Welcome to the CrossAmerica Partners Second Quarter 2022 Earnings Call. My name is Darrel and I will be your operator for today's call. At this time, all participants are in 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 Maura Topper.

You may begin..

Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners second quarter 2022 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. Maura and I appreciate everyone joining us this morning. As always, we thank you for your interest in the partnership. 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 trends in the market and a few other updates similar to what I provided on previous 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 operating results.

For the second quarter of 2022, our wholesale fuel gross profit increased 33% to $40.5 million compared to $30.5 million in the second quarter of 2021. This growth was driven by increases in both volume and fuel margin. Wholesale segment gross profit was $55 million, an increase of 24% or $10.8 million when compared to the second quarter of 2021.

Our wholesale fuel volume was 342.8 million gallons for the second quarter of 2022, an increase of 3% when compared to the same period in 2021, largely due to the acquisition of assets from 7-Eleven, which occurred primarily during the third quarter of 2021. It was a challenging quarter overall for fuel volume.

If you look at gasoline demand data from the Energy Information Administration, national gasoline demand was down year-over-year for every week in the quarter, except 1 week. Our wholesale fuel volume was not immune from the national trend.

We particularly saw a decline in gasoline demand from our wholesale locations as fuel prices rose sharply at late May and into June. Fuel demand continued to remain lower than the prior year after fuel prices peaked in mid-June. Overall, for the quarter, our wholesale same-site fuel volume declined about 6% year-over-year.

Moderating fuel prices in the period since the quarter end have aided fuel volumes, but same-site weekly volumes remain at a lower level than in the prior year. We saw an increase in our wholesale fuel margin per gallon for the quarter, reporting $0.118 per gallon compared to $0.092 per gallon for the second quarter of 2021, an increase of 28%.

The year-over-year increase was primarily driven by the following factors. First, we benefited from increased volume CrossAmerica's company-operated retail sites, which we supply on a variable margin basis. Second, we continue to benefit from better sourcing costs due to the execution of certain strategic initiatives, such as our brand consolidation.

Finally, we continue to realize higher variable fuel margins than in the pre-COVID period as a multitude of market factors appear to be driving a durable shift in market conditions towards higher overall fuel margins. For the second quarter, RBOB gasoline prices rose throughout the quarter until approximately mid-June.

Historically, this type of price movement would have created a difficult fuel margin environment.

The fact that it did not and that we have had other similar fuel price environment quarters and similar fuel margin results in the COVID time frame are indicative of the durability of some of the structural changes in the overall market that are leading to stronger fuel margins.

On our wholesale rent, it was another steady, solid quarter for the stable part of our business. Our base rent for the quarter was $13.6 million compared to the prior year of $13.3 million, a slight increase due to the reopening of certain previously closed sites.

Our retail segment also performed well during the quarter, as gross profit increased 66% or $13.9 million when compared to the second quarter of 2021. Our motor fuel gross profit increased 89% and our merchandise gross profit rose 68% when compared to the same period in 2021.

For volume, on a same-site basis, our company-operated retail volume was up 2% for the quarter year-over-year. This performance was in contrast to the volume decline that we experienced in our Wholesale segment and indicates the quality of our retail assets and the strength of our execution at the retail level.

The retail segment was not immune though from the overall volume pressures nationwide that I mentioned earlier in my comments. Same-site year-over-year volumes in June were generally lower than the prior year for the retail segment and volumes have continued to be lower than the prior year for the weeks since the quarter end.

However, retail fuel margins have been significantly better than the prior quarter or prior year and have more than offset volume declines. For inside sales on a same-site basis, our inside sales were down 3% relative to last year. However, inside sales, excluding cigarettes, were up approximately 1% year-over-year on a same-site basis.

Despite the decline in sales this quarter, our overall store sales remain at a strong level relative to pre-COVID results. Year-to-date, our same-store sales are approximately 10% above 2019 results and indicate the durability of certain sales channel shifts that occurred during COVID and have remained after COVID restrictions have been eliminated.

On the supply chain front, out of stocks in our stores have moderated and are better than in prior quarters but are still at higher levels than we would like.

In terms of inflation, we have seen product cost increases of 6% to 8% in certain categories, and we generally expect to receive price increases across all of our inside store merchandise at some point this year. We generally try to pass these increases on in our retail pricing. We have seen some consumer behavior shift as a result of higher prices.

Consumers buying a 12-pack, down from a 30-pack case, for example. We are closely monitoring these trends and adjusting our product offering to ensure our product mix reflects these evolving consumer behaviors.

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

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

As we review our expenses for the quarter, we saw an increase in our operating expenses compared to the prior year. The increase in operating expenses was primarily driven by the addition of the 7-Eleven sites which increased our average company-operated site count from 150 to 254, a 69% increase year-over-year.

Labor cost at our retail locations have increased in part due to having more labor in the stores, as staffing shortages are not as acute, which is actually a positive, but also due to the overall inflation pressures in the economy. Maura will review our operating expenses in more detail in her commentary.

Our G&A expense declined $1.2 million or 17% for the quarter year-over-year, primarily due to a decrease in acquisition-related costs associated with the 7-Eleven sites that we acquired. As part of our ongoing initiatives, we continue to evaluate our portfolio and look for opportunities to divest noncore properties.

For the second quarter, we had 5 property sales for $2.3 million in proceeds. We have a solid pipeline of identified opportunities within our portfolio to execute on to 2022 as we continue the process our recycling capital to invest in growth opportunities.

As I touched on in my earlier comments, in the period since the quarter end, volumes have generally been lower than in the prior year. In the last few weeks, volume has improved and is trending better, but is still lower than the prior year.

However, declining crude oil prices and subsequent fuel price decreases have generated a strong fuel margin environment, the financial impact of which is significantly greater than that of the lower fuel volume. Store sales have generally continued along the trends experienced in the second quarter and have remained lower than in the prior year.

For the team here, CrossAmerica, we were not surprised at the decline in second quarter GDP announced at the end of July. The data our portfolio generates has indicated for a while that economic activity was slowing. Despite these headwinds, we posted strong results for the quarter, the latest in a string of solid quarters for the partnership.

Our results are proof of the value of the initiatives and transactions we had executed in recent years and demonstrate that the partnership is well positioned to succeed and provide attractive financial returns across a wide range of economic environments. With that, I will turn it over to Maura for a more detailed financial review..

Thank you, Charles. If you would please turn to Slide 6. I would like to review our second quarter results for the partnership. We reported net income of $14 million for the second quarter of 2022 compared to net income of $4.8 million in the second quarter of 2021.

The increase in net income was primarily driven by the year-over-year increases in operating income in both the wholesale and retail segments, with each segment benefiting from the acquisition of assets from 7-Eleven, along with the favorable fuel margin environment that Charles has discussed.

Adjusted EBITDA was $41.4 million for the second quarter of 2022, which was an increase of 39% when compared to adjusted EBITDA of $29.7 million for the second quarter of 2021. Our distributable cash flow for the second quarter of 2022 was $32.4 million versus $25 million for the second quarter of 2021.

The 30% increase in distributable cash flow was primarily due to the increase in operating income in both the wholesale and retail segments, partially offset by an increase in cash interest expense. Our distribution coverage for the current quarter was 1.63x compared to 1.26x for the second quarter of 2021.

Our distribution coverage on a paid basis for the trailing 12 months was 1.48x compared to 1.22x for the 12 months ended June 30, 2021. As Charles referenced earlier, we have felt the impact of inflation in our cost of goods sold and operating expenses over the past several quarters.

On the cost of goods sold front, we continue to focus on identifying price changes in fuel and retail goods as they are occurring and acting effectively to push updates through our channels to maintain margins wherever possible, while retaining our focus on remaining a destination of choice for our customers.

On an operating expense basis, in spite of the upward pressures in labor costs, that Charles mentioned earlier, as well as other costs, including utilities and supplies, we were able to hold operating expenses effectively flat from the first quarter of 2022 to the second quarter of 2022.

This is primarily as a function of the benefits of scale on our above store support functions as well as the benefit of certain utilities contracts where rates were locked in before the recent rise in utility costs. We will continue to monitor our expense profile in the coming quarters. If you will please turn to the next slide.

The partnership paid a distribution of $0.525 per unit during the second quarter of 2022, attributable to the first quarter of 2022 for a total of almost $20 million. And as I noted on the previous slide, this resulted in a coverage ratio of 1.48x on a paid basis for the prior 12 months.

In regards to our capital expenditures during the second quarter, we spent a total of $7.5 million, with $5.8 million of that total being gross-related capital expenditures. This represented a year-over-year decline of approximately $3.8 million.

Growth-related capital spending during the quarter was primarily related to the continued integration of the sites acquired from 7-Eleven as well as remodeling of sites in our existing portfolio, EMV upgrades and site rebranding.

We are now more than halfway through our portfolio-wide EMV conversion efforts and nearly complete our rebranding efforts related to the 7-Eleven transaction. As a result, you have seen and should continue to see our quarterly growth capital expenditures moderate from the high levels incurred from mid-2020 through the end of 2021.

Moving over to our balance sheet and financial resources. Similarly to the first quarter of 2022, we did see an increase in the value of our inventory and accounts receivable, driven by the increased price of motor fuel over the course of the quarter as well as the related increase in our accounts payable balances.

As is typical in our industry, our current liabilities are greater than our current assets due to the longer settlement time frames for real estate and motor fuels taxes as compared to the shorter settlement of receivables and inventory turnover.

Given the increase in the price of motor fuel over the course of the year to date, we have seen the usage of net working capital, which we have been able to offset substantially due to our deleveraging activities.

In regards to our two credit facilities and leverage, as of June 30, 2022, 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 assets acquired from 7-Eleven, our blended aggregate leverage ratio would be around 4.85x compared to approximately 5.1x at the end of the fourth quarter of 2021.

We will continue to move toward our target leverage ratio of 4 to 4.25x on both the credit facility defined and blended aggregate basis over the next 12 to 18 months.

Continuing on the leverage front, we have benefited year-to-date from the floating to fixed rate interest rate swaps we have in place on $300 million of our outstanding revolving credit facility funds.

These swaps carry an approximate fixed rate of 44 basis points, which is favorable compared to the increase in 1-month LIBOR year-to-date, which has increased to nearly 2.4% today. In conclusion, as Charles noted earlier, we had a solid second quarter despite the challenging operational environment.

We will continue to focus on our operations and manage our balance sheet, including our leverage and distribution ratios and are in a good financial position as we enter the third quarter. With that, we will open it up for questions..

Operator:.

Well, it doesn't appear that we have any questions today. Should you think of one later, please reach out to us because we'll be happy to address. Otherwise, thank you for joining us, and have a good day..

Thank you. This concludes today's conference. Thank you for participating. You may now disconnect..