Global Partners LP

Good day, everyone, and welcome to the Global Partners Second Quarter 2023 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, 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, everyone. 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, a regulatory and permitting environment, a forest 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 fines with the Securities and Exchange Commission, 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 purpose of regulation FD. Now my pleasure to turn the call over to our President and Chief Executive Officer, Eric Slivka.

Thank you, Sean, and good morning, everyone. Let me begin this morning by recognizing the terrific work of our entire team in contributing to a solid second quarter with our wholesale and GDSO segments performing above our expectations. From our fueling stations and convenience markets to our liquid energy terminals, the relationships created by our team members with customers and guests every day is a key differentiator that allows us to maintain a competitive advantage across our businesses. From an operating perspective, we bring an exceptionally high level of technical, marketing, and M&A expertise amassed over decades in the energy industry. This expertise powers the three core tenets of our growth strategy, acquire, invest, and optimize. We continue to advance our strategy in the second quarter. In June, the joint venture owned by subsidiaries of Global and ExxonMobil completed its acquisition of 64 convenience and fueling facilities in the greater Houston area, which expands our footprint into Texas. We invested approximately $69.5 million in cash for a 49.9% ownership interest in the joint venture, and under an operations and maintenance agreement, We operate and manage these locations. Our planned acquisitions of five of Gulf's refined product terminals in New England and New Jersey continues to work its way through the regulatory review process. We remain hopeful that the acquisition will close in the second half of this year. Including Gulf, in less than two years, we will have announced or completed more than $570 million of acquisitions while maintaining the strength and flexibility of our balance sheet. Applying our target midteam's returns, these deals are transformative for global, building on our competitive position and driving increased value for unit holders. We continue to put our energy to work in the clean fuel space. In June, we were the title sponsor for the inaugural Northeast Hydrogen Infrastructure Summit held at the Federal Reserve Bank of Boston. Through our team's vision, The event brought together a dynamic group of leaders in the hydrogen infrastructure, transportation, and policy space, as well as potential users to develop solutions to scale the Northeast hydrogen economy. We also recently brought in our first cargo of renewable diesel to our Albany terminal. From Albany, the product can be distributed throughout the Northeast. New York's ambitious climate goals coupled with sustainability-oriented customers eager to decarbonize their footprint, made Albany the perfect location to test the product. We are encouraged by the early demand and interest from customers, both existing and new. Our infrastructure is positioned to play a vital role in storing and distributing fuels that will help our country decarbonize. We will continue to create opportunities in the low-carbon transportation and power sectors through cultivation of relationships policy advocacy and problem solving. Turning to our distribution in July, the Board agreed upon a quarterly cash distribution of $67.50 or $2.70 on an annualized basis on all our outstanding common units for the period of April 1 to June 30, 2023. The distribution will be paid on August 14 to unit holders of record as of the close of business on August 8, 2023. Now let me turn the call over to Greg for the financial review. Greg.

Thank you, Eric, and good morning, everyone. We are very pleased with our second quarter results. However, I will note that the year-over-year comparison is challenging given the exceptionally strong results of our wholesale segment in the second quarter of 2022, which were driven by the historically steep backwardation of the forward product pricing curves in that period. Also, in comparing our year-over-year performance, Keep in mind that net income, EBITDA, and DCF for the second quarter of 2022 included a net gain on sale and disposition of assets of $76.8 million, primarily related to the sale of our Revere Terminal in June of last year. For the second quarter of 2023, adjusted EBITDA was $91.6 million compared with $134.9 million for the same period in 2022. Net income was $41.4 million compared with $162.8 million and DCF was $54.8 million compared with $178.2 million in the same period last year. GTM distribution coverage continues to be strong at June 30, 2023. Including the Q4 2022 special distribution, it was 2.3 times or 2.1 times after factoring in distributions to our preferred unit holders. Turning to our segment details, GDSO product margin was up $0.2 million in the quarter to $199.1 million. The gasoline distribution contribution to product margin was down 2 million to 127.9 million, in part due to a decline in volume sold. Fuel margins continued to be strong at 31 cents per gallon in the second quarter of 2023, essentially flat compared with the second quarter of 2022. Station operations product margin, which includes convenience store and prepared food sales, sundries, and rental income, increased 2.2 million to 71.2 million from the second quarter of 2022. primarily due to an increase in activity at our convenience stores, in part due to the acquisition of Tidewater Convenience last September. At the end of the second quarter, our GDSO portfolio consisted of 1,646 sites, comprised of 341 company-operated sites, 298 commission agents, 187 leasy dealers, and 820 contract dealers. The 341 company-operated sites exclude the 64 sites in our joint venture in Texas. Looking at the wholesale segment, second quarter 2023 product margin decreased $30.8 million to $59.7 million, primarily due to less favorable market conditions in distillates and residual oil. As I mentioned earlier, we experienced historically strong margins in our wholesale segment during the second quarter of 2022 as a result of steep backwardation and tight inventory conditions. Gasoline and gasoline bund stock product margin contributed $39 million, down $2 million from the same period in 2022. primarily due to less favorable market conditions in gasoline, partially offset by more favorable market conditions in gasoline blend stocks. Product margin from distills and other oils decreased 28.8 million to 20.7 million, primarily due to less favorable market conditions in distills and residual oil, partially offset by an increase in crude oil due to the expiration of a pipeline connection agreement in December of 2022. Our commercial segment product margin decreased 5.7 million to 6.8 million, primarily due to less favorable market conditions and bunkering. Looking at expenses, operating expenses increased 1.9 million to 110.4 million in the second quarter of 2023, reflecting increases related to our acquisitions partially offset by lower credit card fees related to decreases in price. SG&A expense increased 5.9 million in the second quarter to 66.7 million, reflecting increases associated with the sale of our rear terminal, higher wages and benefits, and various other expenses, partially offset by a decrease in accrued discretionary incentive compensation. Interest expense was $21.8 million in the second quarter of 2023 versus $21 million in the same period of 2022. CapEx in the second quarter was $22.1 million, consisting of $13.6 million of maintenance CapEx and $8.5 million of expansion CapEx, primarily related to investments in our gasoline station business. the first half of the year we had 23.2 million in maintenance capex and 14.1 million in expansion capex for full year 2023 we continue to 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 equipment and workforce weather and unanticipated events or opportunities requiring additional maintenance or investments. Our balance sheet remains strong at 630, with leverage which is defined in our credit agreement as funded debt to EBITDA of approximately 1.94 times at the end of the second quarter. And we continue to have ample excess capacity in our credit facility. As of June 30, 2023, total borrowings outstanding in our credit agreement were $208.4 million. This consisted of $89.4 million in borrowings outstanding under our $950 million working capital revolving credit facility, and $119 million outstanding under our $600 million revolving credit facility. Looking ahead on our investor relations calendar, on August 22nd and 23rd, we will be participating in the City Midstream Energy Infrastructure Conference. We hope to see many of you out there. Now let me turn the call back to Eric for closing comments.

Thank you, Greg. We have a healthy and well-capitalized balance sheet that continues to position us positively for long-term growth. Looking ahead, we remain focused on executing our strategic priorities to maintain our competitive position and drive value for our unit holders. Now, Greg, Mark, and I would be happy to take any 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 to pick up your handset before pressing the star keys. 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.

Hey, good morning, guys. Thanks for the time here. Greg, good morning. Can you talk a little... Can you tell a little bit about what you're seeing on the demand side in terms of behavior of the consumer at the pump and your observations there? And just, you know, every quarter we talk about how the break-evens are improving from your perspective, or they're going higher, which helps you for the marginal provider of gasoline. Can you talk a little bit about how that's trending?

Yeah, I missed the end of that, Greg, but I think on the demand side of the equation, gasoline demand has been good at our stations, and we're pleased with that year-over-year number. We still compare things to 2019, and we're still off, similar to what we were seeing last year versus 2019, but from a gasoline standpoint. You know, we've been tracking positively. From a diesel demand standpoint, we've seen a different story, and we're down year over year in diesel, but I think that's consistent with the rest of the industry. I didn't hear the end part of that, so I'm not sure if it was a questionable part.

I can repeat. Just at the GDSO segment, every quarter we talk about how the margins seem to be getting better, and one of the arguments is that the break-evens keep going up. Can you talk a little bit about how that's trending? Do you see anything different, anything that's breaking that trend or it continues?

I think overall, I mean, we're going to see, you know, we'll see some ups and downs. We'll see margins expand and compress. I mean, that's just the nature of the business. But I think overall, we continue to see margins trend. You know, you're going to see that, you know, margins expand somewhat due to increased cost to run the business. But, you know, we have seen expansion in margins and our bias is that that will continue.

And then just moving over to the wholesale, I think it was last year where we started talking about how much more volatility there was in the business that was allowing you to earn greater margins. And, you know, last year was a special year. But I'm just curious, is that element still there, or has that died down?

I would say that last year was, as you said, it was a special year. Last year was very unique market conditions. I would say market conditions like we had never seen before, and that was true in 2020 as well. So we've seen extremes in market conditions. I would say that what we're seeing this year is much more normalized. Last year, you know, we saw everything was higher last year. Margins were higher, costs were higher, risks were higher. And so what we're seeing, you know, we're seeing the market kind of normalized back to what we're used to, both on the volume and the margin side of the wholesale business.

And then this last one on the M&A side. Talk a little bit about the opportunity set, and I don't know if you can give us specifics on the most recent acquisition, how much you're paying for them, how much synergies you're seeing, or just whatever you're comfortable telling us there.

Sure. Greg, it's Eric. I'd say it continues to be very active. There's lots of opportunities out there, whether it's terminals, whether it's retail, It's just finding the ones that fit us best and then trying to go after them and be the successful winner. I'd say, and I've said this in the past, the good news is we don't win every one. So I think that tells us that we're not overpaying and we're in the right zone. But we continue to work hard to look at deals and be competitive and, you know, the ones where we can bring the most value to are likely the ones that we're going to be the winners of, right? In terms of multiples, you know, maybe they're off a little bit. I wouldn't say that it sort of depends on the assets, right? But as usual, there always seems to be a bidder who may think it fits them a little bit better and maybe they're willing to pay another half a turn or a turn more. So it really depends on the assets.

When you say it's off a little bit, are you saying valuations are lower?

Yeah, I think... Yeah, I mean, I think it's... You know, I think what costs the money is higher and that people have to have more discipline, right? And even longer-term financing is more expensive, too. And that has to get baked in. I think it's hard to pretend that you're... cost of interest isn't higher, you know? And so most of the competitors that are acquirers, you know, they're borrowing money, right? And they may not even be borrowing it from banks, right? So they've got more expensive money, you know, and that has to depress multiples a little bit, right? But once again, it depends, right? Because everybody's got a slightly different set of economics and And somebody could say, oh, we're going to stretch a little for this because for them it's really not a stretch. It just looks it to the market, right, because they have more value that they can bring to a particular transaction.

That's it for me, guys. Thank you for the time. That's correct.

As a reminder, if you would like to ask a question, press star 1 on your telephone keypad.

One moment, please, while we re-poll for any additional questions. Thank you. Our next question comes from the line of Tyler Rakers with Stiefel.

Please proceed with your question.

Hi, good morning. Tyler Rakers on for Selman. Could you guys share some colors to the GDSO volumes being a little down year over year, just given the acquisitions made during that period?

Yeah, we were 1.2% down year over year, Tyler, on a total basis. You know, as Mark mentioned, you know, we've seen diesel off year over year, as I think a lot of the other industry participants have seen. We also, you know, it was not a great quarter from a weather traffic standpoint up here in the Northeast, and can't quantify how much that played a role, but definitely was a very wet June for us, and I think it rained. We had a rainy day every weekend of June, so, you know, that factors in, I think. I think overall we're pretty happy with volumes are overall. Could they be better? Definitely they could be better, but I think gasoline demand is still decent out there.

Let me just clarify a comment I made earlier with regard to gasoline demand. The comments I made were specific to our company operating stations. I think part of that has got to do with, when you talk about volume and margin, I think part we run and the experience that we create for the guests. So I just want to clarify that those comments are on volume. We're specific to our company operating sites.

Great. Thanks. And if I could ask with the, as you said, regarding the M&A environment with the higher interest we're seeing. if maybe we'd see, as well as with the Exxon deal, if we'd see more of these JV structure deals going forward?

Oh, yeah, I don't really know. I mean, I'd say, you know, we're going to try to be opportunistic, right? And, you know, and the concept, at least with the JV with Exxon, is, you know, can we expand it? You know, but we're already in Texas, right? We've been in Texas for a while doing wholesale. We think this is a natural extension for global, regardless of that. And what I'd say generally is we're having more conversations now because we're recognized differently in that market, which is frankly how we've built the business over decades of doing what we do.

Great. I appreciate the callers.

Thanks, Todd.

Thank you. We have reached the end of the question and answer session. Mr. Slitsky, I'd now like to turn the floor back over to you for closing comments.

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

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