Crossamerica Partners LP (CAPL) 2016 Q3 法說會逐字稿

Welcome to the CrossAmerica Partners first quarter 2016 earnings call. My name is Christine and I will be the operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Randy Palmer, Director of Investor Relations. Mr. Palmer, you may begin.

Thank you, operator. Good morning and thank you for joining the CrossAmerica Partners third 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 operational 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 up the call to questions.

I should point out that today's 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 the organization. There can be no assurance that management's expectations believes and projections will be achieved or that actual results will not differ from expectations.

Please see CrossAmerica's filings with the Securities and Exchange Commission including annual reports on Form 10 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 CrossAmerica'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 you 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 on the CrossAmerica website for a period of 60 days. And with that I will now turn the call over to Jeremy Bergeron.

Thank you, Randy. Yesterday afternoon we reported our third quarter results, which Steve will go through in detail in a few minutes. But first I wanted to discuss our continued strategic and operational initiatives and success we are experiencing. The map on slide 4 identifies the over 1,250 locations the Partnership has today.

Cash flow for CrossAmerica is generated from over the one billion gallons of fuel we distribute annually. The over 880 sites we own or control generating $85 million of rental income per year and the 78 convenience stores we currently operate in the upper Midwest market.

We continue to hold a 17.5% interest in CST Fuel Supply providing a $0.05 wholesale margin on the 1.7 billion gallons distributed within the CST network. As of the end of September the Partnership has grown to a market capital of approximately $850 million with enterprise value of $1.4 billion.

Turning to slide 5, at the end of the third quarter we closed on our previously announced acquisition of assets from State Oil in the greater Chicago market acquiring 57 controlled sites, 25 independent dealer accounts and certain other assets. With already a strong Midwest presence, the immediate addition of 60 million wholesale gallons per year in 56 valuable fee sites is a great plug-in acquisition for CrossAmerica.

If you would turn to the next slide I would like to discuss our growth and optimization strategy. As we have said before our approach to stabilize cash flow by converting recently acquired Company operated locations to lessee dealer accounts is a key part of our integration strategy. We continued with that strategy in the third quarter by converting two more locations to wholesale accounts, as well as by converting three retail State Oil Company operated sites to dealer operated locations immediately upon closing.

Our retail team continues to do a great job offering 78 locations in the upper Midwest today. As we evaluate our long-term strategy over the coming months with regard to the strong convenience store locations.

Regarding our operating results on slide 7, the bar charts demonstrate the growth we continue to experience with our controlled site count, gross rental income and motor fuel distribution volume. While you can see in the chart on the right that we have almost doubled our volume since 2010, you will notice a reduction in the volume for 2016 compared to 2015.

This reduction is a result of our divestment of the low margin, high expense previously required PMI commercial business which represented about 20 million gallons on an annual -- I'm sorry 80 million gallons on an annual basis. The results in the table on the left highlight a few other key point I would like to discuss.

As you may recall the third quarter of 2015 was a record retail fuel margin environment as WTI crude and wholesale gasoline prices declined over 25% during this period. This benefited our dealer Tank Wagon contracts included our wholesale segment, as well as our entire retail segment where we saw fuel margins double what we experienced in the third quarter this year.

It is this volatility that underscores the importance of our dealerization strategy whereby we reduce our exposure to the swings in the underlying commodity market and secure our cash flow to more stable, fixed contracts and lease terms, as well as lowering operating expenses. Although our distributable cash flow was less in the same period a year ago had we not dealerized 75 Company operated locations this year, our DCF would have been impacted that much more.

On slide 8 I would like to quickly discuss the announcement made in August regarding the pending merger agreement between owner of our general partner, CST Brands and Couche-Tard. Upon closing, Couche-Tard will indirectly own 100% of CrossAmerica's general partner and an incentive distribution rights and approximately 20% of CrossAmerica's common units, while CrossAmerica will continue to own 17.5% equity interest in CST Fuel Supply.

The CST Brand shareholder vote on the transaction is scheduled for November 16, 2016 and both parties continue to work with the US Federal Trade Commission and Canadian Competition Bureau on the review of the deal. Closing on the transaction is still expected to occur early 2017.

Turning to the next slide and this is obviously a very exciting time for CrossAmerica as we believe this transaction presents a tremendous opportunity for us and our investors by offering several potential strategic benefits to the Partnership in the years to come. Through our transition discussions it is already evident that the two organizations share many cultural and operational similarities. Such as our experience in acquisitions and integration and our focus on growing cash flow through prudent cost management. In addition to what we share, we just are just as excited with the scale, global reach, financial strength, and numerous programs that we could leverage with Couche-Tard controlling our General Partner.

Not only will we be part of America's largest convenience and fuel retailing networks with the potential combination of Couche-Tard's US dealer network of approximately 700 sites and of CrossAmerica's network of more than 1,200 locations, the combined organization would also be one of the largest wholesale fuel distributors in the US. Slide 10 demonstrates the complementary geographies of the two wholesale organizations.

And while I know many of our stakeholders have questions with respect to how the relationship with Couche-Tard and CrossAmerica will evolve over time, please appreciate that both organizations are committed to maximizing value for all investors. We look forward to sharing more about our long-term plans in the near future and with that I will turn it over to Steve.

Thank you, Jeremy. If you would please turn to slide 12, I would like to touch on our overall third quarter results at CrossAmerica. Today we reported another strong quarter with adjusted EBITDA of slightly more than $27 million and distributable cash flow of over $21 million. The total distributions paid in the third quarter of 2016 were $20 million resulting in a coverage of 1.06 times.

On the next slide we compare our performance in the third quarter of this year against the comparable period in 2015. As Jeremy mentioned, we experience record retail fuel margins in the third quarter of 2015, as wholesale gasoline prices continued to decline over the period.

That was certainly not the case this year, as crude and wholesale gasoline experienced significantly less volatility, lowering the margin earned on our wholesale dealer Tank Wagon contracts and retail fuel CPG margins. In addition, with wholesale gasoline prices averaging 16% below last year, this also negatively impacted the prompt pay terms discount we receive from our suppliers, as a percentage of the total invoice on the fuel we purchase.

Finally, you can see the positive contributions associated with our Holiday acquisition and the expense reduction associated with the integration efforts on prior transactions. We expect these contributions will continue into the fourth quarter thanks to the State Oil acquisition completed at the end of September.

Turning to slide 14. We announced on October 24, 2016 that the Board of the Directors of the General Partner declared the distribution of $0.6075 per unit attributable to our third quarter. This is a $0.005 per unit increase over the distribution attributable to the second quarter of 2016 and marks our 10th consecutive quarterly distribution increase.

As we have said, we expect the growth 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 time. 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.

In addition to further improving our coverage ratio, we're continuing to take steps to strengthen our balance sheet. We ended the third quarter of 2016 with $57 million of available capacity on our revolver. Our leverage ratio was 4.5 times at September 30, 2016, following the State Oil acquisition.

In closing, we're very pleased with our third quarter results, especially considering the challenging fuel margin environment we experienced. We feel that the steps we are taking throughout the organization are demonstrating our ability to execute on our growth strategy in a very prudent manner.

The velocity at which we grow will be dependent upon the market environment and capital availability. Our focus on strengthening of the balance sheet, improvement in our distribution coverage ratio and execution on accretive transactions is the right strategy today for our unit holders and positions us well as the MOP equity markets begin to show signs of returning.

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

(Operator Instructions)

Ben Bienvenu, Stephens.

I'm curious if you could comment a little bit about the current acquisition environment that you're seeing. What does the market look like? Have you seen any change in price expectations of sellers and generally to what range of multiples are you seeing out in the market?

Well Ben, the range we see now is not all that different than we've seen over the past few periods. I mean, there are a variety of ranges in terms of what sellers are looking to achieve, but what we're able to execute on and what's out there I don't think is any different than what we've done over the past couple of years at CrossAmerica. So our focus and our target we understand is to continue to target those transactions that we get at very accretive. And for us, we've said this publicly, if we can get transactions done below an 8 times multiple, we think that a very good opportunity for the Partnership. We think there's a lot of those opportunities still out there.

Okay, great. You talked a little bit about distribution growth expectations for 2016. What should we expect for a forward outlook in terms of balancing deleverage versus growth and how should we think about the leverage trend line over the next year or so as you look to be opportunistic with acquisitions out in the market?

As you know we ended the third quarter at 4.5 times on leverage ratio and that was right after on the heels of closing on the transaction with State Oil. And so we continue to look at our balance sheet, manage it. There are initiatives we have in the works internally that we continue to work on to further delever that balance sheet. We're very comfortable at a 4.5 times. If you look at our cash flow generation we think that's a very comfortable level for us and with our banks as well.

But we're going to continue to look at opportunities to do transactions at a very accretive level with the capacity that we do have and then we'll see where things go long-term. Obviously, with the pending transaction with Couche-Tard we work with them in terms of how things look long-term and then we will be able to come back to you all with a little bit longer-term projections from a growth perspective, as well as managing our balance sheet. Where we are right now is very comfortable. There are opportunities for us to continue to do deals and there are some other things that we can further do to further manage things internally as well.

Great. Last one for me. What are you guys seeing with the help of the c-store customer as we cycle over lower fuel prices year-over-year? Have you seen any slow down in spending or any change in the habits of your customers?

No, I mean for us, Ben, it has been pretty consistent, but understanding our universe the c-stores that we are operating year-over-year is still relatively small. We're at 78 stores today and some of those we just acquired earlier in the year. We certainly think the trends are still strong in the business. It's a business we're excited about. We think it brings a lot of value so inside the store we think there's a lot of opportunity for us in the stores we run, as well as the dealers we look to support.

Perfect. Best of luck.

Thanks, Ben.

Ethan Bellamy, Baird.

Could you talk about the Colonial Pipeline gasoline volatility this quarter and whether that's good or bad for margins and if that at all can impact volumes?

Sure, I mean for us, Ethan, where we're located as you know in the upper Midwest and the Northeast, we were relatively unimpacted in our markets. It does have an overall impact to the overall market in general. We do have some stores in the Tennessee markets, the Virginia markets as well that saw an impact from it. But for us I wouldn't say it had any type of significant impact to our overall performance in the period both in the third quarter or here most recently with the recent incident. So from our perspective, the market had to react to the disruption in supply, but we didn't see a significant impact to our overall volume or margin for the period.

Okay, that's helpful. On G&A this quarter you had a nice step down, but you also probably picked up more G&A from State Oil. What should we expect for G&A in the fourth quarter and beyond and are the any incremental cost savings and was there anything noisy or one-time item in the third quarter numbers?

I will turn it over to Steve in one second, but I think that's one of the great things about the State Oil acquisition for us. It was a great plug-in acquisition where there wasn't a lot of G&A for us and that's why we're excited about it especially at where we were able to bring in. But I will it's Steve comment in going forward with the G&A numbers.

Hey, Ethan. When you look at third quarter results we did have some acquisition costs that were one-time items that we took a hit in the third quarter. We obviously don't expect that to continue into the fourth quarter.

How much was that like 1% of the transaction price?

When you look at that reconciliation we do from EBITDA to adjusted EBITDA we have about $1.6 million.

That's helpful. Then last question, I am sorry if I missed it, but how many stories did you dealerize in the quarter and what is the expectation for dealerization in the coming quarters?

I think the numbers is we dealerized two stores that we started the quarter with that we dealerized over the third quarter period to additional locations, as well as three locations that we acquired with State Oil. Whenever we acquired the assets from the seller on State Oil they were operating three stores as Company operated locations. So we took that opportunity prior to the deal closing and our wholesale team did a great job finding dealers to come in there and run those locations. So in total I would say we dealerized five.

Now we're at the point where we have a good concentration of 78 stores in the upper Midwest market that we think are the better of the c-store is that we acquired in the two transactions with Erickson and Holiday. We will continue to evaluate. Obviously with Couche-Tard coming in we will evaluate those operations as well with them and then we will be able to put together a long-term plan of how we are going to operate those sites going forward.

Got it. Thanks much.

(Operator Instructions)

Mike Gyure, Janney.

Could you talk a little bit about the rent conversion process and where you think you are with the asset you have and maybe looking forward to 2017 where you think that could possibly go to?

When you asked about rent conversions, what are you specifically referring about?

Your strategy of moving more to dealer locations and some more rental income --

More dealer locations versus the C-store operations, right. As we said earlier when we operate the convenience stores what we're getting with operating the stores is we're getting the merchandise margin inside the store, as well as the retail fuel income at the location, as well. When we can find dealers to operate the store we think it's a better investment for our unit holder base and it secures our cash flow long-term to find someone to run those stores and increase our dealer rent as well as lower our operating expenses significantly. And I think you saw that big reduction in OpEx there in the third quarter even versus the prior periods.

So we dealerized like I just explained to Ethan two stores in the third quarter as well as the three from State Oil so we've done five locations in the third quarter and we're at a point right now where we have really good operations in the upper Midwest. And will evaluate to see if there are more opportunities to dealerize any more of those 78 stores. But our strategy of continuing to do acquisitions that are in the marketplace and converting some of the Company operated stores into dealers, that will continue.

So it will depend upon our acquisition that we continue to conduct over the period and see what we do with the 78 stores. So I'd be hesitant to give any guidance of additional rent conversions we'll do it will be really dependent upon what our long-term strategy is for the 78 locations in the upper Midwest and any transactions we do going forward.

Thanks.

I will now turn the call back over to Mr. Randy Palmer for closing comments.

Okay, operator. That completes today's conference call. We appreciate each of you joining us today. If you have follow-up questions, please feel free to contact us. Thank you and have a good day.

Thank you, and thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.