Earnings Call Transcript
CrossAmerica Partners LP (CAPL)
Earnings Call Transcript - CAPL Q3 2025
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the CrossAmerica Partners Third Quarter 2025 Earnings Call. This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Maura Topper, Chief Financial Officer. Please go ahead.
Maura Topper, CFO
Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners Third Quarter 2025 Earnings Call. With me today is Charles Nifong, CEO and President. We'll start off the call today with Charles providing some opening comments and an overview of CrossAmerica's operational performance for the third 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, CEO and President
Thank you, Maura. Maura and I appreciate everyone joining us this morning and thank you for making the time to be with us today. During today's call, I will go through some of the operating highlights for the third quarter. I will also provide commentary on the market and a few other updates as I typically do on our calls. Maura will then review our financial results in more detail. If you turn to Slide 4, I will briefly review some of our operating results for the quarter. For the third quarter of 2025, our Retail segment gross profit decreased 4% to $80 million compared to $83.6 million in the third quarter of 2024. The decrease was primarily driven by a decline in motor fuel gross profit due to lower retail fuel margins for the quarter compared to the prior year. Our retail fuel margin on a cents per gallon basis decreased 5% year-over-year, with a fuel margin of $0.384 per gallon in the third quarter of 2025 compared to a historically strong $0.406 per gallon in the third quarter of 2024. Compared to the prior year, crude oil prices were much less volatile in the third quarter of 2025, resulting in lower market volatility and consequently lower retail fuel margins year-over-year. On a same-store basis, our overall retail fuel volume declined 4% for the quarter year-over-year. Our retail volume performance was divided between our company-operated and commissioned sites. For our company-operated sites, same-store volume was down slightly less than 3% year-over-year. Our pricing strategy for these sites remained unchanged, as we strive to be competitive at each location for the market where the site is located. For our commission class of trade, same-store site volume was down about 7% for the quarter, partly due to our decision to adjust pricing strategies at select sites. We had been aggressive with fuel pricing at the time of conversion, which initially generated strong volume growth. These sites are now classified as same-store locations. In the third quarter, we balanced volume and margin performance at these locations, leading to lower same-store volumes in our commission sites, alongside an overall market volume decline. According to national demand data, national gasoline demand is down about 2.5% for the quarter. Thus, our company-operated sites slightly underperformed the market volume, while our commission sites fell below national market volume, mainly due to deliberate pricing strategy changes we made during the quarter. Since the end of the quarter, national retail volume has declined about 3.5%, with our overall retail same-store volume declining slightly more year-over-year, as we continue to adjust commission pricing strategies relative to the prior year, comparing against a strong volume performance from last October. In the same period, retail fuel margins have been significantly higher than the average for third-quarter retail fuel margins, benefiting from favorable market conditions that enhanced retail fuel margins. Regarding inside sales, on a same-site basis, our inside sales increased about 3% compared to the prior year for the third quarter. Inside sales, excluding cigarettes, were up 4% year-over-year on a same-store basis for the quarter, driven by strong performance in our packaged beverage and other tobacco products categories. Our food category also contributed to the relatively strong 4% growth in same-store sales during this period. Overall, national demand for inside store sales for the quarter was flat to slightly positive, indicating our relative outperformance. Our merchandise gross profit increased by 5% to $32 million, driven by higher sales in our base business and an increase in store merchandise margin percentage. Our merchandise gross margin percentage improved by approximately 100 basis points compared to the prior year, primarily due to significant growth in higher-margin categories like other tobacco products and our transition from a commission-based model for certain products to owning and selling them directly. Since the quarter-end, same-store inside sales have been approximately flat compared to the prior year. In our retail segment, at the end of the quarter, our company-operated site count decreased by 8 sites compared to the second quarter of this year. The decrease reflects the asset sales we completed during the quarter, involving lower-performing sites in markets we deemed no longer strategic. Our commission agent site count also decreased modestly by 3 sites during the quarter compared to the second quarter. These divestitures represent our continued focus on being in retail, in the right markets, with the right assets, positioning our portfolio for long-term success. We continue to seek opportunities to increase our retail exposure, and our overall retail strategy has not changed. The Retail segment performed well in the third quarter. On a fuel margin-neutral basis, the segment outperformed the prior year due to strong inside sales and expense reduction, which Maura will address in her comments. Our volume performance initially appears to have underperformed, but this is mainly attributed to deliberate decisions regarding our commission class of trade to adjust the volume and fuel margin mix at select sites. Since the end of the quarter, we have enjoyed a strong fuel margin environment throughout October. Moving on to the Wholesale segment. For the third quarter of 2025, our Wholesale segment gross profit declined 10% to $24.8 million compared to $27.6 million in the third quarter of 2024. The decrease was mainly due to declines in fuel volume, fuel margin, and rental income. The reduction in fuel volume was primarily caused by converting certain lessee dealer sites to company-operated and commission agent sites now included in the retail segment. Rental income also declined for the same reason and due to site divestitures completed this year. Our wholesale motor fuel gross profit fell 7% to $15.7 million in the third quarter of 2025 from $16.9 million a year earlier. Our fuel margin dropped 2% from $0.09 per gallon in the third quarter of 2024 to $0.088 per gallon in the third quarter of 2025. The decline in wholesale fuel margin per gallon was chiefly driven by fluctuations in crude oil prices and lower prompt pay discounts tied to reduced gasoline prices, which reflected lower crude oil prices during the quarter compared to the previous year, albeit partially offset by better sourcing costs. Our wholesale volume was 177.7 million gallons for the third quarter of 2025, down from 186.9 million gallons in the third quarter of 2024, representing a 5% decline. This decline in volume is mainly attributed to converting certain lessee dealer sites to our retail class of trade, with those gallons now reflected in our retail segment results. For the quarter, our same-store volume in the wholesale segment was down about 2.5% year-over-year, explaining the additional roughly 2.5% drop in volume – the difference between the overall volume decline of 5% and our same-store volume decline for this segment. This was largely due to converting sites to the retail segment or losing independent dealer volume. As previously mentioned, national demand data indicated national volume demand was down around 2.5% for the quarter. Thus, our same-store wholesale volume performance for the third quarter aligned with overall national volume demand. Since the quarter-end, wholesale same-store volume has declined about 4.5%, slightly worse than national volume demand, which has decreased around 3.5%. Regarding our wholesale rent, our base rent for the quarter stood at $8.5 million compared to $10.4 million last year, a decrease attributable to the conversion of certain lessee dealer sites to company-operated sites as well as our real estate rationalization initiatives. The rent from the converted sites, while no longer showing as rent, is now effectively reflected in our retail segment results through our fuel and store sales margins at those locations. This quarter, we continued our real estate rationalization efforts, realizing about $22 million from the sale of 29 sites, which we primarily used to pay down debt. We sold sites with existing fuel supply relationships, allowing us to achieve an attractive effective multiple on these divestitures, thereby strengthening our current financial position and enhancing our future portfolio strategy. Year-to-date, we have generated approximately $100 million from asset sales, marking our largest year ever. We maintain a strong pipeline of asset sales for the remainder of the year and are also developing a pipeline for 2026. While we do not anticipate next year will match this year's record volume of sales, we expect it to yield meaningful proceeds for our balance sheet or business investment. Overall, the third quarter was solid for the partnership. Although our EBITDA was below the prior year, on a comparable fuel margin basis, our EBITDA results surpassed the previous year, even with approximately $100 million in asset sale proceeds realized this year. During the quarter, we achieved significant progress on our strategic goals, including strong site divestitures that reduced our debt by around $22 million compared to the second quarter and further optimized our operational portfolio for the future. Since the close of the third quarter, we have seen a solid start to the fourth quarter, benefiting from a very favorable fuel margin environment.
Maura Topper, CFO
With that, I'll turn it over to Maura to further discuss our financial results. 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 $13.6 million for the third quarter of 2025 compared to net income of $10.7 million in the third quarter of 2024. This increase in net income was driven by a combination of factors, including a decline in adjusted EBITDA year-over-year, offset by increased gains on the sale of assets that Charles discussed in his commentary and a decline in interest expense. We recorded a net gain from asset sales and lease terminations of $7.4 million during the third quarter of 2025 compared to $4.7 million during the third quarter of 2024. Interest expense declined from $14.1 million during the third quarter of 2024 to $11.8 million during the third quarter of 2025, a material benefit to our quarter as a result of our strategic activities, which I will discuss further later on in my comments. Adjusted EBITDA for the third quarter of 2025 was $41.3 million, a decline of $2.6 million or 6% compared to the prior year period. This decline was primarily due to a decline in fuel and rent gross profit, which was offset by a $4 million decrease in overall expenses during the quarter year-over-year. Our distributable cash flow for the third quarter of 2025 was $27.8 million, a slight increase from $27.1 million for the third quarter of 2024. The increase in distributable cash flow was primarily due to lower cash interest expense, sustaining capital expenditures and current income tax expense, offset by our lower adjusted EBITDA. The decline in interest expense we experienced during the quarter was due to a lower average interest rate during the period and a lower average outstanding debt balance on our capital credit facility during the period, as we have materially applied the proceeds of our asset sale activities to pay down our revolver balance. Our distribution coverage ratio for the third quarter of 2025 was 1.39x compared to 1.36x for the same period of 2024. Our distribution coverage for the trailing 12 months for the period ended September 30, 2025, was 1x compared to 1.26x for the same 12-month period ended September 30, 2024. During the third quarter of 2025, the partnership paid a distribution of $0.525 per unit. Charles provided information in his comments on our top line and gross profit metrics during the quarter and how they impacted our adjusted EBITDA compared to the prior year. I will now touch on the expense portion of our operations. In total, across both segments, we reported operating expenses for the third quarter of 2025 of $57.5 million, a $3.2 million decrease year-over-year. We reported G&A expenses for the quarter of $6.5 million, a $0.8 million decrease year-over-year, resulting in a total expense decrease for the organization of $4 million or 6% over the course of the past year. As I touched on during our last quarterly earnings call, we have cycled through the first year of operations of many of our locations in their new classes of trade, which typically results in elevated expenses to onboard and upgrade the converted locations. As a result, we are experiencing a stabilization of our expense profile in our current class of trade site count. We will, of course, continue to experience seasonality of certain types of operating expenses in our stabilized portfolio, like increased labor in the summer and increased snowplowing in the winter. Returning to our operating segments. Retail segment operating expenses for the third quarter declined $1.6 million or 3%. This was driven primarily by the reduced site count in our retail segment this quarter, specifically the 4% decrease in average company-operated site count year-over-year. On a same-store store level basis, operating expenses in our retail segment were down 2% for the third quarter of 2025 compared to the third quarter of 2024. The decline was primarily driven by reduced repairs and maintenance spending at both our company-operated and commission class of trade locations due to realized ongoing efficiencies in our maintenance operations, offset by normal course increases in store labor costs. Operating expenses in our wholesale segment declined by $1.6 million or 19% for the quarter year-over-year due to declines in site level operating expenses and management fees, as our wholesale segment average site count declined 6% year-over-year. And specifically, our lessee dealer or controlled site count within this segment declined 23% year-over-year due to asset sales and to a lesser extent, conversions to our retail class of trade. Our G&A expenses declined 11% for the quarter year-over-year, primarily driven by lower legal fees and equity compensation expense. As noted last quarter, our G&A expense profile this quarter, excluding event-driven acquisition costs and unit price movements impacts to equity compensation is more indicative of our ongoing run rate in this area. We remain focused across the organization on efficient expense management at our locations, ensuring that we are investing in customer-facing areas that will drive the long-term health and sustainability of our sites and driving operating efficiencies in our above-store operations. Moving to the next slide. We spent a total of $6.7 million on capital expenditures during the third quarter with $4.8 million of that total being growth-related capital expenditures and $1.9 million of that being sustaining capital expenditures. The decline in sustaining capital expenditures versus the prior year is in line with our expectations, as we experienced a stabilization of our current class of trade site count as well as a reduction of our real estate controlled site count. Moving to our growth capital spending during the quarter. Our spend remained focused on our company-operated locations and included the completion of various projects to increase food offerings, both our own and QSRs as well as targeted fuel brand and backcourt refresh projects, supported by our wholesale fuel supplier partners. Our food-related growth investments have and will continue to contribute to our merchandise sales and margin results, as Charles discussed earlier. Turning to our balance sheet. The asset sale activities during the third quarter that Charles reviewed in his comments, meaningfully helped us reduce our credit facility balance by $21.5 million since the end of the second quarter of 2025, ending the quarter at a credit facility balance of $705.5 million. Our year-to-date asset sale activities have helped us to reduce our credit facility balance by $62 million year-to-date. The decrease in our balance, combined with the gains on sale generated from our asset sale activities, resulted in a decrease in our credit facility-defined leverage ratio to 3.56x compared to 4.36x as of December 31, 2024. This leverage ratio continues to provide additional meaningful savings on our credit facility interest expense, as we move forward. Our management team remains focused on the cash flow generation profile of our business, utilizing our normal course operations and our targeted real estate optimization efforts to manage our leverage ratio at approximately 4x on a credit facility-defined basis. Our asset sale activities during the quarter and reduced credit facility balance also helped improve our cash interest expense during the quarter, which decreased from $13.7 million in the third quarter of 2024 to $11.3 million in the third quarter of 2025. We also benefited from a lower average interest rate environment during the third quarter of 2025. Our existing interest rate swap portfolio continues to benefit us as well. At this time, more than 55% of our current credit facility balance is swapped to a fixed rate of approximately 3.4% blended, which remains an advantaged rate in the current rate environment. Our effective interest rate on the total capital credit facility at the end of the third quarter is 5.8%. In conclusion, as Charles noted, we had a solid third quarter. We successfully completed several asset sales, reducing our debt by more than $20 million and strengthening our balance sheet. These transactions also positioned our operating portfolio for long-term performance. We remain focused as a team on continuing to execute across the business and are looking forward to 2026, maintaining a strong balance sheet and generating value for our unitholders. With that, we will open it up for questions.
Operator, Operator
It doesn't appear we have any questions today. Should you have any questions later, please feel free to reach out to us. Again, thank you for joining us. Have a great day. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.