Earnings Call: Q2 2021

Aug 10, 2021

Welcome to the CrossAmerica Partners Second Quarter 2021 Earnings Conference Call. My name is Daryl, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to John Benfield, Chief Accounting Officer. John, you may begin. Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners' 2nd 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 ks 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 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. Thank you, John. I appreciate everyone joining us this morning. As always, we thank you for your interest in the partnership and hope that you are well. During today's call, I will briefly go through some of the operating highlights for the Q2 2021. I will also provide some color on the trends in the market, along with an update on our acquisition of Convenience Stores from 711 and a few other updates similar to what I provided during our most recent quarterly calls. John 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 finance experience, most recently with Don Manning Holdings. Maura led the financing process The Topo Group's acquisition of CrossAmerica's General Partner in 2019 and also led the structuring of the recently completed Joe's QuickMarts credit facility And the amendments to the capital credit facility to support CrossAmerica's acquisition of sites from 711. 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 and even. Laura's first official day with us is tomorrow, and I want to welcome Laura 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 Q2 of 2021, Our wholesale fuel volume increased 27% when compared to the Q2 of 2020, largely due to the acquisitions and exchanges that were completed during 2020 And the continued recovery from COVID-nineteen. 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 the 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 May were peak months for the COVID shutdown, which explains the large volume increase in our results. A more insightful comparison is 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 Q1 relative to 2019 was down approximately 3.5%. So we 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 Q2 relative to the Q2 of 2020, which is primarily driven by the movement in crude prices between the two periods. WTI increased 24% during the Q2 of 2021, which in turn drove arbival prices higher by 16%, This negatively impacted our fuel margin per gallon. In contrast, during the Q2 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 Late October last year. Crude oil prices are up over 90% from the start of the Q4 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 virgin environment per 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 As wholesale costs too, although as we just noted, this effect has been significantly more muted in 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 the 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 in 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 The continuing impact of the U. S. Canadian border closure on our higher volume New York Thruway 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 week volumes The period since the quarter end. For retail inside sales, it's 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 Any indications in the retail segment of weakness in our inside sales or gallons figures as a result of the increased concern over 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, our 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 Q2, we did see an increase in both our operating And G and 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 and A for the Q2, the acquisition costs associated with the 711 transaction. I want to provide you with an update regarding our announced agreement with 711 to acquire 106 sites for $263,000,000 As of June 30, 2021, we had closed on 2 sites for total consideration of $4,200,000 As of August 5, 2021, Partnership had closed on a total of 32 sites for total consideration of $106,200,000 The remaining 74 sites of the 106 total sites to be acquired are expected to be completed on a rolling basis over the next 8 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. The 6 months ended June 30, 2021, we divested a total of 9 non core properties and received $3,900,000 in connection with these sales. Through August 5, 2021, we divested an additional 8 non core properties and received $2,100,000 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 the 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 will take appropriate actions as necessary. We remain focused on closing our transaction with 711 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. To all the CrossAmerica team members listening in, thank you. In summary, we believe we are in a good position as we exit the Q2 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 John for a more detailed financial review. Thank you, Charles. If you would please turn to Slide 6, I would like to review our Q2 results for the partnership. We reported adjusted EBITDA of $29,700,000 for the Q2 of 2021, which was an increase of 7 When compared to the Q2 of 2020. Our distributable cash flow for the Q2 of 2021 was $25,000,000 versus $26,000,000 for the Q2 of 2020, reflecting a decrease of 4% year over year. Distributable cash flow in the Q2 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 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 1.22 times, a slight improvement versus 1.21 times for the trailing 12 months ended June 30, 2020. For the current quarter, our coverage on a paid basis was 1.26 times compared to 1.31 times for the Q2 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 4.42 times and remain in compliance with our financial covenant ratios. This compares to 4.54 times at the end of the Q1 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 $159,000,000 available on our credit facility. The partnership paid a distribution of $0.525 per unit during the Q2 of 20 attributable to the Q1 of 2021 for a total of almost $20,000,000 And as I noted on the previous slide, this resulted in a coverage ratio of 1.22 times on a paid basis for the 12 months. In regards to our capital spending during the Q2, 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 711. During the Q2, we spent over $6,000,000 on rebranding, including $4,000,000 in connection with our acquisition from 711 and another $2,500,000 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 711, We generally are reimbursed by suppliers for a substantial portion of the upfront spend either over a period of time post conversion We're after final project completion. If you turn to Slide 8, I want to discuss our new credit facility and our recent amendment The Capital Credit Agreement. On July 16, 2021, Capital JCM Partners LLC, an indirect wholly owned subsidiary of CrossAmerica, entered into a credit agreement. The Joe's QuickMarts or JKM credit facility provides for a $200,000,000 Senior secured credit facility consisting of a $185,000,000 delayed draw term loan facility and a $15,000,000 revolving credit facility. The JKM credit facility will be used to fund the acquisition of the 106 convenience store properties from 711. 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 6 times For the fiscal quarters ending September 30, 2021 December 31, 2021, stepping down each quarter thereafter And ultimately reverting back for the quarter ended December 31, 2022 to our previous covenant of 4.75 times unless in a The capital credit facility amendment provides us with financial flexibility to better manage our ongoing acquisition and integration of assets from 711. 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 2011 sites and our other strategic initiatives. With that, we will open it up for questions. And thank you. We will now begin the question and answer If you are using a speakerphone, you may need to pick it up first before pressing the numbers. And our first question is from Elvira Scotto from RBC Capital Markets. Hey, 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? Yes. Hey, Alvaro, 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 The various different federal programs is different across our geography. Got it. Thanks. And I mean, do you see that I mean, is that driving an increase in G and A expenses? Not G and A, but at the store level operating expenses, obviously, there's been an uptick at the store level labor costs. Got it. Okay. And then just the last question from me. I think you mentioned in your prepared remarks that on the divestiture Sure. Frank, you haven't completed as much as you'd like. Can you give us a little bit of an update of what you're seeing in the M and A market or the Divestiture market, that would be helpful. Thanks. Yes. So far, our divestitures, these are single site properties that We're divesting. And as I mentioned in the 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 it 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 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 queue. Great. Thank you very much. Thank And I have no further questions at this time. 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. Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating and you may now disconnect.