Earnings Call: Q1 2021

May 11, 2021

Good morning, and welcome to the CrossAmerica Partners First Quarter 2021 Earnings Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note this conference is being recorded. I will now turn the call over to John Benfield, Chief Accounting Officer. You may begin, sir. Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners' Q1 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 This 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 any forward looking statements. During today's call, we may 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 Q1 of 2021. I will also provide some color on the recently announced agreement with 711, the continuing impacts from COVID-nineteen, along with a few other updates similar to what I provided during our quarterly calls this past year. John will then review in more detail the financial results. Now if you turn to Slide 4, I will briefly review some of our results. For the Q1 of 2021, Our wholesale fuel volume increased 32% when compared to the Q1 of 2020, largely due to the acquisitions and Changes that were completed during 2020, offset by the impact of COVID-nineteen. While we saw a strong increase in overall volume for quarter relative to last year. We also saw a 19% decrease in our wholesale fuel margin per gallon year over year, primarily impacted by a decline in our dealer tank wagon margins. Despite the decline in fuel margin per gallon, Our wholesale fuel gross profit increased 7% for the quarter. As I have done in prior quarters, I'll provide some color on same store volume performance to provide insight on business conditions. We've now been operating and dealing with COVID for over a year, It was during March of last year that the initial society wide shutdown due to COVID occurred. Basically, for the Q1 of 2020, January February were normal and then March was COVID, which was, as we all appreciate, decidedly not normal. As I go through my comments on our volume performance for the quarter, keep that thought in mind. The volume environment is obviously decidedly better than at this time last year. For example, our same site volume for the last week in March was up approximately 80% year over year. If you look at the quarter overall, our same site volume was down approximately 3% relative to 2020, which again was 2 relatively normal months and then a severe COVID impact in March. For additional context, On a same site volume basis, the Q1 of 2021 relative to 2019 was down 3.5%. For our year to date same site volume performance through late April, we are up approximately 5% year over year as we overtake some of the severe volume declines from last year. Illustrating this effect, same site volumes for the recent weeks And April are up 50% or more relative to the same weeks in 2020. Relative to 2019, Our same site volume performance for the year to date period was down approximately 3.2%, which shows a continued improving environment given the improved volume performance in the quarter end number. A further reason or optimism is that if you look at the volume on a sequential week over week basis, We are seeing same site volume building, which is both a normal pattern as we head into the summer months and a further sign that miles driven and Peoples Mobility are approaching a return to pre pandemic levels. In terms of margin, our wholesale fuel margin for the quarter was $0.73 per gallon, A decline of $0.017 per gallon or 19% from the prior year. The year over year decrease was driven by our dealer tank wagon fuel margins, which, as a reminder, are 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 Q1 relative to the Q1 of 2020, which was primarily driven by the movement in crude prices during the two periods. WTI increased 28% during the Q1 of 2021, which in turn drove RBOT prices higher by 31%, which negatively impacted our fuel margins per gallon. In contrast, during the Q1 of 2020, There was a 66% decline in WTI from a daily spot price of $61.14 per barrel on December 31, 2019 to $20.51 per barrel on March 31, 2020, which drove an almost equal 65% decline in RBOB prices for same period. Although crude and fuel prices trended down during the Q1 of last year, in March, there was a rapid and steep decline due to COVID, which these figures reflect. The dramatic decline in these cost inputs positively impacted our fuel margins for the prior year period. As we have discussed previously, during periods of rising prices, our variable price fuel margins tend to contract due to retail fuel prices not adjusting as quickly as wholesale costs do, which was the case this quarter. As with our 4th quarter, Relative to other periods of increasing crude prices, the margin environment for the quarter was favorable. In terms of rent, As in the prior quarter, we did not experience any COVID related rent collection issues, and our rent collection results were in line with historical pre COVID performance. For our retail operations, we continue to see strong inside sales at our company operated sites. Overall, for the quarter, same store inside sales were up approximately 13% year over year. For additional context, relative to the Q1 of 2019, same store inside sales were up for the quarter over 14%, which indicates our stores are performing well even relative to pre pandemic results. Year to date for the period through approximately the end of April, Our same store inside sales are up approximately 15% year over year. As we have discussed before, The initial COVID impact on our retail inside store sales was considerably less than the volume impact. Also, As we saw over the course of the last year, consumers gravitated to our stores to do their convenience and enhanced product offerings. For the quarter, our retail stores also performed well on the volume side. On a same store basis, for the quarter, Our retail same store volume was up approximately 3% year over year. Year to date, as of approximately the end of April, Our retail store same site volume was up 16% year over year. Both of these volume metrics are stronger than our overall wholesale portfolio metrics. The strong retail same store performance, both for inside sales and volume, is proof of the success The initiatives that we have underway for our retail operations and indicative of the operational focus we intend to bring to the retail operations in our recently announced acquisition. As we noted in prior quarters, in reviewing our retail segment financial performance, It is important to remember the wholesale segment supplies our retail segment on a DTW or variable margin basis. So the overall fuel profitability of these sites is split between our wholesale and retail segments and the DTW fuel margin to our retail sites A meaningful contribution in our wholesale segment and our overall profitability. For the Q1, 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 company operated In commission site count, which increased 154 sites or 76% year over year. Contributing to the increase in G and A for the Q1 was a $900,000 increase in acquisition related costs, primarily due to our announced acquisition and an additional $900,000 increase in management fees related to the increase in headcount associated with the acquisition And exchanges completed last year, particularly driven by the CST Fuel Supply Exchange, where we exchanged a nonoperational economic interest for operational wholesale assets. The operating and G and A expense line is an item that we do closely track, And we expect the incremental G and A burden for our new acquisition to be significantly less than what we experienced for our acquisitions this past year. If you'll turn to the next slide, Slide 5, I want to discuss our recently announced agreement with 711 to acquire 106 sites for $263,000,000 We are acquiring sites in the Mid Atlantic and Northeast regions of the U. S. That fit very well within our existing asset base. Most of the sites currently operate under the Speedway brand. 90 of the sites are fee ownership and 16 of the sites are leased. These are attractive locations, good square footage with solid metrics of gallons and merchandise sold. For the year ending December 31, 2020, The site sold 154,000,000 gallons of fuel and generated $136,000,000 of merchandise sales for an average of 1,450,000 gallons per site and $1,280,000 of merchandise sales per site. We plan to close on this acquisition on a rolling basis that will begin 60 to 90 days after the closing of 711's transaction with Marathon. The closings will take place over several weeks as at each individual site, we have to do a complete rebranding on the site and convert all store systems, such as payment processing over to our and our suppliers' networks. We currently plan to finance the transaction through either undrawn capacity under our revolving credit facility or additional debt financing from other sources. Please turn to Slide 6. As we noted in the press announcement and that I touched on a moment ago, we will be rebranding these sites. On the fuel side, We will partner with our existing branded fuel suppliers to bring nationally well known fuel brands to the sites. On the store side, we intend to brand the sites as Joe's QuickMarts, which is one of our proprietary store brands. For Joe's quick marks, we have been working on redeveloping and reimaging this brand for the past 18 months. The The timing of the acquisition corresponds perfectly with this rebranding initiative and allows us to accelerate our rollout of the reimage and refresh Joe's QuickMarts brand. As I stated earlier, we believe these are great assets in prime locations. In terms of locations, The sites fit well within our existing store network, and we will be able to manage these sites efficiently within our retail network. We anticipate this transaction to be immediately accretive to distributable cash flow to limited partners and expect it to provide value to our unitholders over the long term. We are eager to get into the execution phase of the transaction and to welcome our new colleagues working at the sites to the CrossAmerica team. We look forward to providing you more details on this transaction when it is closed. In conclusion, While our results for the Q1 were not as strong as we wanted, there's a lot of positive momentum for us. We see mobility moving back towards pre pandemic levels And economic activity increasing. While in the short term, this may lead to a further or further increases in crude prices that impact our fuel margins, Longer term, these are positive developments for our business that we are well positioned to capitalize on. We have signed up a great transaction, Strong assets at an attractive valuation that provides immediate value to our unitholders. The entire team here across America is excited about this transaction and the opportunities it provides us. The team understands that we have a lot of hard work in front of us, and we all are committed to doing whatever it takes to ensure a successful execution. With that, I will turn it over to John for a more detailed financial review. Thank you, Charles. If you would please turn to Slide 8, I would like to review our Q1 results for the partnership. We reported adjusted EBITDA of $20,700,000 for the Q1 of 2021, which was a decline of 18% when compared to the Q1 of 2020. Our distributable cash flow for the Q1 of 2021 was $15,800,000 versus $20,400,000 for the Q1 of 2020, reflecting a decrease of 23% year over year. Both adjusted EBITDA and BCF are lower primarily due to the lower variable fuel margins and higher operating and G and A expenses Charles discussed earlier. Our distribution coverage on a paid basis for the trailing 12 months ended March 31, 2021 was 1.23 times, a 3% improvement versus 1.19 times for the trailing 12 months ended March 31, 2020. For the current quarter, our coverage on a paid basis was 0.79 times compared to 1.08 for the Q1 of 2020. While we prefer to stay above 1.0x coverage even for the quarterly period, We have historically seen our coverage the weakest in the Q1 and it was below 1.0x for the Q1 periods of 2014 to 2019, bouncing back above 1.0 times in the second quarter. As we do see some seasonality in our business, This is the primary reason we tend to focus on the trailing 12 month coverage ratio. We will continue to target a 1.2 to 1.3 times trailing 12 month coverage ratio. If you turn to the next slide, Slide 9, we ended the quarter with a leverage ratio as defined under our credit facility 4.54 times and remain in compliance with our financial covenant ratios. Leverage ratio is higher than our year end ratio of 4.06 Because of the weaker results compounded by the fact that we didn't have any significant proceeds from our real estate optimization efforts in the Q1 of 2021. We have sufficient liquidity to execute our plans. And as of May 6, we had $123,000,000 available on our credit facility. The partnership paid a distribution of $0.525 per unit during the Q1 of 2021 attributable to the Q4 of 2020 For a total of almost $20,000,000 and as I noted on the previous slide, this resulted in the coverage ratio of 1.23 times on a paid basis for the 12 months. In regards to our capital spending during the Q1, we did see an increase in our growth related capital expenditures Our recently announced acquisition, we currently expect our overall capital expenditures to decline meaningfully from the levels in 2020. With regard to incremental capital spending related to our pending acquisition, we anticipate receiving financial support from our fuel suppliers of approximately 70% of our estimated 2021 capital spending. In conclusion, as we enter the summer driving season, 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 pending acquisition and our other strategic initiatives. With that, we will open it up for questions. Thank you. And we will now begin the question and answer session. And from RBC, we have Elvira Scotto. Please go ahead. Hey, good morning everyone. A couple of questions for me. Can you provide any more Detail around when the acquisition closes? I know you said it's sort of on a rolling basis, but can you give a little bit of more granular timeline? Yes, this is Charles. So look, the closing of our acquisition is dependent upon the closing of the Marathon 711 acquisition. And If you followed what they've been saying on that most recently on the Marathon conference call, they indicated that the timing for that acquisition to close was in a matter of weeks, and that's consistent with our understanding. And so once that acquisition closes, Our transaction came again to close 60 to 90 days after that. And based on our rolling close, we're looking at our transaction closing over a matter of weeks from the start of that period. Okay. Great. And then in terms of how does that work in terms of number of Stores, is it I mean, is it just you do one store at a time or do you do like a tranche of stores with the rebranding? Yes. So the way that we're contemplating doing is we'll be doing it in groups. We'll see a cluster of sites come over because as I touched on in the comments, you have To rebrand the store and then significantly with a lot of the back office equipment, we've got to take out that equipment and put in our equipment so that we're hooked up with Our networks and our suppliers' networks, so it's not as simple as what you might see in a standard transaction or in a transaction We have a period of time to convert the branding over. We're doing all of this at closing. But the good thing for that is that we anticipate that In terms of actual operations of the site, we're looking at only for a few hours on the initial day of conversion where the sites We'll be not available to customers, but then immediately after that, they'll be back up and running. Got it. Great. And then The other question I have is, with the Colonial Pipeline shutdown, does that have any impact to your operations? Yes. So we obviously have assets within the footprint of the Colonial and you're basically talking about the southeastern part of the United States. And so from our suppliers right now, we're not getting a whole lot of additional information beyond what is publicly available And that Colonial expects to resume substantially normal operations by the end of the week. I'd say right now at the moment, We are seeing certain terminals that are having supply outages, but nothing widespread. And if it does resolve by the end of the week, I think that you will see things resuming back to normal and supply being back to normal within A few days after that, if it goes on longer than this weekend, then you'll start to see more disruptions. And it's not that there's a lack of supply out there. It's really that the ultimate supply points, particularly for some of the markets, will be much further away. And at the moment, there is a shortage of drivers in the industry, which this will exacerbate further such that you could see more Severe disruptions in what we've seen to date. But as of right now, it's been minimal for us. But again, we do have a pretty substantial footprint in the market, but for so far it's been manageable. Okay, great. Thank you very much. Thank you. Thanks, Elvira. From Wells Fargo, we have Ned Baramov. Please go ahead. Hey, good morning. Thanks for taking the question. Could you discuss if there is a Where is your wholesale margin could go given the continued strength in WTI prices? Well, so I think the way to think about our wholesale margins, and we've given some information on this before, is that On the wholesale side, roughly 70% of our wholesale contracts are fixed pricing, which means that really the only variability in those contracts is going to be what happens with the terms discount, which will vary with the price of crude. In this case, higher crude prices will boost that discount that we get. And then the other 30% or so, That's variable price margin, which is really going to be reflective of what happens with the rack to retail pricing, I. E, what's the spread between The wholesale cost at the terminal and the price that people are paying at the pump itself. And so for that, What we've seen here is so since the period of basically the end of October, we've seen A very steady and consistent rise in prices. And typically, with that type of environment, that really hurts our margins. And as I touched on in my comments, relative to other periods where we've seen that type of price increase, our margins have done very well relative to those prior periods. So based on what other people have said for The environment in COVID, are we seeing a repricing and re expectation of where the Other dealers are expecting their what their margins need to be. I don't know. All I can say is that With volumes being down, obviously, people's breakevens are higher, and that does seem to reflect be reflected in pricing networks we've seen on The Street. And so whether or not that will continue that way as volumes get more back to normal remains to be seen. But so far, We've seen a relatively positive pricing environment despite the increase in crude. Thanks for the color. That's all I had. Thank you. It looks like no further questions at this time. I will now turn it to John Benfield for closing remarks. All right. Thank you for listening in And we appreciate you joining us, and we look forward to talking with you again soon. Thank