Crossamerica Partners LP (CAPL) 2017 Q1 法說會逐字稿

Good morning, and welcome to the CrossAmerica Partners First Quarter 2017 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, Executive Director of Investor Relations. Randy, you may begin.

Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners First Quarter 2017 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'll 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, beliefs 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-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 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 U.S. generally accepted accounting principles or GAAP. We've provided schedules that 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'll now turn the call over to Jeremy Bergeron.

Thank you, Randy. We reported our first quarter 2017 earnings results yesterday afternoon and Steve will go through that detail in a few minutes. But first, I wanted to review some of the highlights from our first quarter. If you turn to Slide 4, you can see that at the end of the first quarter we had over 1,250 locations across the U.S. that distribute over 1 billion gallons of fuel and generated gross rental income of over $80 million on an annual basis. We continue to hold 17.5% interest in CST Fuel Supply, which generated a $0.05 wholesale margin on approximately 1.8 billion gallons distributed annually within the CST network. We also currently operate 75 convenience stores in the Upper Midwest market. With over 500 owned sites and ground lease control of close to 400 more, we have built a sizable real estate portfolio. As I will detail later in this presentation, rental income has grown to be our largest category of gross profit even greater than wholesale fuel income. This stable fee base business has aided us in generating consistent results over any economic and commodity environment. On Slide 5, I will quickly review our first quarter operating results. I will discuss a few of the numbers in the table, but wanted to note that several of these items, these trends, hopefully give you a good indication of our strategy of growing our wholesale business and providing more stable qualified income for our investors, acquiring sites and increasing our volume of fuel gallons distributed, dealerizing company-operated sites, which has the effect of lowering our company-operated site count and retail gallons distributed as well as operating expenses, but significantly grows a more stable rental income stream. Finally, lowering our other general administrative and operating expenses where we can find opportunities. So as we look at the table, I would point out that while our wholesale fuel volume of 238 million gallons was up slightly over the first quarter of last year, we captured a healthy increase in our wholesale fuel margin per gallon with an increase of 12% or $0.05 per gallon to $0.56 per gallon. This is due to several initiatives, but was most significantly impacted by the increase in crude oil and wholesale gas prices year-over-year to help boost our supplier term discount earned in the period. We also saw an increase in our rental income from our wholesale segment during the quarter, improving 13%. This is primarily due to our dealerization strategy where we converted 77 company-operated sites to lessee dealer accounts during 2016.

Finally, we saw a decline of 6% in our G&A and operating expenses during the quarter. We continue to focus on our costs and make reductions where we can.

On the next slide, as you look at the pie chart, you can see our successful execution of our dealerization strategy has impacted our segment and category gross profit from the first quarter of 2016 to 2017. In the first quarter of '16, 70% of our segment gross profit was generated by the wholesale business. This increased to 78% in the first quarter of 2017. In regards to our category gross profit, you can see the significant shift from the retail elements of our business to wholesale, fuel and rent. As mentioned, rent, which is the most stable of all categories, increased from 41% of gross profits in the first quarter of 2016 to 46% in 2017, and is now our largest category driver of free cash flow. Once again, this is a testament to our acquisition, integration and dealerization strategy to generate more stable qualifying cash flow for our investors.

If you would turn to the next slide, I would like to recap some of the highlights from the first quarter of 2017. During the period our adjusted EBITDA increased 7% from 2016 to 2017 as we reduced our overall expenses 6% when compared to the first quarter of 2016. We ended the quarter with the leverage at 4.23x and the Board of our General Partner declared a distribution attributable to the first quarter of $0.6175 per unit that will be paid this month. We have now grown our distribution for 12 consecutive quarters. Finally, I want to mention that pending -- the pending merger between Couche-Tard/Circle K and the owner of our General Partner, CST Brands. As announced with our first quarter results yesterday, where there can be no assurances as to timing, CST continues to expect that the merger will be completed this quarter. We view this as great news as we remain excited about the potential strategic benefit this should have for CrossAmerica and look forward to sharing more detail on these plans in the near future. With that, I will now turn the call over to Steve.

Thank you, Jeremy. If you would please turn to Slide 9. I would like to touch on our overall first quarter results at CrossAmerica, which as you know, is our seasonally weakest quarter of the year. Today we reported adjusted EBITDA of nearly $24 million and distributable cash flow of nearly $17 million. The total distributions paid in the first quarter of 2017 were over $20 million, resulting in a coverage of 0.82x on a paid basis and 0.81x on a declared basis. Our trailing 12 month coverage was 1.0x on both the paid and the declared basis.

On the next slide, we compare our performance in the first quarter of 2017 against the comparable period in 2016. The primary driver of our year-over-year growth in adjusted EBITDA revolved around our acquisitions, overall integration efforts and the positive impact from our supplier terms discounts. You can see the roughly $2.5 million positive contribution associated with our Holiday and State Oil acquisitions and the expense reduction associated with the integration efforts on prior transactions along with the over $1.1 million favorable impact from the supplier terms discounts.

As we have noted in the past, we received prompt paid terms discounts from our suppliers as a percentage of the total invoice on the fuel we purchased.

During the first quarter of 2017, with average crude oil prices increasing 55% as compared to the same period for 2016, this resulted in a positive impact on the terms discount that we received from our fuel suppliers. However, this with significantly less volatility in wholesale fuel prices period-over-period, we did experience a decline associated with our retail fuel margins.

Turning to Slide 11, we announced on April 26 that the Board of Directors of our general partner declared a distribution of $0.6175 per unit attributable to our first quarter. This is a $0.05 per unit increase over the distribution attributable to the fourth quarter of 2016 and marks our 12th consecutive quarterly distribution increase. We continue to target a long-term distribution coverage ratio at/or above 1.1x. As we look at 2017, we expect our distributable cash flow growth to continue to be driven by a combination of accretive acquisitions, strong business performance and further expense reduction associated with the -- with integration of our acquisitions.

As of May 4, we had $92 million of available capacity on our revolver. Our leverage ratio, as defined under our credit facility, was 4.23x at March 31, 2017. In closing, we manage through the first quarter and are in a good position, as we enter the seasonally stronger second and third driving season. 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. Although we have not closed on an acquisition since the State Oil transaction in the second half of last year, we remain very active in the space and look forward to continuing our successful M&A strategy that has built this organization to the size it is today. In addition, with the anticipated merger between CST and Circle K, we feel that CrossAmerica is poised for an exciting future and look forward to detailing those plans relatively soon.

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

(Operator Instructions) And from Jefferies we have Chris Mandeville.

Can you guys just provide some color on the fairly modest overall wholesale volume growth of about 1% in the quarter? And maybe help us to understand how should we thinking about this growth in the coming quarters? And maybe just drilling down a little bit further, can we focusing on the CST and commission agent sites, it was mentioned in a footnote that about 25 DMS sites were reverted back to you and then converted to commission sites. I'm just curious if that was really the driving factor behind the 19% volume decline on a per site basis?

Sure. So I'll kind of walk you through that a little bit, Chris, in terms of the volume. So we did complete some acquisitions. So we added acquisitions with the Holiday stores that were added at the back end of the first quarter last year as well as the State Oil acquisition that was done towards the end of the third quarter last year as well. Then we had, I would say, about 10 million gallons of divested volume from the first period compared to last year's first quarter, that was similar to what we've talked about in the past, a lot of that was related to some PMI business, commercial business. I would tell you that those 10 million gallons averaged, I would say, about $0.015 per gallon, so very low margin gallon volume that we divested of over the period. So there is a lot of reasons why you will see the increase in our wholesale margin period-over-period go from $0.05 last year to $0.56. The other thing, and you alluded to this was the comment that's in our Q regarding the DMS. So we did take back some sites from Dunne Manning, one of our largest customers. They -- those were under the lessee dealers segment previously. So we were leasing out the real estate and supplying those sites, and then they were then operating them as commission agent operators. We have, since in the first quarter, have taken those, I think, it was the back half of last year, actually, we have taken those back and then we're working directly with the commission agents and pricing the fuel and capturing more of the margin on those sites. So it moved from the lessee dealer category to the commission agent category. But that did not have an overall effect on our wholesale volume because that -- all of those gallons always flown through our wholesale volume. The main drivers of the delta in the volume have come from our acquisitions we completed and then the volume of which we divested of as well.

Okay, that's helpful. And then, I guess, you just alluded to having divested roughly 10 million gallons of volume. Is that the same as it relates to the 21 wholesale contract that you note having terminated for independent dealers? And if there's any additional color that relates to just that thought process and prospects of further terminations, that would be helpful.

No, that's all part of the mix. I mean, it's a constant review of a portfolio and really where our focus should be overall to improve -- improve things really put us in a good position as we head into the second quarter and third quarter and making sure our team is focus on all of the sites we have and ensuring we're capturing the most out of the gallons we're running through the network, and that was all part of the mix.

Okay. And then just turning over to the company-operated sites, merch and service gross margins, they were down really quite meaningfully around 135 basis points year-on-year. I imagine that maybe some component of that had to deal with the mega lotto in the prior year, but any additional color there.

No, that's right. There were some drivers last year, I think, it certainly helped a lot of retailers out in the first quarter, but that didn't repeat itself in the first quarter of this year. And it's -- for us, that retail network is such in state of flux with stores coming in, and coming out and managing it. The team does a great job of maximizing the margin capture opportunities inside the store. And there was some work that we've done on those sites as well during the period to really make some investments on outside the store that were little disruptive to inside the store as well. So yes, there was a lot of things in the mix as you mentioned.

All right. And then the last one for me here. So post that sale leaseback at the end of 2016, I'm just curious what the percentage of your underlying real estate that you now have own that could potentially be monetized somewhere in the go-forward basis?

That's a good question, Chris. We evaluate a lot of our sites. I think we talked about the number of sites we own. We do have some restrictions with our covenants. But what's nice is when we amended our facility on a go-forward basis, we are not restricted with respect to a lot of these sites that we purchase in terms of not entering into the sale leaseback. So I couldn't give you a number, but it's constant evaluation. I think we have quite a bit of properties, but as I mentioned, we are somewhat restricted under our current covenants. On a go-forward basis, we have a lot more flexibility.

From Stephens Inc., we have Ben Bienvenu.

I just wanted to talk through your thought process around balancing distribution growth and leverage. This is now a second quarter where we've seen moderated distribution growth, which you've talked about it being a prudent process, but leverage just kind of held in at this 4.2x EBITDA level. So just help us think about through the appetite for leverage going forward, should we expect any moderation of leverage as we go through the year and sort of a sustained lower growth rate on the distribution side to help achieve that end goal?

Sure, so like, I would say is that our leverage position where we are right now, we're very comfortable with. I mean, I think that the team has done a great job of balancing the portfolio, achieving the growth we've had and being at the leverage which we are at 4.2x. Our growth, we have said over the past several quarters that our plan is to continue to grow in a very prudent practical manner, that's going to deliver the right amount of growth with the right amount of -- considering the economic conditions that we're under and really what our investors really focus on what do they want to see. I think if we ask our investors, they are very focused on ensuring that the organization maintains a good leverage ratio, which we've had. They want to see growth. But they understand the need to kind of pull back on that growth compared to what we had done back in 2016. So that's all being said with a backdrop of this pending transaction, right, with Couche-Tard and CST, and then the changeover our general partner, it's really putting ourselves in a position as we go into second and third quarter, as we come to the close of that transaction to really be poised to kind of take advantage of whatever the market is at that time. And really the strategy is that we are working through to lay out to the market, so that we can capitalize on it. So sitting here with $92 million of available capacity with the leverage ratio of 4.2x and have grown our distribution for basically the past 3 years consistently, we certainly like our position and where we are going into the summer months.

Great. And then thinking about there has been some recent deal activity in the market, 7-Eleven buying large chunk of the Sunoco assets. As you are in the market looking for deals, we've heard your commentary around elevated multiples in the wake of that, I'm just curious that how do you guys think about wanting to continue to grow distributable cash flow and also not overpaying for deals, what other avenues for growth are there? On the gallon front, maybe signing up incremental dealers, maybe just help us think about the organic growth side of things.

Sure. So, I mean, obviously, we stated on a consistent basis, that majority of our growth is going to come from the M&A field. Acquisitions is a big part of our culture as an organization and how we've built to the point that we're in right now. We've done a lot of deals. There is some transaction that have gone out there with multiples higher than -- we're certainly comfortable going to. So we'll -- but we still see that there is a lot of opportunity in the area in which we had previously played to continue to acquire businesses, integrate and kind of bring expenses down and manage and grow cash flow. We do -- we consistently look internally and see where can we maximize cash flow. And it's not just from growing volumes, it's maximizing the margins in the business, it's managing the expenses in the business. And those are the things, I will tell you, as we sit here in the backdrop of the CST, Circle K-Couche-Tard transaction, that we know as an organization we can remain focused on to ensure we're capturing the most amount of cash flow out of the business. But with that merger coming to a close here relatively soon, I look forward to continuing to returning to the M&A space and really growing cash flow once again through that area. But we don't -- it's not an either/or for us, it's both/and, and I think we can do it both ways.

Understood. And then last one for me. Are there any notable disparities in performance by geographies that are worth calling out, particularly as we've seen erratic weather in the first quarter?

No, I wouldn't say -- really, there's a lot. I mean, I talked previously in the call from Chris' question around the 10 million gallons of divested volume. I will say on a same-store basis, for our gallons across our network, we basically had about 1.5% decline overall from -- on a same-store basis, which is pretty good when you consider what the rest of the industry had seen. Now we see pockets of that. We have a lot of stations up in the Northeast and you may be familiar that New Jersey went through a $0.23 per gallon tax increase here in the first -- in the beginning of the year that we have to manage through. So we have some stations in New Jersey, but we have a lot of stations there in Pennsylvania as well that are kind of stations along the border. So we may be impacted in 1 state, but saw the benefit in another state. So those are things that, I think, consistently happened that we just have to manage through and making sure we're looking to see what our dealers are doing, what the competition is doing and making sure that we're maintaining volume in those markets, and that's something we continue to do.

From FBR and Company, we have Robert Balsamo.

Maybe another way to ask kind of a similar question regarding geography. I was wondering if you saw anything, any impacts during the quarter with differentials moving with Gulf Coast in your part of New York harbor. Has that impacted you at all or how did it impact you [positively]?

No. Yes, Robert, so I mean man -- if you remember most of our gallons are -- it's branded gallons where we're buying from the suppliers where they're more tended to be kind of brac pricing. There isn't a lot of exposure to the spot market in any differentials that may be seen from different harbors or different geographies. So for us, that's kind of the beauty of kind of the structure we have today where it's pretty consistent margin capture throughout the business and not a lot of swing that could impact us overall.

And any updates as we get the next quarter underway on, let's move towards higher demand seasons on just overall volume demand recovering from little bit of weakness in 1Q?

Yes. So as I mentioned, we had a good first quarter. As we come into the second quarter we're seeing continuing improvements as you would expect, as you go deeper into the driving season. So I think we remain very cautiously optimistic about where things are going for us in the second quarter.

From Baird, we have Ethan Bellamy.

You guys are world-leading experts on fuel demand in The United States. And it looks like fuel demand has decoupled from employment. And just from a very big picture, I'm kind of interested to hear about what you think about fuel demand and what are the drivers of attrition in the market and what should our outlook be for the next year or couple of years?

I appreciate the question, Ethan. I don't know about the compliment if that's certainly deserving for us or not, but I will just simply say that for us the first quarter was a good quarter. We like where we ended up. What we're seeing in the second quarter is continue to be good trends for us. We see and we model fuel demand relatively flat going for us throughout the rest of the year. We don't look or really it's not for us to say any massive swings we expect to see overall in the space. We're just managing business day-by-day. But yes, there's probably others in the industry that are much more in tune to that, that can give you a little bit better commentary than we are right now.

Do you place any weight on the EIA data? I mean, where -- what do you think is the most credible source out there?

I think EIA data is certainly good data to look at. I think, OPUS data is good data to review as well. See, I think, you look at all of the information and you have to look in terms of where you have your businesses and from your geographies you have and what's going on in each of those different markets and what's driving the business and that's something certainly we do.

All right. And then a more specific question. How many stores did you dealerize this quarter? And then what should we expect on sort of a quarterly basis for the balance of the year?

So we have dealerized, I believe, 2 year-to-date. 1 in the first quarter and I think 1 since then. For us, as you know, we took a pretty big cut of that last year, dealerizing 77 last year. And as we are looking to get to the close of the transaction with Circle K, we think we have a lot of good assets up there that may end up falling or fitting kind of their overall portfolio. So we have to keep that in mind as we go through and manage it, but we're going to continue to look at and managing our existing C-store operations up there, and then we'll see where things go with potential other acquisitions and bringing in another retail into the fold and potentially dealerizing those. So it's going to be a constant state of flux, but I think the 2 we've done so far this year, I think, we could see some more here in the second and third quarter.

Okay. And then last question, look, I know you want to have dry powder for the big splash about whatever ACT is going to say or not say about the future of CrossAmerica. But can you give us any insight or body language from the ACT folks about how they're treating you? Have you been spending a lot of time in Canada, for example. I mean, I just, I know you guys have the announcement coming, but for people that need to own or not own the stock between now and then, it's certainly the major driver of positioning here.

No, I certainly appreciate that, Ethan. I understand, we -- our investors have been very patient in waiting for the story to kind of be put out there in terms of what the plans are post-close. I will say we've had very good conversations with the folks over at Circle K and Couche-Tard. We're very excited about kind of where things are going and excited about laying out those plans and really engaging with our investors to make sure we understand exactly how we think value can be created for our unitholders as well as their shareholders. We've had a lot of time to work on it. So we certainly are working diligently, working with them and looking forward to going out and telling that story. And we look forward to doing that soon.

(Operator Instructions) And from Janney Montgomery, we have Mike Gyure on line.

Yes, can you guys maybe talk a little bit about the retail and motor fuels gross profit per gallon and I guess your expectation for, I guess, the direction that's headed maybe in back half of the year here?

Sure. I think -- correct me if I'm wrong, Mike. Your question was about retail motor fuel gross profit per gallon?

Yes.

Okay. So I think, if you compare period-over-period for us under the retail side, there was a lot of ins and outs for you to maybe aware of as we have acquired stores that with the Holiday acquisition as well as the 77 stores, which we dealerized last year that I mentioned before. So there are lot of stations that were moved in and out. And then also you had the 25 DMS sites that moved into the commission agent business late last year as well, and so that kind of affected things. Then the last piece I would say, is we are a branded supplier. We work with our brands and we're working with one of our largest brands in the Upper Midwest to work on making investments in some of these stores. And so as we do that, what we do is we're making those investments, and with those investments comes an opportunity for us to capture potentially more of a margin on the wholesale side, which could lower our retail margin capture going forward. And I think you saw a little bit of that in the first quarter as well. So those are the types of things. There's a lot of moving parts in there, and I don't want to get too into weeds with the retail piece of it. But the team constantly looks at different ways in which how can we maximize qualifying income for our investors, yet on the wholesale -- on the wholesale side and working with our suppliers to ensure that we're making the investments in our retail sites out there as well. So it's hard for me to give you any specifics unless Steve has any other comments to add on what to expect on the back half of the year, because we'll continue to make those types of strategic analysis and investments in those stores.

The only other thing that I would add there is that in the prior year, during the first quarter, we had a lot more favorable volatility. We didn't see that in the first quarter, obviously, in 2017, where crude prices were moving. So as crude was moving up, that does have, what -- somewhat of an adverse effect in terms of what that CPG is. Other than that, I don't think that there's really -- I think, Jeremy hit on all the key points that were impacting on our retail business.

Okay. And then maybe on the G&A front, it looks like you guys have done a great job of cutting costs here. Any big initiatives you got planned for the rest of the year there or just going to continue to look at everything as it comes out?

Yes, I mean, that's been a big focus of ours over the past 12 to 18 months is really focusing in on the G&A. And then the only big thing, obviously, to happen is the pending transaction with Circle K and go forward kind of that what looks like. So those are the -- that's the only thing that I would say on the horizon that we could expect that could have some changes in the G&A and that specifically remains to be seen.

Thank you. We will now turn it back to Randy Palmer for our closing remarks.

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

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