Global Partners LP

Good day, everyone, and welcome to the Global Partners fourth quarter 2022 financial results conference call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka, Chief Financial Officer, Mr. Gregory Hansen, Chief Operating Officer, Mr. Mark Romain, 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. Thank you for joining us. Today'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. which are based on assumptions regarding market conditions, demand for liquid energy products and convenience store products, the regulatory and permitting environment, the forward product pricing curve, and other factors which could influence our financial results. 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. and which could cause actual results to differ materially from the partnership's historical experience and present expectations or projections. Global Partners undertakes no obligation to revise or update any forward-looking statements. 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 Sluska.

Thank you, Sean, and good morning, everyone. Let me begin by thanking our entire team for the hard work, creativity, and grit that contributed to a strong year for global. For companies across our industry and many others, 2022 was a year of significant challenges, including supply chain constraints, steep commodity price volatility, inflation, a tough labor market, and the war in Ukraine. Our team successfully navigated through these challenges. In addition to the power of our people, our company performance demonstrates resilience of our business model, the strength of our assets, and the value that we deliver for the guests at our gas stations and convenience markets, and the customers at our liquid energy terminals every day. For the fourth quarter, our wholesale segment product margin more than doubled from the same period in 2021 as market conditions and effective management of our inventories amid sustained backwardation in the distillates markets combined to drive strong margin capture. In our gasoline distribution and GDSO segment, we continue to benefit from higher retail fuel margins and increased activity at our convenience markets in part as a result of our recent acquisitions. Our commercial segment also capped 2022 with a strong fourth quarter as bunkering activity remained robust. Consistent with our focus on strategic transactions that strengthen our long-term earnings power, during the year we closed on over $255 million of retail acquisitions. With the purchases of Consumers Petroleum of Connecticut, Miller Oil Co., and Tidewater Convenience, We added more than 60 company-operated convenience markets and related fuel operations, as well as fuel supply arrangements at more than 55 additional sites. The consumer's petroleum acquisition deepened our footprint in the New England region, while the Miller Oil and Tidewater deals expanded our reach into Virginia. The retail fuel M&A pipeline remains very active, and we continue to evaluate potential opportunities that align with our financial and operating objectives. We also continue to focus on optimizing our terminal network. In December, we entered into a purchase agreement with Gulf Oil Limited Partnership to acquire five of Gulf's refined product terminals for approximately $273 million in cash. Located in Connecticut, Maine, Massachusetts, and New Jersey, the terminals have an aggregate storage capacity of approximately 3.9 million barrels in locations that complement our network by making us more competitive in multiple products over a larger geographic base. The transaction is expected to close in the first half of 2023, subject to customary closing conditions, including regulatory approval. Turning to our distribution, in January, the Board declared a fourth quarter cash distribution of $1.5725 per unit on all of our outstanding common units consisting of a quarterly distribution of $63.50 per unit, $2.54 per unit on an annualized basis, and a one-time special distribution of $93.75 per common unit. The distribution was paid on February 14th to unit holders of record as of the close of business on February 8th. In 2022, we made great strides in defining our role in the energy transition. From actively crafting clean fuels policy, to investing in the infrastructure to deliver low carbon solutions, to creating mechanisms for people to lead with ingenuity, we are making progress on our sustainability journey. In the renewable fuels area, we permitted and completed the installation of customizable biofuel systems at four of our terminals and began biofuel supply projects at two additional facilities. We now offer renewable products at half of our 22 owned or controlled terminals. On the EV front, our sustainability group welcomed an electric innovation strategist to evaluate, educate, and guide our strategy in the electric space, including electric vehicle and charger markets. The group has secured more than $800,000 in grants to deploy DCFC EV charging stations at six of our locations and has developed the spec for DCFC stations at new all-town fresh locations. As we continue to invest in optimizing our sites with an eye towards sustainability, we know that the drivers of tomorrow will have different expectations and needs than the drivers of today. To help us understand those needs and envision the fueling infrastructure of the future, we sponsored Fuel of the Future 2030, a student design competition engaging more than 30 teams of undergraduate and graduate students attending schools across nine states. The top five finalists presented their entries and an awards presentation in November. We are thrilled to have learned from the creativity of these bright minds. As part of our work in the clean fuel space, we formed an interdisciplinary team to research and evaluate hydrogen mobility supply and distribution opportunities. As an organization, we have a responsibility to act thoughtfully and sustainably for all of our customers, shareholders, employees, and communities. Building on this objective, this year we published our inaugural corporate social responsibility report which details the progress we have made along that journey. This report is available on our website, and I encourage you to review it. By caring for the environment, empowering people, particularly our employees and communities, and practicing responsible governance, we have formed the foundation for an enduring business that has stood the test of time and continues to thrive. With that, now let me turn the call over to Greg for his financial review.

Thank you, Eric, and good morning, everyone. As Eric noted, diligent planning, effective fuel inventory management, and solid execution by the entire team allowed us to have continued strong performance in the fourth quarter of 2022, closing out a very strong year for the partnership, highlighted by healthy margin contributions from all three segments of our business. Adjusted EBITDA for the fourth quarter of 2022 was $106.9 million, compared with $66 million for the same period in 2021. For the full year, adjusted EBITDA was $485.2 million, compared with $244.3 million in the same period of 2021. The increases for the quarter and full year of 2022 were primarily driven by our wholesale and GDSO segments. Net income was $57.5 million for the fourth quarter of 2022, compared with $19.3 million for the same period in 2021. Full year 2022 net income increased to $35. 362.2 million from 60.8 million in the prior year. DCF was 57.3 million for the fourth quarter of 2022, compared with 30.5 million in the same period of 21. For the full year, DCF was 413.4 million compared with 120.7 million in 21. DCF for 2022 included a net gain of 79.9 million, primarily related to the sale of our rear terminal in June. TTM distribution coverage as of December 31, 2022, including the one-time special distribution, was 3.4 times or 3.3 times after factoring in distributions to our preferred unit holders. Excluding the net gain on the sale of assets, TTM distribution coverage was 2.8 times or 2.6 times after factoring in distributions to our preferred unit holders. Turning to our segment details, GDSO product margin was up 46.1 million in the quarter to 223.2 million. The gasoline distribution contribution to product margin was up 36.2 million to 155.9 million, primarily due to higher fuel margin and an increase in volume sold, partially due to our recent acquisitions. Fuel margins increased 7 cents per gallon to 37 cents from 30 cents per gallon in the fourth quarter of 2021. Although gasoline and diesel prices ended the fourth quarter at almost the same place they began the quarter, Inter-quarter price volatility allowed for periods of strong margin capture. Station operations product margin, which includes convenience store and prepared food sales, sundries, and rental income, rose $9.9 million to $67.2 million from the fourth quarter of 2021. This reflected an increase in activity at our convenience stores, in part due to our recent acquisitions. For the full year, GDSO product margin was up $209 million to $856.6 million, with fuel margins increasing $0.09 per gallon to $0.36 from $0.27 per gallon in the year earlier period. Gasoline distribution contributed $588.7 million of product margin for the full year, up $175 million from 2021. Station operations product margin was $267.9 million for the full year 2022, up $34 million from 2021. At the end of 2022, our GDSO portfolio consisted of 1,673 sites, comprised of 353 company-operated sites, 295 commission agents, 192 VC dealers, and 833 contract dealers. Looking at the wholesale segment for the fourth quarter of 2022, product margin increased $38.1 million to $70.7 million. Product margin from other oils and related products, which includes distillates and residual oil, was up $48.5 million to $59.4 million, primarily due to more favorable market conditions and distillates. Gasoline and gasoline blend stock product margin contributed $14 million, down $9.9 million from the same period in 2021. Product margin from crude oil was negative $2.7 million for the fourth quarter, down $0.5 million from a year earlier. For the full year of 2022, wholesale product margin increased $148.8 million to $287.7 million. Product margin from other oils and related products increased to $190.1 million for the full year, up $124.7 million from 2021, primarily due to more favorable market conditions, largely in distillates. Gasoline and gasoline blend stock product margin increased $20.7 million to $107 million for the full year, primarily due to more favorable market conditions in gasoline during the second and third quarters of 2022. Crude oil product margin improved to a negative 9.4 million, up 3.4 million from a year earlier. Turning to the commercial segment, product margin in the fourth quarter increased 5.1 million year-over-year to 9.9 million. For the full year, commercial segment product margin increased 25.4 million to 41 million. The segment's performance for both periods was driven largely by an increase in bunkering activity. Looking at expenses, operating expenses increased 25.2 million to 118 million for the fourth quarter and 91.7 million to 445.3 million for the full year. The increases were largely associated with our GDSO operations, including our recent acquisitions, reflecting higher credit card fees related to increases in volume and price, higher salary and rent expenses, partially due to greater activity at our stores, and increases in our environmental reserve and maintenance and repair expenses. SG&A expenses increased 23 million in the fourth quarter 80.8 million. On a full year basis, SG&A was up 50.2 million to 263.1 million. The increases in the quarter and the full year were in part due to increases in accrued discretionary incentive compensation and wages and benefits. In addition, in the fourth quarter, we incurred an expense of approximately 7.5 million in connection with an ongoing dispute between us and a landlord at certain of our sites, which we are currently disputing. Interest expense was 19.7 million in the fourth quarter in both 2022 and 2021. For full year 2022, interest expense increased $1.2 million to $81.3 million. CapEx in the fourth quarter of 2022 was approximately $41 million, consisting of $26.6 million of maintenance CapEx and $14.4 million of expansion CapEx, the majority of which relates to our convenience stores. CapEx for the full year 2022 was $106.8 million, consisting of $54.4 million in maintenance CapEx, in line with our guidance of $45 million to $55 million, and expansion CapEx, excluding acquisitions, of $52.4 million, in line with our guidance of $50 to $60 million. For full year 2023, we expect maintenance capital expenditures in the range of $50 to $60 million, and expansion capital expenditures, excluding acquisitions, in the range of $55 to $65 million. relating primarily to investments in our gasoline station business. These current estimates depend in part on the timing of completion of projects, availability of equipment and workforce, weather, and unanticipated events or opportunities requiring additional maintenance or investments. We continue to manage our balance sheet prudently. Leverage, which is defined in our credit agreement as funded debt to EBITDA, was approximately 1.74 times at the end of the fourth quarter. We continue to have ample excess capacity in our credit facility. As of December 31, 2022, total borrowings outstanding under the credit agreement were $252.4 million. This consists of $153.4 million under our $1.1 billion working capital revolving credit facility and $99 million under our $450 million revolving credit facility at 12-31-2022. Looking at our upcoming investor relations calendar, next week, Mark and I will be participating in the JPMorgan 2023 Global High Yield and Leverage Finance Conference. For those of you who are participating, we look forward to meeting with you. Now, let me turn the call back to Eric for closing comments.

Thank you, Greg. 2022 was an exceptionally strong year for global, reflecting the dedication of our incredible team, our vertically integrated assets, Adaptable operating model and strong balance sheet position us well for the year ahead. While macroeconomic uncertainty remains, we continue to focus on driving returns for unit holders through a combination of organic growth, strategic acquisitions, optimization, and innovation. Now, Greg, Mark, 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 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 Greg Brody with Bank of America. Please proceed with your question.

Good morning, guys. Good morning, Greg. Can I start with the wholesale acquisition you announced in late December? Help us think about how much volume that's going to add and how to think about the normalized EBITDA associated with that.

Yeah, sure, Greg. I mean, candidly, we're... We're not offering much more detail on the Gulf acquisition other than what we released in the 8K in December. We are going currently through the FTC process, so we need to respect that process. We are hopeful that that will close before June 30th this year, but again, we're somewhat at the mercy of the FTC process, which we're currently in review of.

Got it. I know you normally don't provide EBITDA guidance, but you – I was curious if you can give us some thoughts on the operating costs side of the business and SG&A is how we should think about this year. Sure. Yeah.

I'll give you a couple sort of helpful data points. I mean, I would say SG&A in the quarter was extremely heavy. You know, one of the things was the legal expense we incurred with the ongoing dispute we have with one of our landlords. That was approximately $7.5 million. We had... 2 million in charitable contributions on the oil donation we did which was really one time and we had a number of incentive comp um you know more one-time things that related to the strong performance in in 2022. you know I'd say you know our expectation is 2022 is a very strong year for us you know we you know the backwardation in the market was historic our inventory management allowed us to take advantage of that you know our expectation is things will normalize over over time for us so you know, I would also expect our SG&A expense to normalize more over time. And, you know, I'd give you sort of guidance to look at the first three quarters of 2022 for more normalized run rate on SG&A.

Got it. And you provided, what about on the operating cost side?

Sure. Yeah, the operating cost side, you know, not as much as many one-time items in that as there are in SG&A. You know, I would say that we had, you know, in the fourth quarter, we had about $3 million in expense related to some known reserves we took on the environmental side. That'll be one time. But I would say that most of the operating expense is related to our GDSO business, and that is, you know, more related to the acquisition side. You know, the biggest things in that expense budget are the total salaries at our site level and our credit card fees. You know, credit card fees were extremely high all year long. You know, they were $4 million worse quarter over quarter in the fourth quarter. You know, that's all dependent on price at the retail pump on the credit card fees. You know, we've seen prices somewhat normalized versus the earlier part of 2022. you know, our volume is up year over year related to the acquisition. So, you know, I would say that that'll continue to somewhat normalize. We have seen some price, some wage pressures in the OPEC side throughout 2022. We've seen that somewhat normalized over the year, although, you know, labor still continues to be tight, not as tight as it was over the summer, but it's not, it hasn't seen the slack that we thought we would see in it. So it continues to be tight. But, you know, I'd say our run rate on that would, you know, it's probably going to be more like the fourth quarter or third quarter numbers that you're seeing.

And in those numbers, how much inflation between SG&A and operating expense, how much inflation are you assuming in there?

Yeah, it's a good question. I mean, I think what we saw sort of year over year was probably, you know, 15% on things. I will say that's normalized sort of run rate from 2021 to 2022. Got it. And, and,

You mentioned you expect wholesale to normalize. GDSO, though, you're still running at margins that are above history, and you've said the break-evens have improved. What do you think the right number is today for a normalized margin? I know you chuckled because it keeps improving.

I can give my two cents, and I'll let Mark or Eric chip in, too. You know, I think... You know, we do believe that we have seen operating costs for all operators in the gas station business increase, not just in salary, but also on, you know, equipment and credit card fees. All of that has to be offset and passed through on the fuel margin, we believe. And so, you know, we've seen a definite shift since COVID on the fuel margin side. You know, we were seeing it before that too. You know, historically, margins have been creeping up as as expenses increase. And I think it impacts the smaller operators more than guys like us who have scale. We have different levers we can pull on expenses as opposed to some of the smaller guys whose the only lever they can pull is fuel margin. And I think you've heard a lot of other companies mention that. But to your point, yeah, we've seen break-evens increase. And I think we've got to offset the cost.

I appreciate that. Carl, maybe I'll just add one more I can. So this acquisition from December is a little larger than some of the other ones you've done. Is your plan to just fund it on the revolver and pay it down over time, or do you think you might term that out in the bond market at some point?

Yeah, our expectation is we're going to fund it under the revolver. We only have $99 million currently funded under that revolver, and we're You may have seen our recent 8K that came out in January. We did an amendment to upsize the revolving capacity from 450 to 600. So, you know, we currently have about $500 million of revolver availability under the revolver. And so we'll fund it under that, the $273 million acquisition price. We'll fund it as a revolver. And then, you know, as we've historically looked in the past, we have utilized the bond market to term out some of our longer-term borrowings. And, yeah, there's potential there. We'd look to the bond market again at some point as needed.

Thanks for the time, guys. I appreciate it.

Thanks, Greg.

Once again, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from a line of Greg Fleissner with Stiebel. Please proceed with your question.

Hey, guys. This is Greg. Congrats on a... Great end to a strong year. Just wanted to know if you could give any color around kind of diesel margins or fuel margins that you've seen this year so far given volatility and that it's going to be probably a pretty heavy year as far as refinery turnarounds go. So just really any color you could provide would be really helpful.

Do you want to start that, Greg? Yeah, sure.

Yeah, good morning, Greg. It's Mark. I couldn't hear the entire question, but I think I got the gist around margins and refinery turnarounds, and I assume you're talking about the market in general. The curve as we sit here today has flattened out a lot, and so a lot of the volatility and the cost of owning inventory that we saw in 2021 So I think our expectations, and who knows what's going to happen forward, our expectations as we sit here today are margins should, and we have seen this, margins should return back towards something more normal. As the curve has flattened, as volatility has quieted down, and as the cost of carrying inventory has decreased, we've seen a corresponding downshift in margins towards more of the historical norm, although still at elevated levels. And without knowing what's going to happen next, I think as you look out the curve, it's reasonable to assume that those are the market conditions that we're going to be dealing with for the balance of 23. Now, obviously, if there's some sort of event or demand is stronger than anticipated, which I feel like The bias is that it will underperform, not overperform. But any event, I would say inventories are still on the tighter side. So any event could send that in a different direction. But based on our visibility right now, we're starting to see things trend more towards historical norms than what we saw in 2022.

Great, thank you. That's really helpful. Sorry about the mic issues. Just one more question if you can hear it. Just on the special distribution, if 2023 is another really good year, is that a tool that you're thinking about utilizing in the future or just kind of any capital allocation ideas going forward?

Sure. Yeah, I'd preface anything by saying that the board makes the decisions on the distribution. I would say that the special distribution was, you know, in light of this very strong year we had in 2022 and also related to there was some gains related to capital gains related to the Revere Terminal sale. You know, I think, you know, going forward, you know, it all depends on where we are in our capital allocation and what we think the best return of capital is to the unit holders. You know, we've got an acquisition that we've inked in December that we think is a great one for the partnership on the Gulf acquisition. And so, I think it's going to be all dependent on what the best use of capital, the potential return at the time will be for the unit holder.

Great.

That's all for me. Thank you.

Thank you. We have no further questions at this time. I would now like to turn the floor back over to Mr. Slivka for closing comments.

Thank you for joining us this morning. We look forward to keeping you updated on our progress. Enjoy the week, everyone.

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.