Crossamerica Partners LP (CAPL) 2017 Q4 法說會逐字稿

Welcome to the CrossAmerica Partners Fourth Quarter and Year-end 2017 Earnings Call. My name is Jason and I'll be your operator. (Operator Instructions) Also, please note 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 Year-end and Fourth Quarter 2017 Earnings Call. With me today are Jeremy Bergeron, President 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 they will turn the call over to Evan 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. The slides are available as part of the webcast and our 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 could 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'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 year-end and fourth quarter 2017 earnings results yesterday afternoon, and Evan will go through that detail in a few minutes. But first, I wanted to review some of the highlights for our year-end and fourth quarter.

Turning to Slide 4. I'll provide a brief overview of the partnership at the end of 2017. As we look over the past 12 months, we continue to distribute over 1 billion gallons of fuel and generate gross rental income of over $85 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 1.7 billion gallons, distributed annually within the legacy CST network. Our operations consist of approximately 1,350 locations, controlling over 70% of these sites, including owning the fee rise of over 550. As you can see, we have built a significant real estate portfolio within CrossAmerica. We distribute fuel to over 96% of our properties, currently operate 71 convenient stores in the Upper Midwest market and thrive to rent for non-fuel tenants at another 54 sites.

On Slide 5, we recapped some of our fourth quarter and year-end operating results. First, as you look at the fourth quarter, while we experience a slight decline in volume distributed, we saw a 14% increase in our wholesale fuel margin per gallon, thanks to the improvement in our terms discount on our supplier contracts in our efforts to capture more of the available margin in our rack-to-retail priced dealer contracts. These efforts resulted in an 11% increase in our wholesale motor fuel gross profit for the fourth quarter and also made a significant impact for us throughout the year. For the full year, our wholesale margin moved from $0.052 per gallon in 2016 to $0.057 gallons in 2017, driving an increase in our wholesale fuel gross profit of $4.7 million or 9%. During the quarter, we also saw an increase in our fuel margin per gallon for 71 company-operated sites, as it increased from $0.066 in the fourth quarter of 2016 to $0.097 for the same period in 2017.

And finally, our G&A expenses, excluding acquisition-related costs, declined for both the fourth quarter and full year. You can see the reduction in our base G&A expenses quarter-over-quarter and year-over-year of over $2 million for the fourth quarter and over $4 million for the full year of 2017. This is a reflection of the G&A expense synergies we are realizing, thanks to our integration efforts with Circle K, as we have outlined previously. In addition to synergies we have achieved from our prior acquisitions. We are continuing to focus on managing costs and making reductions where we can as we further integrate our operations with our general partner.

If you turn to the next slide, I'd like to review some of the other highlights from 2017.

During the summer of 2017, Couche-Tard completed their acquisition of CST, that included the membership interest in CrossAmerica's general partner, along with the 21% limited partner interest and all of the incentive distribution rights of the partnership. In November of 2017, we closed on the joint acquisition of assets from Jet-Pep, as we acquired 101 commission operated sites and Circle K acquired a fuel terminal, associating trucking equipment and 18 other retails sites in Alabama. This was a great transaction for us as it expanded our presence in the South and was the first strategic acquisition opportunity with our new general partner. In 2017, we grew our adjusted EBITDA of 5% over the full year 2016 and grew our distributions paid by 3% when compared to last year. As we move to the next slide, Slide 7, our integration of the organization is continued, and we are currently tracking ahead of our synergy target with over $3.5 million of annual savings achieved to date. As a reminder, we targeted $5 million of synergies in the first 12 months, following the acquisition of our GP by Couche-Tard as well as an additional $5 million of synergies within the first 3 years. Part of this projection or synergies, we are beginning to realize as we align the management of our fuel distribution business with that of Circle K. And as I mentioned earlier, we closed on the joint acquisition of Jet-Pep late year and continue to work through a successful integration process and see opportunities to realize synergies from this transaction as well.

In regards to the unwind transaction that we have outlined in the past, we continue to work with our GP on the final details of this initial transaction. With the passing of the Tax Cuts and Jobs Act, the tax treatment on such a transaction was significant enough to align closing into Couche-Tard's next fiscal year, which begins May 1. We are taking advantage of this timing to optimize our asset mix in the transaction, following ACT's recent holiday acquisition. And while we are not in a position to detail specific assets included at this time, the scope is consistent with what we have communicated previously, not just with this transaction, but also with future drops, we expect to complete as well.

Moving to the next slide, and before I turn it over to Evan, I did want to outline the strategy and objectives that we as a management team, our board, and new general partner are aligned in achieving this year and beyond: we expect to grow our cash flow and strengthen our business this year through the synergies we expect to achieve; our continued cost control efforts; and other ways we are strengthening the base business each day. Following the unwind transaction, we expect to benefit from the cash flow improvement as a result of the assets being exchanged. We will also benefit from the cash flow from the Jet-Pep acquisition and continue to look for other third-party acquisition opportunities. In 2017, we were able to achieve and maintain our target leverage ratio between 4x and 4.25x, ending the year at 4.14x. We will continue to manage our debt to stay within this target range. While the traditional MLP equity markets continue to be challenged, there are other levers we can pull to provide us with the necessary capital to achieve our goals for the year.

We want to be clear with our investors. We'll be very prudent and diligent with any equity delusion moving forward. We have managed through a very difficult time in the market and are in great financial shape. And while we obviously believe that our units are undervalued, we also understand that investors would like to see a transaction with our general partner to provide clarity and guidance for future growth opportunities. We're confident that once we execute on that transaction, further integrate within Circle K and continue to manage our business in the cost-efficient manner, we have demonstrated, our unit price will respond accordingly. Over the past couple of years as we have continued to increase the distribution, we have seen our coverage ratio pullback from our target level of 1.1x, ending the year at approximately 1.0x. As we go through 2018, we plan on utilizing our cash flow to improve our coverage ratio and intend to maintain our current per unit distribution level throughout 2018. We will focus on improving the coverage ratio to our prior levels and anticipate reaching a 1.1x ratio in 2019. At that time, we will evaluate our long-term coverage ratio target. Once we resume our unit distribution growth, we will also be revisiting our IDR structure with our general partner, which is currently in the 25% splits.

So in summary, we finished the year off well and believe that we've positioned ourselves for a good 2018. We should expect that we would continue our growth strategy by working with our general partner, continuing to look for and completing accretive third-party acquisitions, continuing to manage our expenses, managing our balance sheet and working towards increasing our coverage ratio as we go through the year.

With that, I will turn it over to Evan.

Thank you, Jeremy. If you'd please turn to Slide 10, I will review our fourth quarter and year-end results at CrossAmerica.

Today, we reported adjusted EBITDA of $29 million and distributable cash flow of nearly $22 million for the fourth quarter of 2017. For the full year of 2017, our adjusted EBITDA was $109 million with distributable cash flow at $81 million. The partnership paid a distribution of $0.6275 per unit during the fourth quarter of 2017 for a total of over $21 million, resulting in a coverage ratio of 1.02x on a paid basis. Our trailing 12-month coverage was 0.97x on a paid basis.

As Jeremy touched on earlier, the growth in our wholesale business, coupled with our management of our expenses had a positive impact on our overall performance for both the quarter and the year. As we have noted in the past, we received prompt-pay terms discounts from our suppliers as a percentage of the total invoice on the fuel we purchase.

During the fourth quarter of 2017, average crude oil prices increased 13% as compared to the same period for 2016, resulting in a positive impact on the terms discount that we received from our suppliers. It increased 17% for the full year of 2017 compared to 2016. On top of this increase, we also saw volatility in crude oil and wholesale fuel prices during the 3-month period and full year of 2017, which benefited our dealer-tank-wagon prices for those periods.

During the quarter, we saw a total benefit of nearly $2 million from a combination of supplier terms discounts and the impact of the improved dealer-tank-wagon pricing.

Finally, turning to Slide 11. I wanted to talk briefly about our historical performance. Have you looked at the first paragraph at the top left side, you can see our wholesale fuel margins on a quarterly basis and how it has ebbed and flowed over the quarters in relation to crude oil prices. The chart reflects that our margin does have some sensitivity to the price of crude oil, mainly driven by the terms discount and dealer-tank-wagon pricing that I mentioned earlier. However, as you look at the graph on the top right side of the slide in the historical adjusted EBITDA movements from $13 million in the first quarter of 2013 to $29 million in the fourth quarter of 2017 and compare that to the movements in the WTI price, there has not been a strong correlation between the 2. This has been driven by several factors including: successfully completing accretive acquisitions; the inherent stability of fuel margins earned from our fixed price-based dealer contracts; our management of costs and a dealerization strategy that has increased our rental income over time. This growth in rental gross profit is demonstrated on the chart on the bottom left side of the slide. Rent has grown from $26 million in 2013 to $69 million in 2017, providing a more stable, qualifying income stream for the partnership and its unit holders. In fact, rent gross profit now outpaces fuel gross profit as contributing to our overall cash flow. And while our business has grown substantially over the years as reflected on the last chart, you can see that we have continued to manage and control our overall expenses, as reflected by our G&A reductions over the past 3 years. We conducted sizable acquisitions from 2013 through 2015, then starting in 2015, we've focused more on tuck-in purchases earned with minimal overhead. We also began our dealerization strategy in earnest in 2015 and increased our focus on controlling expenses in the business, which continues now as part of Circle K. You should expect that we will continue to manage our costs in this fashion in 2018. In closing, as Jeremy noted earlier in the presentation, you should expect that we will continue to grow our EBITDA while managing our balance sheet in leverage within overall emphasis on improving our covered ratio as we move through the year.

With that, I will now turn it back over to Jeremy for a few closing remarks.

Thanks, Evan. I'm sure by now most of you saw this morning's announcement, in accordance to the planned leadership transition here at CrossAmerica. As Gerardo Valencia will be joining the team, and I'll be stepping down as CEO later this year. First, I would like to welcome Gerardo to this terrific organization. Gerardo brings a wealth of experience and knowledge in the wholesale fuels and retail industry with his 20 years of BP. I'm excited to see the positive impact that I know he will have on the partnership in growing the business for years to come. And while I'm looking forward to my next challenge within Couche-Tard, I am excited to be working closely with Gerardo in the coming months, as we execute a successful transition.

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

(Operator Instructions) And our first question comes from Chris Mandeville from Jefferies.

This is actually Aaron Eisenberg on for Chris. So starting off with the announcement from this morning. Just curious, if the appointment of Gerardo brings in a different approach or if the same strategy should be expected going forward?

It's a fair question. Now, I think as we mentioned in the -- in our prepared remarks earlier, the management team, the board and the GP are all aligned with the strategy that we've laid out, and we don't really expect any change in the overall strategy for the partnership going forward.

Understood. And then secondly, given some of the storms we've observed at the beginning of the year, could you talk about how volume trends have looked regionally quarter-to-date, I believe OPIS has retail volume's down 4.1% year-to-date, just kind of curious what you are seeing on that front?

Sure. I mean, in the -- throughout 2017, there was some weakness in certain parts of the country. I think where we saw things like tax changes in states like New Jersey, we did see a continued weakness throughout 2017. But we also had some markets that are actually up in the same-store basis and performed well, like a lot of our sites in the Virginia market. So it really is state-by-state and region-by-region. There was a little bit of weakness on the East Coast, but overall, I think we're excited about where things are starting to trend here in 2018, as we get started.

Next we have Ben Bienvenu from Stephens Inc.

I wanted to ask about G&A expenses and operating expenses, really well-managed in this quarter and really all of 2017, and we're hearing a broader backdrop of wage and expense pressure across both the convenience store industry and retail more broadly. Synergies seemed to be one of the levers that you're pulling to manage this cost. But I'm curious around the base business, what are your expectations of how you intend to navigate that more inflationary environment?

Yes, I mean, that is, kind of goes into the nature of our overall business model and kind of why we are focused heavily on the wholesale sector and growing our business with more the dealer-operating model rather than the company-operating model. For us as an MLP, what's important for our investors, we understand is a steady dependable stream of cash flow that we can grow over time with being very smart and diligent on acquisitions and growing the business that way. And as we mentioned, or as Evan mentioned on Slide 11, I think you see, with some of the larger transactions we did back in 2014 and '15, we took on some company operated business as well as some G&A expenses associated with it and really took an effort there in '15 and over the past 2 to 3 years, really trying to bring that down. So I think partnering with Couche-Tard going forward where we can look at acquisitions together and the company operated business sits in well with their model and their very experienced way of managing expenses and managing the store, combined with our opportunity to grow out the dealer channel, it's a great win for us and our investors. And we think that certainly is the right strategy in line with all of the things you just mentioned.

Great. And then in your comments, you alluded to future transactions with Couche-Tard the GP. To the extent that you can discuss that I'm curious, should we have an expectation of those transactions involving just the fuel business or real estate assets? Or some combination thereof depending on for our market rates and multiples?

Yes, I think it's a combination thereof. I don't think we're exclusive into one or the other. There's going to be opportunities we know out there that there are going to be deals like we had with the Jet-Pep acquisition in the fourth quarter last year, where it makes sense for both of us to go in and go after an acquisition. And we have the right home for those assets in each of our 2 organizations. And there are going to be other opportunities where it may just be a pure retail play or just pure wholesale play. I know we have the support of Couche-Tard to go after those opportunities within the partnership that fits the partnership well, if it's just for the partnership's benefit, we look forward to those opportunities as well. So I don't think it's an either/or approach, it's certainly going to be both end.

And next we have Robert Balsamo with FBR and Company.

A couple of my questions have been asked. Just on the macro that kind of extending the growth strategy there. Could you just give us an update on what you're seeing in the M&A market opportunities for the consolidation? And then just confirm that you don't have interest in kind of moving outside the core competencies, we've seen some competitors, kind of start to branch out looking for opportunity?

Sure. So I mean the opportunities that we see are really the deals that we've done over the past few years. We have focused heavily not just on growing the wholesale distribution channel through our dealer network, but also ensuring we get good real estate along the way that support the rental income into the partnership that is certainly good qualified income for our investors, that's allowed us to really grow that part of the business. So we've spoken publicly before in terms of the types of multiples we've seen in the business, and we still see those opportunities out there. You asked a question about fragmentation, and it certainly still is the case. And we certainly like our position with Couche-Tard to be in a favored position to really to go after those opportunities and further growth.

And just housekeeping, you may have mentioned this. What was the $16 million tax benefit? What drove that during the quarter?

That was -- this is Evan. Just with the reduction of taxes from the Tax Cut and Jobs Act, and it's really just reducing the deferred tax liabilities. And we could get into some minor detail, but it was noncash items. But it was really just a reduction of future tax liabilities that was recognized in the fourth quarter.

Next, we have Patrick Wang from Robert W. Baird.

Looking at the unwind transaction, you mentioned the potential for cash flow improvement following that asset swap with Circle K. Should we still assume that initial asset realignment to be modestly accretive as a base case and potentially better as an upside case?

Sure. So I mean, I can't get into the specifics on this until we’re actually completed. But I would say, as we've gone through and we're preparing for what to expect in 2018, that it certainly is a base case assumption for us that we've spoken before about some of the assets and where the partnership purchase those assets previously, and the types of multiples in which we purchase those assets back from the prior drops and really the other opportunities to acquire assets in today's market. And we said the opportunities with Couche-Tard to acquire those types of assets are more akin to what's available to us in the third-party market. So if you go now with the base assumption, I think you can assume that we should see some level of betterment overall. But certainly, once we're able to detail that out specifically, you'll see that, but I think that's a good understanding from a base case.

Okay, that's helpful, that make sense. And then an unrelated follow-up. It looks like you had a dozen sites held for sale at the year-end. Could you talk about your expectations around the anticipated timing of these sales? And is it reasonable to assume that they're more likely to be sold as a package? Or more as one-offs? And secondly, whether or not these sites were reported in disc ops in 4Q?

Right. So most of those assets held for sale, have to do with some of the announced divestitures that we are going forward with related to the FTC review of the holiday transaction by Couche-Tard as well as our Jet-Pep transaction, right. So we are working closely with the team over Couche-Tard on looking to package those assets and get whatever the best return is on behalf of the partnership. So Evan, I don't know if you want to comment on that last question?

Those are not in discontinued operation.

(Operator Instructions) Next we have Mike Gyure from J. Montgomery.

Yes, could you guys talk a little bit about the relationship with the CST fuel supply, maybe, how many locations that applies to, or what kind of volumes that's still subject to?

Sure, that is still subject to about 1.7 billion gallons on an annual basis. And it was basically CST what we refer to as their legacy network with over 1,000 stores that they are operating throughout the United States when the spin occurred from then Valero back in 2013.

Okay. And I don't know if you mentioned. Did you give any guidance regarding the amount of growth capital you think you need for 2018?

We have not provided that guidance yet.

Typically, our growth capital spend has been relatively minimal, and it's -- I think you can look at the prior year's and assume somewhat similar, there maybe a little bit more of an uptick as we go forward in 2018 with more opportunities. But it shouldn't be anything too dramatically different.

And we have no further questions in the queue. I will now turn the call back to Randy Palmer for closing comments.

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.

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