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Edited Transcript of GLP earnings conference call or presentation 8-Nov-18 3:00pm GMT

Q3 2018 Global Partners LP Earnings Call

WALTHAM Nov 8, 2018 (Thomson StreetEvents) -- Edited Transcript of Global Partners LP earnings conference call or presentation Thursday, November 8, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Faneuil

Global Partners LP - EVP, General Counsel & Secretary

* Eric Slifka

Global Partners LP - President & CEO

* Daphne Foster

Global Partners LP - CFO

* Mark Romaine

Global Partners LP - COO

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Conference Call Participants

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* Ben Brownlow

Raymond James - Analyst

* Ned Baramov

Wells Fargo Securities - Analyst

* Will Hardy

RBC Capital Markets - Analyst

* Michael Gyure

Janney Montgomery Scott - Analyst

* Selman Akyol

Stifel Nicolaus - Analyst

* Lin Shen

HITE Hedge Asset Management - Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Global Partners third-quarter 2018 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 would like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

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Edward Faneuil, Global Partners LP - EVP, General Counsel & Secretary [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 from 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, whether, 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.

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Eric Slifka, Global Partners LP - President & CEO [3]

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Thank you, Edward. Good morning, everyone, and thank you for joining us. As I noted in our earnings release this morning, our segment results for the third quarter reflected strong performance in the Gasoline Distribution and Station Operations segment as product margin increased 14% to $148.6 million for the same period in 2017 driven by our acquisitions of Champlain and Cheshire oil in Q3 and the purchase of Honey Farms in Q4 of last year.

We are pleased with the performance of these gas stations and convenience stores, which demonstrate our strategic focus on making complementary acquisitions in markets that leverage our terminal assets, enhance synergies, drive economies of scale and expand our retail footprint.

In our Wholesale segment product margin was down year-over-year due to unfavorable market conditions. Our results in Q3 2017 significantly benefited from weather-related supply disruptions. Q3 2018 did not experience similar disruptions, which was a key reason for the margin decline. As I noted in this morning's release, the fundamentals of our business are strong and we are increasing the lower end of our full-year 2018 EBITDA guidance by $5 million.

Turning to our distributions, in October we announced both the quarterly distribution on our common units and the initial quarterly distribution on our Series A preferred units. The common unit distribution of $0.4750 per unit will be paid on November 14 to unitholders of record as of November 9. The Series A distribution of $0.6635 per unit will be paid on November 15 to holders of record as of the opening of business on November 1.

In closing, we continue to capitalize our expertise in acquiring, integrating and operating assets. Looking ahead, we remain focused on driving growth through organic investments and strategic M&A. With that I'll turn it over to Daphne for her financial review.

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Daphne Foster, Global Partners LP - CFO [4]

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Thank you Eric and good morning, everyone. Turning to our results, gross profit in the third quarter decreased $15.1 million to $135 million. This was due to less favorable market conditions in our wholesale segment, primarily in gasoline and gasoline blend stocks, partly offset by improved margins in our GDSO segment. Combined product margin was down $15.1 million to $157.2 million.

Operating expenses increased $13.5 million to $83.8 million in the quarter. This reflects the three retail gasoline and convenience store acquisitions we have made over the past year with their associated headcount, real estate taxes, rent, utilities and maintenance expenses. In addition, the increase in gasoline prices has resulted in higher credit card fees year-over-year.

SG&A expenses in Q3 increased $2 million to $42.1 million due to $3.7 million in acquisition costs associated with Champlain and Cheshire, partly offset by decreases in accrued incentive comp and professional fees.

You will notice that our third-quarter financials include a gain of $3.5 million related to railcar lease, exit and termination expenses. This 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 future railcar services.

At that time we accrued the incremental costs associated with our obligation. The early return of 500 of those railcars in 3Q 2018 released us from the future obligation to service these cars, resulting in a $3.5 million reduction in the remaining accrued incremental costs.

Interest expense was $22.6 million in Q3 2018 compared with $20.6 million in the year-earlier period. This was due to increased revolver borrowings related to our acquisitions, higher working capital borrowings related to an increase in inventory, and higher interest rates. Net loss for the third quarter was $14.1 million compared with net income of $14.9 million for the same period in 2017.

EBITDA was $35.8 million compared with $60.8 million in the same period in 2017. Adjusted EBITDA was $37.2 million in the third quarter of 2018 compared with $63.8 million in the third quarter of 2017. DCF was $5.3 million compared with $32.3 million in the same period in 2017.

These results included a net loss on sale and disposition of assets and a net goodwill (technical difficulty) and long-lived asset impairment of $1.3 million and $3 million in the third quarter of 2018 and 2017 respectively. TTM distribution coverage at the end of 3Q was 1.8 times.

Turning to our segment detail, GDSO product margin in 3Q 2018 increased $17.9 million to $148.6 million. The gasoline distribution contribution to product margin was up $7.1 million to $91.3 million in the third quarter of 2018, primarily due to the acquisitions of Champlain and Cheshire oil as well as Honey Farms, partly offset by the sale of nonstrategic sites. The average fuel margin per gallon in the quarter improved about a penny to $0.215 per gallon from $0.205 per gallon in last year's third quarter.

Station operations product margin, which includes convenience store sales, sale of sundries and rental income, increased to $10.8 million to $57.3 million largely due to the three acquisitions. At September 30 our GDSO portfolio consisted of 301 Company operated stores, 259 commission agents, 239 lessee dealers, and 790 contract dealers for a total of 1,589. This compares with a total portfolio of 1,435 at the end of the third quarter of 2017.

In our Wholesale segment the gasoline and gasoline blend stocks product margin decreased $24.8 million to $5.6 million primarily due to less favorable market conditions in gasoline and gasoline blend stocks. During the third quarter of 2017 our product margin benefited from weather-related supply disruption not present during the third quarter of 2018.

Product margin from crude oil improved $0.8 million benefiting from slightly lower railcar lease expenses, but also the termination in Q3 2017 of the pipeline connection agreement with Tesoro. Margin was adversely affected by the expiration in June 2018 of our take or pay contract with one particular crude oil customer.

Product margin from other oils and related products was down $9.4 million to $5.2 million primarily due to less favorable market conditions in distillates and residual oil. In addition, during the third quarter of 2017, our product margin in residual oil benefited from weather-related supply disruptions not present during this year's third quarter.

In our Commercial segment product margin increased $0.5 million to $5.5 million primarily due to an increase in bunkering activity. Total volume increased by about 396 million gallons to 1.5 billion gallons. Volume in our Wholesale, Commercial and GDSO segments increased approximately 344 million gallons, 38 million gallons, and 14 million gallons respectively.

CapEx in the third quarter was approximately $16.3 million, consisting of maintenance CapEx of $8.6 million, including $7.6 million related to our retail gas stations and convenience stores, and expansion CapEx excluding acquisitions of $7.7 million, which also related primarily to our gas stations and stores.

Year to date maintenance CapEx was $25.9 million while expansion CapEx, excluding acquisitions, was $17.6 million. For full-year 2018 we expect maintenance CapEx in the range of $35 million to $45 million versus our prior estimate of $40 million to $50 million. We continue to expect expansion CapEx in the range of $30 million to $40 million.

Turning to our balance sheet, as of September 30 we had total borrowings outstanding of $651.9 million under our $1.3 billion facility. During the quarter borrowings under our revolving credit facility increased approximately $59 million to $244.2 million, reflecting the acquisitions of Champlain Oil and Cheshire Oil for $138 million and $34 million respectively, including inventory. This was offset in part by net proceeds of $66.4 million from the issuance of Series A preferred units.

Borrowings under our working capital facility increased approximately $110 million primarily due to an increase in inventory attributed to both volume and to price. Leverage as defined in our credit agreement as funded debt to EBITDA was approximately 4.5 times at the end of the third quarter.

Turning to guidance, as Eric noted, we are increasing the lower end of our full-year 2018 EBITDA guidance by $5 million. Full year 2018 guidance is now $195 million to $215 million compared to our prior range of $190 million to $215 million.

As a reminder, this guidance excludes any gain or loss on sale and disposition of assets and any goodwill and long lived asset impairment charges, as well as the one-time $52.6 million gain recognized in the first quarter of 2018 from the extinguishment of the contingent liability related to the volumetric ethanol excise tax credit.

Before we go to Q&A, I wanted to let you know that we will be participating in upcoming investor conferences. Next week 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.

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). Ben Brownlow, Raymond James.

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Ben Brownlow, Raymond James - Analyst [2]

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On the wholesale segment, the volume growth there of close to 60% year-over-year -- and I understand there were some supply disruptions last year, but that was still the highest third-quarter volume since 2014. Can you comment on the drivers there? And then also balance that with a discussion around your pricing strategy? Because at the same time, given the record low margin in that segment -- just trying to understand the puts and takes there.

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Daphne Foster, Global Partners LP - CFO [3]

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I think in terms of the volume, the majority of the increase in volume in the gasoline and gasoline blend stocks segment was really due to additional tankage we took at the beginning of the year for a blending operation, which essentially allows us to take advantage of blending when markets incent that and basically to engender more volume. So that's the primary reason for the increase in volume.

In terms of product margin, I think we continue to reiterate we had less favorable market conditions this year than last year. Certainly as a reminder, we had Hurricane Harvey -- experienced Hurricane Harvey in August of last year and that really prompted a significant increase in prices as supply was curtailed. And that compared to 2016 in the third quarter, product margin in 3Q 2017 in gasoline and gasoline blend stocks increased about $9 million. However relative to our expectations for that quarter it increased much more than that.

So, what we are saying here now is really, like temperature, we don't budget for normal weather and we don't forecast either for weather-related or other infrastructure-related disruptions. So, while the quarter did come in under everyone's expectations, it didn't come in under as much relative to our expectations.

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Ben Brownlow, Raymond James - Analyst [4]

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Okay, that's helpful. And is it fair to assume that -- embedded in that fourth-quarter EBITDA guidance of $47 million to $67 million implied -- is it fair to assume that you are baking in an improved contribution sequentially for the wholesale segment?

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Daphne Foster, Global Partners LP - CFO [5]

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Yes, we are not going to give guidance on the specific segment and we haven't done that in the past. But certainly we are very comfortable having increased the floor of our guidance and -- I'll make the comment that we've always seen swings quarter to quarter and some of it which can just the timing and I'll give you an example.

For instance, as prices change variability can be caused by the marks at the end of a quarter. And that can impact your hedge and your inventory values, the impact of which can be just timing.

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Ben Brownlow, Raymond James - Analyst [6]

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Okay, great. And one last one from me and I will jump back in. The OpEx growth, can you quantify or give us an idea what the M&A contribution year-over-year was to that 19% growth rate? And just thinking forward, just kind of -- given that there's obviously going to be some seasonality, but is it fair to think about $80 million to $85 million run rate quarterly going forward?

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Daphne Foster, Global Partners LP - CFO [7]

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Okay, so you're talking about OpEx. So, OpEx in the quarter, yes, the $84 million. I would say if you look at it relative to last quarter, not last year, it's up from $76 million or so and that does not reflect a full quarter of those acquisition. We purchased them in July 17 and July 24 respectively.

So, OpEx could be a little bit light, but not materially. The only comment I'll make is that credit card fees are very difficult to project, because obviously it's not only based on volume but it's also based on price.

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Ben Brownlow, Raymond James - Analyst [8]

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Okay, great. Thank you.

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Operator [9]

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(Operator Instructions). Ned Baramov, Wells Fargo.

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Ned Baramov, Wells Fargo Securities - Analyst [10]

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It's another one on your Wholesale operation. So, some of your peers I think were able to find short-term rail contracts out of the Bakken given wide differentials. So, I was just wondering if you could talk about any commercial successes you may have had on this front recently.

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Mark Romaine, Global Partners LP - COO [11]

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Obviously the crude market has -- we've seen some pretty significant volatility over the last several months and the discounts in certain markets are widening pretty significantly. So, on paper it looks like there's opportunity and I think there are certain pockets of opportunity. I think one of the challenges, and part of the reason why the diffs are the way they are, are due to really kind of transportation-related challenges both on the railroad and the railcar side of the business.

So, we are actually -- we are pursuing opportunities. We still of assets that we think are strategic to the marketplace and viable in today's business. So, we are looking at opportunities around that. We didn't have anything in Q3 that would have allowed us to capture any of that. But I think we are pursuing whatever we can around that space.

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Eric Slifka, Global Partners LP - President & CEO [12]

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Hi, it's Eric Slifka, too. What I'd say is well, and I spoke a little bit about it I think the last call, was you can -- the feel of the market is very different particularly as it relates to crude, because the pricing spreads and the discounts are so large.

And what I'd say is the market just feels a lot more active and there's a lot more inbounds. And you can't count your money until anything is done. But it just feels really busy. And so, we are fielding a lot more inquiries on all of the assets that we have that are related to crude.

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Ned Baramov, Wells Fargo Securities - Analyst [13]

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Okay, that's helpful. And I guess last quarter you talked about some of those potential third-party opportunities there. Are there any capital requirements associated with these opportunities? And if there are, are they already reflected in your growth CapEx guidance for the year?

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Eric Slifka, Global Partners LP - President & CEO [14]

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Yes, what I would say is if there's any capital required we are going to try and get that to be paid in fashion by a secure contract on the other side of it. So, we are going to look at it and we're going to be very cautious about how we do it. And then obviously we're going to have to talk about what the best way is to finance it.

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Mark Romaine, Global Partners LP - COO [15]

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Yes, that being said though, I think there are opportunities in the marketplace that won't require CapEx. I think Eric is obviously right there. If there's any upside that we can participate or capture beyond what our facilities can do today, it will be done so with the -- backed by a contract and -- but it's not to say that we have to spend money to capitalize here.

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Eric Slifka, Global Partners LP - President & CEO [16]

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Yes, and these assets have run before from the West Coast to the Bakken to even the East Coast. They've all run crude through it and they've all run material quantities of crude through it as well. So the assets are all capable the way they are structured today.

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Ned Baramov, Wells Fargo Securities - Analyst [17]

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Got it. And last one from me, maybe if you can provide an update on your plans for the IDRs. I agree that cash flow is not a significant -- sorry, cash distributions for IDRs is not a significant burden at this point, but -- and does not require immediate action. But I guess it remains a structural issue and the sector is moving quickly to address it. So, any thoughts on this would be helpful.

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Daphne Foster, Global Partners LP - CFO [18]

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Yes, I guess I'd just say we always evaluating all options and opportunities as to how to maximize returns from both a business and a financial and really also a structural standpoint.

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Eric Slifka, Global Partners LP - President & CEO [19]

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I will add a little to that. Essentially there's cross ownership between the unit and between the general partner. And so, the interests are to figure out how to get good deals done to get the returns and that's what we're focused on.

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Ned Baramov, Wells Fargo Securities - Analyst [20]

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Okay, that's fair. That's all I had. Thank you.

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Operator [21]

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[Will Hardy], RBC.

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Will Hardy, RBC Capital Markets - Analyst [22]

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Good morning. Eric, could you perhaps talk a little bit about your West Coast or Portland assets? I haven't heard much about that. And then is there anything going on with the assets that you had in the Bakken with the pickup in what's going on there? Just kind of address those two things.

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Eric Slifka, Global Partners LP - President & CEO [23]

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Broadly what I would say is there's, A, been a lot of inquiries; B, the discounts are broad enough that even we would look to maybe take position on some of that. I just think and feel like something is going to take place there. It's just -- because spreads are screaming for things to happen. We continue to use it on the West Coast as an ethanol trans load site. But I think there's a possibility that that could swing back to crude, right?

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Will Hardy, RBC Capital Markets - Analyst [24]

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Appreciate it. Thank you.

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Operator [25]

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Michael Gyure, Janney.

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Michael Gyure, Janney Montgomery Scott - Analyst [26]

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Can you guys talk a little bit about the GDSO segment improvement in the margins? I think you noted the combination of the acquisitions is driving that. But I guess specifically maybe related to the acquisitions, where are you seeing the benefit? Is it purchasing power, is it integrating the operations into your platform? I guess what's driving the benefit there?

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Eric Slifka, Global Partners LP - President & CEO [27]

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I could barely hear you, I'm sorry. Could you speak up and just ask the question again? Sorry.

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Michael Gyure, Janney Montgomery Scott - Analyst [28]

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Yes, sorry about that. In the GDSO segment, some of the margin improvement you note is related to the acquisitions. If you could talk about what specifically is driving that integration. Is it purchasing that is different? Is it running the operations that's different?

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Eric Slifka, Global Partners LP - President & CEO [29]

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Yes, what we think we're particularly good at, because we have size and scale in the marketplace, is most of the smaller distributors have these contracts with multiple suppliers and they are not very large with them. And we're large with almost every supplier. And so, we have contracts, purchase contracts with these suppliers.

We can look at it and pretty much know exactly what we can save when we go in and look at an acquisition in terms of fuel. And then we also look at the supply that goes into the C stores. And I'd say we are not as big in that business, but we are bigger than most of the guys that we are buying, so we think we could streamline that cost structure as well.

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Michael Gyure, Janney Montgomery Scott - Analyst [30]

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Great. And then maybe one for Daphne on the guidance. You mentioned weather. I guess, again, can you talk about how you do or don't factor weather into your guidance?

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Daphne Foster, Global Partners LP - CFO [31]

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Yes, we always look forward to a normal year. So that would be normal weather and no significant disruptions. And so, that's how we forecast, that's how we budget. And then obviously if it is particularly cold in the fourth and the first quarter that's helpful, and if it's particularly warm that's less helpful.

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Michael Gyure, Janney Montgomery Scott - Analyst [32]

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Great, thank you.

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Operator [33]

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Selman Akyol, Stifel.

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Selman Akyol, Stifel Nicolaus - Analyst [34]

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Thank you. First of all, can you just say how much the acquisitions contributed to EBITDA for the quarter?

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Daphne Foster, Global Partners LP - CFO [35]

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We haven't broken those out. I will say that when we moved guidance, the ceiling of guidance last quarter, we were doing that to reflect in part the acquisitions. But also we contemplated that we would have one-time transaction costs and at that time they were approximately $4 million. As you saw in the quarter they came in at about $3.7 million. So, I think that's all I can say about that. I will say that we are pleased with the performance of the acquisitions to date.

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Selman Akyol, Stifel Nicolaus - Analyst [36]

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All right. And then can you just talk about additional M&A and your outlook for that?

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Eric Slifka, Global Partners LP - President & CEO [37]

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So, on the retail side I would say it continues to be very busy. We are seeing lots of transactions. And what I think I said on the last prior call is we're comfortable with what we are paying because we are not winning every transaction. And so, it continues to be busy and there's a pretty full pipeline.

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Selman Akyol, Stifel Nicolaus - Analyst [38]

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Okay. And then last one, any initial thoughts on 2019?

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Eric Slifka, Global Partners LP - President & CEO [39]

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As it relates to --?

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Selman Akyol, Stifel Nicolaus - Analyst [40]

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As it relates to guidance, anything like that you would like to say?

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Daphne Foster, Global Partners LP - CFO [41]

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No, we typically put out guidance for 2019 or for the year at our call for the K. So we won't be putting out guidance yet.

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Eric Slifka, Global Partners LP - President & CEO [42]

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Thank you though.

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Operator [43]

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Lin Shen, HITE Hedge Asset Management.

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Lin Shen, HITE Hedge Asset Management - Analyst [44]

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One of your peers recently talked about, in their call, that their convergence of the sulfur specification in their Northeast heating oil market limiting their blending opportunity. Also they also see a less attractive distillate market to purchase. And they think they are going to see their challenge to the rest of the year. I'm just wondering do you see the same thing in the market now.

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Mark Romaine, Global Partners LP - COO [45]

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Yes, the sulfur spec has changed on heating oil in New England, so that is a fact. And we are all required to meet the same spec. We don't see it as a major impact to our business. It doesn't limit some of the blending opportunities we may have taken advantage of in the past, but the move from 500 to 15 PPM -- or the move down to 500 ppm was meaningful. The 500 to 15, we don't see it is a big deal.

So, it certainly provides less opportunity, but I don't see that as the main driver for us. And then with respect to Q4, our expectation is that Q4 will be a normal quarter for us from a distillate standpoint, so I don't necessarily see any changes there.

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Lin Shen, HITE Hedge Asset Management - Analyst [46]

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Okay great thank you.

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Operator [47]

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Thank you. That concludes our Q&A session. I'd like to turn the floor back to Mr. Slifka for closing comments.

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Eric Slifka, Global Partners LP - President & CEO [48]

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Thank you for joining us this morning and we look forward to keeping you updated on our progress.

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Operator [49]

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