Crossamerica Partners LP (CAPL) 2017 Q3 法說會逐字稿

Welcome to the CrossAmerica Partners Third Quarter 2017 Earnings Call. My name is Eric, and I'll be your 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, and good morning, and thank you for joining the CrossAmerica Partners Third Quarter 2017 Earnings Call. With me today are Jeremy Bergeron, President and CEO; Evan Smith, Chief Financial 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 Evan to discuss the financial results. At the end, we'll open up the call to questions.

I should point out that today's call will follow some presentation slides that we'll 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'd 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 the 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 have provided those schedules that reconcile these non-GAAP measures with our reported results on a GAAP basis as part of our earnings release. Today's call is being webcast. 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 third quarter 2017 earnings results yesterday afternoon, and Evan will go through the detail in a few minutes. But first, I wanted to review some of the highlights from our third quarter.

If you turn to Slide 4, I'll provide a brief overview of the partnership at the end of the third quarter. As we look over the past 12 months, we continue to distribute over 1 billion gallons of fuel to approximately 1,250 locations across the U.S. and generate gross rental income of over $80 million. We continue to hold a 17.5% interest in CST Fuel Supply, which generates a $0.05 per gallon wholesale fuel margin on approximately 1.8 billion gallons distributed annually within the legacy CST network. We also currently operate 71 convenience stores in the Upper Midwest market and have close to 500 owned stations.

On Slide 5, we recap some of our third quarter operating results. As you look at the wholesale business for the quarter, our fuel volume of over 266 million gallons was relatively flat when compared to the third quarter of last year, with our wholesale fuel margin per gallon increasing 8% to $0.057 per gallon from $0.053 per gallon for the third quarter of last year. This increase in wholesale fuel margin per gallon was positively impacted by improved margins earned at our commission-operated location and dealer-tank-wagon price contracts. In addition, the increase in crude oil and wholesale gas prices year-over-year also increased our supplier terms discount earned in the period.

During the quarter, we also saw an increase in our rental gross profit for our wholesale segment, improving 13%. This is primarily due to our State Oil acquisition that we completed in September of last year, along with our dealerization strategy to convert company-operated sites to lessee dealer accounts.

Finally, excluding acquisition-related costs, you can see the reduction in our base G&A expenses. This is primarily a reflection of some of the G&A expense synergies we were -- we are realizing, thanks to our integration efforts with Circle K, as we have outlined previously. We are continuing to focus on managing costs and making reductions where we can as we further integrate our operations with our new general partner.

If you would turn to the next slide, I would like to review some of the highlights from the third quarter of 2017. During the period, our adjusted EBITDA increased 7% from 2016 to 2017, driven by growth in both our wholesale and retail segments. We ended the quarter with leverage at 4.03x. We were able to reduce our leverage in the second quarter through our year-over-year growth in EBITDA, along with proceeds from the sale of noncore assets that Evan will outline in a few minutes.

I should also note that the board of our general partner declared a distribution attributable to the third quarter of $0.6275 per unit that will be paid this month. We have now grown our distribution for 14 consecutive quarters.

As we discussed during our second quarter earnings call, the merger between Couche-Tard and Circle K, the former owner of our general partner, CST Brands, was completed on June 28. We are currently actively integrating our business with Circle K's wholesale business, National Wholesale Fuels, to create a leading wholesale distributorship with a strong, unparalleled national presence.

As we noted during our second quarter earnings call, we are working to leverage the strength of each organization by simplifying the 2 businesses. Aside from the C-store retail operations within Circle K and fuel wholesale operations within CrossAmerica, we are leveraging each organization's operational strengths, maximizing their respective capital structures and delivering value for the benefit of each set of investors.

Through the G&A reduction we've experienced in the third quarter, we are well on our way in achieving the synergy targets we've previously outlined. But we're not waiting to take advantage of immediate opportunities in the M&A space as we look to complete our acquisition of certain assets of Alabama-based Jet-Pep. This was an acquisition that we are doing jointly and is a great initial transaction for both organizations.

The Jet-Pep asset that CrossAmerica will be acquiring consists of 101 commission-operated retail sites, including 92 fee sites, 5 lease sites and 4 independent commissioned accounts. The locations sold nearly 91 million gallons of unbranded fuel in 2016. This is a great transaction for us as it expands our presence in the South by acquiring a respected, well-run operation in Alabama, with sites which are mostly fee-simple and unencumbered with any existing fuel brand relationships. Circle K will be acquiring 18 commission-operated sites as well as a fuel terminal and other associated assets that are being utilized to supply the entire chain today. We look forward to closing on this acquisition in the coming weeks.

So in summary, our integration efforts with Circle K have gotten off to a great start. There has been a lot of great work that have taken place in the third quarter and continues today as we look to complete the analyses, evaluations and strategy development necessary to deliver on our goal of providing our investors and organization poised to build on our past success with a general [partner in] a position to support our growth as we enhance the value for our investors. We look forward to providing you with more details on these plans in the near future.

With that, I'll turn it over to Evan.

Thank you, Jeremy. If you would please to turn to Slide 8, I would like to touch on our overall third quarter results at CrossAmerica.

Today, we reported adjusted EBITDA of $29 million and distributable cash flow of over $21 million. The total distributions paid in the third quarter of 2017 were over $21 million, resulting in a coverage ratio of 1.02x on a paid basis. Our trailing 12-month coverage was 0.98x on a paid basis.

As Jeremy noted earlier, our performance centered around the growth in our wholesale business as we benefited from our past acquisitions, integration efforts and the positive impact from our 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 repurchase.

During the quarter, we saw a total benefit of nearly $1 million from a combination of supplier terms discount and the impact of improved dealer-tank-wagon pricing. During the third quarter of 2017, average crude oil prices increased 7% as compared to the same period for 2016, resulting in a positive impact on the terms discount that we received from our fuel suppliers.

On top of this increase, we also saw volatility in crude oil and wholesale fuel prices during the 3-month period, which benefited both our dealer-tank-wagon pricing and our retail fuel margin.

Turning to Slide 9. We announced on October 24 that the Board of Directors of our general partner declared a distribution of $0.6275 per unit attributable to our third quarter. This is a $0.05 per unit increase over the distribution attributable to the second quarter of 2017 and marks our 14th consecutive quarterly distribution increase.

As we look at the remainder of 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 recognition of synergies through our integration with Circle K.

As of November 3, we had approximately $55 million of available capacity on our revolver. And our leverage ratio defined under our credit facility was 4.03x at September 30, 2017, which was a decline from 4.25x at the end of the second quarter.

As Jeremy noted earlier, we did divest some noncore assets this past quarter, along with the sale of 2 properties as required by the FTC in connection with the Couche-Tard/CST merger. With the proceeds, we did take the opportunity to strengthen our balance sheet by paying down some debt and reducing our leverage for the sale of the 28 noncore properties. The total consideration for both transactions was $23.3 million.

In closing, as I just mentioned, we will continue to manage our balance sheet and leverage. As we look towards the remainder of 2017, you should expect that we will continue to focus on our underlying business to grow distributable cash flow.

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

(Operator Instructions) And our first question comes from Ben Bienvenu from Stephens Inc.

I wanted to first ask about the G&A reduction of 31%. If you exclude the sale of the 30 sites, what does that metric look like? Is it materially impacted by the sale of those stores?

So Ben, I think we highlighted that on Slide 5. [If] you look at the G&A that was filed in the earnings release as well as in the Q, it is -- a full all-in number would include all of those expenses associated with the acquisitions and any divestitures. What we tried to do is, in the deck, kind of highlight what the G&A expenses were excluding acquisition or costs. And I think what you saw, you saw about a $1.5 million reduction year-over-year for each quarter, third quarter '17 versus '16. So I think that it is kind of indicative of what we hope to achieve going forward in terms of G&A reduction. What we had guided to and what our target was, was achieving a $5 million per year in annual cost synergies within the first 12 months post acquisition with an opportunity to achieve another $5 million of synergies longer term. And I think it shows that we're well on our way of achieving that.

All right. Great. And then on the hurricane impact in the quarter, can you talk about any impact to your stores? Or your customers might have felt during that time period? And then has there been any residual impact that's lasted into the fourth quarter?

Yes. I mean, if you look at where our stores are, look on the map we have on our slide, I mean, you know that we have -- we don't have a large concentration in Texas. We do have some sites in Texas and some in Florida. We did the 22-site acquisition we did a couple of years ago with CST in the San Antonio market. Aside from that, we have some stores that we operate as -- with BMS down in the Florida Panhandle. So I mean, I think we saw some impact overall. I mean, the gasoline market, as you know, is a very tight market. And any type of significant disruption that we've seen impacts not just those specific areas that were impacted but really the entire network. So I think we've seen that. I think we've absorbed it. I think we are past that and moving forward and in a good position. So we -- also, I would point to -- you may see from the CST Fuel Supply that our interest in -- our equity interest and the EBITDA generated from that was down quarter-over-quarter. So that was probably impacting that a little bit as well. But I think we're in a good position now looking forward.

Understood. And then in your discussion around integration efforts with Circle K, you talked about simplifying your structure through addressing cash flow entanglements. Can you talk a little bit about the details of that process as well as kind of the time line of delivering some of the improvements and the size of that opportunity?

Yes. So we touched on this, I think, in July whenever we put out our presentations, trying to highlight kind of where we see along with Couche-Tard the opportunity to really move more [to] the retail business that we have embedded in [what I should say] into Couche-Tard and some of the what I would call wholesale business that's within Couche-Tard into the partnership. We talked about that opportunity with some of the what I would say noncore assets long term for Couche-Tard that we could then move into the partnership and essentially dealerize and turn them into wholesale business. But a lot of the other assets for the transactions we've done with CST would make more sense on the Couche-Tard side. That's pretty well highlighted in the July deck. So there has been a tremendous amount of efforts here in the third quarter to move that along. I mean, I'll say from CrossAmerica's perspective, we're very excited about what we think the opportunities are and the improvements we can see as we head into 2018. We look forward to sharing that in more detail here in the coming months. We committed that by the time we announced earnings results for the full year of 2017 in February, we also have a plan in place that we can detail with our investors. But we'll certainly keep them apprised as we go further in the process.

And our next question comes from Patrick Wang from Baird.

Jeremy, it looks like solid numbers all around. Just touching on the CST divestiture, the 61 sites that CST sold in September. It looks like you were to amend your agreement to increase CST's fuel purchase commitment there. Should we just think about that as a net cash flow-neutral impact?

Yes. That's the right way. This is Evan, Patrick. That's the right way to think about it. It's essentially a take-or-pay arrangement until a greater, larger transaction is done to simplify and untangle the cash flows.

Right. And that would be the initial asset swap with you and Circle K, right?

That's correct.

Okay. Perfect. And then just looking at the -- just going through the Jet-Pep fuel now. Is the expectation still that your transaction with Jet-Pep and Circle Ks will close simultaneous with each other? And could you just walk us through if there are any really remaining milestones blocks before you can close that deal?

Yes, that's the expectation, Patrick, is to close at the same time. We're still going through the regulatory process, but I think we're very pleased with the progress that's been made to date. And we look forward to closing that here in the coming weeks.

And our next question comes from Mike Gyure from Janney Montgomery.

Can you guys talk a little bit about, I guess, your acquisition strategy going forward and maybe how that's changed with Couche-Tard? I guess, big picture, kind of looking at different geographies or sort of different assets than you had in the past. Maybe something around that would be helpful.

Sure, Mike. Thanks. Yes. So I mean, our acquisition strategy per se really hasn't changed. We see a lot of opportunity in the market to acquire assets and multiples that are very favorable to the partnership and our investors. We still are being very active in that space. I think where we feel is it's expanded is the opportunity to participate on transactions with Couche-Tard as they look at other opportunities, sometimes even much larger opportunities that we can participate in with them as well as their geographic spread being really all over the U.S. in the markets where maybe we didn't have a previous presence. We now see an opportunity to potentially go into those markets maybe that we were not in before. So I think all in all, we're excited about the M&A opportunities we have and the strength that Couche-Tard brings us as we look forward in that space.

Okay. And then maybe on the availability of your credit facility. Do you view that as potentially a limiting factor as to what you can look at as far acquisition size? Or how does that play out?

We have enough -- we have sufficient liquidity to close on the Jet-Pep acquisition that we've highlighted. And in the context of unwinding and working with Circle K for this larger transaction, we'll continue to evaluate our needs for capital and the timing of those needs as well. And so those will become more clear in the coming months, as Jeremy mentioned earlier.

And I would just add on to what Evan's saying. I think the other thing we look at, as you know, we look to -- for capital sources and everywhere that there's a possibility. And historically, we've looked at the strength in the real estate market. We did that with -- after we closed on the State Oil acquisition last year. I think you saw here in the third quarter, there is an opportunity to tap into strength in the real estate market again. I would note that the -- of the 30 sites that were divested here in the third quarter, only one of them had fuel supply associated with it. So we continue to look for ways in which we have strength on our balance sheet that we can take advantage of and take that capital and put it to use and get a further multiple expansion with these acquisitions.

And we have no further questions at this time.

Okay. Thank you, operator. I guess, that does complete our 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.