Global Partners LP

Good day, everyone, and welcome to the Global Partners Second Quarter 2020 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slivka, Chief Financial Officer, Ms. Daphne Foster, Chief Operating Officer, Mr. Mark Romain, and Executive Vice President and General Counsel, Mr. Edward Fanuil. At this time, I'd like to turn the call over to Mr. Fanuel 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, 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 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 any guidance ranges if provided. 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 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 please allow me to turn the call over to our President and Chief Executive Officer, Eric Sliska.

Thank you, Edward. Good morning, everyone, and thank you for joining us. Let me begin this morning by recognizing our team for their outstanding work during the past quarter. From our store associates and managers to our terminal employees to the staff in our Waltham and Brantford offices who have successfully transitioned to working remotely. While the economic environment remains challenging, I'm exceptionally proud of the way we have adapted to this new way of doing business during the pandemic. Our team has eagerly embraced our COVID-19 related procedures and safety protocols, ensuring the health and wellbeing of our guests, customers, and one another, while keeping our retail locations and terminals fully operational to deliver fuel, food, and other essential goods and services. Turning to our results, we delivered strong results in the second quarter, reflecting the extreme contango market structure. Our terminal network enabled us to take advantage of a dramatic shift in the forward product pricing curve, leading to a 73.5 million increase in wholesale product margin from the same period last year. It's important to keep in mind that in Q1 of this year, our wholesale product margin declined by nearly 30 million year over year. Those Q1 results reflected a number of factors, including the steepening forward curve caused by the rapid decline in fuel prices. Through the first half of 2020, our wholesale product margin is up about 44 million versus the same period a year earlier. In our GDSO segment, the gasoline distribution portion of the business benefited from higher retail fuel margins that more than offset a decrease in volume. We sold about 132 million fewer gallons of gasoline in the second quarter of this year than the comparable period in 2019. That reduction is attributable in part to a significant drop in commuter traffic due to COVID-19. Margins, however, were strong, increasing 62% over the same period in 2019. I know that the question on everyone's mind is, what do you expect going forward? Quite frankly, there's still too much uncertainty to give you a definitive answer. Our business, like many others across the country, is navigating the economic downturn created by the worst public health crisis in a century. As Fed Chairman Powell said last week, the economic path forward is uncertain and will depend on the ability to keep the coronavirus in check. I agree with that assessment. As we hit the midway point of summer, it's clear that people are not flocking to the airport to jet off to destinations across Europe and the Americas, but they are getting in their cars, they are renting RVs, and they are driving. not at the same pace they took to the road from July through September of last year. All of those Northeast consumers who jump into their vehicles for day trips and weekend getaways are good for our business, helping to partly offset the decline in vehicle miles traveled since the outset of the pandemic. That being said, what happens when summer ends and vacations are over? According to industry experts, 30% of retail gasoline demand is related to commuting for work. I do not believe this will return in full for the seeable future, particularly as more people work remotely. We are seeing a slight uptick in transportation fuels volumes, customer counts, and convenience store sales as businesses throughout our region begin to reopen. However, business activity is still below pre-pandemic levels. In comparison with July 2019, in July 2020, retail gas volume was down mid-teens on a percentage basis, and convenience store sales were down less than 10%. From a margin standpoint, since the end of Q2, fuel margins in our GDSO segment have remained above the prior year. But even with a modest improvement in business, we're still extremely cautious in light of the current environment. Given ongoing questions about the extent and duration of COVID-19 and the potential imposition of more restrictive conditions on travel and previously permitted reopenings, we cannot predict the impact that the virus will have on general economic and financial conditions, and by extension, its effect on our business. In light of that, we're not providing guidance for 2020. Turning to our distribution, in light of a strong second quarter performance last week, we announced a 6.5 set increase in the quarterly cash distribution on our common units to $45.875 per unit, or $1.83 on an annualized basis. The distribution will be paid August 14 to unit holders of record as of the close of business on August 10th. Before handing the call to Daphne, I want to let you know that we've recently signed a long-term contract with a leading downstream energy company to throughput renewable diesel through our retail and waterborne west coast, sorry, through our rail and waterborne terminal on the west coast. Over the past several years, the terminal has been transloading ethanol for third parties for export. We expect to begin receiving renewable fuel at the terminal this fall. We're excited about partnering with the customer to support and advance the growing renewable fuels market. Now let me turn the call over to Daphne for the financial review. Daphne?

Thank you, Eric. As Eric noted, the primary driver for our Q2 results was the significant recovery in the supply-demand imbalance at the end of the first quarter. The forward product pricing curve was in extreme contango at the start of the quarter and and then flattened, providing an extraordinary benefit to our wholesale segment product margins. Second quarter 2020 net income was $76.3 million compared with $14.5 million for the same period of 2019. Adjusted EBITDA was $126.6 million in the second quarter of 2020 versus $62.8 million in the year earlier period. DCF was 95.8 million in this year's second quarter, compared with DCF of 28.1 million in the same period of 2019. Trailing 12-month distribution coverage at the end of the second quarter was 2.4 times. After factoring in distributions to the preferred unit holders, that coverage was 2.3 times. Volume in the quarter declined 450 million gallons to 1.2 billion, compared with the same period of 2019, with decreases across all segments. In the wholesale segment, volume declined 25%, or 260 million gallons, due to decreases in gasoline and gasoline blend stocks, partially offset by an increase in distillates and residual oil, in part due to cold weather, which was 42% colder than last year and 18% colder than normal. Volume in our GDSO segment declined 32%, or 132 million gallons, reflecting the decline in automobile travel due to the impact of COVID-19. And volume in our commercial segment declined 32%, or 58 million gallons, due to declines in both gasoline and bunker fuel. Turning to our segment margins, GDSO product margin was essentially level at 145.6 million compared with 145.4 million in the second quarter of 2019, with higher fuel margins more than offsetting both the decline in fuel volume and the decline in traffic at the C-stores. The gasoline distribution contribution to product margin increased 9 million to 96.8 million in the second quarter due to higher fuel margins, which increased 13.3 cents per gallon to 34.0 cents per gallon from 21.4 cents per gallon in the second quarter of 2019. While volumes in April were off year-over-year more than 50%, they increased each month during the quarter, with June volume off a little more than 20%. Station operations product margin, which includes convenience store sales, sundries and rental income declined $8.8 million to $48.8 million, primarily due to less foot traffic at our C-stores. In April, our C-store sales were off more than 20% year over year, but similar to volume trends, have increased each month during the quarter, with June sales off less than 10%. At the end of the quarter, our GDSO portfolio consisted of 1,532 sites, comprised of 277 company-operated stores, 257 commissioned agents, 211 lessee dealers, and 787 contract dealers. Looking at the wholesale segment, second quarter 2020 product margin increased 73.5 million to 111.5 million, which, as we've discussed, reflected the flattening of the forward product pricing curve in all products. This is in contrast to the rapid steepening of the forward curve during March that negatively impacted wholesale product margins in the first quarter, resulting in a Q1 decrease of $29.9 million year-over-year. The shift in the curve during 2Q20 was dramatic. For example, in last quarter's conference call, we pointed out the steep contango curve in distillates, which was $0.185 contango through year-end. By the end of June, that curve had flattened to just under $0.08. The gasoline curve had an even more significant move from $0.20 contango at the beginning of April to $0.12 backwards at the end of June. As a result, gasoline and blend stocks product margin increased $28.4 million to $57.8 million. Crude oil product margin increased $10 million to $9.2 million. product margin from other oils and related products was up 35.1 million to 44.5 million. While a much smaller contributing factor, distillate's product margin was positively impacted during the second quarter by colder weather. Commercial segment product margin declined 1.5 million to 3 million, primarily due to a decrease in bunkering activity with less ship traffic related to the pandemic. Turning to expenses, operating expenses were down $9.7 million to $76.7 million in the second quarter of 2020 due to lower credit card fees caused by the reduction in volume and in price and due to the planned reduction in most controllable expense categories in response to COVID-19. The sale of sites also contributed to the reduction in expenses. SG&A expenses were up $18 million to $59 million in the second quarter, primarily reflecting a $14.8 million increase in accrued discretionary incentive compensation, increases in professional fees, and expenses associated with the pandemic, such as providing PPE to employees and making physical and operational adjustments to our terminals and stores to comply with federal and state directives. Interest expense of $21.1 million in the quarter was down $2 million year over year due to lower average balances on our credit facilities and lower interest rates. This decline more than offset the $.7 million write-off of deferred financing fees associated with the amendment to our credit agreement in May 2020. CapEx in the second quarter was approximately $10 million, consisting of $5.5 million of maintenance CapEx and $4.5 million of expansion CapEx, primarily related to our gas station business. You will recall that at the outset of the second quarter, we took certain steps to increase liquidity and create additional financial flexibility given the uncertain business environment. These steps included a 25% decrease, 52 cents on an annualized basis, to our quarterly distribution and our common units for the period from January 1st, 2020 to March 31st, 2020. In an abundance of caution, we borrowed $50 million under our revolving credit facility, which was included in cash on our balance sheet. In addition, we reduced planned expenses in 2020 capital spending and amended our credit agreement to provide temporary adjustments to certain financial covenants. Given the stronger than expected second quarter performance, we have reversed some of those actions. We paid down our revolving credit facility with the $50 million of cash on hand, and we raised our quarterly distribution by 26 cents on an annualized basis. In addition, we are increasing our planned 2020 capital spending. We now expect maintenance capital expenditures of approximately $45 to $55 million, and expansion capital expenditures, excluding acquisitions, of approximately $30 to $40 million in 2020, relating primarily to investments in our gas station business. Leverage, which is defined in our credit agreement as funded debt to EBITDA, was approximately 3.1 times at the end of the second quarter and reflects the paydown of the $50 million. As of June, we had total borrowings outstanding of $404.7 million under our $1.17 billion credit facility, including $188 million under our revolving credit facility and $216.7 million under our working capital facility. Before I turn the call back to Eric, I want to let you know that on August 13, we will be meeting with investors at the city one-on-one midstream energy infrastructure virtual conference. If you're participating, we look forward to the opportunity to meet with you. Eric?

Thanks, Daphne. In summary, the impact of COVID-19 continues to cloud the outlook for our markets, making it difficult to forecast demand. While we believe that our integrated business model, diversified product portfolio, and versatile asset base provide us with the operating and financial flexibility, our performance in the quarters ahead will be affected by the extent and duration of the pandemic. Now, Daphne and I will be happy to take your questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. One moment while we poll for questions. Our first question comes from the line of Ned Baramult with Wells Fargo. You may proceed with your question.

Hi, good morning. Thanks for taking the questions. Could you maybe talk about the Board's decision to increase the distribution given the uncertain environment we're in? And also, maybe could you provide your thoughts on delivering the business further to potentially be better prepared from a total leverage perspective for periods of lower demand and or volatile results?

Sure. Good morning, Ned. You know, obviously the board looks at the distribution every quarter and considers a number of factors. You know, remember we did cut the distribution 25% last quarter due to the uncertainty. And while there's still uncertainty, I think we have, or they have a better understanding. We had a remarkable second quarter with a trillion 12-month coverage of 2.3 times. And so looked at our performance year-to-date, factored in various future scenarios, you know, considered our leverage at 3.1 times. and where it might land in the future, and looking at our CapEx needs and felt that it was appropriate to give back 50% of what we took away last quarter. In terms of leverage, you know, I think 3.1 for us from a funded debt to EBITDA standpoint, obviously it doesn't include the working capital, which, as you know, expands and contracts just based on commodity price more than anything else. You know, I think we are well positioned from a leverage standpoint at this point.

Got it. And then My second question is on the West Coast renewable diesel contract. Could you talk about volumes, EBITDA contributions, or any potential capital investments needed?

I think at this point we're just going to stay a little quiet on it. We have just signed it up and not giving any direction in terms of the magnitude of that contract.

Yeah, Jeff, if I could just... This is Mark. If I could just add to that, because I think, Ned, you asked about CapEx requirements, and the terminal is set to handle the product now, so with no further investment. Although I will say there is, you know... The ability to handle renewable diesel does give us, you know, which is a recent addition to the permit, does give us opportunity to, you know, expand our pursuit of more of that type of business. And certainly the terminal has the ability. We have the ability to expand the terminal. So if we're able to generate more interest in that, you know, the opportunity exists. But the contract that we recently signed does not require any capex.

Let me add one other thing there. It's Eric Flifka, sorry. But we did have to clean the existing tanks out to carry the different products, so there was an expense that was associated with that. You know, what I would say is it is not a material increase or change in the company's earnings statement. or cash flow from that facility, right? It's a good deal because it's a term deal, so it's secure. And there is a term with it that has got some length to it. And so from a sort of conservative safety standpoint, it's a good transaction for us. Thank you very much.

That's all I had today.

Our next question comes from the line of Will Hardy with RBC. You may proceed with your question.

Good morning, all. I hope all are safe. Thank you for a great quarter and the dividend increase. The question I have is, given the speedway transaction for the marathon recently, what's the market like for you all out there, either buyers or sellers, for, you know, convenience stores?

Yeah, you know, what we've always said is that what's interesting about that market is it's made up of many, many, many operators, many individual operators, small companies, family-run businesses, and there's almost always a transaction going on somewhere across the country. That particular transaction happens to be one of the biggies. and so it's unique from that standpoint, and obviously it went at a big dollar number, but in terms of the M&A market, the M&A market continues to be busy, and there are companies that are always talking about doing one thing or another, and obviously we continue to look for potential acquisitions to grow the business.

Well, I want to tell you all congratulations again. Every time there was an auditory opportunity that has appeared in the last five or six years, you all seem to do an incredibly good job on it. So thank you again.

Thank you very much for those kind words and stay healthy and safe.

Ladies and gentlemen, this concludes today's question and answer session. I would like to turn the floor over to Mr. Slipka for closing remarks.

Thank you for joining us this morning. We look forward to keeping you updated on our progress. Stay safe and enjoy the rest of your summer, everyone. Thank you so much for following us.

This concludes today's call conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.