Global Partners LP

Good day, and welcome to the Global Partners Third Quarter 2021 Earnings Conference Call. Today's call is being recorded. With us from Global Partners are President and Chief Executive Officer Eric Slipka, Chief Financial Officer Mr. Gregory Hansen, Chief Operating Officer Mr. Mark Romain, and Acting General Counsel, Secretary and Vice President of Mergers and Acquisitions Mr. Sean Geary. Now let me turn the call over to Mr. Geary. Please go ahead, sir.

Good morning, everyone. Thank you for joining us. 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. 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, demand for convenience store operators, 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 the 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 the services we provide, and uncertainty around the impact of the duration of federal, state, 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. Our assumptions and future performance are subject to a wide range of business risks and uncertainties. In addition, such performance is subject to risk factors, including but not limited to those described in our files 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, it is my pleasure to turn over the call to our President and Chief Executive Officer, Eric Sliska.

Thank you, Sean. Good morning, everyone, and thank you for joining us. By every measure, Q3 was a strong quarter for global partners as we posted margin gains across all three segments of our business. Our Q3 performance was driven by a variety of factors, all connected by a unifying theme. The resilience of our integrated business model, the way we create value through our strategically located terminal network, diverse portfolio of liquid energy products, and our retail fuel and convenience market locations. Our GDSO segment sustained its strong momentum in the third quarter. With COVID-19 restrictions eased, the demand environment improved markedly from the third quarter of 2020. Margins and volume in our GDSO segment posted double-digit percentage growth in the quarter despite a significant increase in wholesale fuel prices year over year. We saw not only more cars at the pumps, but also a nice uptick in activity across our convenience market portfolio. On a year-over-year basis, our wholesale segment benefited from favorable market conditions in gasoline and distillates in Q3, while our commercial segment saw improved volumes and margins. Consistent with our M&A strategy, we completed the acquisition of 14 convenience stores and Citgo-branded gas stations, predominantly in Vermont. With respect to our planned acquisition of Consumers Petroleum of Connecticut, we are still in the process of finalizing regulatory approvals and envision a closing by year end. Our Q3 performance underscores our role as a critical infrastructure company. Every day we provide the essential products and services people need to fuel their vehicles, heat their homes, run their businesses, and add convenience to their lives. Like other businesses, we encountered spot supply chain disruptions and labor shortages. We were able to mitigate these issues where possible, minimizing impacts, and our third quarter results were strong. Turning to our distribution, last week the Board declared a quarterly cash distribution of $57.50 per common unit, or $2.30 on an annualized basis, on all outstanding units for the period from July 1st to September 30th, 2021. The distribution will be paid November 12th to unit holders of record as of November 8th. We continue to play an active role in advocating and planning for the expansion of liquid renewable fuels in our markets. We are in the process of upgrading five terminals for expanded biofuel capacity and are finishing the installation of our first microgrid. The microgrid is being installed at our all-town fresh location in Ayer, Massachusetts. With that, now let me turn the call over to Greg for his financial review. Greg?

Thank you, Eric, and good morning, everyone. As Eric noted, we delivered a strong third quarter across all three segments, resulting in a $33.9 million increase in gross profit, 20% higher year over year. We capitalized on favorable market conditions in the wholesale segment and the improving demand environment in our retail, gas, and convenience store business, as COVID restrictions continued to ease and driving increased. Net income for the third quarter of 2021 was $33.6 million, compared with $18.2 million for the same period of 2020. Adjusted EBITDA increased to $79.2 million for the third quarter, compared with $65.9 million in the same period in 2020, while DCF was $49.7 million, compared with $31.3 million. Please note that EBITDA, adjusted EBITDA, and DCF for the 2021 period include a $3.1 million expense resulting from the retirement of our former Chief Financial Officer in August. TTM distribution coverage as of September 30, 2021, was 1.2 times, or 1.1 times, after factoring in the distribution to our preferred unit holders. Turning to our segment detail, GSO performed well, with higher year-over-year fuel volumes and increased convenience store activity, growing Q3 product margin to $177.7 million from $158.9 million. The gasoline distribution contribution to product margin was up $11 million to $112.4 million from $101.4 million. Fuel margins in Q3 came in at approximately $0.27 per gallon in the quarter, unchanged from a year earlier, while retail fuel volume increased to 417 million gallons from 376 million gallons a year earlier, up 11%. Station operations were also strong, contributing $65.3 million to product margin, up $7.8 million from the third quarter of 2020 due to an increase in activity at our convenience stores. At the end of Q3 of 2021, our GDSO portfolio consisted of 1,597 sites comprised of 295 company-operated stores, 291 commissioned agents, and 203 lessee dealers and 808 contract dealers. Looking at the wholesale segment, third quarter product margin was $42.3 million, up from $28.9 million, primarily reflecting more favorable market conditions in gasoline and distillates. Wholesale gasoline and gasoline blunt stocks contributed $22.5 million, up from $17.1 million. Other oils and related products increased to $22.6 million from $14.5 million. Product market from crude oil was negative $2.8 million in the third quarter, of 2021 versus negative 2.7 million a year earlier. Turning to the commercial segment, product margin increased 3.9 million from 1.5 million, primarily due to an increase in volume sold and improved margins. Looking at expenses, operating expense totaled 92.1 million for the quarter compared with 82.2 million for the prior year period. The primary driver was higher credit card fees resulting from higher retail prices and higher volumes. Two other factors also contribute to the variance, an increase in salaries and benefits related to our convenience store employees due to a combination of higher wages and hours worked, an increased rent expense related to our additional sites in the Philadelphia area. We've added more than 30 sites there since mid-2020. SG&A was $54.7 million for the third quarter, up from $43.2 million in the prior year period. The increase primarily reflected higher incentive compensation and wages and benefits. As I noted, we incurred a $3.1 million expense for compensation resulting from the retirement of our former chief financial officer in the quarter. Interest expense for the quarter was $19.7 million, down from $19.9 million, partly due to lower average balances on our revolver and to lower interest rates. CapEx in the third quarter was $26.8 million. This consisted of $9.8 million in maintenance CapEx, bringing the year-to-date total to $28.1 million. and $17 million in expansion CapEx, excluding acquisitions, bringing the year-to-date total to $37.4 million. The majority of the CapEx relates to our gas station business. Given where we stand through the first nine months of 2021, we expect maintenance CapEx to come in at the low end of our full-year guidance range of $45 to $55 million, and continue to expect expansion CapEx of $50 to $60 million for the year, with the majority consisting of investments in our gasoline stations and convenience stores. I will note a portion of this spend will be dependent on the availability of equipment, which is subject to supply chain concerns. Our balance sheet remains strong. On a TTM basis, leverage defined in our credit agreement as funded debt EBITDA was approximately 3.5 times at the end of the third quarter. We continue to have ample excess capacity under our credit facility. As of September 30th, 2021, total borrowings were $296.3 million, consisting of $252.9 million under our $800 million working capital revolving facility, and $43.4 million outstanding under our $450 million revolving credit facility. Looking at our upcoming investor calendar, over the next several weeks, we will be participating in conferences hosted by RBC Capital Markets, B of A Securities, and Wells Fargo Securities. If you're attending any of these events, we look forward to meeting with you. If you'd like to arrange a one-on-one, please email our investor relations team at glp at investorrelations.com. Now, let me turn the call back to Eric for closing comments.

Thanks, Greg. Looking ahead, we're well positioned both financially and operationally as we prepare to close out 2021. While we remain mindful about the uncertainty of COVID-19, we are encouraged by the improved demand environment in our business. With global supply shortages and a sharp rise in prices creating challenges, For natural gas heading into the winter months, our industry will have the opportunity to reinforce the benefits of liquid fuels as a reliable and cost-effective source of energy. Now, we 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 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, if you would like to ask a question, press star 1 on your telephone keypad. One moment please while we poll for questions. Thank you. Our first question comes from the line of Teresa Chen with Barclays. Please proceed with your question.

Good morning. I wanted to ask about the strength in your GDSO segment on the margin in particular, especially on the heels of rising commodity prices during the quarter. Can you give us a little bit more color on what drove that?

Hey, good morning, Teresa. It's Mark. You know, I think we've talked about this, I think, throughout the year, and we've had rising prices uh, pretty much since the beginning of the year. And typically that, that does tend to compress fuel margins, but we've seen margins stay pretty resilient despite the increase in, in cost. And so that's obviously been a key driver for us. And then in addition to that, we've seen as, as Greg mentioned, we've seen, you know, some healthy return in, uh, in sales to both, uh, fuel sales and store sales and, and, uh, So that's probably the other piece of it. But a big piece of that is the resiliency of margins throughout this increase in our base costs.

So looking forward, I guess, Mark, do you expect this to continue? Do you think that as volumes have normalized from the pandemic trough that this incremental margin could be competed away?

Yeah, it's impossible to say, Teresa. I'm not sure, you know, what to expect in the future. I think, you know, we know what we've seen this year, and that trend continues. You know, where it lands, I don't know.

Okay, thank you.

Our next question comes from the line of Selman Ackel with Stiebel. Please proceed with your question.

Thank you. Congratulations on a very nice quarter. It was pretty impressive. A couple quick questions here. So in regards to your terminals for biofuels, can you just say if you're receiving a premium for those terminals at all for moving product through there, or is it just more you're seeing demand because you're doing biofuels through those terminals?

Solomon, it's Mark. Good morning. I think it's a combination of both. I think the more products we can handle, we get paid for storing and handling products and redistributing. As we're able to introduce more biofuel and higher biofuel blends, not every terminal can handle that. The harder it is to handle, the more margins tend to expand. That being said, it's a very tight margin business as it always has been. So, you know, we look at this twofold. We look to capture, you know, whatever opportunity we can in the front of the market, but we're also setting ourselves up for, you know, perhaps higher volumes of renewable fuels to flow through our system as, you know, as markets may transition in the future. So the projects are kind of twofold, obviously, to capitalize on existing markets, but to set ourselves up for possible changes in the marketplace as well.

It's Eric Flitka. Those changes in the market could simply be consumer demand driven, or they could be regulatory, right? And making sure that we're best positioned to handle those fuels is about setting ourselves up for what we think is coming in the future. The fact of the matter is our Project Carbon Freedom has helped to support regulations in the state of Rhode Island and the state of Connecticut and a proposed regulation in the state of New York for outside of the existing requirement for bio blends throughout the rest of the state of New York. And so what we're really trying to do is just make sure that we are positioned to handle as broad array of fuels as there is current demand for, but also the demand that's coming. In order for states and government to reach their greenhouse gas goals, You know, they're going to have to take the fuels that we carry today and change them somewhat. And I believe that directionally and broadly, our industry is in the best position to take these liquid fuels and distribute them, and they'll have a lower carbon footprint. So we think it's really the best way for government to help support the transition from to lower emission fuels, right? And it's our goal to make sure that we can deliver that as those requirements come in.

Understood. Thank you. Before we wrap on that one, can I just add, because I'm thinking about why you might have asked that question, and I would not expect this to be a material driver of the margin structure on the wholesale side at the moment. Again, as we introduce higher blends, it may have a more dramatic impact, but at the moment, I wouldn't expect this to be a material driver.

Understood. Thank you. So you referenced seeing more traffic, and I'm just curious, your premium stores, all towns, do you see them significantly outperforming your other stores in this environment?

Uh, that's a, that's a good question. Um, and it's, it's, I'm not sure. Are you talking about our new, our all town fresh concept stores?

Yes.

Yeah. So that we have at the moment, we have eight of those stores. Um, you know, some were open, they were open at various points in time over the last two, two and a half years, some open, you know, during the pandemic, um, which is, um, which is a challenge for anybody. I think we've seen a lot of positives out of those stores. Keep in mind, those stores are a lot different than anything else we operate in the sense that all eight of them have full made-to-order kitchens with high-quality food service. So they're quite a bit different than what we operate. So the comparison is a little bit difficult because we have the you know, we have the food service element that we don't have in many of our other stores. But I would say, you know, on balance, we have seen some really positive signs out of this. We're also trying to figure out the model as we go, right? It is a concept, and we're learning from different things that we do, some things that are working, some things that aren't working. But I would say that directionally, we're pleased with how they're performing. And, you know, we're taking learnings from each store that we open and trying to apply them to whatever comes next, including, you know, our expectation is what we will gain, the learnings that we gain from these concepts, we expect we will be able to apply a lot of those features and concepts to our existing portfolio.

And I think we would hear. Was your question also around sort of highway locations directionally versus locations that are in the middle of town?

No. I mean, really what I was... getting at i mean it seemed like traffic was picking up and i'm just wondering are these stores having a significantly higher roi compared to some of your other stores that you have and then because there's such a large you know the difference in capital cost between the two you know is it paying off that's really where i was going with it or thinking about yeah i mean i would say broadly the stores have been busier inside and the gas is picked up outside

I would say the outperformers more recently have been those highway locations, right, because they were probably off the most, particularly commuter locations, but they were great real estate assets right off the highways. They were probably injured a little bit more during the pandemic, but they really started to come back on in the last quarter, right?

That's helpful. Thank you for that. Everyone, you know, is thinking about inflation's coming. It's here. You guys are experiencing it. Can you just remind us what levers you guys can pull in order to try to help offset it?

Yeah, I mean, some of the things that we're doing, you know, are self-checkouts, by example, and try and roll that out to as many places you can in the chain. That takes some pressure. That's on the cost side. On the products that you're selling, you're trying to maintain your margins or increase them because the costs are higher and pass them through. So at the end of the day, if there's an increase in the cost of staffing a store, everybody has that pressure. And so everybody's got to figure out how to deal with it and how to run as efficiently as you possibly can, you know, but also then pass through, um, that cost and that cost will come through in margin, but also the cost of the goods arising as well. Right. So, so you're getting it all around, but I think the good news is, is all of your competitors are going through those same increases. and most of the competitors are very smart, and they realize there's an increase in cost, and in order to continue, they're increasing their margins as well.

Got it. And then just to last for me, any comments you can make on the acquisition market and kind of what you're seeing out there?

You know, it's still very busy. There's lots going on. We've seen lots of transactions, and I think the company continues to position itself to take advantage of those opportunities as they come down the pipe.

Okay. Thank you so much.

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

Thank you for joining us this morning. We look forward to keeping you updated on our progress. Thanks, everybody, and have a great day.

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