Q2 2023 CrossAmerica Partners LP Earnings Call

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Welcome to the customer or cause partners' second quarter 2023 earnings call. My name is Joanna 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'll now turn the call over to Mark Papa you may begin.

Thank you for joining across America partners second quarter 2020.

This call.

With me today is Charles and iPhone CEO and President.

Well start off the call today are Charles providing some opening comments.

SKU across Americas operational performance from the quarter.

I will discuss the financial results.

Well then open up the call for questions.

Today's call will follow the presentation slides that 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 be achieved what is actual results will not differ from expectations.

Please see cross American filings with the Securities and Exchange Commission, including annual reports on Form 10-K and.

The quarterly report on Form 10-Q for a discussion of important factors that could affect our actual results.

Forward looking statements.

Represent the judgment across Americas 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'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 call is being webcast and a recording of this conference call will be available on the Cross America website for a period of 60 days with that I will now turn the call over to Charles.

Thank you Mara.

As always more and I appreciate everyone joining us.

We thank you for making the time and you are scheduled to be with US This morning.

During today's call I will briefly go through the operating highlights for the second quarter.

I'll also provide color on the market and a few other updates so much of what I provided on previous calls.

Laura will then review in more detail the financial results.

Now if you turn to slide four I will briefly review our operating results.

For the second quarter of 2023, our wholesale fuel gross profit declined 6% to $17 9 million compared to $19 million and the second quarter of 2022.

The decline was driven by a decrease in fuel margin, partially offset by an increase in fuel volume.

Wholesale segment gross profit was $31 7 million a decrease of 5% when compared to the $33 $5 million of wholesale gross profit in the second quarter of 2022.

Our wholesale fuel margins declined 8% from $8.09 per gallon in the second quarter of 2022 to $8.02 per gallon for the second quarter of 2023.

Crude oil prices were lower during the quarter compared to the prior year and the year over year decrease in fuel margin was primarily driven by the result of lower cost of motor fuel during the quarter and a corresponding decrease in that.

Dollar value of the terms discounts on certain gallons purchased during the quarter.

Although not directly evident in our results. This quarter. We also continued to benefit from improved fuel sourcing costs and we had success during the quarter and our continued efforts to lower our cost of product.

Our wholesale volume was $218 1 million gallons for the second quarter of 2023 compared to $214 4 million gallons in the second quarter of 2022.

The 2% increase in volume when compared to the same period of 2022 was largely due to the integration of the community service station assets acquired during the fourth quarter of 2022.

Partially offset by the conversion of certain lessee dealer locations to our retail class of trade.

For the quarter, our same store volume in the wholesale segment was up approximately 50 basis points year over year.

If you recall for the first quarter same store volume in the wholesale segment was down approximately 4%. So the second quarter results represent an improvement in our same store volume on a sequential basis relative to the first quarter.

And the period since the quarter and same store wholesale segment volume has been down approximately 1% on a year over year basis.

Across our entire portfolio, our same store volume for the quarter was essentially flat for the second quarter, which also represents a sequential improvement from the first quarter overall same store volume.

Which was down approximately 2%.

Our overall same store volume since the quarter end has been up approximately 1% to 2% driven by strong performance in our retail segment, which I will elaborate on later in my comments.

Regarding our wholesale rack our base rent for the quarter was $13 1 million compared to the prior year of $13 6 million a slight decrease due to the conversion of certain lessee dealer sites to company operated locations.

I'll provide more detail on these conversions later in my comments.

Side from a decrease in rent due to the class of trade changes.

Our rental income continues to be a steady durable income stream in our business.

Yeah.

Our retail segment performed very well during the quarter as gross profit increased 19% or $10 $6 million when compared to the second quarter of 2022.

Our motor fuel gross profit and our merchandise gross profit both increased 20% for the quarter when compared to the same period in 2022.

Our volume on a same store basis, our retail volume declined 1% for the quarter year over year.

We had strong volume performance during the early weeks of the second quarter of last year. So the decline in same store volume. This quarter is due to the comparison with a solid numbers of the prior period.

And the period since the quarter and same store volume has been up approximately 7% year over year.

Outperforming the wholesale segment and national EIA pick it up.

On the margin front, our retail margin on a cents per gallon basis was up 9% year over year as both the macro and micro market fuel pricing factors were favorable for the quarter.

I noted earlier in my wholesale side my comments on our success in our efforts to lower our fuel sourcing costs. We also benefit from these efforts in our retail segment fuel margins as well.

And that creates since the quarter end retail fuel margins have generally been somewhat lower than the results from our second quarter and lower than the extraordinary fuel margin of the third quarter of last year.

For inside sales on a same site basis, our inside sales increased approximately 3% relative to last year.

Inside sales, excluding cigarettes were up approximately 8% year over year on a same store basis.

The strong sales performance was driven particularly by higher sales across several categories.

Notably in the packaged beverage beer and snacks and food categories on.

On the margin front, our store margin was up 170 basis points year over year.

The margin improvement was due to strong sales performance in higher margin categories as well as certain initiatives. We have in place in regards to pricing product sourcing and promotions.

In the second quarter and same store inside sales are up approximately 5% over the prior year.

In our retail segment, if you look at our unit Count for company operated sites you will see that we are up approximately 40 retail sites from the prior year.

This increase is due primarily to a conversion of certain lessee dealer sites to company operated sites.

We have also converted to a lesser extent some of our commission sites the company operated side.

These conversions are part of our strategy to convert certain lessee dealer locations with upside to company operated sites.

We have the ability to convert sites when dealers are unable or unwilling to renew expiring contracts or in some cases, when the lessee dealer fail to perform in accordance with the terms of the contracts.

Either way for the sites, we convert to retail operations. We believe that we can generate more profitability from these locations and enhance these sites long term value through operating our sites ourselves.

While there is expense and converting the locations to company operated retail expenses generally minimal in proportion to the long term incremental EBITDA and value creation potential.

Laura will provide more color on these expenses in her comments.

We expect to continue to expand our company operated retail footprint through these types of classic trade conversions going forward.

Overall, it was a positive quarter for our retail segment at store sales store margin and retail fuel margin for all up relative to the prior year.

Same store gallons, while down compared to a strong second quarter last year had been performing well since the quarter end relative to last year and national volume data.

Recycling capital and our portfolio continues to be a priority for us as we constantly evaluate our site.

During the second quarter, we divested six properties for $7 $8 million in proceeds.

We seek to maximize the value from our locations to evaluating our site long term potential with a goal to divest sites, where we determined that the capital can be better used elsewhere to either reduce leverage or to invest in compelling growth opportunities within our existing assets.

With that I will turn it over tomorrow for a more detailed financial review.

Thank you Carol.

When you turn to slide six I would like to review our second quarter results for the partnership.

We reported net income of 14 $5 million for the second quarter of 2023 compared to net income of $14 million in the second quarter of 2022.

The increase in net income was primarily driven by an increase in adjusted EBITDA.

Partially offsetting the year over year increase in interest expense due to the elevated interest rate environment.

Adjusted EBITDA was $42 $2 million for the second quarter of 2023.

Which was an increase of 2% when compared to the adjusted EBITDA of $41 $4 million for the second quarter of 2022.

Our distributable cash flow for the second quarter of 2023 with $34 million versus $32 $4 million for the second quarter of 2022.

The decrease in distributable cash flow was primarily due to the increase in cash interest expense that impacted our second quarter net income.

Our distribution coverage for the current quarter with 1.53 times.

163 times for the second quarter of 2022.

On a trailing 12 month basis, our distribution coverage was 168 times.

12 months ended June 32023.

Compared to 148 times for the comparable period ended June 32022.

The business overall continues to benefit from the strategic initiatives and growth opportunities. We have acted upon over the past three plus years.

Continuing to result in a strong distribution coverage ratios statistics.

The partnership paid a distribution of 52 and a half cents per unit during the second quarter of 2023 attributable to the first quarter of 2023 for a total of almost $20 million.

Charles discussed some of the primary drivers of our topline and gross profit performance for the quarter earlier.

Turning to the expense portion of our operations.

Operating expenses for the second quarter increased $7 $6 million compared to the 2022 next quarter.

$6 $8 million of that increase was in the area of company operated locations in our retail segment.

Of that increase $4 $1 million with operating expenses attributable to sites that were recently converted the company operated retail locations that were not company operated retail locations in the second quarter of 2022.

That incremental operating expense for the number of locations. We converted the company operated retail locations is in line with our expectation for these sites and they are converted to company operated locations.

On a same store basis operating expenses were up approximately 10% primarily in the areas of store labor cost.

And to a lesser extent maintenance spending.

In the area of store labor as we mentioned last quarter, we have continued to be able to expand our hours of operation at many of our company operated sites.

Leading to an increase in labor hours during the quarter compared to the prior year.

Store level employment costs were also impacted by higher wages, though it moderating increases compared to those experienced in 2022.

Our G&A expenses increased $1 $8 million for the quarter year over year.

This was primarily due to the increase in acquisition related costs largely due to the conversion of lessee dealer and commission agent sites. The company operated sites that we've mentioned.

As well as certain targeted investments in information technology systems to improve the efficiency and effectiveness of our organization.

Moving to the next slide we spent a total of $5 $3 million on capital expenditures during the second quarter with.

With $3 $9 million of that total and growth related capital expenditures.

This was a defined.

Quarter of 2020 to spend $7 $5 million.

Included spending for our rebranding efforts related to the acquisition of assets from 711 and 2021.

During this past quarter growth related capital spending, including targeted investments in the backcourt and Fort worth at certain locations that we converted the company operated retail locations.

Well as store upgrade and rebranding work.

As of June 32023, our total credit facility balance.

761, $5 million down from $785 $5 million a year ago as of June 32022.

Over the course of the past year.

Managed to pay down approximately $24 million of debt, while completing nearly $30 million acquisition in the fourth quarter of 2022.

Continuing to invest in our business.

This deleveraging has resulted in our credit facility to find leverage ratio being three nine times as of June 32023, compared to four five times at the end of the second quarter of 2022.

This improved leverage profile provides us with the capacity and flexibility to continue to invest in growth opportunities in our business moving forward.

Additionally, although we have felt the impact of the elevated interest rate environment.

As with prior periods, we continue to benefit from the interest rate swaps, we put into place in early 2020 and recently in April 2023.

As of June 32023, taking into account interest rate swap contracts that partnership currently has in place.

Our effective interest rate on the capital credit facility with five 1%.

It is an attractive rate against the current rate backdrop.

In conclusion as Charles noted, we had another strong second quarter positive performance and fuel and merchandise gross profit in our retail segment.

We ended the quarter with our leverage ratio below four times and a strong balance sheet with a continued focus on maintaining a leverage profile that provides us with flexibility to opportunistically invest in our business.

We're driving season is now in full swing our team throughout the country is focused on serving our customers wherever they are to continue the partnership's strong recent performance.

With that we will open it up to questions.

Thank you.

We'll now begin the question and answer session. If you have a question. Please press star one on your Touchtone phone.

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Once again, if you have a question. Please press star one on your Touchtone phone.

Ladies and gentlemen, as a reminder, if you have any questions. Please press star one now.

There appear to be no questions you May proceed.

Yeah. So if you should have follow up questions. Please feel free to contact us otherwise we appreciate everyone. Joining us today. Thank you and have a good day.

Ladies and gentlemen. This concludes your conference for today, we thank you for participating and we ask that you. Please disconnect your lines.