Q3 2023 CrossAmerica Partners LP Earnings Call
Good morning.
And welcome to the <unk> Micro partners third quarter direct earnings <unk> earnings call.
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Following the presentation, we will conduct a question and answer session.
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I would now like to turn the conference or Tomorrow, Tupper, Chief Financial Officer Ms. Stopper. Please go ahead.
Thank you operator.
Morning, and thank you for joining across America partners third quarter 2023 earnings call.
With me today are Charles Nifong, CEO and president.
We'll start off the call today are Charles providing some opening comments and a brief overview across Americas operational performance during the quarter.
And then I will discuss our financial results.
We will then open up the call to questions.
Today's call will follow the presentation slides that are available as part of the webcast and are posted on the Cross 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.
Please see <unk> filings with the Securities and Exchange Commission.
Including annual reports on Form 10-K quarterly.
Quarterly reports 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 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 across America website for a period of 60 days.
With that I will now turn the call over to Charles.
Thank you Mara.
Always Laura and I appreciate everyone joining us and thank you for making the time to listen to the call. This morning.
During today's call I will briefly go through the operating highlights for the third quarter.
We also provide color on the market and a few other updates similar to what I provided on previous calls.
Bob will then review in more detail the financial results.
Now if you turn to slide four I will briefly review some of our operating results.
For the third quarter of 2023, our wholesale fuel gross profit declined 4% to $18 8 million compared.
Compared to $19 5 million in the third.
Third 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 $32 9 million, a decrease of 4% when compared to the $34 $1 million or wholesale gross profit in the third quarter of 2022.
Our wholesale fuel margins declined 7% from $9.02 per gallon in the third quarter of 2022 to eight six cents per gallon in the third quarter of 2023.
The decline was primarily driven by the following two factors.
The first was an exceptionally strong fuel margin performance of our variably priced wholesale business in the third quarter of 2022 relative to the current year.
If you recall, we and the industry experienced an exceptionally strong fuel margin environment in the third quarter of 2022.
While the third quarter of 2023 was a generally favorable environment for fuel margins. It was not nearly as favorable as the fuel margin environment in the prior year.
The second factor was that 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 the corresponding decrease in the dollar value of the terms discounts on certain gallons purchased during the quarter.
This was partially offset by our improved fuel sourcing costs, which resulted from our continued ongoing efforts to lower our cost of products.
Our wholesale volume was $217 3 million gallons for the third quarter of 2023.
<unk> $212 7 million gallons in the third quarter of 2022.
The 2% increase in volume when compared to the same period in 2022.
It was largely due to the Covid any 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 and lower volume in our same store business.
Since I just mentioned the community service station assets, we closed on that transaction approximately one year ago.
These assets have been great additions to the portfolio and this past year performed better than our expectations for them at the time of acquisition.
Returning to volume for the quarter, our same store volume in the wholesale segment was down approximately one 2% year over year.
We saw declining same store volumes in the last few weeks of the quarter.
Has continued in the period since the quarter's end with same store wholesale volume down 2% to 3% year over year in this period.
Regarding our wholesale rent our base rent for the quarter was $13 million compared.
Compared to the prior year of $13 8 million.
A slight decrease due to the conversion of certain lessee dealer sites to company operated locations that occurred earlier this year.
Side from a decrease in rent due to the class of trade changes our rental income continues to be a durable income stream in our business.
For the retail segment, despite the challenging year over year comparison due to the exceptionally strong fuel margins of the third quarter of 2020 to our retail segment performed very well during the third quarter of 2023, generating $67 6 million and gross profit.
While our motor fuel gross profit declined 34% our merchandise gross profit increased 23% for the quarter when compared to the same periods in 2022.
Our volume on a same store basis, our retail volume increased 2% for the quarter year over year.
As in our wholesale segment, we saw year over year volume performance decline in the latter part of the quarter and.
In the period since the quarter and same store volume has declined in the mid single digits driven by some site specific issues certain geographies.
And an unfavorable comparison to particularly strong prior year performance.
On the fuel margin front, our retail fuel margin on a cents per gallon basis declined 30% year over year as we experienced exceptionally strong fuel margins at $53.04 per gallon in the third quarter of 2022.
However, on an absolute basis, our quarterly retail fuel margin of $37.02 per gallon was strong and up from the second quarter retail fuel margin.
And while fuel volumes have been lower since the quarter end as I noted a moment ago fuel margins since the quarter end have generally been higher than what we experienced in the third quarter.
For inside sales on a same site basis, our inside sales increased approximately 4% relative to last year.
Inside sales, excluding cigarettes were up approximately 9% year over year on a same store basis.
<unk> sales performance was generally across all categories with packaged beverages, and our food categories, performing particularly well.
On the store merchandize margin front, our merchandise gross margin increased 23% to $25 4 million.
Driven by our increased sales from the higher store count.
Increase in same store sales and improvement in our store merchandise gross margin percentage.
Our store merchandize gross margin percentage was up 160 basis points year over year.
The store merchandise margin improvement was due to merchandise sales shifts towards higher margin categories and certain initiatives. We have in place in regards to pricing product sourcing and promotions.
In the period since quarter and same store inside sales inclusive of cigarettes are up approximately 3% to 5% over the prior year.
As we noted last quarter in our retail segment. If you look at our company operated site count.
Up approximately 40 retail sites from the prior year, but flat from the second quarter of this year.
The increase in site count relative to the prior year is due to our conversion of certain controlled sites from other classes of trade to company operated sites earlier in the year.
Although in the third quarter, we did not have any significant conversion activity.
We expect to continue to get additional sites for other classes of trade. The company operated retail sites or to a lesser extent retail commission sites going forward.
For the sites, we do convert to company operated retail for commission locations. We believe that we can generate more profitability at these locations.
These types of long term value through operating lease sites ourselves.
Overall, despite the challenging year over year comparison to last year's retail fuel margin. It was a positive quarter for our retail segment. Our same store volume same store merchandise sales same store merchandise gross margin and store merchandise margin percentage were all up relative to the prior year.
On the divestiture front, we had a quiet quarter selling only one property this quarter after selling six properties in the second quarter.
Year to date, we have sold eight properties for approximately $8 $3 million in proceeds.
We continuously look at our portfolio to identify potential divestiture locations and it remains a focus of ours to free up capital in this manner, which we would either put towards reducing leverage or investing in growth opportunities.
Overall, the business continues to perform well across many different operating environments. The underlying fundamentals remained strong our balance sheet is healthy and positioned well for the current interest rate environment and we continue to work hard on executing our initiatives and constantly improving the business.
We cannot be successful got great people.
All across America team members.
Hard every day to generate results and to drive the business forward.
With that I will turn it over to Laura for a more detailed financial review.
Thank you Charles.
If you would please turn to slide six I would like to review our third quarter results for the partnership.
We reported net income of $12 $3 million for the third quarter of 2023 compared to net income of $27 6 million in the third quarter of 2022.
Decline in net income was primarily due to the very elevated fuel margins that we experienced in the third quarter of 2022 as Charles noted earlier.
Adjusted EBITDA was $44 $2 million for the third quarter of 2023 compared to adjusted EBITDA of $62 $6 million to the third quarter of 2022.
Our distributable cash flow for the third quarter of 2023 was $31 $4 million.
Versus $50 9 million for the third quarter of 2022.
The decrease in distributable cash flow was primarily again due to the exceptionally strong results in the third quarter of 2022.
In addition to an increase in cash interest expense also impacted our third quarter net income.
Our distribution coverage for the current quarter was one five to seven times.
Third to 255 times for the third quarter of 2022.
On a trailing 12 month basis, our distribution coverage was 143 times for the 12 months ended September 32023.
Third to 174 times for the comparable period ended September 32022.
These strong distribution coverage ratios statistics provide continuing evidence of the strength of our business and our team continues to execute on our organizational goals.
The partnership paid a distribution of <unk> 52, and a half cents per unit during the third quarter of 2023.
Attributable to the second 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 third quarter increased $3 8 million compared to the 2022 third quarter.
As with last quarter. The increase was primarily driven by incremental operating expenses in our retail segment due to the conversion of lessee dealer and commission locations. The company operated locations earlier this year.
The incremental operating expense for the number of locations. We converted the company operated retail locations is in line with our expectations for these sites as they are converted to company operated locations.
Adjusting for the known incremental operating expenses, we add to the business when converting a store to the company operate as cost of trade.
The increase in our other operating expenses was below the inflation levels being experienced in the wider economy.
This is a meaningfully moderated operating expense profile and we have seen for the past 18 months.
Although we continue to monitor the impacts of inflationary cost pressures on our business.
The largest driver of operating expenses, our store labor costs, which are primarily the result of the number of labor hours, our stores are staffed and wages.
Year over year, our same store labor hours are up approximately 2% and our team has continued their focus on ensuring our stores are open and appropriately staffed to meet customer needs.
Although we have experienced year over year cost pressures in the area of maintenance and supply spending.
These have been offset by our team's continued focus on cost management and other areas of the business.
Which have benefited us in this recently completed quarter.
Our G&A expenses increased 4% for the quarter year over year.
So this was primarily driven by higher equity compensation expense.
All other G&A expenses, roughly flat year over year.
Moving to the next slide please spend a total of $10 4 million on capital expenditures during the third quarter.
$8 $5 million of that total being growth related capital expenditures.
This was in line with our third quarter of 2022 spend of $10 4 million.
Which included spending for our rebranding efforts related to the acquisition of assets from 711 and 2021.
During this past quarter.
Growth related capital spending included image upgrades that are being funded primarily through incentives from our fuel suppliers.
As of September 32023.
Our total credit facility balance was $762 5 million.
Slightly from our June 32023 balance of $761 $5 million and below our end of 2022.
<unk> of $765 $1 million.
During the third quarter of 2023, we.
We experienced a generally rising fuel price environment.
Which resulted in a usage of working capital during the quarter.
We also will continue to receive the fuel supplier incentive funds related to our image upgrade projects in future quarters as upgrades are completed.
These two net uses of capital during the quarter are generally items, we consider timing matters and drove the roughly flat quarter over quarter balance on our credit facility.
Our credit facility defined leverage ratio was 435 times as of September 32023.
We continue to remain focused on our operational performance and associated cash flow generation to manage our leverage ratio at approximately four times on a credit facility defined basis.
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.
Approximately 65% of our current credit facility balance is swapped to fixed rates.
As of September 32023.
Taking interest rate swap contracts. The partnership currently has in place into account.
Our effective interest rate on the capital credit facility was four 9%.
It is an attractive rate against the current rate backdrop.
In conclusion as Charles noted.
Despite this quarter's year over year comparisons, we had a strong third quarter with positive performance in fuel and merchandise gross profit in our retail segment.
We ended the quarter with 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 appreciate the efforts of all of our team members around the country. During this past busy summer season that is most of our third quarter.
And we look forward to continuing our strong performance into the fourth quarter and 2024.
With that we will open it up for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
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<unk> today should you have any questions later, please feel free to reach out to us as always thank you for joining us and have a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you.
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