CrossAmerica Partners LP

Welcome to the Cross-America 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 will now turn the call over to Maura Topper. You may begin.

Thank you for joining the Cross-America Partners Second Quarter 2023 Earnings Call. With me today is Charles Nyfong, CEO and President. We'll start off the call today with Charles providing some opening comments and an overview of Cross America's operational performance from the quarter, and then I will discuss the financial results. We will then open up the call to questions. Today's call will follow 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 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 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. Forward-looking statements represent the judgment of Cross America'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, 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 Cross America website for a period of 60 days. With that, I will now turn the call over to Charles.

Thank you, Maura. As always, Maura and I appreciate everyone joining us. We thank you for making the time in your schedule to be with us this morning. During today's call, I will briefly go through the operating highlights for the second quarter. I will also provide color on the market and a few other updates similar to what I provided on previous calls. Maura 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 in 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 margin declined 8% from 8.9 cents per gallon in the second quarter of 2022 to 8.2 cents per gallon in 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 resultant 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. Although not directly evident in the results this quarter, we also continued to benefit from approved fuel sourcing costs, and we had success during the quarter in 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 in 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. In the period since the quarter end, 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 the retail segment, which I will elaborate on later in my comment. Regarding our wholesale rent, 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 will provide more detail on these conversions later in my comments. Aside from the decrease in rent due to the class of trade changes, our rental income continues to be a steady, durable income stream in our business. 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. For 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 the solid numbers of the prior period. In the period since the quarter end, same-store volume has been up approximately 7% year-over-year, outperforming the wholesale segment and national EIA data. 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 segment 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. In the trade since the quarter end, retail fuel margins have generally been somewhat lower than the results from the second quarter and lower than the extraordinary fuel margins 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, most notably in the packaged beverage, beer, snacks, and food categories. On the margin front, our store margin was up 170 basis points year over year. The margin improvement was due to strong sales performance and higher margin categories, as well as certain initiatives we have in place in regards to pricing, product sourcing, and promotions. In the period since the quarter end, 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 our conversion of certain lessee dealer sites to company-operated sites. We have also converted, to a lesser extent, some of our commission sites to company-operated sites. These conversions are part of a 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 an expiring contract or, in some cases, when the lessee dealer fails to perform in accordance with the terms of the contract. 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 the sites ourselves. While there is expense in converting the locations to company-operated retail, the expense is generally minimal in proportion to the long-term incremental EBITDA and value creation potential. Maura 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 class or trade conversions going forward. Overall, it was a positive quarter for our retail segment, as store sales, store margin, and retail fuel margin were all up relative to the prior year. Same-store gallons, While down compared to a strong second quarter last year, I've been performing well since the quarter end relative to last year and national volume data. Recycling capital in our portfolio continues to be a priority for us as we constantly evaluate our sites. During the second quarter, we divested six properties for $7.8 million in proceeds. We seek to maximize the value from our locations through evaluating our site's 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 to Maura for a more detailed financial review.

Thank you, Charles. If you would please turn to slide six, I would like to review our second quarter results for the partnerships. 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 offset by 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 adjusted EBITDA of $41.4 million for the second quarter of 2022. Our distributable cash flow for the second quarter of 2023 was $30.4 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 was 1.53 times compared to 1.63 times for the second quarter of 2022. On a trailing 12-month basis, our distribution coverage was 1.68 times for the 12 months ended June 30th, 2023, compared to 1.48 times for the comparable period ended June 30th, 2022. 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 these strong distribution coverage ratio statistics. The partnership paid a distribution of 52.5 cents per unit during the second quarter of 2023, attributable to the first quarter of 2023 for a total of almost $20 million dollars. Charles discussed some of the primary drivers of our top line 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 second 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 was operating expenses attributable to sites that were recently converted to 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 to company-operated retail locations is in line with our expectations for these sites as 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 costs 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 at moderating increases compared to those experienced in 2022. Our GMA expenses increased $1.8 million for the quarter year over year. This was primarily due to an increase in acquisition-related costs, largely due to the conversion of lessee dealer and commission agent sites to company-operated sites that we've mentioned, as well as certain targeted investments in information technology systems 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 $3.9 million of that total in growth-related capital expenditures. This was a decline from the second quarter of 2022 spend of $7.5 million which included spending for our rebranding efforts related to the acquisition of assets from 7-11 in 2021. During this past quarter, growth-related capital spending included targeted investments in the backcourt and forecourt at certain locations that we converted to company-operated retail locations, as well as store upgrade and rebranding work. As of June 30, 2023, our total credit facility balance $761.5 million, down from $785.5 million a year ago as of June 30, 2022. Over the course of the past year, we've managed to pay down approximately $24 million of debt while completing a nearly $30 million acquisition in the fourth quarter of 2022 and continuing to invest in our business. This deleveraging has resulted in our credit facility defined leverage ratio being 3.9 times as of June 30, 2023, compared to 4.5 times at the end of the second quarter of 2022. This improved leverage profile provides us with 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 30th, 2023, taking into account the interest rate swap contracts the partnership currently has in place, our effective interest rate on the capital credit facility was 5.1%, which is an attractive rate against the current rate backup. In conclusion, as Charles noted, we had another strong second quarter with positive performance in 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. Our 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 will now begin the question and answer session. If you have a question, please press star 1 on your touch-tone phone. If you wish to be removed from the queue, please press star 2. There will be a delay before the first question is announced. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star 1 on your touch-tone phone. Ladies and gentlemen, as a reminder, if you have any questions, please press star 1 now. There appear to be no questions. You may proceed.

Yes, 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.