9.1 million related to our retail sites. Expansion CapEx was $6.4 million in Q2, which related primarily to our retail gas stations and convenience stores. For full-year 2018, we continue to expect maintenance CapEx in the range of (technical difficulty) and expansion CapEx in the range of $30 million to $40 million.

Turning to our balance sheet, as of June 30, we had total borrowings outstanding of $483 million under our $1.3 billion facility. Borrowings consisted of $185 million under our $450 million revolving credit facility and $298 million under our $850 million working capital facility.

Leverage, as defined in our credit agreement as funded debt to EBITDA, was approximately 4.1 times at the end of the second quarter. Since the end of 2Q, we have raised preferred equity, receiving net proceeds of approximately $66.8 million and we have closed on the acquisitions of Champlain Oil and Cheshire Oil for approximately $134 million and $32 million, respectively, excluding inventory.

As we have said in the past, we target long-term leverage at 4 times or better. We raised the distribution for the quarter ending June 30 to $1.90 annually and we continue to have strong coverage. [TTM] coverage at the end of 2Q was 2.2 times.

Turning to guidance, we have revised our full-year 2018 EBITDA guidance to a range of $190 million to $215 million compared with the prior range of $180 million to $210 million. This guidance excludes any gain or loss on sale and disposition of assets and any goodwill and long-lived asset impairment charges.

As a reminder, 2018 EBITDA guidance excludes the onetime $52.6 million gain recognized in the first quarter is as a result of the extinguishment of the contingent liability related to the Volumetric Ethanol Excise Tax Credit.

Before we go to Q&A, I wanted to let you know that we will be participating in one-on-one meetings August 15 and 16 at the Citi 2018 one-on-one MLP Midstream Infrastructure Conference. With that, Eric and I will be happy to take your questions. Operator?

(Operator Instructions). Ben Brownlow, Raymond James.

Congratulations on the quarter and the acquisitions. On the 136 distribution outlets that were acquired, can you talk about, or give some color around what that expected volume contribution would be, and the fuel margin or cent per gallon impact?

Yes, I mean I would say on company operated stations, margins in this market generally range in the $0.20 plus per gallon area all the way up to $0.30, depending on the specific markets that you're in and the products that you're selling. So, I'd say it's pretty much down the fairway with how company operated sites have traditionally operated. What were the other questions that you had as well?

Sort of the total volume contribution of the 136 outlets that were -- or fuel distribution outlets that were acquired.

Hold on one sec here. Yes, approximately $100 million.

$100 million? Okay, that's helpful. And just little bit more on that. So that's 47 acquired company operated locations in that $0.20 to $0.30 per gallon range. Is the merchandise sales, on an average basis across that, similar to the chain?

I would say broadly the stores there are a little bit bigger, a little bit more complicated, because they are just a little bit sized larger than the total chain that we have today. So the sales, even though there's not a large a population there, are higher on average in those sites. And the employee count is higher there, too, to manage this size of the store.

Great, that's helpful. And just one more for me and I'll jump back in the queue. The distribution increase, obviously well recepted by the market. How should we think about just -- and you guys have talked about this, but just -- previously, but to revisit it.

Just give us an update, what your thought is on the long-term approach to that distribution policy. Are you targeting steady annual growth rate? Does it depend on the coverage ratio? Just how should we think about that?

I'd say the board looks at all of those factors, and so they all get taken into account. And frankly it depends what's happening in the Company. We're going to continue to look for deals and look for transactions, and that will weigh in as well.

Okay, great. Thank you.

Tim Howard, Stifel.

Will you provide a cash flow expectation or investment multiple for the two recently completed acquisitions?

Yes. So the way we think about acquisitions, and I think we've historically stated, is we look at these deals, we try to get somewhere in the mid to upper teens for our returns with a hope that, if things break right for us, we can even do a little bit better than that. But I'd just say broadly that's what we look at and target for returns.

Got it. And do these particular deals have any synergies to pull out or -- different from your historical kind -- do you expect the upper end of that or can you provide any kind of insight to these two (multiple speakers)?

Yes. So specifically, I'd say on these sites, they happen to be around terminal assets that we have and that are good facilities. Over time the hope would be we can figure out a way to: A, lower our cost of acquisition of product that goes through the facilities, petroleum in particular; and then also drive that business through the terminal assets that surround the facilities. So, we're talking specifically about Burlington and Albany.

Okay. Okay, great. Thank you for taking our question.

[Will Hardy], RBC.

Nice to see the dividend increase, we thank you. The one question I have is what are the splits again between the GP the LP? It's been a long time and I don't remember what they are.

They are just in a -- in a little over 1.85 or 1.90 -- they are just into the splits. And it's self of 2%.

Okay. I'll send you an email later, Daphne, and you can -- if you don't mind, sending me that split, I'd like to have it. Thank you.

Yes. The expectation is that the Q will be filed later today and it will also be clear in the Q.

Okay, thanks.

Mike Gyure, Janney.

Can you guys maybe talk a little bit about what's going on with the rail transloading assets and I guess, if anything (technical difficulty) fitting into the portfolio over the long-term?

Yes, good morning, Mike. It's Mark. As we've talked about before, those rail transloading assets in North Dakota have been idled for some time. There's minimal activity going on over the last few years there. We have utilized some of the storage that we have either for our own benefit or for that of a third party. So we're looking for any opportunity to run some business through there.

I will say that, while there's not a lot of activity going on there, that that market is certainly picking back up. And so, we're just in the process of trying to explore any opportunity with -- predominantly with third parties to utilize those facilities, but we have nothing concrete to speak of at the moment.

Great. That's all I had, thanks.

(Operator Instructions). Ned Baramov, Wells Fargo.

Most of my questions were answered. I just had a quick one on leverage. I guess you came in at 4.1 at the end of the second quarter. Could you maybe talk about pro forma the two transactions and the preferred offering, where do you expect leverage to be at the end of the third quarter and maybe at year-end?

Yes, Ned. Good morning. So with the $67 million or so in terms of net proceeds, that net ultimately equates to about 40% of the purchase price, right, in terms of the $166 million that we spent on Cheshire and Champlain. And we'll continue to -- when we have asset sales in terms of the nonstrategic assets that we continue to churn through, we'll continue to apply that with a view to continue having a long-term leverage target covered -- leverage test of about 4 times or better.

Thanks, that's all I had.

Lin Shen, HITE Hedge.

I have two questions. I think also James Jampel is on the line; maybe he has a couple questions. First of all, the Wholesale volume is up like over 20% year-over-year. Can you talk a little bit of color what (technical difficulty)?

Yes, Lin, that's really got to do with -- related to our gasoline supply business. So we have taken some additional storage in New York Harbor to run that supply and logistics business, and it's given us the opportunity to access different parts of the market.

So we, in addition to utilizing that storage for the benefit our requirement and our system, we've also been able to take advantage of some third-party sales through that book as well. So it's really -- that's the real driver of it.

Okay. So, should we think about this kind of run rate for the Wholesale volume?

I wouldn't focus on the volume so much because that is a very low margin business. And it's also very opportunistic. So I think you're likely to see -- and the activity will be driven by opportunity that we see. It's not necessarily something we have to be engaged in. So I think it'd be hard to use that as a going forward number.

Great, thank you. And also, what should we think about the run rate for SG&A also OpEx pro forma the acquisitions?

Yes, so certainly when you look at OpEx, it was a much in line first quarter, second quarter, though obviously there's some noise in terms of timing of maintenance and then credit card fees obviously have an impact. But certainly as we take on OpEx would be where all the new company operated site employees would go. And then you've got additional utilities and maintenance and whatnot.

So, can't give you a number on that, but you'll certainly see an uptick in OpEx related to the acquisitions. So therefore, over and above what we're running at today, which was $76 million in 2Q. SG&A, less of an impact certainly from those acquisitions. Those are basically any employees that we take that we call above site, so it would be a much more modest impact in our current run rate.

Great. Thank you. Also James I think has questions also.

Yes. Hey Eric, hey Daphne. Looking at the increased EBITDA guidance, it would seem like, given the acquisitions you made and given how well you did in the second quarter, that maybe the guidance could be a little higher, even higher than what you put down in the press release. It's a little puzzlingly low, I guess, in our view.

So we were at $180 million to $210 million, we went $190 million to $215 million. And looking at where we are year to date, which we completed a solid quarter, and looking forward to the acquisitions, feel comfortable with $190 million to $215 million. And certainly that also reflects any one-time transaction costs that we have related to the acquisitions.

I see, okay, okay. And then I've got a question about financing. I'm not sure I've ever seen what you guys just did. I'd have to rack my brain in terms of raising the distribution and at the same time going out and getting preferred. So, they are both ways of -- in the case of preferred, raising capital and in the case of the distribution, giving capital back.

So you sort of did both at the same time. And I was wondering, how did you think about the financing, the preferred financing vis-a-vis just coming for straight equity, given like where your stock price is now is much better than it was just a couple weeks ago. And just in general, what do you think you saved by using the preferred route as opposed to using the common equity route?

Well, I would say in terms of the preferred, and certainly a handful of MLPs have accessed the preferred market over the past year or two, I think we view it as a very attractive source of capital and it's a fixed rate for the next five years. And we would have the option to take it out at par in five years. So we view that as a very attractive source of equity capital.

I mean, was there some sort of analysis that the bankers did in sort of like looking at, okay, you could use preferred here or you could raise common and like sort of the going through the math and saying, given where we think we can price both, the preferred is better? Or did you just decide to go preferred without looking at the common?

We look at all options, certainly. We assess all financing options. I would say in general, if you look at the number of equity issuances on common units today in the MLP market that have been issued year to date, it's a pretty small number of companies that have [attacked] that market.

Right. And was at the market considered at all?

Yes, at the market is something that you would bleed in over time relative to our average daily trading volume. So that would be very slow add over time. We have not accessed the ATM to date.

The reason I'm belaboring this point is that, among MLPs, you guys are among the least liquid in terms of shares turning over. And so we thought, wow, if you could actually get it out to the common market without it being more expensive than the preferred, that that would be the way to go. Because now you have -- the common units is still the same and now you have this preferred equity, which is hardly going to trade at all, either. So, but -- all right, well, thank you very much.

Thank you. Mr. Slifka, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thanks for joining us this morning. We look forward to meeting with you at the upcoming conference and keeping you updated on our progress. Everybody have a great day. Thank you.

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