Global Partners LP

Good day, everyone, and welcome to the Global Partners First Quarter 2020 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions at the end of the program. With us from Global Partners are President and Chief Executive Officer, Mr. Eric Sliska, Chief Financial Officer, Ms. Daphne Foster, Chief Operating Officer, Mr. Mark Romain, and Chief and Executive Vice President and General Counsel, Mr. Edward Fanuel. At this time, I'd like to turn the call over to Mr. Fanuel. Thank you. You may begin.

Thank you. 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, estimates concerning the future financial and operational performance of global partners. Forward-looking statements 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, utilization of assets and facilities, weather, credit markets, the regulatory and permitting environment, and the forward product pricing curve, which could influence quarterly 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 the COVID-19 pandemic, uncertainty around the timing of an economic recovery in the United States, which will impact the demand for the products we sell and the services we provide, uncertainty around the impact of the COVID-19 pandemic to our counterparties and our customers and their corresponding ability to perform their obligations, and or utilize the products we sell and or services we provide, uncertainty around the impact and duration of federal, state, and municipal regulations and directives related to the COVID-19 pandemic, and 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 and our assessment of historical trends. Because our assumptions of future performance are subject to a wide range of business risks and uncertainties, we can provide no assurance that actual performance will fall within any 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, my pleasure, please allow me to turn the call over to our President, and Chief Executive Officer, Mr. Eric Slifka.

Thank you, Edward. Good morning, everyone, and thank you for joining us. In these difficult and uncertain times, I hope that you and your families are staying safe. Before viewing the quarter, I want to begin by thanking the people across our organization for their unyielding commitment to our guests and customers. First and foremost, we are a critical energy infrastructure business. What I'm proudest of is the 3,800 global employees on the front lines, including terminal operators, convenience store associates, store managers, and office staff. Throughout this crisis, they have come through for those who are also on the front lines, first responders, doctors, nurses, truck drivers, and others by safely delivering fuel as well as other daily goods and services at a time when much of the country was under stay at home orders. I also want to talk about the measures we took early on to get ahead of the COVID-19 from a health and safety perspective. Specifically, we proactively mobilized our crisis incidents management team in anticipation of the possibility that the virus could strike in the regions where we operate. Our real-time crisis management exercises enabled us to successfully execute our business continuity planning in a measured and deliberate manner. In addition, we have transitioned our office staff to working remotely, a move that has been successfully implemented and we believe has long-term bandwidth. We also put procedures in place across our terminals, stations, and retail stores with a primary focus in mind, continuing to provide essential products and services while prioritizing the safety and wellbeing of our employees, guests, customers, and suppliers in the communities where we do business. Today, some eight weeks after COVID-19 first made its present felt, I'm proud to say that our locations are open, operating, and fulfilling that commitment. To navigate the challenges of this unprecedented environment, We have implemented a number of operational measures at our stations, stores, and terminals, from providing gloves and masks for employees to putting in place social distancing procedures, all with an eye toward keeping our team members, guests, business, and suppliers safe. We also have taken a number of actions to provide additional financial flexibility in this challenging environment. These include reducing the quarterly distribution on our common units, amending our credit agreement, drawing on our revolver and putting that cash on our balance sheet, and reducing planned expenses and 2020 capital spending. Looking at our first quarter, in light of the circumstances, we were pleased with our Q1 performance. In our GDSO segment, gasoline distribution product margin was up 23% year over year. This increase reflected the decline of wholesale gasoline prices due to COVID-19 and the price war between Saudi Arabia and Russia. While the decline in wholesale prices negatively impacted our wholesale segment product margin in the first quarter, our excess storage capacity in our terminal network positioned us to take advantage of the contango environment resulting from the steepening forward product pricing curve. From mid-March into April, we saw reductions of more than 50% in gasoline volume and more than 20% in convenience store sales. Fewer cars on the road translates to fewer guests at our stores, resulting in fewer sales at the register. Social distancing guidelines and directives limiting food operations at our convenience stores have also contributed to a reduction in in-store traffic and sales. Fuel margins in our GDSO segment declined in April, but still remained strong. Over the past few weeks, we have seen a slight uptick in volume, customer count, and convenience store sales. We could reasonably expect that increase to continue as states begin to lift restrictions and allow nonessential businesses to gradually reopen. It's a promising sign, but we remain cautious given the many variables and uncertainties associated with COVID-19. I think it's fair to say that our business has changed in the past eight weeks. These changes will be with us for an indefinite period, and we would certainly expect to see an increase in costs to comply with both governmental directives and other voluntary measures we adopt to support the safety of our employees, customers, and suppliers. That being said, we think that over the long term, we're advantaged by having a strong and integrated asset base. And while the near-term outlook remains uncertain, we believe that our diversified product portfolio and significant storage capacity provide operating and financial flexibility that will enable us to weather the current market challenges and capitalize on opportunities as market conditions improve. Now, let me turn it over to Daphne to review our financial results in detail. Daphne?

Thank you, Eric, and good morning, everyone. As you've heard, our first quarter results reflected in part pandemic-related demand destruction and the price war between Saudi Arabia and Russia, which caused a rapid decline in prices. This decline had a positive impact on fuel margin in our GDSO segment, but a negative impact on the product margin in our wholesale segment. In addition, significantly warmer weather during this year's first quarter negatively impacted margins of our weather sensitive products. First quarter 2020 net income was $3.3 million compared with net income of $7.1 million for the same period of 2019. Q1 2020 net income reflects recognition of a $6.3 million tax benefit in connection with the carryback of losses under the CARES Act for which we expect to receive cash refunds of approximately $15.8 million. Adjusted EBITDA was $45.4 million in the first quarter of 2020 versus $58.6 million in the year-earlier period. DCF was $22 million in this year's first quarter compared with DCF of 27.8 million in the same period of 2019. Trailing 12-month distribution coverage at the end of the first quarter was 1.33 times. After factoring in distributions to the preferred unit holders, that coverage was 1.23 times. Turning to our segment details, GDSO product margin was 155.9 million, up 17.5 million, from $138.4 million in the first quarter of 2019 due to higher fuel margins. The gasoline distribution contribution to product margin increased $19.8 million in the quarter to $107.2 million, reflecting the rapid decline in wholesale gasoline prices, which fell 97 cents per gallon between the beginning and the end of March. The average fuel margin per gallon increased 7.5 cents to 30.5 cents from 23 cents in the first quarter of 2019. Volume declined 28 million gallons in part as states restricted travel and issued stay-at-home or similar-like directives. Station operations product margin, which includes convenience store sales, sundries, and rental income, declined 2.4 million, to 48.6 million, also in part due to the pandemic and reduced in-store foot traffic. At the end of the quarter, our GDSO portfolio consisted of 1,536 sites comprised of 283 company-operated stores, 258 commissioned agents, 214 lessee dealers, and 781 contract dealers. Looking at the wholesale segment, First quarter 2020 product margin declined $30 million to $4.9 million due to less favorable market conditions, including the steepening forward product pricing curve caused by the rapid decline in prices. The resultant contango at the end of March was significant for all products we handle. By example, at the end of March in distillates, the December 2020 price for ULSD Futures declined was approximately 18 cents per gallon more than the May 2020 price for ULS East Futures. Storage capacity in our terminal network positions us to be able to take advantage of this contango environment. In Q120, gasoline and gasoline blend stocks product margin decreased $17.9 million to $9.1 million in part due to the rapid price decline and steepening forward curve. In contrast, during the first quarter of 2019, gasoline product margin benefited from tight supply due in part to planned and unplanned refinery outages. Product margin from crude oil was negative 4.4 million and improvement from negative 6.2 million in the comparable period of 2019 in part due to lower rail car related expenses. Product margin from other oils and related products was 0.2 million down $13.9 million from Q1 2019. The decrease was primarily due to less favorable market conditions, largely in residual oil, but also in distillates, again, in part due to the steep price decline caused by COVID-19 and geopolitical events. Significantly warmer weather in the first quarter of 2020 than in Q1 2019 also adversely affected product margin in other oils and related products. Temperatures in the first quarter of 2020 were 19% warmer than normal and 15% warmer than the year earlier period. Product margin in the commercial segment decreased 0.5 million to 5.9 million. Turning to expenses, operating expenses were down 0.4 million to 82.5 million in the first quarter of 2020. SG&A expenses were down 0.2 million to 40.9 million in the first quarter. reflecting lower incentive compensation and professional fees, offset by increases in wages and benefits, and other SG&A expenses primarily related to our gas station and convenience store business. Interest expense of $21.6 million in the quarter was down $1.3 million year over year due to lower average balances in our credit facilities and lower interest rates. CapEx in the first quarter was approximately $11.7 million, consisting of $7.3 million of maintenance capex and $4.4 million of expansion capex, primarily related to our gas station business. As Eric noted, we have proactively taken a number of steps to maintain our financial flexibility in response to the uncertain business environment. These steps include a 25% reduction of the quarterly cash distribution on all outstanding common units for the period from January 1st to March 31, 2020. We also have reduced planned expenses, such as discretionary expenses and new hires, and have reduced 2020 capital expenditures. For full year 2020, we currently expect maintenance capital expenditures of approximately $40 to $50 million, compared with our previous estimate of $45 to $55 million. We expect expansion capital expenditures, excluding acquisitions, of approximately $15 to $25 million, compared with our previous estimate of $30 to $40 million. We also, in an abundance of caution, borrowed $50 million under our revolving credit facility that is included in cash on the balance sheet. Therefore, leverage, which is defined in our credit agreement as funded debt to EBITDA, was approximately 4.2 times at the end of the first quarter and includes the incremental $50 million borrowing. Excluding that $50 million, leverage would have been four times. As of March 31st, we had total borrowings outstanding of $451.6 million, including $242.7 million under our revolving credit facility and $208.9 million under our working capital facility. We have entered into an amendment to our credit facility that provides us with temporary covenant relief for four quarters starting June 30th, 2020. With an increase in our combined total leverage ratio covenant, and a reduction in our combined interest coverage ratio covenant. We voluntarily reduced the total facility commitment by 10% from $1.3 billion to $1.17 billion, consisting of a $400 million revolving line of credit down from $450 million and a $770 million working capital line of credit down from $850 million. As noted in this morning's earnings release, Given the uncertainty about the impact of COVID-19 on operations and demand, we are withdrawing our previously issued full-year 2020 EBITDA guidance, which was originally provided on March 6, 2020. In summary, we believe that we are operationally nimble and that our portfolio of assets presents us with opportunities in these uncertain times and volatile markets. With that, Eric and I will be happy to take your questions. Operator?

Thank you. Ladies and gentlemen, we will now be conducting our Q&A session. If you would like to ask a question, please push star 1 on your telephone keypad now. A confirmation tone will indicate your line is in the question queue. You may push star 2 if you'd like to remove your question from the queue. And for any participant using speaker equipment, it may be necessary to pick up your handset before pushing the star key. One moment while we poll for questions. Ladies and gentlemen, we have no questions in queue at this time. I would like to turn the floor back over to Mr. Sliska for closing comments.

Thank you for joining us this morning. We look forward to keeping you updated on our progress. Please, everybody, be safe. Thank you very much.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day.