Global Partners LP (GLP) Q2 2017 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Global Partners Second Quarter 2017 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. At this time, all participants are in a listen-only mode. [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, 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 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 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 two months of last year's second quarter, product margin and station operations portion of GDSO was that about 12.2% year-over-year in Q2 2017 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 non-strategic 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 non-strategic 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 partnerships 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 unitholders 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 through the halfway point of 2017 bears that out. Looking ahead, with our focus 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 were $4.7 million lower primarily due to decrease 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 volume 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 the accrued incentive compensation. The increased product margin and lower expenses resulted in $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 is defined by our partnership agreement, does not include adjustments for certain non-cash charges such as net losses on the sale and disposition of asset and goodwill and long lived asset impairment charges. Our DCF result for the second quarter of 2017, include $2.4 million in such non-cash charges compared to $2.6 million in 2016. Excluding these charges DCF would have 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 to $21 million in the year earlier period. The increase was due to $1.1 million associated with the financing obligations 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 facility 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 the decline in the NYMEX price per 87 RBOB positively impacted our fuel margin which increased from about $0.17 to $0.20 per gallon. Station operations product margin decreased to $6 million to $43.2 million largely due to the sale of sites including the Drake sites 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 $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 volume through our system. Wholesale gasoline and gasoline blendstocks 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 margin 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 blendstocks. 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 site. Expansion CapEx of $3.6 million related to investment 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 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 have 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 in 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?

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Ben Brownlow with Raymond James. Please proceed with your question.

Hi. Good morning and congratulations on the quarter.

Thank you. Good morning, Ben.

On the 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 [beat their] [ph] volume demand?

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

The only thing I would add -- the only thing I would add to that is just, I think we talk about this -- we 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 going 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 and our -- which can impact volumes and margin and such.

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

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

Okay, thanks. 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 the decline in the wholesale was really to do in the crude segment, whether it's just lower activity, I mean, certainly last year was a challenged market and we had, some volume that we were moving and this year it is less volume that we are moving or selling out through the system. And then, the other decreases it's really in gasoline and gasoline blendstocks and not any material impact on the company from a margin standpoint that is another shelf did not have a material impact, it's just flat activity.

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

Yes. So 239 company operated, 269 commission agent, 237 less the dealer and 698 contract dealer for 1443 total.

Great. Thank you. I'll jump back in the queue.

Okay.

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

Thank you. Good morning. So, I guess first of all, just in terms of thinking about your guidance, you didn't raise anything though, we're kind of six months in, to take the midpoint and kind of apply to the back half looks like that you are guiding look down compared to what you've 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, I mean we gave obviously a big band at the start of the year and basically a [indiscernible] 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'm going to just look quickly for that last quarter. I think last quarter we were at sort of 37 out 35, I might suggest both are perhaps a little bit light only in terms of timing of investments and some of the IT asset support the business, major personnel and systems to support GDSO, timing of additional marketing programs that maybe a little bit light.

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

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

All right. Thank you so much.

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

Hello, good morning, everyone. Thank you for having the call. 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 the 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, at time sure when we grow volume I would say that we're -- that we're taking market share from some place, but there maybe times where we many decide to take a different margin approach or different approach to that balance of the business. So, again, it's just a little bit of a fluid process, it's corner-by-corner. So, I wouldn't on a perspective basis, I wouldn't read too much into that. I think as Eric said, we have, what we believe to the 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.

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 partially because of that as opposed to your pricing strategy.

Yes. David, its Eric. I don't, I mean 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 got the best real estate in the market. 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 will that leads to better volumes, so you got to be very focused on. I just think its hard to say, I got a direct correlation. And if -- to delve into that even a little bit further, I'm sure that there are locations where somebody close the 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 on volume.

The second question is regarding the status of the fixed tank sale that you announced last quarter, earlier this year. What's your sense of the timeframe now is, when we -- shareholders might hear about transaction regarding that?

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

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

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

All right. Thanks very much guys.

Our next question comes from the line of Lin Chen with Hite Hedge Asset Management. Please proceed with your question.

Thanks for taking the question. So, you noted in the press release that your improved financial position allows for more organic growth and potentially M&A, could you just give a little 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?

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 fit us the best. But, we'll look at everything from tanks and terminaling to retail and it's -- I would 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 hard for us to go out and unless it's a very scaled transaction go out and [indiscernible] business. It's likely that those are going to be competitive purposes that I have difficult time adding a lot of value to. So, those would be harder, but certainly, this gas station ownership and companies that are broad and there is lots of them and so there is a lot of opportunity by those, tank ownership, those companies are few and far between. But, we try to look at everything.

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 a leverage in a good size but we talked historically about the balance between any the cash flow that you might generate that's excess and reinvesting in the business in some high return projects.

Okay. So, there is no sort of firm boundaries that you are yet to cross your kind of there, but your balancing that versus investment opportunities?

Yes. Look, that investment opportunity could be an M&A acquisition, that investment opportunity could be -- raise in rebuilds and NTI's. So, there is good uses for the capital to grow the business.

Right, great. Thank you.

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 summer. Thanks.

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