Global Partners LP (GLP) Q1 2015 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Global Partners First Quarter 2015 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions at the end of the call [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 would like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead sir.

Good morning everyone. Thank you for joining us. Before we begin, let me remind everyone that this morning, we will make 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' future EBITDA are based on a number of assumptions regarding market conditions, including demand for petroleum products and renewable fuels, commodity prices, weather, credit markets, the regulatory and permitting environment and the forward product pricing curve. Therefore Global Partners can give no assurance that our future EBITDA will be as estimated. The actual performance for Global Partners may differ materially from the performance expressed or implied by any such forward-looking statements. In addition, such performance is subject to risk factors including but not limited to those described in Global Partners' filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or publically release the results of any revisions to the forward-looking statement that maybe made during today’s conference call. With Regulation FD in effect in effect, it is our policy that any material comments concerning future results of operations will be communicated through press releases, publicly 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, and good morning, everyone. Global delivered strong EBITDA and distributable cash flow, demonstrating the strength of our vertically integrated business. Reflecting the January acquisition of Warren Equities as well as the favorable impact of declining gasoline prices, our Gasoline Distribution and Station Operations segment delivered record product margin of more than $98 million for the quarter, up 85% from the same period last year. As I mentioned on our Q4 call, the integration of Warren into our operation is proceeding smoothly and is realizing its expected synergies. Wholesale product margin was up about 26% year-over-year primarily reflecting the absence of unusually favorable opportunities we saw in the gasoline blendstocks market in last year’s first quarter. Conditions in the crude oil market also contributed to a lower wholesale margin in the quarter, as we continue to see light sweet crude barrels directed to storage. Despite the uncertainty in today's environment and current market conditions, which continue to negatively impact crude-by-rail performance our bias is that both the East and West Coasts remain attractive markets for Bakken crude. Temperatures in the in the first quarter of 2015 were 10% colder than the same period last year, and 20% colder than normal. This benefited the performance of our distillates and resids. Now let me turn to recent highlights, beginning with our Mid-Continent assets, construction is complete on our 176,000 barrels of additional crude tankage at the Stampede, North Dakota, terminal, expanding our total capacity in the Bakken region to 726,000 barrels. New tankage and enhanced rail infrastructure will support additional throughput at our Stampede facility. Part of that volume will come through the new pipeline connecting the terminal to Summit Midstream Partners Divide Gathering System. Summit expects the line to be in service in the fourth quarter of 2015. We are receiving significant interest for multiple product lines from prospective customers in our planned waterborne rail terminal in Port Arthur, Texas, and remain very enthusiastic about the opportunities for this project. Opening is scheduled for 2017. Turning to our GDSO segment, in April we entered into an agreement to purchase a portfolio of primarily Exxon- and Mobil-branded retail gas stations and dealer supply contracts. From a strategic standpoint, the acquisition of this portfolio creates density for us in two very attractive markets. We are acquiring 51 retail locations and 7 dealer supply accounts in New York City and 46 retail sites in the Maryland-Washington DC market. For background, these stations sold approximately 125 million gallons of fuel in 2014. With this acquisition we can leverage our existing operations and dealer relationships without significant incremental expense to grow the business. We're excited about the opportunity to add these assets to our portfolios and expect to close in June. Now I would like to briefly discuss the new rules issued last week by the U.S. Department of Transportation and Transport Canada to promote rail safety. These rules focus on safety improvements intended to prevent accidents and steps to support emergency response. Of note, new tank cars built after October 1, 2015 are required to meet a new DOT specification that include various additional safety enhancements. Existing cars must be retrofitted with the same components based on a specific timeline. The retrofit deadline varies depending on the type of car and the classification of products serviced Let me make two points regarding the new rules. First, the safety of our employees and the community is a priority for Global. Whether it is regular employee training, spill drills in conjunction with first responders, or other initiatives, we are firmly committed to ensuring the safety and security of the communities we serve, our facilities and equipment. Last year we took the voluntary and proactive step of requiring that all crude oil railcars arriving at our East and West Coast terminals be compliant with CPC-1232 safety standards. Second, we see no material impact to Global in complying with these new rules. We lease all of the railcars in our crude service fleet, and given the retrofit guideline for these cars we don't expect to incur any additional costs on our existing fleet. Let me also mention our quarterly distribution. In the first quarter, we increased our distribution by 8.8% to $0.68 per unit which is 272 on an annualized basis. We remain committed to providing strong returns to our investors. Now 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. Product margin up approximately $17 million or 10% from the same period in 2014 to $190.1 million product margin benefited an 85% year-over-year margin improvement in our GDSO segment partially offset by less offset by less favorable market conditions in the wholesale gasoline and gasoline blendstocks market and a decrease in crude oil. First quarter EBITDA of $71.8 million was approximately $14.7 million less than the prior year period reflecting a more normal gasoline blendstocks market. DCF was $53.7 million versus $69.5 million in the same period of 2014. The year-over-year decline was for the same reason as an increase in interest expense was approximately offset by lower maintenance CapEx. Expenses increased primarily due to the Warren acquisition and included $6.7 million in acquisition and severance related costs. Net income for the first quarter was $30.4 million compared to $57 million in the first quarter of 2014 partly reflecting higher depreciation from additional investments in our business, most notably Warren, and the Revere terminal acquisition, and higher interest expense due to the issuance of high-yield bonds in mid 2014. Looking at our segments in more detail, Wholesale segment product margin was down approximately $27.7 million to $80.1 million. This was primarily due to a $19.8 million decrease in gasoline and gasoline blendstocks margin caused by less favorable market conditions. As you might remember, during the first of 2014, severe weather caused rail disruption and shortages of gasoline blendstocks in certain markets which had a significant positive impact on product margins. In the first quarter of this year, we did not experience similar market conditions. Crude oil product margin also contributed to the decline in the wholesale segment product margin decreasing $8.2 million due to less favorable market conditions, lower volumes and $5 million reserve for a commercial dispute. As Eric mentioned, the less favorable market conditions were due in part to demand dislocation as barrels moved to fill storage. Also within the Wholesale segment, other oil and related products, which include distillates and residual fuel, had a strong quarter with a $35 million product margin approximately inline with last year’s performance. Cold weather that was 20% colder than normal drive demand and positively impacted margins. Our gasoline distribution at station operations segment had a record quarter and posted a product margin of $98.4 million, primarily reflecting the purchase of Warren Equities, which we acquired in early January. Station count those that we own, lease, or supply increased from 9.34 a year ago to 14.47 at the end of the first quarter of 2015. The segment generated $45.3 million increase in product margin with $28.4 million increase in fuel margin and $16.9 million increase in station operations. The increase in fuel product margin reflects the addition of the Warren sites and also the benefits from a decrease in wholesale gasoline prices early in the quarter. The $16.9 million increase in station operations product margin was primarily due to increased margin generated through the sales at our convenience store. The Warren acquisition increased our company owned and operated sites by 147, bringing our total Company operated convenience store site count to 287. Increased rental income from the addition of Warren sites leased to dealers or commission agents also contributed to our results. Our smaller Commercial segment product margins was $11.6 million down approximately 770,000 from the prior year period. Turning to expenses. Total expenses excluding amortization were $117.9 million for the first quarter, with SG&A and operating expenses increasing $11.5 million and $20.8 million respectively from the first quarter of 2014. The increase was almost entirely due to the Warren acquisition, although there were small increases related to planned headcount additions and overhead to support our growing GDSO segment. Notably, included in expenses were $2.3 million in severance cost related to Warren and $4.4 million in acquisition related transaction cost. Interest expense was approximately $14 million for the quarter from comparable to $11.1 million for the comparable period of last year. This increase was due to the issuance of the $375 million six and a quarter percent each unsecured bonds last June and increased borrowings to finance the acquisitions of Warren and the Revere terminal in January. Total CapEx for the quarter was approximately $14 million, $3.7 million of which was maintenance CapEx, the majority of which consisted of investments in our gasoline stations as well as investments in IT. Our expansion CapEx was $10.3 million and includes $6.4 million in investment in gasoline stations in C-stores, including investments in two New to Industry sites, work on three Raze-and-Rebuilds, and co-branding investments. Our renovation of the 23 Connecticut Turnpike sites is almost complete with three remaining sites expected to be finished and operational by the end of the second quarter. The remaining $3.9 million in expansion CapEx includes $2.6 million in crude related investments across our crude-by-rail system. Our balance sheet remains strong with the significant changes since year-end primarily reflecting the acquisition of Warren. Total assets increased approximately $529 million due primarily to acquisition related increases and in PP&E, intangibles and good will. Total liabilities also increased, and at March 31, total funded debt was $885.7 million consisting of the $368.3 million in unsecured notes and $517 million outstanding under our acquisition revolver, as we funded the purchase of Warren and the Revere terminal in January. As a reminder, we executed on our plan to finance approximately 40% of the Warren acquisition with equity through the December 2014 issuance of 3.6 million units. Total funded debt-to-EBITDA was 3.9 times and we had total borrowings of less than 800 million under our $1.75 billion committed bank facility. Distribution coverage remains strong with trailing 12 months DCF of $145.4 million, providing distribution coverage of 1.74 times. The integration of Warren is progressing well. To reiterate, we expect Warren to be accretive in the first full year of operations, and to generate $50 million to $60million of EBITDA in the second full year. We anticipate closing on the Capitol acquisition in the second quarter of this year, pending HSR approval, and we expect the transaction to be accretive in the first full-year of operations. Turning to guidance, we are reaffirming our expectations for full-year 2015 EBITDA in the range of $205 million to $225 million which doesn’t include the Capitol Petroleum portfolio acquisition. The guidance is based on assumptions regarding market conditions such as demand for petroleum products and renewable fuels, commodity prices, weather, credit markets, the regulatory and permitting environment, and the forward product pricing curve, which can influence quarterly financial results. As a reminder, we will be presenting later this month at the NAPTP MLP Investor Conference in Orlando, and in June at the BofA Merrill Lynch Energy and Power Leveraged Finance Conference in New York City. We look forward to seeing you there. Now let me turn it back to Eric for concluding comments.

Thank you, Daphne. One of the strategic themes we talk about frequently is the diversity of our product lines and businesses, and with good reason. Five years ago our main products were gasoline, distillates and residual oil sold into two classes of trade, wholesale and commercial - primarily in New England. Through strategic acquisitions and organic projects, Global has transformed its business. We've added a large and highly profitable portfolio of retail gasoline stations and convenience stores surrounding many of our terminal assets. We've leveraged our industry expertise to create a formidable network of strategic, geographically diverse assets that directly support the safe, efficient movement of North American energy products by land, rail, and water. Now we would be happy to take your questions. Operator.

Thank you. [Operator Instructions] Thank you, the first question if from Ray Fu of Bank of America. Please go ahead.

Hi, guys. Congrats on the good quarter. Just wanted to ask if you guys have seen any potential headwinds from the new rail safety regulations that we are seeing.

Yes, god morning Ray, this is Mark. I think if you look at the new regs that the new railcar regs that came out last Friday, I think as Eric mentioned earlier in his review, those railcar retrofits or standards, since our fleet is entirely leased, 100% leased I don’t think we are going to be impacted by those retrofits. In most cases they don’t start facing until 2020 in other cases not until 2023. The fleet that we currently lease will have expired by then, so we expect that any impact from that would be on the back end of additional car leases. I think cars after October of 2015 need to be manufactured to the new standards and we expect that once we are out of our current lease obligations that we will start facing newer design cars, but that won’t be for a couple of years.

Got it. Then just one other quick question on the IRS comments that came out earlier this week, I suppose that doesn't have a material impact on Global's status quo.

Yes that's right Ray, in our preliminary review we don’t see any impact on our operations.

Got it. Okay, that's all I had. Thanks so much.

Thank you. [Operator Instructions] the next question is from Cory Garcia of Raymond James. Please go ahead.

Good morning, guys. Great quarter and just curious, any update on the project on the Clatskanie project? I didn't hear anything in the prepared remarks.

Yes, god morning Cory, its Mark. I think we continue to drive advance that expansion project, where as we have been for the last several months, we continue to work with local agencies other entities at the port to align our constructions initiatives with the interest of everybody, so that project is moving along or the design and the ramp up to that construction is moving as planned.

Okay. So timing is still sort of next year is the way to think about it?

Yes.

Okay, great. I guess this is a little bit more in the weeds, looking at your ethanol manufacturing facility, it actually -- we didn't see quite as much of a drop off on that as I think we would have expected in the Wholesale business. Am I reading too far into what's going on out there? Or were there some dynamics on the West Coast market maybe different from the rest of the U.S. ethanol space that maybe made that facility a little bit better off?

I'm not exactly sure I understand the question, so hold on that…

Yes Cory, I'm not sure, are you looking at the gasoline and gasoline blendstocks margin and questioning the change in that. I'm not sure it was you are asking.

Yes, yes, yes, yes.

Okay well the change here will be that has noting to do with manufacturing ethanol right. So the change year-over-year from 2014 to 2015 was largely due to an extraordinary first quarter in 2014 when there were opportunities with blendstock shortages caused by rail disruption that we took advantage of. So it was an extraordinary first quarter 2014 and if you might remember we gave a lot back in the second quarter of 2014, all events of blendstoks. This year this quarter was a more normal market in the gasoline blendstocks.

Got you, got you. Should we expect a similar first-half progression? Obviously, not necessarily the exaggerated drop 1Q to Q2 like we saw last year, but a similar guidance figure, if you will, for the first half?

Yes, we are not going to give guidance obviously on the second quarter, but just last year you got to remember as we - and there was a mark-to-market component to that position at the end of the first quarter last year. So it was - and you can go back and sort of look relative to the prior year, but it was up over $40 million relative to the prior year and then we stood at the end of that first quarter and we said we were going to give back 20, so we could see because of the sever backwardation were going to do that. Today's market is very different.

Okay, yes, that makes sense. Thanks for the color.

Thank you. I would now turn the conference back over to management for any additional or closing remarks.

Thank you for joining us this morning. We look forward to keeping you updated on our progress. Everybody have a great day. Thanks.