Global Partners' (GLP) CEO Eric Slifka on Q2 2016 Results - Earnings Call Transcript

| About: Global Partners (GLP)

Global Partners LP (NYSE:GLP)

Q2 2016 Earnings Conference Call

August 08, 2016 10:00 AM ET

Executives

Eric Slifka - President and CEO

Daphne Foster - CFO

Mark Romaine - COO

Edward Faneuil - EVP and General Counsel

Analysts

Gabe Moreen - Bank of America

Jeremy Tonet - J.P. Morgan

Matt Niblack - HITE Hedge Asset Management

Barrett Blaschke - MUFJ Securities

Gregg Brody - Bank of America Merrill Lynch

Operator

Good day, everyone. And welcome to the Global Partners’ Second Quarter 2016 Financial Results Conference Call. Today’s call is being recorded. There will be an opportunity for questions at the end of the call. [Operator Instructions]

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

Edward Faneuil

Thank you. Good morning and thank you for joining us. 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 financial guidance and future performance are based on assumptions regarding market conditions, such as the competitive crude oil market, business cycles, demand for petroleum products and renewable fuels, utilization of assets and facilities, weather, credit markets, the regulatory and permitting environment, and the forward product pricing curve, which could influence quarterly financial results.

We believe these assumptions are reasonable, given currently available information and our assessment of historical trends. Because our assumptions and future performance are subject to a wide range of business risks and uncertainties, we can provide no assurance that actual performance will fall within guidance ranges. In addition, such performance is subject to risk factors, including but not limited to those described in our filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements that may be made during today’s conference call.

With Regulation FD in effect, it is our policy that any material comments concerning future results of operations will be communicated through news releases, publicly announced conference calls, or other means that will constitute public disclosure for purposes of Regulation FD.

Now, please allow me to turn the call over to our President and Chief Executive Officer, Eric Slifka.

Eric Slifka

Thank you, Edward. And, good morning, everyone. We are successfully executing our plan to optimize our portfolio, divest non-strategic access, and pay down debt. With those objectives in mind, we have announced the disposition of approximately $100 million in assets.

In July completed the sale-leaseback of certain New England gas stations to a premier institutional real estate investor for a total purchase price of approximately $63.5 million. The transaction involves 30 retail sites. We have master unitary lease agreement with the purchaser under which we will lease the properties for initial term of 15 years with 20 years of contractual extension options.

In May, we entered in agreement to sell 31 non-strategic gas stations and C-stores in New York and Pennsylvania to Mirabito Holdings for a total cash consideration of approximately $40 million. This agreement includes term supply contracts for branded and unbranded petroleum products, underscoring our commitment to maintain a long-term interest in these assets after the sale is completed. The sale is expected to close this quarter.

We are also in the process of divesting approximately 90 non-strategic retail sites in Massachusetts, Connecticut and New York through N NRC Realty & Capital Advisors. To-date, approximately one-third of these sites are under agreement at an average multiple of approximately 11 times EBITDA including in many instances term supply contracts.

We are focused on maximizing returns on our existing retail portfolio and expanding our network through long-term leases and other cost efficient approaches. Selling stations is one way in which we are optimizing our portfolio. We are also adding high return locations to our retail deck where we can leverage our scale in branding and merchandising. For example, this spring we expanded our retail network into Western Massachusetts, signing a long-term agreement for 22 gas stations and C-stores with O’Connell Oil Associates. We expect these sites, which generated incremental volume of 6 million gallons in the second quarter, to contribute several million dollars of EBITDA in the first full year of operation.

In terms of our organic projects within GDSO, over the past year, we opened seven new-to-industry and renovated sites for total investment of approximately $9 million with expected returns in the high teens, and have a number of other projects in the permitting phase. Over the next 12 months, we expect to open as many five additional NTI and complete seven raze and rebuilds. Through organic growth, marketing efforts and the efficiencies of our vertically integrated system, we are realizing higher throughput volume at our strategic gasoline terminals in the northeast.

In our wholesale segment, the crude to ethanol tank conversion and dock expansion at our Clatskanie, Oregon, transloading terminal was completed on schedule early in the third quarter. We have begun to receive store and sell ethanol from that facility.

Before turning the call over to Daphne, let me briefly review our financial results. Our retail gasoline business delivered positive results in the quarter, partly offsetting the impact of the weak crude oil environment. Product margin in our gasoline distribution and station operations segment increased 18% year-over-year, driven by better gasoline margins, the acquisition of stations and supply contracts from Capitol Petroleum, the addition of the O’Connell sites and the opening of raze and rebuilds and NTIs. Gasoline distribution product margin in the quarter was up 26% year-over-year. Product margin for station operations which consists of rental income and C-store sales, increased more than 9%.

Turning to the wholesale segment, product margin from gasoline and gasoline blendstocks rose 50% year-over-year, reflecting favorable market conditions including the ability to leverage our approximately 11 million barrels of storage capacity to capitalize on a contango opportunities. The margin from other wells and related products including distillates also benefited from the favorable market conditions in the quarter, more than doubling from the same period in 2015.

Turning to our distribution, in July, the Board of Directors announced quarterly cash distribution of $0.4625 or $1.85 on an annual basis, unchanged from the first quarter of 2016. The distribution will be paid August 12th to unitholders of record as of the close of business on August 8, 2016.

In summary with the completion of the sale-leaseback transaction and the ongoing disposition of non-strategic sites, we are successfully executing on our strategy to optimize our assets, reduce debts and provide flexibility to invest in our business.

With that, let me turn the call over to Daphne for her financial review, Daphne?

Daphne Foster

Thank you, Eric, and good morning everyone. Let me start with some color on our second quarter performance.

Combined product margin was down approximately 7% or $11.7 million year-over-year to $154.5 million. This decline is primarily attributable to tight crude oil differentials as mid-continent crudes did not discount sufficiently to make rail transport to the East Coast competitive with imports.

SG&A expenses declined approximately $9 million or 19% in the quarter to $36.6 million, reflecting ongoing cost reduction initiatives. The decrease is largely attributable to lower professional fees due-diligence expenses related to potential acquisitions and growth projects and accrued incentive comp. SG&A for the second quarter of last year included $4.2 million in acquisition costs related to the Capitol Petroleum and Warren transactions.

Operating expenses for the quarter were up $3.7 million or 5% to $75.9 million due to the Capitol acquisition in June 2015, primarily rent expense, property taxes and maintenance, as well as the addition of 22 lease sites in April 2016, which increased rent and convenience store salary expenses. We also incurred $2.2 million in costs associated with cleaning tanks and related infrastructure at our Clatskanie, Oregon terminal in order to utilize the facility for ethanol transloading. These increases were offset by $1.5 million reduction in operating costs at our Basin Transload facilities in North Dakota in response to lower volume at those locations, and $1.4 million decrease in various operating expenses associated with our terminal network.

Second quarter EBITDA of $41.3 million was down $7.4 million from the same period in 2015. In the quarter, we recorded $1.9 million impairment charge related to assets used in supplying compressed natural gas and a $0.6 million loss on sites held for sale and impairment. Excluding these charges, adjusted EBITDA of $43.8 million was approximately $5.1 million less than the adjusted EBITDA of $48.9 million for the prior year period. Interest expense increased $4.6 million to $21 million. The increase was due to the issuance of $300 million 7% bonds in June of 2015, the sale leaseback accounting for Capitol Petroleum, which resulted in a $1.6 million increase in the re-class of rental expense to interest and additional borrowings related to the Capitol acquisition.

Distributable cash flow for the quarter decreased $11.9 million to $14.2 million from $26.2 million a year earlier. Excluding the $2.5 million loss on sale and disposition of assets and impairment charges, DCF would have been $16.8 million in this year’s second quarter as compared to $26.4 million in Q2 of last year. TTM distribution coverage was 1 time or 1.2 times when adjusting for the loss on sale of assets and impairment charges.

Looking at our segments in more detail. In the wholesale segment, our crude oil product margin decreased $46.5 million year-over-year to a negative margin of $9.6 million due to the tighter crude oil differentials. Additionally, our margin in the second quarter of 2016 was negatively impacted by the absence of logistics nominations from one particular contract customer. Due to the absence of nominations by that customer, specifically in the second quarter, the Partnership expects additional revenue of approximately $8 million by the end of the year related to the take-or-pay nature of the contract. Said differently, with this additional revenue, crude oil margin for the second quarter would have been negative $1.6 million compared with negative $2.4 million in the first quarter of this year.

Wholesale gasoline and gasoline blendstocks product margin increased $8.9 million or 50% to $26.6 million, primarily reflecting more favorable market conditions including the contango gasoline market. Other oils and related products which include distillates and residual fuel, also benefitted from similar favorable market conditions specifically in distillates resulting in a $9.4 million increase in product margins to $15.8 million.

Turning to our GDSO segment, product margins from gasoline distribution increased $13.8 million to $67 million, due to a number of positive factors. While wholesale gasoline prices increased in both last year’s second quarter and this year’s second quarter, June of this year benefitted from an $0.11 per gallon decline in the NYMEX price of 87 RBOB versus an increase in June of last year. This decline in price positively impacted our fuel margin, which increased to more than $0.16 per gallon in the second quarter of this year from approximately $0.14 per gallon in last year’s second quarter.

The Capitol acquisition in June 2015, the addition of the 22 leased sites in April 2016, and the completion of raze and rebuild projects and new-to-industry sites also contributed to the $13.8 million increase in fuel margins. Year-over-year, retail gasoline volume increased 7.1% or 26.7 million gallons in the second quarter of 2016 for substantially same reasons.

Product margin from station operations, which includes rental income and C-store margin, was $49.3 million in the second quarter of 2016, $4.2 million or 9.3% higher than the $45.1 million earned in the prior year period. The year-over-year increase primarily reflects the additional rental income from Capitol and C-store operations from the 22 additional leased sites from O’Connell Oil.

Commercial segment product margin decline $1.5 million in the quarter due primarily to a decrease in bunkering activity. Total volume for the second quarter of 2016 was down about 32 million gallons for the quarter to 1.3 billion gallons. The 27 million increase in GDSO volume was more than offset by a 67 million decrease in wholesale volume due primarily to the weak crude oil market.

CapEx in the quarter was approximately $22.4 million, including $15.1 million in expansion CapEx and $7.3 million in maintenance CapEx. Expansion CapEx consisted of approximately $10 million in ongoing raze and rebuild, and other improvements at our retail gasoline stations as well as asset purchase as part of the lease of 22 sites from O’Connell Oil. The remaining approximately $5 million in expenditures was primarily associated with our terminal assets, including the dock expansion projects at our Oregon facility. Maintenance CapEx included $4.8 million related to our retail sites. We expect maintenance CapEx for the full year to be in the $35 million range and expansion CapEx to also be in the same range. With respect to expansion CapEx, we have spent approximately $27 million in the first two quarters, which includes about $16 million in investments in our retail gasoline station business, including the O’Connell transaction and about $8 million in the Oregon dock expansion projects. Any additional expansion projects will be evaluated based on the return and financing sources. New-to-industry sites for instance can be financed with build-to-suit leases. The O’Connell transaction is a good example of ways to grow without expending significant capital. In that transaction, we spent approximately $5.5 million to purchase certain assets such a pumps, dispensers and tanks, entered into a long term lease of the real property and expect to generate more than $3 million in EBITDA in the full year of operations.

Turning to our balance sheet, as of June 30, 2016, the Partnership had total borrowings of $582.2 million under our $1.475 billion facility. Borrowings consisted of $213.4 million under our $575 million revolving credit facility and $368.8 million under our $900 million working capital facility.

Our leverage defined as funded debt to EBITDA was 4.47 times at the end of the quarter and well within our 5.5 times covenant. You will notice a $62.5 million increase in the financing obligation on our balance sheet. This relates to the sale-leaseback of the 30 sites executed in the second quarter of this year. The transaction did not meet the criteria for sale accounting, therefore we did not recognize a gain or loss in the sales of sites and the assets remain on the balance sheet. There is a corresponding $62.5 million financing obligation recorded, which equates the $63.5 million in sale proceeds, less than $1 million in transaction related expenses such as transfer taxes and deal [ph] recording costs. The $62.5 million in net proceeds were used to pay down the revolver. The annual rent for these 30 sale-leaseback properties for the first 12 month is approximately $4.4 million, which will be recorded as interest expense associated with the financing obligation.

As we have said on prior calls, our goal is to maintain a strong balance sheet with ample liquidity, and we target long-term leverage of 4 times or lower. Given the headwinds and uncertainty in the crude oil market, our priority is to position ourselves to manage through a longer period of challenging industry conditions. Our strategic asset divestiture program continues to make progress and our portfolio provides an additional optionality with which to raise capital.

For 2016, we affirm our outlook for EBITDA in the range of $170 million to $200 million which guidance excludes the gain or loss on the sale and disposition of assets and impairment charges. As a reminder, next week, Mark Romaine, and I will be participating in the Citi MLP/Midstream Infrastructure Conference in Las Vegas. For those of you attending, we look forward to the opportunity to meet with you.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Gabe Moreen from Bank of America. Please proceed with your question.

Gabe Moreen

Question on the ethanol plant conversion in Clatskanie, can you just talk about how that’s going? It seems like the export market is pretty strong at the moment for ethanol. How much is embedded in your guidance from that facility, and is there a chance you might do a little better expected given market conditions?

Mark Romaine

It’s Mark. That business, as we’ve converted those tanks from crude, and tanks and the pipes from crude to ethanol, it’s a business that we expect is going to take some time to build. That being said, we have been -- we did load our first boat out for export a couple of weeks ago, we have another one slated to leave either at the end of this month or the beginning of September, and we continue to pursue opportunities to export as well as supply domestic markets. As far as how much is baked into our guidance, I don’t think we really get into that level of detail, but safe to say that we are seeing opportunities to grow that business and we’ll keep chasing it.

Gabe Moreen

And then, given how, I guess, the asset sale and sale-leasebacks are proceeding and selling stuff at 11 times EBITDA, have you given consideration at all to potentially trying to buy out some of your crude oil infrastructure obligations? I don’t know if there’s any sort of NPV positive trade there; is that something that you’ve considered doing?

Eric Slifka

I think, Gabe, we would look to do anything that would benefit the unitholders. So, if there was a transaction that we thought was net beneficial for the Company, we would chase it hard.

Gabe Moreen

But it sounds like no discussions at the moment, Eric?

Eric Slifka

There’s always conversations.

Gabe Moreen

And then, I don’t know if I missed it from Daphne’s remarks, but the one customer that doesn’t sound like it’s meeting its NVCs and in terms of the financial impact from when that EBITDA would fall from when you recognize it, is there a chance that slips out of 2016, or is that definitely going to get recognized within 2016?

Daphne Foster

Yes. I mean, we expect certainly to you recognize any obligation for 2016 in 2016 by the end of the year.

Operator

Our next question comes from the line of Jeremy Tonet from J.P. Morgan. Please proceed with your question.

Jeremy Tonet

I just want to touch base real quick on the leverage. Did you guys mention what the leverage was at quarter-end? I might have missed that.

Daphne Foster

Yes, it was just under 4.5 times; it’s 4.47 times.

Jeremy Tonet

Okay, great. Thanks. And then, as far as the divesture programs for the gas stations hold, was that 11 times, that kind of an EBITDA average weighted across the portfolio that number?

Daphne Foster

Yes, that reflects the sites that we have agreed to sell, and that is the first group of sites, and so that is across that average debt.

Jeremy Tonet

Okay. How many sites is there? Sorry.

Daphne Foster

Approximately 25 sites, 25 to 30 sites.

Operator

Our next question comes from the line of Lin Shen from HITE Hedge Asset Management. Please proceed with your question.

Matt Niblack

Thank you. This is Matt Niblack for Lin. Thanks for taking the question. So, it looks like the core business performed very well this quarter. And congratulations on that execution. And the crude by rail seems to be tracking net of this delayed payment of about $8 million, seems to be tracking pretty close to where it was last quarter. So, given those two facts, it seems like you ought to be tracking closer to the high end of guidance. Is that a fair assumption? And if so, why not raise the lower end of guidance to reflect that strength in the business year-to-date?

Daphne Foster

Yes. We haven’t adjusted guidance yet, and we’ll continue to look at that as we progress through the rest of the year.

Matt Niblack

Is there any reason to think that some of the strength -- given what you are seeing in the market quarter-to-date, any reason to think that some of this strength in the business that has been displayed, particularly in the second quarter here could be reversed?

Eric Slifka

So, directionally, right? And let’s just talk about the retail piece here for the moment. Directionally, when prices fall, your margins generally widen. And when prices increase, they narrow. And, I think that -- if you just use that information and then figure it out on your own, I think you can come to a conclusion.

Matt Niblack

Fair enough. And then, on the crude by rail business, it sounds like -- I think you’ve talked about this in the past, that you don’t want to necessarily just buy out the lease if it’s not a strong return type transaction. But, to what extent are you exploring other options there such as selling a lease effectively to the GP or another third party in exchange for some payment that you would make, or equity issuance, or some other structure; is something like that on the table or being seriously considered?

Eric Slifka

We look at every option that’s available we chase, every way that you can utilize them or to make Company more efficient in some way; so, every venue that’s out there, every idea we chase down.

Matt Niblack

I’d certainly say for our perspective that we’d be interested in participating in a restructuring there. So, you’ve got one investor willing to help on that front.

Eric Slifka

Thank you.

Matt Niblack

I am going to turn it over briefly to James here for another question.

Unidentified Analyst

You guys talk a lot about core versus non-core in your gas station operations. If you could just talk a little bit about what makes something core and what makes something non-core when you look at it? There’s a lot of shuffling going on, so.

Eric Slifka

Yes. So, I’m not quite -- when you talk about core, I mean, look, we’ve got a retail business that comes in under GDSO. And then, we have what I would describe as sort of a heritage business, that we took public an awful long time ago. And then, we sort of have this crude business, which is sort of the third piece. And, I think when we think about core, it’s more based on sort of that heritage kind of business, which has the terminals in it, it has the supply function in it, it has a wholesale function in it, the wholesale unbranded function in it that includes distillates and gasoline. I’m not quite sure, if that’s what you’re getting at.

Unidentified Analyst

No, it’s more like you’re selling Binghamton and expanding in Western Mass.

Eric Slifka

And so what’s your -- be a little more [Multiple Speakers]

Unidentified Analyst

So, are there certain -- is something that we need to look forward in the retail that is geographically adjacent…

Eric Slifka

I think for us, when we look at that upstate New York business; that is a business that for us is not a main focus whereas if you said to me, Eric, do you want to expand in southern New Hampshire and populated parts of Massachusetts, or highway locations, same for Connecticut, same for New York, basically it’s where the population is, is where we want to emphasize our growth, on the retail. Does that makes sense to you?

Unidentified Analyst

Yes. So, you believe that sort of locations and more densely populated places have a better return on capital than...

Eric Slifka

Well, it depends too; it’s a little bit more complicated than that, because you’re also -- that is one attribute. There are actually many attributes that when you go and you look to where you want to be, things such as income, things such as how many existing sites exist in the marketplace. We talk about that as how much oxygen is left in the site -- in the market area that you’re looking to build or develop a site. There’s a lot of things that go into our analysis as to why we want to be in specific areas, and that I just gave you a couple of them.

Unidentified Analyst

Then, I guess maybe last one from me, or maybe two more. Have the favorable conditions for wholesale gasoline continued here into this quarter?

Mark Romaine

Yes, I think some of the benefit that we saw in the wholesale gasoline book was related to market conditions in end of March and into April. So, I wouldn’t expect that degree of benefit to continue. However, the gasoline market, we will continue to benefit from market conditions in the gasoline -- the wholesale gasoline segment. The market is -- can have some movement in it. So, we don’t see a real large amount of contango in the gasoline market moving forward. That being said, I think we are well-positioned to capitalize on what the market gives us with respect to gasoline.

Unidentified Analyst

Okay. Is there anything -- setting crude by rail aside, in the retail and in the sort of I guess the legacy wholesale, if that’s the right term, is there -- are there any trends out there that -- sort of macro trends out there that you think are particularly favorable or unfavorable to those two lines of business?

Eric Slifka

To gasoline stations business, is that…

Unidentified Analyst

Yes, to everything but the crude by rail. You spoke about the three lines of business…

Eric Slifka

Yes, I mean macro trends, that’s particularly favorable or unfavorable. I mean, on the gasoline, there continues to be a lot stuff -- discussion about electric vehicles but the amount that gets sold every year is not a lot in the steam of the business. CAFE standards over time are there; that’s a concern. But, it’s our belief particularly in that business and continues to be our believe that we have the best locations that those locations are going to perform well in the markets, almost regardless of sort of demand trends, because they’re going to be the assets that essentially customer demand is driven to.

Unidentified Analyst

Okay. And this is indeed the last one from me that the decline in the G&A due to not looking -- not spending a lot of effort, looking at acquisitions or on due diligence, is that a good run rate now or do you expect there to be increased G&A related to acquisition activity?

Daphne Foster

Yes, I think the SG&A is a reasonable run rate, certainly on the OpEx side, you saw it tick up a little bit with the 22 lease sites. And there is some seasonality in there and you’ve got credit card fees that can have impact, but not a bad run rate. Of course, you’ll have, as we sell some sites, there will be an impact there as well to bring it down a bit.

Operator

Our next question comes from the line of Barrett Blaschke from MUFJ Securities. Please proceed with your question.

Barrett Blaschke

Just two from me. One was, Daphne, is that correct that you said the rents are going to go into the interest expense, just as a housekeeping item?

Daphne Foster

Yes. That’s correct.

Barrett Blaschke

Okay. And if that’s the case, what was the tick-up in OpEx this quarter; was that all just transactional costs related to the sale?

Daphne Foster

In operating expenses? It’s actually 22 lease sites from a O’Connell Oil. So, you’ve got rents in there, you lease them and then you’ve got 22 Company-operated sites that you have employees.

Barrett Blaschke

Okay. So some of the rent -- I guess you’ve get rent going in there and into interest expense?

Daphne Foster

So, O’Connell Oil versus the 22 sites that we leased and that rent goes to the OpEx. The sale-leaseback, in terms of the financing obligation, that $4.4 million in rents on an annual basis will go into interest.

Barrett Blaschke

Yes, I just wanted to be clear on where everything was going to be. And then, quarter-over-quarter -- SG&A is down for the year obviously, but quarter-over-quarter, there was about just short of a $2 million increase. Can you give me a little color on what that was maybe; is that just seasonality a little bit or…?

Daphne Foster

If you take out the severance related charge in each quarter and then we -- there’s also some noise, when we get reimbursement from state tax funds and we had about a $1 million or so in the first quarter, if you take that out, we’re pretty much on par at about $35 million.

Barrett Blaschke

And then, this is more for Mark, but can you give us an idea just as -- you said there is ramp time to Clatskanie for the ethanol exports. Can you give us more of a timeframe as how long is that ramp do you think?

Mark Romaine

So, be as quick…

Barrett Blaschke

Is it more of an operational thing, or is it more of a contracting and sales thing I guess is my question?

Mark Romaine

It’s more of a market -- sales and marketing or supply and marketing function. So, it requires us to establish relationships with new counterparties and a lot or some of the business that will go through there will likely be for export. So, you’re talking about not only developing relationships with new counterparties but also changing people’s behavior. So, I think it’d be tough to say exactly what will constitute the ramp-up period, but we’re working hard to accelerate that and we’re having some success.

Barrett Blaschke

And then, one other follow-up on that, is that new to market demand or is it increasing demand or is it you are going to be pulling from other facilities where you are going to have to be stealing business from them?

Mark Romaine

It’s tough to say because some of the sales that we make will probably go into markets that maybe somewhat discretionary. But that being said, we expect to have to compete for market share for a portion of that business.

Operator

Our next question comes from the line of Gregg Brody from Bank of America Merrill Lynch. Please proceed with your question.

Gregg Brody

Just on the sell process, could you just bring us up to speed where you are? I think previously you thought you’d have final bids in by June, but I imagine there is -- things never work out quite as planned. So, I’m just curious, what’s the timing, and is there any change in the size of what you think you want to sell?

Daphne Foster

I don’t think -- no, there is no change. First round of bid was due end of June. And so, you go through that process and you review them and you land on some and you say those are good and you keep going with the others. So, that there is -- it is tracking as we expected, and I think certainly in the first third or so, at 11 times EBITDA we were reasonably pleased with that.

Gregg Brody

Those prices look very good. Just when you talk about your leverage targets going forward, do you think about them with capital leases or do you think about that?

Daphne Foster

Do you mean in terms of the whole transition in 2019? We don’t have -- right now, it’s operating leases, and the financing obligations are not included.

Gregg Brody

No, you just put $63 million of capital leases in, so…

Daphne Foster

No, those actually are -- those are operating leases in the financing obligation itself because you’re really grossing up the balance sheet, both leaving the assets on as well to booking at $63 million financing obligation, you are grossing up the balance sheet. That financing obligation is not included in our calculation of leverage because they’ve got operating leases.

Gregg Brody

And that’s with respect to the covenants for your bank group, which I fully understand.

Daphne Foster

Right.

Gregg Brody

With respect to how you think about the Company, do you think about that as debt or do you exclude that?

Daphne Foster

I don’t think about the financing obligation as debt.

Operator

That is all the time we have for questions. I would like to hand the call back over to Mr. Slifka for closing comments.

Eric Slifka

Thank you all for joining us today. We look forward to speaking with you next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.

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