Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Global Partners (NYSE:GLP)

Q2 2008 Earnings Call

August 07, 2008 at 5:00 pm ET

Executives

Eric Slifka – President and Chief Executive Officer

Tom Hollister - Chief Operating Officer and Chief Financial Officer

Edward Faneuil - Executive Vice President and General Counsel

Analysts

Barrett Blaschke – RBC Capital Markets

Brian Zorrono – Lehman Brothers

James Jampo - Height

Gill Alexander – Daffodil Association

Michael Sweeney – Wells Fargo

Operator

Good day everyone and welcome to the Global Partners second quarter 2008 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 our President and Chief Executive Officer, Mr. Eric Slifka. Chief Operating Officer and Chief Financial Officer, Mr. Tom Hollister; Executive Vice President, Treasurer 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. Edward Faneuil for opening remarks. Please go ahead, sir.

Edward Faneuil

Good morning everyone. Thank you for joining us. Before we begin, let me remind everyone that during today’s call, we will make forward looking statements within the meeting 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.

The actual financial and operational performance of Global Partners may differ materially from those expressed or implied in any such forward-looking statement. 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 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 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, allow me to turn the call over to our President and Chief Executive Officer, Eric Slifka.

Eric Slifka

Thank you Edward, good morning every one and thank you for joining us for our second quarter conference call. I will begin today’s call by discussing the quarter, providing you with our distribution outlook for the balance of 2008. Tom will take you through the supply demand factors that affected our business in Q2, and review the key items from the P&L and balance sheet. Afterwards, we will be happy to take your questions.

Let me begin by saying that on balance, we are satisfied with our second quarter results, especially given the recent pricing environment in the refined petroleum products market. As we have noted previously, Q2 is historically one of our weaker reporting periods simply because of temperature and the related lower heating demand. For example, EBITDA for second quarter of 2007 represented only 9% of last year’s total 2007 adjusted EBITDA.

This year, one of the challenges we have faced has been the rapid and significant increase in product prices. Average gasoline prices on the New York Mercantile Exchange were up approximately 42% in the second quarter over a year ago and heating oil prices were up 85% for the same period.

As a result, in Q2 we saw reduction in demand for certain products such as distillates and residual fuel. Clearly, the industry is in a transition phase in which higher prices have crafted a move toward conservation, and to some degree, conversion from residual fuel to natural gas.

Against this backdrop, we are particularly pleased that the five terminals we acquired last year from ExxonMobil continue to perform on plan. Just as a reminder, the purchase price of these two acquisitions was based on a low double digit price to EBITDA multiple in the first year of operation and high single digit multiple in the second year with improving result expected thereafter.

The large volume of transportation fuel from these new terminals enabled us to offset the challenges that affected other refined products in the wholesale and commercial segments of our business.

On the strength of higher volumes and margin improvement, wholesale gasoline net product margin more than tripled year-over-year in Q2. Gasoline contributed approximately 45% to our wholesale net product margin to the second quarter of 2008, compared with 11% in the same period last year.

In addition, our gasoline business drove a 7% increase in our total product volume over last year's second quarter offsetting volume reductions in distillate and residual fuel. Investors have asked us how trends and conservation have affected our gasoline business.

Because our gasoline sales are growing, especially in light of our 2007 ExxonMobil acquisition, gasoline conservation has not been a meaningful issue for us. The performance of our gasoline business illustrates the successful execution of our strategy to create a diverse product mix that enables us to weather a changing demand picture.

Beyond our product diversity, another enduring feature of Global Partners is that like our refined products pipeline, we play an essential infrastructure role in supplying the refine petroleum product needs of the North East. Demand for our products is going to continue as long as people need to drive their cars and trucks, heat their homes and buildings, and generate power for their businesses.

Another factor in overcoming the challenges of this quarter was our ability to continue to tightly manage expenses. SG&A expenses decreased 8% from the first quarter of 2008, and 11% from the second quarter of 2007. Operating expenses decreased 3% from the first quarter of 2008. On a year-over-year basis, operating expenses were up 39% from the second quarter of 2007 reflecting the cost of running our newly acquired terminals and our new terminal at the Port of Providence.

In response to conservation and increased price volatility, we have adopted innovative and aggressive approaches to various elements of our business proactively taking steps such as increasing the frequency of our intraday price changes, selectively increasing lines of credit to our creditworthy customers, and controlling purchases at inland storage terminals during abrupt changes in price.

Overall, margins began to improve toward the end of the second quarter as the industry adjusts to lower levels of demand, price volatility and higher products financing cost. Looking at our balance sheet, we continue to maintain a healthy balance sheet with ample liquidity. Last month, we strengthened our working capital revolving credit facility by expanding our borrowing capacity and increasing our existing accordion feature.

In this high priced and challenging market, our balance sheet gives us a competitive advantage over small or less creditworthy competitors and enables us to purchase pursue additional opportunities for growth. Moving to our distribution outlook, we believe it is important to convey to investors our intention with respect to quarterly distributions through the remainder of the year.

A few weeks ago, we announced the second quarter distribution of $48.75 per unit or $1.95 per unit on an annualized basis. While we cannot guarantee any course of action, it is management's intent to recommend to the Board of Directors that maintains our cash distribution of $48.75 per unit for the third and fourth quarters of 2008. This recommendation is subject to revision each quarter.

In summary, Global Partners begins the second half of 2008 well positioned, we believe, with a healthy balance sheet and diversified product demand including a growing gasoline business. The overall margin environment shows signs of improvement and we are encouraged about our prospect in the quarters ahead.

With that I will turn the call over to our Chief Operating Officer and Chief Financial Officer, Tom Hollister. Tom?

Tom Hollister

Thank you Eric and good morning everyone. I got some comments about our income statement, distributable cash flow and our balance sheet. First with respect to the income statement, EBITDA was up $1.2 million or 22% from a year ago, and there are a couple of factors affecting that result. The combined net product margin was up $2.3 million or 10% from the year ago and experienced some shifts in results amongst our mix of products primarily in the wholesale sector.

The net product margin in the wholesale sector for distillates was down $3.2 million or 26% from the year ago reflecting a reduction in demand due to conservation, but equally as important due to narrower margins. The result also included a $2.5 million benefit from a change in inventory reserve estimates as a result of improved operating procedures and efficiencies.

The net product margin for wholesale residual, oil was down $2.3 million or 41% as result of lower volumes, narrower margins, and commercially user switching from residual fuel to natural gas.

On the positive side, the net product margin from our wholesale gasoline business was up $8.1 million or 350% from the year ago, driven by higher volumes from our acquisitions and by better margins across the board. So, here is the big picture on net product margins. Distillates and residual fuel suffered in the second quarter as a result of work reductions in volume and margin pressures. Gasoline, on the other hand, enjoyed tremendous results due to volume and margin improvements, largely as a result of the performance of our terminal acquisitions.

Operating expenses were up $2.5 million due to the year-over-year impact of the higher operating costs related to our acquisitions in our new ProvPort facility. This increase was offset by $1.3 million reduction in SG&A expenses due to the careful cost management Eric referenced. Interest expense was up $1.6 million or 64% from $2.5 million a year ago to $4.1 million this year. This was driven by higher product costs and an increase in acquisition related debt. In this price environment, higher financing costs are simply a cost of doing business.

Fortunately, we have begun to see margins widened recently as we believe the industry is adjusting to these increased costs. As Eric mentioned, it is our intent at this time to recommend that the Board maintain our cash distribution at $48.75 per unit for the third and fourth quarters of 2008. We are comfortable with this level of distribution, particularly given the somewhat unusual confluence of factors that affected our result in the first quarter of this year.

In 2006, our distribution coverage ratio calculated as distributable cash flow divided by distributions was approximately 1.7 to 1 and in 2007 it was 1.5 to 1. Our coverage ratio will be much tighter this year and stood at a little under 1.1 to 1 through the first six months of this year.

In terms of our debt, it is important to remember that we only have $71 million of long-term debt related to our terminal operating infrastructure compared to a net worth of $154 million. This $71 million is comparable with the long-term debt you see in the balance sheets of other MLPs.

The rest of our indebtedness is related to owning product inventory and is borrowed under our working capital facility. Because it is long term commitment from our bank group, some of our working capital facility appears as a long-term liability and the rest, as a current liability. But a key point for investors to understand is that as of June 30, $450 million or 86% of our total debt of $521 million is related to inventory financing if the remaining 71 million or 14% being more classic long-term debt.

We believe Global Partners' balance sheet is very healthy. As of June 30, our total receivables and inventory of $889 million exceeded our total debt of $521 million by a total of $368 million or 1.7 times. Another simple and important way to look at our liquidity and capital position would be as follows; As of June 30, if we were to sell all of our inventory, we could pay off all of our working capital borrowings and we would own all of our receivables and our entire network of terminals, free and clear of any funded debt beyond the $71 million.

In July, we amended our bank agreement, adding an additional $100 million of borrowing capacity in the months of July and August, up from $550 million to $650 million. We also added an additional $100 million accordion feature to our working capital facility bringing net total to $200 million.

Although this accordion feature of $200 million is uncommitted, we have the ability to request this financing on the exact same terms and conditions as the rest of the working capital facility. Our bank group reconfirmed our facility through which 2011 maturity; these changes were agreed to 100% by our very supportive 13-member bank group.

With that, we are ready to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator's instruction) Our first question comes from the line of Barrett Blaschke with RBC Capital. Please go ahead.

Barrett Blaschke – RBC Capital Markets

Good Morning Guys.

Eric Slifka

Good morning, Barrett.

Barrett Blaschke – RBC Capital Markets

Quick question, if the price of crude oil begins to recede away from its highs here, what is the effect on you guys? I know you are relatively commodity neutral but it seems like the change in prices we have talked about before is really what causes more of an effect than the absolute price?

Tom Hollister

Barrett I think, this is Tom speaking, and we would likely say it is favorable because we will reduce our cost of financing.

Barrett Blaschke – RBC Capital Markets

Right.

Tom Hollister

The cost will be less and that will help our interest costs. And in addition, obviously, consumers are conserving across the board. If prices drop some, that may change their behavior.

Barrett Blaschke – RBC Capital Markets

And this is a follow up. If natural gas prices come down as well, does that prevent or that hinder some of the switching back from the commercial businesses?

Tom Hollister

If the relationship between oil and gas were to change and go back to what it has historically been, you would see that commercial business switch back to residual fuel.

Barrett Blaschke – RBC Capital Markets

Right. Okay, thank you.

Operator

Thank you. Our next question comes from the line of [Brian Zorrono] with Lehman Brothers. Please go ahead.

Brian Zorrono – Lehman Brothers

Good Morning.

Eric Slifka

Good morning.

Tom Hollister

Good morning.

Brian Zorrono – Lehman Brothers

Can you provide total volumes for the second quarter?

Tom Hollister

Sure, for the second quarter we did 730 million gallons, that compared to the second quarter of last year when we did 683 million gallons of total volume.

Brian Zorrono – Lehman Brothers

In terms of interest expense, it was up a little year-over-year but down sequentially. What drove the decline sequentially?

Eric Slifka

Sequential decline, Brian is because it is typically in the first and fourth quarters will be carrying the higher levels of inventory during the heating season. And that is typical for us that our inventories drop down during the summer as well at less heat related inventory. And that pattern has been pretty consistent over the last several years.

Brian Zorrono – Lehman Brothers

Looking at last year's seasonality for interest expense, that is a good guide.

Tom Hollister - Chief Operating Officer and Chief Financial Officer

If you are trying to, sort of plot out what is happening, looking at the last two years is a decent guide, yes.

Brian Zorrono – Lehman Brothers

Okay. And you mentioned distribution coverage, the first half of this year, a good run rate to think about the rest of the second half?

Tom Hollister

Brian, I cannot make, in effect, a forward-looking statement for the second half. What we can say is that coverage ratio in the first six months was a little under one to one.

Brian Zorrono – Lehman Brothers

Thank you.

Tom Hollister

One point one to one, pardon me.

Operator

Thank you, our next question comes from the line of Wyatt McCormick of Raymond James. Please go ahead.

Wyatt McCormick - Raymond James & Associates

Hi, good morning gentlemen.

Eric Slifka

Good morning.

Wyatt McCormick - Raymond James & Associates

I was wondering, excluding the accordion feature, what is the remaining available liquidity on your working capital?

Eric Slifka

As of June 30, we have $200 million of availability, and then separately as you may remember on July 21, we put out a press release as did many other MLPs in the context of the SemGroup issues, and at that point, we had $225 million availability. We are very comfortable that we have ample liquidity to run the business.

Wyatt McCormick - Raymond James & Associates

And just on accounting question, what happens to this if product prices declined? Is there any accounting treatment on your balance sheet?

Eric Slifka

We are, as we have said in the past, run a hedged book and our inventory is accounted for in the lower cost to market. But, because we run a hedge book, any change on prices in effect should be neutral to our income statement.

Wyatt McCormick - Raymond James & Associates

And then my final question is, with your changed inventory reserve accounting, is there any remaining capability there, remaining capacity to change that over for inventory?

Eric Slifka

The change in the accounting estimate is specifically set forth, we think that the improvement in operating procedures and efficiencies may modestly improve our results overtime but it is not something you should think of as part of our permanent run rate.

Wyatt McCormick - Raymond James

Okay, great, thank you gentlemen.

Operator

Thank you, our next question comes from the line of James Jampo with Height. Please go ahead.

James Jampo - Height

Hi, Eric. Hi, Tom.

Eric Slifka

Hi James.

James Jampo - Height

Could you talk a little bit more about the, to me it would be a startling reduction in G&A expense, given that you are a much bigger company, how did you do that? And is there more fruit to be picked there, how did you do that?

Tom Hollister

Well, James it is Tom speaking, obviously business has been our results were off in the first quarter. So, management took the kind of actions we think we should to tighten the ship, and we screwed it down pretty tight.

James Jampo - Height

Do you think it is something that will need to bounce back up as the business recovers?

Eric Slifka

I think James, we are running it as tight as we can, and I think we are doing the right thing. That is our perspective.

James Jampo - Height

I see, and if you could talk a little bit more about what you observed in the margin expansion in the end of the quarter, is that on the distillate side as well as the gasoline side?

Eric Slifka

It is really across; it is across the board in distillate and gasoline.

James Jampo - Height

And anymore color on what was driving that?

Tom Hollister

We believe the industry is adjusting to the increase cost inherent in their operations, for example the financing with inventory because of the higher prices. So, we saw margins widen really in the month of June, and so far this quarter appears to have continued.

James Jampo - Height

And lastly, do you think you are taking on any more risk as you extend the credits lines to some of your customers?

Eric Slifka

Now, we have been, as you know James, very careful on this. Our record is, in the last five years, I think the average write-off is under $400,000. And in this quarter alone, we had $2.5 billion in sales order, quite careful on credit. We have selectively increased lines of credit having watched our customers now go through a full season at much higher prices, and we think we are making prudent credit decisions.

James Jampo - Height

Okay, thanks.

Eric Slifka

Thank you.

Operator

(Operator's instructions) Our next question comes from the line of Gill Alexander with Daffodil Associates. Please go ahead.

Gill Alexander - Daffodil Associates

Good morning, as you look at the acquisitions you made last year, and you say you are on plan. Could you give some idea what the pretax contribution was for the first half of the year?

Tom Hollister

We are not going to give the specifics on any terminals or acquisitions but what we can say is that they are on plan, including the original estimates we had up in the first full year results. They were purchased in effect of 11 times EBITDA multiple, or low double digits, let us say and then high single digit in the second year and both of them are tracking along that line. So you can take that price we paid for, multiplied by those ratios, and have a good sense.

Gill Alexander - Daffodil Associates

Thank you very much.

Operator

Our next question comes from the line of Mike Sweeney with Wells Fargo. Please go ahead.

Mike Sweeney - Wells Fargo

Good morning Gentlemen.

Eric Slifka

Hey, Mike.

Mike Sweeney - Wells Fargo

Tom you were just running through some numbers on the net product margin impact, and I just missed one. Could you give a number on the negative impact of volume in margin reductions on the distillate residual business?

Tom Hollister

Mike, you will see it in the queue.

Mike Sweeney - Wells Fargo

It is in the queue, okay.

Tom Hollister

Well we were likely to file probably tomorrow but can you give us just a second we will try to…

Mike Sweeney - Wells Fargo

That is okay, Tom. It is in the Q, that is fine.

Tom Hollister

Okay, the picture for distillates is that net product margins were down.

Mike Sweeney - Wells Fargo

Okay.

Tom Hollister

And that was nicely offset by big increases in gasoline.

Mike Sweeney - Wells Fargo

Great, thank you.

Operator

There are no further questions in the queue at this time. I will turn the conference back over to Mr. Slifka for any closing comments.

Eric Slifka

Thank you all for your time. We look forward to keeping you updated on our progress. That concludes today’s call. Thanks.

Operator

And that concludes our conference call. Thank you for joining us today, you may disconnect your lines at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Global Partners Second Quarter Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts