Global Partners - Q3 2022

Transcript

Operator (participant)

Good day, everyone, and welcome to the Global Partners third quarter 2022 financial results conference call. Today's call is being recorded. 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 Hanson, Chief Operating Officer, Mr. Mark Romaine, and Chief Legal Officer and Secretary, Mr. Sean Geary. At this time, I'd like to turn the call over to Mr. Geary for opening remarks. Please go ahead, sir.

Sean Geary (Chief Legal Officer and Secretary)

Good morning, everyone. Thank you for joining us. Before we begin, let me remind everyone that this morning's call will include forward-looking statements within the meanings of federal securities laws. These statements include projections, expectations, and estimates concerning the future financial and operational performance of Global Partners. These forward-looking statements are based on assumptions regarding market conditions, business cycles, demand for liquid energy products and convenience store products, utilization of our assets and facilities, the regulatory and permitting environment, the forward product pricing curve, and other factors which could influence our 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 and its impact on our counterparties, our customers, and our operations, and other 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, uncertainties, and factors, which are 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 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's my pleasure to turn the call over to our President and Chief Executive Officer, Eric Slifka.

Eric Slifka (President and CEO)

Thank you, Sean, and good morning, everyone. We reported a strong third quarter with year-over-year growth in each segment of our business. Our performance is underpinned by solid financial and operational execution. As we've discussed many times on these calls, we have great storage, terminaling, and retail assets, and we have done an outstanding job integrating acquired sites into our portfolio. Our ability to successfully integrate these new sites into our network has enabled us to capture economies of scale and leverage our buying power to drive increased contribution from our GDSO segment. The segment continued to perform well in Q3, reflecting increased activity at our convenience stores as a result of our recent acquisitions and higher retail fuel margins year over year. In our wholesale segment, we continued to effectively manage our fuel inventory amid sustained backwardation in the gasoline and distillate markets.

Our commercial segment saw a year-over-year increase in bunkering activity, an area that has been very strong throughout 2022. On the M&A front, during the third quarter, we expanded our GDSO footprint in the Mid-Atlantic with the acquisition of Tidewater Convenience and its portfolio of 15 retail fuel and convenience store locations in Virginia. Our retail site count in Virginia has increased nearly sevenfold in the past year from 13 locations at the end of Q3 last year to 89 at the same point in 2022. The M&A pipeline remains very active across all areas of our business, and we continue to evaluate potential opportunities that align with our strategic growth objectives. We continue to expand our efforts around renewable fuels.

In September, we announced the receipt of regulatory approval to increase storage capacity and to transload up to 1.8 billion gallons in the aggregate of renewable diesel, renewable feedstocks, and ethanol at our CPBR terminal in Oregon. Our permits allow additional tankage and pipeline infrastructure with the potential to provide more than 600,000 barrels of storage capacity at the terminal. Product flexibility combined with its rail and deep water access enables CPBR to serve as a renewable fuels hub for existing and emerging low carbon markets. We continue to employ our EV strategy of evaluating multiple ownership and/or host site opportunities. Earlier this year, we received additional funding from the Massachusetts Department of Environmental Protection under the Massachusetts Electric Vehicle Incentive Program to install direct current fast charging at four of our retail stores.

In all of our operating states, we are actively involved in conversations regarding the national EVIP deployment. Turning to our distribution in October, the board voted to increase quarterly distribution on our common units by $0.02 per unit to $0.6250 per unit or $2.50 per unit on an annualized basis. The distribution will be paid on November fourteenth to unitholders of record as of the close of business on November eighth. Now let me turn the call over to Greg for the financial review. Greg?

Gregory Hanson (CFO)

Thank you, Eric, and good morning, everyone.

Across all the key performance metrics, Q3 was another strong quarter for Global. Net income for the third quarter was $101.4 million, compared with $33.6 million for the same period in 2021. Adjusted EBITDA was $168.5 million versus $79.2 million for the year earlier period, and DCF increased to $128 million from $49.7 million for the third quarter of 2021. TTM distribution coverage as of September 30 was 4.5x or 4.3x after factoring in distributions to our preferred unitholders. Excluding the net gain on the sale of assets primarily related to the sale of our Revere terminal in June, TTM distribution coverage was 3.5x or 3.4x after factoring in distributions to our preferred unitholders.

Turning to our segment details, GDSO product margin was up $83.9 million in the quarter to $261.6 million. The gasoline distribution contribution to product margin was up $75.6 million to $188 million, primarily due to higher fuel margins and an increase in volume sold due to our recent acquisitions. Fuel margin increased $0.17 per gallon to $0.44 from $0.27 in last year's third quarter. Contributing to the fuel margin performance was the large $0.18 per gallon decline in NYMEX wholesale gasoline prices during the three months ended September 30 versus an increase of $0.01 per gallon during the same period last year.

Station operations product margin, which includes convenience store and prepared food sales, sundries, and rental income, contributed $73.6 million, up $8.3 million from the third quarter of 2021, reflecting the increase in activity at our convenience stores and the contribution from recent acquisitions. At the end of the third quarter, our GDSO portfolio consisted of 1,684 sites, comprised of 356 company-operated sites, 293 commissioned agents, 196 lessee dealers, and 839 contract dealers. Looking at the wholesale segment, third quarter 2022 product margin was $79.3 million, up $37 million from the same period in 2021. Gasoline and gasoline blendstock product margin increased $31.7 million to $54.2 million, primarily due to more favorable market conditions in gasoline.

Product margin from other oils and related products, which includes distillates and residual oil, increased $3.1 million to $25.7 million, primarily due to more favorable market conditions in distillates. Product margin from crude oil was -$0.6 million in the third quarter, up $2.2 million from -$2.8 million in the same quarter a year ago, primarily due to the expiration of a pipeline connection agreement in August of last year. As Eric mentioned, in the third quarter, we saw the continuation of backwardation in the forward product pricing curves. Backwardation exists when contracts for the near-term delivery of commodities are priced higher than those for longer-term delivery.

Due to the steep backwardation, we have seen an increase in the cost of carrying our hedged inventory and expect this cost at some point in the future to offset a portion of the increased wholesale segment product margin we experienced in the third quarter. Turning to the commercial segment, product margin increased $6.5 million year-over-year to $10.4 million, largely due to our bunkering business. Looking at expenses, operating expense increased $27.4 million in the quarter to $119.5 million, primarily in our GDSO segment, including our recent acquisitions, due in part to increased credit card fees related to the increases in volume and price, higher salary expense, higher rent expense, and an increase in our environmental reserve.

SG&A expense increased $10.4 million to $65.1 million in the third quarter due to increased accrued incentive comp, wages and benefits, and various other expenses. The increase was partially offset by a $3.1 million expense incurred in the third quarter of 2021 for compensation resulting in the retirement of our former CFO in recognition of service. Interest expense for the quarter decreased to $19 million, compared with $19.7 million in the year earlier period, as significant cash flow generation in the quarter reduced our average working capital facility outstandings compared with the same period in 2021, offsetting the increase in interest rates.

CapEx in the third quarter was approximately $23.4 million, consisting of $10.5 million in maintenance CapEx and $12.9 million of expansion CapEx, the majority of which relates to our investments in our gasoline stations and C-stores. For the first nine months of 2022, we had maintenance CapEx of $27.8 million and expansion CapEx of $38 million, excluding acquisitions. For the full year, we continue to expect maintenance capital expenditures of approximately $45-$55 million and expansion capital expenditures, excluding acquisitions, of approximately $50 million-$60 million, relating primarily to investments in our gasoline station business. Our balance sheet continues to be strong with leverage, which is defined in our credit agreement as funded debt to EBITDA at approximately 1.87x at the end of the third quarter.We continue to have ample access and capacity in our credit facilities. As of September 30, we had total borrowings outstanding under the credit agreement of $99 million. This consisted of zero borrowings under our $1.1 billion working capital revolving credit facility and $99 million under our $450 million revolving credit facility. Looking ahead on our investor relations calendar this month, we'll be hosting one-on-one meetings at the RBC Capital Markets Midstream and Energy Infrastructure Conference. In December, we will be participating in the Wells Fargo Wells Fargo Midstream, Utility & Renewables Symposium

Eric Slifka (President and CEO)

Thanks, Greg. We have executed well through the first nine months of the year and begin the final quarter of 2022 with strong operational and financial momentum.

While economic uncertainty associated with the inflationary environment merits a level of caution, we remain focused on leveraging our supply, marketing, and terminaling assets to drive profitable growth across our businesses. Now, Greg, Mark, and I will be happy to take your questions. Operator?

Operator (participant)

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 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 Selman Akyol with Stifel. Please proceed with your question.

Selman Akyol (Managing Director and Senior Equity Analyst)

Thank you. Congratulations on another nice quarter.

Gregory Hanson (CFO)

Thanks.

Selman Akyol (Managing Director and Senior Equity Analyst)

You've had really two exceptional quarters back to back. You guys have benefited from favorable pricing. Clearly RBOB declined through the quarter, gave you an uplift. I'm just kinda wondering, how are you thinking about that? I'm looking at your balance sheet and, you know, do you see your business operating with, you know, permanently less debt because of all the gains you've had? Is it that it enables you to be able to go out and do more on the acquisition front, and so then you're able to turn it into recurring revenue on a go-forward basis by investing in GDSO in terminals? Or maybe you can just kinda help me understand how you view it and maybe what the strategy is going forward.

Gregory Hanson (CFO)

Sure. I'll take it, and I'll let Eric follow up with any questions. This is Greg. Selman, how are you doing? Yeah, I mean, I think, listen, our strong performance has led to significant cash flow in the quarter. Our balance sheet, in year to date, our balance sheet's very strong. Our leverage is very low historically. You know, I think we are comfortable with higher leverage levels on our balance sheet, as we've said before. You know, we view the opportunity to look at acquisitions. We've been an acquisitive company for a number of years. We think there's still a good opportunity on the acquisition front, throughout our segments, which is good. I think we view this as a good opportunity to continue to expand our business.

You know, we're always looking at what's the best return for use of our capital, and so we'll continue to be very prudent about where we invest to get the highest return. We do think, yeah, this significant cash flow generation should give us a good advantage to go out and continue to expand the businesses. Eric, I don't know if you have anything to add.

Eric Slifka (President and CEO)

Yeah. I mean, you know, the story is a little bit the same as it's been. You know, we have been acquiring companies. You know, we believe we can make decent returns on those assets that we've acquired. We're gonna continue to do the same. Look, I'd say we try to see every transaction out there that we believe fits the company regardless of the position, right? We're gonna continue to look at those deals. It's only the very largest deals that we sort of look at and we go, "Well, there's really no way to get that done because they're just too big." You know, and even with these kind of earnings, I mean, you know, the multi-billion-dollar deals, it's gonna be hard for us to do, right?

We haven't seen really many of those anyways, right? Most of them have been smaller and sort of truthfully a better fit for the company, and we're gonna continue to focus, you know, on those opportunities as we go forward. I mean, maybe it's a little bit boring. We're gonna continue to do the same stuff that we do. We're gonna do what fits us. We're gonna do what we think is gonna get us the best returns, make us the most money. We'll be opportunistic as we can to figure out what's best to do, but we're trying to make sure that we see every opportunity that's out there and decide what we can transact on.

Selman Akyol (Managing Director and Senior Equity Analyst)

Got it. In hearing that, I guess I hear also that the first priority really is to continue investing, complete, you know, do acquisitions. I guess you would never consider doing, like, a special dividend because of these, you know, sort of excess margins or something like that.

Gregory Hanson (CFO)

Yeah, I mean, Selman, as we said before, the board makes the decision every quarter on the distribution and, you know, that'll be up to the board to make that quarterly distribution. I do think this puts us in a very good position, and we believe that there are still very strong returns in our industry to be made through the growth of our business.

Selman Akyol (Managing Director and Senior Equity Analyst)

Got it. Then you also talked about some fast charging at stores. I'm just kinda curious, how's that going? Are you seeing increase in utilization? Is it low? I mean, any just color you got there on how the adoption is going?

Eric Slifka (President and CEO)

Yeah, I mean, last time I looked, it's still single digits. Look, I mean, I do-

Selman Akyol (Managing Director and Senior Equity Analyst)

Of utilization?

Eric Slifka (President and CEO)

Yeah.

Selman Akyol (Managing Director and Senior Equity Analyst)

Okay.

Eric Slifka (President and CEO)

I do think it's a business that over time is gonna grow. I do think we have the right assets in the most convenient locations with the right setup to take advantage of that. Getting a strategy around it, whether it's somebody else putting the money out or whether it's us putting the money out, making sure that we can make a return on that investment is gonna be critical. You know, and part of it is, in fact, you know, having the government out there pushing the development of those stations. You know, we're gonna continue to look at it and be opportune around it as well. I do think over time a strategy will emerge when it looks like there's a real pathway to getting returns out of the business.

Selman Akyol (Managing Director and Senior Equity Analyst)

Okay. Thank you very much.

Gregory Hanson (CFO)

Thanks, Selman.

Operator (participant)

As a reminder, if you would like to ask a question, press star one on your telephone keypad. One moment, please, while we re-poll for any additional questions. Thank you. Mr. Slifka, I will turn the floor back over to you for closing comments.

Eric Slifka (President and CEO)

Thank you for joining us this morning. We look forward to keeping you updated on our progress. Thanks everybody for your interest in the company.

Gregory Hanson (CFO)

Thank you.

Operator (participant)

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.