Good morning, and welcome to the CrossAmerica Partners Fourth Quarter and Year-End 2018 Earnings Call. My name is Brandon and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded.

And I’ll now turn it over to Randy Palmer, Executive Director of Investor Relations. Mr. Palmer, you may begin..

Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners year-end and fourth quarter 2018 earnings call. With me today are Gerardo Valencia, CEO and President; Evan Smith, Chief Financial Officer; and other members of our executive leadership team.

Gerardo will provide some opening comments and a brief overview of CrossAmerica’s operational performance and highlights from the year and the quarter, and then we’ll turn the call over to Evan to discuss the financial results. At the end, we’ll open up the call to questions.

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 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 or obligation to update any forward-looking statements. During today’s call, we may also provide certain finance – 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 CrossAmerica website for a period of 60 days.

And with that, I’ll now turn the call over to Gerardo..

Thank you, Randy. Good morning, everybody. We reported our year-end and fourth quarter 2018 earnings results yesterday afternoon, and Evan will go through those details in a few minutes. But first, I wanted to briefly review some of our operating results and highlights from the full-year and quarter.

For the full-year 2018, we reported operating income of $35 million and net income of $5.2 million, driven by growth in both our Wholesale and Retail businesses. Our operating income was $15.5 million and net income was $7.7 million for the fourth quarter of 2018.

Our adjusted EBITDA was $113.4 million for the full-year 2018, an increase of 4% over 2017 and was $30.5 million for the fourth quarter, an increase of 7% over the fourth quarter 2017. Our distributable cash flow for the fourth quarter was $21.4 million.

And on January 29, our Board approved a quarterly distribution of $0.5250 per unit, attributable to the fourth quarter of 2018 that was paid earlier this month. We delivered strong results for the year. We strengthened our coverage ratio and we continue to show momentum with our strategic initiatives. Let me go into some more detail.

If you turn to Slide 4, I would briefly review some of our operating results for the full-year and quarter. For the full-year of 2018, we increased the number of average sites to which we distribute fuel by 5%. This was primarily driven by our acquisition of Jet-Pep site in November 2017.

We grew our volume by 2%, and with increasing volume more importantly, we grew our wholesale fuel margin by 18% from $0.057 in 2017 to $0.067 in 2018. This resulted in a 19% increase in our wholesale motor fuel gross profit for 2018.

In regards to our rental and other gross profit that flows through both our Wholesale and Retail segment, it was relatively flat year-over-year, despite the disruption, while transitioning sites in Florida during the third quarter of 2018 to a third-party multi-site operator, Applegreen. Overall, our gross profit grew by 7% for 2018.

Our general and administrative expenses, excluding separation benefits and acquisition-related costs declined 9% in 2018, reflecting our continued discipline to manage our corporate overhead.

For the fourth quarter of 2018, our wholesale fuel gross profit increased to $19.4 million from $15.4 million in the fourth quarter of 2017, representing an increase of 26%. This was primarily driven by a strong fuel margin of $0.076 for our Wholesale business during the fourth quarter.

We also had a strong fuel margin of $0.171 for our company-operated sites within our Retail segment, which was an increase of 76% over the fourth quarter of 2017. Rent and other gross profit increased 3% when comparing the fourth quarter of 2018 versus 2017.

While we did see an uptick in our G&A expenses in the fourth quarter, this was primarily due to the timing of such expenses. And as I already noted, our G&A declined 9% from 2017 to 2018. We feel very good about our G&A expense level going into 2019. If you would turn to the next slide, I would like to review a few highlights from 2018.

Our Wholesale business continues to do well, and we continue to focus on growing and developing it. Our overall gross profit for the Wholesale segment increased 8%, driven by our motor fuel gross profit. As I noted on the previous slide, we realized both an increasing volume and higher margin per gallon during the year.

This is a result of our initiatives to grow our most profitable gallons and to optimize margin. We also continue to manage our expenses, both in the operating side as well as G&A.

As our overall expenses declined 10% on a reported basis and were down 1%, excluding acquisition and separation benefit charges, this reduction was driven by the synergies that we have been talking about throughout 2018, along with good management of our expenses, both at the operating and corporate level.

Overall, we continue to manage our expenses with discipline. During the third quarter of 2018, we transitioned 43 sites to Applegreen in Florida.

Our team did a very good job to complete the transition of these sites in the third quarter, and we look forward to working with Applegreen into the future, given the strength of their operating capabilities and their investment plans as we have previously discussed. Moving to the next slide.

In December, we announced that we had entered into an asset exchange agreement with Circle K, where we will be receiving 192 U.S. company-operated convenience and fuel retail stores in exchange for 56 U.S.

stores that are part of a master lead where the sites are currently leased from CrossAmerica and operated by Circle K and 17 stores in the Upper Midwest that are currently part of our Retail segment.

As we noted during our call in December, dealers will be secured to operate the sites, while they are under the Circle K ownership and will then be transacted to CrossAmerica. We expect these changes will be done in tranches over a 24-month period.

We have made already significant headway regarding dealerization process and have now signed letters of intent on over 85 of the 192 sites, and we have already converted 38 of these two contracts.

We’re still on track to complete our first transaction in the first-half of 2019, and we are seeing accelerated progress as we have established the blueprint to execute these transactions. We have plans to leverage the Circle K franchise for several of these locations. I also wanted to update you regarding our Alabama site and our synergy capture.

We are currently converting our Alabama sites those that we acquired from the Jet-Pep acquisition to the Marathon fuel brand. We have now sub-branded these sites and will be hard running them between now and this summer.

We had a market launch with all of our operators in the area and have plans to leverage the Circle K franchise for several of these locations. Over time, we anticipate improvements in performance through better operations, better brand recognition and premium fuel penetration. Regarding our synergies.

We have now completed the strategic review of a third of our portfolio. We have identified a few strategic brands to focus our growth and are about to implement new contracts with the oil companies.

Through the first six quarters, since the merging between Couche-Tard and CST Brands occurred, we have captured $9.5 million of cost savings, which was right in line with a plan that we provided to you during our first quarter earning call.

As we enter 2019, we remain confident in our synergy plans, as we believe there are opportunities to further lower our costs and deliver total synergies. If you would turn to the next slide, please, I want to discuss some of our strategies and objectives for 2019. We will continue to deliver growth in our EBITDA.

First, through initiatives that do not require us to access more capital. We will continue to implement our fuel strategic review to capture fuel synergies across our portfolio. We have a great team in Alabama, who are developing excellent operators as we transform our assets, improve our offer and drive more value from all of our sites.

We will continue to implement our asset exchange with Circle K, demonstrating how we can add value together with a General Partner in a seamless and efficient way across the U.S. We will continue to assess third-party transaction for acquisition, as the industry continues to consolidate in the U.S.

We are focusing on improving our coverage ratio and currently expect to maintain our current distribution for unit level in 2019, and we’re expecting to further strengthen our capital structure and deleverage our balance sheet through the year.

Finally, we have been working on our business strategy and we plan to have more details to share with you in the coming quarters. Overall, we finished the year up very well and we were pleased with our overall resource for the fourth quarter. We have a great team.

The base business is strong and we have plans to strengthen it further as we go through 2019. We are working to deliver growth through the capture of synergies working with our General Partner, completing the asset exchange and continuing to drive value from our portfolio.

We are focused on improving our coverage ratio and leveraging the balance sheet. With that, I will turn it over to Evan..

Thank you, Gerardo. If you would please turn to Slide 9, I would like to review our fourth quarter and full-year results for the partnership. As we look at the fourth quarter, we reported adjusted EBITDA of $30.5 million in 2018, compared to $28.6 million in the fourth quarter of 2017, reflecting an increase of 7%.

Our distributable cash flow for the fourth quarter of 2018 was $21.4 million versus $21.7 million in 2017. As Gerardo touched on earlier, both our adjusted EBITDA and distributable cash flow benefited from good results in both our Wholesale and Retail segments, but were impacted by the increase in cash versus equity-funded omnibus expenses.

Our distribution coverage on a paid basis rose to 1.19 times in the fourth quarter of 2018, compared to 1.02 times for the fourth quarter of 2017. And for the full-year of 2018, we reported adjusted EBITDA of $113.4 million, or a 4% increase over the $109.1 million of adjusted EBITDA in 2017.

Distributable cash flow was $78 million for the full-year of 2018 versus $81.2 million in 2017. Our distribution coverage also increased for the full-year, rising to 1.03 times, compared to 0.97 times at the end of 2017.

If you would turn next to Slide 10, we managed the balance sheet very prudently during the fourth quarter and used additional cash flow to pay down revolver borrowings, resulting in a leverage ratio as defined under our credit facility at 4.53 times, down from 4.61 times the prior quarter and in compliance with our financial covenant ratios.

As of February 20, we had $37.1 million available on our credit facility. The partnership paid a distribution of $0.525 per unit during the fourth quarter of 2018, attributable to the third quarter of 2018 for a total of over $18 million, resulting in a coverage ratio of 1.19 times on a paid basis.

As I noted on the previous slide, our trailing 12-month coverage was 1.03 times on a paid basis, up from 0.97 times in the prior trailing 12-month period. In regards to our coverage and leverage goals or targets, we will continue to work to improve our coverage for 2019, targeting 1.1 times coverage ratio.

And for leverage, we expect to continue to move towards our target in the 4 to 4.25 times range. One item that was noted in our 10-K, and I wanted to mention it here is that, our existing credit facility will be maturing in April 2020.

We have recently initiated negotiations with lenders to enter into a new five-year credit facility to replace our existing credit facility and expect to have this completed in the first-half of 2019.

In conclusion, as Gerardo mentioned earlier, we ended 2018 on a strong note and we’re pleased with the underlying performance of our base business during the quarter. As we enter 2019, we should expect that we will continue to improve our coverage ratio and manage our balance sheet and leverage. With that, we will now open it up for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have no questions at the moment. [Operator Instructions] And from Wells Fargo, we have Sharon Lui online. Please go ahead..

Hi. Good morning, gentlemen. I was just wondering if you could provide maybe an update on the sites that were transitioned to Applegreen.

Have you seen, I guess, the change in performance of those sites? And is the plan to transition more sites to Applegreen over time?.

Hi, Sharon, good to hear you. Yes. So we’re doing very well with regards to all the transition to Applegreen. And we have done a lot of work with them to get them settled in. Actually, ironically, after we did the transition, as you might recall, in October, we actually had Hurricane Michael that came through that area.

But I can tell you that, we did that as an opportunity, and there’s a lot of work that we’ve done because of that working together with our oil supplier to actually refresh the image in some of those sites.

There were several that were impacted and we actually did a lot of work through that period of time to make sure that they were actually in a better place. As you know, Applegreen is a very professional operator. And so we’re very pleased and fortunate that we have them in play by the time that Hurricane Michael came through.

And it was, of course, a tragedy for many people within that region. So in terms of the future, I’m actually going to ask George Wilkins. He is our VP of Ops, so he is responsible to working with Applegreen and meeting with them.

And he’s actually had some recent meetings about other areas that I would like him just to talk a little bit about where we are with them.

George?.

Yes. Thank you, Gerardo. I would like to say a couple of things. First, with the Florida sites, we’re working very closely with Applegreen in developing those sites. And their performance in those sites actually have improved since they’ve gone in those sites.

In addition to that, we are looking for strategic opportunities throughout the rest of the portfolio, including these sites that are part of the asset exchange to continue the growth with Applegreen..

Okay, great. And I believe for the asset exchange, you mentioned that you have signed letters of intent for 85 of the 192 sites.

What is your thinking in terms of the timing of the tranches? Do you think it makes sense to split the sites evenly, like two transactions, or – what’s the thinking behind, I guess, as you sign these new operators?.

Yes. So, Sharon, we actually have 88 right now, 88 letters of intent. I said over 85. There’s 88 at this point in time. And what I had in my notes when we initiated the call, we had 38 signed contracts. Right now, we actually have 41. So I’m just saying, we’re moving at pace. We’re moving at speed.

And as we disclosed, we are planning on finishing these within two years. But, of course, it’s in the best interest of Circle K, as well as CrossAmerica to complete these as quickly as we can. And so we have deployed our best people to make sure these happen.

Where we are right now is, if you think about the transaction, this entails nine different business units within Circle K, so we’re working with all of them. So we start – we’ve created a lot of that structure and we have created a process within the organization to make sure that we’re managing that seamlessly.

So this is a transition where their staff and operation that are going to be moving from being company ops to dealers. And we want to make sure that we treat all of the employees in a way that is very respectful, but also seamless to the operation. So we have established all of that process.

And I mentioned the quick ramp-up of contracts, because that’s what we’re seeing now. We started low, because we were setting all of these processes. We’re moving at speed now, and we expect to finish this within two years, but definitely are moving as fast as we can.

We do expect to finish or to close the first transaction, the first tranche within the first-half, and I’m hoping to communicate more details with you by the time that we have our next earnings call..

Okay, great. Thank you..

Thanks, Sharon..

[Operator Instructions] Okay. Showing no further questions at the moment. Randy, we’ll turn it back to you for closing remarks..

Okay. I think I’m going to pass it on to Gerardo. I think he wants to make some closing comments..

Yes. I just wanted to make sure I know we were having some difficulty – technical difficulties. So – okay. So the couple of things that I wanted to mention. First, on the volume front, I just wanted to make sure that I talked a bit about where we are with our volume and margin.

And part of what we have done to improve our overall delivery for the portfolio, we’ve been focusing on quality versus the volume itself. And because of that, there’s initiatives that we’re seeing in Alabama and other places, where we’re actually working to be able to improve the asset base.

And while that means is that, we’re going to get a better margin and better returns from each one of the different sites. So that’s part of what we have been focusing on and we’re going to be sharing more of that as we get into our strategy conversation in the second quarter.

And then just what I wanted to leave everybody with is that, as we talked about, we’re very pleased with having a strong set of results in the fourth quarter. We have a great team.

I’m very proud of the team that we have pulled together, how everybody is very clear about their roles, how we interact with our General Partner and how we have built a strong group of individuals and a strong structure cost organization. And we’re going to keep on focusing on implementing our strategic program.

As we talked about Alabama improvement, the exchange, the fuel synergies, and we’re assessing future transactions. One thing I also missed to mention when we’re talking about the asset exchanges, we are already in motion at looking at other assets that might be a set of future exchanges or future transactions with our General Partner.

And Evan said, we’re improving our coverage ratio and we’re focusing on making sure that we deleverage our balance sheet for the balance of – for the rest of the year. And we’ll have that strategic update for you guys in the next quarter or so..

Very good. Okay, that does complete today’s conference call. We appreciate each of you joining us today. If you do have follow-up questions, please feel free to contact us. Thanks, and have a good day..

Thank you. And ladies and gentlemen, this concludes today’s conference. Thank you for joining. You may now disconnect..