Transcript
Good morning. Thank you for joining us. Today's call will include forward-looking statements within the meaning of Federal securities laws. These statements include projections, expectations, and estimates concerning the future financial and operational performance of Global Partners, which are based on assumptions regarding market conditions, demand for liquid energy products and convenience store products, the regulatory and permitting environment, the forward product pricing curve, and other factors, which could influence our financial results. 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, which could cause actual results to differ materially from the Partnership's historical experience and present expectations or projections. Global Partners undertakes no obligation to revise or update any forward-looking statements. 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.
Thank you, Sean, and good morning, everyone. Let me begin by thanking our entire team for the hard work, creativity, and grit that contributed to a strong year for Global. For companies across our industry and many others, 2022 was a year of significant challenges, including supply chain constraints, steep commodity price volatility, inflation, a tough labor market, and the war in Ukraine. Our team successfully navigated through these challenges. In addition to the power of our people, our company performance demonstrates the resilience of our business model, the strength of our assets, and the value that we deliver for the guests at our gas stations and convenience markets and the customers at our liquid energy terminals every day. For the fourth quarter, our Wholesale segment product margin more than doubled from the same period in 2021 as market conditions and effective management of our inventories amid sustained backwardation in the distillates markets combined to drive strong margin capture. In our gasoline distribution and GDSO segment, we continued to benefit from higher retail fuel margins and increased activity in our convenience markets, in part as a result of our recent acquisitions. Our Commercial segment also capped 2022 with a strong fourth quarter as bunkering activity remained robust. Consistent with our focus on strategic transactions that strengthen our long-term earnings power, during the year, we closed on over $255 million of retail acquisitions. With the purchases of Consumers Petroleum of Connecticut, Miller Oil Co., and Tidewater Convenience, we added more than 60 company-operated convenience markets and related fuel operations, as well as fuel supply arrangements at more than 55 additional sites. The Consumers Petroleum acquisition deepened our footprint in the New England region, while the Miller Oil and Tidewater deals expanded our reach into Virginia. The retail fuel M&A pipeline remains very active and we continue to evaluate potential opportunities that align with our financial and operating objectives. We also continue to focus on optimizing our terminal network. In December, we entered into a purchase agreement with Gulf Oil Limited partnership to acquire five of Gulf's refined product terminals for approximately $273 million in cash. Located in Connecticut, Maine, Massachusetts, and New Jersey, the terminals have an aggregate storage capacity of approximately 3.9 million barrels in locations that complement our network by making us more competitive in multiple products over a larger geographic base. The transaction is expected to close in the first half of 2023, subject to customary closing conditions, including regulatory approval. Turning to our distribution, in January, the Board declared a fourth quarter cash distribution of $1.5725 per unit on all of our outstanding common units consisting of a quarterly distribution of $0.6350 per unit, $2.54 per unit on an annualized basis, and a one-time special distribution of $0.9375 per common unit. The distribution was paid on February 14 to unitholders of record as of the close of business on February 8. In 2022, we made great strides in defining our role in the energy transition from actively crafting clean fuels policy to investing in the infrastructure to deliver low-carbon solutions to creating mechanisms for people to lead with ingenuity; we are making progress on our sustainability journey. In the renewable fuels area, we permitted and completed the installation of customizable biofuel systems at four of our terminals and began biofuel supply projects at two additional facilities. We now offer renewable products at half of our 22 owned or controlled terminals. On the EV front, our sustainability group welcomed an electric innovation strategist to evaluate, educate, and guide our strategy in the electric space, including electric vehicle and charger market. To date, the group has secured more than $800,000 in grants to deploy DCFC EV charging stations at six of our locations and has developed a spec for DCFC stations at new Alltown Fresh locations. As we continue to invest in optimizing our sites with an eye towards sustainability, we know that the drivers of tomorrow will have different expectations and needs than the drivers of today. To help us understand those needs and envision the fueling infrastructure of the future, we sponsored Fuel of the Future 2030, a student design competition engaging more than 30 teams of undergraduate and graduate students attending schools across nine states. The top five finalists presented their entries and an awards presentation in November. We are thrilled to have learned from the creativity of these bright minds. As part of our work in the clean fuel space, we formed an interdisciplinary team to research and evaluate hydrogen mobility supply and distribution opportunities. As an organization, we have a responsibility to act thoughtfully and sustainably for all of our customers, shareholders, employees, and communities. Building on this objective, this year, we published our inaugural Corporate Social Responsibility Report, which details the progress we have made along that journey. This report is available on our website, and I encourage you to review it. By caring for the environment, empowering people, particularly our employees and communities, and practicing responsible governance, we have formed the foundation for an enduring business that has stood the test of time and continues to thrive. With that, now let me turn the call over to Greg for his financial review.
Thank you, Eric, and good morning, everyone. As Eric noted, diligent planning, effective fuel inventory management, and solid execution by the entire team allowed us to have continued strong performance in the fourth quarter of 2022, closing out a very strong year for the Partnership, highlighted by healthy margin contributions from all three segments of our business. Adjusted EBITDA for the fourth quarter of 2022 was $106.9 million, compared with $66 million for the same period in 2021. For the full year, adjusted EBITDA was $485.2 million compared with $244.3 million in the same period of 2021. The increases for the quarter and full year of 2022 were primarily driven by our Wholesale and GDSO segments. Net income was $57.5 million for the fourth quarter of 2022 compared with $19.3 million for the same period in 2021. Full year 2022 net income increased to $362.2 million from $60.8 million in the prior year. DCF was $57.3 million for the fourth quarter of 2022 compared with $30.5 million in the same period of '21. For the full year, DCF was $413.4 million compared with $120.7 million in '21. DCF for 2022 included a net gain of $79.9 million primarily related to the sale of our Revere terminal in June. TTM distribution coverage as of December 31, 2022, including the one-time special distribution was 3.4x or 3.3x after factoring in distributions to our preferred unitholders. Excluding the net gain on the sale of assets, TTM distribution coverage was 2.8x or 2.6x after factoring in distributions to our preferred unitholders. Turning to our segment details, GDSO product margin was up $46.1 million in the quarter to $223.2 million. The gasoline distribution contribution to product margin was up $36.2 million to $155.9 million, primarily due to higher fuel margin and an increase in volumes sold, partially due to our recent acquisitions. Fuel margins increased $0.07 per gallon to $0.37 from $0.30 per gallon in the fourth quarter of 2021. Although gasoline and diesel prices ended the fourth quarter at almost the same place they began the quarter, inter-quarter price volatility allowed for periods of strong margin capture. Station operations, including station operations product margin, which includes convenience store and prepared food sales, sundries, and rental income, rose $9.9 million to $67.2 million from the fourth quarter of 2021. This reflected an increase in activity at our convenience stores, in part due to our recent acquisitions. For the full year, GDSO product margin was up $209 million to $856.6 million, with fuel margins increasing $0.09 per gallon to $0.36 from $0.27 per gallon in the year-earlier period. Gasoline Distribution contributed $588.7 million of product margin for the full year, up $175 million from 2021. Station operations product margin was $267.9 million for the full year 2022, up $34 million from 2021. At the end of 2022, our GDSO portfolio consisted of 1,673 sites, comprised of 353 company-operated sites, 295 commission agents, 192 leasing dealers, and 833 contract dealers. Looking at the Wholesale segment for the fourth quarter of 2022, product margin increased $38.1 million to $70.7 million. Product margin from other oils and related products, which include distillates and residual oil, was up $48.5 million to $59.4 million, primarily due to more favorable market conditions in distillates. Gasoline and gasoline blendstock product margin contributed $14 million, down $9.9 million from the same period in 2021. Product margin from crude oil was negative $2.7 million for the fourth quarter, down $0.5 million from a year earlier. For the full year 2022, wholesale product margin increased $148.8 million to $287.7 million. Product margin from other oils and related products increased to $190.1 million for the full year, up $124.7 million from 2021, primarily due to more favorable market conditions, largely in distillates. Gasoline and gasoline blendstock product margin increased $20.7 million to $107 million for the full year, primarily due to more favorable market conditions in gasoline during the second and third quarters of 2022. Crude oil product margin improved to a negative $9.4 million, up $3.4 million from a year earlier. Turning to the Commercial segment, product margin in the fourth quarter increased $5.1 million year-over-year to $9.9 million. For the full year, Commercial segment product margin increased $25.4 million to $41 million. The segment's performance for both periods was driven largely by an increase in bunkering activity. Looking at expenses, operating expenses increased $25.2 million to $118 million for the fourth quarter and $91.7 million to $445.3 million for the full year. The increases were largely associated with our GDSO operations, including our recent acquisitions, reflecting higher credit card fees related to increases in volume and price, higher salary and rent expenses, partially due to greater activity at our stores, and increases in our environmental reserve and maintenance and repair expenses. SG&A expenses increased $23 million in the fourth quarter to $80.8 million. On a full year basis, SG&A was up $50.2 million to $263.1 million. The increases in the quarter and the full year were in part due to increases in accrued discretionary incentive compensation and wages and benefits. In addition, in the fourth quarter, we incurred an expense of approximately $7.5 million in connection with an ongoing dispute between us and a landlord at certain of our sites, which we are currently disputing. Interest expense was $19.7 million in the fourth quarter in both 2022 and 2021. For full year 2022, interest expense increased $1.2 million to $81.3 million. CapEx in the fourth quarter of 2022 was approximately $41 million, consisting of $26.6 million of maintenance CapEx and $14.4 million of expansion CapEx, the majority of which relates to our convenience stores. CapEx for the full year 2022 was $106.8 million, consisting of $54.4 million in maintenance CapEx, in line with our guidance of $45 million to $55 million; and expansion CapEx, excluding acquisitions, of $52.4 million, in line with our guidance of $50 million to $60 million. For full year 2023, we expect maintenance capital expenditures in the range of $50 million to $60 million; and expansion capital expenditures, excluding acquisitions, in the range of $55 to $65 million, relating primarily to investments in our gasoline station business. These current estimates depend in part on the timing of completion of projects, availability of equipment and workforce, weather, and unanticipated events or opportunities requiring additional maintenance or investments. We continue to manage our balance sheet prudently. Leverage, which is defined in our credit agreement as funded debt-to-EBITDA was approximately 1.74x at the end of the fourth quarter. We continue to have ample excess capacity in our credit facility. As of December 31, 2022, total borrowings outstanding under the credit agreement were $252.4 million. This consists of $153.4 million under our $1.1 billion working capital revolving credit facility and $99 million under our $450 million revolving credit facility at 12/31/22. Looking at our upcoming Investor Relations calendar, next week, Mark and I will be participating in the JPMorgan 2023 Global High Yield and Leverage Finance Conference. For those of you who are participating, we look forward to meeting with you. Now let me turn the call back to Eric for closing comments.
Thank you, Greg. 2022 was an exceptionally strong year for Global, reflecting the dedication of our incredible team, our vertically integrated assets, adaptable operating model, and strong balance sheet position us well for the year ahead. While macroeconomic uncertainty remains, we continue to focus on driving returns for unitholders through a combination of organic growth, strategic acquisitions, optimization, and innovation. Now, Greg, Mark, and I will be happy to take your questions.
Our first question comes from Gregg Brody with Bank of America.
Can you start by discussing the wholesale acquisition you announced in late December? What kind of volume do you expect it to add, and how should we consider the normalized EBITDA related to that?
Yes, sure, Gregg. I mean, candidly, we're not offering much more detail on the Gulf acquisition other than what we released in the 8-K in December. We are going currently through the FTC process, so we need to respect that process. We are hopeful that that will close before June 30th this year. But again, we're somewhat at the mercy of the FTC process, which we're currently reviewing.
Got it. I know you typically don't provide EBITDA guidance, but I'm curious if you can share some insights on the operating costs and SG&A for this year.
Certainly. I can share a few useful data points. SG&A expenses in the quarter were quite substantial. A significant factor was the legal costs associated with an ongoing dispute with one of our landlords, which amounted to about $7.5 million. We also made $2 million in charitable contributions related to the oil donation, which was a one-time occurrence. Additionally, there were various incentive compensation items tied to our strong performance in 2022. Looking ahead, 2022 was an exceptional year for us, marked by historic backwardation in the market. Our inventory management enabled us to capitalize on that situation. We anticipate that conditions will return to normal over time, which should also lead to a normalization of our SG&A expenses. For a more standard run rate on SG&A, I would suggest looking at the first three quarters of 2022.
Got it. What can you tell me about the operating cost side?
Sure. The operating costs did not include many one-time items as seen in SG&A. In the fourth quarter, we incurred around $3 million in expenses related to known environmental reserves, which are one-time in nature. Most of the operating expenses are connected to our GDSO business, particularly tied to acquisitions. The largest components of those expenses are salaries at our sites and credit card fees, which were significantly high throughout the year. In the fourth quarter, credit card fees were $4 million worse compared to the previous quarter, largely due to retail pump prices. While we've observed some normalization in prices compared to early 2022, our volume has increased year-over-year due to acquisitions, suggesting this normalization will continue. We experienced some wage pressures throughout 2022 as well, which have also somewhat normalized, although the labor market remains tight, not as tight as it was during the summer, but it hasn't loosened as we anticipated. I would estimate that our operating expense run rate will likely align more closely with the figures from the third and fourth quarters.
And in those numbers, how much inflation between SG&A and operating expense, how much inflation are you assuming in there?
Yes, it's a good question. I mean I think what we saw year-over-year was probably 15% on things I will say that's normalized sort of run rate from 2021 to 2022.
Got it. And you mentioned this a bit, Wholesale normalized. GDSO though, you're still running at margins that are above history. You've said the breakevens have improved. What do you think the right number is today for a normalized margin? I know you chuckled because it keeps improving.
I can give my 2 cents, and I'll let Mark or Eric chip in, too. I think we do believe that we have seen operating costs for all operators in the gas station business increase, not just in salary, but also on equipment and credit card fees, all of that has to be offset and passed through on the fuel margin, we believe. And so we've seen a definite shift since COVID on the fuel margin side. We were seeing it before that, too. Historically, margins have been creeping up as expenses increase. And I think it impacts the smaller operators more than guys like us who have scale, we have different levers we can pull on expenses as opposed to some of the smaller guys, whose only lever they can pull is fuel margin. And I think you've heard a lot of other companies mention that. But to your point, yes, we see breakeven increase. And I think we've got to offset the cost.
I appreciate that information. If I may add another point, the acquisition from December is a bit larger than some of the previous ones you've completed. Are you planning to fund it through the revolver and pay it down gradually, or do you think you might refinance it in the bond market at some point?
Yes. Our expectation is we're going to fund it under the revolver. We only have $99 million currently funded under that revolver. And you may have seen our recent 8-K that came out in January, we did an amendment to upsize the revolving capacity from $450 million to $600 million. So we currently have about $500 million of revolver availability under the revolver. And so we'll fund the $273 million acquisition price under that, as a revolver. And then as we've historically looked in the past, we have utilized the bond market to term out some of our longer-term borrowings. And yes, there's potential there, we'd look to the bond market again at some point as needed.
Our next question comes from Greg Fedele with Stifel.
This is Greg. Congrats on the great end to a strong year. Just wanted to know if you could give any color around kind of diesel margins or fuel margins that you've seen this year so far, given volatility and that it's going to be probably a pretty heavy year as far as refinery turnarounds go. But just really any color you could provide would be really helpful.
Greg, it's Mark. I couldn't hear the entire question, but I think I understood your concerns about margins and refinery turnarounds. I assume you're referring to the overall market situation. Currently, the curve has flattened significantly. This means that much of the volatility and inventory carrying costs we experienced in 2023 have changed. Our expectations, although uncertain, suggest that margins should normalize as the curve has flattened, volatility has decreased, and the costs of holding inventory have dropped. We are observing a shift in margins towards a more historical level, although they remain elevated. Looking ahead with the information we have now, it's reasonable to conclude that these market conditions will continue for the rest of 2023. Of course, if there is an unforeseen event or if demand exceeds our expectations—which I believe will not be the case—this could alter the situation. However, inventories still appear to be on the tighter side, so any event could affect this. Overall, based on what we see now, things are starting to trend more toward historical norms compared to 2022.
Great. That's really helpful. Sorry about the mic issues. Just one more question, if you can hear it just on the special distribution, if 2023 is another really good year, is that a tool that you're thinking about utilizing in the future? Or just kind of any capital allocation ideas going forward?
I want to start by saying that the Board is responsible for making decisions on distributions. The recent special distribution was a result of our strong performance in 2022 and gains related to the sale of the Revere terminal. Looking ahead, our decisions will depend on our capital allocation strategy and what we believe will provide the best returns for unitholders. We have an acquisition we finalized in December that we consider beneficial for the partnership in the Gulf region. Ultimately, the best use of capital and potential returns for unitholders will guide our decisions.
We have no further questions at this time. 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. Enjoy the week, everyone.
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.