Global Partners LP (GLP) Q1 2019 Earnings Report, Transcript and Summary

Good day, everyone. And welcome to the Global Partners' First Quarter 2019 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; and Executive Vice President and General Counsel, Mr. Edward Faneuil. At this time, I'll 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 including gasoline and gasoline blend stocks 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 the 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, it's my pleasure 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 first quarter results reflect solid performance across our business units. Our Q1 performance was highlighted by strong few margins early in the quarter in our Gasoline Distribution and Station Operations segments, which posted a product margin increase of 22% over the same period last year. GDSO also benefited from the Q3 2018 acquisitions of Champlain in Cheshire. These acquisitions are part of a broader strategy to expand our portfolio, further optimize our assets and drive incremental volume through our terminals. Our GDSO business is supported by our strong fuel supply terminalling and marketing operations, which include nearly 11 million barrels of store of tankage throughout the Northeast. We believe that the vertical integration of our supply terminalling and retail assets gives us a competitive advantage in the marketplace. Turning to our distributions. In April, the Board increased the quarterly distribution on our common units from $0.50 to $0.51 per unit or 2% on an annualized basis. The distribution will be paid on May 15 to common unitholders of record as of May 10. We're off to a solid start 2019. Our terminal network and retail locations continue to perform in line with our expectations and we are on track to achieve our full-year EBITDA guidance. Now I'll turn the call over to Daphne for her financial review. Daphne?

Thank you, Eric, and good morning, everyone. Let me begin with an overview of our first quarter results. As we go through these numbers please keep in mind that in the first quarter of 2018 adjusted EBITDA, net income and DCF results included a one-time non-cash gain of $52.6 million associated with the extinguishment of a contingent liability related into the Volumetric Ethanol Excise Tax Credit. First quarter 2019 adjusted EBITDA was $58.6 million, compared with $107.6 million in the first quarter of 2018 or $55 million excluding the $52.6 million non-cash gain. Net income in Q1 2019 was $7.1 million versus net income and Q1 2018 of $59 million or $6.4 million excluding the $52.6 million non-cash gain. DCF was $27.8 million in the first quarter of 2019, compared with $79.8 million in the same period of 2018 or approximately $27.2 million excluding the $52.6 million. Stronger fuel margin and contribution from our 2018 acquisitions were the drivers to these increases year-over-year. TTM distribution coverage at the end of the first quarter was 1.8x. Turning to margin, combined product margin in the first quarter increased $13.6 million to $179.7 million driven by growth in our GDSO segment. GDSO product margin increased $24.7 million to $138.4 million. The Gasoline Distribution contribution to product margin was up $17.3 million, primarily due to higher fuel margins and the acquisitions of Cheshire and Champlain in July 2018. The average fuel margin per gallon improved more than $0.03 to $0.23 from $19.4 in last year's first quarter. Margins remains strong in January, but were negatively impacted by the approximate $0.53 per gallon increase in wholesale gasoline prices during February and March. Volume in the GDSO segment increased approximately 17 million gallons a year-over-year due primarily to the acquisitions, partially offset by the sale of non-strategic retail sites. Station Operations product margin, which includes convenience store sales, sales sundries and rental income increased $7.5 million to $51 million primarily due to the acquisitions, which added 47 company operated sites to our portfolio. At the end of the quarter, our GDSO portfolio consisted of 1578 sites comprise of 296 company operated stores, 254 commissioned agents, 230 lessee dealers and 798 contract dealers. In our Wholesale segment, the gasoline and gasoline blend stocks product margin increased $1.6 million to $27 million primarily due to more favorable market conditions in wholesale gasoline, partially offset by less favorable market conditions in gasoline blend stocks. Product margin from crude oil was negative $6.2 million compared with a positive $5.1 million in the first quarter of 2018. Our product margin for the first quarter of 2018 was positively impacted by $10.7 million in revenue, related to a take or pay contracts with one particular customer, which contract expired in June, 2018. Product margin from other oils and related products was down $2.6 million to $14.1 million. This decrease was primarily due to less favorable market conditions year-over-year in distillates. Volume in our Wholesale segment increased 128 million gallons or approximately 14% due to increases in gasoline and gasoline blend stocks. In our Commercial segment, product margin increased $1.2 million to $6.4 million in the first quarter of 2019 largely due to an increase in bunkering activity. Volume in our Commercial segment increased 47 million gallons due to increases in gasoline and bunker fuel. Turning to expenses, operating expenses increased $8.9 million to $82.9 million in the first quarter. This increase reflects the Champlain and Cheshire acquisition and their associated headcount and other expenses, including real estate taxes, rent, utilities and maintenance expenses. This increase was partly offset by $8.4 million decrease in operating expenses associated with our terminal operations. SG&A expenses and Q1 increased $1.7 million to $41.1 million primarily to support our GDSO business. The $0.5 million lease termination and exit gain during this year's first quarter relates back to the voluntary early terminations of a railcar sublease with counterparty in December of 2016 and the fleet management services agreement with that counterparty pursuant to which we agreed to provide certain future railcar services. At that time, we accrued the incremental costs associated with our obligation. The early return of a number of railcars in 1Q 2019 released us from the future obligation to service these cars, resulting in a reduction in the remaining accrued incremental costs. As you may recall, we also had a similar reduction in obligations related to railcar leases in the third quarter of 2018. Interest expense was $22.9 million in Q1 2019 compared with $21.4 million in the year earlier period. The year-over-year increase was primarily due to higher average balances on our credit facilities and to higher interest rates. CapEx in the first quarter was approximately $10.2 million consisting of $8 million of maintenance CapEx and $2.2 million of expansion CapEx. The majority of these expenditures related to our gas station and convenience store business. For full-year 2019, we continue to expect maintenance CapEx in the range of $40 million to $50 million and expansion CapEx in the range of $40 million to $50 million. Turning to our balance sheet. Adoption of new required lease accounting under ASC 842 resulted in more than $300 million increase in our total assets and liabilities since the 2018 year end. Adoption of this new standard did not materially impact our statement of operations or cash flows for 1Q 2019 and our bank covenants are calculated using prior accounting protocol. We continue to have ample excess capacity under our credit facility. As of March 31, we had total borrowings outstanding of $586.5 million under our $1.3 billion facility, including $217 million under our $450 million revolving credit facility and $369.5 million under our $850 million working capital facility. Leverage as defined in our credit agreement as funded debt-to-EBITDA was approximately 3.4x at the end of the first quarter. In April, we entered into an amended credit agreement. Among other things, the agreement extended the maturity date for our working capital and revolving credit facilities by two years from April 2020 to April 2022. It also reduced by 25 basis points the applicable rate for borrowings and letters of credit under the $450 million revolving credit facility. We are pleased with this recent amendment and the continued support from our Bank Group. Turning to guidance. We continue to expect full-year 2019 EBITDA in the range of $200 million to $225 million. This EBITDA guidance excludes the gains or losses on the sale and disposition of assets and goodwill and long-lived asset impairment charges. Before we go to Q&A, I wanted to let you know that we will be participating in one-on-one meetings at the upcoming MLP & Energy Infrastructure Conference in Las Vegas, the Bank of America Energy Conference in New York City, and the Stifel Cross Sector Insight Conference in Boston. We look forward to meeting with you. And with that, Eric and I will be happy to take your questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Barrett Blaschke with MUFJ Securities. Please proceed with your question.

Hey guys. As we kind of look at coverage and leverage and everything else and the paradigm we're seeing in MLPs today, is there pressure coming from investors to kind of get distribution growth restarted? Or is this just something that is more of an internal goal?

Good morning, Barrett. I think are you asking directly about our distributions. I think as we said in the past, that's something that honestly the board considers every quarter. And it's certainly a balancing act between retention of cash flow for self-funding, CapEx and projects, and then paying distributions and being mindful of leverage. So it really is a balancing act.

Okay. Anything new on sort of CapEx front as far as growth opportunities or things that you're looking at beyond sort of the blocking and tackling you've been doing this year?

Yes. I mean, we continue to sort of look at all M&A opportunities. I can tell you the breather the market took last quarter I think is over and it seems to be a little bit busier.

Okay. And how are you seeing margins as we kind of get into partway through the second quarter?

Yes. I mean, I think if you just looked at the publicly available data and the fact that crude and gasoline have generally gone up, I'd say directionally, when you look at that public data that would tell you that those markets have squeezed the margins a little bit.

Okay. Thank you.

Thank you. Our next question comes from the line of Ben Brownlow with Raymond James Financials. Please proceed with your question.

Hi, good morning. You mentioned the GDSO strength be in the fuel margins and Champlain and Cheshire. Just on the fuel margin side, the northeast region has been one of the stronger regions of the country. Can you give a little color on what you believe is maybe supporting that margin structure? And then on the Champlain and Cheshire, can you just give us an update on how far along you are in the process of synergies there?

Yes. Let me handle the first one. Ben, it's Eric Slifka. But what I'd say - I'd say broadly is it's hard to get permits. It's hard to find real estate. It's hard to just decide you're going to go in and build a station where ever you want. And so there are barriers to entry into the market, particularly in high real estate value here is that make it difficult for competitors to come in, right. Mostly the good corners have been picked over and there is not a lot of growth as in other states. And so I think that that sort of leads to a little bit of a different pricing model maybe versus other locations, and then on top of that, there's no refineries, there's no pipelines that are in outside of New York that are in these markets. So there are alternatives once those barrels touched the water. And I just truly believe that that ends up affecting retail, right. And what was your other question? Your second question was around overhead at Champlain.

Thinking around the synergies at Champlain and Cheshire, if you strip out the fuel margin strength or kind of fuel volatility, just how are you along in those synergies? Or what are you seeing kind of structurally underline the improvement there in operations?

Yes. I think we've been very pleased with the integration today. I think in terms on the fuel side, it's very straight forward in terms of how we buy fuel and how fuel had been bought previously. So it's a pretty straightforward implementation in extracting those synergies.

Okay. Great. Thank you.

Thank you. Our next question comes from line of Ned Baramov with Wells Fargo. Please proceed with your question.

Good morning. Thanks for taking the question. Switching over to your commercial segment, could you maybe talk about the increasing bunkering activity in the last two quarters? Specifically is this higher level of volumes, something you could sustain through the rest of the year?

Yes, good morning. This is Mark. I think we've seen - I think it's a result of two things. One, we've seen some market conditions vis-à-vis our competitors that have allowed us to grow some volume. There's been some additional barrels on the market that had been available. So I think we've been able to capitalize on that. I think it's also just we continue to focus on that piece of our business. It's a niche piece of the business, but I think we do it well. We've got some infrastructure and we've got a team that's been in place for a really long time. So I think we've been able to just organically grow the business. We have the IMO 2020 coming up in January. So we're expecting that to be - create some dislocations in the marketplace. We'll see how that plays out. But I think we're well positioned given the fact that we have the ability to handle multiple grades in our storage.

That's great color. Thank you. And then in the Wholesale segment, I think volumes were higher than we estimated, but then the product margin for crude oil was negative. Could you maybe expand on the crude oil margin weakness and expectations for the rest of the year?

Sure. So the delta year-over-year is pretty clear, if it's a $11 million or so, a little bit more than $11 million down year-over-year is really due to the recognition of the revenue last year for the take or pay contract. The negative 6 million in the quarter, it's going to be reflective of pipeline commitments that we have. So if you do the math and you look at the K, it's around $3.5 million a quarter. And then you have some small ancillary costs to do with railcar insurance and storage and railcar lease expenses substantially less than last year. And so what where's the delta? Frankly, what and I think we talked about this certainly in the third quarter didn't need to talk about in the fourth quarter. When you have products that are not in a fair value hedge relationship and prices go up, you lose or you expect the - you're lose in the hedge right? And you can't write up the inventory. So we have a timing issue in terms of what is in crude margin. So it's a larger negative than it would have been in a flat market.

Understood. That's all I had today. Thank you.

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

Thank you. A lot of questions have already been answered. Just one quick-one though. On your SG&A came in better than we were looking for and I just kind of wondering that related to you didn't have a lot of deal expenses obviously, but you said the market wasn't quite as active. So just in terms of looking forward for the balance of the year, is this good run rate or should we expect that to tick up?

Good morning, Selman. Yes, SG&A I think you're asking about SG&A?

Correct.

Yes. So it was $41 million and so actually when you look back to third quarter which was $42 million despite in the fourth quarter largely because of incentive comp. So yes, $41 million is not a bad run rate.

Very good. Thank you.

Thank you. Our next question comes from the line of Lin Shen with HITE. Please proceed with your question.

Good morning. Thanks for taking the call. For your guidance with $29 million, $40 million to $50 million of expansion CapEx? Can you talk a little bit about how much you just think is going to be spent your existing said, or how much maybe is acquiring new size?

Good morning, Lin. It's Daphne. Well, so the expansion CapEx that would not, typically our expansion CapEx or guidance for expansion CapEx does not include acquisitions. And so honestly we haven't spent much year to date. I will say that when we think about some of the rebranding that we may do from time-to-time, that can be supported by investments from an accounting standpoint, sometimes that is viewed as CapEx. And yet the reality is the cash is actually covered by the party for whom you're doing the rebranding with. So it looks higher than it might be on a true cash basis. But in terms of, from an accounting standpoint, that would be CapEx. But they are no acquisitions indebtedness $40 million to $50 million?

Great. And then what are the returns you're targeting at by spending this CapEx?

When we look at any one of these projects in terms of expansion, yes, you're going to be looking for teen returns.

Great. Thank you.

Thank you. Our next question comes from the line of Jeremy Tonet with J.P. Morgan. Please proceed with your question.

Good morning. This is Charlie on for Jeremy. First question just wanted to get your thoughts on distillates market one of your peers was talking about had a bit more contango there and just curious what your view was there and how you think about that in near-term?

Yes, distillate market is I would say it's slightly in contango. I don't think there's a major incentive there. When you factor in the cost of carrying the barrel. There's a little bit of an incentives to build inventories but I don't think it's anything meaningful at the moment. So we continue to manage that business as we always do I would consider the market to be flattish contango just when you net out the expensive carrying the inventory.

What historically has been level that's incentivized that a little bit more on the carry trade?

Well I think it's varies historically depending on what it cost you to take carry what flat prices and what it cost you to carry the inventory. So I think it's fairly straight forward math. And it depends I guess on how you view your cost of storage and whether or not you own the storage or whether you leasing it from a third-party. So - but historically, it's probably north of $0.01 a month. You start to look at it and build layers. We don't look at - we'd look at that and we have a pretty disciplined approach to how we manage our inventory on our system. So we treat - we've got the base load of working inventory that we always have to have in the system. And then we look at some will expand inventory in a pretty controlled fashion, according to market conditions. So not just saying, hey, we look fill the tanks once we have a small amount of content that will step in and build layers of inventory on a pretty controlled basis.

Great. Thanks. One more from me, apologize if I missed all of it. And I think you touched on it in the opening remarks, the accounting change, related to the lease rental payments. I think there was a cure out there that's talked about an impacting their EBITDA. I just wanted to verify that this doesn't impact or change anything there. And then secondly, the changes to the balance sheet, any idea, how they're rating to view this? Is there any notable impact we should kind of be aware of there?

Yes. From our perspective, there should be no notable - there's no notable impact there. It does not impact materially any of your operations from an EBITDA or DCF standpoint. And in terms of the balance sheet, the reality is the agencies were already putting everything on the balance sheet from a liability perspective. So no change there.

All right, great. Thank you.

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

All right. Good morning, all and congratulations on a great quarter. Daphne, you mentioned that the fuel margins were $0.23 up from $0.19 a year-ago. Could you remind us what it was in the fourth quarter?

Sure. It was $0.32 in the fourth quarter and I think it was $0.24 fourth quarter of 2017. Both of those quarters and I've talked about it last earnings call, obviously fourth quarter 2018 was particularly strong and actually fourth quarter 2017 actually was advantage as well in terms of declining prices and some very healthy margins.

Right. How about the second quarter and third quarter of 2018? You happen to know those off the top…?

Don't have them right in front of me.

Okay. Of the 1,578 stores either owned or worked with, were there any sales during the quarter for any transition that resulted in…?

Yes, with the small number of sale. Less than 10, it was around, I mean it was seven sites that were sold and you can see or you will see in the cash flow is about $4 million or $4.2 million in sales price, that those sites were so for, and we continue to have in the 20 site range in terms of sites that we continue to non-strategic sites that we're selling. We've been pleased in terms of how those have as we sell those and often we'll retain supplies. So we then pleased with the multiple separate getting net a supply.

Okay. And last question is the CapEx, was earlier discussed by Lin and others. How many sites does that CapEx, expansion CapEx, look to cover?

[Indiscernible] number of sites, I mean we've got different buckets. When you're thinking about expansion CapEx, we're looking at some new to industries which would be a handful. We're looking at raising rebills and there's a piece of that that certainly is expansion. There are some rebranding commitments that we have that is expansion because it is not only covered from a cash standpoint, but also there are rebates and so you actually have incremental margin/DCF. And then we have sort of a placeholder for some potential other branding opportunities.

Okay. So in total, the number of sites that would be affected would be approximately how many?

Yes, I don't have that number.

Okay.

It's not a huge number of sites.

Okay, great. Thank you very much.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Slifka for any final comments.

Thanks for joining us this morning. We look forward to keeping you updated on our progress. Have a great day everybody. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.