CrossAmerica Partners Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 3 speakers on the call.

Operator

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.

Speaker 1

Thank you for joining CrossAmerica Partners' Q2 of 2023 earnings call. With me today is Charles Nifong, CEO and President. We'll start off the call today with Charles providing some opening comments and an overview of CrossAmerica's operational performance from the quarter, And now 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 CrossAmerica website.

Speaker 1

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 ks 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 CrossAmerica's management as of today's date, and the organization disclaims any intent for obligation to update any forward looking statements. During today's call, we may also provide certain performance measures We do not conform to U.

Speaker 1

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 CrossAmerica website for a period of 60 days. With that, I will now turn the call over to Charles.

Speaker 2

Thank you, Maura. As always, Maura and I appreciate everyone joining us. We thank you for making the time and your schedule to be with us this morning. During today's call, I will briefly go through the operating highlights for the Q2. I will also provide color on the market and a few other updates similar to what I provided on previous calls.

Speaker 2

Laura will then review in more detail the financial results. Now if you turn to Slide 4, I will briefly review our operating results. For the Q2 of 2023, Our wholesale fuel gross profit declined 6% to $17,900,000 compared to $19,000,000 in the Q2 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 31,700,000 A decrease of 5% when compared to the $33,500,000 of wholesale gross profit in the Q2 of 2022.

Speaker 2

Our wholesale fuel margin declined 8% from $0.89 per gallon in the Q2 of 2022 to $0.082 per gallon for the Q2 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 in lower cost of motor fuel during the quarter and the corresponding decrease and the dollar value of the terms discount on certain gallons purchased during the quarter. Although not directly evident in the results this quarter, We also continue to benefit from improved fuel sourcing costs, and we had success during the quarter in our continued efforts to lower our cost of product. Our wholesale volume was 218,100,000 gallons for the Q2 of 2023 compared to 214,400,000 gallons in the Q2 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 Q4 of 2022, partially offset by the conversion of certain lessee dealer locations to our retail class of trade.

Speaker 2

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 Q1, Same store volume in the wholesale segment was down approximately 4%. So the 2nd quarter results represent an improvement in our same store volume on a sequential basis relative to the Q1. 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 Q2, which also represents a sequential improvement from the Q1 overall same store volume, which was down approximately 2%.

Speaker 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 comments. Regarding our wholesale rent, our base rent for the quarter was $13,100,000 Compared to the prior year of $13,600,000 a slight decrease due to the conversion of certain lessee dealer sites Company operated location. 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 percent or $10,600,000 when compared to the Q2 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.

Speaker 2

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 Q2 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.

Speaker 2

I noted earlier in my wholesale segment comments On our success and our efforts to lower our fuel sourcing costs, we also benefit from these efforts in our retail segment fuel margins as well. In the period since the quarter end, retail fuel margins have generally been somewhat lower than the results from the Q2 and lower than the extraordinary fuel margins of the Q3 of last year. For inside sales on a same site basis, our inside sales increased 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, 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.

Speaker 2

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 site 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.

Speaker 2

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. 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 class of 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 Q2 last year, have been performing well since the quarter end relative to last year and national volume data.

Speaker 2

Recycling capital in our portfolio continues to be a priority for us as we constantly evaluate our sites. During the Q2, we divested 6 properties for $7,800,000 in proceeds. We seek to maximize the value from our locations through evaluating our sites' long term potential with a goal to divest sites Where we determine 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.

Speaker 1

Thank you, Charles. If you would please turn to Slide 6, I would like to review for Q2 results for the partnership. We reported net income of $14,500,000 for the Q2 of 2023 compared to net income of $14,000,000 in the Q2 of 2022. The increase in net income 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 $42,200,000 for the Q2 of 2023, which was an increase of 2% when compared to adjusted EBITDA of $41,400,000 for the Q2 of 2022.

Speaker 1

Our distributable cash flow for the Q2 of 2023 was $30,400,000 versus $32,400,000 for the Q2 of 2022. The decrease in distributable cash flow was primarily due to the increase and cash interest expense that impacted our 2nd quarter net income. Our distribution coverage for the current quarter On a trailing 12 month basis, our distribution coverage was 1.68 times for the 12 months ended June 30, 2023, compared to 1.48 times for the comparable period ended June 30, 2022. The business overall continues to benefit from the strategic initiatives and growth opportunities we have acted upon over the past 3 plus years, continuing to result in the strong distribution coverage ratio statistics. The partnership paid a distribution of $0.525 per unit during the Q2 of 2023 attributable to the Q1 of 2023 for a total of almost $20,000,000 Charles discussed some of the primary drivers of our top line and gross profit performance for

Speaker 2

the quarter

Speaker 1

earlier. Turning to the expense portion of our operations. Operating expenses for the Q2 increased $7,600,000 compared to the 2022 Q2. $6,800,000 of that increase was in the area of company operated locations in our Retail segment. Of that increase, dollars 4,100,000 was operating expenses attributable to sites that were recently converted 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 as they are converted to company operated locations.

Speaker 1

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 We're also impacted by higher wages, though at moderating increases compared to those experienced in 2022. Our G and A expenses increased $1,800,000 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 to improve the efficiency and effectiveness of our organization.

Speaker 1

Moving to the next slide. We spent a total of $5,300,000 on capital expenditures during the Q2 with $3,900,000 Of that total, we are seeing growth related capital expenditures. This was a decline from the Q2 of 2022 spend of $7,500,000 which included spending for our rebranding efforts related to the acquisition of assets from 711 in 2021. During this past quarter, growth related capital spending includes 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 was $761,500,000 down from $785,500,000 a year ago as of June 30, 2022.

Speaker 1

Over the course of the past year, we've managed to pay down approximately $24,000,000 of debt, while completing a nearly $30,000,000 acquisition in the Q4 of 2022 and continuing to invest in our business. This deleveraging has resulted in our credit 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 30, 2023, taking into account the interest rate swap contracts the partnership currently has in place, Our effective interest rate on the Cabell credit facility was 5.1%, which is an attractive rate against the current rate backdrop.

Speaker 1

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 4 times and a strong balance sheet with a continued focus 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 With that, we will open it up to questions.

Operator

Thank you. We will now begin the question and answer session. There appear to be no questions. You may

Speaker 2

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.

Operator

Ladies and gentlemen, this concludes your conference for today. We thank you for participating and we ask that you please disconnect

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Key Takeaways

  • Wholesale fuel gross profit declined 6% year-over-year to $17.9 million, driven by an 8% drop in fuel margin amid lower crude oil prices, partially offset by a 2% increase in volume.
  • Retail segment gross profit rose 19% to $10.6 million with fuel and merchandise margins both up 20%, despite a 1% same-store volume decline versus last year and post-quarter volumes up around 7%.
  • The company converted approximately 40 lessee dealer and commission sites to company-operated retail locations, aiming to boost long-term profitability and value with minimal upfront conversion costs.
  • Net income reached $14.5 million and Adjusted EBITDA grew 2% to $42.2 million, while distributable cash flow was $30.4 million and the trailing-12-month distribution coverage ratio improved to 1.68x from 1.48x.
  • Debt leverage decreased from 4.5x to 3.9x over the year, with an effective interest rate of 5.1% on the credit facility thanks to interest rate swaps, and the partnership divested 6 properties for $7.8 million to redeploy capital.
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Earnings Conference Call
CrossAmerica Partners Q2 2023
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