Welcome to the CrossAmerica Partners fourth quarter 2019 earnings call. My name is Ellen 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 Jon Benfield, Interim Chief Financial Officer..

Thank you operator. Good morning and thank you for joining us at CrossAmerica's fourth quarter and year-end 2019 earnings call. With me today are Charles Nifong, CEO and President and other members of our executive leadership team.

Charles will provide some opening comments, a brief overview of CrossAmerica's operational performance and highlights from the full year and quarter and then I will discuss the financial results. At the end, we will open the call up 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 have provided schedules that reconcile these non-GAAP measures with our reported results on a GAAP basis as part of the earnings press release. Today's call is being webcast and a recording of this conference call will be available on CrossAmerica website for a period of 60 days. With that, I will now turn the call over to Charles..

Thank you Jon. We reported our full year and fourth quarter 2019 earnings results yesterday afternoon and I will briefly go through some of the highlights and strategic objectives. Then Jon will go through the financials in more detail in a few minutes.

First, I wanted to say that it is a pleasure to be here this morning and to be back at the partnership. I was previously at the partnership until early 2015 leading the acquisitions, capital markets and strategy functions.

In the period since then, I have been working in the wholesale and retail business with Joe Topper, currently our largest unitholder and Chairman of the Board. Second, I look forward to working with our team here at CrossAmerica.

While there was some transition involved with the Circle K transaction at the senior management level, for the most part the core of the team is unchanged. Dave Hrinak, who was previously at the partnership for over a decade until 2017, is back as Executive Vice President of Wholesale.

Jon Benfield, our Interim CFO has been with for CrossAmerica since its IPO in 2012. So there is a lot of continuity in management and at the same time, a healthy amount of change of leadership that will enable us to examine how we operate to find ways of being better.

As part of his team, I will of course be working closely with Joe Topper, who is very much, along with our unitholders, will be looking to me and our team to increase unitholder value over the long term.

Finally, in my new role, you can expect that I will be spending some time with the investment community as I will be attending investor and analyst meetings and conferences. So I look forward to meeting those of you that I have not met before in the coming months.

With that, let's move on the operating results of the fourth quarter and full year of 2019. If you turn to slide four, I will briefly review some of the results.

For the fourth quarter of 2019, while our wholesale fuel volume was relatively flat compared to the same period of 2018, we did see a decline in the wholesale fuel margin per gallon year-over-year driving our wholesale fuel gross profit down 11% for the quarter.

In the fourth quarter of 2018, we reported a robust fuel margin of $0.076 per gallon, primarily driven by dealer tank wagon fuel margins. During that period, crude oil prices went from $75 a barrel on October 1, 2018 to $45 a barrel on December 31, 2018, an approximately 40% decline. This was a great period for fuel margins on a rack to retail basis.

While we still reported a good wholesale fuel margin of $0.068 per gallon for the fourth quarter of 2019, it was just not as strong an environment as we had the previous year.

If you look at our rental and other gross profit for the fourth quarter, we reported $17.2 million, which was an increase of approximately 10% relative to last year, after adjusting for the new lease accounting guidance that went into effect on January 1, 2019.

For the fourth quarter, we reduced our operating and SG&A expenses by 23% on a combined basis and continue to focus on overall expense control. Our adjusted EBITDA was $25.6 million and distributable cash flow was $18.8 million for the fourth quarter.

Both were impacted by the lower fuel margins and the new lease accounting guidance that I mentioned earlier.

If you move to the right hand side of the chart, for the full year of 2019, we reported an increase of 3% in our wholesale fuel gross profit, led by an increase of 7% in the wholesale fuel margin per gallon, which was $0.072 per gallon for 2019. Our rental and other gross profit increased 6% after adjusting for the new lease accounting guidance.

Rental and other continues to be a significant portion of our overall gross profit and represented 42% of total gross profit in 2019. Both operating and general and administrative expenses declined for the year, down 15% and 6%, respectively.

The decrease in operating expenses was due primarily to divestitures and a dealerization of sites that occurred during 2018 and 2019. G&A expenses primarily declined due to a decrease in acquisition related costs, the synergies resulting from the dealerization of the company operated sites and a decrease in legal fees.

While adjusted EBITDA was down slightly for the year, distributable cash flow increased 5% to $80.1 million. The primary drivers for the increase were a tax benefit related to taking bonus depreciation on assets acquired in the asset exchange and a reduction in operating and general and administrative expenses that I just mentioned.

If you will turn to slide five, I want to revisit a few highlights of 2019. Our wholesale fuel margin for the full year of 2019 was $0.072 per gallon, which was a 7% increase over the full year 2018.

This is the highest level in the partnership's history for full calendar year and this growth in margin per gallon also reflects the impact of the fuel synergies that were mentioned over the past few quarters. As I noted earlier, rent and other continues to be a large part of our gross profit and represented 42% of overall gross profit in 2019.

Our expenses continued to decline in 2019 with an overall decrease of 13%. While there were a number of specific events that took place in 2019 that drove down these expenses, such as some divestitures and a dealerization of our company operated sites, you should still expect that we will continue to be disciplined with our expenses in 2020.

If you turn to the next slide, slide six, I will continue with a couple more highlights from 2019. We completed two asset exchanges with Couche-Tard and Circle K during 2019. One was completed on May 22 and the other on September 5 for a total of 116 sites. These sites are dealerized and are under our wholesale segment now.

On November 19, Joe Topper, our Founder and now Chairman of the Board and his investor group purchased the general partner IDRs approximately 7.5 million common units from Couche-Tard, marking the start of a new chapter for the partnership.

The GP and partnership took another important step forward on February 6 of this year when the IDR elimination transaction closed. As a result, our Chairman and largest unitholder is even further aligned with all of our public unitholders. If you turn to slide seven, I want to outline our key areas of focus in 2020.

First, we are continuing to work on completing the remaining asset exchanges and the agreement that was entered into with Couche-Tard and Circle K in December 2018.

There 76 sites remaining as part of that overall asset exchange and based on our current timeline, we expect the remaining sites to be dealerized and the final asset exchange to be completed by the first quarter or early second quarter of 2020.

While we have previously noted that we expect to complete the remaining exchanges by the first quarter, some of the exchange transactions may move into the early part of the second quarter due to the timing of program.

Second, when we announced the general partner acquisition in November of last year, we also announced another exchange agreement with Couche-Tard and Circle K that entailed exchange of U.S. wholesale fuel supply contracts from Couche-Tard to CrossAmerica with a 17.5% limited partner interest in CST Fuel Supply.

Based on our current timeline, we still anticipate closing on the transaction before the end of the first quarter. We are also working on acquisition of wholesale and retail assets that was announced on January 15, 2020.

This acquisition includes retail operations of 172 sites and wholesale fuel supply for 114 sites that we will be acquiring from entities affiliated with Joe Topper. We continue to expect to complete this transaction sometime during the second quarter of 2020.

With this transaction, we will not only be adding wholesale fuel contracts to our portfolio, but will be adding retail assets and retail capability that will enable the partnership to pursue a broader range of acquisition opportunities and provides greater flexibility for optimizing across the trade for each asset in our current portfolio.

If you please turn to the next slide, slide eight. Once we have completed the asset exchanges and acquisition that I just discussed, our focus will be to make sure that these assets are transitioned and integrated in our business units efficiently and that the assets our positioned for the future.

Next, the real estate optimization is an overall review our real estate portfolio in order to determine if there are properties within the portfolio that may no longer meet our needs or are not assets that we want to hold long term.

This is an initiative that will continue on throughout this year as the real estate portfolio has not been reviewed with this focus in several years. It will help us at the margin to lever as well.

We will also continue to focus on fuel synergies as noted in the past quarters and optimizing our relationships with fuel suppliers and the number of brands that we offer. Finally, I want to conclude by noting that we remain comfortable with the guidance that we provided earlier this year.

With the announced transactions and initiatives, we still anticipate generating between $125 million and $135 million in adjusted EBITDA and distributable go cash flow between $100 million and $110 million in 2020. With that will turn it back over to Jon..

Thank you Charles. If you would please turn to slide 10, I would like to review our fourth quarter and full year results for the partnership. For the fourth quarter of 2019, we reported adjusted EBITDA of $25.6 million compared to $28.7 million for the same period of 2018, representing a decline of 11%.

Our distributable cash flow for the fourth quarter of 2019 was $18.8 million versus $21 million in 2018, also a decrease of 11% year-over-year. Both adjusted EBITDA and distributable cash flow for the fourth quarter were impacted by lower fuel margin and the new lease accounting guidance that Charles mentioned earlier.

Our distribution coverage on a paid basis for the fourth quarter of 2019 was 1.04 times versus 1.16 times for the fourth quarter of 2018. For the full year, our adjusted EBITDA was $103.7 million, representing a decline of 2% with distributable cash flow increasing 5% to $80.1 million.

Our distribution coverage on a paid basis for the full year of 2019 was 1.11 times, which was an improvement over the 1.01 times that we experienced for the 12 months ended December 31, 2018.

As Charles touched on earlier, we have adjusted both the three and 12 month periods of 2018 for the new lease accounting guidance that went into effect on January 1, 2019. We have provided reconciliations for the lease adjustments for 2018 in the appendix of the presentation slides.

If you would turn to the next slide, slide 11, we ended the year with a leverage ratio as defined under our credit facility at 4.70 times and remain in compliance with our financial covenant ratios.

We have sufficient liquidity to execute our plans and as of February 21, we had $79 million available on our credit facility with nominal capacity of $226 million and another $300 million of additional accordion capacity from our lender group under our credit facility.

The partnership paid a distribution of $0.525 per unit during the fourth quarter of 2019 attributable to the third 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 1.11 times on a paid basis for the 12 months.

Our required investment in the business remains relatively modest with total capital expenditures of $24.6 million for 2019 with $22.2 million of that being growth CapEx.

This has been primarily associated with the rebranding and reimaging program in Alabama that has had a positive impact on volumes and margins and the rebuilding in Florida from Hurricane Michael in 2018. In January of this year, we provided guidance that Charles touched on earlier.

Part of that guidance was long term goals for coverage of 1.2 to 1.3 times and leverage of 4.0 to 4.25 times that we will be working toward as we go through 2020 and beyond. In conclusion, we believe we are in good position as we enter 2020.

We expect to continue to improve both our coverage and leverage ratio and manage our balance sheet as we see the benefits from the asset exchanges, the acquisition and other strategic initiatives. With that, we will now open it up for questions..

[Operator Instructions]. We have a question from Dane Reinhardt with Baird. Please go ahead..

Hi. Good morning guys. Just one quick one for me.

I was wondering how much of a step down you guys were expecting in CapEx this year considering that rebranding in Alabama is done? Or if there any expectations for further spending around the acquisitions or asset exchanges that you guys have?.

Thanks, Dane, for your question. I think what we anticipate for 2020 is CapEx to still be higher than it has been historically. We still have some EMV chip card upgrades to do at our dispensers. But you are right, the blip in 2019 from Hurricane Michael and the Alabama rebranding is largely done..

Okay. Thank you. How big is the M&A market for you guys? I know there has been talks with other companies in the market.

I don't know how much you comment on that or how much more you see on that front?.

This is Charles. So obviously we are continuingly being brought deals to us. I would say we touched on our margin, our focus really especially for the first, at least for the first half of the year is on closing the acquisitions that we have already announced and making sure that they are integrated.

And so while we will look at the M&A market, really our focus in on making sure that we close these acquisitions and integrate them effectively into the organization..

Okay. Thank guys. That's it for me..

Thank you..

[Operator Instructions]. Our next question is from Sharon Lui with Wells Fargo. Please go ahead..

Hi. Good morning..

Hi. Good morning..

Just wondering if you could maybe bridge the fourth quarter results to what you are expecting for full year in 2020? I think you mentioned that you are still comfortable with guidance.

Just if you can provide any details in terms of how you would get to like an annualized fourth quarter number versus like full year 2020 of your expectation?.

Well, obviously if you look at our fourth quarter, there are still a number of assets that aren't in there for the acquisitions that we have announced. So we have still got the remaining asset exchanges to complete.

We have got the transaction involving the exchange of the CST Fuel Supply for the national wholesale fuel assets from Circle K come onboard and we have got retail transactions coming over. So there is a lot going on from that.

Annualizing our fourth quarter is not going to indicative of what the partnership is going to look like in a few months when all those transactions come onboard.

So I don't know, I would not say that exercise is, in and of itself, all that useful but if you look again with our guidance that we provided, we provided the impact of what all the things together should do in aggregate also adjusted for the expected timing of when those acquisitions will come online for us..

Okay. So the main benefit would be from those transactions.

Is there any, I guess, underlying assumptions in terms of what margins may look like or expenses?.

Well, obviously on the expense side, I wouldn't -- for the core business that we have in place today, there is not going to be a dramatic change in expense structure there. We will continue to do things to improve on the margin at that.

But you are going to see and particularly with bringing the retail over, that's going to change what our financials look like because there is a cost structure embedded with that that will come over and that will add on the operating expense side and also for G&A, so that those results won't look comparable when you look at the fourth quarter again.

But net net, those transactions are positive for us and will result in an increased EBITDA for the partnership..

Okay. And then just I guess a question on maintenance CapEx. It increased during the fourth quarter.

Is this a good run rate going forward?.

So, on maintenance CapEx, Sharon, I think what you should see is, we have been in that $1 million to $2 million territory for a number of years now. I think that's what we would anticipate going forward with the exception that bringing on the retail will bring with it some maintenance CapEx as well..

But again, I would reiterate that the expectations for that maintenance CapEx are already built into the numbers that we provided for guidance, particularly as it relates to the distributable cash flow numbers that we put for guidance for full year 2020..

Okay. All right. Thank you..

[Operator Instructions]. I am showing no further questions in queue at time..

Yes. So for everyone out there, thank you for joining us today. We appreciate your interest in the partnership. We have a lot of work to do this year and we are working hard to execute our plans.

And then for our investors on the line, we want you to know that we are focused on our ultimate goal of creating value for you, our unitholders and that's the focus of what we are trying to do here at the partnership..

Thank you for joining today's call and if you have further questions, please don't hesitate to reach out to us. Thank you very much..