Q3 2021 Global Partners LP Earnings Call

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 Slifka.

Chief Financial Officer, Mr. Gregory Hanson.

Chief operating officer, Mr. Mark Romaine and.

And acting General Counsel Secretary, and Vice President of mergers and acquisitions, Mr. Sean here.

Now, let me turn the call over to Mr. Gary. Please go ahead Sir.

Good morning to everyone and 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.

Global partners.

<unk> looking statements are based on assumptions regarding market conditions, such as the crude oil market business cycles.

And 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.

Certainty 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.

The uncertainty around the impact of the COVID-19, pandemic to our counterparties and our customers and their corresponding ability to perform their obligations and utilize the products, we sell and the services, we provide and uncertainty around the impact of.

The duration of federal state and municipal regulations indirect is 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.

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 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 unit factors. 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.

Pleasure to turn over the call to our President and Chief Executive Officer, Eric Slifka.

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 unifying theme.

The resilience of our integrated business model the way, we create value through our strategically located terminal network.

<unk> portfolio of liquid energy products, and our retail fuel and convenience market locations.

Our <unk> segment's 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 GSO 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 cards 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 distillate in Q3, while our commercial segment saw improved volumes and margins.

Consistent with our M&A strategy, we completed the acquisition of 14 convenient stores and sic co 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 closing by year end.

Yes.

Our Q3 performance underscores our role as a critical infrastructure company.

Every day, we provide 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 one.

September 32021.

The distribution will be paid November 12 to unitholders of record as of November eight.

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 micro grid. The microgrid is being installed at our all town fresh location in.

Massachusetts.

With that now let me turn the call over to Greg for his financial review Greg.

Thank you, Eric and good morning, everyone.

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, and our retail gas and convenience store business as COVID-19 restrictions continue 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 98 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 2020. One 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 32021 was one two times or one one times after factoring in the distribution to our preferred shareholders.

Turning to our segment detail GSL performed well with higher year over year fuel volumes and increased convenience store activity growing Q3 product margins to $177 7 million from $158 9 million.

The gasoline distribution contribution to product margin was up $11 million to a $112 4 million from $101 4 million fuel margin in Q3 came in at approximately 27 cents per gallon in the quarter unchanged from a year earlier, while retail fuel volume increased to 417 million gallons from 300 set.

6 million gallons, a year earlier up 11%.

Station operations were also strong contributing $65 3 million 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 GSO portfolio consisted of 1597 sites comprised of 295 company operated stores 291 Commission 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 distillate.

Wholesale gasoline and gasoline Blendstock contributed $22 5 million up from $17 1 million.

Their oils and related products increased to $22 6 million from $14 5 million.

Product margin 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.

Primary driver was higher credit card fees, resulting from higher retail prices and higher volumes to other factors also contributed to the variance and increase in salaries and benefits related to our convenience store employees due to a combination of higher wages and hours worked and 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.

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.

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 and 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 totaled $37 4 million the majority of the Capex related 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 million to $55 million and continue to expect expansion capex of $50 million to $60 million for the year with the majority of 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 to EBITDA was approximately three five times at the end of the third quarter.

We continue to have ample excess capacity under our credit facility as of September 32021, total borrowings were $296 3 million.

Listing 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 Bofa Securities and Wells Fargo Securities. If you are 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 <unk> Investor Relations Dot com.

Now, let me turn the call back to Eric for closing comments.

Thanks, Craig 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 one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press star two if he would like to remove your question from the queue.

It's just been 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 one on your telephone keypad one moment, please while we poll for questions.

Thank you. Our first question comes from the line of Theresa Chen with Barclays. Please proceed with your question.

Good morning.

I wanted to ask about the strength in your GDS Air segment.

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 curious its mark.

I think we've talked about this.

I think throughout the year and we've had rising prices.

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 cost and so that's obviously been a key driver for US and then in addition to that we've seen is as Greg mentioned, we've seen.

You know some healthy return.

And in sales to both the fuel sales and store sales.

And.

So that's probably the other piece of it but a big piece of that is the resiliency of margins throughout this increase in AR.

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.

The incremental margin could be competed away.

Yeah, it's impossible to say Theresa I'm not sure what to expect in the future I think we've we know what we've seen this year.

And that trend continues.

Where it lands I don't know.

Okay. Thank you.

Our next question comes from the line of Selman <unk> with Stifel. Please proceed with your question.

Thank you congratulations on a very nice quarter. It was pretty impressive Hum couple of quick questions here. So.

In regards to your terminals for Biofuels.

Can you just say if.

You were 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.

Yeah.

So it's mark.

Yeah.

I think it's a combination of both I think that.

The more products, we can handle that we get paid for handling storing and handling products and redistributing. So as we're able to introduce more biofuel and higher bio biofuel blends its not every terminal can handle that so you know the the.

The harder it is to handle the you know the more margins tend to expand that being said, it's a very tight margin business at a as it always has been so we look at this two fold we look to capture.

Whatever opportunity we can in the front of the market, but we're also setting ourselves up for.

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 with a set us set ourselves up for possible changes in the marketplace as well.

It's Eric Slifka, those those changes in the market.

Could simply be consumer demand driven.

Or they could be regulatory.

Right and.

And <unk>.

Making sure that we are best positioned.

To handle those fuels.

Is about.

It is about setting ourselves up for what we think is coming in the future. The fact of the matter is our project carbon freedom.

<unk> 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 Bayou blend throughout the rest of the state of New York and so what we're really trying to do is just make sure that we're positioned to handle as broad array of fuels.

As as there is current demand for but also the demand that's coming.

Right in order for state.

And government to reach their greenhouse gas goals.

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 that transition.

To lower emission fuels right and it's our goal to make sure that we can deliver that as those requirements come in.

Yeah understood. Thank you for the wrap on that one can I just can I just add because I'm thinking about why you might have asked that question in.

I would not expect a material this to be a material driver of the margin structure in the wholesale side at the moment right, but again as.

As we introduce higher blends that 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 of stores all towns do you see them significantly outperforming your other stores.

This environment.

Yeah.

That's a that's a good question.

And it's I'm not sure.

Do you are you talking about our new are all town fresh concept stores, yes, yes. So that we have at the moment, we have eight of those stores.

Some were open they were opened at various points in time over the last two two and a half years some open.

During the pandemic.

Which is.

Which is always 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 a sense that all eight of them have.

Full made to order.

Kitchens with you know with high quality foodservice. So there are quite a bit different than what we operate so the comparison is a little bit difficult because we have the.

We have the foodservice element that we've that we don't have in many of our other stores, but I would say.

On 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 we're learning from different things that we do some things that are working some things that arent working but I would say that directionally, we're pleased with.

How they are performing and we're taking learnings from from each store that we open and trying to apply them to whatever comes next.

<unk> our expectation is what we will gain the learnings that we gained from the from these concepts. We expect we will be able to apply a lot of those.

A lot of those features and concepts to our existing portfolio.

Hmm.

Was your question also around.

Set of highway locations Directionally versus locations that are in there.

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 the stores, having a significantly higher ROI compared to some of your other stores that you have and then because they're such a large difference in capital costs between the two.

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 gastric picked up outside I would say the outperformers more recently has been those highway locations.

Right because they were probably off the most particularly from either location, but they were great.

Real estate assets write off the highways they were probably injured a little bit more during the pandemic, but let's say it really started to come back on in the last quarter right.

That's helpful. Thank you for that.

Everyone.

I was 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.

Our self checkouts by example, and trying to roll that out.

Is there any places you can.

In the chain that takes that takes some pressure.

You know that's on the cost side.

On the products that you're selling.

You know you are 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 is an increase in the cost of.

Staffing is store everybody has that pressure.

And so everybody has got to figure out how to deal with it and how to.

Run as efficiently as you possibly can.

But also then pass through.

That cost and that cost will come.

And margins, but also the cost of the goods are rising as well right. So so you're getting it all around but I think the good news is is all of your competitors.

Going through those same increases.

And all of the you know most of the competitors are very smart and they realize there is an increase in cost and in order to.

In order to continue their increasing their margins as well.

Got it and then just last for me any comments you can make on the acquisition market and kind of what youre seeing out there.

It's still it's still very busy there's lots going on you've seen lots of.

Transactions.

The company continues to position itself to take advantage of those opportunities as they come down the pike.

Okay. Thank you so much.

Okay.

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

Thank you for joining us. This morning, we look forward to keeping you updated on our progress. Thanks, everybody 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.