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Global Partners LP (GLP) Q3 2019 Earnings Call Transcript

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Global Partners LP (NYSE: GLP)
Q3 2019 Earnings Call
Nov 7, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Global Partners Third Quarter 2019 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. [Operator Instructions]

With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Financial Officer, Ms. Daphne Foster; Chief Operating Officer, Mr. Mark Romaine; and Executive Vice President and General Counsel, Mr. Edward Faneuil.

At this time, I'd like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

Edward J. Faneuil -- Executive Vice President, General Counsel and Secretary

Good morning, everyone, and 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 and estimates concerning the future financial and operational performance of Global Partners. Estimates for Global Partners' EBITDA guidance and future performance are based on assumptions regarding market conditions such as the crude oil market business cycles, demand for petroleum products, including gasoline and gasoline blend stocks and renewable fuels, utilization of assets and facilities, weather, credit markets, the regulatory and permitting environment and the forward product pricing curve which could influence quarterly financial results.

We believe these assumptions are reasonable given currently available information and our assessment of historical trends. Because our assumptions and future performance are subject to a wide range of business risks and uncertainties, we can provide no assurance that actual performance will fall within guidance ranges. 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 the 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.

Eric Slifka -- President and Chief Executive Officer

Thank you, Eddie. Good morning, everyone, and thank you for joining us.

We delivered strong third quarter results, highlighted by product margin increases. Our gasoline distribution and station operations benefited from higher retail fuel margins and a full quarter of results from our Champlain and Cheshire Oil portfolio of retail stations and convenience stores which we acquired in July of last year. In our wholesale segment, product lines primarily benefited from favorable market conditions.

Turning to our distribution. In October, the Board raised the quarterly distribution on our common units from $0.515 to $0.52 per unit or $2.08 on an annualized basis. The distribution will be paid on November 14 to common unit holders of record as of November 8.

In summary, we had a strong performance through the first nine months of 2019 and our terminal network and retail assets provide us with a strong foundation as we move forward.

Now I'll turn the call over to Daphne for her financial review. Daph?

Daphne H. Foster -- Chief Financial Officer

Thank you, Eric, and good morning, everyone.

As we go through the numbers, please keep in mind that as expected, net income, EBITDA, adjusted EBITDA and DCF for Q3 of this year include a $13.1 million loss on the early extinguishment of debt related to the $400 million issuance of the 2027 senior notes and the repurchase of the 2022 notes. The $13.1 million consists of a $6.9 million call premium and a $6.2 million non-cash write-off of deferred financing fees and unamortized original issue discount.

Third quarter 2019 adjusted EBITDA was $66.1 [Phonetic] million compared with $37.2 million in the third quarter of 2018. Net income was $15.1 million versus a net loss of $14.1 million in Q3 2018. DCF was $30.4 million compared with $5.3 million in the same prior-year period. TTM distribution coverage at the end of the third quarter was 2.2 times. After factoring in distributions to the preferred unitholders, that coverage was 2.1 times.

Turning to margins. Combined product margin in the third quarter increased $53 million to $210 million driven by growth in our GDSO and wholesale segments. GDSO product margin increased $20.1 million to $168.7 million. The gasoline distribution contribution to product margin was up $16.3 million, primarily due to higher fuel margins and to a lesser extent the Champlain and Cheshire acquisitions. The average fuel margin per gallon improved approximately $0.039 to $0.254 from $0.215 in last year's third quarter.

Year-over-year volume in the GDSO segment decreased approximately 800,000 gallons due in part to the sale of non-strategic retail sites, partially offset by the acquisitions. Station operations product margin which includes convenience store sales, sundries and rental income increased $3.8 million to $61.1 million, primarily due to the acquisitions, which added 47 Company-operated sites to our portfolio. At the end of the quarter, our GDSO portfolio consisted of 1,566 sites, comprised of 295 Company-operated stores, 253 commissioned agents, 221 lessee dealers and 797 contract dealers.

In our wholesale segment, the gasoline and gasoline blend stock product margin increased $14.6 million to $20.2 million, reflecting more favorable market conditions and a comparison to a weak third quarter of 2018. As we mentioned on last year's Q3 call, product margin swings quarter-to-quarter can sometimes be a matter of timing. As prices change, for instance, product margin variability can be caused by marks at the end of the quarter, thereby impacting quarter-end hedge and inventory values.

Product margin from crude oil was negative $3.0 million compared with a negative $7.6 million in the third quarter of 2018. The improvement from Q3 of last year primarily reflects lower railcar related expenses. Product margin from other oils and related products increased $11.9 million to $17.1 million. This increase was largely due to more favorable market conditions, primarily in distillates and also in residual oil.

Volume in our wholesale segment increased 71 million gallons or approximately 8% due primarily to increases in gasoline and gasoline blend stocks.

In our commercial segment, product margin increased $1.7 million to $7.2 million in the third quarter of 2019, with increases in multiple product lines. Volume in our commercial segment increased 5 million gallons on increases in distillates and gasoline.

Turning to expenses. Operating expenses increased $4 million to $87.8 million in the third quarter. Approximately $3.1 million of the increase was associated with GDSO, primarily the Champlain and Cheshire acquisitions, while the remaining $0.9 million was associated with terminal operations.

SG&A expenses in Q3 were up $3.2 million to $45.3 million. This included increases in incentive compensation and increases in wages and benefits in part to support our GDSO business, including the 2018 acquisitions, partially offset by $3.6 million in acquisition costs incurred in Q3 2018 that were not incurred in the same period of 2019.

Interest expense was $22.1 million in Q3 2019 compared with $22.6 million in the year earlier period. The year-over-year decrease was primarily due to lower average balances in our credit facilities. Outstandings on our $850 million working capital facility were lower, primarily due to lower commodity prices, and outstandings under our $450 million revolver were lower in part due to proceeds from asset sales and the issuance of the $400 million notes.

CapEx in the third quarter was approximately $22.5 million, consisting of roughly $12.2 million of maintenance CapEx and $10.3 million of expansion CapEx. The majority of these expenditures related to our gas station and convenience store business. For full year 2019 we now expect maintenance CapEx in the range of $45 million to $55 million compared with the prior range of $40 million to $50 million and expansion CapEx in the range of $35 million to $45 million compared with the range of $40 million to $50 million.

Turning to our balance sheet. Leverage, defined in our credit agreement as funded debt to EBITDA, was approximately 3.0 times at the end of the third quarter. We continue to have ample excess capacity under our credit facility. As of September 30 we had total borrowings outstanding of $449.9 million under our $1.3 billion facility, including $197 million under our $450 million revolving credit facility and $252.9 million under our $850 million working capital facility. The reduction in our revolver from $220 million at year-end 2018 to $197 million at September 30 was due in part to proceeds from the sale of assets as well as the larger bond offering.

Turning to guidance. Based on our performance for the first nine months of the year, we are raising our full year 2019 EBITDA to a range of $225 million to $240 million before recognition of the $13.1 million loss on the early extinguishment of debt in the third quarter of 2019 related to the recently completed private offering. This guidance excludes any gains or losses on the sale and disposition of assets and goodwill and long-lived asset impairment charges.

Before we go to Q&A, I wanted to let you know that in November we will be hosting one--on-one meetings at the RBC Capital Markets Midstream Conference in Dallas, in December we will be at the Bank of America Merrill Lynch Leveraged Finance Conference in Boca Raton and the Wells Fargo MLP Symposium in New York City. To all of those attending, we look forward to meeting with you.

With that, Eric and I will be happy to take your questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Ned Baramov of Wells Fargo. Please proceed with your question.

Ned Baramov -- Wells Fargo -- Analyst

Hi, good morning, and thanks for taking the question. I'll start with one on guidance. So based on the midpoint of the revised guidance range, it seems you're expecting a significant step-down in EBITDA in the fourth quarter and that's more than what normal seasonal weakness would imply. Is this driven by conservatism on your part? Or are there other dynamics in play?

Daphne H. Foster -- Chief Financial Officer

Yeah. Good morning, Ned. I mean, certainly the increase in guidance reflects the strong year-to-date performance. But it's really too early to predict the fourth quarter. As you know, price movements can impact fuel margins on the retail side of business in GDSO segment. Certainly weather can have an impact. And then obviously singular events are hard to predict such as like we had in September with the Saudi drone attacks which can have an impact. So it's really too early to tell.

Ned Baramov -- Wells Fargo -- Analyst

That's fair. And then what is the latest on a potential IDR elimination transaction?

Daphne H. Foster -- Chief Financial Officer

Well, certainly others in the MLP space have eliminated their IDRs. That said, we periodically review our capital structure. We always are examining all opportunities in the marketplace.

Ned Baramov -- Wells Fargo -- Analyst

Got it. And then I guess while we're on the topic of simplification or restructuring, has the REIT format come up in your discussions? It seems that your assets will be well suited for this type of structure, and also there is a broader market acceptance.

Daphne H. Foster -- Chief Financial Officer

I think same -- yeah, same comment. I mean, we're always looking at alternatives out there, looking to maximize our position, both from a structural and a business standpoint.

Ned Baramov -- Wells Fargo -- Analyst

Thanks for the time this morning. That's all I had.

Operator

Thank you. Our next question comes from the line of Jeremy Tonet of JPMorgan. Please proceed with your question.

Charles -- JPMorgan -- Analyst

Hey, good morning. This is Charlie [Phonetic] on for Jeremy. Just stepping back to the 4Q -- oh, not the 4Q guidance but the increased annual guidance. I understand that obviously it will be price movements that will dictate where fuel margin shake out but when you look at guidance and as you maybe start looking forward to 2020, what's the kind of run rate or fuel margin that you typically embed into your guidance numbers?

Daphne H. Foster -- Chief Financial Officer

Good morning, Charlie. Yeah. I mean, I can't give you a number directly on that. I mean, in terms of -- as you know, the GDSO segment, the fuel margins can go up or down just depending on what's happening in terms of the movement of prices. And frankly, that's not something that we worry about because, net-net, it's pretty much down the fairway on an annual basis.

Charles -- JPMorgan -- Analyst

Okay. And then I guess this past quarter -- I mean, was it largely kind of price swings? Or was there any -- nothing -- did anything fundamentally change that as helping improve margins on the fuel side?

Daphne H. Foster -- Chief Financial Officer

Yeah, I think if you look at the NYMEX, if you look at wholesale prices during the quarter, you see that it basically peaked somewhere in mid to late July and then it was pretty much down in August and bottomed out early in September. And then of course, obviously your pricing -- your gas relative to the very local competition for every site. So margins continued to hold really in the last two months of the quarter.

Charles -- JPMorgan -- Analyst

Okay. And on OpEx, sorry if I missed it in the prepared remarks. The tick-up, is that largely Champlain and Cheshire? Was there anything else there?

Daphne H. Foster -- Chief Financial Officer

No, I think in general the third quarter -- second quarter and third quarter can run a little heavier in terms of what's happening in maintenance at the terminals, but also at the stations. That -- I would say in general that $87 million in terms of the third quarter, certainly it's up from the second quarter and quite a bit up from the first quarter, it's probably a bit heavy.

Charles -- JPMorgan -- Analyst

Okay, great. And then...

Daphne H. Foster -- Chief Financial Officer

But -- it's seasonal maintenance -- seasonal maintenance, more than anything else.

Charles -- JPMorgan -- Analyst

Seasonal maintenance? Okay. And then the last question. Then looking at EI data and seen that distillates inventory in the Northeast -- are they pure pretty well. I don't know how much that is influenced by the refinery outage with us. But what is that -- what can that do as we kind of enter the heating season? Do you see this potentially causing an issue with a shortage of inventory? Can that be rectified pretty easily in terms of just importing more supply coming from Colonial or, I guess, imports?

Mark Romaine -- Chief Operating Officer

Yeah, good morning. It's Mark. You're right. Distillate inventories are -- I think they might be below the -- at a 10-year low heading into winter, and regarding your question as far as how that gets solved in the event that, let's say, winter is cold and demand spikes -- yeah, the market will just attract more barrels -- or price itself will attract more barrels. But what the impact of the low inventories will be -- any disruption will be felt a little bit -- a little bit greater. There could be more volatility. I mean, say -- the risk is to the upside here on distillate prices. So -- but if the market needs a barrel, it will find a barrel [Indecipherable] more imports.

Charles -- JPMorgan -- Analyst

Sure, that makes sense. That's it from me. Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Lin Shen of HITE. Please proceed with your question.

Lin Shen -- HITE -- Analyst

Hi, good morning. Thanks for taking the call, and congratulations for a great quarter. I have two question. First at the -- for the GDSO, you report a great margin. Also a couple of your peers also report good margin for the third quarter. When we think about the industry, should we think there are some fundamental change or structural change for the industry that by average the margin is better than it used to be? Maybe less competition or some other reasons?

Eric Slifka -- President and Chief Executive Officer

Very broadly -- Lin, it's Eric. There has been a lot of consolidation in the business. So I think that's one piece of the -- I think that you have had a lot of assets change hands here and go into ownership that is -- that borrows a lot of money in order to buy their assets. And so it could in fact be that there is some change in the market. But all it takes is one player to come in and upset the market.

So I think there's really a couple of things going on here. Yes, I do in fact believe that structurally there is consolidation in the market. That's one thing. But yet, it is also a market that can have other disruptions that take place by players executing in different ways, right? And there are large independents out there who in certain markets have been really successful in executing on different models. So I also think that there is that risk there as well.

But I think generally there is consolidation in the market for sure. Companies are leveraging to do those acquisitions not in a bad way but so their economics are different. And then there is also that other piece out there which on the other side says if somebody has a business model that they can execute on in a better fashion than others, right, their economics are going to be different and that's always the risk side of the equation.

Lin Shen -- HITE -- Analyst

Great. Thank you. And also, you mentioned that go into the winter, their distillate inventory is low. It is part of their IMO 2020 impact? Or what are their IMO 2020 impact that you think you're going to see in Q4 or Q1?

Mark Romaine -- Chief Operating Officer

So, Lin, your question was, what is the impact that we're going to see on -- due to IMO 2020?

Lin Shen -- HITE -- Analyst

Yes.

Mark Romaine -- Chief Operating Officer

Yeah. It's a little hard to say what the impact is going to be. Obviously, there is going to be a greater demand for lower sulfur fuel and that is presumably contributing to lower distillate inventories on a larger scale. Our expectation, like it was for this year with respect to our [Indecipherable] and resid business is that anytime you're going through a spec change, especially one of this nature, there is going to be increased volatility, there is going to be -- there'll likely be supply dislocations.

Our expectation is that given our storage position and our experience in the markets that we operate, I think we're well positioned to continue to run the business and capitalize on conditions in the marketplace as they come out. And so it's kind of hard to say exactly what the impact is going to be. I would -- it's been a choppy 2019. So expect that same choppiness is going to continue into 2020, but we should be fairly well positioned for it.

Lin Shen -- HITE -- Analyst

So do you already see some customer change their -- like demand on your asset or is it too early to see?

Mark Romaine -- Chief Operating Officer

Yes. It's probably a little early. There may be some -- there may be some ship owners that are -- that have either recently or will are about to start transitioning. But on a large-scale basis, it hasn't been a major factor. But it's probably occurring as we speak and will likely continue as we get through the end of the year.

Lin Shen -- HITE -- Analyst

Great. Thank you very much. Appreciate it.

Operator

Our next question comes from the line of Selman Akyol of Stifel. Please proceed with your question.

Will -- Stifel -- Analyst

Hi, good morning. This is Will on for Selman. Just a couple of questions. SG&A came in this quarter a bit above what we had estimated. So I was just wondering if you could -- just your outlook on SG&A and if that $45 million is a good run rate.

Daphne H. Foster -- Chief Financial Officer

Yeah. Good morning. The SG&A of $45 million in the third quarter, that's up certainly from $41 million or so which was both in the first and the second quarter and the increase is largely due to the crude incentive comp.

Will -- Stifel -- Analyst

Okay. And then could you just maybe talk about the M&A market, what you guys are seeing, what's going on out there?

Eric Slifka -- President and Chief Executive Officer

I think it continues to be active. Obviously you've had some major assets, particularly in these markets changing hands. I mean, multiples are pretty high from what I can see. We'll try to participate in any processes that are out there. But it does seem as if there is quite a bit of movement. And that's across the board, not just retail but terminally as well.

Will -- Stifel -- Analyst

Okay. Thank you.

Operator

There are no further questions over the audio portion of the conference. I would now like to turn the floor back over to Mr. Slifka for closing comments.

Eric Slifka -- President and Chief Executive Officer

Thanks for joining us this morning. We look forward to keeping you updated on our progress. Have a great day, everybody.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Edward J. Faneuil -- Executive Vice President, General Counsel and Secretary

Eric Slifka -- President and Chief Executive Officer

Daphne H. Foster -- Chief Financial Officer

Mark Romaine -- Chief Operating Officer

Ned Baramov -- Wells Fargo -- Analyst

Charles -- JPMorgan -- Analyst

Lin Shen -- HITE -- Analyst

Will -- Stifel -- Analyst

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