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Edited Transcript of CAPL earnings conference call or presentation 6-Aug-19 1:00pm GMT

Q2 2019 Crossamerica Partners LP Earnings Call

Allentown Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Crossamerica Partners LP earnings conference call or presentation Tuesday, August 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Evan W. Smith

CrossAmerica Partners LP - VP of Finance & CFO - CrossAmerica GP LLC

* Gerardo Valencia

CrossAmerica Partners LP - President, CEO & Director of CrossAmerica GP LLC

* Michael W. Federer

CrossAmerica Partners LP - Senior Director of Legal & Corporate Secretary - CrossAmerica GP LLC

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Conference Call Participants

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* Sharon Lui

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Walter Morris

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Presentation

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Operator [1]

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Welcome to the CrossAmerica Partners Second Quarter 2019 Earnings Conference Call. My name is Ellen and I will be your operator for today's call. (Operator Instructions) 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.

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Michael W. Federer, CrossAmerica Partners LP - Senior Director of Legal & Corporate Secretary - CrossAmerica GP LLC [2]

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Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners Second Quarter 2019 Earnings Call. With me today are our 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 he 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 the CrossAmerica website for a period of 60 days. With that, I'll now turn the call over to Gerardo Valencia.

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Gerardo Valencia, CrossAmerica Partners LP - President, CEO & Director of CrossAmerica GP LLC [3]

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Thank you, Mike. Good morning. We reported our second quarter 2019 earnings results yesterday afternoon, and I will briefly go through some of the highlights, 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 delivered strong performance for the second quarter. We reported operating income of $13.9 million and net income of $6.4 million. This compares to an operating loss of $1.6 million and a net loss of $6.9 million for the second quarter of 2018. This resulted in adjusted EBITDA growth and strong attributable cash flow.

Our strategic initiatives are progressing at speed, allowing us to feel confident about delivering on our goals for the future. If you turn to Slide 4, I will briefly review some of our operating results from the quarter. We have been delivering value through optimization of our portfolio. We reduced volume by 5%, but we more than offset this through fuel margin, rental income growth and controlling both our operating and SG&A expenses. These helped us to deliver 5% adjusted EBITDA growth versus 2018 on a comparable basis when adjusting for the new lease accounting guidelines.

Our distributable cash flow increased by 14% versus 2018. We grew without having to inject any material capital. We're building a solid foundation for our business and anticipate that this will produce strong results in coming quarters as we continue to see improvements through our initiatives, which I will turn to now.

If you turn to Slide 5, I want to discuss our wholesale fuel margin and our distribution coverage ratio. For the second quarter, our wholesale fuel margin was $0.074 per gallon, which was a 12% increase over the second quarter of 2018. As we look at our performance on a trailing 12-month basis, we have steadily increased our wholesale fuel margin to its highest level in the partnership's history with a cents per gallon of $0.071 at the end of the second quarter of 2019. If you look at the chart on the right side of the page, we ended the quarter with a 1.24x coverage ratio, our highest level since 2016. On a trailing 12-month basis, we have had steady improvement over the past few quarters and ended the period at 1.06x. We expect continued improvement as we go through the remainder of 2019.

If you turn to the next slide, I want to provide you with an update on some of the strategic initiatives. We completed our first tranche of the asset exchange with Circle K on May 21, in which we received 60 sites that are now [dealer-ized] and under our wholesale segment. We are now working on our second one, and we have signed contracts with dealers for 65 additional sites, most of which were part for the second tranche of assets to be exchanged. We are completing our final due diligence, and we expect to have this transaction finalized before the end of the third quarter. Based on our current timeline, we expect the remaining sites to be dealer-ized and the final asset exchange to be completed by the first quarter of 2020. In regards to our fuel supply strategic review and associated fuel synergies, we have recognized a small contribution during the second quarter, and we expect considerable growth in the next few quarters. We continue to work closely with our strategic suppliers through this process.

We continue to work on our rebranding and reimaging program with our Alabama business. Over half of the 90 sites have now been hard branded and reimaged to the Marathon brand, and we have changed dispensers in over half of the network. As we improve the network quality, we are seeing the benefits as we planned, optimizing the volume and profitability of the network, with an increase of 47% over the first half of 2018. As we complete the work by the third quarter of this year, we expect further growth from this network.

On June 26, we announced that we entered into a master fuel supply and lease agreements with Applegreen to run the remaining 46 company-operated sites that we have in the Upper Midwest. We are very excited to expand our relationship with them. They are a very strong operator, and we expect to finish the year with over 105 by the end of 2019. As previously mentioned, we plan to exit our direct retail operations to focus on what we do best. We expect that as we do this our adjusted EBITDA will actually grow as we generate efficiencies in this process.

Finally, we should expect that we will continue to assess other opportunities whether valued third-party acquisitions or current assets at Circle K. All of these will continue to be with discipline to continue to deliver growth. We are growing and delivering on our plan.

To conclude, we continue to make great progress in our initiatives in establishing a strong foundation for the partnership. From a strong wholesale business, improving our financial metrics, all of this should contribute to our performance in the next quarters and into the future.

With that, I will turn it over to Evan.

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Evan W. Smith, CrossAmerica Partners LP - VP of Finance & CFO - CrossAmerica GP LLC [4]

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Thank you, Gerardo. If you would please turn to Slide 8. I would like to review our second quarter results for the partnership.

As we look at the second quarter, we reported adjusted EBITDA of $27.7 million in the second quarter of 2019 compared to $26.4 million in the same period of 2018, reflecting an increase of 5%. Our distributable cash flow for the second quarter of 2019 was $22.3 million versus $19.5 million in 2018, an increase of 14% year-over-year. Our distribution coverage on a paid basis for the second quarter of 2019 was 1.24x and was 1.06x for the trailing 12 months, which was an improvement over the 0.97x that we reported for the trailing 12 months ending June 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 it, in the appendix of the presentation slides.

If you would turn to the next slide, 9, we ended the second quarter with a leverage ratio as defined under our credit facility at 4.68x, a decrease from 4.81x in the prior quarter and in compliance with our financial covenant ratios. We anticipate that our leverage will continue to trend lower as we go through the back half of the year. We have sufficient liquidity to execute our plans. And as of August 1, we had $84.5 million available on our credit facility with nominal capacity of $234 million and another $300 million of additional accordion capacity from our lender group with the close of our new credit facility on April 1. The partnership paid a distribution of $0.525 per unit during the second quarter of 2019 attributable to the first 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 1.06x on a paid basis for the trailing 12 months.

Our required investment in the business remains relatively modest, with total capital expenditures of $3.6 million for the second quarter, with $3.2 million of the total being growth CapEx. This has been primarily associated with the rebranding and reimaging program at the Alabama sites, which Gerardo noted. We expect to have a positive impact on volumes and margins.

In conclusion, we feel good about our position going into the back half of this year. 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 other strategic initiatives.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question, it's from Sharon Lui from Wells Fargo.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [2]

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Just wanted to, I guess, touch on the new contract with Applegreen. So starting in Q3, should we see, I guess, a net benefit from that contract? Or do you expect, I guess, the contributions to ramp up over time?

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Gerardo Valencia, CrossAmerica Partners LP - President, CEO & Director of CrossAmerica GP LLC [3]

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Yes. So that's a very good question, Sharon. So we expect to see this over time. So it's not something that we expect to see immediately. And there's two components of this. One is when Applegreen takes over the direct operations that we have in those 46 locations in the Upper Midwest. But then they are going to be investing in those sites, and there's going to be some improvement that, that builds upon. But then from a standpoint of SG&A, so we are currently supporting those sites not only with the people that are working at those locations but then we have teams that are working on merchandising, POP, making sure that all of the promotions are in place, et cetera. And that would be phased out from our operations by the end of the year. So I would say that we're working -- we should expect to see some of the incremental EBITDA versus what we currently have at some point in time early in the first quarter of the next year, Sharon.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [4]

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And then from a reporting standpoint, will you guys shift -- have one segment wholesale going forward?

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Evan W. Smith, CrossAmerica Partners LP - VP of Finance & CFO - CrossAmerica GP LLC [5]

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Yes, we'll address that probably towards the -- when we file the 10-K, Sharon.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [6]

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Okay, great. And I think, on the same slide, you mentioned that there's potential future strategic asset acquisitions. How quickly could those materialize after you see the final asset exchange? And what are some of the transactions that could be contemplated?

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Gerardo Valencia, CrossAmerica Partners LP - President, CEO & Director of CrossAmerica GP LLC [7]

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Yes. So we're looking at those right now, Sharon. There's a combination of our production that we have available to us. But I'm going to say that there are some that will be very, very, very quick because of the nature of the assets and what they would entail from an operational standpoint. And that, meaningful, it will almost be done concurrently with the current asset exchange that we're doing right now. But then there's others that might be just a combination of what we're currently doing just to maintain the pipeline going forward into the future. So -- and there's -- it's going to be one or the other, but I'm going to say, I think what we're planning and making sure is that we have a continuous pipeline for growth. So I assume that we finish that first -- that last tranche of the asset exchange and expecting that we should continue to see some similar size transactions happening very routinely. So that would be my -- our aspiration, but it all depends on, of course, on being able to secure the right assets at the right price.

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Operator [8]

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(Operator Instructions) And we have a question from Walter Morris with Baraboo Growth.

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Walter Morris, [9]

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Could you expound a little more on the current income tax benefit of a little over $2 million? And was it a contributor to the meaningful increase in distributable cash flow?

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Evan W. Smith, CrossAmerica Partners LP - VP of Finance & CFO - CrossAmerica GP LLC [10]

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Sure, Walter. We had some significant investment in the quarter and we're -- per the tax law, we're able to take 100% bonus depreciation on that.

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Walter Morris, [11]

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And most of that was the Alabama rebranding.

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Evan W. Smith, CrossAmerica Partners LP - VP of Finance & CFO - CrossAmerica GP LLC [12]

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Some of it was Alabama, and some of it was newly acquired assets with the first tranche of the asset exchange.

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Walter Morris, [13]

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So will there be additional current income tax benefits on the second and third tranche exchanges?

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Evan W. Smith, CrossAmerica Partners LP - VP of Finance & CFO - CrossAmerica GP LLC [14]

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That's a good question. And we do anticipate seeing similar benefit for each of the tranches going forward.

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Operator [15]

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At this time, I'm showing no further questions. I will turn it back now for any closing marks.

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Gerardo Valencia, CrossAmerica Partners LP - President, CEO & Director of CrossAmerica GP LLC [16]

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Okay. Well, thank you very much, everybody, for joining. So I just wanted to say that we do have a very strong platform to continue to build from. We have a great team. And we have a very stable set of cash flows from rental and fuel, which is less and less dependent on upward fuel price as we've been working through to get us to that place. And as our continued initiatives materialize, we're in a great position to continue to grow without capital and continue to be disciplined to capture other opportunities. So just I wanted say thank you very much for listening, and I'm going to be turning it back over to Evan.

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Evan W. Smith, CrossAmerica Partners LP - VP of Finance & CFO - CrossAmerica GP LLC [17]

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Thanks, Gerardo. Okay. That completes today's conference call. We appreciate each of you joining us today. And if you have any follow-up questions, please feel free to contact us. Thank you.

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Operator [18]

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