Q2 2021 Crossamerica Partners LP Earnings Call
Yeah.
Yeah.
Later, we will conduct a question and answer a sector.
Please note that this conference is being recorded I will now turn the call over to Jon Benfield.
Counting officer, John you may begin.
Thank you operator, good morning, and thank you for joining the Cross American partners second quarter 2021 earnings call with me today is Charles My Fong CEO and President.
Charles will provide some opening comments are brief overview across Americas operational performance and highlights from the quarter and then I will discuss the financial results.
Yeah, we will open up the call to questions.
I would point out for today's call will follow some presentation slides that we will utilize during this morning's event.
Slides are available as part of the webcast and are posted on across America website.
Before we begin I would like to remind everyone that todays 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.
So you see cross America'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 for.
We're looking statements represent the judgment of cross American'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 for GAAP.
We've 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 harvesting that.
And we reported for this conference call will be available on the crop America website for a period of 60 days with that I will now turn the call over to Carl.
Thank you John I appreciate everyone. Joining us this morning is on.
Always we thank you for your interest for the partnership and hope that you're all well during.
During today's call I will briefly go through some of the operating highlights for the second quarter 2021.
I'll also provide some color on the trends on the market along with an update on our acquisition of convenient source from 711 and.
And a few other update 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 more top of ours, our chief Financial Officer.
Or has an extensive amount of financing experience most recently with <unk> holdings.
Nor have led the financing process for the topper group's acquisition of across America channel partner in 2019.
And also led restructuring of the recently completed shows quick March credit facility and the amendments for the capital credit facility to support Cross on records acquisition of sites from 711.
During the recent financing I worked closely with more.
And it was evident from our skills and capabilities from demonstrated that more was the best candidate for the CFO role.
As an added bonus for us already deeply familiar with the organization will be able to hit the ground running with little transition period and EBITDA.
For his first official day with US is tomorrow and I want to welcome Mark to our team.
I look forward to her joining me on next quarter's earnings call.
Now if you turn on 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 on 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 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 were up approximately 26% year over year.
Last year April and May where peak months for the Covid shutdown, which explains a large volume increase on our results.
A more on Sighful comparison same site volume performance relative to 2019 for.
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 per cent.
We experienced a sequential improvement in volume for the quarter relative to 2019.
For the period since the quarter and 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 day of Covid.
In terms of margin our wholesale fuel margin for the quarter was $5.02 per gallon a decline of 1.6 cents 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 duty W margin for the second quarter relative to the second quarter of 2020.
This was primarily driven by the movement in crude prices between the 2 periods.
WTO increased 24% during the second quarter 2021.
Which in turn drove <unk> price was higher by 16%, which negatively impacted our fuel margin per gallon.
Contrast, during the second quarter 2020 across America 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 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, which significantly adversely impact our variable fuel margin business.
And while there has been an impact.
Margin environment for the quarter was better than it historically would have been continuing our 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 too.
Although as we just noted this effect has been significantly more muted than in prior months and our historical experience.
In terms of Red we've not experienced any COVID-19 related issues for several quarters now.
And our rate for the quarter benefited from a favorable comparison to the prior year and the associated rent concessions made during the quarter and 2000 Twenty's.
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 per cent for the quarter year over year.
On a same site comparable week basis relative to the quarter on 2019 free.
Retail volume was down by approximately 4%.
For retail volume relative to 2019. The main driver of the decrease is the continued impact for the U S. Canadian border closure on a higher volume of 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.
And the period since the quarter end retail same site comparable week 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 is important to note that we continue to trend above last year's strong sales results in <unk>.
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 a weakness in our inside sales for gallons figures as a result for the increased concern for the Delta variant of Covid.
Okay.
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 D. T. W are variable margin basis. So the overall fuel profitability on these sites are split between our wholesale and retail segments.
TWC margin to our retail sites makes a meaningful contribution to our wholesale segment and to our overall profitability and is not apparent in looking at the retail segment financial results in isolation.
During the second quarter, we did see an increase on 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 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 million.
As of June 32021 day at.
Close on 2 sites for total consideration of for $2 million.
As of August 5.2021.
Partnership that 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 8 to 10 weeks.
As we mentioned previously.
As an extensive amount of work required to close on our 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 of 2021.
We divested a total of 9 non core properties on the street $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 of the 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 the 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 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.
Across America team has been hard at work on closing the acquisition and on executing on our overall strategic plan there.
Their efforts and dedication I appreciate it.
All across America team members listening in thank you.
In summary, we believe we are on 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 unit holders.
With that I'll turn it over to John for a more detailed financial review.
Yeah.
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 for.
The 7% increase in adjusted EBITDA was primarily driven by increases in operating income for both the wholesale and retail segments.
Our distribution our distribution coverage on a paid basis for the trailing 12 months ended June 32021, with 1 point to 2 times, a slight improvement versus 1.21 times for the trailing 12 months ended June 30th 2020.
For the current quarter our coverage on a paid basis was 1.26 times compared to 131 times 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 for 4.2 times and remain in compliance with our financial Covenant ratios.
This compares to $4.5 4 times at the end of the first quarter of 2020.1.
We have sufficient liquidity to execute our plan and as of August 5th 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 52 and a half cent 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 point to 2 times 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 E M b upgrades and rebranding of certain sites, including the sites being acquired from 711 during.
During the second quarter, we spent over $6 million on rebranding, including $4 million in connection with our acquisition from 711, and another 2 and a half million on M B 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 precisely on conversion, 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 or after final project completion.
If you turn to slide 8 I want to discuss our new credit facility and our recent amendments for the capital credit agreement.
On July 16th 2021 capital J Cam partners LLC, an indirect wholly owned subsidiary of Cross America entered into a credit agreement.
Joe.
The Joe's quick marks or J Cam credit facility provides for a $200 million senior secured credit facility, consisting of a $185 million delayed draw term loan facility and a $15 million revolving credit facility.
The J Cam credit facility will be used to fund the acquisition of the 106 convenience store properties from 711.
We also amended our preexisting 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 32021, and December 31, 2021 stepping down each quarter there.
Or after and ultimately reverting back for the quarter ended December 31, 2022 to our previous covenant of 475 times.
Unless specified.
Specified acquisition period for 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 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 the 711 sites and our other strategic initiatives.
With that we will open it up for questions.
Thank you we will now begin the question and answers Greg do you have a question. Please press Star then 1 on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key don't want be a delay before the first question is on hours. If you are using a speakerphone you may need to pick it up first before pressing the numbers. Once again, if you have a quest.
Please press Star then 1 on your Touchtone phone.
And our first question from Scott <unk> from RBC capital markets.
Hey, good morning, everyone.
Couple of quick ones for me given the broader macro backdrop in the job market. In particular are you can see on any challenges on the labor from either labor shortages and door.
Inflation.
Debt pay 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.
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.
Got it thanks.
I mean do you see that if any you know is that driving an increase in G&A expenses.
Not DNA, but at the store level operating expenses, obviously theres been an uptick at the store level labor cost.
Got it Okay and then.
The last question from me I think you mentioned in.
In your prepared remarks debt on the divestiture front you havent completed as much as you'd like can you give us a little bit of an update on what you're seeing.
On the M&A market.
Divestiture my Kid that would be helpful.
So far our divestitures. These are our single site properties that where we are 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 nothing systematic it's just it seems like there have been things that have popped up.
It's a delay or closings, but you know 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 queue.
Great. Thank you very much.
You.
Once again, if you do have a question press Star then 1 on your phone zone.
And I have no further questions at this time.
Yeah, 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.
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.