CrossAmerica Partners LP
Q4 2015 Earnings Call Transcript

Published: 19 Feb 2016

[Operator:]

Welcome to the CST Brands and CrossAmerica Partners Joint Year End and Fourth Quarter 2015 Earnings Call. My name is Christie and I will be the 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.

[Randy Palmer:]

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

[Kim Lubel:]

Well, thanks, Randy, and 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 profit of $1.2 billion and adjusted EBITDA of $602 million. These strong results in 2015 were driven by year-over-year increases in the 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’s 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 had 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 opening up 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 merchandize categories and food offerings as well as an expanded fuel island. And as we noted during the 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 on improving our inside store performance across our network. For the full year 2015, merchandizing services contributed $577 million in gross profit to our results, a more than 6% increase over 2014. Our US merchandizing services, same-store sales increased 3% for the year and our Canada segment merchandizing services same-store sales presented in Canadian dollars increased 5%. Hal will touch on some of our merchandizing efforts and share some of our early results later on in the presentation. However, I did want to point that there are photos of several store initiatives that include our recently introduced made to order food and grocery programs and our rebranding efforts in our appendix. With our 2020 vision that we provided on our last call we noted that we are focused on three key growth plans. 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 plans, 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 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. And finally, as I have mentioned on previous calls, we will work to leverage our acquisitions including implementing acquired best practices across our systems and seeking out synergies. And with that, I’ll turn the call over to Clay to review the CST fourth quarter financial results.

[Clay Killinger:]

Thanks, Kim. I will provide a brief overview of the fourth quarter results for CST and then turn it over to Hal for 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 per share for the fourth quarter of 2015 compared to $79 million or $1.2 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 accrual 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 merchandizing services, I want to point out that beginning with this quarter’s results, we are now combining our other services revenues and gross profit with merchandizing revenues and gross profits. This revised presentation of merchandizing 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 recaps our merchandizing services margins and per site per day numbers by quarter for 2015 and 2015. Our gross profit for merchandizing services increased $7 million or 6% in the fourth quarter of 2015 when compared to the same period in 2014. This increase reflects the impacts 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 merchandizing services gross profit includes approximately $3 million of income from credit card fees settlement. So the impact on our NTIs and acquisitions is even greater than our reported results indicates. 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 a weakening of the Canadian economy. Our reduced fuel margin and resulting motor fuel gross profit was also affected by the Canadian dollar devaluations 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 from for merchandizing services sales and our other category declined $3 million for the fourth quarter of 2015, compared to 2014, again primarily attributable to foreign currency exchange. Assuming at constant value for the Canadian dollar our merchandizing 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 of 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’ll 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 is 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 sales 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 regards to our capital spending, capital expenditures for the full year of 2015 totaled $5360 million much of this went towards our NTI build 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 plans, we currently estimate that we will spend between $450 million and $500 million for CST-related capital expenditures. A 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

[Hal Adams:]

Thanks, Clay. As Kim has mentioned in the past, one of our same-store sales growth initiative 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 the three year process. If you turn to Slide 13, I want to briefly discuss the initial success of made to order food program that we have transferred from Nice N Easy in New York. If you look at the chart from left to right, you can see the impact the program has on the sales mix in these stores. This slide shows that while the results are early, the program has quickly moved to 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 and alignment of our marketing operation team, we will have a heightened focus on operational cost as we rollout these new marketing programs. With that, I will turn it over to Jeremy.

[Jeremy Bergeron:]

Thank you, Hal. If you please turn to Slide 15, I would like to touch on our overall fourth quarter and full year results of 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 despite 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 Chain 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 unit holders is to find lessee dealers to operate our locations. By doing this, we maintained wholesale supply to these sites and our exchanging non-qualifying retail fuel and merchandize 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 detailed a chart to demonstrate the differences between the performance of this quarter compared to the comparable period in 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 discount that I mentioned earlier. Finally, as I was just mentioning, you can see that despite all of the growth we have undertaken in 2015, we are 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 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 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 impacts from supplier terms discount 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 phase of this rapidly declining crude oil and finished products market. We have significantly 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 lower crude environment as the lower price to 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 discounts. The good news is that, we have absorbed the $70 per barrel decline in crude prices and continue to demonstrate growth and 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 Station Stores from SSG Corporation. 28 of the sites are located in Wisconsin and three are located in Minnesota. All 27 of them are own 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 a distribution of $0.5925 per unit related to our fourth quarter results. This is a $1.05 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 of capital expenditure needs, we certainly feel like this is a comfortable range for us to feel confident in maintaining our future distribution commitment. 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, an increasing cash flow stream, thanks to our 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 in 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 announcements, we continue to see attractive third-party acquisition opportunities. We have a long runway of available drops from our supported sponsor at CST and look forward to completing more of those acquisitions this year. But as we have said before, we are 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’s very important that we execute on our strategy with the Partnership’s current capital structure. We are confident in our ability to deliver on these commitments, to grow distributions, further reduce volatility, lower expenses, sustaining 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:]

Thank you. [Operator Instructions] Our first question comes from Damian Witkowski from Gabelli and Company. Please go ahead.

[Damian Witkowski:]

Hi, good morning. Can we focus on same-store sales, in the US in particular, if you look at just not your average per store per day, but just same-store sales, it looks like, fuel was down about 2.5% little bit less than that, merchandize did well, but then on the new two industry stores, the bigger stores, in the fourth quarter, gallons again as fuel gallons were down over 4% and merchandize sales per store per day were down as well. I mean, just some thoughts around that will be great.

[Hal Adams:]

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

[Damian Witkowski:]

Okay, so, maybe I am looking at the wrong thing. I am just looking at your core same-store sales information that you have on 944 stores year-over-year comparison on a 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?

[Clay Killinger:]

Right, so fuel volume has decreased a bit, but the sales volume is up. So that – is that correct?

[Hal Adams:]

Merchandize sales is up.

[Hal Adams:]

That’s right. So, we are down a bit in fuel volume.

[Jeremy Bergeron:]

Damian, we had – the fourth quarter, we got hit hard with the holidays and with some bad weather here in – particularly in the Texas market with very severe weather in DSW, Houston, and San Antonio with heavy rain and we had snow in Houston, unlike these weather, I mean, snow in Denver, I am sorry, snow in Houston would be worst.

[Kim Lubel:]

The unusual thing.

[Jeremy Bergeron:]

So we did get hit with some weather at 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 this good work with try and maintain the high gross margins and fighting the competition over out there as well. So – but the fourth quarter we did hit some through the holidays and that hurt us a bit. And even…

[Kim Lubel:]

And then 2015 was the rainiest on record for Texas.

[Damian Witkowski:]

Okay. If I just look 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?

[Jeremy Bergeron:]

Store counts.

[Kim Lubel:]

Right, I would use the year end number that we show.

[Damian Witkowski:]

Okay.

[Jeremy Bergeron:]

End of period number.

[Kim Lubel:]

Right.

[Damian Witkowski:]

So that does include Flash Foods?

[Hal Adams:]

That’s correct.

[Damian Witkowski:]

Okay. All right, thanks.

[Operator:]

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

[Betty Chen:]

Thanks, good morning. I was wondering how if you can talk about the learnings – on that slide you mentioned the significant increase in food sales penetration, what’s on working allow, what may not be and how we could see all of that implemented and longer-term, where can we see merchandize gross margin trend to? We are 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? Thanks.

[Hal Adams:]

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 opened in the month of December. So, as you can see on the slide, we get a significantly larger piece of our business in food in those stores. So we’ve re-tooled our NTI stores for 2016, mostly towards second half of the year to be able to accommodate this program to enjoy the higher food sales from that program. So as you can see in our guidance for the first quarter, we are going to see a significant increase in margins, 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’ll be open through the whole quarter and as we open more stores and have those stores ramp up they will begin to add more to our merchandize margin. We also made some changes in pricing in some of our key categories towards the end of last year and so that’s helping some of the same-store margin percent increase as well. So, then the other thing I would point out as Clay mentioned, in the fourth quarter of last year, we had a benefit for a credit card settlement that went through merchandize margin. So our merchandize 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 are 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.

[Betty Chen:]

Got it, 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, five years? Thanks.

[Kim Lubel:]

Sure, sure. So, when we did our third quarter earnings call, we did lay out our five year NTI plan. So I’d 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 this NTI category. So significant growth ramping up over the outer years as well. We are 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 those stores as well.

[Betty Chen:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from Ben Bienvenu from Stephens. Please go ahead.

[Ben Bienvenu:]

Thanks, good morning.

[Kim Lubel:]

Morning.

[Ben Bienvenu:]

So, just 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 repurchases, maybe I thought we would in the fourth quarter and then how are you thinking about that going forward?

[Clay Killinger:]

Sure, 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 and we also implemented a CrossAmerica 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. And so we had some competing dollars for NTI CapEx as well as there was some great investment opportunities for the Partnership unit given what’s happened in the MLP market that we utilized cash there. Then we got out into blackout period and so now we are coming out of that period beginning with the filing of the 10-K and so, you’ll have to see us evaluate opening up that program again for Q1.

[Ben Bienvenu:]

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’d be curious about sort of going forward, what your plans are there? It looks like the guidance suggests some continued weakness in that segment. I realize that the economics of your geography there are challenging, but how are you thinking about navigating through that going forward?

[Kim Lubel:]

Sure, well, 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 seasonality that you will see in those numbers there. Canada is predominantly a fuel-focused business for us and it’s about two-thirds of our stores up there are being fuel only for CST. It has been a consistent contributor of those from a cash flow basis over the years, it is a consistent kind of fuel margin environment and so, it certainly provides that level set there. In terms of just the economic impacts, I think, kind of the only sector that we see some impact is the E&P 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 are very pleased with the merchandize sales increases. We are pleased with the improvement on that end and I think we are seeing a consistent margin driver from Canada.

[Ben Bienvenu:]

Okay, thanks. And then, just two quick housekeeping items. How much taxes that you guys pay on the repatriated cash from Canada? And then, what was the thought process for why you repatriated that cash during the quarter?

[Clay Killinger:]

So the total tax – the net tax effect was $14 million and the reason why we repatriated $185 million from Canada, the Canadian repatriation tax is 5%. It was really a repatriation of our tax basis from Canada. So Canada has been growing its cash positively over the last several years. It was building the cash balance. We needed the cash in the United States as we just funded the large acquisition in Flash Foods. And so, 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 was really based on our full basis amount of $360 million. So we have now employed the capability of repatriating an additional $175 million of cash out of Canada in the future that we will not be incurring any tax expense on. So, we needed the cash, because we did the – for the Flash Foods acquisition, and it was the right time to do the tax repatriation strategy.

[Ben Bienvenu:]

Okay, thanks for that color. And then, just one last one. If we look at the expense guidance that you all gave for the fourth quarter, for operating expenses of 178 to 182 and G&A expenses of 34 to 36, did that include or exclude some of these acquisition-related expenses that you called out in the quarter?

[Kim Lubel:]

The fourth quarter would not had the Flash Foods which is the biggest increase that we are seeing in the first quarter of 2016.

[Ben Bienvenu:]

Sorry, I was referencing the fourth quarter guidance that you gave on the third quarter earnings call. You guys called out some of the one-time expenses this morning, I was just curious, trying to get an apples-to-apples?

[Kim Lubel:]

Definitely, right, so it included some acquisition costs.

[Ben Bienvenu:]

The guidance did include the acquisition cost?

[Clay Killinger:]

Yes.

[Kim Lubel:]

Yes.

[Ben Bienvenu:]

Okay, thanks.

[Operator:]

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

[David Hartley:]

Hi, good morning everyone and just quick first question on other income. I think it’s 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 hedging gains on that hedge? Or maybe talk a bit about that?

[Clay Killinger:]

Yes, that’s what it was David. We converted Canadian dollars into US dollars in the midpoint of last year.

[David Hartley:]

Okay, and are you expecting that to recur in coming quarters?

[Clay Killinger:]

We do intend to continue to repatriate cash from Canada down in the US and so as Canada – the short answer is yes, to that extent, it’s only when we convert cash at the US dollar that of course depends on what the exchange rate does. But we now have a 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.

[David Hartley:]

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

[Clay Killinger:]

If you are talking about the one-time items, the largest piece of that is the tax expense, the $14 million that will not – that’s 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 …

[David Hartley:]

And then…

[Clay Killinger:]

I am sorry. Go ahead.

[David Hartley:]

No, I just wanted to know that, $6.7 million withholding tax. Is that part of the $14 million there? What is that?

[Clay Killinger:]

Well, I said, it’s a 5% withholding tax on the full amount of the 360. So that’s how you get. There was a – the gross amount of tax in Canada was $17 million to $18 million, but there was some offsetting tax deductions in the US that we are able to take to net it down to $14 million.

[David Hartley:]

Okay, and so, how was that attributed now, when I shake it out in – if I am looking at normalized presentation. If you took away the $16 million from your financials, where would I take them out to normalize? Would it all come out of SG&A or would just $2 million come out of SG&A in 14 out of tax or how should…

[Clay Killinger:]

The latter. That’s where it is David, it’s $14 million in the tax expense line and then two comes out of G&A.

[David Hartley:]

Got it, okay. That’s really helpful. Thanks guys. And just on – 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 little color there would be helpful?

[Kim Lubel:]

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

[David Hartley:]

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

[Kim Lubel:]

We did. If you look exactly the last slide of our presentation deck.

[David Hartley:]

Okay, I’ll visit that and just…

[Kim Lubel:]

Sure, sure, it’s about $10 million a year. We’ve already got about almost 20% of that so far recognized.

[David Hartley:]

Okay, great. Thanks. That’s helpful. And the last question, just on the big picture on gasoline margins in the US. Certainly not as high as last year, but industry-wide still very high, well, I have asked you this question in the past, but what’s your take on where these things, gasoline margins settle out on a net basis for you in the coming months?

[Kim Lubel:]

We 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 in Canadian dollars, $0.26, which is actually quite a bit stronger than the January of 2015. So, comparing kind of month-to-month comparison, we started off stronger in 2016, much stronger in 2016 than we did in 2015. But, you know, it all depends on what – at what pace crude changes and we’ve certainly seen a lot of volatility both up and down here recently. And as we said before, for us, the margin is really more dependent on the amount of volatility as opposed to the absolute price of the crude, but we are certainly seeing quite a bit of up and down in the crude markets.

[David Hartley:]

Yes, I totally agree with that and I mean, I think in the past, you’ve kind of given out in our discussions normalized kind of long-term gasoline margin that you think would be reasonable. Would you be able to give one now?

[Kim Lubel:]

No, we’ve just said historical margins have been and we are running about a three year average of about $0.17 a gallon in the US, sorry five year average. This is a consistent quarterly correction here from Randy which I appreciate. But we are on a five-year average at $0.17 a gallon in the US and Canada tends to stay in the same range that $0.23, $0.24 Canadian dollars.

[David Hartley:]

Great. Well, thanks a lot guys.

[Kim Lubel:]

Sure. Thank you.

[Operator:]

Thank you. Our next question comes from Sharon Liu from Wells Fargo. Please go ahead.

[Sharon Liu:]

Hi, good morning. Maybe if you could just touch on the key factors I assume to support the target distribution growth at CrossAmerica. Are you factoring, I guess, the benefit of certain amount of dropdowns of acquisitions?

[Jeremy Bergeron:]

Sure, Sharon. This is Jeremy. I’ll answer that. I mean, it’s reflective of our recently completed acquisitions last year. The cash flow we expect to build acquisitions to add to the Partnership as well as the pending acquisition of SSG Corporation add just up in the Wisconsin, Minnesota market. And just a continual execution by the team to continue to grow our cash flow. So I mean, it really is everything involved and as we said in the – earlier on the call, we do expect to conduct 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 with the Partnership, which should translate to additional distributions for our unitholders.

[Sharon Liu:]

Okay. And maybe if you can just touch on the level of accretion expected from the Holiday acquisition?

[Jeremy Bergeron:]

Sure, so I mean, we are not in the habit of talking about overall multiples and what we purchase, but I would say that, as we’ve 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 – acquisition we paid a very good multiple. It’s on the low-end of what we’ve paid over the past couple of years in terms of multiple standpoints. So, it’s going to be a good return for the Partnership.

[Sharon Liu:]

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

[Jeremy Bergeron:]

I am sorry. I missed that question. I apologize.

[Sharon Liu:]

Just trying to understand, I guess 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?

[Jeremy Bergeron:]

Sure, sure. So, Sharon, I mean, it’s a balanced approach that we take this year. I mean, 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’s going to be a balanced approach. We ended 2015 growing distributions per unit 8%. We go into this year understanding our capital availability in 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 of that capital and able to generate a very solid coverage ratio in continuing target 1.1 times. So we think it’s the right approach and it’s the right mix.

[Sharon Liu:]

Great. Thank you very much.

[Kim Lubel:]

Thanks, Sharon.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Bonnie Herzog from Wells Fargo. Please go ahead.

[Adam Scott:]

Hi good morning. It’s actually Adam on behalf of Bonnie.

[Kim Lubel:]

Hey Adam.

[Adam Scott:]

Just a couple of quick questions. First related to the merchandize margins just following up on an earlier question. I wanted to get a little sense on kind of expectations going forward, obviously, you have a pretty impressive expansion projected for Q1. Is that’s something that we can expect to go forward based some of the fresh food initiative, or is that driven more by sort of one-time items for the quarter? It’s the first question I had.

[Clay Killinger:]

No, you should expect that to go forward.

[Adam Scott:]

Okay, and then, second related to the OpEx guidance that you provided which is – I believe largely driven by Flash. Is that’s something that is one-time in nature or should we kind of consider the OpEx to be more in that range going forward based on the acquired stores?

[Clay Killinger:]

That’s the new runway down. We have the last – it’s really being driven by our acquisitions that are NTIs and obviously throughout – as we get throughout the year, that OpEx will increase as well as we continue to open new industry stores.

[Adam Scott:]

Right, of course. And then lastly, as it relates to the real estate venture, just wondering if you have any updates in terms of rest or further details based on what you provided earlier?

[Clay Killinger:]

Sure, Adam. We actually have made tremendous amount of progress. We’ve solicited offers and opened up dayrooms to kind of initiate this venture process. We got a very good response that was very robust with a lot of potential participants. We are moving – kind of ahead of pace that I would say as even advanced – more advanced than what we had originally thought. And so, we are clearly on track to try to complete something in the second quarter.

[Adam Scott:]

All right. Great. Thanks so much.

[Kim Lubel:]

Thank you.

[Operator:]

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

[David Hartley:]

Hi, sorry for that. Thanks for the follow-up. Just curious, on the other revenue line, I guess, you reclassified into your merchandize profits and provide some nice comparables. I am just wondering, what was the dollar amounts in sales in gross margins that were ultimately reclassified over this quarter?

[Kim Lubel:]

Just a second, David, we are going to pull out that sheet out of the big binder here.

[David Hartley:]

Sure, do you want me ask another question?

[Randy Palmer:]

David, what we are doing - this is Randy, we did post on the website. There is a spreadsheet the 2014 and 2015 moving from the merchandize category to the merchandizing services category showing per store per day and the margins.

[Kim Lubel:]

So it can be comparables.

[Randy Palmer:]

You can see the comparables.

[Kim Lubel:]

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

[David Hartley:]

Okay. Great. That’s fantastic and that would be like straight revenues and gross margins, or there is no cost to that, right?

[Kim Lubel:]

Yes, pretty much.

[David Hartley:]

Okay. And on the real estate venture and the potential real estate venture that you are looking into, I mean, I guess, this is just so I am clear on the opportunity here. I guess really just an opportunity be more capital light and in developing your new real estate and stores. By not being able to drop it anymore into CAPL, 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?

[Clay Killinger:]

Well, I wouldn’t say that, it’s necessarily has to replace what we were doing with the Partnership, this is a current cost to capital for the Partnership and so we will prohibit it for dropping down real estate because the implied multiples, even at the 7.5% triple net lease rate was over 13 times and that’s 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 lease-backed deal for CST that that will enable us to fund a substantial portion of NTI cost. Hopefully, in the future, we – beginning maybe – as early 2017, we hope to use the venture for a build-to-suit program. So that the venture is actually constructing the NTIs as they are 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 the construction period, obviously there is no return. And so once it’s completed, we would receive the keys of the front door then we would start generating operating income. So, that’s really kind of levering the overall NTI investments and it will remove or lower the investment that CST has to make about $1.5 million per store which is really just the real – in the personal property with the equipment in the store. And in our previous investor deck, we provided what that does to the cash flow returns, it takes up from about 15% 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 return. They are over 15% and this is the stores that have been open for two years and that’s year versus year it’s important information. We also are now providing the total capital investment we had. You can see what we give some levered and unlevered returns on that, because we did do an asset drop with – in the middle of the year to CrossAmerica and that does show the power leverage and it does increase the NTI returns. So, we are very optimistic about the venture, we did yet. So I would put that copy out in there, but we’re proceeding along nicely.

[David Hartley:]

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

[Clay Killinger:]

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

[David Hartley:]

Yes, okay. Okay, great, thanks.

[Kim Lubel:]

Thank you.

[Hal Adams:]

And operator, I think we have time for one follow-up question.

[Operator:]

Yes. We have one follow-up question from Damian Witkowski from Gabelli and Company. Please go ahead sir.

[Damian Witkowski:]

Yes, hi, thanks for taking the question. Just looking at your CapEx guidance for this year, 450 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 and how much is it really for buying land for other – next year’s NTI developments?

[Clay Killinger:]

Sure, I can give you a breakdown of that Damian. For the full year, our sustaining capital was about – it’s a $140 million range. And we give the range, it’s there, the NTI land bank is somewhere between $80 million and $100 million and the total construction will be somewhere in this $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’s about $10 million, $15 million, like it’s the total of somewhere with

[Randy Palmer:]

450.

[Kim Lubel:]

450.

[Clay Killinger:]

450, 500 range. The maintenance capital is somewhere between, I’d say 50 to 60.

[Operator:]

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

[Randy Palmer:]

Okay, 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.

[Operator:]

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