Crossamerica Partners LP (CAPL) 2016 Q1 法說會逐字稿

Good morning and welcome to the CrossAmerica Partners first-quarter 2016 earnings call. My name is Brandon and I will be your operator for today. (Operator instructions) Please note this conference is being recorded.

And I will now turn it over to Randy Palmer, Director of Investor Relations. Mr. Palmer, you may begin.

Thank you, operator, and good morning and thank you for joining the CrossAmerica Partners first-quarter 2016 earnings call. With me today are Kim Lubel, Chairman; Jeremy Bergeron, President; Clay Killinger, Chief Financial Officer; Steven Stellato, Chief Accounting Officer; and other members of our executive leadership team.

Jeremy will provide a brief overview of CrossAmerica's operation performance and an update on current strategic initiatives. And then we will turn the call over to Steve to discuss the financial results. At the end, we will open the call up to questions.

I should point out today this call will follow some presentation slides that we will utilize during this morning's event. These slides are available as part of the webcast and are posted on the CrossAmerica website.

Before we begin, I would like to remind everyone that today's call, including the question-and-answer session, may include forward-looking statements regarding expected revenue, future plans, future operational metrics, and opportunities and expectations of this organization. There can be no assurance that management's expectation, beliefs, and projections will be achieved or that actual results will not differ from expectations. Please see filings with the Securities and Exchange Commission, including annual reports on Form 10-K and quarterly reports on Form 10-Q, for a discussion of important factors that could affect our actual results.

Forward-looking statements represent the judgment of the Company's management as of today's date. And the organization disclaims any intent or obligation to update any forward-looking statements.

During today's call, we may also provide certain performance measures that do not conform to the US Generally Accepted Accounting Principles, or GAAP. We've provided schedules to reconcile these non-GAAP measures with our reported results on a GAAP basis as part of our earnings press release. Today's call is being webcast and a recording of this conference call will be available there for a period of 60 days.

And with that, I will now turn the call over to Jeremy Bergeron.

Thank you, Randy. This morning we reported solid first-quarter earnings results, which Steve will go through in detail in a few minutes. I wanted to spend a brief time talking about CrossAmerica's position today and our long-term strategy and execution.

As you turn to slide 3, you can see that the Partnership has grown dramatically over the past couple years and now has a strong presence across a number of regions of the United States, distributing over 1 billion gallons annually and generating annual rental income of approximately $80 million. At the end of the first quarter, we had over 1,180 fueling locations in 29 states.

We continue to hold an interest in CST Fuel Supply, providing us with a 17.5% interest and a 5% wholesale fuel margin on approximately 1.9 billion gallons annually, which represented over $4 million of EBITDA to the Partnership this quarter. We have a strong diversified platform that we continuously optimize and expand as we implement our strategy to maximize cash flow and provide a steady, consistently growing distribution for our investors.

If you turn to the next slide, I wanted to make a few comments about how we are executing on that strategy. Since going public in 2012, acquisitions have been a vital component of our growth strategy. We feel that completing acquisitions at favorable terms and successfully integrating them as we recognize synergies and other cost savings has been a competitive advantage for CrossAmerica.

With the tightness in the capital markets, we don't believe that doors close on acquisition opportunities. Rather, this has created an opportunity for prudent, diligent buyers to continue to grow at lower multiples than what was seen just a year or two ago.

Our acquisition of 34 sites from SSG Corporation is evident of just that type of growth. In the first quarter, we successfully completed this acquisition in the Upper Midwest region, providing us with good fuel volume and inside sales growth while leveraging our existing operational network in the region. Our investors value prudent accretive growth, but in today's market, we understand that they are valuing a solid balance sheet and strong distribution coverage even more.

At CrossAmerica, we continue to implement strategies to further tighten expenses, stabilizing our cash flow streams, and sustain a solid balance sheet in line with our business model. In today's market, we must be able to create value outside of just the purchase multiples in these acquisitions. Our focus on process and systems integration post transaction is allowing us to significantly reduce general and administrative expenses more quickly in the acquired business.

During integration, the team also focuses on optimizing the operation, including applying our retail experience and buying power to improve profitability. A major part of our optimization strategy includes dealerizing many of these sites, where we bring in a lessee dealer to operate the locations. This strategy not only stabilizes the cash flow of the site by eliminating the retail margin variability and essentially all operating expenses for the Partnership at the site, but it also brings in more qualifying income through dealer rent.

In the first quarter alone, the team dealerized 52 Company-operated locations. The chart at the bottom of this slide demonstrates the ongoing execution of our acquisition strategy and the successful repositioning of our portfolio from a retail segment to a more stable, tax-advantaged wholesale segment.

If you turn to the next slide, you will see how we have performed over the past two years through very different crude price environments. We have spoken at length about how our wholesale margins are impacted by terms discount from our suppliers, whereby the value of our prompt payment discounts decline as the absolute price of the underlying commodity is lower.

While this has been a headwind to our margin capture, through execution of completing highly accretive acquisitions, successful integration, consistent base business performance, and proper expense management, we have been able to lift our trailing 12-month coverage ratio to just below our long-term target of 1.1 times. Thanks to the hard work of all of our team members as we head into the heart of the driving season and our more lucrative operational quarters, we are positioned better than ever to benefit from the successful execution of this strategy.

Before I turn it over to Steve, I did want to make a couple comments regarding strategic initiatives underway at CST. As they have announced yesterday, CST has reached agreement to sell their operations in California and Wyoming. These stores represent approximately 10% of the volume in CST Fuel Supply.

With CrossAmerica recently purchasing and now owning 17.5% of that volume, we are working with CST to identify the most effective way to keep us whole. As this transaction approaches closing, we expect to have more details regarding how that may be structured.

I also wanted to make a few comments with respect to the strategic review announced by CST's Board in March. While I do not have an update to provide in regards to the process, I did want to make a comment about how this may or may not affect CrossAmerica and our strategy.

As we reiterated immediately after the announcement, the Partnership continues to execute and focus on completing the growth strategy we have outlined, which includes growing our distribution in 2016 by 5% to 7% over 2015.

In today's market, there are ample third-party acquisition opportunities to satisfy our prudent growth appetite. Market conditions and opportunities for asset drops beyond 2016 remain to be seen, but I can assure you that everyone at CrossAmerica is committed and excited about continuing to deliver on our promise to our unitholders of continued, long-term, sustainable growth. That is what this organization was built on and that is what everyone here strives for each and every day.

With that, I will turn it over to Steve.

Thank you, Jeremy. If you would, please turn to slide 6. I would like to touch on our overall first-quarter results at CrossAmerica.

Today, we reported a strong first quarter, with adjusted EBITDA of approximately $22 million, up 43% compared to last year. As you look at distributable cash flow, it was slightly over $17 million in the quarter or an increase of 71% when compared to the same period last year.

On a per unit basis, our DCF increased 27% during the quarter with distribution coverage at 0.88 times at the end of the quarter. Overall, the growth during the quarter was primarily driven by our acquisitions as well as the strong performance in our wholesale segment as we executed on our strategy to reposition our assets.

As we look at how each of our segments contributed on the next couple of slides, you will see that thanks to the fuel volume and rental income growth achieved from our acquisitions, our wholesale segment grew adjusted EBITDA by 37% for the quarter. This is despite the reduction in our terms discounts due to wholesale gasoline prices averaging over $0.40 below last year. We also experienced in 18% reduction in our operating expenses period over period, primarily due to the divestment of certain non-core assets in 2015.

Turning to the retail segment on the next slide, which includes our Company-operated and commission agent sites, our segment EBITDA declined during the quarter due to a thinner rack-to-retail margin as we saw the crude price declines start to bottom out and reverse direction.

We also experienced a lot of site change in the period as we completely dealerized the one-stop locations while adding the SSG sites late in the quarter. We look forward to the successful integration of those stores with our Erickson Freedom Valu locations, creating a strong operational network for us in the Upper Midwest.

On slide 9, we have detailed a chart to compare the performance of this quarter to the same period last year. As noted previously, we are experiencing a significant contribution from our recent acquisitions. We did see some impact, approximately $1.5 million, to our terms discount during the quarter compared with the first quarter 2015 as a result of lower fuel prices during the quarter.

Finally, as we have discussed in the past, we continue to benefit from our integration efforts, reducing our overall G&A and operating expenses to our base business in the quarter compared to last year.

As we turn to the next slide, this chart compares our performance in the first quarter to the results of the fourth quarter of last year. It demonstrates the inherent seasonality we have previously discussed in our business. The fourth and first quarters are our seasonally weaker periods because of the reduction in driving and motor fuel consumption, with the first quarter generally being the weakest.

If you turn to slide 11, we announced on May 5 that the Board of Directors of the General Partner declared the distribution of $0.5975 per unit attributable to our first-quarter results. This is a $0.05 per unit or 9.1% increase over the distribution attributed to the first quarter of 2015.

As we said last quarter, we expect the rate of CrossAmerica's distribution per unit attributable to 2016 will be between 5% to 7% over 2015 levels. And we continue to target a long-term distribution coverage ratio at or above 1.1 times. We expect our distributable cash flow growth to continue to be driven by a combination of accretive acquisitions, strong business performance, and expense reduction associated with integration of our recently completed transactions.

We continue to have a strong balance sheet with a debt to EBITDA ratio well below our bank covenant requirements, with approximately $60 million of available capital on our revolver. The cash flow associated with our recent acquisitions coupled with the seasonally stronger periods we are now entering should place us in a good position to grow our revolver availability even more. In addition, with the significant real estate in our portfolio, we have alternative capital sources from which to pull to continue our prudent growth strategy in 2016 without accessing the equity markets.

In closing, we were very pleased with our first-quarter results. Even more satisfied with the successful execution of our strategy and the position it places us in for the remainder of 2016.

With that, we will now open it up for questions.

(Operator Instructions) Ben Bienvenu, Stephens Inc.

I would be curious to hear a little bit about your thoughts around M&A and your appetite to continue to do some of these smaller deals. Obviously, you had some nice tuck-in opportunities and there is opportunities to capture synergies as you bring those into the fold. I would be curious to your thoughts there.

And then on the recent stores that you have acquired even within the last year, how much more juice do you think there is to squeeze out in terms of integration synergies?

Sure. You are right: the acquisition market is still strong and still great opportunity for us to participate in. These types of deals that we have closed on, such as the SSG acquisition in the first quarter, is kind of exactly what we are looking for: a strong asset base, an asset transaction where we can have it tuck in into our existing operations in the Upper Midwest. Where we can leverage our team that we have there to help run those locations and immediately recognize some of the synergies and savings.

So yes, those continue to be out there. We continue to look for them and we look forward to doing those going forward. As far as how much additional opportunity there are to further reduce overall savings and G&A, we just closed on SSG, so obviously there is some opportunity there.

But we still continue to digest the acquisitions done last year with the Freedom Valu Erickson acquisition earlier last year as well as the One Stop acquisition. So we continue to bring those into the fold. So you should see a bit more reductions going forward in that process and continued improvement.

Great. And then your merchandise sales were up nicely in the quarter. The margin was pressured a little bit. On the margin side, what opportunities are there inside the stores that you have that you want to continue to operate that you can enhance profitability?

Right. So if you go back to our slide deck that we posted, on slide 4, you see really a change in the mix overall of our stores. And I think what underscores this the most is if you look at all of our stores that we operated in the first quarter of 2015 versus first quarter of 2016, although we went from 144 locations to 97, there are only 11 of those stores were in there for the full period in 2015 and full period in 2016. So that just underscores the amount of mix and turnover that we have there as we complete acquisitions and dealerize them and move forward.

So when you look at our statistics, I would caution you to not just look at what is happening period over period, but what excites us is the continuous improvement we see on the cash flows we are acquiring and the improvement we are seeing along the way. Because we are actually moving merchandise margin of up as we go in and we leverage our buying power and we implement our systems and recognize other opportunities.

So we think there is continuing improvement with what we have in the portfolio right now. And we look to -- for that to continue going into the second quarter.

Got it. Got it. That's really helpful. Okay. Thanks. Best of luck.

Chris Mandeville, Jefferies.

Just very quickly, can you reaffirm that you do plan, in fact, to perform some asset dropdowns in 2016?

Well, Chris, we discussed that in 2015 in terms of what our expectations were for 2016. And as we have gone deeper into 2016, we continue to look in terms of what is our availability with our revolver and our opportunity to complete acquisitions and other transactions and managing our capital so that we can -- as I mentioned earlier, so that we can address what we understand and respect is a concern of shareholders, which is managing the balance sheet and managing our coverage ratio.

And we think opportunities like what we have done with SSG provide great third-party acquisition opportunities to buy assets at very attractive multiples and are good uses of our available capital. Dropdowns are still an opportunity, but as we said all along with CST, we are going to be opportunistic with those transactions.

And with the growth we have and what we have done so far, we will continue to evaluate that as an option for us in 2016 and beyond, but that is on the table as well as third-party acquisitions. But we like the third-party acquisition market and the multiples at which we can execute those at.

Okay. And then -- sorry, could you remind me what your leverage was at the end of the quarter?

Yes. The leverage was approximately [4.3] times.

Okay. And then lastly, you made some nice progress on the dealerization front in this quarter. Can you just provide some qualitative backdrop as it relates to the level of interest as it remains -- as it relates to the remaining 94 stores or so?

Sure. I mean, one of the advantages at CrossAmerica is as we continue to grow, then our dealer network continues to grow as well. And dealing with a lot of good operators out there that we work with and continue to identify as good dealers and good business partners for us, good customers.

So there are ample opportunities to identify additional dealers to go in there and operate the stores. Or we can continue to get good rental income back into the Partnership as well as good wholesale margin, which are both qualifying pieces.

So yes, there are opportunities, obviously. There is a lot of stores we now have in the Partnership today, which are in the Upper Midwest region. We're just closing on the acquisition of SSG and being associated with the Holiday Stationstores.

We look forward to working with them in the foreseeable future and continuing to grow our margin capture inside the store. And then we will continue to look and identify long term to find the right dealers to go into those stores that can be success for us in the long term.

Great. And actually, just one quick follow-up as it relates to that. Seeing how you now have a very solid concentration in the Upper Midwest, would you be looking for one party to primarily take over the majority of the remaining stores? Or would you still be willing to break that up into smaller pieces?

It is a combination. We have done that, where we have done transactions where we have brought lessee dealers into the stores, where it is multiple locations -- 10-plus, sometimes even more. And we do some where it is kind of one-offs. So it is going to be a combination of those. So they are not really mutually exclusive, so we are going to look at both options.

We have no further questions at the moment. Mr. Palmer, I will turn it back to you for closing remarks.

Okay, operator. We thank everyone for joining us today. If you do have any follow-up questions afterwards, please feel free to reach out to us. Thanks.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.