Global Partners LP (NYSE:GLP ) Q2 2022 Earnings Conference Call August 5, 2022 10:00 AM ET

Sean Geary - Chief Legal Officer

Eric Slifka - President & Chief Executive Officer

Gregory Hanson - Chief Financial Officer

Mark Romaine - Chief Operating Officer

Gregg Brody - Bank of America

Good day, everyone and welcome to the Global Partners Second Quarter 2022 Financial Results Conference Call. Today's call is being recorded. [Operator Instructions]

With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Financial Officer, Mr. Gregory Hanson, Chief Operating Officer, Mr. Mark Romaine; and Chief Legal Officer, Mr. Sean Geary.

At this time, I'd like to turn the call over to Mr. Geary 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's call will include forward-looking statements within the meaning of federal securities laws. These statements include projections, expectations and estimates concerning the future financial and operational performance of Global Partners.

These forward-looking statements are based on assumptions regarding market conditions, business cycles, demand for liquid energy products and convenience store products, utilization of our assets and facilities, the regulatory and permitting the environment, the forward product pricing curve and other factors, which could influence our financial results.

These statements involve significant risks and uncertainties, some of which are beyond the partnership's control, including without limitation, the impact and duration of COVID-19, and its impact on our counterparties, our customers and our operations, and other assumptions that could cause actual results to differ materially from the partnership's historical experience and present expectations or projections. We believe these assumptions are reasonable given currently available information. Our assumptions and future performance are subject to a wide range of business risks, uncertainties and factors, which are described in our filings with the Securities and Exchange Commission.

Global Partners undertakes no obligation to revise or publicly release the results of our -- any revision to any 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 to turn the call over to our President and Chief Executive Officer Eric Slifka.

Thank you, Sean, and good morning everyone. By every measure, we delivered outstanding results in the second quarter. Our financial and operating performance in Q2 reflects great execution by our team and underscores the value drivers that fuel our business.

Specifically, an integrated network of supply storage marketing and retail assets, which enable us to quickly adapt to changing market conditions, a diverse portfolio of products and services relied on by our customers and guests every day, skilled and dedicated employees and continued emphasis on data analytics, which enables us to effectively manage inventory levels and product mix to respond to changes in the demand environment for both wholesale and retail.

In the second quarter, we benefited from continued momentum in our GDSO segment, including our recently acquired retail sites, as well as favorable market conditions in our Wholesale segment and an increase in bunkering activity in our Commercial segment. During these calls, I've spoken frequently about the high value of our real estate assets, including our storage infrastructure and retail locations.

Historically, we have not been able to – historically, we have not only been able to optimize these assets, but monetize them as well. In Q2 for example, we completed the sale of our 2.1 million barrel refined petroleum product terminal in Boston Harbor, Revere, Massachusetts.

The purchase price was $150 million in cash and after closing costs and other considerations, the partner received net proceeds of approximately $99 million. As part of the sale, we entered into an agreement with the bar under which we leased back key infrastructure at the terminal including certain tanks, dock access rights and loading racks in order to continue business operations at the facility. The key takeaway is that the transaction enables us to work the value of this asset and provides capital for future growth.

On that note, we continue to deliver our strategy to grow our GDSO business. We are pleased with the contribution in Q2 of our two recent acquisitions; Consumers Petroleum of Connecticut and Miller's Neighborhood Market.

The Miller's transaction provides us with our first company-operated locations in Virginia where we continue to expand our presence this quarter by signing an agreement to purchase a portfolio of 13 owned and two leased gas stations and convenience stores as well as six adjacent pieces of real estate. The acquisition is expected to be completed by the end of Q3.

We continue to make investments in the sustainability space, including further diversifying our EV offerings and sustainability business lines to create long-term value for our portfolio. In May, we launched our first resilient convenient station location with a micro grid linking solar energy battery storage and a DC fast charging station for electric vehicles. We continue to be a leader in advancing renewable fuels policies and positioning our assets to deliver these products.

Turning to our distribution. In July, the Board voted to increase the quarterly distribution on our common units by $0.01 per unit to $2.42 per unit on an annualized basis. The distribution will be paid on August 12 to unitholders of record as of the close of business on August 8.

With that, now let me turn the call over to Greg for his financial review. Greg?

Thank you, Eric and good morning, everyone. Across all of our key performance metrics, Q2 was an extremely strong quarter for Global. Net income for the second quarter was $162.8 million compared with $12.1 million for the same period in 2021. Adjusted EBITDA was $134.9 million versus $58.7 million for the year earlier period.

DCF increased to $178.2 million from $26.6 million for the second quarter of 2021. Please note, that net income EBITDA and DCF included a $76.8 million net gain on the sale and disposition of assets, primarily related to the sale of our Revere terminal.

TTM distribution coverage as of June 30, 2022 was 3.6 times or 3.5 times after factoring in distribution to our preferred unitholders. Excluding the net gain on sale of assets, TTM distribution coverage was 2.7 times or 2.5 times after distributions to our preferred unitholders.

Turning to our segment details. GDSO product margin was up $36.5 million in the quarter to $198.9 million. The gasoline distribution contribution to product margin was up $28.6 million to $129.9 million, reflecting higher fuel margins and an increase in volume due in part to our recent acquisitions. Fuel margins increased by $0.05 per gallon to $0.31 from $0.26 in last year's second quarter. We were pleased with the fuel margin performance in light of wholesale gasoline prices in the quarter.

NYMEX wholesale gasoline prices increased by $0.46 per gallon during the three months ended June 30th, 2022 versus an increase of $0.29 per gallon during the same period last year.

Station operations product margin which includes convenience store and prepared food sales, sundries, and rental income contributed $69 million, up $7.9 million from the second quarter of 2021, reflecting an increase in activity in our convenience stores due in part to our recent acquisitions.

At the end of the second quarter, our GDSO portfolio consisted of 1,683 sites comprised of 343 company-operated sites, 292 commission agents, 196 leasing dealers, and 852 contract dealers.

Looking at the Wholesale segment, second quarter 2022 product margin was $90.6 million, up $57.1 million from the same period in 2021, primarily reflecting more favorable market conditions largely in distillates and gasoline Product margin from other oils and related products, which include distillates and residual oil increased $38.6 million to $51.9 million. Gasoline and gasoline blendstock product margin increased $17.5 million to $41 million.

Product margin from crude oil was negative $2.3 million in the second quarter, up from negative $3.3 million in the same quarter a year ago, primarily due to the expiration of a pipeline connection agreement in August of 2021.

In the second quarter, we saw a continuation of the steep backwardation of the forward product pricing curve. Backwardation exists when contracts for the near-term delivery of commodities are priced higher than those for longer term delivery. We do expect the steep backwardation to increase the cost of carrying our hedged inventory at some point in the future. But as we saw in the second quarter it can also contribute to strength in our Wholesale margins.

Turning to the Commercial segment, product margin increased $9.8 million in the second quarter to $12.5 million, largely due to our bunkering business, which continued to see strong volumes and margins in the quarter.

Looking at expenses. Operating expenses increased $20.3 million to $108.5 million in the quarter, primarily in our GDSO segment including our recent acquisitions, due in part to increased credit card fees related to the increases in volume and price, higher salary expense, and higher rent expense.

SG&A expenses increased $6.8 million to $60.8 million in the second quarter, primarily due to increased incentive comp and wages and benefits offset by a $6.6 million expense incurred in the second quarter for compensation and benefits resulting from the passing of our General Counsel.

Interest expense for the quarter increased to $21 million compared with $20.3 million in the year earlier period in part due to a higher average balance under our revolving credit facility as a result of recent acquisitions.

CapEx in the second quarter was approximately $25.3 million consisting of $9.8 million in maintenance CapEx and $15.5 million of expansion CapEx and the majority of which relates to our investments in our gasoline stations and C-stores.

Through the first half of 2022, we had maintenance CapEx of $17.3 million and expansion CapEx of $25.1 million excluding acquisitions. For the full year, we continue to expect maintenance CapEx of approximately $45 million to $55 million and expansion CapEx excluding acquisitions of approximately $50 million to $60 million in 2022, relating primarily to investments in our gasoline distribution business.

Our balance sheet continues to be strong with leverage, which is defined in our credit agreement as funded debt to EBITDA at approximately 2.4 times at the end of the second quarter. We continue to have ample excess capacity in our credit facility. As of June 30, 2022 we had total borrowings outstanding under the credit agreement of $193.7 million. This consisted of $70.7 million under our $1.1 billion working capital revolving credit facility and $123 million under our $450 million revolving credit facility.

Looking ahead on our Investor Relations calendar. Next month, we'll be hosting one-on-one meetings at the Wells Fargo Leveraged Finance Conference. If you're heading to Nashville for the conference, we look forward to meeting with you.

Now let me turn the call back to Eric for closing comments. Eric?

Thanks Greg. We entered the second half of 2022 with solid momentum and believe we are well-positioned to continue to deliver value for unitholders, customers and guests.

Now Greg, Mark and I will be happy to take your questions.

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

Thank you. Congratulations on a very nice quarter. Let me just start with the wholesale and distillates and your thinking. And I guess you referred to the steep backwardation, but I guess how long do you see this continuing? And especially as I think about the Northeast and being short refinery capacity and diesel in general. So maybe you could just give an outlook for that?

Yeah. Selman, good morning. It's Mark.

Yeah. We've seen since the end of Q1, the markets are misstep backed the will say they have softened the curve has softened a bit. But the backwardation consist or exists into out into -- even through 2023. So I think we're going to be -- at the moment looking forward, we're going to be dealing with this at least for the near future. And so we'll just continue to run the business the way we have. We've managed inventories accordingly. Certainly as we head into winter, we'll have to expand inventory to meet demand a little bit. But I don't see anything different looking forward. We'll just continue to manage the business the same way we have although the curve has softened a little bit.

Okay. And then can you also just talk about the uplift in bunkering fuels and maybe what's driving that and how sustainable that might be?

Yeah. Demand has been great. And we've also benefited from some market opportunities in the supply of those fuels, so our outlook is positive for that business and we'll just continue to drive value through that.

Yeah. I think the only thing I'd add to that -- hi, Selman, it’s Greg Hanson. If you look back historically that has always been a strong contributor to the commercial group is really -- it was really impacted by COVID in the last two years. And so it's been pretty muted and now we're getting back to more, although, very strong, but a better normalized numbering.

Got it. And then, in prior conversations, I know, you've invested in charging stations and you've said utilization has always been pretty underwhelming. And so, you're still continuing to do that. And I'm just wondering, are you starting to see any more uptick in utilization, or are you just doing it to have the rounded product line? Any comments on that?

Sure, Selman, it's Eric Slifka. So, essentially -- two parts to your question. The first one is, are utilization rates higher? The answer is yes. But they're from a very small base. They may be as much as double, right? So that's the one, but it's from a very small base, right?

Number two is, we've been strategic in terms of partnerships around that and whether those partnerships are with other providers. So, I spoke a little bit about our Ayer, Mass facility and creating a microgrid. That was with a third-party who spent the capital to put it in.

The only capital we spent was for a backup -- backup generator on the site, which by the way, we're happy to do, because at the end of the day, it's a larger site it's got good inside format. And when there's electricity outages, you want to make sure that you are in a position to fulfill the need in the marketplace, right?

So that all works out well. But in that particular site, there's solar on top of the canopy, there's battery storage. All this has all been paid for by a third-party and they've also got EV charging on the site as well. So our role only there was back up generator on fossil fuels. But for us, it makes sense, because it's such a large site, right, and important to the community.

Do you have other sites like that you would do that…

That would be, I’d say -- yes, I would say, yes, we would be very interested in doing that in other sites. This is a relatively new concept, but a third-party come in, or a fairly large one at that. So I mean, at the end of the day we would consider this on other sites if we have parties that came to us and wanted to make that kind of an investment.

Got it. And then, you also just talked about real estate and being willing to realize the value of it. So, I guess, I would ask, number one, are there any other opportunities you're pursuing right now in terms of liquidations with sale leasebacks, or then, in particular, you highlighted, I think, it was Virginia, where you got six, seven like adjacent parcels. Would you be looking to monetize those, or are you looking to build on those?

Yes. Selman, this is Greg. I mean, I think, one of the core tenets of our business is real estate. And so, we're always looking at our portfolio for opportunities long term. I mean, we have a very strong real estate position throughout the Northeast and the East Coast. And so, we're continuing to always look at optimization.

I would say, for sort of things like Revere, I think that was somewhat of a one-off that, size of that facility and the location of that facility and the ability to get that kind of price. But that said, on the retail side, I mean, I think, part of the game there is definitely the real estate and we'll continue to look at ways to optimize its doing more raise and rebuilds more NTIs, looking at larger format stores, or truck stock type opportunities. So, it's something we're always looking at.

All right. Thank you very much.

Our next question comes from the line of Gregg Brody with Bank of America. Please proceed with your question.

So just in GDSO business, can you talk a little bit about, what you're seeing at the pump and how – I guess, we had higher price has come down a little bit, but there is this general consumer nervousness. How are you seeing that impact the business right now? And do you think you continue to keep margins at the – at these levels?

So Gregg, your question is more about how the impact of the higher prices impact, the consumer, or potential recession here is effective? Is that sort of where you're getting at?

Yeah. I mean, if there's a way to isolate, I imagine, it's pretty hard to isolate off of them, but I'm curious what you're seeing and what you think is going to happen.

Yeah. So I think what, we did see some demand destruction in the gasoline side, during the really high prices in May and June. Prices have obviously come off a tremendous amount over – in the third quarter so far, which I think provides a lot of relief to consumers on the gasoline side. I think, we saw some softness, but obviously nothing like what we saw in COVID. But again, we continue to sort of satisfy any sort of volume declines that potentially are out there have been more than offset by margin. And we continue to see that being a trend that we've seen since the beginning of COVID in 2022. So –

Got it. No I appreciate it. The big moved around, and I was just wondering, if you're seeing any more weakness, but clearly your drop in prices has helped. I mean, just GDS the wholesale business, I understand, you worried about backwardation. Can you help us understand a little bit more how you did so well this quarter. I always, I'm always fine studying this business interesting, but I'm curious what happened this quarter. If you can give a little bit more color there?

Yeah, Gregg, this is Mark. So the markets have been backwards. We any time markets are backwards or even, especially seafood bakers like they have that can increase the cost of carrying inventory from a few different angles. One, obviously at a higher price level you've got higher cost to finance that inventory. But in addition to that, we run a hedge book. And we roll all – of our inventory from month to month. So in a backward market that is a cost for us. What we've seen so that's on the supply side.

On the sales side, what we've seen is throughout the markets that we operate in we've seen margins expand across the board both on gasoline and distillate. And the way, I look at that is that is the market's response to the increased cost of carrying inventory. In addition to that, as I mentioned earlier, we have we have taken a pretty aggressive stance on reducing inventory throughout our terminal and that's generally how we manage in contango markets. We expand inventory back up markets we reduce it, gives us some level of risk mitigation, but a combination of higher margins at the wholesale rack level.

And then, we have seen markets soften a little bit, but there hasn't been a real meltdown in the curve so to speak. So timing can have something to do with that as well. And I do think that, when markets flatten out or perhaps even slip in a contango at some point who knows when but it will happen, that's when you'll see some of that, additional costs come through. But Margins are Greg sand it's not just a letter the retail is Brent pointed to some lower volumes. We saw some dramatically lower volumes during COVID, we are seeing some lower volumes now due to a high price environment in most of those cases or I would say, in all those cases we are seeing an offset in higher margins and it's no different in the wholesale.

Anything that could persist for some time?

Do you think that can persist? I mean it hasn't changed. It's still…

No I think -- as I said I think a lot of it depends on the market. So as the markets return to something -- return closer to normal. As I said if you look at the distillate curve now, it's not as deeply backwards as it was before. And we're seeing margins normalize a little bit or go directionally towards normal. They're not normal at this point.

But -- so I think it's a function of the market. And I think as you see -- as I said it can persist as long as there is this extreme backwardation which is leading to dislocation short margin healthy margins can continue to exist. So - but it will be driven by -- it will be dictated by the structure of the market.

Gregg, it's Eric Slifka. Just a follow-up. I mean the markets are -- these markets are very efficient, right? And they price to make sure that supply and risk and margin all meet, so that the market can continue to fulfill the requirements, right? And whether it was COVID where you saw low retail demand, the margins fixed on the other side right? And so, you had a margin that paid for the reduction in demand.

Here in this instance, you have backwardation. And so, there are fewer competitors and you're seeing the margins expand to handle that additional cost. But they operate very quickly. And then I think the key here is, as I said in my prepared remarks we have a business model that really puts us in a position to adapt to and change as the markets move around, right?

And we think our model is differentiated versus a pure retailer or a pure wholesaler right because we've integrated the business model and we have better advantages given that connection all the way down from store supply terminaling to retail.

And I appreciate all that. It always -- you guys have persistently executed when the opportunity has been there like us. Thanks for explaining that to make because it's never that simple for us to try to model it over here. Last question for you. Operating costs. They're up quite a bit from last year, is that M&A related? And how -- or is there some other components driving that?

Yes. Gregg, it's Greg Hanson. Yes. So, we're up about $2.4 million year-over-year. The majority of that is acquisition related also with credit card fees, given the higher retail prices we saw in the quarter, obviously, our credit card fees are variable based on price and volume. So that was significantly higher. But that is also related to the additional volumes we brought on with the acquisitions and the additional credit card fees there. So it's really -- it's a mixture of the majority of the acquisitions.

And then on top of that we are seeing some higher salaries at the site level year-over-year. We've seen pressure on employment as I think every retailer has. So we had to increase some of our starting salaries on an hourly basis year-over-year. So that's a part of it, but the majority of it is related to the acquisitions.

Right. Thanks a lot for the time guys. Good luck in the quarter.

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to Mr. Slifka for closing comments.

Thank you for joining us this morning. We look forward to keeping you updated on our progress. Stay well and enjoy the remaining weeks of summer. Thanks everybody.

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