Crossamerica Partners LP (CAPL) 2015 Q4 法說會逐字稿

Welcome to the CST Brands and CrossAmerica Partners joint year-end and fourth-quarter 2015 earnings call. My name is Christine, and I will be the operator for today's call.

(Operator Instructions)

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. Good morning, and thank you for joining the CST Brands and CrossAmerica Partners year-end and fourth-quarter 2015 earnings call. With me today are Kim Lubel, CST Chairman and CEO; Clay Killinger, Chief Financial Officer; Hal Adams, President of Retail Operations; Jeremy Bergeron, President of CrossAmerica Partners; Steve Stellato, Chief Accounting Officer at CrossAmerica Partners; and other members of our executive leadership team.

Kim will provide an overview of the CST operational performance for the year and the fourth quarter, and current strategic initiatives; and then we will turn the call over to Clay to discuss the CST financial results. Hal will provide a brief update on our merchandising efforts, and then Jeremy will follow with an overview of the operational and financial performance for CrossAmerica Partners. And at the end we will open the call to questions for both organizations. I should point out that today's call will follow some presentation slides that our team will utilize during this morning's events. These slides are available as part of the webcast and will be posted on the CST Brands and CrossAmerica websites.

Before I 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 organizations. There can 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 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 US generally accepted accounting principles, or GAAP. We provided schedules that reconcile these non-GAAP measures with our reported results on a GAAP basis as part of our earnings press release. We should also note that the results provided today by CST represent the business operations of CST on a standalone basis before the consolidation of CrossAmerica Partners LP, but include the income associated with CST owning a percentage of the outstanding common units and all of the IDRs of CrossAmerica. Full consolidation information is included in the 2015 form 10-K, which will enable you to arrive at our completed consolidated financial results.

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

Thanks, Randy. Good morning, everyone, and welcome to our year-end and fourth-quarter 2015 earnings call.

As you turn to slide 4, CST reported full-year 2015 gross profits of $1.2 billion and adjusted EBITDA of $602 million. These strong results in 2015 were driven by year-over-year increases in inside sales and fuel volumes.

As we look back at 2015, CST along with CrossAmerica, began the year with a joint purchase of 22 Shell-branded convenience stores from Landmark Industries located in the San Antonio and Austin, Texas markets. And furthering CST strategic vision for growth, the Company announced its largest acquisition to date with the purchase of Flash Foods. The 165 convenience stores located in Georgia and Florida will allow the Company to continue to grow and bridge the geographic gap between its existing retail networks. The transaction closed just a few weeks ago, and integration and synergy capture initiatives are well underway.

During the year, CST completed two fuel drop transactions and one real estate drop transaction with CrossAmerica. By the end of 2015, CrossAmerica held 17.5% of CST Fuel Supply, and CST owned 18.7% of the total CrossAmerica units. The Company's focus on organic growth also continued in 2015 with the opening of 31 new stores in the US and 11 in Canada. Currently, the Company expects to open a total of 45 to 50 new stores in the US, including two in Georgia; and 10 to 15 new stores in Canada during 2016. These new stores provide a much larger footprint that accommodates broader merchandise categories and food offerings as well as an expanded fuel island.

As we noted during our last earnings call, our fuels business remains very important to our profitability, and we continue to work to maximize fuel gross profit dollars. Our primary focus, however, is in improving our inside store performance across our network. For the full year 2015 merchandise and services contributed $577 million in gross profits to our results, a more than 6% increase over 2014. Our US merchandise and services same-store sales increased 3% for the year, and our Canada segment merchandise and services same-store sales presented in Canadian dollars increased 5%. Hal will touch on some of our merchandising efforts and share some of our early results later on in the presentation; however, I did want to point out that there are photos of several of our store initiatives that include our recently introduced made-to-order food and grocery programs and our rebranding efforts in our appendix.

With our 20/20 vision that we provided on our last call, we noted that we are focused on three key growth planks: organic growth, inside store growth, and acquisition growth. We believe these are important areas to focus on to grow the Company in the coming years. In addition to these growth planks, we continue to look for other opportunities to increase shareholder value. We plan on continuing to refine our operational platform, including our made-to-order food and grocery programs, and we will continue our efforts to lift our overall sales and margins. In conjunction with our recently announced organizational changes, there will be an added focus on expenses and cost control initiatives throughout the year, both in operations as well as in our new store construction program.

Finally, as I have mentioned on previous calls, we will work to leverage our acquisitions, including implementing acquired best practices across our system and seeking out synergies. And with that, I will turn the call over to Clay to review the CST fourth-quarter financial results.

Thanks, Kim.

I will provide a brief overview of the fourth-quarter results for CST, and then turn it over to Hal to discuss our retail operations. Today CST reported net income of $25 million or $0.34 per share for the fourth quarter of 2015. This compares to net income of $94 million or $1.21 per share for the fourth quarter of 2014. For both periods we had certain one time expenses that included asset impairment charges, acquisition expenses, legal expenses, professional fees, and tax effects on cash repatriation, as outlined in our earnings release. The after-tax income effect of these items was approximately $16 million for the fourth quarter of 2015 and approximately $15 million for the fourth quarter of 2014. Excluding these items, our earnings would have been $42 million or $0.55 share for the fourth quarter of 2015 compared to $79 million or $1.02 per share for the fourth quarter of 2014.

As I discuss our fourth-quarter CST highlights in more detail I will be referring to slides for our US and Canadian segment operating results. We have provided slides for the full-year operating results as well. In regards to CST's US segment, if you turn to slide 6, fourth quarter 2015 net motor fuel gross profit decreased by $70 million or 44% when compared to the fourth quarter of 2014. The year-over-year decline was attributable to near record fourth quarter margins in 2014 resulting from the rapid decline in crude oil prices experienced in the fourth quarter of 2014. Although crude oil declined in the fourth quarter of 2015, the volatility of crude oil prices was lower than in the comparable quarter. We experienced a decrease in the average cents per gallon fuel margin, net of credit card fees, of $0.13 per gallon between the periods. For our core stores, our US motor fuel gallons sold per site per day increased by approximately 1% quarter versus quarter.

Moving to merchandising services, I want to point out that, beginning with this quarterly results, we are now combining our other services revenue and gross profit with merchandising revenues and gross profit. This revised presentation of merchandise and services gross profits and our associated margin percentage was done to be more comparable to our peers. We have included a schedule on our website that recasts our merchandise and services margin and per-site per-day numbers by quarter for 2014 and 2015. Our gross profit for merchandising services increased $7 million or 6% in the fourth quarter of 2015 when compared to the same period in 2014. This increase reflects the impact of our new-to-industry stores, period versus period, along with our Nice N Easy and Landmark stores we acquired. The comparable fourth quarter 2014 merchandise and services gross profit includes approximately $3 million of income from credit card fee settlements, so the impact on our NTIs and acquisitions is even greater than our reported results indicate.

Turning to the next slide for our Canadian segment results, please keep in mind that our reported results have been significantly impacted by the devaluation of the Canadian dollar, which I will discuss in a moment.

Fourth quarter motor fuel gross profit decreased by $6 million or 10%. The cents per gallon fuel margin, net of credit card fees, was approximately $0.22 for the fourth quarter of 2015 compared to $0.24 for the comparable period in 2014. As we have stated in the past, crude oil price changes affect our Canadian margins more moderately. Our motor fuel gallons sold declined 3% for the quarter, in part a reflection of the weakening of the Canadian economy. Our reduced fuel margin and resulting motor fuel gross profit was also affected by the Canadian dollar devaluation over the comparable period. For additional comparative purposes, results on this slide are also provided in percentage change in Canadian dollars.

Our reported gross profit for merchandise and services sales in our other category declined $3 million for the fourth quarter of 2015 compared to 2014; again, primarily attributable to foreign currency exchange. Assuming a constant value for the Canadian dollar, our merchandise and services gross profit would have increased by $3 million or almost 12%. The exchange rate for the US dollar relative to the Canadian dollar averaged approximately $0.75 for the fourth quarter 2015 versus approximately $0.88 for the comparable period in 2014. This represents a devaluation of approximately 15% between the comparable periods. Overall, excluding the effect of foreign currency translation, our gross profit for our Canadian segment for the fourth quarter of 2015 would have been up over $7 million when compared to the fourth quarter of 2014.

Looking over to slide 10, I will now make a few comments about CST's financial position. At the end of the year we had $313 million of cash and $247 million of that cash was held in Canada. Subsequent to year end, we repatriated $185 million back to the US, and our reported total debt is just over $1 billion. Subsequent to year end, we increased our revolver capacity to $500 million and drew down just over $300 million to fund a portion of our Flash Foods acquisition. These revolver draws are expected to be paid down upon receiving proceeds from our California real estate sale as part of our previously announced tax-efficient 1031 exchange process. As of yesterday, we had approximately $144 million available under our credit facility.

In regard to our capital spending, capital expenditures for the full year of 2015 totaled $360 million. Much of this went toward our NTI builds and land bank, aggregating $249 million. During the fourth quarter we completed 22 new stores in the US and 9 in Canada. For the full year 2015 we completed 31 stores in the US and 11 in Canada. Turning to slide 11, as we look at our 2016 spending plan, we currently estimate we will spend between $450 million and $500 million for CST-related capital expenditures. The bulk of the estimated spend is our NTI builds and land bank, which will be 45 to 50 new sites in the US and 10 to 15 new sites in Canada. Included in the estimate is sustaining capital expenditures, which includes remodels, renovations, and rebranding, and is expected to be between $140 million and $160 million.

On this slide we also provide some guidance for the first quarter. I will not go through all of the details, but we did want to note the following. We are expecting an increase in our operating expenses over fourth quarter and previous-year levels, primarily driven by the addition of Flash Foods and the full-quarter impact of 31 NTIs opened in the fourth quarter of 2015. We have included a slide in the appendix that quantifies these increases in operating expenses over our fourth quarter levels. Our general and administrative expenses are expected to be at the same level as last year's first quarter expenses.

Finally, included in the appendix of our slide presentation we have a schedule that presents the economics associated with our NTIs on a same-store basis. These are NTI stores that have been open two years or more. The slide also presents our total investment in these sites. While a few sites located in the South Texas Eagle Ford shale area did impact our merchandise and services gross profit year over year, as we've stated in the past, these mature NTIs are generating at or greater than 15% cash flow returns.

With that, I will turn it over to Hal

Thanks, Clay.

As Kim has mentioned in the past, one of our same store sales growth initiatives is our grocery expansion project, which is currently in 100 stores. Based on the success of this project and the needs of our customers for grocery fill-in items to complement their milk, bread, and egg purchases, we will have expanded this to another 100 stores by year end. We have also implemented our refreshed corner store image in 11 legacy stores in South San Antonio. This pilot, which includes an advertising component, will be monitored for the next few months. We will use our learnings to make the necessary changes before we roll the project out more broadly, which could include up to 300 stores in the second half of this year. This is the first phase of a three-year project.

If you turn to slide 13, I want to briefly discuss the initial success of our made-to-order food program that we have transferred from Nice N Easy in New York. If you look at the charts from left to right, you can see the impact the program had on the sales mix in these stores. This slide shows that while the results are early, the program has quickly moved the higher margin food mix in these stores to more than 30% of sales. We are currently planning to add this food program to at least 20 additional NTIs in our 2016 growth program.

And finally, I wanted to note that, with our newly announced organization changes in alignment of our marketing and operation team, we will have a heightened focus on operational costs as we roll out these new marketing programs.

With that I will turn it over to Jeremy.

Thank you, Hal.

If you'd please turn to slide 15, I would like to touch on our overall fourth-quarter and full-year results at CrossAmerica. Today we reported a very strong fourth quarter, with adjusted EBITDA of $25 million, up 74% compared to last year. For the full year of 2015, adjusted EBITDA was $90 million, reflecting an increase of 47%. Our DCF per unit increased 48% during the quarter and 8% for the year.

As we look at how each of our segments contributed on the next slide, you will see that, thanks to the fuel volume and rental income growth achieved from our acquisitions, our wholesale segment grew adjusted EBITDA by 26% for the year. This is a spike, the reduction in our terms discount due to wholesale gasoline prices averaging over $0.70 below last year.

While our retail segment EBITDA declined during the quarter due to a thinner rack-to-retail margin, we experienced a significant increase during the year, reflecting the contributions of the Erickson and One Stop chains as we continue to integrate those operations. It is also worth noting that in 2015 we converted 77 Company-operated stores to lessee dealer accounts. As we have said, a key part of our long-term strategy to stabilize cash flow for our unitholders is to find lessee dealers to occupy our locations. By doing this, we maintain wholesale supply to the sites and are exchanging non-qualifying retail fuel and merchandise margins for qualifying rental income and lower operating expenses. This focus on expenses and the success of the strategy is evident on the next several slides.

On slide 17 we have a detailed -- a chart to tell the differences between the performance of this quarter compared to the comparable period last year. As noted previously, we are experiencing a significant contribution from our recent acquisitions, which also includes the CST fuel supply and real estate drops completed in 2015. Other changes include the impact to our terms discounts that I mentioned earlier. Finally, as I was just mentioning, you can see that despite all the growth we have undertaken in 2015, we were able to reduce our overall G&A and operating expenses to our base business in the quarter compared to last year.

As we turn to the next slide, this chart compares our performance in the fourth quarter when compared to the third quarter of this year. It demonstrates the inherent seasonality we have previously discussed in our business, as the fourth and first quarters are our seasonally weaker periods of our operation because of the reduction in motor fuel consumption. In addition, you can see the declining impact of our supplier terms discounts. The final water chart -- waterfall chart -- on slide 19 demonstrates the differences between the performance of 2015 compared to 2014. Once again you can see the contribution of our acquisitions, the nearly $9 million impact from supplier terms discounts due to the declining cost of crude, and further demonstration of our commitment on expenses, which were kept flat year over year on our base business.

Going to slide 20, throughout this presentation we have discussed our exposure as relates to terms discount, but I wanted to highlight our financial performance over the past two years in the face of this rapidly declining crude oil and finished products market. We have significant grown cash flow and distribution for our unitholders, with a continued focus on maintaining a healthy coverage ratio. Unlike many other MLPs, our sustaining capital expenditures are minimal, and the contractual commitments we have on volume are actually helped by a lower crude environment, as the lower price at the pump supports overall fuel demand. We continue to manage our growth to minimize volatility, as the majority of the volume we have acquired over the past two years is not associated with terms discount. The good news is that we have absorbed the $70 per barrel decline in crude prices and continue to demonstrate growth in prudent cost control. We are well positioned to enjoy whatever upside returns to the crude market whenever that occurs.

Going to slide 21, I wanted to provide a review of our most recently announced third-party acquisition of the 31 Holiday Stationstores from SSG Corporation. 28 of the sites are located in Wisconsin, and 3 are located in Minnesota, while 27 of them were owned fee-simple sites. This was an attractive acquisition for us, as we were not only able to obtain a quality set of assets and partner with a strong regional brand like Holiday, but it further solidifies our presence in the Minnesota and Wisconsin markets, allowing us to leverage our local team to manage these stores and recognize synergies even faster. We expect this transaction to close later this quarter.

On the last slide, we announced on February 1 that the Board of Directors for the general partner declared the distribution of $0.5925 cents per unit related to our fourth quarter results. This is a $0.015 cent per unit or 2.6% increase over the third quarter of 2015. We grew distributions per unit 8.1% in 2015 over 2014, and expect to continue that growth trend in 2016. We currently expect the rate of CrossAmerica's distribution per unit attributable to 2016 will be between 5% to 7% over 2015 levels and continue to target a long-term distribution coverage ratio at or above 1.1 times. Because of the limited volatility and low-level capital expenditure needs, we certainly feel like this is a comfortable range for us to feel confident in maintaining our future distribution commitments. We ended 2015 with coverage of 1.08 times.

We understand that we are in a different market than what MLPs experienced over the prior several years. It is extremely important for us to be good stewards of our investors' capital by being very selective with whatever growth opportunities we have before us. At the end of 2015 we had approximately $100 million of available capital on our revolver and increasing cash flow stream, thanks to a recent acquisitions that should expand our revolver availability, quality real estate assets that we can monetize if we feel we can get a better return by investing those proceeds into higher-return projects, and an established experienced team to take advantage of those acquisition and integration market opportunities.

As evident by our most recent acquisition announcement, we continue to see attractive third-party acquisition opportunities. We have a long runway of available drops from our supportive sponsor at CST and look forward to completing more of those acquisitions this year. But as we have said before, we're going to be opportunistic with the third-party acquisitions and judicious with how we deploy our capital and grow the business. We recognize that it is very important we execute on our strategy with the partnership's current capital structure. We're confident in our ability to deliver on these commitments, to grow distributions, further reduce volatility, lower expenses, sustain a strong balance sheet, and maintain a healthy coverage ratio without having to raise additional equity.

With that we will now open it up for questions.

(Operator Instructions)

Damien Witkowski, Gabelli & Company.

Can we focus on same store sales in the US in particular? If you look at not your average per store per day but just at same store sales, it looks like fuel was down about 2.5%, a little bit less than that. Merchandise did well, but then on the new to industry stores, the bigger stores, in the fourth quarter, gallons, again fuel gallons were down over 4% and merchandise sales per store per day were down as well. Just some thoughts around that would be great.

Same store sales for the quarter in the total network are up 2.4% and the same store NTI figure is a 3% increase. Help me understand what you are looking for.

Maybe I'm looking at the wrong thing. I'm looking at your core same store sale information that you have 944 stores year-over-year comparison on the per site per day motor fuel gallons went from 5043 a year ago to 4921 in the fourth quarter of last year, am I looking at the wrong thing?

Fuel volume has decreased a bit,but the sales volume is up, so merchandise sales is up. We are down a bit in fuel volume. Damien, we had -- the fourth quarter we got hit hard with the holidays and with some bad weather here in particularly in the Texas market. We had very severe weather in DFW, Houston and San Antonio with heavy rain, and we had snow in Houston, and not only is the weather -- I mean snow in Denver, I'm sorry, snow in Houston would be a first

An unusual thing.

We did get hit with was some whether. We had a very good pace going, and at the end of the year overall same-store sales was just slightly down, just barely less than 1% which I think was a pretty good year overall considering we are still working with trying to maintain good high gross margins and fight the competition while we are out there as well. But the fourth quarter we did hit some soft volume through the holidays and that did hurt us a bit.

2015 was the rainiest on record for Texas.

(multiple speakers) Just looking at the first quarter guidance for per store per day numbers again, what should we use -- how should we think about the actual number of stores for the first quarter?

Store counts?

I would use the year and number that we show.

Yes, end of period number.

(multiple speakers) So it doesn't include Flash Foods?

That is correct.

Betty Chen, Mizuho Securities.

I was wondering how if you can talk about the learnings on that slide you mentioned the significant increase in food sales penetration, what has been working so well, what may not be and how we could see all of that implemented. And longer term where can we see merchandise or gross margin trend to? We're looking for that to be up significantly now in the Q1 guide. How should we think about the opportunity for that margin segment going forward longer term?

Definitely as we've been very encouraged with the success we've had with moving the Nice N Easy food program to the first five stores that we have here in San Antonio. We opened the first one in November, so the majority of them were open in the month of December so as you can see on the slide we did a significantly larger piece of our business in food in those stores.

We have retooled our NTI stores for 2016 mostly towards the second half of the year to be able to accommodate this program to enjoy the higher food sales from that program. So you can see in our guidance for first quarter we're going to see a significant increase in margin. Most -- a lot of that benefit is coming from the stores that we opened in the fourth quarter, so they are kicking in. And in the first quarter they will be open for the whole quarter, and as we open more stores and as those stores ramp up they will begin to add more to our merchandise margin.

We also made some changes in pricing in some of our key categories toward the end of last year, so that is helping some of the same store margins percent increase as well. Then the other thing I would point out as Clay mentioned in the last -- in the fourth quarter of last year we had a benefit for a credit card settlement that went to merchandise margins, so our merchandise margin in the fourth quarter actually increased at a higher rate than what we are showing if you were to do a comparable. So we were up 60 basis points, apples to apples in the fourth quarter so in the first quarter you see that carrying over and throughout the rest of the year.

Great, helpful. I was wondering maybe I think, Kim, you mentioned three pillars of growth. Can you talk a little bit more about also the NTI opportunity? How should we think about where the number of NTIs could shake out eventually and whether we should expect this pace of opening to at least continue in the next three to five years.

Sure. When we did our third quarter earnings call we did lay out our five year NTI plan, so I would refer you back to the investor slide there that certainly kind of details it by year, but, yes, we definitely are planning to continue this level of growth and then some so that by the end of 2020 we have about 500 stores or so that are in these NTI category, so a significant growth ramping up over the outer years as well. We're very pleased with the results that we see. We are getting the returns there and the opportunity to bring in food as Hal just mentioned really enhances the stores as well.

Ben Bienvenu, Stephens.

Thinking about capital allocation, I know that acquisitions and NTIs are a priority. Could you talk a little bit about how share repurchase fits into that paradigm? We didn't see as much share repurchase as maybe I thought we would in the fourth quarter, and then how are you thinking about that going forward?

Ben, this is Clay. We did have a very large capital expenditure program that occurred in the fourth quarter, so we had to back off a little bit on our share repurchases. We also implemented and a Cross America unit buyback program, and if you look at that you will see that we did take some of our available cash and used to support the partnership and do a buyback program there.

We had some competing dollars for NTI CapEx as well as there were some great investment opportunities for the partnership unit given what is happening in the MLP market so we utilized cash there. And then we got out in the blackout period, and so now we're coming out of that period beginning with the filing of the 10-K so look to see us evaluate opening up of that program again for Q1.

Okay, thanks. That's helpful. Can we talk about Canada for a little bit? You showed results that had a little bit of improvement in the most recent quarter, but I would be curious about going forward what your plans are there. It looks like the guidance suggest some continued weakness in that segment. I realize the economics of your geography there are challenging, but how are you thinking about navigating through that going forward?

Sure. I think some of the first quarter guidance you see is that first quarter is going to be very cold snowy weather impacted quarter up in Canada in particular so some of that is seasonality that you'll see in those numbers there. Canada is predominantly a fuel focus business for us, about two thirds of our stores up there being fuel only for CST.

It has been a consistent contributor though from a cash flow basis over the years. It is a consistent fuel margin environment, and so it certainly provides that level set there. In terms of the economic impacts, I think the only sector that we see some impact is the EMP downturn on the West Coast seems to be impacting a little bit of the commercial truck traffic, and we see that in our card lock industry. So our card lock volumes are down, but overall we're very pleased with the merchandise sales increases. We are pleased with the improvements on that end, and I think we are seeing a consistent margin driver from Canada.

Two quick housekeeping items, how much taxes did you guys pay on the repatriated cash from Canada, and what was the thought process for why you repatriated that cash during the quarter?

The total tax, the next tax effect was $14 million, and the reason why we repatriated $185 million from Canada, the Canadian repatriation tax is 5%. It was a repatriation of our tax bases Canada, so Canada had been growing its cash positively over the last several years and was building a cash balance. We needed the cash in the United States as we just funded the large acquisition of Flash Foods.

The tax strategy that we employed needed to be employed at the end of the year which we did, but what -- the taxes effect -- the tax effect is really based on our full basis amount of $360 million so we have now in place the capability of repatriating an additional $175 million cash out of Canada in the future that we will not be incurring any tax expense on. We needed the cash because we did the Flash -- for the Flash Foods acquisition, and it was the right time to do the tax repatriation strategy.

Thanks for that color. One last one if we look at the expense guidance that you all gave for the fourth quarter for operating expenses of $178 million to $182 million and G&A expenses of $34 million to $36 million, did that include or exclude some of these acquisition related expenses that you called out in the quarter?

Fourth quarter would not have had the Flash Foods which is the biggest increase we're seeing in the first quarter of 16.

Sorry I was referencing the fourth quarter guidance that you gave on the third quarter earnings call. You guys called out one time expenses this morning to pull out., and I was just curious (multiple speakers) apples.

Right so it included some of the acquisition costs.

The guidance did include the acquisition costs?

Yes.

Yes.

David Hartley, Credit Suisse.

Just quick first question on other income. I think it is a $13 million item there. Can you talk a little bit about that? Is that related to cash balances held in Canada that you had hedged and you had gains on that hedge or maybe talk a bit about that?

Yes, that is what it was David. We had converted Canadian dollars into US dollars midpoint of last year.

Are you expecting that to recur in coming quarters?

We do intend to continue to repatriate cash from Canada down to the US so as Canada -- the short answer is yes, to that extent. It is only when we convert cash into US dollars and of course it depends on what the exchange rate does, because we have to mechanism to repatriate cash out of Canada there really is no need to have Canadian dollar exposure there, because we do intend to repatriate the cash flow when we can.

Got it. When I think about the, think there was a withholding tax of $6.7 million incurred in the year. I think it was even in just this quarter. When I look at the $16 million of one time items that you talk about, how much of that gets attributed or clawed back from SG&A and how much would be clawed back from taxes? Is that the way I should be thinking first of all and maybe you can take me to that a bit?

If you are talking one time items, the largest piece of that is the tax expense of $14 million, that will not -- that is not recurring. I would not expect necessarily the other income to be as high as $10 million, $13 million in Q1 but there could be, there certainly could be Canadian currency, I'm sorry go ahead.

No, I just wanted to know the $6.7 million withholding tax is that part of the $14 million or what is that?

It is 5% withholding tax on the full amount of the $360,000 million, so that's how you get -- the gross amount of tax in Canada was $17 million to $18 million but there was some offsetting tax reductions in the US that we were able to take so it netted it down to $14 million.

How was that attributed now when I shake it out, if I'm looking at normalized presentation if you took with the $16 million from your financials were what I take them out to normalize? Would it all come out of SG&A or would $2 million come out of SG&A and 14 million out of tax?

The latter, that is where it is, David. It's $14 million on the tax expense line and then the $2 million comes out of G&A.

Okay. That's really helpful. I guess the market for acquisitions as we look forward how does that look nowadays, prices have gone up in the industry on assets and is it prohibitive now right to make acquisitions hence more focus on NTIs or maybe a little color there would be helpful.

Well, with the Flash Foods acquisition, that is obviously our largest one to date. So we certainly are focusing on integration of that acquisition, and CrossAmerica just announced their acquisition up in Minnesota and Wisconsin. We continue to see opportunities that are good opportunities for both CrossAmerica and CST from an acquisition standpoint.

Did you announce the amount of synergies you hope to get on Flash Foods?

We did. If you'll look it is actually the last slide of our presentation deck.

Okay. I will visit that.

It is about $10 million a year. We have already got about almost 20% of that so far recognized.

Great. That's helpful. Last question on the big picture on gasoline margins in the US, certainly not as high as last year but industry wide still very high. I've asked you this question in the past, but what is your take on where these things, gasoline margins settle out on a net basis for you in the coming months?

Will be posting our January margins today and we ended up January at $0.20. per gallon in the US and $0.19 in Canada in US dollars. If you did it in Canadian dollars CAD0.26, which is actually quite a bit stronger than the January 2015. So comparing month to month comparisons we started off stronger in 2016, much stronger in 2016 that we did in 2015.

It all depends on at what pace crude changes, and we have certainly seen a lot of volatility both up and down here recently. As we have said before, for us the margin is really more dependent on the amount of volatility as opposed to the absolute price of the crude so we have certainly seen quite a bit of up and down in the crude markets.

I totally agree with that. I think in the past you have given out in our discussions a normalized long-term gasoline margin that you think would be reasonable. Would you be able to give one now?

No, we have just said historical margins, and we are running about a three year average pf about $0.17 a gallon US -- sorry, five year average. This is a consistent quarterly correction here from Randy which I appreciate, but we are on a five or average at $0.17 a gallon in the US. And Canada tends to stay in the same day range, CAD0.23, CAD0.24.

Sharon Lui, Wells Fargo.

Maybe if you could just touch on the key factors assumed to support the target distribution growth at CrossAmerica, are you factoring the benefit of certain amount of drop downs or acquisitions?

Sure, Sharon. This is Jeremy. I'll answer that. It is reflective of our recently completed acquisitions last year. The cash flow we expect builds acquisitions to add the partnership as well as the pending acquisition of SSG Corporation's asset up in the Wisconsin, Minnesota market. And just a continual, continual execution by the team to continue to grow our cash flow, so it really is everything involved. And as we said in these earlier on the call we do expect to contact more drop downs of the fuel assets from CST, and so all of those things go into the additional cash flow we expect to generate at the partnership which translates to additional distributions for our shareholders.

Maybe if you can touch on the level of accretion expected from the Holiday acquisition.

Sure, we're not in the habit of talking about overall multiples and what we purchase, but I would say that as we have said the market, the availability of capital in the marketplace is something that I think everyone is having to deal with and that hopefully we can position ourselves to be opportunistic with the acquisition opportunities that are out there. And with the Holiday Stores acquisition, and we paid a very good multiple. It is on the low end of what we have paid over the past couple years in terms of the multiple standpoint. It is going to be a good return for the partnership.

And maybe if you could just touch on the distribution policy and I guess your decision to increase the distribution in light of the valuation and alternative uses for the cash.

I'm sorry I missed that question I apologize.

Just trying to understand the rationale of the distribution target opting to increase the distribution in light of the valuation versus perhaps using -- conserving that cash for other uses.

Sure, Sharon it is a balanced approach that we take this year. We understand the expectation of our unitholders and what they would like to see, and we understand our availability of capital and what we can spend, and it is going to be a balanced approach.

We ended 2015 growing distributions per unit 8%. We go into this year understanding our capital availability and what we think we can execute on. And we certainly think that growing that distribution another 5% to 7% this year is certainly a prudent use of that capital. It enables us to generate a very solid coverage ratio and continue to target 1.1 times. We think it is the right approach and it is the right mix.

(Operator Instructions)

Bonnie Herzog, Wells Fargo.

It is Adam on behalf of Bonnie. Just a couple quick questions, first related to the merchandise margin just following up on an earlier question, wanted to get a little sense on expectations going forward. Obviously you have a pretty impressive expansion projected for Q1. Is that something we can expect to go forward based on some of the fresh food initiatives, or is that driven more by one time items for the quarter is the first question I had.

You should expect that to go forward.

Second related to the OpEx guidance that you provided which is I believe largely driven by Flash Foods is that something that is one time in nature, or should we consider the OpEx to be more in that range going forward based on those acquired stores?

That is the new run rate now. We have a lot -- it is really being driven by our acquisitions that are NTI, so as and obviously as we get throughout the year that OpEx will increase as well as we continue to open new to industry stores.

Right, of course. Lastly as it relates to the real estate venture just wondering if you have any up dates in terms of the progress or further details based on what you provided earlier?

Sure, Adam we have actually made tremendous amount of progress. We have solicited officers and opened up data rooms to initiate this venture process. We got a very good response it was very robust with a lot of potential participants. We're moving at a pace that I would say is even advanced -- even more advanced than what we originally thought so we're clearly on track to try to -- something in the second quarter.

David Hartley, Credit Suisse.

Just curious on the other revenue line I guess you reclassified into your merchandise profits and provide some nice comparables. I'm just wondering what was the dollar amount in sales in gross margins that were ultimately reclassified over this quarter?

Give us a second, David, we're going to pull that sheet out of the big binder here.

Do you want me to ask another question?

While she's doing this -- this is Randy. We did post on the website there is a spreadsheet showing the 2014 and 2015 moving from the merchandise category to the merchandise and services category showing per store per day and the margins.

So you can do comparable.

So you can see the comparables.

For the quarter it was $13 million for 2015 and 13 -- $12 million for 2014.

Great, that is fantastic. That be straight revenue and gross margins, there is no cost to that right?

Yes, pretty much.

On the real estate venture -- the potential real estate venture that you are looking into I guess this is just so I am clear on the opportunity here, really just an opportunity to be more capital light in developing your new real estate in stores. By not being able to drop it anymore into Cap L, first of all is that correct and secondly, would you agree that you probably lose a bit of the valuation pick up you would have gotten previously?

I wouldn't say that it necessarily has to replace what we were doing with the partnership. It is just the current cost of capital for the partnership it is a little prohibitive for dropping down real estate because the implied multiple even at the 7.5% triple net lease rate was over 13 times, and that is higher than the enterprise value multiple that the MLP has right now. So as the market stabilizes that could change in the future, but you are correct. What this is intended to do is to provide a sale leaseback vehicle for CST that will enable us to find a substantial portion of our NTI cost.

Hopefully in the future we -- beginning maybe in -- as early as 2017, we hope to use the venture for a build to suit program so that the venture is actually constructing the NTIs. They're the ones providing the capital in the construction program, and so there will not be this drag on CST's capital, if you will, because during construction period obviously there is no return. So once it is completed we would receive the keys to the front door, and then we would start generating operating income.

That is where really kind of levering the overall NTI investment, and it will remove -- or lower the investment that CST has to make to about $1.5 million per store which is really just the real -- excuse me the personal property with the equipment in the store. And in our previous Investor deck we provided what this does to the cash flow returns. It takes them from about 15% to over 30%. And you can see, if you -- and take some time to look at the slide we have in the appendix that shows the NTI returns.

They are over 15% and this is stores that have been open for two years, and it is year versus year it is important information. We also are now providing the total capital investment we had. You can see where we give some levered and unlevered returns on that, because we did do an asset drop with a -- in the middle of the year to CrossAmerica, and that does show the power of leverage, and it does increase the NTI return.

We're very optimistic about the venture. It hasn't been completed yet, so I would put that caveat there, but we are proceeding along nicely.

Just finally would that then potentially give you cause to increase your NTI builds in 2016 like increase your guidance that you provided now, or are you already contemplating that in your guidance?

This is all part of the large 2020 strategic plan that Kim rolled out last.

Operator I think we have time for one follow up question.

Damien Witkowski, Gabelli & Company.

Just looking at your CapEx guidance for this year, $450 million to $0.5 billion, can we get into a little bit more detail in terms of how much of it is for the new stores, how much is maintenance of how much of it is really for buying land for other, next year's NTI developments?

I can give you a breakdown of that Damien. For the full year our sustaining capital was about $140 million range, I'll get the ranges there. The NTI land bank somewhere between $80 million and $100 million, and the total construction would be somewhere in the $220 million, $240 million range. There is a little bit of capital expenditures in the sustaining to complete and finish out our new corporate service center location, that is about $10 million, $15 million. That gives a total of $450 million, $500 million range. The maintenance capital somewhere between say $50 million to $60 million.

I will now turn the call back over to Randy Palmer for closing remarks.

Thank you, operator. We appreciate each of you joining us today for the call, and if you do have follow up questions please feel free to let us know. Thanks.

Thank you and thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating in you may now disconnect.