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Edited Transcript of GLP earnings conference call or presentation 9-May-19 2:00pm GMT

Q1 2019 Global Partners LP Earnings Call

WALTHAM May 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Global Partners LP earnings conference call or presentation Thursday, May 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daphne H. Foster

Global Partners LP - CFO & Director of Global GP LLC

* Edward J. Faneuil

Global Partners LP - Executive VP, General Counsel & Secretary of Global GP LLC

* Eric S. Slifka

Global Partners LP - President, CEO & Vice Chairman of Global GP LLC

* Mark A. Romaine

Global Partners LP - COO of Global GP LLC

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Conference Call Participants

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* Barrett Auten Blaschke

MUFG Securities Americas Inc., Research Division - Senior Analyst

* Benjamin Preston Brownlow

Raymond James & Associates, Inc., Research Division - Research Analyst

* Charles W Barber

JP Morgan Chase & Co, Research Division - Analyst

* David Schechter

* Lin Shen

Hite Hedge Asset Management LLC - Analyst

* Ned Antonov Baramov

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Global Partners First Quarter 2019 Financial Results Conference Call. Today's call is being recorded. (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'll turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

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Edward J. Faneuil, Global Partners LP - Executive VP, General Counsel & Secretary of Global GP LLC [2]

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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, utilization of assets and facilities, weather, credit markets, the regulatory and permitting environment in 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 it's my pleasure, please allow me to turn the call over to our President and Chief Executive Officer, Eric Slifka.

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Eric S. Slifka, Global Partners LP - President, CEO & Vice Chairman of Global GP LLC [3]

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Thank you, Edward. Good morning, everyone, and thank you for joining us. Our first quarter results reflect solid performance across our businesses. Our Q1 performance was highlighted by strong fuel margins early in the quarter in our Gasoline Distribution and Station Operations segment, which posted a product margin increase of 22% over the same period last year.

GDSO also benefited from the Q3 2018 acquisitions of Champlain and Cheshire. These acquisitions are part of a broader strategy to expand our portfolio, further optimize our assets and drive incremental volume through our terminals.

Our GDSO business is supported by our strong fuel supply, terminalling and marketing operations, which include nearly 11 million barrels of store of tankage throughout the northeast. We believe that the vertical integration of our supply, terminalling and retail assets gives us a competitive advantage in the market place.

Turning to our distributions. In April, the Board increased the quarterly distribution on our common units from $0.50 to $0.51 per unit or 2% on an annualized basis. The distribution will be paid on May 15 to common unit holders of record as of May 10.

We are off to a solid start in 2019. Our terminal network of retail locations continue to perform in line with our expectations, and we are on track to achieve our full year EBITDA guidance.

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

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [4]

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Thank you, Eric, and good morning, everyone. Let me begin with an overview of our first quarter results. As we go through these numbers, please keep in mind that in the first quarter of 2018 adjusted EBITDA, net income and DCF results, included a onetime noncash gain of $52.6 million associated with the extinguishment of a contingent liability related to the Volumetric Ethanol Excise Tax Credit.

First quarter 2019 adjusted EBITDA was $58.6 million compared with $107.6 million in the first quarter of 2018 or $55 million excluding the $52.6 million noncash gain. Net income in Q1 2019 was $7.1 million versus net income in Q1 '18 of $59 million or $6.4 million excluding the $52.6 million noncash gain.

DCF was $27.8 million in the first quarter of 2019 compared with $79.8 million in the same period of 2018 or approximately $27.2 million excluding the $52.6 million. Stronger fuel margins and contribution from our 2018 acquisitions were the drivers to these increases year-over-year.

TTM distribution coverage at the end of the first quarter was 1.8x.

Turning to margin. Combined product margin in the first quarter increased $13.6 million to $179.7 million driven by growth in our GDSO segment. GDSO product margin increased $24.7 million to $138.4 million.

The Gasoline Distribution contribution to product margin was up $17.3 million, primarily due to higher fuel margins and the acquisitions of Cheshire and Champlain in July 2018.

The average fuel margin per gallon improved more than $0.03 to $0.23 from $0.194 in last year's first quarter.

Margins remain strong in January, but were negatively impacted by the approximate $0.53 per gallon increase in the wholesale gasoline prices during February and March.

Volume in the GDSO segment increased approximately 17 million gallons year-over-year due primarily to the acquisitions, partially offset by the sale of nonstrategic retail sites.

Station Operations product margin, which includes convenience store sales, sales sundries and rental income increased $7.5 million to $51 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 1,578 sites, comprised of 296 company operated stores, 254 commissioned agents, 230 lessee dealers and 798 contract dealers.

In our Wholesale segment, the gasoline and gasoline blendstocks product margin increased $1.6 million to $27 million, primarily due to more favorable market conditions in Wholesale gasoline, partially offset by less favorable market conditions in gasoline blendstocks.

Product margin from crude oil was negative $6.2 million compared with a positive $5.1 million in the first quarter of 2018. Our product margin for the first quarter of 2018 was positively impacted by $10.7 million in revenue related to a take or pay contract with one particular customer, which contract expired in June 2018.

Product margin from other oils and related products, was down $2.6 million to $14.1 million. This decrease was primarily due to less favorable market conditions year-over-year in distillates.

Volume in our Wholesale segment increased 128 million gallons or approximately 14% due to increases in gasoline and gasoline blendstocks.

In our Commercial segment, product margin increased $1.2 million to $6.4 million in the first quarter of 2019, largely due to an increase in bunkering activity. Volume in our Commercial segment increased 47 million gallons due to increases in gasoline and bunker fuel.

Turning to expenses, operating expenses increased $8.9 million to $82.9 million in the first quarter. This increase reflects the Champlain and Cheshire acquisitions and their associated headcounts and other expenses, including real estate taxes, rents, utilities and maintenance expenses. This increase was partly offset by a $0.4 million decrease in operating expenses associated with our terminal operations.

SG&A expenses in Q1 increased $1.7 million to $41.1 million, primarily to support our GDSO business.

The $0.5 million lease termination and exit gain during this year's first quarter relates back to the voluntary early termination of a railcar sublease with a counterparty in December 2016. And the fleet management services agreement with that counterparty pursuant to which we agreed to provide certain future railcar services.

At that time, we accrued the incremental costs associated with their obligation. The early return of a number of railcars in 1Q '19 released us from the future obligation to service these cars, resulting in a reduction in the remaining accrued incremental costs.

As you may recall, we also had a similar reduction in obligations related to railcar leases in the third quarter of 2018.

Interest expense was $22.9 million in Q1 2019 compared with $21.4 million in the year earlier period.

The year-over-year increase was primarily due to higher average balances on our credit facilities and to higher interest rates. CapEx in the first quarter was approximately $10.2 million, consisting of $8 million of maintenance CapEx and $2.2 million of expansion CapEx. The majority of these expenditures related to our gas station and convenience store business.

For full year 2019, we continue to expect maintenance CapEx in the range of $40 million to $50 million and expansion CapEx in the range of $40 million to $50 million.

Turning to our balance sheet. Adoption of new required lease accounting under ASC 842 resulted in more than a $300 million increase in our total assets and liabilities since the 2018 year-end. Adoption of this new standard did not materially impact our statement of operations or cash flows for 1Q '19, and our bank covenants are calculated using prior accounting protocol. We continue to have ample access capacity under our credit facility. As of March 31, we had total borrowings outstanding of $586.5 million under our $1.3 billion facility, including $217 million under our $450 million revolving credit facility and $369.5 million under our $850 million working capital facility.

Leverage as defined in our credit agreement as funded debt-to-EBITDA was approximately 3.4x at the end of the first quarter. In April, we entered into an amended credit agreement. Among other things, the agreement extended the maturity date for our working capital and revolving credit facilities by 2 years from April 2020 to April 2022. It also reduced by 25 basis points, the applicable rate for borrowings and letters of credit under the $450 million revolving credit facility. We are pleased with this recent amendment and the continued support from our bank group.

Turning to guidance. We continue to expect full year 2019 EBITDA in the range of $200 million to $225 million. This EBITDA guidance excludes the 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 we will be participating in one-on-one meetings at the upcoming MLP & Energy Infrastructure Conference in Las Vegas, the Bank of America Energy Conference in New York City, and the Stifel Cross Sector Insight Conference in Boston. We look forward to meeting with you.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Barrett Blaschke with MUFG Securities.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [2]

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Just as we kind of look at coverage and leverage and everything else and paradigm we're seeing in MLPs today, is there pressure coming from investors to kind of get distribution growth restarted? Or is this just something that is more of an internal goal?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [3]

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Barrett, I think you're -- are you asking directly by our distributions. I think as we said in the past, that's something that obviously the Board considers every quarter. And it's certainly a balancing act between retention of cash flow for self-funding CapEx and projects and then paying distributions and being mindful of leverage. So it really is a balancing act.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [4]

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Okay. Anything new on the sort of CapEx front as far as growth opportunities or things that you're looking at beyond sort of the blocking, tackling you've been doing this year?

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Eric S. Slifka, Global Partners LP - President, CEO & Vice Chairman of Global GP LLC [5]

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I mean we continue to sort of look at all M&A opportunities. I can tell you the breather the market took last quarter, I think, is over, and it seems to be a little bit busier.

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Barrett Auten Blaschke, MUFG Securities Americas Inc., Research Division - Senior Analyst [6]

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Okay. And how are you seeing margins as we kind of get into -- we're part way through second quarter, so...

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Eric S. Slifka, Global Partners LP - President, CEO & Vice Chairman of Global GP LLC [7]

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Yes. I mean I think if you just looked at the publicly available data and the fact that crude and gasoline have generally gone up, I'd say directionally when you look at that public data that would tell you that those markets have squeezed the margins a little bit.

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Operator [8]

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Our next question comes from the line of Ben Brownlow with Raymond James Financial.

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Benjamin Preston Brownlow, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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You mentioned the GDSO strength being in the fuel margins and Champlain and Cheshire. Just on the fuel margins side, the northeast region has been one of the stronger regions of the country. Can you give a little color on what you believe is maybe supporting that margin structure? And then on the Champlain and Cheshire, can you just give us an update on how far long you are in the process of synergies there?

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Eric S. Slifka, Global Partners LP - President, CEO & Vice Chairman of Global GP LLC [10]

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Yes. Let me handle the first one, Ben. It's Eric Slifka, but -- what I'd say broadly is, it's hard to get permits, it's hard to find real estate, it's hard to just decide you're going to go in and build a station wherever you want. And so there are barriers to entry into the market, particularly in high real estate value years that make it difficult for competitors to come in, right?

Mostly, the good corners have been picked over. There is not a lot of growth as in other states. And so I think that, that sort of leads to a little bit of a different pricing model maybe versus other locations. And then on top of that, there is no refineries, there is no pipelines that are in -- outside of New York that are in these markets. So there are alternatives once those barrels touch the water, and I just truly believe that, that ends up affecting retail, right?

And what was your other question, your second question was around overhead at Champlain?

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Benjamin Preston Brownlow, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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Thinking around the synergies at Champlain and Cheshire, if you strip out the fuel margins strength or kind of fuel volatility, just how are you along in those synergies? Or what are you seeing kind of structurally underlying the improvement there in operations?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [12]

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Yes. I think we've been very pleased with the integration today. I think in terms on the fuel side, it's very straightforward in terms of how we buy fuel and how fuel had been bought previously. So it's a pretty straightforward implementation in extracting those synergies.

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Operator [13]

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Our next question comes from the line of Ned Baramov with Wells Fargo.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [14]

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Switching over to your Commercial segment, could you maybe talk about the increase in bunkering activity in the last 2 quarters? Specifically, is this higher level of volumes something you could sustain through the rest of the year?

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Mark A. Romaine, Global Partners LP - COO of Global GP LLC [15]

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This is Mark. I think we've seen -- I think it's a result of 2 things. One, we've seen some market conditions vis-a-vis our competitors that have allowed us to grow some volume. There's been some additional barrels on the market that have been available, so I think we've been able to capitalize on that. I think it's also just we continue to focus on that piece of our business. It's a niche piece of the business, but I think we do it well.

We've got some infrastructure, and we've got a team that's been in place for a really long time. So I think we've been able to just organically grow the business. We have the IMO 2020 coming up in January. So we're expecting that to be -- create some dislocations in the marketplace. We'll see how that plays out, but I think we're well positioned given the fact that we have the ability to handle multiple grids in our storage.

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Ned Antonov Baramov, Wells Fargo Securities, LLC, Research Division - Associate Analyst [16]

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That's great color. And then in the Wholesale segment, I think volumes were higher than we estimated, but then the product margin for crude oil was negative. Could you maybe expand on the crude oil margin weakness and expectations for the rest of the year?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [17]

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Sure. So the delta year-over-year is pretty clear. It's $11 million or so, a little bit more than $11 million down year-over-year is really due to the recognition of the revenue last year for the take-or-pay contract. The negative $6 million in the quarter is going to be reflective of pipeline commitments that we have. So if you do the math and you look at the K, it's around $3.5 million a quarter.

And then you have some small ancillary costs to do with railcar insurance and storage. And railcar lease expense is substantially less than last year. And so where is the delta? Frankly, what -- and I think we talked about this certainly in the third quarter, didn't need to talk about it in the fourth quarter, when you have products that are not in a fair value hedge relationship and prices go up, you lose or you expense the -- you're losing a hedge, right? And you can't write-up the inventory. So we have a timing issue in terms of what is in crude margin. So it's a larger negative than it would have been in a flat market.

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Operator [18]

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

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [19]

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A lot of questions have already been answered. Just one quick one though. On your SG&A came in better than we were looking for and I just kind of wondering that related to you didn't have a lot of deal expenses, obviously, but you said the market wasn't quite as active. So just in terms of looking forward for the balance of the year, is this good run rate or should we expect that to tick up?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [20]

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Selman. Yes. SG&A -- I think you're asking about SG&A?

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [21]

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Correct.

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [22]

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Yes. So it was $41 million. And so actually when you look back to third quarter, which was $42 million. It spiked in the fourth quarter largely because of incentive comp. So yes, $41 million is not a bad run rate.

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Operator [23]

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Our next question comes from the line of Lin Shen with Hite.

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Lin Shen, Hite Hedge Asset Management LLC - Analyst [24]

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For your guidance for 2019, $40 million to $50 million of expansion CapEx, can you talk a little bit about how much do you think is going to be spent on your existing said or how much maybe is acquiring new size?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [25]

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Lin, it's Daphne. Well, so the expansion CapEx that would not -- typically our expansion CapEx or guidance for expansion CapEx does not include acquisitions. And so I think that we haven't spent much year-to-date. I will say that when we think about some of the rebranding that we may do from time to time that can be supported by investments from an accounting standpoint, sometimes that is viewed as CapEx, yet the reality is the cash is actually covered by the party for whom you're doing the rebranding with. So it looks higher than it might be on a true cash basis, but in terms of from an accounting standpoint that would be CapEx. But there are no acquisitions embedded in that $40 million to $50 million.

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Lin Shen, Hite Hedge Asset Management LLC - Analyst [26]

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Great. And then what are the returns you're targeting at by spending this CapEx?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [27]

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When we look at any one of these projects in terms of expansion, you're going to be looking for teen returns.

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Operator [28]

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Our next question comes from the line of Jeremy Tonet with JPMorgan.

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Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [29]

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This is Charlie on for Jeremy. First question, just wanted to get your thoughts on the distillates market. One of your peers was talking about seeing a bit more contango there and just curious what your view was there and how you think about that in near term.

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Eric S. Slifka, Global Partners LP - President, CEO & Vice Chairman of Global GP LLC [30]

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Yes, the distillate market is, I would say, is slightly in contango. I don't think there is a major incentive there when you factor in the cost of carrying the barrel. There is a little bit of an incentive to build inventories, but I don't think it's anything meaningful at the moment. So we continue to manage that business as we always do. I would consider the market to be flattish contango just when you net out the expense of carrying the inventory.

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Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [31]

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What historically has been a level that's incentivized a little bit more on the carry trade?

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Eric S. Slifka, Global Partners LP - President, CEO & Vice Chairman of Global GP LLC [32]

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Well, I think it varies historically depending on what it cost you to carry -- what flat price is and what it costs you to carry the inventory. So I think it's fairly straightforward math. And it depends, I guess, on how you view your cost of storage and whether or not you own the storage or whether you're leasing it from a third party, so -- but historically, it's probably north of $0.01 a month. You start to look at it and build layers. We don't look at -- we look at that and we have a pretty disciplined approach to how we manage our inventory in our system. So we treat -- we've got a base load of working inventory that we always have to have in the system and then we look at some -- we'll expand inventory in a pretty controlled fashion according to market conditions. So I'm not just saying, hey, we will fill the tanks once we have a small amount of contango. We'll step in and build layers of inventory on a pretty controlled basis.

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Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [33]

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Great. One more from me. Apologies if I missed all of it. But I think you touched on it in the opening remarks, the accounting change related to the lease rental payments. I think there is a peer out there that talked about it impacting their EBITDA. I just wanted to verify that this doesn't impact or change anything there. And then secondly the changes to the balance sheet, any idea how the rating agencies view this? Is there any notable impact we should kind of be aware of there?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [34]

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Yes. From our perspective there should be no notable -- there is no notable impact. It does not impact materially any of our operations from an EBITDA or DCF standpoint. And in terms of the balance sheet, the reality is the agencies were already putting everything on the balance sheet from a liability perspective, so no change there.

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Operator [35]

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Our next question comes from the line of David Schechter with Perspective Capital Management.

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David Schechter, [36]

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Congratulations on a great quarter. Daphne, you mentioned that the fuel margins were $0.23 up from $0.19 a year ago. Could you remind us what it was in the fourth quarter?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [37]

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Sure. It was $0.32 in the fourth quarter and I think it was high -- it was $0.24 fourth quarter '17.

Both of those quarters and I've talked about it last earnings call. Obviously, fourth quarter '18 was particularly strong and actually fourth quarter '17, actually, was advantaged as well in terms of declining prices and some very healthy margins.

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David Schechter, [38]

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Right. How about the second quarter and third quarter of '18? Do you happen to know those off top of your head?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [39]

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Don't have them right in front of me.

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David Schechter, [40]

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Okay. Of the 1,578 stores either owned or worked with, were there any sales during the quarter or any trends that resulted in (inaudible)

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [41]

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Yes, with a small number of sales, less than 10. It was around -- I mean it was 7 sites that were sold. And you can see or you will see in the cash flow, it's about $4 million to $4.2 million in sales price, that those sites were sold for. And we continue to have in the 20-site range in terms of sites that we're continuing nonstrategic sites that we're selling. We've been pleased in terms of how those have -- as we sell those and often we'll retain supply, so we've been pleased with the multiples that we're getting net of supply.

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David Schechter, [42]

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Okay. And last question is the CapEx was earlier discussed by Lin and others. How many sites does that CapEx -- expansion CapEx look to cover?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [43]

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Naturally, number of sites. I mean we've got different buckets. When you think about expansion CapEx, we're looking at some new to industries which would be a handful. We're looking at raising rebills and there's a piece of that, that certainly is expansion. There are some rebranding commitments that we have that is expansion because it is not only covered from a cash standpoint, but also there are rebates, and so you actually have incremental margins/DCF. And then we have sort of a placeholder for some potential other branding opportunities.

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David Schechter, [44]

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Okay. So in total, the number of sites that would be affected would be approximately how many?

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [45]

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Yes, I don't have that number.

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David Schechter, [46]

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Okay.

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Daphne H. Foster, Global Partners LP - CFO & Director of Global GP LLC [47]

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It's not a huge number of sites.

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Operator [48]

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Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Slifka for any final comments.

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Eric S. Slifka, Global Partners LP - President, CEO & Vice Chairman of Global GP LLC [49]

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

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Operator [50]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.