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Edited Transcript of CAPL earnings conference call or presentation 8-Nov-19 2:00pm GMT

Q3 2019 Crossamerica Partners LP Earnings Call Allentown Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Crossamerica Partners LP earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Evan Smith;Chief Financial Officer * Gerardo Valencia;CEO and President * Michael Federer;Senior Director of Legal & Corporate Secretary ================================================================================ Conference Call Participants ================================================================================ * Ethan Heyward Bellamy Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Hello and welcome to the CrossAmerica Partners Third Quarter 2019 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 Mike Federer, Senior Director and Corporate Secretary. Mr. Federer, you may begin. -------------------------------------------------------------------------------- Michael Federer;Senior Director of Legal & Corporate Secretary, [2] -------------------------------------------------------------------------------- Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners Third Quarter 2019 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 operational 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 the call up 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 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 CrossAmerica website for a period of 60 days. With that, I'll now turn the call over to Gerardo Valencia. -------------------------------------------------------------------------------- Gerardo Valencia;CEO and President, [3] -------------------------------------------------------------------------------- Thank you, Mike. We reported our third quarter 2019 earnings results yesterday afternoon, and I will briefly go through some of the highlights and initiatives, and then Evan will go through the financials in more detail in a few minutes. Overall, we had a very strong quarter operationally and financially. We are delivering on our strategy, growing our distributable cash flow to its highest quarterly level in the history of the partnership, deleveraging our balance sheet, all supported by sound business fundamentals with our strategic customers and our portfolio management. I am very proud of our team. If you turn to Slide 4, I will briefly review some of our operating results from the quarter. For the third quarter, all of our indicators are in line with our strategy. We continued with our fuel optimization agenda and delivered an increase in wholesale fuel gross profit of 13%. We reduced our operating and SG&A expenses by double digits on a combined basis. This is through our focused discipline approach to growth. Through these efforts, we grew our adjusted EBITDA 8% for the quarter versus 2018 on a comparable basis, when adjusting for the new lease accounting guideline. Our distributable cash flow increased by 32% versus 2018 on a comparable basis. We had a very solid third quarter, and we're able to generate such growth without having to inject any material capital. If you will turn to Slide 5, I want to once again discuss our wholesale fuel margin and our distribution coverage ratio. Our wholesale fuel margin for the third quarter was $0.08 per gallon, which was an 18% increase over the third quarter of 2018. This is the highest level in the partnership's history and this growth in cents per gallon is supported by the fuel synergies that we have been discussing over the past few quarters. As we look at our performance on a trailing 12-month basis, this is not a one-off situation, but rather a result of our strategy as we have steadily increased our wholesale fuel margin to its highest level in the partnership's history with a cents per gallon of $0.074 at the end of the third quarter of 2019. Looking at the chart on the right side of the page, we ended the quarter with a 1.42x coverage ratio, our highest level in over 5 years. On a trailing 12-month basis, we have seen steady improvement over the past few quarters and ended the period at 1.14x, which is the highest in over 4 years, which is a testament of our continued growth and discipline. If you will turn to Slide 6, I want to provide you with an update of our current strategic initiatives, which underpin our business. As of September 5, we have now completed 2 asset exchanges with Couche-Tard Circle K for a total of 116 sites that are now dealerized and under our wholesale segment. We are continuing to work on the remaining 76 sites that are part of the overall asset exchange and based on our current time line, we expect the remaining sites to be dealerized and the final asset exchange to be completed by the first quarter of 2020. Of these 76, we have already signed 48 contracts and have just 13 without a letter of intent completed. On October 1, we announced the closing of our master fuel supply and lease agreements with Applegreen to run 46 sites that we have in the Upper Midwest. They are a very strong operator, and these deals further expands our relationship with them. With the completion of these agreements, they are now operating over 100 sites for us. We are now in the final stage of our exit of direct retail operations. We anticipate that if we do this, we will see a $1.5 million to $2 million benefit to our adjusted EBITDA as we generate efficiencies in this process. In regards to our fuel supply strategic review and associated fuel synergies, we did realize contributions during the third quarter, reflecting the wholesale fuel margin improvement, and we expect to continue into the fourth quarter. We continue to work with our strategic suppliers for this process. Regarding Alabama, we have completed our rebranding and reimaging program across the business. The sites have now been hard branded and reimaged with the Marathon brand, and we have changed dispensers across most of the network. As we have improved the network quality, we're seeing the benefits beyond our original plan, optimizing volume and profitability of the network with an increase in EBITDA of 58% over the first 9 months of 2018. With the completion of these projects, we expect this will benefit our network in the coming quarters and years. To conclude, we continue to make great progress on our initiatives in establishing a strong foundation for the partnership. We were pleased with our third quarter performance as we saw growth in adjusted EBITDA and distributable cash flow and an improvement in our financial metrics. With that, I will turn it over to Evan. -------------------------------------------------------------------------------- Evan Smith;Chief Financial Officer, [4] -------------------------------------------------------------------------------- Thank you, Gerardo. If you would please turn to Slide 8, I would like to review our third quarter results for the partnership. For the third quarter of 2019, we reported adjusted EBITDA of $29 million compared to $26.8 million in the same period of 2018, reflecting an increase of 8%. Our distributable cash flow for the third quarter of 2019 was $25.7 million versus $19.5 million in 2018, an increase of 32% year-over-year. Our distribution coverage on a paid basis for the third quarter of 2019 was 1.42x and was 1.14x for the trailing 12 months, which was an improvement over the 0.99x that we generated in the trailing 12 months ending September 30, 2018. As Gerardo touched on earlier, we have adjusted the 3-month period for 2018 for the new lease accounting guidance that went into effect on January 1, 2019. We have provided reconciliations for the lease adjustments for both 2018 and 2019, depending on how you choose to look at in the appendix of the presentation slides. If you would turn to the next slide, Slide 9, we ended the third quarter with a leverage ratio as defined under our credit facility at 4.47x, a decrease from 4.81x at the end of the first quarter through lower borrowings on the credit facility, no new debt and improved EBITDA and remain in compliance with our financial covenant ratios. We have sufficient liquidity to execute our plans. And as of November 4, we had $123.5 million available on our credit facility with nominal capacity of $244 million and another $300 million of additional accordion capacity from our lender group under our credit facility. The partnership paid a distribution of $0.525 per unit during the third quarter of 2019, attributable to the second quarter of 2019, for a total of over $18 million. And as I noted on the previous slide, this resulted in a coverage ratio of 1.14x on a paid basis for the trailing 12 months. Our required investment in the business remains relatively modest with total capital expenditures of $7.7 million for the third quarter, with $7.2 million of the total being growth CapEx. This has been primarily associated with the rebranding and reimaging program in the Alabama sites that had a positive impact on volumes and margins as well as the rebuilding in Florida from Hurricane Michael that occurred in 2018. In conclusion, we feel good about our performance in the third quarter and believe that we are in a good position to finish 2019. We expect to continue to improve our coverage ratio and manage our balance sheet and leverage as we see the benefits from the asset exchanges and our other strategic initiatives. With that, we will now open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) I do have 1 question in the queue, and that question comes from Ethan Bellamy with Baird. -------------------------------------------------------------------------------- Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2] -------------------------------------------------------------------------------- I have a couple of questions. The first thing is we've seen some of your competitors turn to the IDRs. I don't think that, that would be a material problem for you guys to do. And clearly, quarter by quarter, you're more of an outlier by still having those in place. What, if anything, is the impediment that would keep you guys from eliminating those IDRs? -------------------------------------------------------------------------------- Evan Smith;Chief Financial Officer, [3] -------------------------------------------------------------------------------- Ethan, this is Evan. Good morning. Thanks for joining. That's a discussion that we continue to have with the general partner. But we continue to be focused on operating the business well, and you can see that in our results this quarter. But those are ongoing discussions we have with the general partner. -------------------------------------------------------------------------------- Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. Separately, it looks like Speedway could be carved out. I'm wondering what, if anything, that could mean in terms of the M&A market? Or if you guys could speak more broadly about what's trading out there? And just generally potential upside from further M&A once you get the asset exchange knocked out. -------------------------------------------------------------------------------- Gerardo Valencia;CEO and President, [5] -------------------------------------------------------------------------------- Yes. So thanks, Ethan, and good morning. It's good to hear from you. So we continue to see opportunities out in the marketplace, and I'm going to say there's a lot of activity that we're monitoring that we're participating in across the country. And I'm going to say there's -- there were some very healthy results from many organizations in the last few quarters. So we're seeing a lot of activity, but I'm also going to say that what we're seeing is also some very aspirational multiples being out there. And so while we continue to assess the environment, we're, of course, being very disciplined about what we do and making sure that we can add value to whatever we're considering from an acquisition standpoint. I think from a standpoint of where we are focusing right now, we're also -- we're about to conclude the execution of the initial exchange that we announced with Circle K as we discussed before. But what we're looking at is, are there any other opportunities that we can do together with our general partner, and that's something that we're continuing to consider and look at because what we're seeing in the marketplace seems to be, as I was saying, is very high multiples, some numbers that we wouldn't be considering from a forward outlook and being very disciplined about how we spend our capital. And then regarding Marathon and Speedway and whatever is happening there, it would be pure speculation from my side to say anything about that. So I just can't tell whatever they're going to be doing with their Speedway organization. -------------------------------------------------------------------------------- Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6] -------------------------------------------------------------------------------- Okay, that's fair. I appreciate that. And we certainly appreciate the capital spending discipline. One sort of housekeeping question. As we look over the next year or so, are there any lumpy items in CapEx, maintenance CapEx, anything else that we should be modeling? -------------------------------------------------------------------------------- Gerardo Valencia;CEO and President, [7] -------------------------------------------------------------------------------- I -- go on, Evan. -------------------------------------------------------------------------------- Evan Smith;Chief Financial Officer, [8] -------------------------------------------------------------------------------- Yes. Ethan, we've had some -- we talked about some of the rebranding money that we've been spending in -- down in Alabama with rebranding the sites, Marathon. It's run about almost $5 million this year, and we've pretty much run through. It's winding down. It's run its course. So that would not be a -- and that's considered growth CapEx. So we would not expect to see that next year with those specific assets. -------------------------------------------------------------------------------- Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9] -------------------------------------------------------------------------------- Okay. And then final one. It doesn't sound like there are too many questions, so apologize for monopolizing here. But the big concern in the oil market is what's EV penetration going to look like and what does that do to long-term refined product demand in the U.S.. Historically, we've thought about maybe 0.5% or 1% a year's type decline long term. If I look at your results, you've done some M&A and exchanges. So same-store looks are pretty hard to come by. How have you seen refined products' demand trending? And how do you anticipate thwarting what could be kind of a long-term structural problem for demand? -------------------------------------------------------------------------------- Gerardo Valencia;CEO and President, [10] -------------------------------------------------------------------------------- Yes. So from a standpoint of long-term, Ethan, so -- I mean, we are aware of what's happening from an EV standpoint, of course. And from -- we're working very closely with Circle K, and Circle K has a very, very large presence in Norway. And Norway is a market that has the highest EV penetration across the globe, that because of subsidies and what the government has done there. And we're -- Circle K is using that as a place where there's a lot of learning that we're continuing to get. Europe has different dynamics than the U.S. Even from a behavioral standpoint, consumers behave differently and we know -- and so there's always going to be -- there's always a consideration from that standpoint. A lot of that has been driven by regulation. What we're seeing when we talk to oil companies and our own analysis, fuel demand, we would -- what I've seen other companies planning for is a decline of about 1%. So that will continue to happen. And that based on -- not that much on EVs, but more from efficiencies that are being driven by the car fleet. And we do see EVs coming up in the future, not in the very near term. We're continuing to monitor that and just making sure that we can leverage Circle K to help us to understand how do we make sure that we can support our customers to battle that if it were to happen in the U.S. or as it happens in the U.S., not if, but as it happens in the U.S. In terms of our demand, yes, you're right that there are some areas where we're seeing further erosion of volumes than others. But what we're seeing in some areas where we have been investing and being able to drive some efficiencies like Alabama, so our volumes there have been growing at positive high single digits, and we're very proud about what we're doing there, and we're continuing to implement our programs to support that. So we will continue to see that as we invest in our different sites. We've changed operators just like we did with Applegreen right now, where we brought a very strong operator to help us to support that. And what we believe is that there's going to be continued erosion, but that's where other companies are going to plan. We're supporting our base and we expect therefore to be able to acquire some businesses as they have some struggle themselves. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- (Operator Instructions) We have no further questions. -------------------------------------------------------------------------------- Gerardo Valencia;CEO and President, [12] -------------------------------------------------------------------------------- Well, very good operator. So just before we conclude, so as I mentioned, we're very pleased with our results. We're delivering sustainable, continued growth, strong financial performance, and we have built a very strong foundation with our customers and portfolio. I want to acknowledge our team for all their contributions. Our people are our greatest assets, and they are the reason we have accomplished so much over the last few quarters. I just want to say thank you to everybody in the organization. Are there any other questions, operator? -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- No, sir, we have no questions in the queue at this time. -------------------------------------------------------------------------------- Evan Smith;Chief Financial Officer, [14] -------------------------------------------------------------------------------- Okay. That completes today's conference call. We appreciate each of you joining us today. And if you have any follow-up questions, feel free to contact us. Thank you. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen, this will conclude today's teleconference. Thank you for your participation. You may now disconnect.