CrossAmerica Partners LP (NYSE:CAPL) Q3 2023 Earnings Call Transcript

CrossAmerica Partners LP (NYSE:CAPL) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good morning. And welcome to the CrossAmerica Partners Third Quarter 2023 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Maura Topper, Chief Financial Officer. Ms. Topper, please go ahead.

Maura Topper: Thank you, Operator. Good morning. And thank you for joining the CrossAmerica Partners third quarter 2023 earnings call. With me today is Charles Nifong, CEO and President. We will start off the call today with Charles providing some opening comments and a brief overview of CrossAmerica’s operational performance from the quarter and then I will discuss the financial results. We will then open up the call to questions. Today’s call will follow presentation slides that 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.

Charles Nifong: Thank you, Maura. As always, Maura and I appreciate everyone joining us and thank you for making the time to listen to the call this morning. During today’s call I will briefly go through the operating highlights for the third quarter. I will also provide color on 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 four, I will briefly review some of our operating results. For the third quarter of 2023, our Wholesale fuel gross profit declined 4% to $18.8 million, compared to $19.5 million in the third quarter of 2022. The decline was driven by a decrease in fuel margins partially offset by an increase in fuel volume.

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Q&A Session

Wholesale segment gross profit was $32.9 million, a decrease of 4%, when compared to the $34.1 million of Wholesale gross profit in the third quarter of 2022. Our Wholesale fuel margin declined 7% from $0.092 per gallon in the third quarter of 2022 to $0.086 per gallon in the third quarter of 2023. The decline was primarily driven by the following two factors. The first was an exceptionally strong fuel margin performance of our variably priced Wholesale business in the third quarter of 2022 relative to the current year. If you recall, we and the industry experienced an exceptionally strong fuel margin environment in the third quarter of 2022. While the third quarter of 2023 was a generally favorable for fuel margins, it was not nearly as favorable as a fuel margin environment in the prior year.

The second factor was that crude oil prices were lower during the quarter compared to the prior year and the year-over-year decrease in fuel margin was primarily driven by the result in lower cost of motor fuel during the quarter and the corresponding decrease in the dollar value of the terms discounts on certain gallons purchased during the quarter. This was partially offset by our improved fuel sourcing costs, which resulted from our continued ongoing efforts to lower our cost of product. Our Wholesale volume was $217.3 million gallons for the third quarter of 2023, compared to $212.7 million gallons in the third quarter of 2022. The 2% increase in volume when compared to the same period in 2022 was largely due to the Community Service Station assets acquired during the fourth quarter of 2022, partially offset by the conversion of certain lessee dealer locations to our Retail class of trade and lower volume in our same-store business.

Since I just mentioned, the Community Service Station assets we closed on that transaction approximately one year ago. These assets have been great additions to the portfolio and this past year performed better than our expectations for them at the time of acquisition. Returning to volume for the quarter, our same-store volume in the Wholesale segment was down approximately 1.2% year-over-year. We saw a decline in same-store volumes in the last few weeks of the quarter, which has continued in the period since the quarter’s end with same-store Wholesale volume down 2% to 3% year-over-year in this period. Regarding our Wholesale rent, our base rent for the quarter was $13 million, compared to the prior year of $13.8 million, a slight decrease due to the conversion of certain lessee dealer sites to company-operated locations that occurred earlier this year.

Aside from the decrease in rent due to the class of trade changes, our rental income continues to be a durable income stream in our business. For the Retail segment, despite the challenging year-over-year comparisons due to the exceptionally strong fuel margins of the third quarter of 2022, our Retail segment performed very well during the third quarter of 2023, generating $67.6 million in gross profit. While our motor fuel gross profit declined 34%, our merchandise gross profit increased 23% for the quarter when compared to the same period in 2022. For volume on a same-store basis, our Retail volume increased 2% for the quarter year-over-year. As in Our wholesale segment, we saw year-over-year volume performance decline in the latter part of the quarter.

In the period since the quarter-end same-store volume has declined in the mid-single digits, driven by some site-specific issues, certain geographies and an unfavorable comparison to particularly strong prior year performance. On the fuel margin front, our Retail fuel margin on the cents per gallon basis declined 30% year-over-year as we experienced exceptionally strong fuel margins at $0.534 per gallon in the third quarter of 2022. However, on an absolute basis, our quarterly Retail fuel margin of $0.372 per gallon was strong and up from the second quarter Retail fuel margin, and while fuel volumes have been lower since the quarter end, as I noted a moment ago, fuel margin since the quarter end have generally been higher than what we experienced in the third quarter.

For inside sales on a same-site basis, our inside sales increased approximately 4% relative to last year. Inside sales excluding cigarettes were up approximately 9% year-over-year on a same-store basis. The strong sales performance was generally across all categories with packaged beverages and our food categories performing particularly well. On a store merchandise margin front, our merchandise gross margin increased 23% to $25.4 million, driven by our increased sales from the higher store count, the increase in same-store sales and improvement in our store merchandise gross margin percentage. Our store merchandise gross margin percentage was up 160 basis points year-over-year. The store merchandise margin improvement was due to merchandise sales shifts towards higher margin categories and certain initiatives we have in place in regards to pricing, product sourcing and promotions.

In the period since quarter-end same-store inside sales inclusive of cigarettes are up approximately 3% to 5% over the prior year. As we noted last quarter in our Retail segment, if you look at our company-operated site count we are up approximately 40 retail sites from the prior year, but flat in the second quarter of this year. The increase in site count relative to the prior year is due to our conversion of certain control sites from other classes of trade to company-operated sites earlier in the year. Although in the third quarter, we did not have any significant conversion activity, we expect to continue to convert additional sites from other classes of trade to company-operated Retail sites or to a lesser extent Retail commission sites going forward.

For the sites we do convert to company-operated retail or commission locations. We believe that we can generate more profitability from these locations and enhance these sites long-term value through operating these sites ourselves. Overall, despite the challenging year-over-year comparison to last year’s Retail fuel margin, it was a positive quarter for our Retail segment as same-store volume, same-store merchandise sales, same-store merchandise gross margin and store merchandise margin percentage were all up relative to the prior year. On the divestiture front, we had a quiet quarter selling only one property this quarter after selling six properties in the second quarter. Year-to-date, we have sold eight properties for approximately $8.3 million in proceeds.

We continuously look at our portfolio to identify potential divestiture locations and it remains a focus of ours to free up capital in this manner, which we will either put towards reducing leverage or investing in growth opportunities. Overall, the business continues to perform well across many different operating environments. The underlying fundamentals remained strong, our balance sheet is healthy and position well for the current interest rate environment and we continue to work hard on executing our initiatives and constantly improving the business. We cannot be successful without great people. So thank you to all the CrossAmerica team members who work hard every day to generate results and to drive the business forward. With that, I will turn it over to Maura for a more detailed financial review.