Q2 2020 Global Partners LP Earnings Call

Good day, everyone and welcome to the Global Partners second quarter 2020 financial results Conference call.

This call is being recorded there will be an opportunity for questions at the end of the cold with us from global partners, Our President and Chief Executive Officer, Mr., Eric Slifka, Chief Financial Officer, Ms., Daphne Foster Chief operating Officer, Mr., Mark remain an executive Vice President and general.

So let's start at work schedule.

I'd like to turn the call overtime. Mr. Bond you also 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 blendstocks in renewable fuels.

It was actually the basket some facilities, whether credit markets, the regulatory and permitting environment in the Ford product pricing curve, which could you give once quarterly financial results.

These statements involve significant risks and uncertainties some of which are beyond the partnership's control, including without limitation the impact in duration of the cope with 19 pandemic.

Uncertainty around the timing of an economic recovery in the United States, which will impact the demand for the products we sell in the services we provide.

[noise] uncertainty around the impact of the Coburn 19 pandemic to our counterparties in our customers and their corresponding ability to perform their obligations handle utilize the products, we sell indoor services we provide.

Uncertainty around the impact in duration of federal state and municipal regulations and directives related to the cobot 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 in our assessment of historical trends.

Because our assumptions in 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.

Well the partners undertakes no obligation to revise your publicly released the results of any revision.

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 Slifka.

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. They don't want them at Brad Pitt off the says what successfully transition toward work.

Being remotely.

Well 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 is eagerly embraced our cobot 19 related procedures and safety protocols, ensuring that health and wellbeing of our guests customers add 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 and afford 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 factors, including the Steepening fourk curved 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 Judy So 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 then the comparable period in 2019.

That reduction is attributable in part to a significant drop in commuter traffic due to covert 19.

Margins, however were strong increasing 62% over the same period in 2019.

I know that's a 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 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 corona virus 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 the destinations across Europe and the Americas.

But they are getting in their cars, they are renting arby's and they're 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 per day trips and weekend getaways are good for our business, helping to partly offset the decline in vehicle miles traveled since the outside 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 the meeting 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 convenient 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 convenient store sales were down less than 10%.

From a margin standpoint since the end of Q2 fuel margins in our GDS. So segment have remained above the prior year.

But even with the modest improvement in business, we're still extremely cautious in light of the current environment.

Given the ongoing questions about the extent and duration of cobot 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 twentytwenty.

Turning to our distribution in light of a strong second quarter performance last week, we announced a 6.5 cents increase in the quarterly cash distribution on our common units to 45 to 80 tough to 45 87, five per unit or $1.83 five on an annualized basis.

The distribution will be paid August 14, two 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 recently signed a long term contract with a leading downstream energy company just throughput renewable diesel through our retail and waterborne West coast.

Oh, I'm, sorry through our rail in waterborne terminal.

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 a customer to support an advance the growing renewable fuels market.

Now, let me turn the call over to Daphne for the financial review Daphne.

Thank you Eric.

Eric noted the primary driver for our Q2 results.

With a significant recovery in the supply demand imbalance at the end of the first quarter.

Forward product pricing curve was in extreme contango at the start of the quarter 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 years 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 blendstock.

Docs, partially offset by an increase in distillates and residual oil in part due to cold weather, which was 42% colder than last year, an 18% colder than normal.

Volume in our GDS, though segment declined 32% or 132 million gallons, reflecting the decline in automobile travel due to the impact of cobot 19.

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 Judea, So product margin was essentially level at 145.6 million compared with 145.4 million in the second quarter of 2019.

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 just 34.2 cents per gallon from 21.4 cents per gallon in the second quarter of 2019.

Well 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 GDS. So portfolio consisted of 50 832 sites comprised of 277 company operated stores 257 commissions to 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 to 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 Twoq, you 20 was dramatic.

For example in last quarters conference call, we pointed out the steep contango curve and just to let switch was 18.5 cents contango through year end.

By the end of June that curve it flattened to just under eight cents.

The gasoline curve had an even more significant move from 20 cents contango at the beginning of April to 12 cents backwards at the end of June.

As a result gasoline blendstocks product margin increased 28.4 million to 57.8 million.

Crude oil product margin increased 10 million to 9.2 million.

Arctic margin from other oil some related products was up 35.1 million to 44.5 million.

Well a much smaller contributing factor just lets 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 west 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 price and due to the planned reduction in most controllable controllable expense categories in response to covert 19.

The sale of sites also contributed to the reduction in expenses.

<unk> expenses were up 18 million to 59 million in the second quarter, primarily reflecting a 14.8 million dollar increase in accrued discretionary incentive compensation increases in professional fees and expenses associated with the pandemic such as providing P to employees.

And making physical and operational adjustments to our terminals in 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 point 7 million dollar 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 four and a half million of expansion capex, primarily related to our gas station business.

You will recall that at the outset or the second quarter, we took certain steps to increase liquidity and create additional financial flexibility given the uncertain business environment.

Steps included a 25% decrease 52 cents on an annualized basis to our quarterly distribution and our common units for the period from January Onest 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 and 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 a 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 an 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 is funded debt to EBITDA was approximately 3.1 times at the ended the second quarter and reflects the pay down of the $50 million.

As of June we had total borrowings outstanding for all 4.7 million under our 1.17 billion dollar credit facility.

Including 188 million under our revolving credit facility and 216.7 million onto our working capital facility.

Before I turn the call back to Eric I want to let you know than an 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 staff. They in summary, the impact of covert 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 definitely I will be happy to take your questions operator.

Thank you we won't be cannot NIM will now be conducting a question answer session. If you're like that's a question. Please press star one on your telephone keypad. It confirmations will indicate your line isn't the question you you made fresh start you. If you would like your question from the Q.

He thinks speaker equipment and may be necessary for you to pick up your handset before passing the sarkies, one moment well we pull for questions.

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

One moment.

Question.

Our first question comes from the line of net Baumohl 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 well it's on Delevering the business further.

To potentially be better prepared from a total leverage perspective for periods of lower demand and or both all results.

Sure Good morning, Ed.

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 where they have a better understanding we had a remarkable second quarter Westside trailing 12 month coverage of 2.3 times and so looked at our.

Performance year to date factored in various future scenarios, you know consider our leverage at 3.1 times and where it might land in the feature 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 Ah you know I think 3.1 for US most 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.

Oh I think at this point, where just gonna be you know stay a little quite on it would just a you know would have just signed it up and I'm not giving in any direction in terms of the magnitude of that contract.

Yeah. Thanks, if I could just this is mark if I get yourself.

Because I think that you asked about Oh.

About capex requirements and 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 an addition to the recent recent addition to the permit does give us opportunity to.

You know expand our pursuit of more of that type of business and certainly that terminal has the ability we have the ability to to expand the terminal. So we're able to generate more interest in that the you know the opportunity exists, but the contract that we recently signed does not require any capex.

<unk>, let me add one other thing there, it's Eric Slifka, sorry, but.

We did have to we did have to clean the existing takes out the carry the different products. So there was an expense it was associated with that.

You know what I would say is.

It is is it is not a it is not a material <unk> increase.

Or change in the in the and the Companys earnings.

Or cash flow from that facility right. It's a good deal because it's a term deal so its secure.

And there is a term with it that is got some wants 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.

Party with RBC you May proceed with your question.

Good morning, all the older safe.

Oh, Thank you for a great quarter and dividend increase work and I have is given the.

Speedway transaction for the marathon recently, what's the market like for you all out there Oh your buyers or sellers.

For your convenience stores.

Yeah, you know I you know what we've always said is a that's the what's interesting about that market is it's made up of many many many operators many individual operators small companies family run.

Businesses, a and area. There's you know almost always a transaction going on somewhere across the country.

That particular transaction happens to be one of the one of the big East.

And so its unique from that standpoint, and and the obviously at what at.

At a at a big dollar number yeah, but up but in terms of the M&A market. The M&A market continues to be a busy.

And there are companies that are always talking about doing one thing or another and it obviously, we continue to to walk for potential acquisitions to grow the business.

Well I want to tell your old congratulations again every time, there's an arbitrage opportunity that has appeared to learn as far as Mr. cheers.

They all seem to do an incredibly good job on it so thank you again.

Thank you very much of those kind words and stay healthy.

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Ladies and gentlemen. This concludes today's question answer session I would like to trying to pull over to Mr. slipped out 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 footfall enough.

This concludes todays teleconference. You may disconnect your lines I. Thank you for your participation have a great.

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