Crossamerica Partners LP (CAPL) 2018 Q1 法說會逐字稿

Good morning, and welcome to the CrossAmerica Partners First Quarter 2018 Earnings Call. My name is Michelle, and I will be your operator for today's conference. (Operator Instructions) And please note that this conference is being recorded.

I will now turn the call over to Mr. Randy Palmer, Executive Director of Investor Relations. Sir, you may begin.

Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners First Quarter 2018 Earnings Call. With me today are Jeremy Bergeron, CEO; Gerardo Valencia, President; Evan Smith, Chief Financial Officer and other members of our executive leadership team.

Jeremy will provide some opening comments, Gerardo will provide a brief overview of CrossAmerica's operation performance and highlights from the quarter, and then we'll 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. 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 could 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 2018 earnings results yesterday afternoon, and Gerardo and Evan will go through those details in a few minutes. But first, I wanted to review some of the highlights from the quarter. For the first quarter, we reported operating income of over $7 million, with adjusted EBITDA of $26 million, with growth in both our wholesale and retail segments.

Yesterday, our board approved a quarterly distribution of $0.525 per unit attributable to the first quarter of 2018 that will be paid later this month.

Overall, we were pleased with our performance during the quarter as both our businesses of wholesale and retail performed well, while we did experience some seasonal weakness with our newly acquired Jet-Pep asset acquisition, which Gerardo will be talking about in more detail. We are working with our general partner to improve our overall performance with all sites, including evaluating our fuel supply arrangements. We expect to be in disposition for the upcoming summer driving season and continue to build on value for our unitholders.

With that, I will now turn it over to Gerardo.

Thank you, Jeremy. I am very glad to be here today. I joined CrossAmerica on March 1, after more than 20 years with BP, getting product to market, customers and consumers. I am very excited about the future of CrossAmerica, as me and my management team finished our integration with NWF, the former Circle K and National Wholesale Group. But we've captured the sieges for both cost and top line as we improve our base business with strategic collaboration with strong retailers, as we grow with our general partner and participate in the industry consolidation.

If you turn to Slide 4, I will provide a brief overview of the partnership at the end of the first quarter. As we look over the past 12 months, we continued 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, including over 600 lessee dealer sites. We control over 70% of these sites, including owning the fee right of over 550. As you can see, we have built a significant real estate portfolio within CrossAmerica.

So if we please turn on Slide 5, here we recap some of our first quarter operating results. For the first quarter, we had an increase of 5% in gallons distributed, primarily driven by our Jet-Pep acquisition. Along with increasing volume, we also grew our wholesale fuel margin from $0.056 in the first quarter of 2017 to $0.057 in 2018. This resulted in a 7% increase in our wholesale motor fuel gross profit for the first quarter. We increased rental and other gross profit by 4% during the quarter. For the first quarter of 2018, rental and other gross profit represented 45% of our total gross profit.

During the quarter, we grew our fuel margin per gallons for our 70 company-operated sites to $0.101 in the first quarter of 2018, up from $0.056 for the same period in 2017.

Turning over to the next slide. I would like to review a few highlights from the first quarter. Our adjusted EBITDA increased 10% for the first quarter of 2018 compared to the first quarter of 2017. This was driven by growth in both our wholesale and retail segments. As you may have seen on the previous slide, as we have noted in the past, we continue to focus on discipline across management as we further integrate our operations with our general partner.

During the quarter, our G&A expenses declined over $1 million or 19%. This decline is related to the synergies we have discussed in July of 2017. We are ahead of our plan and have captured over $5.8 million through the first quarter of 2018.

Finally, I wanted to talk briefly about our most recent acquisition of the Jet-Pep assets, which closed in November of 2017. This was a great addition to our portfolio in the south. When we acquired the business, supply was established as a plus base index, which is seasonally impacted. And we did experience some margin softness in this region of the country during the quarter.

As part of our regional plans, we are improving the fuel supply chain, which includes both sourcing and freight. And we are also about to finalize the profits to define a different fuel brand for our network of about 100 sites. We clearly see the potential of the Jet-Pep network, and I expect further growth from what we experienced in the first quarter of 2018.

Overall, despite the isolated weakness for this part of the portfolio, the rest of the business performed well in the quarter.

If you please turn to Slide 7, I will provide you with a brief update on our synergies. In July 2017, we announced that we expected to capture annual cost synergies of $10 million within the first 3 years following the merger of ACC and CST, with approximately half of those synergies to be achieved within the first 12 months.

Through the first 3 quarters since the transaction closed, we have captured over $5.8 million of cost savings, and we are ahead of our synergy plan. After additional review and analysis of CrossAmerica's portfolio of supplier contracts and in context of Circle K's significant purchasing scale, we have identified further opportunities to lower our cost and deliver total synergies, which, we believe, will exceed $15 million by the end of 2020.

In summary, we're in a strong position as we enter into the spring and summer driving season. We have built a strong foundation. You should expect that we will continue our growth strategy together with our general partner, integrating capturing costs and top line synergy, improving our base business to make life easy for our customers and completing accretive acquisitions. With that, I will turn it over to Evan.

Thank you, Gerardo. If you would please turn to Slide 9, I would like to touch on our first quarter results for the partnership. We reported adjusted EBITDA of $26 million for the first quarter of 2018 compared to $23.7 million in 2017.

Our distributable cash flow for the first quarter of 2018 was $16.7 million. The partnership paid a distribution of $0.6275 per unit during the first quarter of 2018 attributable to the fourth quarter of 2017 for a total of over $21 million, resulting in a coverage ratio 0.78x on a paid basis.

Our trailing 12-month coverage was 0.96x on a paid basis. As Gerardo touched on earlier, the growth in both our wholesale and retail businesses, coupled with our -- the management of our expenses, had a positive impact on our overall performance over the quarter.

Finally turning to Slide 10, we ended the first quarter with leverage as defined under our credit facility at 4.21x, which is in line with where we were in the first quarter of 2017 and within our target leverage ratio range between 4.0x and 4.25x. I also wanted to briefly walk through our recent amendment to our credit facility. Last week, we amended our credit facility that extends our maturity out to April of 2020, and this amendment did several things for us, including increased our total capacity from $550 million to $650 million, extended the period during which the permitted total leverage ratio as defined in the revolving credit facility is increased from 4.5x to 5x after the closing of a material acquisition from 3 quarters up to 4 quarters, and it decreased the applicable margin in commitment fees, which vary based on our leverage ratio, but overall, the applicable margin for LIBOR and alternate base rate loans was reduced by the 50 basis points.

We were pleased to be able to make this amendment with the support of our lending group and believe it provides us with the flexibility that we need to continue to manage and grow our business.

Finally, I wanted to address our recently announced quarterly distribution that will be paid later this month. Our management team and board made the decision to reduce the distribution 16% from a quarterly rate of $0.6275 per unit to $0.525 per unit, which reduces our annualized rate of $2.51 per unit to $2.10 per unit. In an effort to reduce further equity dilution going forward into immediately improve our coverage ratio, the decision was made to eliminate any further equity fund and expenses related to the amended omnibus agreement. Going forward, instead of issuing units to our general partner for such expenses, we will be primarily settling these obligations in cash. As we noted in our quarterly distribution press release, this equated to approximately 550,000 common units being issued during the calendar year of 2017 to pay for these expenses.

With our current distribution yield near 12%, it was determined that settling in cash for the omnibus expenses versus continued issuance of units was the better option for the partnership and its unitholders. While we anticipate staying at the $0.525 per unit level for the remainder of 2018, this will be something that our management team and board will continue to evaluate as we work through the coming quarters.

As Gerardo noted earlier in the presentation, you should expect that we will continue our growth strategy by working with our general partner to manage expenses and focus on capturing synergies as we go through the year and continue to evaluate and complete accretive third-party acquisitions, and we will maintain focus on managing our balance sheet and leverage within overall emphasis on improving our coverage ratio as we move through the year. With that, we will now open it up for questions.

(Operator Instructions) Okay. I have one question in the queue from Ben Bienvenu from Stephens Inc.

Actually, Daniel Imbro on for Ben. Wanted to start on the updated synergy targets. Yes, Synergy capture thus far has been impressive and obviously ahead of schedule. Can you provide some more color on what buckets you guys are kind of removing those costs from? Is it just best practices being transferred? Or what do those savings look like on a more operational level?

Sure. This is Evan. If you look at the synergies that have been captured to date since the merger with Couche-Tard, there's largely been an overhead G&A-related areas. We've had some headcount reductions, some resets of pay, salary, that sort of thing. That's where most of the synergies have been captured already. Good hard numbers that have been realized. As we think about where the larger opportunities are going forward, those will be largely focused from looking at our relationships with our suppliers and evaluating the supply relationships that we have against the supply relationships that our general partner has with those same vendors. And relying upon the mid-scale and purchasing power that our general partner has to ultimately, hopefully, better our cost.

Dan, just -- if I just could add, just -- as I was describing at the beginning of the call, we have been integrating 2 organizations. So one is CrossAmerica, as you know it well, and then the other component is our wholesale operation within Circle K. Now that's what enables us as well to capture some of the synergies from the top line perspective. As Evan described, when we look at all the fuel supply contracts that we have in place, there are a lot of learnings that we have -- that we are applying to CrossAmerica by bringing all of the expertise in contract management in -- and, of course, in scale that we have within Circle K. So most of the early savings were related to overhead reductions, and what you will see now mostly going forward is top line growth by improving the way which we go to market and the way in which we optimize our supply chain.

Okay. Great. Kind of moving to the balance sheet, I think you noted leverage was within your target range. Given the increased flexibility under revolver, how does the M&A market look today? And how has that changed over the last, say, 12 months, as we've seen the retail industry get a little bit more challenging?

Yes. So we are seeing a lot of activity within M&A then. So what we are seeing is more than what we used to see when CrossAmerica was managed independently. And the opportunity that we have is that we now can add value in other parts of any network. So as you know, in the industry, you would hope for an ideal portfolio that has certain types of assets but that just doesn't happen. And with CrossAmerica working independently, we can only add value to some portions of any portfolio. But now with our general partner, when we look at any portfolio, we can add synergies, and we can add value to other portfolios. So we are seeing a lot of activity. We have different opportunities in our pipeline that we are progressing. And that we're continuing to evaluate. Of course, we need to make sure that they are accretive for the partnership.

Okay. Great. And then last one for me. Stepping back a little bit, more industry-wide, we seem to be entering a more normal environment of higher gasoline prices. Are you seeing any particular pockets of demand geographically that are, say, weaker or stronger on the demand side? Or has it been a pretty expected response to the higher gasoline prices?

Yes. No, so we definitely see increases in different pockets of the U.S., but that's more because of population growth and income growth in different regions. I wouldn't say that this has to do -- this differential doesn't -- don't have to do with the fuel price environment. Actually what we are seeing is a strong demand in some of the areas. And across our portfolio, we're seeing first growth in some areas like Florida, where we're seeing strong growth from a demographic standpoint as well as from the demand standpoint. And there's -- everywhere out, we're seeing growth in a very -- I'm going to say, it's very -- it's not dependent on fuel price, but it's more dependent as well on the demand and based on the population and available income.

The next question in the queue comes from Patrick Wang with Baird.

On ACT'S recent freight cost negotiations, which also included CrossAmerica's transportation contracts, can you help us understand just the magnitude of the cost savings you expect following those renegotiations? And if they were material, were they fully reflected in the quarterly results? Or do you expect that to be mostly a 2Q benefit?

Yes, so we -- we're not -- I mean, I can -- I cannot tell you exactly right now. I cannot disclose the exact figure, but it's [going to be] material, but what we're expecting to see is, we're working through it, so we're expecting to see more of those benefits coming in the future. So it's not something that we have already seen captured in the first quarter of the year.

Okay. Understood. That's great. And then just turning back to the Jet-Pep sites. Looking at those volumes with CrossAmerica historically not hedging its fuel purchases, to what extent is CrossAmerica protected by Circle K’s fuel hedging programs, specifically on those Jet-Pep volumes?

Yes. So the current structure that we have for those back contracts has more seasonality than what we -- and both actually see, than what we would typically have in the rest of the CrossAmerica portfolio. And we -- so we know that there is going to be -- we have seen some of this volatility in the first quarter. Now we expect that to be even for the balance of the year. But what we are seeing right now with some of the impacts of that first quarter volatility, which we typically -- when you look at that region of the country, we typically see this in the first part of the year, so it's not only related to the volume or a demand, but it's more related to the margin opportunity, which is dictated by supply as well in that specific region. But I guess my point is, we are more exposed volatility in this region than in any other part of the portfolio for CrossAmerica. We are working through optimization of the supply chain, including both sourcing and freight. And we're actually looking at this point in time on identifying what is the best brand for those locations. We want to have brands that appeal to consumers and communicate a different value proposition. So we are in the process of finalizing this, and we expect to leverage our purchasing scale and strategic collaboration with our fuel suppliers to deliver. So there will be some more value of -- that's part of where I know we're going to be delivering more volumes from the Jet-Pep portfolio.

Okay. Got you. That's helpful. And as a final check, do the -- do you expect -- those Jet-Pep volumes, will they qualify for the terms discount as well?

So those are not bought under a branded supply agreement. And we don't expect that to be a contract going forward, which -- that's where we receive -- historically, for the majority of our portfolio, that's where we received terms discounts.

Yes. So currently, it's not a branded network. So currently, we're not -- I mean, so it's a Jet-Pep brand field. We are -- actually, we're, right now, looking at one of the difference. As I was saying, what is the best brand, which would entail both supply chain frames from the supplier but also brands that commence a premium or brands that are well recognized in that area. And we -- we're in negotiations right now, then we will be structuring those deals in the next few weeks. So there's currently no payment discounts, but we're working on establishing those contracts just now.

The next question in the queue comes from Robert Balsamo from FBR and Company.

Most of my questions have been answered. I was wondering if you can just elaborate a little bit on the distribution. Looking at past quarter, is -- the IDR payments for CST were up, was around $1.2 million a quarter. So by reducing this distribution, they are -- CST is relinquishing almost $5 million a year in IDR so kind of in addition to the reduction improved leverage -- improved coverage, part of that will be driven by the reduction of IDRs by CST?

That's -- Robert, that is correct. With this reduction, there will be a reduction in IDR payments to the general partner as well.

Great. Looks supportive. And any new outlook for distribution coverage or target coverage rates moving forward before you think about reinstating distributions or increasing? Any updated thoughts on that?

(inaudible) in our 1.1x target over the coming year and into 2019.

The next question in the queue comes from Sharon Lui from Wells Fargo.

Just following up on the question about the distribution. If maybe you could just touch on how you arrived at the size of the distribution cut? It sounds like the plan is to maintain this run rate for the balance of the year, but potentially, there could be a reduction to get back to your coverage targets, is that a reasonable assumption?

Sharon, this is Evan. Really, the thought process, when we looked at what we have been issuing, the dollar amount and especially where it's going now with the yield on the units and how dilutive that was, you look back at a run rate basis over the last year and of what we essentially paid for these management fees through issuing equity. And this dollar amount that we're reducing the distribution by essentially what offsets that. So that's how we -- that was essentially how the number was derived.

And how should we think about, I guess, the distribution going forward? Is the plan to keep the rate flat for at least the balance of this year and revisit -- and see where coverage is in 2019?

Our longer-term thinking is, as we hit our 1.0x and then move towards our 1.1x coverage, as we continue to realize benefits from synergy capture and other opportunities to increase our cash flow, we will reevaluate our distribution policy at that time.

Yes. Sharon, just to add a little bit of color. So as I look into the future, now that we've combined the strength of both groups, we talked about the synergies, and there is a lot of opportunities from that standpoint for growth to deliver value. The vendor has also a lot of opportunity in terms of how we continue to improve our portfolio -- our current portfolio of base business. And then, of course, there is the acquisitions that we're also contemplating, whether they are from a third party and also working together with our general partner. But definitely, there's a very large opportunity that we see -- I see coming into the company and -- so we are -- it's just about the timing in which -- where you're going to be capturing those opportunities.

Yes, and I guess, on that point, maybe if you can give an update on your latest thoughts of the asset exchanges and the timing of drop-downs? I know that previously, you talked about deferring that after a clarity from a tax perspective. But just wondering, if -- in asset exchange, if they'll target it for this year?

Yes, Sharon, so it's a very good question. We are committed to working on getting the first transactions done. Both parties have continuous rediscussions to get a transaction in line with our previous communications with you. Now it is more complex than a simple pipeline, a large terminal or a large individual asset. But now as I have come in, I can tell you that I am very confident that once we establish these blueprints, we can expect a much faster pace to continue growing. And we expect to be able to announce a deal on this specific area relatively soon.

Okay. Okay. And then, I guess, on the Jet-Pep acquisition, I know that you guys are working on the sourcing and also freight. In terms of timing, when can we start seeing the benefit in the margin and volumes?

So there are different components here. So I want to just be clear, as I was describing earlier. Our Jet-Pep supply is currently structured as a flat bolt index. And as you will know, this creates some volatility in our results. Now I do expect that the Jet-Pep portfolio will deliver additional EBITDA on quarterly basis on top of what we saw in the first quarter of 2018. And I would -- I expect that over 50% of that additional EBITDA will be related to this flat volatility. We are already seeing a considerable change in April versus what we saw in the first quarter, which will also support our volume growth. We're improving the supply chain that we inherited from Jet-Pep, as I mentioned before, and it involves both supply agreements and freight structure. And we are optimizing our position, and we'll see further growth coming from this in the very near future. And as I was saying, we are currently working on the fuel program, and we're just about to finish the determination of which fuel brand will be the best one for that portfolio to appeal to consumers and communicate a different value proposition. And as we are finishing this, we expect to leverage our purchasing scale. So if you think about the synergies that I was mentioning before, so there is also -- this also comes into play here, to be able to leverage that scale and the strategic collaboration with our fuel suppliers to deliver it.

Very helpful. And then, I guess, just the last question, in terms of the credit facility leverage, I guess, the timing of when that 5x threshold rolls off?

It's after 4 quarters, which currently -- Sharon, that would be based on the Jet-Pep acquisition, which is the last acquisition that was material. That would mean, we would -- it would drop down at the end of the first quarter of 2019.

If -- so -- but if we complete an acquisition of above -- material acquisition of above $30 million, then we would expand -- we -- that would go back to that 5.0x leverage.

Okay. And we do have another question in the queue, and that question comes from Mike Gyure with Janney Montgomery.

Yes. Can you guys talk a little bit about how you would expect to finance future acquisitions, taking into account the recent refinancing and then the restructuring at the distribution? Does that change? I think at one point, you guys were talking maybe doing a 50-50 mix of debt equity. Does that change in light of the refinancing and the distribution?

It's a good question. And we have additional capacity now with the revolver, a little more flexibility there and actually a better rate, which helps as well. We are conscious and focused on managing flexibility on the balance sheet, keeping that leverage in check. And so we've looked at -- historically, we've used various mechanisms to raise capital, including sale/leasebacks. We can do asset exchanges, we think there's value there. So there are different types of -- in addition to using the revolver. And so we have different methods to finance, but we're going to be focused on doing accretive transactions that don't stress our balance sheet.

Okay. And then maybe one more on the equity-funded expenses. Is the management fee the only equity-funded expenses? Or have there been other things in there?

No. It's the management fee for the omnibus arrangement with the general partner. Yes, that's all that it's limited to.

We have no further questions in the queue at this time. I will turn the call over to Mr. Palmer for any closing remarks.

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

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