Crossamerica Partners LP (CAPL) 2015 Q1 法說會逐字稿

Welcome to the CST Brands and CrossAmerica Partners first quarter 2015 earnings call. My name is Vivian and I'll be your operator for today's call. At this time, all participants are in a 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 Mr. Randy Palmer, Director of Investor Relations. Mr. Palmer, you may begin.

Thank you, Operator. And good morning and thank you for joining this CST Brands and CrossAmerica first quarter 2015 earnings call. With me today are Kim Lubel, CST Chairman and CEO; Clay Killinger, Chief Financial Officer; Joe Topper, CEO of CrossAmerica Partners; and other members of our executive leadership team. Kim will provide an overview of the first quarter operational performance for CST, Joe will provide an overview of the operational performance for CrossAmerica and then we'll turn the call over to Clay to discuss the financial results. At the end we will open the call up for questions for both companies.

Before we begin, I'd 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 Companies. There could be no assurance that the management's expectations, beliefs and projections will be achieved or that actual results will not differ from expectations. Please see 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 the Company's management as of today's date and the Companies disclaim any intent or obligation to update any forward-looking statement.

During today's call, we may also provide certain performance measures that do not conform to US Generally Accepted Accounting Principles, or GAAP. We've provided schedules that reconcile these non-GAAP measures with the reported results on a GAAP basis as part of the earnings press release. We should also note that the results provided today represent the business operations of CST on a stand-alone basis before the consolidation of CrossAmerica Partners but include the income associated with CST on a percentage of the outstanding units and all the IDRs across America. Full consolidation information is included in note 16 in the first quarter 10-Q, which will enable you to arrive at our complete consolidated financial results.

Today's call is being webcast, the recording of this call will be available for a period of 60 days. And with that, I'll now turn the call over to Kim Lubel.

Thank you, Randy. And good morning, everyone, and welcome to our first quarter 2015 earnings call. This morning, CST reported solid results for the first quarter as we continued to trend the positive same-store sales with same-store merchandise growth of 3% for the US segment and 4.8% for Canada. We have now produced positive same-store merchandise growth in both the US and Canada for several straight quarters, a trend we expect to build upon in the coming months and years.

We also carried the momentum of the fourth quarter over to the first in regards to our US fuel margins as we benefited from a favorable fuel margin environment in January. CST reported fuel margin net of credit card fees of $0.14 for the first quarter. This is a strong result for our historically weaker quarter as this compares to a $0.10 margin last year an $0.08 average margin over the past five years. Overall, we are pleased with our first quarter results and believe that our efforts to drive traffic to our stores during the first quarter positioned us well to build on these efforts as we head into the summer driving season.

As we look at the remainder of this year, as we noted on the last call, we plan on building more new stores in 2015 and currently project that we will build between 35 to 40 new stores in the US and 10 to 12 new stores in Canada this year alone. We expect this level of organic growth to continue in future years supported by our partnership with CrossAmerica Partners as we expand into new markets. We believe these new builds, coupled with acquisitions, will continue to provide us growth well into the future.

As I have noted before, the overall convenience store market remains quite fragmented. The two transactions that we closed in the first quarter and our continued focus on other potential opportunities further underscore our commitment to acquisitive growth as we leverage the favorable capital structure across America. And with our dedicated integration team, we are even better positioned to make each acquisition successful through our ability to quickly integrate, capture identified synergies, and leverage some knowledge and strength of the acquired companies.

As we reported on our last call, we completed a dropdown of assets on January 1 as CST sold a 5% equity interest in CST's fuel supply business to CrossAmerica in exchange for approximately 1.5 million CrossAmerica units. This was our first of many drops to come. While we have not yet finalized the specific timing and assets, we are targeting another drop this summer that will most likely encompass those recently constructed NTIs and an additional equity interest in the fuel supply business.

I wanted to spend a little time talking about our Canadian business. As you look at the Canadian segment results this past quarter, as reported in US dollars, we saw declining gross profit of $1 million in that segment, as we experienced an 11% year-over-year decline in the Canadian dollar compared to the US dollar.

Excluding the effects of foreign exchange, we would have seen an increase of $13 million in Canadian gross profits. The fuel margin net of credit card fees remains strong at $0.21 per gallon for the first quarter of 2015. As we have note in the past, the relatively stable and strong fuel margin continues to be one of the key attributes of our Canadian business. We see opportunities to not only build new sites in Canada, but also believe there are various opportunities to grow through acquisitions as well.

And with that, I will turn the call over to Joe to review the CrossAmerica first quarter results.

Thank you, Kim. For today's call, I will provide a brief overview and some initial commentary on our first quarter results followed by a review of the over $125 million in acquisitions completed during the quarter. I will then turn it over to Clay for a more detailed walk-through of the financial results.

First, looking at our wholesale segment, our overall gallons sold increased from $160 million in the first quarter of 2014, to $234 million in 2015, reflecting an increase of 47%. Margin for the wholesale segment was $0.056 compare to $0.059 in the first quarter of 2014. For the first quarter, our purchase price of fuel in the wholesale segment declined by approximately $1.20 per gallon, or approximately 43% relative to the first quarter of 2014.

For most of our wholesale gallons we supplied, we received a terms discount from the product supplier, that is a percentage of the partnership's purchase price of the fuel. The dollar value of this discount will vary as the price of fuel varies. As a result, the dollar value of the purchase discount from our suppliers decreased relative to the prior quarter as a result of the lower fuel prices.

The decrease in the purchase discount due to the drop in fuel prices during the quarter was the primary driver of the decline in wholesale segment margin per gallon for the quarter when compared over a year-over-year basis. This was slightly offset by the positive margin environment for the smaller percentage of our variable price gallons during the quarter.

For the CrossAmerica retail segments, which does include our commission agent business, overall gallons sold increased from $15 million in the first quarter of 2014, to $46 million in 2015, reflecting an increase in the number of company-operate convenience stores, primarily from PMI and Erickson Oil acquisitions. Margins for the retail segment net of credit card fees and commissions was $0.102 compared to $0.021 for the first quarter of 2014.

Moving on to acquisitions, the partnership closed on approximately $125 million in acquisitions during the quarter. The primary acquisitions during the quarter were the Landmark store acquisition, which was a joint acquisition with CST, and the Erickson Oil Products acquisition, which was acquired by CrossAmerica in a stock deal.

Through the efforts of the integration team and the hard work of all of our team member, the assimilation of the 22 Landmark stores is complete. We are now in the process of integrating Erickson and continue our evaluations to strategically optimize the business we acquired as part of last year's PMI acquisition.

I know that Kim discussed this earlier, but I did want to briefly touch on the M&A market. The market place, whether it's retail, wholesale or a combination of both still remains fragmented. Because of this, we will continue to seek purchase opportunities.

We are in a much better position today with our partner CST. It is a collaborative effort. We are in the process of determining the details of the next dropdown of assets from CST to CrossAmerica. This is an important lever that we can utilize not only to provide overall growth to CrossAmerica but to also provide capital back to CST to fund such things as NTIs.

Finally, I want to talk briefly about the leadership change at CrossAmerica that has taken place this quarter. In March of 2015, I stepped down as President of the partnership and Jeremy Bergeron, who has been CST Senior Vice President for Integration and Development Operations, became CrossAmerica's President.

I will continue as CEO until September 30th of this year and then will remain on the boards of both Companies thereafter. We also combined the CFO with Clay Killinger, who you will hear from momentarily, become the Chief Financial Officer for both Companies.

I made these changes because of the deep respect for these gentlemen and the experience they bring from CST and because of my confidence in their ability to lead CrossAmerica into an even more profitable future. The collaboration between CST and CrossAmerica is strong and is providing us with the structure to consolidate our recent acquisitions, fulfill our vision for strategic growth. We believe we are positioned well for the upcoming and traditionally robust summer driving season.

I turn it over to Clay now.

Thanks, Joe.

First I'll provide a brief overview of the first quarter results for CST and then cover CrossAmerica. I'd like to remind everyone that the financial results that I'll be presenting for both CST and CrossAmerica today are on a stand-alone basis and not consolidated. Consolidated results are available in the CST 10-Q filed earlier this morning and I would refer you to footnote 16 that walks you through the consolidation of CST and CrossAmerica.

CST's portion of the cash distributions associated with CrossAmerica's IDRs and common units are included within CST's results and were approximately $1 million for the quarter. Today CST reported net income of $14 million, or $0.18 per share, for the first quarter 2015. This compares to net income of $11 million, or $0.14 per share, for the first quarter of 2014.

For the first quarter of 2015, we had certain one-time expenses that included acquisition, legal and professional fees and gains on the sales of assets as outlined in our earnings release. The after-tax income effect of these items was approximately $2 million for the first quarter of 2015. Excluding these items, our earnings would have been $16 million, or $0.20 per share, for the first quarter of 2015. There were no similar one-time items in the comparable quarter of 2014.

Associated with our first dropdown transaction that took place on January 1, we are providing non-GAAP financial metrics in our earnings release that reflects the economic impact of this transaction. You should expect that we will continue to show such metrics in the future as these dropdowns reflect recurring economic transactions based on independently determined market prices.

After taking into effect the economic gain from our first dropdown, for the first quarter CST achieved adjusted EBITDA of $126 million, adjusted net income of $52 million and adjusted diluted earnings per share of $0.67. Reconciliation to GAAP reported net income and earnings per share is provided in the earnings release.

As I discuss our first quarter CST highlights in more detail, I will be referring to our US and Canadian segment operating results which were included within the CST earnings release. In regards to CST's US segment, first quarter 2015 net motor fuel gross profit increased by $19 million, or 43%, when compared to the first quarter of 2014.

The year-over-year improvement was primarily attributable to an increase in the cents-per-gallon fuel margin, net of credit card fees of nearly $0.04 between the periods, rising to $0.14 from $0.10 for the first quarter of 2014. The increase in fuel margin was primarily result of falling crude oil prices early in the first quarter of 2015. This motor fuel gross profit reflects a reduction in gross profit attributable to CrossAmerica of $2 million, less than $0.005 per gallon of margin.

For our core stores, our US motor fuel gallon sold per site per day increased by approximately 4% quarter-versus-quarter, primarily driven by new to industry stores. Our gross profit from merchandise sales increased $5 million, or 5%, in the first quarter of 2015 when compared to the same period in 2014, also primarily driven by new to industry stores. Operating expenses increased $10 million quarter-versus-quarter reflecting our new to industry store growth and acquisitions.

Turning to our Canadian segment, first quarter motor fuel gross profit increased by $1 million, or 2%. The cents per gallon fuel margin net of credit card fees was approximately $0.21 for both the 2015 and 2014 periods with motor fuel gallons sold relatively flat.

Although the reported results are relatively comparable between the periods, excluding the effects of foreign currency exchange, our motor fuel gross profit increased $9 million in the first quarter of this year. Our reported gross profit from our merchandise sales and our other category was flat for the first quarter of 2015 compared to 2014. The slight decline was primarily attributable to foreign currency exchange as merchandise gross profit would have increased $1 million, excluding the effects of foreign exchange.

The Canadian dollar continued to devalue relative to the US dollar during the first quarter of 2015 versus the comparable period in 2014. As noted in our earnings release, the exchange rate for the US dollar relative to the Canadian dollar averaged approximately $0.81 for the first quarter of 2015 versus approximately $0.91 for the comparable period in 2014. This represents a devaluation of the Canadian dollar by approximately 11% between the comparable periods.

I'll now make a few comments about CST's financial position. At the end of the quarter, we had $309 million of cash and $297 million available under our credit facility after considering letters of credit and our maximum leverage constraint of 3.75 times adjusted EBITDA.

We have $198 million of cash in Canada and presently have no intentions of repatriating any amounts back to the US. In regards to our capital spending, capital expenditures for the first quarter of 2015 totaled $50 million.

For your 2015 modeling purposes, I'd like to provide you with some guidance on CST-related, non-gross margin items. Operating expenses for the second quarter of 2015 are expected to be in the range of $172 million to $177 million. As we move through 2015 and open additional NTIs, these quarterly amounts are expected to increase by $2 million to $5 million per quarter.

Recurring general and administrative expenses are expected to average in the range of $28 million to $32 million per quarter for 2015. Depreciation, amortization and accretion expense is expected to be in the range of $32 million to $34 million per quarter.

In past earnings calls, Randy would provide you with guidance on gross profit-related metrics. The gross profit segment guidance that we have provided in the past is now located within the earnings release.

Now turning to CrossAmerica, I'd like to briefly touch on key performance metrics that we believe are important to our unitholders. As I discuss these results, I will refer to CrossAmerica's separate earnings release filed earlier this morning.

Today we had reported adjusted EBITDA of $16 million for the first quarter of 2015. This compares to adjusted EBITDA of $11 million for the same period of 2014, or a 45% increase. The increase was primarily driven by recent acquisitions. Distributable cash flow for the first quarter was $10 million, or $0.41 per diluted unit, compared to $8 million, or $0.40 per diluted unit, for the first quarter of 2014.

For CrossAmerica's wholesale segment, gross profit increased 36% to $21 million from $16 million in the first quarter of 2014. Wholesale margin per gallon for the total system was $0.056 compared to $0.059 for the first quarter of 2014. The increase in wholesale gross profit was primarily driven by an increase in motor fuel gallons distributed related to acquisitions.

We have computed distributable cash flow using a current methodology that is consistent with others in the MLP space. This methodology is slightly different from our historical presentations, but consistent with how Joe described it in our year-end earnings conference call.

As a result of the dropdown of the 5% interest in the CST fuel supply business that was mentioned earlier, CrossAmerica's wholesale segment received $1.1 million in distributions from CST during the quarter. For CrossAmerica's retail segment, gross profit for the first quarter of 2015 was $14 million compared to $1 million for the same period in 2014. The increase is attributable to the acquired convenience store operations from the PMI and Erickson Oil acquisitions made over the past 12 months.

Retail margin per gallon for the total system was $0.102 compared to $0.021 for the first quarter 2014. CrossAmerica retail operations in the first quarter of 2014 consisted solely of commissioned agent sites, and therefore the margins are not fully comparable, as retail sites from PMI and Erickson have improved the overall fuel margin.

For the first quarter of 2015, distribution coverage was at 0.8 times, which was relatively comparable to the same period in 2014. As has been previously noted, we look at the coverage ratio over the course of a full year with the fourth and first quarters of the year typically being seasonally weaker quarters in our business.

Computing our distribution over the trailing 12 months, the coverage would have been approximately 1.1 times. Over the long term, we target coverage to be at or above 1.1 times. Finally, in regards to the annual growth rate of CrossAmerica's distributable cash flow per unit, we are targeting a growth rate of 7% to 9% for 2015.

With that, I'll turn it back to Kim.

Thank you, Clay. And before we turn the call over to questions, I do want to acknowledge that this month marks two years since CST spun off from Valero into an independent public company. I first want to thank all of our CST and CrossAmerica team members across the US and Canada for their support and dedication to delighting more customers everyday. I am also deeply grateful to the board of directors of both Companies for their continued guidance and support.

I would like to take a few moments to recast our transformational growth during our first two years as we have become one of the largest independent retail and wholesale distributors of motor fuel and convenience merchandise in North America. During this period, with the purchase of the general partner of CrossAmerica partners, we have doubled our footprint and acquired both a growth vehicle for future expansion and a strong wholesale fuel supply business.

We, together with CrossAmerica, along with the Nice N Easy Grocery Shoppes, a chain of 32 company-operated and 45 franchise stores in upstate New York, expanding our operations to a new market and with a network with a strong retail operating history. We, all put together with CrossAmerica, purchased 22 stores in Texas from Landmark Industries, marking our first corner stores shelling Shell-branded fuel in our existing market footprint. And with CrossAmerica's acquisition of Erickson Oil in the upper Midwest market in February, we continued to expand our footprint into new markets.

We have also focused on our organic growth with the opening of 62 new-to-industry stores and a new larger regional distribution center in San Antonio. Our growth to date aligns with our strategic vision for the future.

As we go through 2015 and beyond, we will continue to focus on the following: organic growth, with the building of new-to-industry stores and dropdowns across America; growing our inside store sales and merchandising efforts as we continue to strengthen our brand; targeted acquisitions, along with CrossAmerica partners, with growth in both our retail and wholesale networks; and deepening our integration and consolidation of the stores that have joined our network and our legacy stores around the country.

And with that, we will now open it up for questions.

Thank you. We will now begin the question and answer session.

(Operator Instructions)

And our first question comes from Ben Brownlow from Raymond James. Please go ahead.

Hey, good morning.

Good morning.

On the G&A guidance, just a slight uptick from what you were looking for previously, that $28 million to $32 million a quarter. Just give a little bit of color behind that. And Clay, you mentioned I believe $2 million in -- unusual charges for the quarter. Were there any other additional charges in the first quarter?

I'll take the second part first, Ben. With respect to CST, there was some severance and some legal and professional fees in the first quarter, and that's why the general and administrative expenses are higher. And that's offset by the gain on the sale of assets, so we had about $7 million of additional expenses in G&A offset by the $5 million gain on sale of assets and that gets you to the $2 million. The severance is just part of us integrating the CrossAmerica team into an integrated network.

So -- and with respect to the uptick in G&A costs, I don't think that it's a big creep. It's really just reflecting the growth that we're seeing in our business. We are an acquisitive company and we have been growing and we need some back office support to be able to continue to do the construction in our NTIs. We have benchmarked ourselves on our G&A costs as a percentage of our gross profit to our peers and we still think we're very favorable and comparable to the peers.

Great, thank you. And just one more from me -- Obviously there's a long multi-year drop down pipeline on the fuel distribution to CrossAmerica. But can you just update us on your thoughts or ability to drop down the Canadian fuel supply business? Is that something you're looking at? And then also on the IRS proposed changes, obviously that's not going to have an impact on CrossAmerica, but does that have any impact on what type of assets you would look to acquire?

Sure, Ben, I'll take the first piece. It's not like we're ignoring the Canadian assets at all. We've got enough on our plate right now with the drop downs in the US, and I think as time matures and goes by later on in the year or two we are going to evaluate what we can do with the Canadian assets. It's not something that we're just looking at, at the exact present moment.

With respect to the IRS regulation, they did issue some proposed regulations on May 5 that really clarify what qualifying and non-qualifying activity is. There really was no significant changes from our historical interpretations of the IRS rules. So -- and, in fact, I think they are beneficial to us, because they actually do codify -- or at least the proposed regs codify, that a wholesale distribution activity, which is primarily what CrossAmerica does, is a qualifying activity.

Now, there was some clarifying language on transportation activities and -- which is really trucking operations and that's the movement of the fuel from the rack to the actual pump. Those have always been considered non-qualifying activities and, within CrossAmerica, there is a small trucking operation but it's embedded into a tax-paying entity that sits underneath the MLP, and so therefore there's really no issue on non-qualifying income there. Would it affect our -- what we're looking at in terms to acquire? I think nothing's really changes with the regulations, they basically just codify things. And I will remind everybody that they're just proposed regulations, so it takes a little while for those -- for comments to come in and for them to finally be issued, but we don't see that to be an impact on us.

Great, thank you for the color.

Thank you. And our next question comes from Bonnie Herzog from Wells Fargo. Please go ahead.

Thanks. Good morning, everyone.

Good morning, Bonnie.

Kim, you mentioned you're doing another drop this summer, but I was hoping you could talk in more detail about what some of your considerations are for when it makes sense to do these drops? And also you mentioned your acquisition pipeline is quite full, so could you talk about how you prioritize these two initiatives?

Sure, sure. You know, we're evaluating the drop for, as I said, later this summer. The candidates we're looking at are the new-to-industry stores that we've built pretty much since we spun out and a commensurate amount of the fuel supply business associated with those stores. In terms of how we evaluate timing and those things, obviously, you know, financing plays a role from the partnership standpoint. And we're just modeling all that together and are looking towards later this summer for that next activity.

In terms of the acquisition pipeline, there are plenty of acquisition opportunities out there. And as we are coming together with CrossAmerica from a filter standpoint, I've described it to many as the Venn diagram. We have one circle of what CST would like, and what CrossAmerica would like in the other circle and it's that middle part that we're really focusing our activities, looking for networks in geographies that have strong economic conditions. You know, the upper Midwest, for example, with the Erickson transaction, I think, is a very good example of what we are looking for.

A strong network in terms of stores where there's either an opportunity for growing inside store sales as we bring in our offering or strong store sales like we see Nice N Easy to begin with where we can learn from it and bring it across scale, across the networks themselves. The beauty of the partnership with CrossAmerica is as we look at networks that have a combination of both company-operated stores and wholesale stores, we now have a place to put and grow the wholesale volume along with growing the retail side as well.

Okay, and then listening to you, would it be fair to say that you're entering a period of ramped up activity? Just listening to you about, you know, future drops as well as this really full acquisition pipeline.

Sure. Sure, absolutely. I think it will be continued to ramp-up activity for the years to come, it's certainly our expectation.

Okay. And then I have a question on, broadly, traffic, which was good in the quarter, and I believe you ran a lot of tactical promos. So could you drill down a bit more on this, and then how you'll be balancing driving future traffic and promos? And then, for instance, I guess I'm thinking about it because it seems like you're starting to ease up a bit on the promos since you're guiding to higher merch margins in Q2.

Good morning, Bonnie, this is Hal and thanks for the question. Yes, absolutely. As you can see, we're quite proud that this is our fourth quarter of same-store sales increases in the US and then our third quarter in a row in Canada. So our tactical moves of driving increased traffic into our Corner Stores is working for us.

And you're keen in noticing that we've guided our merchandise margin for the next quarter higher than what it is for this quarter because we have eased up on the promotional tactics that we were using in the fourth and first quarter. We've really promoted fountain drinks at a great price in the fourth and first quarter, and it worked for us really well. We've eased up on that and we're seeing that we've hung on to our increased traffic in the stores. So we're happy with the tactics that we've used and our stores are doing a great job at servicing and delighting our customers in the stores.

Okay, thank you.

Thanks, Bonnie.

Thank you. And our next question comes from John Lawrence from Stephens. Please go ahead.

Good morning, everyone.

Good morning, John.

Continuing, Hal, would you just comment on some of the new products you've put in place? And always want to get an update of what's really working and maybe some tests that haven't worked as well and just give us an update there?

Great, thanks John. Well, one of the things we're really excited about is in March we completed the installation of 160 freestyle fountain units in the San Antonio area market. We've partnered with Coca-Cola on this unique way to deliver fountain drinks to our stores and as you know, fountain plays a key role in growing food and growing snacks in our stores. And we're really interested in seeing how installing this in a market-wide basis is able to allow us to move the needle on these high-margin products.

So, as you can see with our guidance for second quarter sales, we remain enthusiastic on what those results are and what they will be. So that's probably the most exciting thing that we've had going in the last couple months. We continue to play with our afternoon food offering in our advanced food stores and growing that one-handed food. We've introduced, about a year ago, the puff pie and the empanada-type item that we're pleased with the results so far -- in growing our afternoon food business.

And we just introduced a new line of tube nuts in our proprietary food line with the fresh choices label. And we have a couple other items coming this quarter that will help extend that private label line. So good things on high margin end and we're really pleased with our beverage business.

And just one last point there. As you go forward, the balance between proprietary food and QSRs, or partners, how do you look at that?

Well, I think it's fair to say to we're very bullish in proprietary food programs, especially with the embrace of the Nice N Easy model in New York. And as I mentioned last call, we're busily working on getting a number of those concepts inserted into some stores here in the southwest so we can begin to play with them and understand how the customers embrace that idea. So we really embrace the proprietary food program idea in our stores.

Yes, thanks. Last question, Kim, as you look at geographies for either new builds or acquisitions, you touched on it a little bit of where it makes sense, but is there anything in particular regions of the country that make more sense at this point in time? Thanks.

Well, we certainly like the fill-in on our existing footprint. In particular, Texas is 60% of our US marketplace and a substantial number of our new store builds are in Texas. The Landmark acquisition that we did in January was very quickly integrated into our system, within about 2.5 weeks to 3 weeks, so we now have Corner Stores in San Antonio, Austin, selling Shell-branded fuel, which is helpful from a Corner Store brand identity standpoint. So, to the extent we find the right networks in our footprint right now, that's an easy acquisition approach, an integration approach. And then, as I said earlier, that upper-Midwest area is interesting, as well. I think Erickson Oil certainly gives us a nice footprint with CrossAmerica to evaluate further expansion in that area.

Great, thanks. Good luck.

Thank you.

Thank you, John.

Thank you. And our next question comes from Theresa Chen from Barclays Capital. Please go ahead.

Good morning.

Good morning, Teresa.

My first question is in relation to your comments about the drop downs for the rest of the year and specifically referring to the fuel supply drop. So given the magnitude and pace of third-party acquisitions that you've done year to date, plus the plan drop downs of the NTI real estate assets, I mean, I wouldn't necessarily think that you would need a drop down of fuel supply imminently.

I understand that it makes a lot of sense to do the NTI drops regularly because you don't have a depreciated cost basis for those and thus no tax bill. But for fuel supply, are you planning to execute this drop because you think you'll need it to support distribution growth? Or should we think of it more as the set schedule drop down strategy?

Really it's we're looking at the new store drops, we're just modeling the fuel supply kind of commensurate with the amount of fuel to these stores. So it's really not additional fuel supply on top of that.

Okay, that's helpful. And then, in terms of the breakdown in the partnership's cash flow between variable and non-variable pricing contracts. I believe, and please correct me if I'm wrong, about 20% of the pricing is variable and I was just wondering if you're looking to bring that number down further over time or do you think that this is the right balance?

I think we are moving towards a more consistent everyday price, just partly the way we do with CST, like at $0.05 a gallon. Or the contracts that we have between the partnership -- we're trying to bring down less variability and more predictability so that we -- less variable move to the price of gallon. So, I would say that percentage will decline over time as a percentage of our total business.

Understood. And lastly, in terms of first-party acquisitions, I appreciate your comments on the continued fragmentation in the market, and I wanted to ask if you could share with us what has incrementally changed in the market from a quarter ago, a year ago? What are some, I guess, tangible changes you're seeing that we wouldn't be able to necessarily discern from the outside?

There's a new rational exuberance for buyers and sellers going on right now. (laughter)

So, I don't know that the deal flow and the deal opportunities have necessarily increased so substantially in the last quarter or the last year. I think we've had, it's been a very active acquisition market I think now for the last 12 months-plus. But to Joe's point, there are more players on both buyer and seller side and I still think we still present a very attractive buyer of these networks. You know, we are -- we know how to run Corner Stores, we've done it for years and decades. We have the wholesale strength from CrossAmerica coming into it and that combination, I think we're a very attractive buyer as CST/CrossAmerica continues to participate in the acquisition market.

Teresa, since we've gone out, we've done close to $600 million of acquisitions, and they fit within the model that CrossAmerica has put forward and there still is a significant amount of accretive acquisitions that are out there for us to buy in this market and I don't see that changing anytime soon.

Thank you very much.

Thanks, Teresa.

Thank you. And our next question comes from Matthew Boss from JPMorgan. Please go ahead.

Good morning, this is [Esteban] on for Matt. On the M&A front, how should we think about higher rates on your overall business, and specifically the value of CrossAmerica units and your ability to finance acquisitions and drop downs going forward?

I don't think we have any problems to finance acquisitions going forward as long as we buy them at accretive multiples. I think -- I don't want to comment on the share price, because it's inappropriate for me to comment on the share price, other than I bought shares personally myself in March. I'm looking forward to other opportunities. I think there are many ways for us to finance things, whether through our credit facility, whether through a high-yield offering, so I'm not necessarily worried or concerned about the share price today. I'm looking for ways to make the share price go higher for everybody.

Got it. And now that your past-year May spend restriction date. Have you given any thought to either additional stored invested shares above the 100 that you did recently or any other strategic options that weren't available previously?

You know, as the two-year market has come and gone -- our job is to continue to show up every day and continue to increase shareholder value. In terms of things that we could do today that we couldn't do a week ago, really, you know, we moved into the MLP space with our transaction with CrossAmerica. And so the one thing that we were probably stopped from doing prior to May 1 in terms of forming our own MLP, we were able to get there and I think we've certainly brought value to both the unitholders and shareholders as a result.

And then in terms of just our store divesture, you can expect us to continue every year to look at our portfolio and identify those that may be underperforming for us and look for other places for those stores to go, whether it's a [deal at market] or from a divesture standpoint. But no big structural changes other than everyday showing up and trying to beat the performance from the day before.

Got it. And lastly, any color you can give us on the new distribution center and, you know, how it's impacted your operations and any benefit you've seen or you expect to see this year.

Sure, I'll let Hal give details, but we're thrilled with the new distribution center. We are able to move operations over a weekend into the center. We got there early, we were able to, I think, capture some savings as a result of the early move. And certainly from my corner, it looks like things are going very well, but Hal is more deeply into that too.

Absolutely. Well, the logistic center provides us advantage in the market place in terms of cost and getting fresh products to our stores every other day in over 600 stores that we deliver product to. But what the new center does is it just relieves a lot of pressure from the size that we are operating under before.

Our growth and our expansion in that business and our utilization of that center was just causing the old center to be busting at the seams. Now we are moved into a place where we've got plenty of room for growth, plenty of room to handle the volume that we're handling today, and just makes the logistic a lot more efficient. So we're pleased with it, we're glad we got into it before spring, like Kim said, ahead of schedule. And it's humming and we haven't missed a beat.

Great. Thanks and good luck, guys.

Thank you. And our next question comes from Betty Chen from Mizuho Securities. Please go ahead.

Good morning, everyone. Thanks for taking my question. My first question, I was wondering, I think we've now seen two consecutive quarters of gallon per site per day increase and the guidance in the second quarter also reflects additional growth. Can you talk a little bit about what's driving that? Is it a change in consumer behavior, your strategy around fuel margins, et cetera?

And then, my second question is in regard to the drop down. Can you, I think you've shared with us your thinking around the timing of that, but any color in terms of, you know, how are you considering the NTIs that would be candidates for drop downs, in terms of the quantity or the size of that drop down, that would be really helpful. Thanks.

Sure.

Betty, hi, this is Tony. I'll take the fuel question first. There's two things really driving the increase in gallons. One is the continued NTI growth that we're having. Those stores are, you know, pumping over 8,000 gallons a day today versus our average that you see around close to 5,000 a day on the average. So they're continuing to be an incremental add. The second piece of that is the rationalization that we did of the, roughly now, 70 stores-plus that were at lower volume numbers. So that combination of what's left is what's really causing that increment there.

Sure. And then in terms of on the NTI, looking at the drops. You know, the candidates for the drops are, we're really looking at our most recently constructed stores, primarily those that we've constructed since we spun out in the US. That's 40 or so stores that we're looking at there. And so those candidates, because the depreciation is still, they're still pretty high-level bases in those stores are good candidates for the drop as well.

Thank you. And our next question comes from Sharon Lui from Wells Fargo. Please go ahead.

Hi, good morning.

Good morning.

Just wondering if you could provide, I guess, a little bit more detail on the target growth rate for the partnership. I believe it's 7% to 9%. Is that on a distribution per unit number or did you say distributable cash flow?

It's on a distribution per unit.

Okay. And I'm assuming that incorporates the potential drop down but not any third-party acquisitions?

It's, well, it would be a combination, it's just what we are targeting on an annual basis for 2015, so the partnership has completed some acquisitions. There are some in the pipeline and then obviously we've talked about the asset drop and that is -- is significant for both, both entities. And it's recurring and it's something we've talked about. So this is looking at -- we wanted to give some guidance to the investing public on what we are actually currently seeing and targeting. So that's where we got the number from.

Okay, that's helpful. And I guess with the drop down of the NTI stores, I'm assuming that the partnership would also acquire additional interests in the CST supply, fuel supply. Is that how it's going to work?

Right, that's how we are modeling it right now.

Okay, great. Great. And then, just in terms of the -- you gave some guidance for OpEx and G&A for CST. I was wondering maybe if you could provide your expectations at the partnership level for those amounts.

Given we're still in the process of truing up and finalizing our models, so we're not in a position to be providing guidance on G&A at this present time. But I think we will -- there were some one-time items and you can compare those in the distributable cash flow table that was in the earnings release. And I would not expect that to be significantly different from the recurring rate that was incurred --

Okay, great.

-- in the first quarter.

Thank you.

Thanks, Sharon.

Thank you. And our next question comes from Damian Witkowski from Gabelli & Co. Please go ahead.

Good morning, nice quarter. Question, going back to your guidance for Q2 on the gallons per store per day. Obviously, moving up nicely as you've seen in the last two quarters. But in that number, can you talk about what your expectation is for same-store sales? Is it still negative or would that positive 3% sort of imply positive same-store sales as well?

Damian, hi, this is Tony again. The same-store level, we're managing those a little bit differently. And we're trying to push -- maximize gross profit in those cases. So I'm not overly concerned. We would like to see us maybe move today to around flat if we could, but I'm not overly concerned because those are also our older units and also continuing to look at where those may end up ultimately, right? We talked a little bit about rationalization earlier. Some of those are stores that may end up moving into that category at a later date. So I'm not overly concerned about it and I think we should all be happy with it, for the most part, staying close to it.

And I've asked this before, but are you seeing anything in your Texas economy that gives you pause or worries you in terms of just the economy slowing due to what's happened with oil prices. Obviously they've rebounded, but still. Are you seeing any discernible difference between your geographies?

You know, the 600 stores-plus in Texas alone, we had, you know, I think very positive numbers in the first quarter. You should expect that a lot of that came from Texas and 60% of it comes from the Texas for the US side. So, really, we're not seeing any significant impact. If anything, you know, I think the Texas economy, as we said before, has gotten even more diversified over the last several years. We tend to be centered in urban markets, like San Antonio and Dallas and Houston and Austin, that all have different industries driving growth in those areas.

Only about 2% of our stores are in the Eagle Ford area and I would say we're still pleased with the results of those stores. You know, as we said earlier when we opened a few of them, the results initially were extraordinary during kind of the heyday in Eagle Ford. And while we're probably not seeing the extraordinary results we saw a couple years ago, we're still very pleased with the results of those stores as well.

And then lastly, we've been talking about drop downs and sort of in the short term. But can you just go back to when you did the acquisition of the MLP back in August of 2014? I think the idea was to, over a five-year period, drop down the entire $1.9 billion or so in US fuel gallons. And, you know, what's -- how should we think about the cadence of that drop down? You did 5% at the beginning of this year. Are you going to do more? And is five years still the time frame we should think about? And then also, remind me what determines the sort of the multiple that the MLP pays for those gallons?

Sure, [it's] Clay. Damian, I think we've guided five years-plus, and so it's a minimum of five, and it can go, you know, obviously much longer. And the amount of cadence isn't set in stone, obviously it can change, But I think the initial expectation was that there would be at least one a year. And we did drop --a fuel drop only in January. One of the primary reasons for doing the drop, and it wasn't a big one, was to provide some metrics that the investing public could use to sort of triangulate and quantify what the drops might be in the future, especially with respect to the fuel supply.

So I would say the expectation is over five years, which is a 20% cadence per year, that's probably on the heavy side. It's not impossible, but probably on the heavy side. And in terms of the number per year, probably at least one, and -- actually what we're doing, other than the January fuel drop, is right in line with what we had modeled out internally. We haven't disclosed that, but it's modeling right in line in terms of what we thought when we acquired the GP and the IDRs.

Now, with respect to the purchase prices and the multiples between CST and CrossAmerica, those are determined through what I would call very robust negotiations between CST and the independent Board of Directors/members at CrossAmerica. Which each of them hired independent appraisers and consultants to determine what the fair value of those are and so it is not a dictated price, it is truly a market-driven price based on a number of different factors. I would say that it is a very robust and spirited negotiation between both Boards.

All right, thank you.

Operator, we've got time for one more question.

Thank you. And our next question comes from David Hartley from Credit Suisse. Please go ahead.

Thanks and good morning. Just could you reiterate the cash you have in Canada right now? I missed that number.

All right, just over, what, $300 million?

In Canada it's close to $200 million. I think it's $198 million.

So, there are no plans to repatriate that down to the US. What is your thinking with that cash in Canada? What are your options for that?

You know, we're certainly growing our NTIs on new stores in Canada as well. We've got 10 to 12 that we're looking at this year alone. You know, we're interested in acquisitions in both US and Canada. So as opportunities come up, that certainly is cash flow available to us up there for that as well.

Okay, that's great. Just on the core store, same-store information for the US. I'm noticing the merchandise sales were up year-over-year, but it looks like a good portion of that, maybe 70% of it is coming ex-cigarettes. Can you give us a sense of, you know, how these sales increases -- and I assume they're related to food service predominantly, how is that cadence of sales versus dollar profits trending out? Or are sales growing much faster than the operating or the gross profits for food service at this point in time in its early days? And do you expect that to catch up and surpass sales growth over time?

David, this is Hal. Obviously when you look at total store sales, cigarettes come at a lesser percent margin than ex-cigarette business does. It's helpful for us to grow the ex-cigarette business faster than cigarette business, and so that's our strategy. And things like beverage and food and snacks come at a higher pool margin than things like general merchandise, grocery and milk.

So we've got lots of levers to pull and we're pulling all of those different levels at different cadences to make sure we're growing sales and gross profit at the same time. But as we've said before, we're very concentrated on gross profit growth regardless of what happens to the revenue. So we're very focused on growing pennies per customer out the door. So you're right -- food service, as food service grows, it pulls up the total margin percent in the pool and we benefit from that. So our focus is on food service, beverage and snacks, and growing those categories because they pull up our margin.

But I'm just wondering why the margin didn't go up and your merchandise gross profit dollars are actually down a little bit, given everything you're saying. I mean, what's happening there? Is there a lot of promotion involved, is there a lot of shrink involved, is there initial labor costs? Well, I guess that wouldn't be in gross margins. But what's happening there that would have the sales going up in merchandise, but not necessarily the profit?

Great, thanks for clarifying your question, David. So as we mentioned earlier in the call, we did in the fourth quarter and -- late in the fourth quarter and all during the first quarter we ran a very heavy promotion in our fountain category which did increase our traffic but did have a decline on our percent margin overall. So that's what you're seeing as an anomaly for this one quarter. But if you look at the guidance for next quarter, you see that we normalize that percent and it begins to grow again and that would be -- that's our strategy and that would be what our intention is. So what you're seeing is a one-time hit to the margin percent in fountain which had a big impact because of its large percentage base.

Okay, thank you.

Okay. Thank you very much. That does complete today's conference call. We appreciate each of you joining us today, and if you have followup questions, please feel free to contact us. Thank you very much.

Thank you.

And thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.