CrossAmerica Partners LP
Q2 2013 Earnings Call Transcript

Published: 9 Aug 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2013 Earnings Conference Call for Lehigh Gas Partners. At this time, all participants are in listen-only mode. Later in the call, we will conduct a question and answer session. Instructions will be given to you at that time on how you may participate. This conference call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended relating to the Partnership's, future business expectations and predictions, and financial conditions and results of operations. These forward-looking statements involve certain risks and uncertainties. The Partnership has listed some of the important factors that may cause actual results to differ materially from those discussed in such forward-looking statements which are referred to as cautionary statement in its second quarter 2013 earnings news release. The news release may be viewed on the Lehigh Gas Partners website at www.lehighgaspartners.com. All subsequent, written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements. In addition, certain non-GAAP financial measures will be discussed on this call. The Partnership has provided a description of these measures as well as a discussion of why they believe this information is useful to management in its Form 8-K furnished to the SEC yesterday. The Form 8-K may be accessed through a link on the Partnership's website at www.lehighgaspartners.com. In addition to accessing the Form 8-K on the Partnership's website, you can also sign-up for lgpe/communication to keep you up-to-date on the activity on the Partnership and be notified on the latest Partnership news. As a reminder, this conference call is being recorded. I will now turn the conference call over to the host, Joe Topper, Chairman and CEO. Please proceed.

[Joe Topper:]

Thank you and good morning. Welcome to Lehigh Gas Partners' second quarter 2013 earnings call. Joining me on the call today are Mark Miller, CFO and Dave Hrinak, President. The purpose of today's call is to review our second quarter 2013 results. Once we have concluded our prepared remarks, we will open the session to questions. I will first walk through a brief overview of our second quarter results, comment on the two transactions that we recently announced and review our announced distribution increase. Mark will then provide more detailed review of the second quarter. Net income for the second quarter of 2013 totaled $5.5 million, or $0.36 per common unit. For the quarter, EBITDA totaled $14.1 million, Adjusted EBITDA totaled $14.9 million and Distributable cash flow amounted to $11.2 million, or $0.75 per common unit. The Partnership declared a second quarter distribution of $0.4775 per unit, a 5.5% increase over the current quarterly distribution. Based upon our distributable cash flow of $0.75 per common unit, the coverage ratio on the declared second quarter distribution is approximately 1.6 times. As Mark will touch on in his comments, we had a strong quarter from a fuel margin perspective, which helped drive our solid financial performance. As we have stated on previous calls, our ability to grow our distributable cash flow and distributions will be driven by acquisitions. We are pleased to announce the two recent transactions. They are great transactions for us allowing us to acquire quality assets in scale and a new market in Tennessee that we are excited about. The larger transaction that we announced last week for the Rocky Top portfolio, which for an aggregate consideration of $36.9 million. In the transaction, we acquired 30 key sites, four leasehold properties along with seven third-party supply contracts and other assets associated with the sites. The Partnership will acquire certain sites at closing for a total consideration of $10.7 million. At closing, we will also enter into a lease for the remaining site, 29 in total and then buy those properties on August 1, 2015 or later for the remaining consideration of $26.2 million. The lease component of the transaction was structured to enable the seller to avoid a prepayment penalty on debt currently on the property while allowing us immediate use of the properties. So, effectively through the lease structure we have locked in the price today to purchase the asset in the future while also securing the ability to use the properties immediately. Transaction enhances the Partnership's geographic diversity and provides an access to a new market region. The 34 sites that locate in and around the Knoxville Tennessee region, and along Interstate Highways 40 and 75. In aggregate, we included -- third-party supply contract. The total portfolio sold 34.1 million gallons of motor fuel in 2012. 31 of the 34 sites are Shell branded. We expect the transaction to close during the third quarter. We intend to use the funds available on under our corporate credit facilities to fund the transaction. The second transaction that we announced on Wednesday was for our portfolio of 17 assets in the Tri-Cities, Tennessee area for $21.1 million. We acquired these assets from Rogers Petroleum and affiliates and they consist of 14 fee and three leasehold sites. The sites are located in Eastern Tennessee with a concentration of Tri-Cities region and along Interstate 81. The portfolio geography is highly complementary with the Rocky Top assets and together the Rocky Top and Rogers assets provide us a large platform in the region to give us scale. The Rogers sites in aggregate had fuel volume of 18.7 million in 2012. We also expect this transaction to close during the third quarter of 2013, when we will fund it from the turnkeys available under our corporate credit facility. Concurrent with the signing of both of these transactions, we enter into a long-term supplier in rental agreements with Lehigh Gas, Ohio, whereby the Partnerships of leasehold sites for Lehigh Gas Ohio and supply fueled for the sites of 15 years. In separate agreements with the sellers, Lehigh Gas Ohio also agree to purchase of fuel and merchandise inventory and certain other asset at the site associated with the rental operations. In summary, these two great transactions are complementary to each other and provide us immediate scale in the new market region. We are excited about these deals and hope that they will lead to further opportunity to expand the portfolio. We will work diligent to close on the transactions and to integrate them into the Partnership. The aggregate consideration for these two acquisitions is approximately $58 million, which when combined with our year end Dunmore and Express Land acquisitions of $74.4 million, plus it puts us at a total announced acquisition since our IPO of $132.4 million. We are pleased with the success we have had in the acquisition market and will continue to work hard to execute on quality transactions that are accretive our unit holders. As part of that [inventory] we are pleased to announce a 5.5% increase in our quarterly distribution. The high 5.5% increase represents a $0.25 increase per unit in our quarterly distribution. The increased rate of the distribution to $0.4775 per unit on a quarterly basis, or $1.91 per unit on an annual basis. Based on the Partnerships' closing price as of August $26.87 to $1.91 per unit annual distribution represents 7.1% distribution rate on the common unit. The distribution increase is our second consecutive quarter distribution increase. Given that we have only been a public partnership for two full quarters and we think that is an impressive track record. Since our IPO, our annual distribution rate has increased by 9.1%, or $0.15 per unit from our initial annual distribution rate of $1.75 per unit. Our board of directors will review our distribution policy quarterly. As noted last quarter, we will announce our quarterly distribution concurrent with our earnings release. I will now turn it over to Mark for detailed review of the financial result of the quarter.

[Mark Miller:]

Thank you, Joe. The second quarter of 2013 represented the Partnership's second full quarter as a public partnership. In addition to the actual financial results for the quarter, the Partnership is providing 7 pro forma results for the period ending June 30, 2012, in our earnings press release. The Partnership completed its initial public offering on October 30, 2012. And, as such, management believes the pro forma results for June 30, 2012, provide investors with a more relevant comparison than the actual results of our predecessor for the periods ending June 30, 2012. For the second 2012, on a pro forma basis, the Partnership distributed 154 million gallons at an average selling price of $3.09 per gallon and an $0.069 average margin per gallon. Gross profit from motor fuel sales for the second quarter of 2012 on a pro forma basis totaled $10.7 million. Relative to the pro forma results for the second quarter of 2012, our fuel margin increased 4.4% and our gross profit from motor fuel sales increased 12% in the second quarter 2013. The increase in gross profit from motor fuel sales including by both the higher volumes and margin for the quarter relative to the previous year. Net rental income, less than expense for the quarter totaled $6.4 million. On pro forma basis, the Partnership recorded $3 million in net rental income in the second quarter 2012. The increase in net rental income for the second quarter 2013 relative to 2012 is primarily due to the increased rent associated with the Express Land and Dunmore acquisitions completed at the end of last year and to the lesser extent the Getty leases signed during the second quarter at the end of last year. On the expense side, operating expenses for the second quarter 2013 totaled $1.1. And, selling, general and administrative expenses totaled $3.8 million. For the second quarter of 2012, operating expenses totaled $600,000, and selling, general and administrative expenses totaled $2.5 million. The increasing selling, general and administrative expenses in the second quarter of 2013 relative to 2012 was primarily due to the increased equity compensation expense and public company expenses. The increase in operating expense in the second quarter 2013 relative to last year was due to a large number of sites in the portfolio during the second quarter as compared to a year ago. Overall, we had another strong quarter. From margin perspective, we able to achieve stronger results of the strong margins [to our] motor fuel volumes someway. We were comfortable with the trade out and we are pleased with the growth in our motor fuel's gross profit margin. Our acquisitions in last year continued to perform for us and add to our financial results. We look forward to speaking with you at the end of next quarter when we can update you on the status of our three recently announced acquisitions. On the financing side, as we discussed in our last quarter's call, we increased the size of our credit facility during the quarter by $75 million to $324 million. In addition to the increase in the credit facility size, the credit facility is also amended to modify certain terms in the credit agreement to allow us a greater leverage and flexibility in regards to the acquisitions. We also have the ability to expand the credit facility further upon $100 million to $424 million subject to certain terms and conditions and approval of our lenders. As of June 30, 2013, under the Partnerships' credit facility, we had $184.9 million of outstanding borrowings and $124.5 million available for borrowing net of outstanding borrowings and what is letters of credit. We were pleased to get the credit facility expansion and the amendment completed during the quarter. The increased capacity and flexibility has already benefiting us as evidenced by our two recently announced transactions. At this time, I would turn the call back over to Joe.

[Joe Topper:]

I want to thank everyone for joining the call today and we appreciate your interest in the Partnership. With that, I would like to open up the line for questions.

[Operator:]

(Operator Instructions) First question comes from the line of Ben Brownlow from Raymond James. Please go ahead.

[Ben Brownlow:]

Good morning. Congratulations on the acquisitions in the quarter.

[Joe Topper:]

Thank you.

[Ben Brownlow:]

Just trying to get a sense of the EBITDA contribution from, I guess the EBITDA from last year or going forward on that two acquisitions. Can you give a little detail on how the fuel margin is comparable to your existing fuel margins and the rental income that you expect?

[Joe Topper:]

Ben, we didn't disclose it in the press release. At this point, that's competitive information right now and it's a very active market out there and we are not going to disclose that because we end up either bidding against ourselves from prior releases or with other competitors now that have that information and have our metrics. I would tell you that they are within the guidelines of what we have acquired in the past and we hold through to those guidelines going forward.

[Ben Brownlow:]

Are there any upfront CapEx requirements, or are you pretty happy with the asset quality?

[Joe Topper:]

These assets are very good, outstanding assets. Most of them have rebuilt within the last five, seven years. They are in very good shape.

[Ben Brownlow:]

I guess from another perspective, on the acquisition environment, what sort of range in multiples are you seeing out there for wholesale supply contracts in both fee based acquisitions? Has that changed materially from the last year or so.

[Joe Topper:]

How do I answer that? There's just still an attractive group of acquisitions that are available in the multiples that we would like to buy. There are some transactions that are going higher than we think and there are some transactions that are going lower for different reason. I guess at this point, we are probably looking at somewhere between five and eight different transactions that are in the multiple that are attractive to us. There are some things that are going at a higher multiple, but they are not as attractive to us.

[Ben Brownlow:]

Okay. And, just one last one for me. On the fuel margin, were there any RIN credits embedded in that?

[Joe Topper:]

There's two things going on with the RIN credits. Some of the markets that we are in, the RIN credits are actually showing up in the rack pricing and some of the markets that were in the RIN credits are showing up as rebates of off the rack. So, yes, there are RIN credits built direct and indirect in those numbers.

[Operator:]

Thank you for that question. The next question we have comes from the line of Ethan Bellamy from Robert W. Baird. Please go ahead.

[Ethan Bellamy:]

Good morning, everybody. Congrats on a solid quarter. What kind of annual acquisitions are you targeting now, Joe? Then kind of a follow-up to that is, do you have the human capital in place to fully integrate these acquisitions and/or do you need to build out sort of the team to manage this success you having in the rollout?

[Joe Topper:]

Thanks, Ethan for the complement on the quarter and I'll try to get the other two as good as answers. I don't have a goal to acquire a dollar amount of assets in a year. I would tell you that I am very comfortable saying that, I think when we publicly talked about a range of $50 million to $75 million a year in acquisitions, I think the market of attractive assets would probably push that target up to a higher range of $150 million of potential acquisitions for the next couple of years, somewhere in the $50 million to $150 million, depending on whether they meet our criteria. On the other side, the evidence by this quarter was that we integrated the last two acquisitions seamlessly and they were accretive to the partnership. We are scaling up and have plans that have put us in place to double the size of the company within the next two to three years, so yes we need additional human capital, but that's part of our plan and we are in the process of acquiring it.

[Ethan Bellamy:]

Thank you. That's helpful. Then just one more. Who are you out there competing with in the acquisition market right now? It seems like you still have a fairly first mover advantage in terms of being public and being out there hunting with a public currency.

[Joe Topper:]

I break it into three categories. 7-Eleven, Quester, obviously the lead in the marketplace for what they want to buy. Then of the large jobber market, we would obviously have the leading edge based upon our capital structure to do it, but there are other competitors out there that are trying to grow knowing that they need to grow in this environment and level of things they want to follow where we went and they think that this was an attractive outcome for us and other competitors want to get there, but I think we have still a year, year and a half advantage on any next competitors.

[Ethan Bellamy:]

All right. How the volumes look so far this quarter? I am sorry if I missed it. I joined late.

[Joe Topper:]

The second quarter? The second quarter volumes store-over-store were down slightly for a couple of reasons. One was, we were repositioning some of the Getty assets. When we acquired the Getty leases last year, we had the right to give back assets. And as we have gone through and done a better analysis there, we were giving some of those assets back. Some of it is, because we converted some of the stations from commission to dealer and there are some pricing issues that occur from when a dealer starts having to price his own product, which we envision to work through that. There were some difficulty with volumes in the Northeast, some of in the Utica Shale area where they were, the Marcellus Shale, where they have cut back on the drilling a bit that affected the volume, so we are a little bit lower volume, but we made it up in margin which is we made more money.

[Ethan Bellamy:]

Got it. In Calendar 3Q so far?

[Joe Topper:]

Calendar Q3 volumes are, I don't see anything wrong in those numbers. I don't see anything wrong in the margin numbers.

[Ethan Bellamy:]

Excellent. Thank you very much.

[Joe Topper:]

I will give you heads up. The fourth quarter when Sandy hit and the price of fuel dropped by a lot of money last fourth quarter, I think we did like $9.8 a gallon. I am not sure we are going to be meeting that this year, but I am confident of the full year number.

[Ethan Bellamy:]

Excellent. Thank you.

[Operator:]

Thank you. The next question we have comes from the line of Suzanne Hannigan from Janney. Please go ahead.

[Suzanne Hannigan:]

My question has actually been asked and answered, but congratulations, guys.

[Joe Topper:]

Thank you very much. I am glad you liked the answer, Suzanne.

[Operator:]

And so, we have no questions at this time, so now I would like to hand the call back over to Joe Topper for closing remark.

[Joe Topper:]

Thank you very much. Thank you for the good questions. Appreciate your interest and we will continue to work hard to represent the unit holders and increasing the dividend going forward. Thank you very much.

[Operator:]

Ladies and gentlemen, that concludes your call. You may now disconnect. Have a good day.