Crossamerica Partners LP (CAPL) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first-quarter 2014 earnings conference call for Lehigh Gas Partners. (Operator Instructions). This conference call may contain forward-looking statements relating to the Partnership's future business expectations and predictions and financial condition and results of operation. These forward-looking statements involve certain risks and uncertainties. The partnership has listed some of the important factors that may cause actual results to differ materially from those discussed in such forward-looking statements which are referred to as cautionary statements in its first-quarter 2014 earnings news release. The news release may be viewed on the Lehigh Gas Partners website at www.LehighGasPartners.com.

All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are thusly qualified in their entirety by such cautionary statements.

In addition, certain non-GAAP financial measures will be discussed on this call. The Partnership has provided a description of these measures as well as a discussion of why they believe this information is useful to management in its Form 8-K furnished to the SEC yesterday. The Form 8-K may be accessed through a link on the Partnership's website, www.LehighGasPartners.com.

In addition to accessing the Form 8-K on the Partnership's website, you can also sign up for LGP's eBlast communications to keep you up to date on the activities of the Partnership and be notified of the latest Partnership news.

As a reminder, this conference call is being recorded. I will now turn the conference call over to your host, Joe Topper, the chairman and CEO.

Thank you and good morning. Welcome to Lehigh Gas Partners' first-quarter 2014 earnings call. Joining me on the call today are Mark Miller, Chief Financial Officer, and Dave Hrinak, President.

I will provide a brief overview of our first-quarter results as well as some initial commentary, followed by a review of our first-quarter distribution and then review the acquisitions we announced subsequent to the quarter end. Once we have concluded our prepared remarks, we will open the session to your questions.

Net income for the first quarter of 2014 totaled $1.4 million, or $0.07 per basic comment unit. For the quarter, EBITDA total $11.5 million; adjusted EBITDA totaled $11 million; and distributable cash flow amounted to $7.2 million, or $0.39 per common unit.

Our wholesale gross margin for the quarter was $0.059 per gallon. The first quarter of the year is typically the weakest quarter in terms of both demand and margin for motor fuels. As in the fourth quarter, gasoline prices generally rose during the first quarter which continued to put pressure on our margins. Based on US Energy Administration data, retail prices on the East Coast, which represents the majority of our current markets, rose a little over 5% during the first quarter.

Also weather continued to be a factor for the quarter as a result of the harsh winter, particularly in Northeast. Based upon the National Weather Service data, there were seven winter storms that affected our Northeast markets during the quarter. Approximately 14 days or 16% of our total quarter had material winter precipitation.

As in the fourth quarter, our rental revenue provided us a steady revenue stream that was not impacted by the winter weather of the quarter. We recorded $6.9 million in net rental income for the quarter, over slightly 41% of the total gross profit of the quarter.

The Partnership declared a first-quarter distribution of $0.5125 per unit. Based on our distributable cash flow of $0.39 per basic common unit, the coverage ratio on the declared first quarter distribution is approximately 0.8 times. However, over the trailing 12-month period the current distribution level of $0.5125 per unit represents a coverage ratio of approximately 1.2 times based upon our distributable cash flow for the same period after adjusting for our acquisitions and capital raises.

As we have said previously, when we review our distribution policy and coverage, we look at the distribution in the context of an entire year, which tends to mitigate the impact of fuel gross margins swings and seasonal volume demand on a quarterly basis. In the context of an entire annual cycle we believe the coverage ratio of approximately 1.2 times is an appropriate level for our Partnership.

Since demand and margins tend to be the weakest in the first quarter, the first quarter will generally have the lowest coverage rates of the year. Even in that context though, our first-quarter results were disappointing. However, we believe the Partnership has ample financial strength to maintain its distribution until margin and demand conditions improve.

Moving on to acquisitions, the Partnership had an active quarter with two announced transactions subsequent to the end of the quarter. The Partnership closed on the acquisition of PMI on April 30 for a net total consideration of $61 million funded with our credit facility. We are excited about the PMI transaction as it complements our Manchester acquisition in December from an operational and geographic perspective and to a lesser extent, our [riders] and Rocky Top portfolios. PMI has a great C-store business with 85 locations as well as a strong petroleum products distribution business that distributed approximately 280 million gallons of petroleum products last year to company-owned and third-party sites.

In terms of structure, we acquired PMI in a stock transaction, so its revenue will be initially flowed through our taxable corporate subsidiary. Over time we will migrate PMI's assets out of the C-corp into the Partnership and are confident that we can minimize PMI's tax leakage.

The transaction also brings PMI's store operation into the partnership. Initially, we intend to operate the stores within the Partnership and then transfer these operations to third parties while continuing to supply these sites with motor fuel and collect rental income.

PMI's distribution business is primarily the wholesale distribution of motor fuels. However, it also operates a lubricants business. Because the Partnership does not have any interest or strategic rationale for owning a lubricant business, it divested this business. Ideally we would have divested this business to an unrelated third party, but given the transaction's structure and timing, this is not feasible.

As a result, the Partnership divested the business for $14 million to an entity that I've personally finance. As part of the purchase agreements, the Partnership will receive any of the profits above the purchase price upon the sale of the lubricant business to third party, but retains no exposures should the business sell for less. So the Partnership retains all of the upside but has no downside exposure to the sale of this business.

We have begun in earnest the process of integrating PMI into LG operations, and I look forward to reporting back to you next quarter with our progress.

The second announced deal with that Atlas Oil Company to purchase assets in the metro Chicago market. These assets consists of 55 wholesale supply contracts; 11 fee, or leasehold sites; two commissioned marketing contracts; and certain other assets for a total consideration of $38.5 million, subject to certain closing adjustments.

In addition, the partnership is acquiring certain short-term financing assets associated with the purchase contract for the face value of the [financial] assets at closing. The assets all are branded BP. The wholesale supply contracts are long-term contracts with a remaining term of approximately 15 years. The real estate sites are all leased to third-party commissioned agents. We expect to close the transaction during the second quarter and will fund it with the Partnership's credit facility. We are looking forward to entering into the Chicago market and to expand our relationship with BP as we think both will expand the range of opportunities available for us for future growth.

In conjunction with these two acquisitions, we have also amended our management fees. The change was driven by several factors. Since the IPO, our management company has internalized or enhanced certain capabilities of the Partnership previously purchased from third parties. In addition, the management company has expanded its management infrastructure in terms of systems, software, and personnel to allow us to deal with greater amount and range of assets.

The PMI acquisition is also initially adding additional operating requirements on the management company. Due to these factors we have determined it was appropriate to review the management fee at this time. It is important to note that as a result of the change in management fee, going forward the variable costs associated with acquisitions from management fee perspective will be lower than under the previous agreement.

Also in connection with the amendment, our general partner and the management company have the right to waive all or part of the management fee facility that either are not needed or are purchased from other providers. This will be useful as well as we integrate acquisitions ensuring that the management remains at the appropriate level.

I will now turn it over to Mark for a more detailed view of the financial results of the quarter.

Thank you, Joe.

During the first quarter of 2014, we distributed on a wholesale basis 159.6 million gallons of motor fuels, resulting in a $2.90 average selling price per gallon and a $0.059 average wholesale margin per gallon. Wholesale gross profit for motor fuel sales totaled $9.4 million for the quarter.

In our retail segment, which represents our commissioned agent sites, we distributed 15.2 million gallons, resulting in a $3.51 average selling price per gallon and a $0.021 average retail margin per gallon. Retail gross profit for motor fuel sales totaled $321,000 for the quarter.

As noted in previous quarters, we wholesale distribute to our retail segment so our aggregate total gallons distributed for the quarter is 159.6 million gallons rather than 159.6 million wholesale gallons plus 15.2 million retail gallons. For the same period in 2013, the Partnership wholesales distributed 149.7 million gallons at average selling price of approximately $3.08 per gallon and a $0.066 average margin per gallon.

Gross profit from fuel sales for the first quarter of 2013 totaled $9.9 million. There were no retail segment sales in the first quarter of 2013.

Relative to the results for the first quarter 2013, our wholesale fuel volume increased by 6.6% and our wholesale gross profit from fuel sales decreased by 5.7% for the first quarter 2014. The decline in gross profit was driven by the lower margins for the first quarter compared to last year.

Net rental income, which is rental income less rent expense, totaled $6.9 million for the quarter. For the same period in 2013 the Partnership recorded $6.4 million in net rental income. The increase in net rental income for the first quarter of 2014 relative to last year is primarily due to the increase in rent from acquisitions completed during the past year. It was offset by determination of leases at commission sites that occurred in the third quarter of 2013 and the termination of leases at certain closed sites.

Our net rental income for the first quarter of 2014 represented approximately 42% of our total gross profit for the quarter.

On the expense side, operating expenses for the first quarter of 2014 totaled $2.2 million, and SG&A expenses totaled $4.5 million. Included in SG&A expenses for the quarter is approximately $300,000 of acquisition-related expenses. For the quarter, the Partnership also recorded net income tax expense of $100,000. For the same period in 2013, operating expenses totaled $820,000, and SG&A expense totaled $2.6 million.

Operating expenses increased $1.4 million for the quarter relative to 2013, primarily due to an increase in the number of sites owned and leased as a result of acquisitions, including completing deferred maintenance at certain acquired sites; increased operating expenses associated with the commission class traded sites; and the timing of the completion of certain maintenance items. In addition, operating expenses included a $400,000 charge relating to the termination of contracts of certain Chevron-branded sites and the work associated with rebranding the sites to Exxon. With rebranding we were able to generate more favorable site-level economics going forward at these sites.

SG&A expenses increased from the first quarter of 2014 relative to 2013 primarily because of an increase in equity-based compensation.

The Partnership divested two sites during the quarter, realizing a gain of $1.5 million. We continually evaluate all our sites, and we selectively divest sites in order to redeploy capital where it can be utilized more efficiently in our business.

This quarter continued the trend of increasing motor fuel prices that began in the fourth quarter. As we have noted on many occasions, rising motor fuel prices generally tend to depress our margins with a more valuable price contracts. Approximately 57% of our first-quarter volume was from variable priced contracts. On a sequential basis, our wholesale fuel margins went from $0.063 per gallon in the fourth quarter to $0.059 in the first quarter.

As Joe noted, the first quarter tends to be the weakest quarter of the year with regard to our motor fuel margin and volume. Thankfully, we are entering the summer driving season in the second and third quarters which generally are the strongest quarters from a demand and margin perspective.

As of March 31, 2014, the Partnership had $158.9 million in outstanding borrowings under its credit facility. The Partnership had a nominal $278 million available for borrowing, net of outstanding borrowings and letters of credit.

At this time, I will turn the call back over to Joe.

Thank you, Mark. That concludes our prepared remarks. Operator, I would like to open the line for questions. Thank you.

(Operator Instructions) Ben Brownlow, Raymond James.

Joe, can you talk about some of the benefits that you see of operating the retail merchandise side of the business of PMI under the MLP umbrella? Or is it purely a simply a timing issue? And if it's a timing issue, how quickly would you expect to shift or sell that part of the business over to a third party?

It is primarily a timing issue. I think the way we've got the model set up with the fuel staying in the Partnership and the retail sales in the outside via third parties or LGO, I would expect that by the end of the year that the 85 sites would be outside of the partnership at that point in time and be operating the way the rest of the Company is operating.

Great. And in that interim can you give us a sense of what the OpEx structure and D&A run rate will be including the Atlas and PMI post those two deals?

I'm sorry. I am confused by what you are asking. I'm not going to give you necessarily guidance by it, but we're going to be consolidating -- the Lehigh Gas wholesale is going to be selling the entities, the PMI entity, its fuel. So it's fuel margin will be sitting up into the qualified income. And so, we will see very little tax leakage from it. The acquisition fits within the model of what we have done in the past so I believe it will be accretive almost immediately to earnings.

Okay. And the acquisition fees on those two deals, are the bulk of those fees -- were those realized in the first quarter, or is there still some kind of flow through in the second quarter?

They will be in the second quarter. The deal closed May 1, so that is when it -- April 30, so that is when the fees will be realized.

Okay. I didn't know, the $0.3 million, if that was part of those fees.

And then just last question for me, are you seeing any improvement in demand trends so far in the second quarter?

Yes we are. Obviously, the weather is better and we're seeing a lot of things that are positive. The fuel has dropped significantly in the last two or three weeks, so that's a good sign and a typical sign for the industry.

Great. Thank you, guys.

(Operator Instructions) Ethan Bellamy, Baird.

Joe, we haven't talked in a while about the really big picture for demand. What is your base case assumptions for the next three years given trends in vehicle miles, efficiency, alternative fuels? Are we looking at a minus 1% market? Are we looking at a plus 1% market for diesel and [mo] gas all together?

I would break it up into markets, Ethan. I would say that Northeast where I thought we were at a minus 1%. I am going to tell you, I think the Northeast is probably closer to a minus 2%, minus 3%. And I would say that is north of Baltimore. Baltimore going north, in those markets.

I would say that my trend for the South -- Virginia, Tennessee and Florida -- I would say it is flat. That population growth will offset the decreased demand by higher fuel vehicles.

Okay. And what is the driver of that decline in the Northeast? Is it GDP related? Is it efficiency?

I think it is the alternate use of it, meaning there is public transportation up here. I think that there's actually, I think, population is not necessarily growing up here also. So, I think you have 2% efficiency increases not being offset by population or job growth in the Northeast.

Got it. Does that mean we should expect to see you in Texas sometime soon?

Texas is a wonderful state. It is getting a little crowded down there, but I would love to be in Texas.

Got it. So that is a good segue. Could you give us your thoughts on the Sunoco-Susser deal and how that will play into your M&A activity?

Sure. I think that is a wonderful transaction for both companies. I think the way they are structuring it where they are going to be more efficient with their earnings and distribution through the partnership is a good idea. Sort of the advantage we are taking now with the commission and also by converting the income over from LGO. So in many ways that model is like what we're doing.

I would tell you that it is -- they have paid a formidable price and so as the larger acquisitions get that pricing, that will be a drag on us doing larger deals. But we have focused on the deals in the $25 million to $75 million range. And I think that really won't affect that size transactions for us.

Okay. And last question, you've got pretty strong year-over-year double-digit distribution growth. What type of outlook should we have for distribution growth in say, 2015 and 2016, if all goes as planned?

I would like to say and how do I this -- I would say 8 to 12 would be a good number for us to forecast for dividend growth for the second half of 2014 and 2015.

Excellent. Thank you so much, Joe.

Matt Niblack, HITE.

First on the demand, when you referenced that demand was impacted by factors other than weather, were you referring to this acceleration of the decline in the broader market of 2% or 3%? Or is there something else that you were referring to in the [first place]?

No, the combination of the two were what was the most disruptive. Normally, we would have seasonal demand. How I would to tell you is that in a typical year the first quarter -- if the year is divided into four quarters of 25% each, the first quarter is around 22% of demand for the year. Just because of traffic patterns and seasonality. People visit their mother-in-laws over Christmas and they are not going back again in January. But this was more activated because it was economically -- with the snow impact, there was less driving because of that. So it was a compounding factor, both the economics and the weather on the first quarter.

Okay. So when you are looking at the second quarter so far then on demand, this is looking more like down 2% to 3% year over year versus last year as opposed to the larger decline in Q1 on a same-store basis?

I would say down 2% in the Northeast and flat in the rest of the markets that we are in.

Okay, rest of the markets, does that include -- like Ohio is that a different market than the Northeast?

I would say Cincinnati is different than Cleveland. I would take Cincinnati south to Texas -- not Texas, Florida and Tennessee and Virginia, so far.

Okay. And then on margins, you feel like you are capturing the margin that you would expect from the changing fuel price as we move into 2Q?

Absolutely. That is something that we look at and model every day.

Okay, so there's no sort of secular degradation of the margin that is reflected in the results in Q1; it's merely the move in the gasoline price?

There is nothing that I have seen in the marketplace that would say structurally we're moving down from an average of 6.5, 6.6 on a basis. When it was 7.1 and 7.5 last year I said it was not -- nothing. I had seen the structurally had changed it from being moving up, and I don't seeing any difference being at 5.9. I think over a 12-month period we're going to be an average of 6.6, 6.7, something like that. And nothing that I have seen has changed it from the economics right now.

Okay, great. And then the recent acquisitions that you've done, forgive me if I missed this in the press releases, but what range of EBIT to multiples are you seeing in that size transaction?

I would tell you that the ranges are anywhere from 5 to 11. I hate to say that. Now if you are telling me of the acquisitions we have made, would tell you they are in the 6 to 8 range.

6 to 8 range -- that has ticked up versus a year ago when I think 4 to 6 you said, maybe I am mistaken?

Yes, yes it has. But I would say it has picked up by half a turn.

By half a turn? Okay.

Yes. But I would also say is at eight times it is still very accretive to do those transactions.

Right. Certainly the case.

And then to switch over in a little bit of a different direction, you mentioned some dealer supply contracts that did not renew and also some leases that you canceled. Could you give some color on what was going on in those situations?

Yes, in the Getty transaction that we did in May two years ago, there was a provision in that that gave us the ability to give back around 18 or 20 sites over period of time. And that was for us to digest the transaction because it was 115 stations and the timing of what it was we didn't necessarily know exactly which would be good ones and which would be bad ones, so we put that provision in there for us to be able to put back stations. And so after digesting it for about a year, we started to put back stations that are not economically plus to the Company. So I would view though as being positive to the Company over the long term.

There was a couple of supply contracts, third-party dealers tend to have 10-year supply contracts. And they sometimes will renew with us; most times they do, sometimes they don't. Sometimes they get out of business; sometimes they look at their portfolio of real estate and say, I'd rather be selling it to somebody else, just like we do when we rationalize our portfolio. So there's nothing -- a strong trend that way at all. In fact, we're probably a net positive to supply contract.

Okay. And then last question, one of the concerns that some investors might have with your situation is the type relationship and contracts with the privately held entity that you control. And so I'm a little concerned that there could be a red flag with the change in the management fee structure with the recent acquisition, and particularly the change in the per-gallon structure. I think I might understand a little bit of the change in the fixed fee. So could you maybe comment on the logic behind that change in structure and how you think about that and how stable that management fee structure is going forward?

Yes, rest assured I would rather leave a dollar of income in the Partnership than in that privately-held company. It's much more profitable to the Partnership and to myself being over there.

I would tell you there are four drivers of that fixed-fee increase. One is that we have significantly increased our systems. When we came out we were about a 650 million gallon distributor company, and now we are going to be about 1.1 billion. And so we needed to invest in systems that will take us to the next level, I would say up to a 2-billion-gallon level. And so there's a significant amount of investment that is going in there.

The second thing that happened was we brought in some services that we contracted for on the outside so that will enable us to mitigate the increase in costs going forward. So we brought in counsel; we brought in taxes at different types of skills that were more appropriate to bring inside, we feel.

And the third piece was, the PMI transaction is a significant transaction, almost 300 million gallons. And because of the timing of the transaction and the way came together in the last six weeks, we felt that we needed to be conservative with the management fee and that over time if we could get synergies in the efficiencies in it, that we would be able to not take the fees. So that's the part of my statement which says the LGC has the right not to take the management fee if it is not used. And so, we left that in there as a kind of a hedge.

Okay, and then the change in structure to the per gallon, so now you've got this zero to $0.003 for wholesale but $0.015 retail versus if I read it correctly, it was $0.025 per gallon previously?

Previously the Partnership did not have any retail gallons in it, so there was no need for the fee. The fee of $0.015 is the fee that LGC charges LGO for its services. So, we thought it was appropriate that that would be the fee that it would charge the PMI gallons that fit in retail.

I see. So the retail piece is effectively no change to what the internal structure was previously?

That is correct.

And then the added flexibility in the fee per wholesale gallon?

That recognizes the fact of going forward it's going to be $0.002 per gallon on incremental gallons because we're over the 1 billion gallon mark. And so some of the cost efficiency that I spoke to about bringing inside will mean that incremental gallons should be less costly as we go forward.

Okay. So in actuality that fee, we should see a decline on a per-gallon basis?

Per-gallon basis. Yes, that is correct.

Great. Well, that was a lot of questions. I appreciate your candid answers. Thank you.

All good questions. Thank you.

(Operator Instructions) Bernie Colson, Oppenheimer.

Just to follow up a little bit on what you are see in the acquisition market, what do you attribute the higher multiples to? Are there more parties bidding on the properties that you are looking at or is it the same, and just willing to pay more? And what's driving that?

I would tell you that the higher end of it was driven by ETP and the deals that we did not get. So, I think they were the primary driver of the higher end of the multiples. I think people are -- some buyers are trying to take advantage of interest rates at the level they are at to lock in some financing at this rate. And buyers are being more aggressive on what they are willing to sell for. So, I think it's a combination of -- there were some aggressive buyers out there; there's some interest rate risk that people are trying to lock in; and I think buyers are asking for more. I don't think it's an ever-increasing trend. I'm pretty sure of it because the two transactions that we did are market appropriate.

So for ETP, you're not saying ETP bidding on deals that the same size you are; it's just that was something that Susser deal was out in the market and then --?

No, I would say that we were a bidder on the [Max] deal in Baltimore-Washington. And we were a bidder on the deal in Nashville. And so, the Nashville deal was at the higher end of what we thought we were going to do in the $75 million range, but something that would be accretive in the market down there. And the Max deal, the price that we were paying for it, it would've been accretive, too.

So, I guess they started at the lower end and then moved up into the $1.8 billion market. But yes, we did run up against them in a couple of transactions. But we maintained our discipline as to what we're willing to pay for assets.

Sure. And then can you remind us again how much leverage you want to carry on a sustainable basis?

I think from an enterprise value we are running around 40%. I think 50% is the level I get -- I think 50-50 would be the appropriate level on the high side before we raise more equity.

Okay. And can you translate it into a debt-to-EBITDA number? I know if a debt to EBITDA was going to be -- the ratio would be higher this quarter because the EBITDA was lower seasonally. Are you comfortable at 4 times, 3.5 times, 3 times?

I would give you a range which says, I would tell you on the high side I think 4.5, but on the low side I would like to get it back down to 2.75 and that we will manage within that range. I would not want to operate on a sustained basis at more than 4 times.

Right, right. Okay. That's all for me, thanks.

T.J. Leverte, PCO Capital.

Joe, in light of some of the large transactions taking place in the industry, can you talk a little bit about the big picture for Lehigh Gas, where you'd like to see the Company in terms of size the next two or three years?

And then also perhaps you can talk about the current acquisition pipeline. Obviously, you just announced two significant acquisitions, but maybe you can talk about what is left out there.

That is a couple of good questions. The pipeline is still good. There's probably eight to nine deals that we are looking at. I would suspect that they probably will not occur anytime soon as we are digesting these two transactions; they are both quite significant transactions. But the deals are out there, and if it's the right deal, we will go after it.

I think to be honest with you, every deal that we announced brings two or three more out of the woodwork to find the sellers that want to talk to us because it expands the market that we are in. So I am quite optimistic -- what was the first question, T.J.?

Just the multi-year opportunity for Lehigh Gas.

I think we would model it within ourselves, the $100 million to $150 million a year in acquisitions. I think that still gives us the sweet spot of the multiple that we like to pay. If we come across an acquisition like a Max that would've been accretive at a 7, 7.5 multiple, we are going to go take a shot at it, but I think we are quite comfortable doing the singles and doubles at the $30 million to $70 million range.

And I think that could, over three years, you add that up that is $450 million on the high side of acquisitions and that could be -- could get us to probably about 1.6 billion, 1.7 billion in gallons from that standpoint of view.

Okay, great. Thanks.

At this time, we have no further questions in queue. I would like to turn the call over to Joe Topper for closing remarks.

Thank you all very much for your time and interest and your questions. They were quite good today, and look forward to having a very good quarter with you in August. Thanks. Take care.

Thank you for your participation in today's conference. This concludes the presentation. You may all disconnect. Good day, everyone.