Good morning, and welcome to the CrossAmerica Partners' Second Quarter 2020 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’ll conduct a question-and-answer session. Please note, this conference is being recorded.

I will now turn the call over to John Benfield, Interim Chief Financial Officer. You may begin, sir..

Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners' second 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 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. 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, John. I appreciate everyone joining us this morning. We thank you for your interest in the partnership and hope that you all are well. During today's call, I will briefly go through some of the operating highlights for the second quarter.

I will also provide some color on the impacts from COVID-19, along with a few other updates along the lines of what I provided in our first quarter earnings call. John will then review in more detail the financial results. If you turn to Slide 4, I will briefly review some of our results from the quarter.

For the second quarter of 2020, our wholesale fuel volume increased 1% when compared to the second quarter of 2019, largely due to the impact of acquisitions and exchanges that were completed over the past months offset by the impact of COVID-19.

While we only experienced a slight increase in overall fuel volume for the quarter, we saw a strong increase in our wholesale fuel margin per gallon year-over-year, driving our wholesale fuel gross profit up 48% for the quarter.

In terms of volume, given the changes in our business and asset mix, the overall volume comparison to prior quarters is not particularly useful. As I did last quarter, I will provide some color on same-site volume performance to provide more insight on business conditions.

In terms of same-site year-over-year volume performance, weekly volumes at the start of April were off 45% to 50% on a comparable week year-over-year basis. Since that low, weekly fuel volumes have improved consistently on a week-over-week and year-over-year comparable week basis.

In recent weeks, same-site year-over-year comparable week volumes have been off in the high single-digits to low double-digits compared to the prior year.

In other words, our same-site weekly volumes have increased from a low of being down around approximately 50% to the prior year to now being down around approximately 10% compared to the prior year, which is a substantial improvement.

Our wholesale fuel margin of $0.108 per gallon, an increase of 46% year-over-year, was primarily driven by our dealer-tank-wagon fuel margins, which, as a reminder, our variable fuel margin accounts with certain of our third-party wholesale dealers and also how we supply our company-operated in commission retail sites.

The percentage of our wholesale fuel gallons that is variable, our dealer-tank-wagon price also increased with our recent retail and wholesale acquisition. It is now approximately 28% of our overall gallons compared to 70% for the first quarter of 2020.

As in the first quarter, the strength of our variable rate margins helped to offset the loss in volume we have experienced due to COVID-19. In terms of margin, the margin environment at the start of the quarter in April was very strong given the continued decrease in crude oil prices during April.

Crude oil prices have stabilized and increased since then, which tends to lower our fuel margins. The overall margin environment since May, and continuing past the quarter end, has been in a more historically normal range. Fuel margins, although good, have not been extraordinary in this period as they were in March and parts of April.

Additionally, if crude oil prices stay where they are, the terms discount component of our fuel margins will be lower relative to the prior year.

If you look at our rental gross profit for the second quarter, we reported $14.3 million, down 6% year-over-year due primarily to the termination of leases at sites in connection with the retail and wholesale acquisition. We now operate, operate, rather than mid of these sites.

And the underlying economics of the sites have not changed, but the transaction has resulted in effectively moving to the revenues recorded on the income statement for these sites. In terms of rent, April and May was a peak period of rent-related issues.

In June and July, we saw a steady improvement in our rent collection performance, with July not being far off of our historical performance in terms of rent collection. Overall, we provided approximately $500,000 in rent waivers for the quarter or approximately 2% of our base rent.

In addition, separately and reflected in our G&A expense, we recorded an approximately $500,000 bad debt expense or 2% of our base rent for the quarter. Offsetting these drivers was the impact from our closed asset exchanges with Circle K and the conversion of company-operated sites to dealer-operated sites in the third quarter of 2019.

For August, although it is early, it would appear our rent collection is in line with July, so within our historically normal performance. For the second quarter, we did see an increase in both our operating and SG&A expenses.

The increase in operating expenses was primarily driven by the increase in our average company-operated site count year-over-year from 55 sites to 128 sites as well as the acquisitions and exchanges that were – and increased our overall number of controlled wholesale sites.

In addition, we had an $800,000 increase in management fees recorded in operating expenses related to the increase in headcount associated with our recent acquisitions.

Contributing to the increase in SG&A expense was $500,000 credit loss expense associated with COVID-19 pandemic, which I mentioned moments ago, and a $400,000 increase in management fees related to the increase in headcount. Our adjusted EBITDA was $27.7 million and distributable cash flow was $26 million for the second quarter of 2020.

If you turn to Slide 5, as we noted during our last earnings call, we completed our acquisition of retail and wholesale assets on April 14. With this acquisition, we now have 150 company-operated sites in our retail segment, an increase of over 200% year-over-year.

In terms of our retail store operations and comparing the performance of these sites since the April 14, 2020 transaction, the results for the comparable period before these sites were in the partnership, inside sales at our company-operated sites have remained relatively strong throughout the quarter.

On a comparable week year-over-year basis, our inside store sales have been up since early May. Over approximately the last six weeks, same-store inside sales have been up in the range of 5% to 10% in a year-over-year comparable week basis.

This strong performance illustrates the resiliency of convenience store sales in general and is also a testament to some of the initiatives that we are executing in our store operations. Thanks to our volume performance at our retail sites, it has also been slightly better than that of our wholesale segment overall.

Reviewing our retail segment performance, it is important to remember the wholesale segment supplied our retail segment on a DTW basis with the overall profitability of these sites is split between our wholesale and retail segments.

The DTW margin to our retail sites makes a meaningful contribution to our wholesale segment, profitability and our overall profitability. We continue to work with Circle K to complete the remaining asset exchanges from the agreement that was entered into in December of 2018.

We completed two additional exchanges during the second quarter, representing approximately $44 million in assets. As noted in our earnings release and the 10-Q, there are now only 23 Circle K properties and four CrossAmerica properties remaining to be exchanged as part of that overall asset exchange agreement.

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. During the second quarter, as part of our real estate optimization plans, we divested seven properties for a total of $4.4 million.

As I mentioned during our last call, while this is not a significant number of properties or dollars, we will continue to review our portfolio and work to divest noncore properties in the coming quarters. Despite COVID-19, we continue to make progress on these plans.

Finally, I wanted to take a moment to thank everyone in the organization for their continued hard work and dedication. They have executed on a significant volume of transactions this year and dealt with the disruption due to COVID-19.

Through it all, they have persevered to ensure we are able to provide fuel and other essential goods and services to millions of end consumers. To those team members that may be listening, thank you for your efforts. With that, I will turn it over to John for a more detailed financial review of the quarter..

Thank you, Charles. If you would please turn to Slide 7, I would like to review our second quarter results for the partnership. We reported adjusted EBITDA of $27.7 million for the second quarter of 2020, which was flat to the same period of 2019.

Our distributable cash flow for the second quarter of 2020 was $26 million versus $22.3 million for the second quarter of 2019, reflecting an increase of 17% year-over-year. Our distributable cash flow for the second quarter benefited from the performance of our wholesale segment and from lower cash interest and current tax expense.

Our distribution coverage on a paid basis for the second quarter of 2020 was 1.31 times versus 1.24 times for the second quarter of 2019. Our distribution coverage on a trailing 12 month basis was 1.21 times, which was an improvement over the 1.06 times that we experienced for the 12 months ended June 30, 2019.

As Charles touched on earlier, our operating expenses increased $11 million for the second quarter of 2020 compared to the second quarter of 2019. Our company-operated sites drove $9 million of that increase. Excluding rent expense, operating expenses at our company-operated sites increased $6 million or 122%.

our average company-operated site count increased to 134%. Additionally, a greater percentage of our company-operated sites are leased than in the prior year, and so the rent component of operating expenses at our company-operated sites increased $2 million.

On the wholesale side, operating expenses increased $2 million, driven predominantly by the increase in our controlled site count as a result of the transactions closed on since the second quarter of last year. 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 2.96 times and remain in compliance with our financial covenant ratios.

Despite the additional borrowings to fund the retail and wholesale acquisition during the quarter, along with the negative impacts of COVID-19, we were able to improve our leverage from 4.19 times as of March 31st, 2020 and 4.70 times as of December 31st, 2019. We have sufficient liquidity to execute our plans.

And as of July 31st, we had $198 million available on our credit facility, an increase of $34 million compared to our availability at March 31st, 2020 and $106 million compared to our availability at December 31st, 2019. Touching briefly on the balance sheet.

Inventory, property and equipment, intangible assets and accounts payable related parties are all up fairly significantly compared to the December 31st, 2019 balances, primarily as a result of the transactions closed on in the first six months of the year.

Accounts payable and motor fuel and sales taxes payables are higher than the December 31st, 2019 balances, due primarily to timing, which benefited our cash flow from operating activities on the cash flow statement relative to the first six months of 2019.

Equity increased $40 million as a result of $77 million in net income, largely driven by the gain on our divestiture of our investment in CST fuel supply, partially offset by $38 million in distributions.

The partnership paid a distribution of $0.525 per unit during the second quarter of 2020, attributable to the first quarter of 2020 for a total of almost $20 million. And as I noted on the previous slide, this resulted in a coverage ratio of 1.21 times on a paid basis for the 12 months.

During the second quarter of 2020, our distributable cash flow, again, benefited from a current tax benefit driven by losses incurred by our taxable subsidiaries relating primarily to bonus depreciation on qualifying assets acquired in the quarter.

Given the CARES Act and the expectation of a final tranche closing in the back half of 2020, we anticipate distributable cash flow will benefit from additional losses in our taxable subsidiaries in the back half of 2020. In conclusion, we believe we are in good financial position as we enter the third quarter of 2020.

Despite the challenging environment, we continue to improve both our coverage and leverage ratios and manage our balance sheet during the second quarter as we see the benefits from the asset exchanges, our acquisition of retail and wholesale assets and our other strategic initiatives.

We have ample capacity under our credit facility and continue to have a relatively modest amount of annual capital expenditures. With that, we will open it up for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] From Baraboo Growth, we have Walter Morris. Please go ahead..

Excellent quarter, gentlemen, congratulations..

Thank you, Walter..

Thank you, Walter..

How much seasonally stronger is the third quarter normally? And are you seeing that trend so far in this year's third quarter?.

Hey Walter, this is Charles. So I guess what you're asking indirectly is sort of the volume performance. And as I touched on in my comments earlier, basically what we've seen so far is that for the last several weeks, year-over-year, we've been on a volume basis down around 10%, sometimes more, sometimes less than that.

In terms of what the rest of the year is going to look like, obviously, that's a tough one to answer given all the uncertainty with COVID going on. I mean, for example, what's back-to-school going to look like, it just – I would hesitate to make a guess in terms of what things will be.

Obviously, as what you touched on, the second and third quarters tend to be our strongest volume quarters, and we're just going to have to see how things play out in regards to that..

Thank you. One other question.

Could you discuss your capital deployment strategies going forward now that you have reached your targeted goals announced in November of 1.1 times plus coverage ratio and a leverage ratio in the 4 times to 4.25 times range?.

Yes. So again, this is Charles. So I think given with COVID, there's obviously still a lot of uncertainty in regards to how things will progress from here. So you should expect us to see to – for us to continue to be conservative. I think all things being equal, we're going to look to improve our coverage ratio.

And then as it relates to capital expenditures, while we're still trying to, for the full extent possible, have somewhat business as normal in terms of how we view capital expenditures, we're obviously being very cautious in regards to what the environment is before we do any significant outlays..

Thank you, Charles..

From Wells Fargo, we have Sharon Lui. Please go ahead..

Hi, good morning..

Good morning..

Just wondering maybe you can share some of the volume trends by region given the shift, I guess, in COVID cases to certain states in your footprint?.

Yes. So as I said, for the last several weeks, on average, we've been around 10% off year-over-year, but that varies by geography based on your question. So we still see in the Northeast that they've been lagging. So for example, New Jersey has been a lagger state throughout the whole process and they continue to be so, also New York as well.

New York, in particular, we have a lot of sites, some are throughway, and they've been significantly impacted by the lack of travel along that major thoroughfare. In terms of states that seem to be doing a lot better, Alabama is a bright spot for us in terms of its volume performance for the year. They've been very strong.

And then also, Virginia has also not been that bad for us either. As you touched on, though, it does seem to vary in regards to whether it's severity of COVID outbreaks, but also, too, in terms of how the states individually are handling the COVID outbreak in terms of the restrictions that they have in place.

So for example, Ohio earlier in the year, had a lot more onus restrictions in place. And we saw a significant decline in volume there. It's come back. But given that state government there, if they would choose to go back into a lockdown mode, you would see obviously a significant drop-off in volume..

Okay. And I guess just a question on your expectations for margins going forward. It sounds like you're a bit more conservative relative to some of your competitors.

Can you maybe share some of your assumptions and what you expect going forward in terms of margin?.

Well, I guess I'll touch on in regards to the margin sort of this quarter. Obviously, the first part of the quarter was very strong. And then since then, they've been good, but not extraordinary as they were in the first part of the quarter.

But the interesting part about that is the margins remain good in an environment where typically you would have seen margins compress more given that crude oil prices increased during the quarter. And so I've seen others comment on this as well.

I think that with COVID, what we're entering into is uncharted territories in regards to what margins will do because given the drop in volume, obviously, margin isn't a much more important component for the profitability of store operations now because there's not just – not as much inside sales perhaps to go around.

And you're looking at perhaps operators rethink how they view that. And so I wouldn't be surprised if margins reset to perhaps a higher level than what they would have been in the past. But it's really too early to say if that's going to be the case or not, but we're optimistic that perhaps it will be..

Okay. Thank you..

[Operator Instructions] Okay. It looks like we have no further questions at the moment..

Okay. Well, if there are no further questions, that will conclude today's call. We appreciate each of you joining us today. Thank you for your interest in the partnership. And if you have any follow-up questions, feel free to contact us. So we look forward to speaking with you next quarter, and thank you, again..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining, you may now disconnect..