Hello and welcome to the CrossAmerica Partners First Quarter 2019 Earnings Call. My name is Rena and I’ll be your operator for today call. 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.

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 first quarter 2019 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 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 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.

I should also note that in February 2016, the Financial Accounting Standards Board issued ASU 2016-02 leases or topic 842, this standard modifies existing guidance for reporting organizations that entered into leases to increase transparency by recognizing lease assets and lease availability on the balance sheet and disclosing key information of our leasing arrangements.

This guidance became effective CrossAmerica on January 1, 2019. We have provided disclosure regarding this new lease, a guidance and our filings and in the presentation slide that I mentioned earlier. 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’ll now turn the call over to Gerardo..

Thank you, Randy. We reported our first quarter 2019 earnings results yesterday afternoon and I will briefly go through some of that highlights and then Evan will go through financials in more details in a few minutes. If you turn to Slide 4, I will briefly review some of our operating results from the quarter.

Soft industry demand and margins impacted our first quarter results but we have solid business fundamentals and strategic programs to support our growth for the balance of 2019 which I will cover shortly. For the first quarter, we reported operating income of 7.6 million and net income of 200,000.

This confers to operating income of 7.4 million and a net loss of 800,000 for the first quarter of 2018. Our adjusted EBITDA was 21.4 million for the first quarter of 2019, a decrease of 18% from 2018. These were largely impacted by the negative effect of the new lease accounting guide lines, which was approximately 1.8 million for the quarter.

Then about 3.3 million from the decision to sell the Omnibus Agreement in cash rather than in unit in the first quarter of 2018, there was also a termination of a low margin contract which contributed to about 0.3 million in the first quarter of 2018. We were also impacted by 0.4 million from asset divestments from the SEC mandate.

We offset some of these impacts through our margin optimization efforts which I will address shortly. Our distributable cash flow for the first quarter was 13.3 million and on April 25th, our board approved a quarterly distribution of $52.50 per unit attributable to the first quarter of 2019 that will be paid later this month.

For the first quarter, our wholesale fuel margin was $0.64 per gallon which was a 12% increase over the first quarter of 2018. Our gallons distributed declined 7% for the quarter. The volume decline was mainly associated with our margin optimization efforts together with soft demand across the industry.

While we do normally experience some seasonal weakness during the first quarter, these were compounded by some unfavorable weather across several regions along with our rebranding and development programs in the south Alabama and Florida that produced some downtime at some of our sites.

Regarding industry demand that EIA's gasoline product supplied in the first two month of the year is down by about 2%. When weighing for the CrossAmerica volume mix across the country, industry demand was also about a 2% decline across our portfolio. Despite the decline in volume, our fuel gross profit still increase 3% for the quarter.

To give you some indication of our optimization effort, in Alabama, while our volume declined by 60% in the region versus 2018, our EBITDA for the first quarter of 2019 more than doubled from the first quarter of 2019. The decline in our rental and auto gross profit during the first quarter was primarily driven by the new lease accounting guidance.

We continue to focus on discipline operations to drive both OpEx and SG&A cost efficiencies. As mentioned earlier, we have solid business fundamental and strategic program to support our growth for the balance of 2019. These should provide momentum in the near future.

If you would turn to the next slide, I want to discuss some of our strategic initiatives. To start regarding our previously announced asset exchange, we're progressing to obtain returns in the higher end of the range that we communicated to you previously and we expect to finish ahead of plan.

We have completed transitioning the first 60 sites to dealers and we expect these will be the first tranche of the average change. We're completing our final due diligence and expect to have a first transaction finalizing in coming week. Aside from the first transaction of the balance of sites, we already have 64 signed letters of intent.

And of these, we have signed 25 contracts already with dealers for the second tranche of the asset to be exchanged. Currently, we see high and likelihood of finishing much faster than the 24 month that we originally announced. We continue to work with our general partners to find additional growth opportunities.

Regarding our second strategic initiative, we have now completed our fuel supply strategic review that entails about 320 million gallons of fuel or roughly a third of the gallons that we distributed on an annual basis. We are finishing the implementation of the new contracts and we expect to have the impact of this following our second quarter.

The value of the synergy is in line with what we have previously communicated. As you can see on the charts of the bottom of this page, we have streamlined the portfolio of brand to focus on fewer strategic brands for us into the future.

We could see additional value as we will be refreshing or reimaging a large number of the sites coming out of these review. Moving to the next slide, we're continuing to implement a transformation of our Alabama business. We have changed dispenser in our half of the network.

These have some plans impacting our volumes as mentioned before, but a very dispenser [indiscernible] business it is during this period of the year. We're seeing very good results form a profitability standpoint.

We're progressing with completing our Marathon hard branding as well as a reimaging of this site and the network as you can see in the slide. We expect to complete this work by the third quarter of this year.

Regarding our exit of retail company operations, we have signed the letter of intent with a strong operator around the balance of the Company operated network of site that we have in the upper mid west post asset exchange. As a result, we refer to separation benefits cost totaling 400,000 in the first quarter of 2019.

We are in fact [indiscernible] company operations by the end of the year. Finally, regarding our base business improvement, we continue to progress franchising of sites in our portfolio.

We just signed the first 8, have 24 contracts pending signature and have an aspiration to finish this year with over 75 new franchised sites with the Circle K family of brands.

We have now established strategic collaboration with fuel brands after our strategy fuel supply review, and we're working very closely with these brands to ensure we do an excellent job of implementing their program to the end consumers and capture all the value from these brands. If you would turn to Slide 7, I want to review our long-term strategy.

We have now completed our strategic review and we have plans to become the best branded fuel wholesaler in North America. The key point I want to share with you today either we're one of the largest branded fuel wholesalers across North America and we're likely the one with the largest portfolio of control properties.

So, these provide stability for our renewals and also less volatility in our earnings. We also have access to a leading Back Court C-Store offer through the family of Circle K brand. We will deal on our culture and people at the platform. We're marketing focused company not a midstream company. We will win with our customers, our brands and our offer.

The five pillars that you see in slide disciplined operational efficiency, rigorous operational excellence, strong customer portfolio, compelling value proposition and advantaged asset portfolio will help us to offset the fuel industry decline, capture rent growth and maintain our fuel margin.

Then on top of that there are three areas of growth organic growth, then growth with Circle K and finally inorganic growth. All of this together will allow us to grow our adjusted EBITDA between 5% to 16% compound annual growth rate in the next few years.

We're aiming to get our covers to at least 1.1 times and get our leverage down to between 4.0 and 4.25 target level. This includes we are ahead on our original schedule and better than planned in several of our initiatives which will contribute to our performance in the next quarter and into the future. With that, I will turn it over Evan..

Thank you, Gerardo. If you would please turn to Slide 9, I would like to review our first quarter results for the partnership. As we look at the first quarter, we reported adjusted EBITDA of $21.4 million in first quarter of 2019 compared with $26 million in the same period of 2018, reflecting a decrease of 18%.

Our distributable cash flow for the first quarter of 2019 was $13.3 million versus $16.7 million in 2018. As Gerardo touched on earlier, both our adjusted EBITDA and distributable cash flow were negatively impacted by the new lease accounting guidance and I will walk through those specific in a few minutes.

Our distribution coverage on a paid basis for the quarter of 2019 was 0.73 times and was 1.03 times for the trailing 12 months, which was an improvement over the 0.96 times that we will experience for the trailing 12 months March 31, 2018.

If you would turn to the next slide, Slide 10, we ended the first quarter with the leverage ratio as defined under our credit facility at 4.81 times, an increase of 4.53 times with the prior quarter and in compliance with the financial covenant ratios. As of May 2nd, we had approximately $21 million available on our credit facility.

As I noted during our yearend earnings call, we were in negotiations with our lenders to enter into a new five year credit facility to replace our existing credit facility. We have now completed it and have a new $750 million credit facility that matures in April 2024.

I will not go through all of the points and benefit of this new credit agreement listed on the slide. However, I would just say that we’re pleased to finalize this new agreement with our banking partners and this provides us with financial flexibility and increases our borrowing capacity going forward.

The partnership paid a distribution of $52.05 per unit during the first quarter of 2019 attributable to the fourth quarter of 2018 for a total of over $18 million; and as I noted on the previous slide, this resulted in a coverage ratio of 1.03 times on a paid basis for the trailing 12 months.

If you turn to Slide 11, I will review the lease accounting guidance that went into effect on January 1 of this year. Prior accounting guidance effectively resulted in our previous sales-leaseback transactions being accounted for capital leases.

With rent payment paid under the lease back in characterized as principle and interest neither of which impacted EBITDA. Under the new guidance, the same rent payments are now characterizes as rent expense, which reduces EBITDA primarily within the wholesale segment.

There is a significantly lesser impact on distributable cash flow as the portion of rent payments previously characterized as interest expenses as always reduced DCF.

From gross profit standpoint, it reduces rent and other approximately $6.7 million to the wholesale segment and $0.5 million for the retail segment based on our full year 2018 results and we expect a similar impact to our 2019 financials.

Moving to the next slide, we demonstrate the impact of the new lease accounting guidance based on our full year 2018 results.

The adoption of the new lease standard, if it has been adopted January 1, 2018, would have been approximately $7.2 million to the adjusted EBITDA line, $1.7 million to the distributable cash flow line and an impact of 0.02 times to our covered ratio.

If you turn to Slide 13, you can also see our reported results for 2019 compared to the first quarter of 2018, as adjusted for the impacted of new accounting guidance. Approximately $1.8 million to the adjusted EBITDA line, $0.4 million to the distributable cash flow line and an impact of 0.02 times to our coverage ratio.

In conclusion, as Gerardo mentioned earlier, we continue to make a great deal of progress on our strategic initiatives, providing us with momentum as we enter the spring and summer driving season.

From a financial perspective, we should expect that we will continue to improve our coverage ratio and manage our balance sheet leverage as we go through the remainder of 2019. With that, we will now open up the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ben Brownlow of Raymond James. You may go ahead..

On the exit of the retail ops, can you give any color around the terms there as you move those retail sites to wholesale?.

I’m very pleased about it. We're very pleased about it that we have secured a very strong operator for those sites. So, we're expecting to be able to do is to get better returns from those sites. They will be getting better returns on these sides.

So we should -- we expect to get very good returns as well ourselves by being able to lease this site to these operators.

And then, there will be some cost that we will be avoiding of course on some point of overhead that we will not be requiring and so that should -- if you think about, if you look at our numbers and you can see the overhead that we have in the retail business and SG&A in retail business, and what we have for the rest of the forward organization.

So, there is definitely benefit that we expect to generate some of that, but we're expecting to see also, as I was discussing before, a very strong contributions from these sites, once we convert them over to an operator which should be in the same line as what we get from another sites in the network from a wholesale standpoint..

Thank you. Our next question comes from Walter Morris with Baraboo Growth. Please go ahead..

I have calculated that roughly 80% to 85% of your cash flow outside of minor seasonal variation and long-term modern shift and gas demand trend as essentially fixed.

If so the stability of your cash flow upon which the distribution is based is extremely high quality and presumably justifies a relatively high valuation, almost certainly justifies some premium to your comps.

In light of that, why does your stock trade with a 12.3% yield significantly higher than Sunoco at 10.9% and 10.3%?.

Yes. So, thanks for the question, Walter, and I’m very glad you're doing a lot of your research and you understand our business very well. So, I have the same question that you have yourself in your mind. And -- but in -- the way that I see you, Walter, we need to deliver what we said we will, and I’m seeing all of these coming through.

So, if I reflect in this quarter as I was -- we were discussing, so there were some seasonal impact, but we have several strategic initiatives that are coming through and we’re just about to start seeing them materializing. So, I’m expecting to get --- we’re expecting to get a first tranche of the asset exchange announced in the very near future.

And so, that would have helped us to start implementing this. Then there is also the fuel synergy that we’ve been talking about. We saw a very small amount of that, very, very small amount of that already circling in the first quarter, but that’s considerably growing the second quarter. So, that's number too.

And then, we’re going to see a lot of improvements that the team is doing already in the Alabama business as we discussed in some of those lines. So, that will materialize as well. So, what I’m making sure that we are continuing to do is to remain focus and making sure that we implement all the growth initiatives that we have in place.

But aside from that, Walter, I’m in the same place you are, which is, I have a very strong level of confidence on what we have from a cash flow standpoint of a quality of our income with strong operators and we will continue to improve on that. And we’ll start to see some of that growing into the future as we implement the strategic initiatives.

So, that’s my perspective, Walter..

In light of that and now that you’ve established the template for the drops.

Are you going to significantly increase your investor outreach program to educate the investment community about the quality and consistency of your cash flows and the growth potential of the enterprise going forward? And finally, I just wanted to make sure my math on the first quarter numbers was right.

When I add back the change on a just year-over-year for the difference in the lease expense and make the adjustment for equity funded expenses that were paid in stock last year, and for the most part paid in cash this year.

I show an adjusted EBITDA number that was essentially flat year-to-year as well as the distributable cash flow number that was essentially flat.

Is my math correct?.

Walter, this is Evan Smith.

As we -- after we announced the first tranche and can provide more details of this first transaction and more guidance around the -- more details around the guidance that Gerardo spoke about regarding the multiyear strategy, that will -- included in that will be more investor outreach to focus on the fix nature and the high quality of the cash flow strength.

Regarding the, your second point….

Regarding the adjusted EBITDA, you’re absolutely right. When you add back the 1.8 and adjust for the 3.3 of Omnibus charges that were settled in unit, we are much more in line year-over-year on adjusted EBITDA.

Just to be clear from a distributable cash flow perspective, on the impact of the new lease guidance, it’s only a $400,000 reduction as opposed to the full 1.8 million as shown in the investor slide. So, I just want to make sure that’s clear..

Thank you. [Operator Instructions] You have question from Sharon Lui of ‎Wells Fargo. Please go ahead..

I am just wondering, what your expectations are in terms of coverage with the first tranche? Coverage was a bit like the supporter. Do you anticipate it to go back to where levels were in the back half of 2018? And in terms of the timing of the asset exchange, I think, previously you said it was over a 24 month period.

When do you expect it to be completed at this time?.

Let me start addressing then the pace of the asset exchange, Sharon. So, I want to say that what we announced before whether we were going to complete this in the 24 month after we announced it in the December 17th. We also announced that we have plans to complete that first tranche in the first half of the year.

So, where we always -- I have very high level of confidence that we will be able to announce the first tranche in the next few weeks, so that we will be doing within the first half. I don’t see a lot of risk for that to happen. I do expect these to be the case. So, we're very, very close.

We're just missing a couple of asset due diligence pieces that we're working on. And then with regard to the balance, we have already started the -- signed several letters of intent as we discussed, over 60 already. And then, we have over 20 contracts, 25 already signed, so which will be the foundation for the second tranche.

So, I have a very high degree or high level of confident that we're going to be able to complete the faster than what we have originally announced, Sharon, and considerably faster than what we have originally announced.

And then in terms of the -- what we're seeing, so we took a little bit of time in this part of the year to make sure that we have the right operators. And so, George Wilkins and his team, our COO and his team, have been working on, being able to get all of the right operators into these locations. So, we're seeing very good results.

Now, these sites have been dealerized. So, I’m very excited to have them as part of the organization now, and financially, we expect these to the in the high end of what we announced before. So, bottom line, we expect some strong results from these sites that we expect to finish faster than what we have originally said.

So, that’s in terms of facing and what we're seeing from the transaction. So, in terms of the distributable cash flow or the coverage ratio, so I’m going to say, we did have, as you guys know, the first quarter is typically a very seasonally low quarter for us.

And as we were describing earlier, so these were even further impacted by some seasonal effect. I mean I don’t like talking about weather, but weather happens and people don’t go out and they don’t shop and they stay home. And so that started impact us. As we discussed, the EIA volume was down 2% for the first two months of the year.

So, we spoke with the suppliers and they felt this impact too. So, it's something that we see seasonally happening so we do expect to have, I mean, as we look at our trends in the last few years. You can see that -- you can see that cover was considerably lower in the first quarter versus what we saw in next quarters.

So, we remain focused on delivering for the long-term. So -- and again, this is something that we know happen with some of our ability especially in this first quarter for us.

Anything else, Evan?.

No, I think that's highlighted. Just a seasonality in the first quarter, the trailing coverage ratio was over 1 like the prior quarter and we would expect that to maintain through the rest of the year..

Okay, great. And then on Slide 7 where you layout your long-term strategy, there is an EBITDA growth target of 5% to 15% CAGR.

Can you maybe talk about how you get to that range? Is it assuming I guess the asset exchange as well as potential third-party acquisition? Or do you bake-in any potential additional drop downs from the GP to get to that guidance range?.

Yes, yes, very good question, Sharon. So, what we have been doing -- so, we did a lot of work behind it, so it’s a very simple slide, but there is a ton of work that we have done behind the scene.

And George and his team, across the country, also the directors are starting the process of actually embedding this at a very detailed level in each one of the different region that we have.

So, all of these directors, I’m working them to be able to understand exactly at each one of the deeper in area, what’s our plan to improve our portfolio and do those slides and there is additional components as talked about and then grow.

But then, the growth as you see in that slide, so there is in the bottom left -- so, those five pillars that are the foundation. So, when that’s going to allow us to do is to make sure that we offset the industry.

So, if you think about fuel volume, fuel volume in the industry is likely going to be declining in the future because of the efficiency as well as some of the some mandates -- so some of the mandates for fuel efficiency as well as some of the change of the vehicle fleet over to electric vehicle. So, this is small decline that we’re expecting.

That’s going to help us to offset that, but that’s nonmaterial growth is just making sure that we have a strong foundation. What's really going to propel the growth that you’re seeing there, in the early years, it's going to be things like the fuel synergies that we have been discussing about that don’t require capital.

And then also in the early years, we’re going to be doing half of the exchanges that will be -- that’s, our goal is to do asset exchanges that would align our portfolio and that will Circle K.

So, we’ll be doing some of that in the early years, but then as we go into the future there’ll be more and more organic growth, which is we have a team of people that are growing in the market. We have dealers. They're successful. So, we're going to be growing with them as we developed that. And then there is third-party acquisition.

But to be fair, what we’re seeing right now in the market is very, very high multiples, and I want to make sure that we’re very disciplined about growth. And what you would or should remember that in the fourth quarter last year, there were some very strong retail fuel margins, some of the strongest in the history.

So, we just need to be careful about we assume for a future brand new acquisition. And there, we’re seeing some people in the market and we’re just want to be careful about just is doing that things right. So -- but that's a longer-term we know, my view right now is at the market is very frothy, but it's like everything else goes through cycle.

So, we don’t need to go straight into the market to raise the capital to get some of these right now. But definitely, there is some of that going to the future..

We have another question from Ethan Bellamy of Baird. Please go ahead..

With respect to the incentive distribution rate, there is obviously trend within the space of getting rid of those, another, they're -- all that meaningful from the cash flow prospective now, but just curious about the ultimate disposition of those?.

Ethan, this is Evan. It's something we look at, evaluate and discuss with our general partner, but you're right at this point the burden is very low because we're in the low split and it's a fairly small amount. So there's not been any long-term decision made there..

Our next comes from Ben Brownlow of Raymond James. Please go ahead..

Thanks for taking my follow up. Just on a strategic review with the fuel supply that is not going to complete into this quarter.

Can you remind us how of the annual step up in synergies for this year is related to that review and just your confidence level seems like it's just kind of a line up to hit the top end of that $14 million target this year?.

Yes, Ben. So, I think you put on, so I think that we -- since July 2017, we have captured close to 10 million of synergies with that both our costs as well as some of fuel distribution. And what we stated is that, we would capture between 11 million and 14 million by the end of this year.

And I’m very confident that we will deliver on that plan as well as on the things that we talked about for years to come. So, basically, the results that we're seeing, so we looked at some of that -- so, as looking at all of the brands and what we worked on and the contract that we're working on to implement, so we're seeing strong results of that.

And I would say, if I'd describe it before, it was at tail end of March, we already starting implementing some of it. So, we should see a very -- I am expecting to see a considerable impact flowing into the second quarter of April, May, June already..

And just to be clear, the sub jobs or terms that are from the Alabama sites, that $1.1 million benefit that was part of that total kind of fuel strategic review?.

No, what we're focusing on right now, so the strategic review that we're describing now is additional 307 or so sites. So, we started with really 5 sites, but these were not inclusive of the Alabama one. So, the strategic review that we're conducting right now is exclusive of that, Ben.

So, we're really just talking about now where we're going to be getting from looking at additional sites. So, it's nothing to do with the Alabama markets in specific..

Thank you. I show no further question at this time..

Okay, thank you, operator. Let me turn it over to Gerardo for some closing comments..

Yes. So, I just wanted to just say before you leave you guys. So, we experienced some seasonal loss as we discussed and that were further impacted by softer-than-normal industry demand.

However, we have a very strong progress in our strategic initiatives, we have focused that what I want to make you understand that we all have very clear focus [indiscernible] and we will continue to have it.

So, we are implementing the largest site acquisition in the history of the partnership, so, these 192 sites that we’re bringing along, and as we discuss, we're dealing for future growth across whole asset of the organization, just setting up this organization for growth and knowing, how to convert sites and dealer to company operation.

We’re capturing fuel margins with the strategic fuel supply. We’re finishing implementation of Alabama. Transitioning the convenience operation through stronger operators that we’ve discussed and the strategy going to be embedded in each one of the territories that where we operate owned by each director to deliver growth from bottom up.

And then lastly, I’m going to say, we do have a great culture and we have the best in the industry. So, that'd make me very proud, but also give me a high degree of confidence that we have the right strategy, the right team, and that we have already takes to become the best fuel wholesaler in North America.

Thanks for the time and look forward to seeing some of you guys in the near future..

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