Crossamerica Partners LP (CAPL) 2018 Q3 法說會逐字稿

Welcome to the CrossAmerica Partners Third Quarter 2018 Earnings Call. My name is Hilda, and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Randy Palmer, Executive Director of Investor Relations. Mr. Palmer, you may begin.

Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners Second (sic) [Third] Quarter 2018 Earnings Call. With me today are Gerardo Valencia, CEO and President; Evan Smith, Chief Financial Officer; and other members of our executive leadership team.

Gerardo will provide some opening comments and a brief overview of CrossAmerica's operation performance and highlights from the quarter and then we 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. 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 filing 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 obligations 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 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.

With that, I'll now turn the call over to Gerardo.

Thank you, Randy. We reported our third quarter 2018 earnings results yesterday afternoon, and Evan will go through those details in a few minutes. But first, I wanted to briefly review some of our operating results and highlights from the quarter.

For the third quarter, we reported operating income of $13.7 million and net income of $5.3 million, primarily driven by growth in our wholesale business. Our adjusted EBITDA was $28.6 million for the third quarter and our distributable cash flow for the quarter was $20 million. On October 24, our board approved a quarterly distribution of $0.525 per unit attributable to third quarter of 2018, which will be paid later this month.

If you turn to Slide 4, I will briefly review some of our operating results from the quarter. For the third quarter, we increased the number of average sites to which we distribute fuel by 6% and we reduced the company-operated network by 3%, in line with our long-term strategy. On a quarter end basis, our company-operated sites declined by 11%, driven by the FTC required divestitures of sites in the Upper Midwest related to Circle K's acquisition of Holiday, which took place in September. We grew our volume by 2% primarily driven by our Jet-Pep acquisition. Along with increasing volume, we also saw our wholesale fuel margin grow 19% from $0.057 in the third quarter of 2017 to $0.068 in 2018. This resulted in a 21% increase in our wholesale motor fuel gross profit for the third quarter.

In regards to our rental and other gross profit that flows through both our wholesale and retail segments, we experienced a 2% decline. As we noted during our last quarterly call, this is due to the transitioning of sites in Florida to a third-party multisite operator, Applegreen, and as a result of some divestitures that occurred in the third quarter of 2017. Despite the decline, overall gross profit grew by about 5% as a result of our growth in other areas.

If you would turn to the next slide, I would like to review a few highlights from the third quarter. Our base business continues to do well, and we continue to address efficiencies in this space. Our overall gross profit for the wholesale segment increased 8%, driven by our motor fuel gross profit. As I noted in the previous slide, we realized both an increase in volume and higher margin per gallon. Our operating expenses declined by 4% or $300,000. We optimized our low-margin portfolio and improved our pricing capability. Overall for the whole segment, we reported $30 million of adjusted EBITDA, which was nearly a $2.5 million or 9% increase over the third quarter of 2017.

Overall, we continue to manage our expenses with discipline. Expenses for the partnership declined 8% for the quarter and were flat when excluding acquisitions and severance charges. You should expect that it will continue to be a focal point for us as we manage the day-to-day business and realize additional synergies with our general partner.

In our last quarter call, we announced the transition of 43 sites to Applegreen in Florida. Our team did a very good job to complete the transition of these sites in the third quarter, and we look forward to working with Applegreen into the future given the strength of their operating capability and their investment plan.

In this quarter, we also closed on the sale of 9 sites in the Upper Midwest per the FTC order. We have also agreed in a compensation payment from Alimentation Couche-Tard to CrossAmerica. This is a forced nature of the sale, which resulted in proceeds that were below our market value.

If you would turn to the next slide, please. I want to highlight the efforts with the Jet-Pep site in Alabama. Aside from operational improvement that we continue to implement, we were successful in running a process to partner with a branded oil company to rebrand the majority of the network of about 100 sites. Over time, we expect to see improvement in our performance of these sites through better brand recognition, fuel programs and premium fuel penetration through our rebranding, which is starting in the fourth quarter.

As you can see in the charts in this slide, our premium penetration is very well compared to what other private label and what branded oil company sites experience across the industry.

Shifting to cost of product. As mentioned in our previous calls, we had a fuel buy structure based on bulk price of fuel, which brought volatility to CrossAmerica. With these new deals, while we were able to maintain a very competitive cost of product, we were able to change our pricing structure to reflect the local terminal price. This should reduce the volatility for CrossAmerica going forward.

If you would turn to the next slide, please. I want to highlight now our progress in regard to our fuel synergies, which we discussed in previous calls. We are on track with the plans we disclosed earlier in the year to leverage the strength and the scale of our general partner, Circle K. We have reviewed our portfolio and have identified a first set of 385 sites for an initial optimization effort. These sites amount to about 325 million gallons of fuel per year. We have been running a process with major oil suppliers across the U.S., and our plans are to establish relationships with a smaller group of strategic suppliers with whom future growth will provide incremental value going forward. We have received feedback from multiple parties, and we expect to complete our optimization review and secure contract shortly.

Overall, our business -- our base business continues to perform well. We're strengthening our portfolio with sophisticated industry-leading retailers. We continue to manage our cost with discipline and leveraging the scale of our general partner. You should expect that we will continue our growth strategy working with our general partner and position ourselves for a strong 2019.

With that, I will turn it over to Evan.

Thank you, Gerardo. If you would please turn to Slide 9. I will review our third quarter results and partnership. We reported adjusted EBITDA of $28.6 million for the third quarter of 2018 compared to $29 million in 2017. Our distributable cash flow for the third quarter of 2018 was $20 million.

As Gerardo touched on earlier, both our adjusted EBITDA and distributable cash flow benefited from good results in our wholesale segment but were impacted by the increase in cash versus equity-funded Omnibus expenses in the quarter and over the last couple of quarters.

If you would turn to the next slide, Slide 10, we ended the third quarter with leverage as defined under our credit facility at 4.61x that's within compliance with our financial covenant ratios. As of November 1, we had $49.2 million available on our credit facility. The partnership paid a distribution of $0.525 per unit during the third quarter of 2018 attributable to the second quarter of 2018 for a total of over $18 million, resulting in a coverage ratio of 1.10x on a paid basis. Our trailing 12 months coverage ratio was 0.99x on a paid basis, up from 0.97x in the prior quarter.

As I noted during the last quarterly earnings call, as part of Circle K's acquisition of Holiday, the FTC issued a decree in which 9 sites were required to be divested to FTC-approved third-party buyers. Since this was a forced divestiture of assets for us, Circle K agreed to compensate us with an amount representing the difference between the value of the 9 Upper Midwest sites and the proceeds of the sale to FTC-approved third-party buyers, which amounted to $6.3 million. We anticipate Circle K's payment to us will be made during the fourth quarter of 2018. This payment will be accounted for the transaction between entities under common control and thus recorded as a contribution to partners capital.

In conclusion, as Gerardo mentioned earlier, we were pleased with the underlying performance of our base business during the quarter. As we go through the last quarter of the year and look towards 2019, you should expect that we will continue to improve our coverage ratio, manage our balance sheet and leverage.

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

(Operator Instructions) And we have a question from Ben Brownlow from Raymond James.

On the fuel synergies, specifically with the strategic review on the 385 sites, any more color there on the timing of the completion of that review. I know it's kind of in process right now. And how much synergies are anticipated from that initiative?

Yes. Ben, thanks for the question. So I'm going to say we are on track with the plans that we disclosed earlier in the year to leverage the strengths and the scale of Circle K. As you guys know, we buy over 1 billion gallons and Circle K buys over 10 billion gallons in North America, and we have a very professional team that has world-class capabilities to be able to analyze and work with different suppliers. So the first step -- we succeeded with our 100-site network with Jet-Pep, and we're applying some of the same logic to the balance of our portfolio. So we analyzed all of our base and then we identified the 30% of the volume, which is the one that we can adjust more rapidly given the commitments that we have with different brands or different suppliers. In terms of the overall synergies, so we have already captured between cost and some of the freight synergies that we have already implemented about $9 million so far. And we intend to get to the numbers that we disclosed earlier in the year, so in which -- if you remember by 2019, we said we'll be between $11 million and $14 million. By 2020, we said we will be between $15 million and $20 million. And 2021, we'll be between $20 million and $25 million. So the process that we have right now running should be able to get us well on our way to accomplish those goals.

Great. That's helpful. And on the retail fuel margin being a little bit weaker, down year-over-year and below the first half, it's a little bit below what I modeled. And I know you indicated that some of that was the commission agent -- higher-commissioned agents year-over-year. Was there any other mentionable kind of notable cost dynamics that impacted the third quarter relative to the first half of this year?

No. No. There was nothing else very special that I can point out to, Ben. So it's really more the environment that we saw, the competitive nature of the environment in some of these areas where we have a retail presence. And what we are working on, as I was disclosing before, is in making sure that we can capture more margin across the whole chain between wholesale and retail, so we look at all of it in an integrated basis. And when you look at all of it together, we have captured a better margin than in previous quarters, and that's part of our efforts. So we are focusing to get all of our teams from the standpoint of pricing together in one single center of excellence. And we are almost there to transition all of these pricing activity rather than being done in the field centrally. And so we're seeing some of that. That's why we're experiencing some better fuel margins across the whole chain. Specifically for these retail businesses, based on the competitive nature of the areas where we operate, that's why we saw some of those margins weaker than what we were expecting.

Great. And if I could just fit one more last one in. On wholesale rental income with the site transition over to Applegreen, just from a modeling standpoint, can you give us some kind of color of what the anticipated quarterly run rate on wholesale rental income will be going forward?

Yes. So I think what you saw in September -- so we in the quarter -- across the third quarter, we have this transition. And so therefore, we saw a reduction there in the -- therefore, in the rental income. We're then transitioning over to Applegreen. And so as we're doing that, we're expecting to get to a better place than where we -- we showed in the third quarter. So we should be seeing some of that coming through into the future quarters.

The next question comes from Mike Gyure from Janney Montgomery.

Could you talk a little bit -- I think you did certainly on the fuel supply synergies about the 30% of sort of the fuel. I guess, are you envisioning sort of working your way through the rest of the portfolio? Or I guess, just kind of what's the strategy there on the fuel supply side?

Yes, Mike. Yes. Thanks for the question. So yes, so we're going through the whole portfolio. And the reason why we started with this -- with 30% is because when you look at all of our sites, there's some that have commitments longer term, that CrossAmerica had established commitments. Now as we're leveraging the scale from Circle K, we're looking at trenches of sites that are available for us based on the commitments that we have. And so we're making sure that it is the optimal decision for CrossAmerica. If you think about then the time line that we have set up in the next few years, that's why there's a progressive increase. And so we're going to be -- of course, we will be looking at options to be able to accelerate that. But what we have right now is based on the commitments that we have with our oil suppliers. There are certain time that -- it's going to take a certain amount of time to be able to transform the whole portfolio. But definitely we're looking at all, and that is from the base business. And so something else that we're going to be able to generate is, one, we have this portfolio with better structure, aligned with strategic suppliers. This would also enable us for growth in some of those areas because we'll have a better cost base, and we will be able to then add more value to some other opportunities that we have in those geographies. But getting back to your question, it is going to take us time based on the contract that we have in place.

Great. And then maybe if you could touch on, Gerardo, I guess, the strategy for acquisitions going forward. I guess, do you envision CrossAmerica still looking at smaller bolt-ons? And then, I guess, again, do you see the focus being more on the wholesaler or on the retail side of things?

Yes. So definitely, I'm going to start with the last part of your question, Mike. So definitely, it is the wholesale part where we're going to be focusing more because that's where our strengths lie. So we have a world-class wholesale team. And we have great capabilities within the organization to make sure that we can win in the marketplace in that space. So definitely that's going to be our focus going forward. Now in terms of how we would see bolting on some of these acquisitions, so we're working right now -- we continue to work on making sure that we get an initial transaction with our general partner for several sites that would allow us then to be able to grow. That's what our first focus, in developing that initial transaction to get a blueprint for growth. And so if you think about our growth, so there's things that are going to come from alignment with our general partner. Now if you follow the announcements from Circle K and their investors presentations, there's a commitment for growth from Circle K in North America. And because of that, we are working collaboratively with Circle K to be able to capture some of that growth. Again, we are the wholesale arm for Circle K, so we're the ones that -- they will be taking some of those portfolios. Just like we did with Jet-Pep if you think about it. There's portfolios that have strength for wholesale, some parts of the portfolio that have strengths for convenient retail operations, and that's where Circle K comes in. So that's alignment with our general partner. And then, of course, we're monitoring the industry and we're looking at potential acquisitions. And they need to make sense. But when you think about why us, why CrossAmerica? So we have a couple of strengths there, at least. So one is we have the scale that we were discussing before from a fuel synergy standpoint, so we can add value to acquisitions. And then the other one is we have the general partner in Circle K, which is a very sophisticated retail operator, world-class operator. So they have a strong offer. So we can leverage that. There's franchise opportunity that we can offer to some of the dealers where appropriate. So going back to your question, so we would continue to look at industry opportunities where we can leverage our strengths, but we're also then looking at making sure that we align portfolios and continue to grow with our general partner.

(Operator Instructions) The next question comes from Patrick Wang from Baird.

Going back to the synergy, looks like you've now held on to that $3.5 million G&A run rate excluding the one-offs. How should we think about run rate going forward just on the G&A side. Would future synergies now come primarily from the fuel side as opposed to G&A?

This is Evan. That's correct, Patrick. I think that's the way to think about it. We've taken -- we've captured most of the overhead and staffing resource opportunities -- synergy opportunities. It's going to be coming from just working more efficiently and optimizing with our vendors and leveraging the scale and the size of Circle K.

Okay. That's great to hear. And then more of an accounting question now. In regards to the pending analysis around your sale-leasebacks, the potential to become operating leases, and I know that looks like this is still under review, but could you comment on if we should expect the potential shift to operating leases impact your reported cost structure going forward just due to the nature of the classifications?

Right. So in our cash flow statement, you can see the principal payments on the sale-leaseback. Going forward next year, upon adopting the new accounting guidance, those payments will be reflected on the income statement as rent expense.

The next question comes from Keith Howlett from Desjardins.

Just wondering if you could just speak to the process you used to select Applegreen for the 43 sites in Florida.

Yes, Keith. Yes, so we have been working with Applegreen for quite some time, so this is not something new. So my team, our team here in CrossAmerica has been working with them for at least now more than 2.5 years or so. And we started operations with them in the New England area. And so they were coming into the U.S. And we started with them with over 20 properties, and that's how we started. And then we have been collaborating with them and we have been able to see their strength in operations and their strength in execution and how they are investing in the sites to be able to make them stronger. So that's where we started. Now we have been collaborating with them, looking at other opportunities. And then Florida is one that came across where Florida is an attractive area that fit both of our portfolios, our aspirations. So that's how we ended up with that market as a next place where we have been growing with them. And going into the future, we are looking at other areas where both of us can collaborate. And we're looking at a transaction with our general partner that you guys know about, and there are several opportunities for us to further collaborate with Applegreen and other operators once we're able to get more sites. But that's -- so we know they're very strong operators. We know their strengths in investments and seeing -- being visionary about how to improve the site performance. And we're collaborating in many spaces. And it's pretty much -- it's not just a one-off. This has been a relationship that we've been nurturing and we've been proving for quite some time.

And I'm not sure that -- whether you can speak to this or not, but how does their fuel mix look compared to, say, the Jet-Pep fuel mix?

So I mean, from a standpoint of fuel, so I think my best way to talk about this is in the slide that we disclosed, so there's branded oil companies and then there is the Jet-Pep fuel brand that we have right now. And I would say that Applegreen's fuel mix is closer to what you would see with the major oil brands. That's what they currently have in their corridors here in the U.S. So the they don't have a private label like they do in Europe. So that's where we are collaborating. We have major oil brands with them. So their mix is more closer to that -- those numbers. And again, if you think about them, they are very strong operators. Now on the Jet-Pep front, what we currently have ourselves is we have a brand that is not as well recognized and that is not as well recognized as a premium fuel brand. So it's playing in a space, more value-sensitive consumers. And therefore, our premium ratio, as you can see in the slide that we disclosed, is much lower than what we were seeing from major oil brands. And that's where we see an opportunity. And that's why we're working right now as we speak and then rebranding some of that portfolio over to a brand that would be more conducive for higher premium sales and that would be better recognized in the marketplace.

We have no further questions at this time. I would like to turn the call back to Mr. Palmer for final remarks.

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

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