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 question at the end of the call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

[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..

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 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 blendstocks and renewable fuels; utilizations 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..

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 a 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 unitholders 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?.

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 noncash write-off of deferred financing fees and unamortized original issue discount. Third quarter 2019 adjusted EBITDA was $66.1 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 distribution 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 the 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 nonstrategic retail sites, partially offset by the acquisitions.

Station Operations product margin, which includes convenience store sales, sale of sundries and rental income increased $3.8 million to $61.1 million primarily due to the acquisition 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 blendstocks 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 a 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 blendstocks. 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 gasolines. 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 would not have 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 on our credit facilities. Outstanding 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 those attending, we look forward to meeting with you. With that, Eric and I will be happy to take your questions.

Operator?.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ned Baramov of Wells Fargo. Please proceed with your question..

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 we imply.

Is this driven by conservatism on your part? Or are there other dynamics in play?.

Yes, 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 the business and 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..

That’s fair.

And then what is the latest on a potential IDR elimination transaction?.

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..

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 would be well suited for this type of structure. And also, there's a broader market like this..

Yes, 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..

Thanks for the time this morning, that’s all I had..

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

Hey good morning this is Charlie on for Jeremy. Just stepping back to the 4Q – well, not the 4Q guidance but the increased annual guidance. I understand that obviously, there will be price movements that'll dictate where fuel margins 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?.

Yes, good morning Charlie. Yes, I mean, I can't give you a number directly on that. I mean in terms of – as you know, the GDSO segment, that fuel margins can go up or down, just depending on what's happening in terms of 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..

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 is helping improve margins on the fuel side?.

Yes. I think if you look at the NYMEX, if you look at wholesale prices during the quarter, you'll see that it basically peak 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, we are pricing your gas relative to the very local competition for every site.

So margins continue to hold really in the last two months of the quarter..

Okay. And on OpEx. Sorry if I missed it in the prepared remarks.

The tick up, is that largely Champlain and Cheshire? Is there anything else there?.

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.

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 from the first quarter, it's probably a bit heavy..

Okay great..

But as you know, it's seasonal maintenance. Seasonal maintenance more than anything else..

Seasonal maintenance. Okay. And then the last question, been looking at EIA data and seen that distillates inventory in the Northeast are – they appear pretty low.

I don't know how much that is influenced by the refinery outage with PES, but what does 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 – on more supply coming from Colonial or, I guess, imports?.

Hey good morning. It’s Mark. You are 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's cold and demand spikes, yes, the market will just attract more barrels.

So I have to price itself to attract more barrels. But what the impact of the low inventories will be – any disruption will be felt a little bit greater. It could be more volatility. I would say the risk is to the upside here on distillate prices so – but if the market needs the barrel, it will find the barrel, it'll just incent more imports..

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

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

Hey good morning. Thanks a lot for taking the call. And congratulations for a great quarter. I have two questions. First, at the – for the GDSO, you reported great margin. Also, a couple of your peers also reported margin for the third quarter.

When we think about industry, should we think, there's some fundamental change or structural change for the industry that, by average, margin is better than it used to be? Maybe a less competition or some other reason?.

Very, very broadly – Lin it's Eric. There's been a lot of consolidation in the business, so I think that's one piece of it. I think that you have had a lot of assets change 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's 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's 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's 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's also that other piece out there, which on the other side said, 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 a risk side of the equation..

Great. Thank you. And also, you mentioned that going to the winter, their distillate inventories are low.

Is this part of their IMO 2020 impact? Or what are their IMO 2020 impact are you going to – you're seeing you're going to see in Q4 or Q1?.

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

Yes..

Yes, it's a little hard to say what the impact is going to be. Obviously, there's 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 bunker and resid business, is that any time you're going through a spec change, especially one of this nature, there's going to be increased volatility. There's 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 at us. So it's kind of hard to say exactly what the impact's going to be.

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..

So do you already see some customer change their, like, demand on your asset? Or I mean – or it's too early to see?.

Yes, it's probably a little early. There may be some ship owners 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..

Great, thank you very much. I appreciate it..

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

Hi 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 – and just your outlook on SG&A.

And if that $45 million is a good run rate?.

Yes good morning. Yes, 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 as incentive comp. .

Okay.

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

I think it continues to be active. Obviously, you've had some major assets, particularly in these markets changing. And 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 terminaling as well..

Okay. Thank you..

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

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

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day..