CrossAmerica Partners LP (CAPL) Q1 2020 Earnings Report, Transcript and Summary

Welcome to the CrossAmerica Partners' First Quarter 2020 Earnings Call. My name is Vanessa, and I'll be your operator for today's call. [Operator instructions] Please note that this conference is being recorded. I will now turn the call over to Jon Benfield, Interim Chief Financial Officer.

Begin. Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners' First Quarter 2020 Earnings Call. With me today are Charles Nifong, CEO and President, and other members of our executive leadership team. 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 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-K and quarterly reports on Form 10-Q for discussion of important factors that could affect our actual results. Forward-looking statements represents the judgment of CrossAmerica's management as of today's date, and the organization disclaims any intent or obligation update any forward-looking statement. 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 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 CrossAmerica website for a period of 60 days. With that, I will now turn the call over to Charles.

Thank you, Jon. I hope that everyone is doing well in these challenging times. Although we are here today on our first quarter earnings call, we understand that everyone's focus is on COVID-19 and its impact on our business in the period since the quarter end as well as any thoughts that we can offer about our business going forward in the current environment. Given that, we will structure our comments on today's call differently than what we normally do. I will briefly go through some of the highlights for the first quarter and then let Jon review in more detail the financial results. After that, I will provide an update on the business since the quarter end and specifically address the impact of COVID-19. If you turn to Slide 4, I will briefly review some of our results from the quarter. For the first quarter of 2020, our wholesale fuel volume declined 5% when compared to the first quarter of 2019, largely due to the impacts of COVID-19. Beginning in mid-March, specifically around March 12, we have begun to see sudden and significant declines in our volumes as economic activities begin to curtail due to measures taken to fight COVID-19. This decline in volume for the quarter was more than offset by a strong increase in our year-over-year wholesale fuel margin per gallon, driving our wholesale fuel gross profit up 35% for the quarter. Our wholesale fuel margin of $0.09 per gallon, an increase of 41% year-over-year, was primarily driven by our dealer-tank-wagon fuel margins, which as a reminder are variable fuel margin accounts for certain of our third-party wholesale dealers and also how we supply our company-operated and commissioned retail sites. Crude oil prices went from $61 a barrel on December 31, 2019, to just over $20 a barrel on March 31, 2020, an overall decline of 66%. This rapid and steep decline of oil prices was highly beneficial to our variable fuel margin business. If you look at gross -- rental gross profit for the first quarter, we reported $15.8 million, which was an increase of approximately 5%, primarily due to increases resulting from our closed asset exchanges with Circle K and the conversion of company-operated sites to dealer-operator sites in the third quarter of 2019. For the first quarter, we reduced our operating and SG&A expenses by 23% on a combined basis, which is indicative of our continuing focus of overall expense control. Our adjusted EBITDA was $25.3 million, and distributable cash flow was $20.4 million for the first quarter. Both increased significantly for the quarter relative to the prior year due to the performance of the wholesale segment and lower overall expenses. If you turn to Slide 5, you can see that our team has continued to move forward in completing our previously announced transaction. In the midst of an incredibly challenging operating environment, CrossAmerica organization completed acquisitions involving over 550 sites in the quarter and the period subsequent to the quarter end. This was an incredible achievement by the organization. Executing acquisitions, particularly on this scale, is never easy. But considering the disruption caused by COVID-19, it is truly an extraordinary achievement. These acquisitions both strengthen the partnership operationally and provide immediate financial benefits. We continue to work with Couche-Tard and Circle K to complete the remaining asset exchanges from the agreement that was entered into in December 2018. We completed two asset exchanges with Couche-Tard and Circle K during 2019 and now have completed three smaller transactions in 2020, one in February and another in April and our most recent one was completed earlier this week. There are now 24 sites remaining as part of that overall asset exchange. And based on our current time line, we expect the remaining sites to be converted to dealer sites and the final asset exchange to be completed in the second half of 2020. At the end of the first quarter, on March 25, we completed another exchange agreement with Couche-Tard and Circle K that entailed the exchange of wholesale fuel supply contracts with Couche-Tard, covering 333 sites, 33 fee and leasehold properties and approximately $13 million in exchange for 17.5% limited partner interest in CST Fuel Supply. In April, we completed the acquisition of wholesale and retail assets that was originally announced on January 15, 2020. This acquisition included retail operations of 161 sites, wholesale fuel distribution to 110 sites, including 53 third-party dealer contract and leasehold interest in 62 sites. As I noted during our last earnings call, with this acquisition, we not only added Wholesale Fuel contracts to our portfolio but also added retail assets and a retail capability that will enable the partnership to pursue a broader range of acquisition opportunities and provides greater flexibility for optimizing the class of trade for each asset in our portfolio. Finally, during the first quarter, as part of our real estate optimization plans, we sold 6 properties that we considered noncore for a total of $5 million. While this was not a significant number of [technical difficulty] for a more detailed financial review of the quarter, and then I will return to discuss the period after quarter end and the impact of COVID-19.

Thank you, Charles. Please turn to Slide 7, I would like to review our first quarter results for the partnership. We reported adjusted EBITDA of $25.3 million for the first quarter of 2020 compared to $21.4 million for the same period of 2019, reflecting an increase of 18%. Our distributable cash flow for the first quarter of 2020 was $20.4 million versus $13.3 million for the first quarter of 2019, reflecting an increase of 54% year-over-year. Both adjusted EBITDA and distributable cash flow for the first quarter benefited from the performance of our wholesale segment and lower overall expenses. Distributable cash flow also benefited from lower cash interest and current tax expense. Our distribution coverage on a paid basis for the first quarter of 2020 was 1.08x versus 0.73x for the first quarter of 2019. Our distribution coverage on a trailing 12-month basis was 1.19x, which was an improvement over the 1.03x that we experienced for the 12 months ended March 31, 2019. If you would please turn to the next slide, Slide 8. We ended the quarter with a leverage ratio as defined under our credit facility of 4.19x and remain in compliance with our financial covenant ratios. We have sufficient liquidity to execute our plans. And as of May 1, we had $152.6 million available on our credit facility, an increase of $60.7 million compared to our availability from December 31, 2019. With the overall decline in interest rates, we recently made the decision to enter into an interest rate swap contract. On March 26, we entered into an interest rate swap contract to hedge against interest rate volatility on our variable rate borrowings under the credit facility. The interest payments on our credit facility vary based on monthly changes in 1-month LIBOR and changes, if any, in the applicable margin, which is based on the partnership's leverage ratio. The interest rate swap contract has a notional amount of $150 million, a fixed rate of 0.495% and matures on April 1, 2024. On April 15, we entered into two additional interest rate swap contracts, each with notional amounts of $75 million, a fixed rate of 0.38% and that mature on April 1, 2024. All of these interest rate swap contracts have been designated as cash flow hedges and are expected to be highly effective. These swaps effectively converted almost 60% of our variable rate borrowings under our credit facility to a fixed rate. The partnership paid a distribution of $0.525 per unit during the first quarter of 2020 attributable to the fourth quarter of 2019 for a total of over $18 million. And as I noted on the previous slide, this resulted in a coverage ratio of 1.19x on a paid basis for the 12 months. Our required investment in the business remains relatively modest with total capital expenditures of $5.4 million for the first quarter, with $4.7 million of that being growth CapEx. In conclusion, we believe we are in good position as we enter the second quarter of 2020. We continue to improve both our coverage and leverage ratios and manage our balance sheet during the first quarter as we see the benefits from the asset exchanges, our acquisition of retail and wholesale assets and our other strategic initiatives. With that, I will turn it back over to Charles to discuss the COVID-19 impact and the period subsequent to quarter end.

Thank you, Jon. While pandemics may not be a new or even an unusual occurrence, the disruption associated with COVID-19 is certainly unprecedented and has dramatically impacted us all. Given the unique circumstances, we wanted to provide you with additional color today on impact of COVID-19 to the partnership. We typically do not provide this level of detail. But these are unusual times, and we want to be as transparent as possible to our investors. First, in terms of volume, as I briefly touched on earlier, we begin to see dramatic declines in volume around March 12. We are watching volume on a day-by-day basis, particularly at our retail sites, and can see the sudden and dramatic changes happening in the economy in real time. The volume declines, both on a year-over-year basis and a week-over-week basis, accelerated through the end of March, but then began to stabilize at the beginning of April. Since early April, we have seen moderate increases in overall same-site week-over-week volume. Currently, our volumes in the most recent weekly are period off around 40% on a same-site year-over-year comparable week basis. The impact varies by geography. Alabama, for example, is off around 28% on a same-site year-over-year comparable week basis, while our New Jersey sites are off around 58% on a same-site year-over-year comparable week basis. The encouraging news from our volume is that we have seen modest improvement in recent weeks. And as more states look to lift or ease up on lockdown restrictions, we are hopeful that trend will continue. With the completion of our recent retail acquisition, about 25% of our portfolio by gallons is now variable margin. These are either our own retail sites, operated by us or commissioned agents or our variable rate third-party wholesale customers, which we also refer to as dealer tank wagon customers. Given the rapid decline in oil prices that occurred recently, March and April have been an extraordinary period for rack-to-retail margins, which is indicative of the fuel margin that our variable margin business captures. Rack-to-retail margins have come in, in the recent weeks, but still remain quite strong. We would expect the margins to normalize over time, but the rate at which they do is dependent upon a number of factors from the movement of oil prices, overall demand and site-specific competitive factors that, given the current environment, are even harder to predict than normal. The strength of our variable rate margins has significantly offset, but not completely mitigated the gross profit impact of the loss of gallons we have experienced to date. In terms of rent, in April, we saw a modest impact regarding COVID-19-related rent issues. We agreed to rent deferrals on less than 3% of our base rent and granted waivers on under 2% of our scheduled base rent for April. For May, we have had, so far, COVID-19 impacts on approximately $500,000 in rent, representing approximately 8% of our base rent. Of this amount, over half represents rent deferrals to be paid later in the month or later this year. For the most part, our dealer network is in decent financial shape in the current environment given the strong retail fuel margins I touched on earlier. Our rent issues have been primarily concentrated with dealers that, due to the structure of their contracts with us, don't benefit to a significant degree from the current fuel margin environment. In terms of our retail store operations, inside sales at our company-operated sites have remained strong throughout this period. On a same-store comparable week basis, our inside sales are off 5% to 10% from the prior year from the most recent. Our inside sales are a relative bright spot in our overall performance and also demonstrate the resiliency of convenience store sales in general. Operationally, have taken a number of steps to safeguard and protect our employees and our customers. Our retail sites have implemented numerous additional safety protocols and our personnel are vigilant and ensuring we are doing what we can to safeguard everyone at our sites. Office personnel have been working remotely or in the office on rotating schedules and have adjusted to wearing masks while in the office, one of the many changes in our work routines that we are getting used to. Our people are the strength of the organization, and I've been consistently impressed with their spirit and resolve during this trying time. We haven't missed a beat operationally in this challenging environment, and that is due to their constant efforts. For those employees that may be listening in on the call today, thank you. As we stated in our press release, we have suspended our financial guidance in light of the impact of COVID-19 and the uncertainty it has created to what conditions will be going forward. As Jon touched on in his remarks, our liquidity position is strong and has improved relative to year-end and our leverage, when adjusted for our completed acquisitions, is also lower than at year-end. In short, we believe we are well positioned to deal with the challenges we face in the current environment. With that, we will open it up to your questions.

Okay. Well, this is Charles again. So I guess that means that we did an adequate job of addressing everyone's concerns in our commentary. So again, we appreciate your interest in the partnership, and thank you for taking part in the call today.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.