CrossAmerica Partners LP (CAPL) on Q2 2021 Results - Earnings Call Transcript
Jon Benfield: Good morning, and thank you for joining the CrossAmerica Partners Second Quarter 2021 Earnings Call. With me today is Charles Nifong, CEO and President. Charles will provide some opening comments, a brief overview of CrossAmerica’s operational performance and highlights from the quarter, and then I will discuss the financial results. At the end, we will open up the call to questions. I should point out that today’s call will follow some presentation slides that we will utilize during this morning’s event. These slides are available as part of the webcast and are posted on the CrossAmerica website. Before we begin, I would like to remind everyone that today’s call, including the question-and-answer session, may include forward-looking statements regarding expected revenue, future plans, future operational metrics and opportunities and expectations of the organization. There can be no assurance that management’s expectations, beliefs and projections will be achieved or that actual results will not differ from expectations. Please see CrossAmerica’s filings with the Securities and Exchange Commission, including annual reports on Form 10-K and quarterly reports on Form 10-Q for a discussion of important factors that could affect our actual results. Forward-looking statements represent the judgment of CrossAmerica’s management as of today’s date, and the organization disclaims any intent or obligation to update any forward-looking statements. During today’s call, we may also provide certain performance measures that do not conform to U.S. generally accepted accounting principles or GAAP. We 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 will now turn the call over to Charles.
Charles Nifong: Thank you, Jon. I appreciate everyone joining us this morning. As always, we thank you for your interest in the partnership and hope that you’re well. During today’s call, I will briefly go through some of the operating highlights for the second quarter 2021. I will also provide some color on the trends in the market, along with an update on our acquisition of convenience stores from 7-Eleven and a few other updates similar to what I provided during our most recent quarterly calls. Jon will then review in more detail the financial results. Before I begin going through the operating highlights, I wanted to note that we have announced the appointment of Maura Topper as our Chief Financial Officer. Maura has an extensive amount of financing experience, most recently with Dunne Manning Holdings. Maura led the financing process for the Topper Group’s acquisition of CrossAmerica’s general partner in 2019 and also led the structuring of the recently completed Joe’s Kwik Marts credit facility and the amendment to the capital credit facility to support CrossAmerica’s acquisition of sites from 7-Eleven. During the recent financings, I worked closely with Maura, and it was evident from the skills and capabilities she demonstrated that Maura was the best candidate for the CFO role. As an added bonus, Maura is already deeply familiar with the organization and will be able to hit the ground running with little transition period needed. Maura’s first official day with us is tomorrow, and I want to welcome Maura to our team. I look forward to her joining me on next quarter’s earnings call. Now if you turn to Slide 4, I will briefly review some of our results. The second quarter of 2021, our wholesale fuel volume increased 27% when compared to the second quarter of 2020, largely due to the acquisitions and exchanges that were completed during 2020 and the continued recovery from COVID-19. While we saw a strong increase in overall volume for the quarter relative to last year, we also saw a 15% year-over-year decrease in our wholesale fuel margin per gallon, primarily impacted by a decline in our dealer-tank-wagon margins. Overall, despite a decline in fuel margin per gallon, our wholesale fuel gross profit increased 8% for the quarter. In terms of same-store volume performance, for the quarter, we were up approximately 26% year-over-year. Last year, April and May were peak months for the COVID shutdown, which explains a large volume increase in our results, a more insightful comparison, the same-site volume performance relative to 2019. For the quarter, on a same site basis relative to 2019, we were down slightly less than 3%. If you recall, our same-site volume for the first quarter relative to 2019 was down approximately 3.5%. So we experienced a sequential improvement in volume for the quarter relative to 2019. For the period since the quarter end, same-store comparable week volume has certainly been up in the mid- to low single digits relative to 2020, and relative to 2019 has been down generally less than 2%, which indicates a continuing improvement in the overall operating environment. We have not seen any evidence in our volume data as of yet to indicate any significant changes in driving behavior due to the increased concern over the delta variant of COVID. In terms of margin, our wholesale fuel margin for the quarter was $0.092 per gallon, a decline of $0.016 per gallon or 15% from the prior year. The year-over-year decrease was driven by our dealer-tank-wagon fuel margins, which, as a reminder, our variable fuel margin accounts with select third-party wholesale dealers and also how we supply our company-operated and commission retail sites. The decrease in fuel margin was due to a decline in our DTW margins for the second quarter relative to the second quarter of 2020, which was primarily driven by the movement in crude prices between the two periods. WTI increased 24% during the second quarter of 2021, which in turn drove oil barrel prices higher by 16%, which negatively impacted our fuel margin per gallon. In contrast, during the second quarter 2020, CrossAmerica benefited from a sharp reduction in wholesale fuel prices, particularly at the beginning of the quarter due to the onset of the COVID pandemic. We have now been in a generally rising crude oil price environment since late October of last year. Crude oil prices are up over 90% from the start of the fourth quarter of 2020 through the end of the second quarter. Historically, this magnitude and duration of crude oil price increases would significantly, adversely impact our variable fuel margin business. And while there has been an impact, the margin environment for the quarter was better than it historically would have been continuing a trend from the previous quarters. As a reminder, generally during periods of rising prices, our variable price fuel margins tend to contract due to retail fuel prices not adjusting as quickly as wholesale cost do. Although as we just noted, this effect has been significantly more muted than the prior months than our historical experience. In terms of rent, we’ve not experienced any COVID-related rent issues for several quarters now. And our rent for the quarter benefited from a favorable comparison to the prior year and the associated rent concessions made during the quarter in 2020. For our retail operations, we continue to see strong volume and inside sales at our company-operated sites. For volume, on a same-site comparable week basis, our retail volume was up 35% for the quarter year-over-year. On a same-site comparable week basis relative to the quarter in 2019, retail volume was down by approximately 4%. For retail volume relative to 2019, the main driver of the decrease is the continuing impact of the U.S.-Canadian border closure on our higher-volume New York throughway sites. For inside sales, on a same-site comparable week basis, our inside sales were up 11.5% relative to last year and 13.5% relative to 2019. On both volume and inside sales metrics, our retail sites are performing strongly, which reflects the success of our retail initiatives and the impact of capital we have spent on brand imaging and site upgrades. In the period since the quarter end, retail same-site comparable weak volumes have generally been up in the low double digits year-over-year. For retail sales, same-site comparable week inside sales have been up in the mid- to low single digits year-over-year for the period since the quarter end. For retail inside sales, it is important to note that we continue to trend above last year’s strong sales results and significantly above our 2019 results. As we touched on in the wholesale segment review, we have not yet seen any indications in the retail segment of weakness in our inside sales or gallons figures as a result of the increased concern for the delta variant of COVID. As we noted in prior quarters, reviewing our retail segment financial performance, it is important to remember the wholesale segment supplies our retail segment on a DTW or a variable margin basis. So the overall fuel profitability of these sites is split between our wholesale and retail segments. The DTW fuel margin to our retail sites makes a meaningful contribution to our wholesale segment and to our overall profitability that is not apparent in looking at the retail segment financial results in isolation. During the second quarter, we did see an increase in both our operating and G&A expenses compared to the prior year. The increase in operating expenses was primarily driven by the increase in our average company-operated site count increasing 17% year-over-year. The primary drivers for the increase in G&A for the second quarter with acquisition costs associated with the 7-Eleven transaction. I want to provide you with an update regarding our announced agreement with 7-Eleven to acquire 106 sites for $263 million. As of June 30, 2021, we had closed on two sites for a total consideration of $4.2 million. As of August 5, 2021, partnership had closed on a total of 32 sites for total consideration of $106.2 million. The remaining 74 sites of the 106 total sites to be acquired are expected to be completed on a rolling basis over the next eight to 10 weeks. As we mentioned previously, there is an extensive amount of work required to close on a site and convert to our network and fuel suppliers. The team here at the partnership is working hard to ensure these conversions go well, and even more importantly, that the stores are able to continue to provide a great experience for our customers. We continue to evaluate our portfolio of assets and look for opportunities to divest non-core properties. For the six months ended June 30, 2021, we divested a total of 9 non-core properties and received $3.9 million in connection with these sales. Through August 5, 2021, we divested an additional 8 non-core properties and received $2.1 million in proceeds. Although our pace of divestitures so far this year has been slower than we would like, we have an active pipeline of transactions and expect to continue to process of recycling capital to invest in growth opportunities within our portfolio. In conclusion, we are encouraged by the solid results that we generated this quarter and the positive traffic patterns and increased economic activity that we have continued to witness. As we noted, we haven’t seen evidence yet of any delta variant related impact on our results, but we continue to be vigilant and we’ll take appropriate actions as necessary. We remain focused on closing our transaction with 7-Eleven over the next 8 to 10 weeks and ensuring that these assets generate the expected financial results. The CrossAmerica team has been hard at work on closing the acquisition and on executing on our overall strategic plan. Their efforts and dedication are appreciated. So all the CrossAmerica team members listening in: thank you. In summary, we believe we are in a good position as we exit the second quarter to continue to execute on our plans and to provide growth and strong returns for our unitholders. With that, I’ll turn it over to Jon for a more detailed financial review.
Jon Benfield: Thank you, Charles. If you would please turn to Slide 6, I would like to review our second quarter results for the partnership. We reported adjusted EBITDA of $29.7 million for the second quarter of 2021, which was an increase of 7% when compared to the second quarter of 2020. Our distributable cash flow for the second quarter of 2021 was $25 million versus $26 million for the second quarter of 2020, reflecting a decrease of 4% year-over-year. Distributable cash flow in the second quarter of 2020 benefited from a current tax benefit related primarily to bonus depreciation on eligible capital expenditures primarily related to the asset exchanges with Circle K. The 7% increase in adjusted EBITDA was primarily driven by increases in operating income for both the wholesale and retail segments. Our distribution coverage on a paid basis for the trailing 12 months ended June 30, 2021 was 1.22x, a slight improvement versus 1.21x for the trailing 12 months ended June 30, 2021. For the current quarter, our coverage on a paid basis was 1.26x compared to 1.31x for the second quarter of 2020. If you would turn to the next slide, Slide 7, we ended the quarter with a leverage ratio as defined under our credit facility of 4.42x and remain in compliance with our financial covenant ratios. This compares to 4.54x at the end of the first quarter of 2021. We have sufficient liquidity to execute our plans. And as of August 5, given the amendment, we entered into in July 2021 that increased our maximum leverage covenant we had $159 million available on our credit facility. The partnership paid a distribution of $0.525 per unit during the second quarter of 2021, attributable to the first quarter of 2021, for a total of almost $20 million, and as I noted on the previous slide, this resulted in a coverage ratio of 1.22x on a paid basis for the 12 months. In regards to our capital spending during the second quarter, we did see an increase in our growth-related capital expenditures as a result of EMV upgrades and rebranding of certain sites, including the sites being acquired from 7-Eleven. During the second quarter, we spent over $6 million on rebranding, including $4 million in connection with our acquisition from 7-Eleven and another $2.5 million on EMV upgrades. As Charles noted, the impact of certain of our spending in the current and prior quarters is evident in the strong gallons and sales performance at our sites, particularly in the retail segment. As I’ve mentioned before, for site brand conversions, including those related to the sites acquired from 7-Eleven, we generally are reimbursed by suppliers for a substantial portion of the upfront spend, either over a period of time post conversion or after final project completion. If you turn to Slide 8, I want to discuss our new credit facility and our recent amendment to the capital credit agreement. On July 16, 2021, CAPL JKM Partners LLC, an indirect wholly owned subsidiary of CrossAmerica entered into a credit agreement. The Joe’s Kwik Marts or JKM credit facility provides for a $200 million senior secured credit facility, consisting of a $185 million delayed draw term loan facility and a $50 million revolving credit facility. The JKM credit facility will be used to fund the acquisition of the 106 convenience store properties from 7-Eleven. We also amended our pre-existing capital credit agreement as of July 28, 2021. This amendment, among other things, amended certain provisions relating to unrestricted subsidiaries, increased the maximum level for the consolidated leverage ratio financial covenant to 6x for the fiscal quarters ending September 30, 2021 and December 31, 2021, stepping down each quarter thereafter and ultimately reverting back for the quarter end December 31, 2022, to our previous covenant of 4.75x unless a specified acquisition period or a qualified note offering has occurred. And finally, the amendment modified the applicable margin for outstanding borrowings. The capital credit facility amendment provides us with financial flexibility to better manage our ongoing acquisition and integration of assets from 7-Eleven. In conclusion, as Charles noted earlier, we had a strong quarter, and we remain cautiously optimistic as we conclude the summer driving season. From a financial perspective, we believe we are in a good position. We expect over the long term to continue to stay within both our coverage and leverage ratio target ranges and manage our balance sheet as we see the benefits from the 2020 transactions, our acquisition of the 7-Eleven sites and our other strategic initiatives. With that, we will open it up for questions.
Operator: Thank you. And our first question is from Elvira Scotto from RBC Capital Markets.
Elvira Scotto: Good morning, everyone. Just a couple of quick ones for me. Given the broader macro backdrop in the job market, in particular, are you guys seeing any challenges on the labor front, either labor shortages and/or wage inflation?
Charles Nifong: Elvira, this is Charles. So yes, just like everybody else, we’re not immune to that. So at the store level and our company-operated sites, obviously, labor is very tight. And so we’ve undertaken a number of different initiatives to counter that, both from new hiring incentives as well as retention bonuses, and that includes our existing sites as well as the sites that we’re acquiring. And so far, they seem to be working, but again, it also varies by state as the impact of the various different federal programs is different across our geography.
Elvira Scotto: Got it. Thanks. And I mean, do you see that – I mean, is any – is that driving an increase in G&A expenses?
Charles Nifong: Not G&A, but at the store-level operating expenses, obviously, there’s been an uptick at the store level labor costs.
Elvira Scotto: Got it. Okay. And then – just the last question for me. I think you mentioned in your prepared remarks that on the divestiture front, you haven’t completed as much as you’d like. Can you give of an update of what you’re seeing in the M&A market or divestiture market, that would be helpful?
Charles Nifong: Yes. So far, divestitures, these are single-site properties that we’re divesting. And as I mentioned in our remarks, we do have a pipeline of transactions, and we’ve just had things pushed back for various different reasons. Nothing systematic, it’s just seems like there have been things that have popped up to delay our closings. But as we talked about, we’ve got a solid transaction pipeline. And I don’t want to jinx our real estate department, but I think that the level that we did last year, that’s certainly a level that we could do this year if everything falls right with the transactions that we actually have in the Q.
Elvira Scotto: Great. Thank you very much.
Operator: And I have no further questions at this time.
Charles Nifong: Yes. Well, then if you do have further questions later, we’re always here available to reach us. You can reach out to Randy Palmer, and we’re happy to address those questions later. But then for now, thank you again for joining us on this call, and thank you for your interest in the partnership.
Operator: Thank you, ladies and gentlemen. That concludes today’s call. Thank you for participating, and you may now disconnect.
