Good morning, and thank you for joining the CrossAmerica Partners Third Quarter 2021 Earnings Call. My name is Darrell and I will be your operator for today’s call. At this time all participants are on listen-only mode. Later we will conduct a question-and-answer session. Please note this conference is being recorded.

I will now turn the call over to Maura Topper, Chief Financial Officer. Maura you may begin..

Thank you, operator. Good morning and thank you for joining the CrossAmerica Partners Third Quarter 2021 Earnings Call. With me today is Charles Nifong, CEO and President. Charles will provide some opening comments, a brief overview of CrossAmerica’s operational performance and highlights from the quarter, and then I will discuss the financial results.

At the end, we will 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 have provided schedules that reconcile these non-GAAP measures with our reported results on a GAAP basis as part of our earnings press release. Today’s call is being webcast, and a recording of this conference call will be available on the CrossAmerica website for a period of 60 days. With that, I will now turn the call over to Charles..

Thank you, Maura. I appreciate everyone joining us this morning. As always, we thank you for your interest in the partnership. I especially welcome Maura today on our first call as CFO since joining us in August. We are glad to have her on our team.

During today’s call, I will briefly go through some of the operating highlights for the third quarter 2021. I will also provide some color on trends in the market along with update on our acquisition of convenience stores from 7-Eleven and other updates similar to what I provided during our most recent quarterly calls.

Maura will then review in more detail the financial results. Now if you turn to slide 4, I will briefly review some of our results. For the third quarter of 2021, our wholesale fuel gross profit was $34.1 million, an increase of $3.4 million, or 11% when compared to the third quarter of 2020.

This was driven by both volume and fuel margin increases during the quarter. Wholesale segment gross profit was $48.2 million, an increase of 13% or $5.4 million when compared to the third quarter of 2020.

Our wholesale fuel volume was 355 million gallons for the third quarter of 2021, an increase of 8% when compared to the same period in 2020 largely due to the acquisition of assets from 7-Eleven as well as the continuing recovery from COVID-19.

In terms of same store buying performance in wholesale for the quarter we were up approximately 4% year-over-year. For the quarter on a same site basis relative to 2019 we were down slightly more than 3%. We did see some relative weakness in volume from mid August to early September as a Delta variant, or fears of the Delta variant are at their peak.

Year-to-date wholesale same site volume was up approximately 8% relative to last year and down approximately 3% relative to 2019.

In terms of our volume mix, with the addition of our newly acquired retail sites for the third quarter of 2021 we received a fixed markup per gallon on approximately 67% of gallons sold to our customers with remaining gallons being primarily DTW or variably price contracts with third party customers or with our retail segment.

We all saw an increase in our wholesale fuel margin per gallon for the quarter, reporting $9.6 per gallon, compared to $9.4 per gallon for the third quarter of 2020 an increase of 2%. The year-over-year increase was primarily driven by three factors.

First, we benefited from increased volume across America’s company operated retail sites, which as I just noted, we supply on a variable margin basis. Second, we benefited from better sourcing costs due to the execution of certain strategic initiatives such as our brand consolidation.

Finally, our wholesale fuel margin per gallon also benefited from higher terms discounts, as crude oil prices increased 73% from $40.89 per barrel for the third quarter of 2020 to $70.58 per barrel for the third quarter of 2021.

While we increase our wholesale fuel margin per gallon for the quarter, the macro fuel margin environment for the quarter was mixed to negative. We have now been in a generally rising crude oil price environment since late October last year.

Crude oil prices are up over 95% from the start of the fourth quarter of 2020 through the end of the third quarter. For the first half of the third quarter, crude oil prices declined, but then began to increase in the latter half of the quarter and have continued to rise since then, albeit with some respite over the last few weeks or so.

As we noted on prior calls, typically crude oil price increases of the magnitude we have experienced with B2 materially lower fuel margins and what we achieved in the third quarter and earlier in the year.

The fact that fuel margins had diverge from historical experience and have consistently done so this year provides support to the theory that COVID has altered the dynamics of the fuel market, perhaps permanently. In terms of rent, we’ve not experienced any COVID related rent issues for several quarters now.

Our rent for the quarter benefited from the favorable comparison to the prior year, and the associated rent concessions made during the quarter in 2020. Our retail segment also performed well during the quarter as gross profit rose $8.4 million, or 43% when compared to the third quarter of 2020.

Our motor fuel gross profit increased 122% and our merchandise gross profit rose 26% when compared to the same period in 2020. For volume on a same site comparable week basis, our retail volume was up 14% for the quarter year-over-year. On a same site comparable week basis relative to the quarter in 2019 retail volume was down approximately 1%.

For inside sales on the same site comparable week basis our inside sales were flat relative to last year, and up approximately 9% relative to 2019. Our retail sites have continued to perform well on both volume and inside sales metrics.

On the volume side, our retail locations have significantly outperformed relative to the overall wholesale portfolio and compare favorably to data we have relative to the industry overall. Particularly, we’ll be looking at our performance relative to 2019. While inside sales were flat for the quarter, they’re still up 9% relative to 2019.

On both volume and inside sales metrics, our retail sites are continuing to perform strongly, which reflects the ongoing success of our retail initiatives and impact of capital we have spent on brain imaging and site upgrades in the past 12 to 18 months. Our retail segment results this quarter also include our newly acquired sites from 7-Eleven.

These sites were acquired on a rolling basis throughout the quarter. So the included results are not reflective of anywhere near full quarter’s financial results for these assets. Nonetheless, our results do reflect a meaningful contribution from these newly acquired locations.

Although it is early, we’ve been pleased by the performance of the sites, and in particular a fuel margin environment at the location. We continue to put a lot of energy and effort into successfully integrating these locations into our operations and ensuring our new team members have the tools and knowledge they need to be successful.

As we noted in prior quarters, reviewing our retail segment financial performance is important to remember the wholesale segment supplies our retail segment on a DTW or variable margin basis. So the overall fuel profitability of these sites is split between our wholesale and retail segments.

As I mentioned a moment ago, the wholesale fuel margin to our retail sites contributed to our overall increase in wholesale fuel margin per gallon for the quarter relative to the prior year.

Overall, the DTW fuel margin to our retail sites makes a meaningful contribution to our wholesale segment and our overall profitability that is not apparent and looking at the retail segment financial results in isolation.

As we work through the integration of the 7-Eleven sites we have seen an increase in both our operating and G&A expenses compared to the prior year. The increase in operating expenses was primarily driven by the addition of 7-Eleven sites, producing an increase in our average company operating site count increasing 29% year-over-year.

We have also experienced increases in labor costs at our retail sites, consistent with what has been experienced in the broader economies overall.

The primary drivers for the increase in G&A for the third quarter for the acquisition costs associated with the 7-Eleven transaction, and an increase in management fees related to the increase in headcount.

In regards to the announced agreements 7-Eleven to acquire 106 sites as of the end of the quarter, we closed on 98 sites for total consideration of $262 million, including inventory and other working capital.

As of November 4, the partnership had closed on an additional five sites for total consideration of $10.4 million, including inventory and other work capital. We anticipate closing on the final three properties once we are in receipt of all the required operational licenses and permits.

As I touched on briefly my retail comments earlier, while we have had the site only a relatively short amount of time, we are pleased with how the sites are performing and with how the overall integration process and the rebranding of these sites has gone so far.

We are already seeing a positive impact from these sites and we believe the acquired assets are positioned to perform well going forward. We also continue to evaluate our portfolio and look for opportunities to divest non-core properties. We had a busy quarter for property sells, investing 14 sites for $4.9 million in proceeds.

Through September 30, 2021 we had invested 23 properties for $8.8 million in proceeds. We continue to have a strong pipeline of transactions and expect to have an active four core. Looking forward, we will continue the process of recycling capital to invest in growth opportunities within our portfolio.

Overall, despite the challenges this quarter, we had a strong quarter and are beginning to demonstrate some of the financial results of our strategic initiatives. As I noted earlier, we have substantially completed our transaction with 7-Eleven and our results this quarter provided a brief glimpse of the positive financial impact of these assets.

We believe these sites will be great contributors to our overall financial performance in the coming months and years. CrossAmerica teams have done a tremendous job of integrating these assets and in executing our overall strategic plan. Their efforts and dedication are appreciated. To all CrossAmerica team members listening in thank you.

In summary, we believe we are in a good position as we exit third quarter to continue to execute on our plans and to provide growth and strong returns for our unit shareholders. With that, I will turn it over to Maura for more detailed financial review..

Thank you, Charles. If you would please turn to slide 6, I would like to review our third quarter results for the partnership. We reported net income of $8.8 million for the third quarter of 2021 compared to $21.2 million in the third quarter of 2020.

During the third quarter of 2020 net income benefited from a $12.9 million gain, primarily driven by gains related to the properties sold in the asset exchanges with Circle K compared to a $0.4 million gain on the sale of properties sold during the third quarter of 2021.

Adjusted EBITDA was $35.9 million for the third quarter of 2021 which was an increase of 20% when compared to the third quarter of 2020. Our distributable cash flow for the third quarter of 2021 was $30.4 million versus $29.7 million for the third quarter of 2020, reflecting an increase of 2% year-over-year.

Distributable cash flow in the third quarter of 2020 benefited from a current tax benefit of $3.8 million compared to a tax expense of $0.2 million in the third quarter of 2021.

The 20% increase in adjusted EBITDA was primarily driven by increases in operating income for both wholesale and retail segments and the addition of our assets acquired from 7-Eleven As Charles covered. Our distribution coverage for the current quarter was 1.53 times compared to 1.50 times for the third quarter of 2020.

For the trailing 12 months ended September 30, 2021 our distribution coverage was 1.22 times a slight decline versus 1.24 times for the trailing 12 months ended September 30, 2020.

If you will please turn to the next slide, the partnership paid a distribution of $52.5 per unit during the third quarter of 2021 attributable to the second quarter of 2021 for a total of almost $20 million. And as I noted on the previous slide, this resulted in a coverage ratio of 1.22 times on a paid basis for the 12 months.

In regards to our capital expenditures during the third quarter, we spent $10.5 million overall, with 9.5 of that total being growth related capital expenditures. This represented a year-over-year decline of approximately $3.2 million for the quarter.

Growth related capital projects during the quarter included $5 million on the rebranded of the certain sites being acquired from 7-Eleven approximately $1 million on rebranding of sites in our existing portfolio, and $3.5 million on other projects, including EMV upgrades, and site improvements.

As I mentioned last quarter, for site brand conversions, including those related to the site acquired from 7-Eleven we generally are reimbursed by suppliers for a substantial portion of the upfront spend, either over a period of time post conversion or after final project completion.

The impact of certain of our spending in the current and prior quarters is evident in the strong gallons and sales performance at our sites, particularly in the retail segment.

If you turn to slide 8, I wanted to review our new capital structure, the new JKM credit facility and our existing CAPL credit facility, which were discussed during our second quarter earnings call. On July 16, 2021, capital JKM partners, an indirect wholly owned subsidiary of CrossAmerica entered into a new credit agreement.

We call this the Joe’s Kwik Marts or JKM credit facility. This facility is a $200 million senior secured credit facility consisting of a $185 million delayed drop term loan and a $15 million revolving credit facility.

The delayed drop term loan portion of the facility has been used to fund the acquisition of the 106 convenience store properties from 7-Eleven and the revolver is available to support the ongoing working capital needs of the Joe’s Kwik Marts business as we move forward. We also amended our pre-existing CAPL credit agreement as of July 28, 2021.

The amendment increased our maximum leverage ratio under this facility through 2022 to provide us with financial flexibility to better manage our ongoing acquisition and integration of assets from 7-Eleven.

Due to the structure of our acquisition, our leverage ratio calculation under the CAPL credit facility does not allow us to include the pro forma EBITDA for our newly acquired assets until the cash flows from the assets are actually generated.

As these new assets are fully on boarded to our organization, our leverage ratio under the capital credit facility will step down. As our revolver balance is paid down with cash generated from these new assets and our credit facility defined EBITDA increases as a result of these cash flows.

As a result, we anticipate that leverage this quarter and next quarter will be our highest level due to these structural definitions.

As we look at and present our financial leverage going forward, we will report our two credit facility defined leverage ratios, but also speak to our blended aggregate leverage ratio for the organization as a whole to the investor community.

As of September 30 2021, if we were to calculate a leverage ratio for the organization overall, as defined in our credit agreements, taking into account our total debt levels, and the benefit of the pro forma impact of our newly acquired assets, our blended aggregate leverage ratio would be around 5.2 times.

As I noted previously, with our credit facility defined leverage ratios, and this blended aggregate ratio will move down over the course of the next 24 months and we will continue to move toward our target level of four to four and a quarter times on both a credit facility defined and a blended aggregate basis.

Well, we in our board review our quarterly distribution on a regular basis based on our current financial position, and our outlook for operations we do not expect that this will have any impact on our current distribution rate.

As Charles noted earlier, we’ve been pleased with the integration process regarding the 7-Eleven sites and their early financial performance. We believe that this is a great acquisition, and will provide value to our unit holders for years to come.

I should note that we did file a Form 8-K last week, providing some pro forma statements for the acquired properties.

These pro forma statements layer in the balance sheet and income statement information for the acquired locations for 2020 and the first six months of 2021 as operated by the prior owners on top of the similar period results for CrossAmerica, with certain adjustments for acquisition accounting, and their financing.

As noted in the 8-K these pro forma statements do not include any adjustments to the historical performance of the location including the impacts of the COVID-19 pandemic, non-recurring items or other factors interlinked in the industry.

These pro forma statements also do not include any SG&A charges incurred by the prior owners or to be incurred by CrossAmerica partners, as they only include store level profit and loss information.

In conclusion, as Charles noted earlier, with our wholesale and retail segments performed well during the third quarter, contributing to a strong overall quarter with the bulk of the 7-Eleven site integration behind us we are in a good financial position entering that fourth quarter and the New Year.

As I noted we have a plan to reduce our leverage over the next 12 to 24 months and expect our coverage ratio to stay within our target range.

Looking forward, we will continue to manage our balance sheet as we see the continued benefits from our 2020 transactions, our acquisition of the 7-Eleven sites and our other strategic initiatives on our overall performance. With that, we will open it up for questions. .

And thank you. We will now begin the question and answer session. [Operator Instructions] We do have a question that just populated Elvira Scotto from RBC. Your line is now open..

Can you talk a little bit more about what you’re seeing on the labor front and how you see that kind of developing over the next few quarters?.

Elvira, good morning. This is Charles. So on the labor front at the retail stores we just like everyone else, it’s certainly been tight in terms of finding folks out there, depending upon the market, we’re seeing shortages. And we’ve had to adjust rates.

In some cases we’ve implemented temporary programs and other cases it’s been permanent elevations and base rate.

And so in terms of the outlook obviously there was the expectation that in September with the end of some of the enhanced unemployment benefits that things would improve somewhat, and depending upon the market, we may have seen that, but it’s still overall it’s very tight out there. And we expect it to continue for several quarters at least.

It’s tough to say how things necessarily get better, but it’s definitely added to expense at the store level. But so far, we’ve been able to manage it fairly well, I think..

And then can you provide a little more detail when you were talking sort of your, I think the wholesale fuel margin the divergence between the margin and how historically that has trended versus changes in crude oil prices. But the pandemic appears to have changed that.

Maybe talk a little bit more about that and do you think that trend stays?.

Yes. So I think I’ve been saying for a while now that I’ve been a little bit more hesitant to say it’s been a permanent change in how the market is but certainly if you listen to others out there some of our competitors as well, I mean, they know and they make valid points about breakeven margins for operators being higher.

And certainly that’s the case. And what we’ve seen is also from operators in the past that I would say, put less emphasis on fuel margin in terms of their business, and it was more of the fuel was a draw to get people inside their store.

They seem to have awakened to the fact that fuel margin is also important because of either increase in labor costs, declines in certain parts of their store offering in terms of sales such that there seems to be overall a bias towards higher fuel margins that continued in the market.

I mean, certainly, if you look at what has happened this year, with crude oil prices typically our margin would have been in the mid to low single digits and we’ve not been anywhere near that. Whether that will continue once COVID becomes more and more endemic I don’t know.

But certainly it has lasted much longer than I think we would have expected initially..

Thank you. Our next question comes from [Indiscernible] from Wells Fargo. Your line is now open..

Thanks for taking the questions.

On the last three stores from the 7-Eleven deal could you provide a rough timeline of when you expect to secure all the remaining licenses and permits and complete the transaction?.

Yes, so those three stores happened to be in the Philadelphia market and there are some peculiarities associated with Philadelphia in terms of getting those permits. So I don’t have great visibility right now on when those sites will come over.

I will say in terms of both their purchase price and contribution to the overall portfolio they’re not material. We’ve substantially as I said in my comments are substantially complete with the transaction with what we’ve acquired to-date and we finished those acquisitions at the start of October.

So we’re optimistic we’ll get those three sites over, but whether they come over or not anytime soon it’s certainly not material to the overall impact of the acquisition..

Got it. Thanks for this Charles.

And then could you maybe talk about the level of activity in the M&A market just generally? And then maybe your appetite to participate leverage metrics normalizing the next 12 to 24 months?.

Yes. So I’ll address the second part of that question first. So as Maura touched on her comments obviously right now, we’re focused on from a capital perspective, bringing down our leverage, and also too from operational perspective, integrating these assets and ensure that the acquisition that we’ve just completed, performs the way that it should.

So that’s our primary focus for the time being, as you astutely pointed out I think that means that we’re not going to be all that active in the market until we’ll say, mid to the latter half of that year, next year in terms of looking from the market overall.

So our deal notwithstanding, we’ve seen, purchase price expectations from sellers in the market continued to be high. And from our perspective it has to be something special for us to want to do something at those elevated levels.

But again, for the time being, while we continue to look and monitor the market, it would have to be something that was really special or strategic for us and in order to do something at this moment while we’re still processing what we’ve just finished from a 7-Eleven sites..

Thank you. [Operator Instructions].

Well, it doesn’t look like there any further questions in the queue. Again, we thank everyone for joining us today on the call and wish you well, thanks..

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for your participation. You may now disconnect..