CST Brands' (CST) CEO Kim Lubel on Q4 2015 Results - Earnings Call Transcript

| About: CST Brands (CST)

CST Brands, Inc. (NYSE:CST)

Q4 2015 Results Earnings Conference Call

February 19, 2015 09:00 AM ET

Executives

Randy Palmer - Director, IR

Kim Lubel - Chairman CEO

Clay Killinger - Chief Financial Officer

Hal Adams - President, Retail Operations

Jeremy Bergeron - President, CrossAmerica Partners

Analysts

Damian Witkowski - Gabelli & Company

Betty Chen - Mizuho Securities

Ben Bienvenu - Stephens

Sharon Lui - Wells Fargo

Adam Scott - Wells Fargo

Operator

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. 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, Steve Stellato, Chief Accounting Officer of 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 will turn the call over to Clay to discuss the CST financial results. Hal will provide a brief update on the merchandising efforts and then Jeremy follow with an overview of the operational and financial performance of CrossAmerica Partners. And at the end, we’ll 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 event. These slides are available as part of the webcast and what we 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 could be no assurance that the management’s expectations, beliefs and projections will be achieved or that actual results will not differ from expectations.

Please see filings with the Securities and Exchange Commission, including annual reports on Form 10-K and quarterly reports on Form 10-Q for a discussion of important factors that could affect our actual results. Forward-looking statements represent the judgment of the Company’s management as of today’s date, and the organizations disclaim any intent or obligation to update any forward-looking statements.

During today’s call, we may also provide certain performance measures that do not conform to U.S. Generally Accepted Accounting Principles or GAAP. We 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 the IDRs of CrossAmerica. Full consolidation information is included in the 2015 Form 10-K, which will enable you to arrive at our complete 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’ll now turn the call over to Kim Lubel.

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 four, CST reported full year 2015 gross profit of $1.2 billion and adjusted EBITDA of $602 million. The strong results in 2015 were driven by year-over-year increases in inside sales and fuel volumes. As we look back to 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 owned 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 U.S. and 11 in Canada. Currently, the Company expects to open a total of 45 to 50 new stores in the U.S. 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.

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, merchandising and services contributed $577 million in gross profits to our results and more than 6% increase over 2014. Our U.S. 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, increase 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 2020 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 of focus on the growth of 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 program, and we will continue our efforts to list 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 on 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 system 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 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 a $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 $1.02 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 U.S. and Canadian segment operating results. We have provided slides for the full year operating results as well.

In regards to CST U.S. segment, if you turn to slide six, fourth quarter 2015 net motor fuel gross profit decrease 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 in crude oil prices was lower than in the comparable quarter. We experienced the 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 U.S. motor fuel gallons sold per site per day increased by approximately 1% quarter versus quarter.

Moving to merchandise and services, I want to point out that beginning with this quarter’s 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 profit 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 merchandise and services margins and per site per day numbers by quarter for 2014 and 2015.

Our gross profit for merchandise and 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 include approximately $3 million of income from credit card fees settlement. So, the impact on our NTIs and acquisition 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’ll 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 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 affected 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 devaluation over the comparable period. For additional comparative purposes, results on this slide are also provided in percentage change in Canadian dollar.

Our reported gross profit from merchandise and 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 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 U.S. 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 U.S. 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 the 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 a $144 million available under our credit facility.

In regards to our capital spending, capital expenditures for the full year of 2015 totaled $360 million. Much of this went towards our NTI bills and land bank, aggregating $249 million. During fourth quarter, we completed 22 new stores in the U.S. and 9 in Canada. For the full year 2015, we completed 31 stores in the U.S. and 11 in Canada.

Turning to slide 11, as we look at our 2015 spending plans, we currently estimate we will spend between $450 million and $500 million for CST related capital expenditures. A bulk of the estimated spend is our NTI bills and land bank, which will be 45 to 50 new sites in the U.S. and 10 to 15 new sites in Canada. Included in the estimate is sustaining capital expenditures, which includes remodels, renovation and rebranding, and is expected to be between the $140 million and $160 million.

On this slide we also provide some guidance for the first quarter. I’ll now 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 opened 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 areas did impact our merchandise and services gross profit year-over-year, as we stated in the past, these mature NTIs are generating at or greater than 15% cash flow return.

With that, I will turn it over to Hal.

Hal Adams

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 Core 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 process.

If you turn to slide 13, I want to briefly discuss the initial success of our made-to-order food programs 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 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 and alignment of our marketing and operations 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.

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.

Well 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 operate our locations. By doing this, we maintain wholesale supply to these sites interchanging 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 detailed a chart to demonstrate 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 discount 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 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 impact 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 it 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 significantly grown cash flow and distribution for unitholders with a continued focus on maintaining a healthy coverage ratio. Unlike many other MLPs, our sustaining capital expenditures were minimal and the contractual commitments we have on volume are actually helped by lower crude environment, as the lower price 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 want 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 three 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 teams 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 1st that the Board of Directors of the general partner declared a distribution of $0.5925 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 of capital expenditure needs, we certainly feel like this is a comfortable range for us to feel confident and maintaining our future distribution commitments. We ended 2015 with coverage of 1.08 times.

We understand that we’re in a different market that what MLP has 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 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 those proceeds into high return projects and an established, experienced team to take advantage of those acquisition and integration market opportunities. As the 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 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 is 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, so 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.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instruction] Our first question comes from Damian Witkowski from Gabelli & Company. Please go ahead.

Damian Witkowski

Can we focus on same-store sales in the U.S. 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%, 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 -- fuel gallons were down over 4% and merchandise sales per store per day were down as well. I mean just some thoughts around that will be great.

Hal Adams

So, 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…

Damian Witkowski

Okay, I am sorry. So, maybe I am looking at the wrong thing. I am just looking at your core same-store sale information that you have, 944 stores year-over-year comparison and the per site per day motor fuel gallons went from 5,043 a year ago to 4,921 in fourth quarter of last year. Am I looking at the wrong thing?

Hal Adams

Right. So, fuel volume has decreased a bit but the sales volume is up. So that’s -- merchandise sales is that.

Damian Witkowski

Yes, right.

Hal Adams

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

Clay Killinger

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 very severe weather in DSW, Huston and San Antonio with heavy rain and snow in Huston -- I mean snow in Denver, I am sorry; snow in Houston would be…

Kim Lubel

Unusual thing.

Hal Adams

So, we got hit with some weather there, very good pace going. And at the end of year overall same-store sales was just slightly down to fairly 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 fighting the competition while we’re out there as well. So, the fourth quarter, we did hit some soft volume through the holidays and that hurts a bit.

Kim Lubel

I think 2015 was the rainiest and record for Texas.

Damian Witkowski

Okay. And just looking out 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?

Hal Adams

Store count?

Kim Lubel

I would use the year-end number that we’ve shown…

Damian Witkowski

Okay.

Clay Killinger

Yes. And the period number.

Damian Witkowski

So, it doesn’t include Flash Foods?

Clay Killinger

Yes, correct.

Damian Witkowski

Okay.

Kim Lubel

Right.

Operator

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

Betty Chen

I was wondering, Hal, if you can talk about the learnings. On that slide, you mentioned the significant increase in food sales penetration. Sort of what’s 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 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 -- we have 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 did a significantly larger piece of our business in foods in those stores. So, we 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, as you can see in our guidance for 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 taking in. And in the first quarter, they’ll be opened 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 margins. 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 margins 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 our credit card settlement that went to merchandise margin. So, our merchandise margin in the fourth quarter actually increased at a higher rate than what we’re 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.

Betty Chen

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 openings to at least continue in the next three to five years? Thanks.

Kim Lubel

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 investors 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’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 those stores as well.

Operator

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

Ben Bienvenu

Thanks, good morning. 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 as maybe I thought we would in the fourth quarter. And 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. We also implemented a CrossAmerica unit buyback program. 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 or NTI CapEx as well as there were some great investment opportunities for partnership units, given what’s happened in the MLP market. So, we utilized cash there. Then we got out in the blackout period. So, now, we’re coming out of that period beginning with the filing of the 10-K. And so, look to see evaluating the 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. I think some of the first quarter guidance you see, the first quarter is going to be a 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, about two thirds of our stores out there being fuel only for CST. It has been a consistent contributor of those from a cash flow basis over the years, so it is a consistent fuel margin environment. And so it certainly provides that kind of level set there.

In terms of just the economic impact, I think the only sector that we see some impact is the E&P downturn on the West Coast seems to be impacted a little bit of the commercial truck traffic and we see that in our cardlock industry. So, our cardlock volumes are down but overall we are very pleased with the merchandise sales increases; we’re pleased with the improvement on that end. And I think we’re seeing a consistent margin driver from Canada.

Ben Bienvenu

Okay, thanks. And then just two quick housekeeping items. How much taxes did 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 had 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 of Flash Foods. And so, the tax strategy that the 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 in place the capability of repatriating an additional $175 million of cash on hand in the future that we will not be incurring any taxes and so on. So, we needed the cash because we did the Flash Foods acquisition, 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 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?

Kim Lubel

So, fourth quarter not had the Flash Foods, which is the biggest increase that we’re seeing in the first quarter ‘16.

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 to pull out and I’m just curious comparing them apples to apples?

Kim Lubel

Right. So, included the acquisition cost.

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 out in Canada that you had hedge and gains on that hedge or maybe talk a bit about that?

Clay Killinger

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

David Hartley

Okay. Are you expecting that to recur in coming quarters?

Clay Killinger

We do intend to continue to repatriate cash from Canada down to U.S. And so as Canada -- so short answer is yes to that extent. It’s only when we convert cash in the U.S. dollar, then of course it depends on what the exchange rate does. Because we now have a mechanism to repatriate cash out of Canada, there really is need to have Canadian dollar closure there, because we do intend to repatriate the cash going forward.

David Hartley

Got it. And so when I think about the, I think there is withholding tax of $6.7 million incurred in the year. I think it was even in just this quarter. So, when I look at $16 million of one-time items that you talk about, how much of that gets attributed or kind of clawed back from SG&A, and then 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 through that a bit.

Clay Killinger

If you’re talking about the one-time items, the largest piece of that is the tax expense of $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 with Canadian -- I’m sorry. Go ahead.

David Hartley

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

Clay Killinger

What I said is -- it’s 5% withholding tax on the full amount of the 360. So that’s how you get. It was -- the gross amount of tax in Canada was $17 million to $18 million, but there were some offsetting tax deductions in the U.S. that we were able to take, so netted it down to 14.

David Hartley

Okay. And so how was that attributed now, when I shake it out in -- 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 coming out of SG&A in 14 out of tax or how should…

Clay Killinger

It’s the latter. That’s where it is, David. $14 million out of tax expense line and then the $2 million out of SG&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 to make acquisitions and more focus on NTIs or maybe a little color that would be helpful?

Kim Lubel

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

David Hartley

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

Kim Lubel

We do. If you look at actually the last slide of our present 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 last question, just on -- a big picture on gasoline margins in the U.S., certainly not as high as last year but industry-wide still very high. I’ve 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 U.S. and $0.19 in Canada, in U.S. dollars; if you did in Canadian dollars, $0.26, which eventually quite a bit stronger than the January of 2015. So, comparing kind of month to month comparison, we started out stronger in ‘16 -- much stronger in ‘16 than we did in ‘15. But it all depends on what -- at what pace crude changes, and we’re certainly seeing a lot of volatility, both up and down here recently. 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. So, we have certainly seen quite a bit of up and down in crude market.

David Hartley

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

Kim Lubel

Historical margins have been -- and we are running about a three-year average at about $0.17 a gallon U.S -- sorry, five -year average. This is a consistent quarterly correction here from Randy. I appreciate it. But we are on a five-year average with $0.17 a gallon in the U.S., and Canada tends to stay in the same range that $0.23, $0.24 Canadian dollars.

Operator

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

Sharon Lui

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

Jeremy Bergeron

Sure, Sharon, this Jeremy. I’ll answer that. I mean it’s reflective of our recently completed acquisitions last year the cash flow we expect those acquisitions to add to the partnership as well as depending acquisition of SSG Corporation’s assets up in the Wisconsin and Minnesota market and just a continual execution by the team to continue to grow our cash flow. So, I mean really it’s everything involved. And as we said earlier on the call, we do expect to conduct more drop downs of the fuel assets from CST. And so, all those things go in to the additional cash flow we expect to generate at the partnership which should translate into additional distributions for unitholders.

Sharon Lui

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

Jeremy Bergeron

Sure. So, I mean we’re not in the habit of talking about overall multiples in 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’s 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 hitchhiker acquisition, we paid a very good multiple, and it’s on the low end of what we paid over the past couple of years in terms of multiple standpoints. So, it’s should -- it’s going to be a good return for the partnership.

Sharon Lui

Okay. And maybe if you just touch on the distribution policy and I guess your decision 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 Lui

Just trying to understand, I guess the rational 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. So, Sharon, it’s 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’s 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, enables us to generate a very solid coverage ratio and continue to target 1.1 times. So we think it’s the right approach and it’s a right mix.

Sharon Lui

Great, thank you very much.

Operator

Thank you. [Operator Instruction] 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 merchandise 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 something that we can expect to go forward, based some of the fresh food initiatives, 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 Foods. Is that 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 those acquired stores?

Clay Killinger

That’s the new run-rate, Adam. We have the last -- it’s really being driven by our acquisitions that are NTIs. And obviously as we get throughout the year, that OpEx will increase as well as we continue to open new industry stores.

Adam Scott

And then lastly, as it relates to the real estate venture, just wondering if you have any updates in terms of progress 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’re moving kind of at pace that I would say is even advanced -- in more advance than what we had originally thought. And so, we are clearly on track to try to complete something in the second quarter.

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 merchandise profits and provided 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

So, 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

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.

Kim Lubel

So, you can do comparables.

Randy Palmer

So, 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 revenue and gross margins; there is no cost to that, right?

Kim Lubel

Yes, pretty much.

David Hartley

Okay. And on the real estate venture, 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 to be more capital light 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 necessarily has to replace what we were doing with at the partnership, it’s just is a current cost of capital for the partnership that’s a little prohibitive for dropping down real estate because the acquired implied multiples, even at the 7.5% triple net lease rate was over 13 times and that’s higher than the enterprise value multiples 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 deal for CST that that will enable us to fund a substantial portion of our NTI cost. Hopefully, in the future, we -- beginning maybe 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 at -- 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 and then we would start generating operating income. So, that’s really kind of levering the overall NTI investments and it will remove our -- or lower the investment that CST has to make about $1.5 million per store, which is really just the real -- 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% 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 the stores that have been open for two years, and that’s year versus year. I guess 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. It hasn’t been completed yet. So, I would put that caveat in there, but we’re proceeding along nicely.

David Hartley

And 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?

Clay Killinger

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

Randy Palmer

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 & Company. Please go ahead sir.

Damian Witkowski

Yes, hi. Thanks for taking the question. 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 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 -- in the $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 and it’s sustaining to complete and finish out our new corporate service center location. That’s about $10 million, $15 million. That gives the total of somewhere…

Randy Palmer

450.

Kim Lubel

450.

Clay Killinger

450, 500 range. The maintenance capital is somewhere between, 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.

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