Welcome to the CST Brands and CrossAmerica Partners' First Quarter 2015 Earnings Call. My name is Vivian, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Randy Palmer, Director of Investor Relations. Mr. Palmer, you may begin. .

Thank you, operator, and good morning, and thank you for joining the CST Brands and CrossAmerica First Quarter 2015 Earnings Call. With me today are Kim Lubel, CST Chairman and CEO; Clay Killinger, Chief Financial Officer; Joe Topper, CEO of CrossAmerica Partners; and other members of our executive leadership team.

Kim will provide an overview of the first quarter operational performance for CST, Joe will provide an overview of the operational performance for CrossAmerica, and then we'll turn the call over to Clay to discuss the financial results. At the end, we will open the call up for questions for both companies. .

Before we begin, I'd like to remind everyone that today's call, including the question-and-answer session, may include forward-looking statements regarding expected revenue, future plans, future operational metrics and opportunities and expectations of the company -- companies.

There could be no assurance of 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 company disclaims any intent or obligation to update any forward-looking statement. During today's call, we may also provide certain performance measures that do not conform to U.S. generally accepted accounting principles or GAAP.

We provided schedules that reconcile these non-GAAP measures with the reported results on a GAAP basis as part of the earnings press release. .

We should also note the results provided today represent the business operations of CST on a standalone basis before the consolidation of CrossAmerica Partners, but include the income associated with CST owning a percentage of the outstanding units and all the IDRs of CrossAmerica.

Full consolidation information is included in Note 16 in the first quarter 10-Q, which will enable you to arrive at our complete consolidated financial results. Today's call is being webcast, and a recording of this call will be available for a period of 60 days..

And with that, I'll now turn the call over to Kim Lubel. .

Thank you, Randy, and good morning, everyone, and welcome to our first quarter 2015 earnings call. This morning, CST reported solid results for the first quarter, as we continue to trend at positive same-store sales to same-store merchandise growth of 3% for the U.S. segment and 4.8% for Canada.

We have now produced positive same-store merchandise growth in both the U.S. and Canada for several straight quarters, a trend we expect to build upon in the coming months and years. We also carry the momentum of the fourth quarter over to the first in regards to our U.S. fuel margins as we benefited from a favorable fuel margin environment in January.

CST reported fuel margins net of credit card fees of $0.14 for the first quarter. This is a strong result for a historically weaker quarter, as this compares to a $0.10 margin last year and an $0.08 average margin over the past 5 years.

Overall, we are pleased with our first quarter results and believe that our efforts to drive traffic to our stores during the first quarter position us well to build on these efforts as we head into the summer driving season.

As we look at the remainder of this year, as we noted on our last call, we plan on building more new stores in 2015, and currently project that we will build between 35 to 40 new stores in the U.S., and 10 to 12 new stores in Canada this year alone.

We expect this level of organic growth to continue in future years, supported by our partnership with CrossAmerica, as we expand into new markets. We believe these new builds, coupled with acquisitions, will continue to provide us growth well into the future. .

As I have noted before, the overall convenience store market remains quite fragmented. The 2 transactions that we closed in the first quarter and our continued focus on other potential opportunities further underscore our commitment to acquisitive growth as we leverage the favorable capital structure of CrossAmerica.

And with our dedicated integration team, we are even better-positioned to make each acquisition successful through our ability to quickly integrate, capture identified synergies and leverage the knowledge and strength of the acquired company.

As we reported on our last call, we completed the drop-down of assets on January 1, as CST sold a 5% equity interest in CST's fuel supply business to CrossAmerica in exchange for approximately 1.5 million CrossAmerica units. This was our first of many drops to come.

While we have not yet finalized the specific timing and assets, we are targeting another drop this summer that will most likely encompass those recently constructed NTI and an additional equity interest in the fuel supply business. .

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

Excluding the effects of foreign exchange, we would have seen an increase of $13 million in Canadian gross profit. The fuel margin net of credit card fees remains strong at $0.21 per gallon for the first quarter of 2015.

As we have noted in the past, the relatively stable and strong fuel margin continues to be one of the key attributes of our Canadian business. We see opportunities not only to build new sites in Canada, but also believe there are various opportunities to grow through acquisitions as well. .

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

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

First, looking at our wholesale segment, our overall gallons sold increased 160 million in the first quarter of 2014 and 234 million in 2015, reflecting an increase of 47%. Margin for the wholesale segment was $0.056 compared to $0.059 in the first quarter of 2014.

For the first quarter, our purchase price of fuel in the wholesale segment declined by approximately $1.20 per gallon or approximately 43% relative to the first quarter of 2014. For most of our wholesale gallons we supply, we receive a terms discount from the product supplier that is a percentage of the partnership's purchase price of the fuel.

The dollar value of this discount will vary as the price of fuel varies. As a result, the dollar value of the purchase discount from our suppliers decreased relative to the prior quarter as a result of the lower fuel prices.

The decrease in the purchase discount due to the drop in fuel prices during the quarter was the primary driver of the decline in wholesale segment margin per gallon for the quarter when compared over a year-over-year basis.

This was slightly offset by the positive margin environment for the smaller percentage of our variable price gallons during the quarter. .

For the CrossAmerica retail segments, which does include our commission agent business, overall gallons sold increased from 15 million in the first quarter of 2014 to 46 million in 2015, reflecting an increase in the number of company-operated convenience stores primarily from PMI and Erickson Oil acquisitions.

Margins for the retail segment net of credit card fees and commissions was $0.102 compared to $0.021 for the first quarter of 2014. .

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

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

I know that Kim discussed this earlier, but I did want to briefly touch on the M&A market. The marketplace, whether it's retail, wholesale or combination of both, still remains fragmented because of this, we will continue to seek purchase opportunity. We're in a much better position today with our partner, CST. It is a collaborative effort.

We're in the process of turning the details of the next drop-down of assets from CST to CrossAmerica. This is an important lever that we can utilize, not only to provide overall growth to CrossAmerica, but to also provide capital back to CST to fund such things as NTIs. .

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

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

I made these changes because of my deep respect for these gentleman and the experience they bring from CST, and because of my confidence in their ability to lead CrossAmerica into an even more profitable future.

The collaboration between CST and CrossAmerica is strong, and is providing us with the structure to consolidate our recent acquisitions, and fulfill our vision for strategic growth. We believe we are positioned well for the upcoming and traditionally robust summer driving season. .

I'll turn it over to Clay now. .

Thanks, Joe. First, I'll provide a brief overview of the first quarter results for CST, and then cover CrossAmerica. I'd like to remind everyone that the financial results that I will be presenting for both CST and CrossAmerica today are on a standalone basis and not consolidated.

Consolidated results are available in the CST 10-Q filed earlier this morning, and I would refer you to Footnote 16 that walks you through the consolidation of CST and CrossAmerica.

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

This compares to net income of $11 million or $0.14 per share for the first quarter of 2014. For the first quarter of 2015, we had certain one-time expenses that included acquisition, legal and professional fees and gains on the sales of assets, as outlined in our earnings release.

The after-tax income effect of these items was approximately $2 million for the first quarter of 2015. Excluding these items, our earnings would have been $16 million or $0.20 per share for the first quarter of 2015. There were no similar one-time items in the comparable quarter of 2014. .

Associated with our first drop-down transaction that took place on January 1, we are providing non-GAAP financial metrics in our earnings release that reflects the economic impact of this transaction.

You should expect that we will continue to show such metrics in the future as these drop downs reflect recurring economic transactions based on independently determined market prices.

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

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

The year-over-year improvement was primarily attributable to an increase in the cents per gallon fuel margin, net of credit card fees, of nearly $0.04 between the periods, rising to $0.14 from $0.10 for the first quarter of 2014. The increase in fuel margin was primarily a result of falling crude oil prices early in the first quarter of 2015.

This motor fuel gross profit reflects a reduction in gross profit attributable to CrossAmerica of $2 million, less than $0.005 per gallon of margin. .

For our core stores, our U.S. motor fuel gallons sold per site per day increased by approximately 4% quarter versus quarter, primarily driven by New to Industry stores.

Our gross profit for merchandise sales increased $5 million or 5% in the first quarter of 2015 when compared to the same period in 2014, also primarily driven by New to Industry stores. Operating expenses increased $10 million quarter versus quarter, reflecting our New to Industry store growth and acquisitions. .

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

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

The slight decline was primarily attributable to foreign currency exchange, as merchandise gross profit would have increased $1 million, excluding the effects of foreign exchange. The Canadian dollar continued to devalue relative to the U.S. dollar during the first quarter of 2015 versus the comparable period in 2014.

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

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

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

For your 2015 modeling purposes, I'd like to provide you with some guidance on CST-related non-gross margin items. Operating expenses for the second quarter of 2015 are expected to be in the range of $172 million to $177 million.

As we move through 2015 and open additional NTIs, these quarterly amounts are expected to increase by $2 million to $5 million per quarter. Recurring general and administrative expenses are expected to average in the range of $28 million to $32 million per quarter for 2015.

Depreciation, amortization and accretion expense is expected to be in the range of $32 million to $34 million per quarter. In past earnings calls, Randy would provide you with guidance on gross profit-related metrics. The gross profit segment guidance that we have provided in the past is now located within the earnings release. .

Now turning to CrossAmerica. I'd like to briefly touch on key performance metrics that we believe are important to our unitholders. As I discuss these results, I would refer to CrossAmerica's separate earnings release filed earlier this morning. Today, we had reported adjusted EBITDA of $16 million for the first quarter of 2015.

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

For CrossAmerica's wholesale segment, gross profit increased 36% to $21 million from $16 million in the first quarter of 2014. Wholesale margin per gallon for the total system was $0.056 compared to $0.059 for the first quarter of 2014.

The increase in wholesale gross profit was primarily driven by an increase in motor fuel gallons distributed related to acquisitions. We have computed distributable cash flow using a current methodology that is consistent with others in the MLP space.

This methodology is slightly different from our historical presentations, but consistent with how Joe described it in our year-end earnings conference call.

As a result of the drop down of the 5% interest in the CST fuel supply business that was mentioned earlier, CrossAmerica's wholesale segment received $1.1 million in distributions from CST during the quarter.

For CrossAmerica's retail segment, gross profit for the first quarter of 2015 was $14 million compared to $1 million for the same period in 2014. The increase is attributable to the acquired convenience store operations from the PMI and Erickson oil acquisitions made over the past 12 months. .

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

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

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

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

Thank you, Clay. And before we turn the call over to questions, I do want to acknowledge that this month marks 2 years since CST spun off from Valero into an independent public company. I first want to thank all of our CST and CrossAmerica team members across the U.S. and Canada for their support and dedication to delighting more customers every day.

I am also deeply grateful to the Board of Directors of both companies for their continued guidance and support. .

I would like to take a few moments to recap our transformational growth during our first 2 years as we have become one of the largest independent retail and wholesale distributors of motor fuel and convenience merchandise in North America.

During this period, with the purchase of the General Partner of CrossAmerica Partners, we have doubled our footprint and acquired both a growth vehicle for future expansion and a strong wholesale fuel supply business.

We, together with CrossAmerica, bought the Nice N Easy Grocery Shoppes, a chain of 32 company-operated and 45 franchised stores in upstate New York, expanding our operations to a new market, and with a network with a strong retail operating history, we, also together with CrossAmerica, purchased 22 stores in Texas from Landmark Industries, marking our first corner stores selling Shell-graded fuel in our existing market footprint.

And with CrossAmerica's acquisition of Erickson Oil in the upper Midwest market in February, we continue to expand our footprint into new markets. We have also focused on our organic growth with the opening of 62 New to Industry stores and a new larger regional distribution center in San Antonio.

Our growth to date aligns with our strategic vision for the future. .

Organic growth with the building of New to Industry stores and drop downs of CrossAmerica; growing our inside store sales and merchandising efforts as we continue to strengthen our brands; targeted acquisitions along with CrossAmerica partners, with growth in both our retail and wholesale networks; and deepening our integration and consolidation of the stores that have joined our network and our legacy stores around the country.

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

[Operator Instructions] And our first question comes from Ben Brownlow from Raymond James. .

On the G&A guidance, it's just a slight uptick from what you were looking for previously, that 28% to 32% a quarter, just give a little bit of color behind that. .

And Clay, you mentioned, I believe, $2 million in kind of unusual charges for the quarter.

Were there any other additional charges in the first quarter?.

I'll take the second part first, and with respect to CST, there were some severance and some legal and professional fees in the first quarter, and that's why the general and administrative expenses are higher, and that's offset by the gain on the sale of assets.

So we had about $7 million of additional expenses in G&A, offset by the $5 million gain on sale of assets, and that gets you to the $2 million. The severance is just part of us integrating the CrossAmerica team into an integrated network. .

So -- and with respect to the uptick in G&A cost, I don't think that it's a big creep. It's really just reflecting the growth that we're seeing in our business. We are an acquisitive company, and we have been growing and we need some back office support to be able to continue to do the construction in our NTIs.

We have benchmarked ourselves on our G&A cost as a percentage of our gross profit to our peers, and we still think we're very favorable and comfortable to the peers. .

Great. And just one more for me, the -- obviously, there's a long multiyear drop-down pipeline on the fuel distribution to CrossAmerica.

But can you just update us on your thoughts or ability to drop-down the Canadian fuel supply business? Is that something you're looking at?.

And then also on the IRS proposed changes, obviously, that's not going to have an impact on CrossAmerica, but does that have any impact on what type of assets you would look to acquire?.

Sure, Ben. I'll take the first piece. We're -- not like we're ignoring the Canadian assets at all. We've got enough on our plate right now with the drop-downs in the U.S., and I think as time matures and goes by later on in the year or 2, we are -- we're going to evaluate what we can do with the Canadian assets.

It's not something that we're just looking at, at the exact present moment. .

With respect to the IRS regulation, we have a -- did issue some proposed regulations on May 5 that really clarified what qualifying and non-qualifying activity is.

There really was no significant changes from our historical interpretations of the IRS rules, so -- and in fact, I think they're beneficial to us because they actually do codify, or at least, the proposed regs codify that wholesale distribution activity, which is primarily what CrossAmerica does, is a qualifying activity.

Now there was some clarifying language on transportation activities and -- which is really trucking operations, and that's the movement of the fuel from the rack to the actual pump.

Those have always been considered non-qualifying activities, and within CrossAmerica, there is a small trucking operation, but it's embedded into a taxpaying entity that sits underneath the MLP, and so therefore, there's really no issue on non-qualifying income there.

Would it affect our -- what we're looking at in terms to acquire, I think nothing's really changed with regulation. They basically just codified things, and I will remind everybody that they're just proposed regulations.

So it takes a little while for those -- for comments to come in -- then to be finally be issued, but we don't see that being an impact on us. .

And our next question comes from Bonnie Herzog from Wells Fargo. .

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

So could you talk about how you prioritize these 2 initiatives?.

Sure, sure. We're evaluating the drop for, as I said later this summer, the candidates we're looking at are the New to Industry stores that we've built pretty much since we spun out and the commensurate amount of the fuel supply businesses associated with those stores.

In terms of how we evaluate timing in those things, obviously, financing plays a role from the partnership standpoint, and we're just modeling all that together and are looking towards later this summer for that next activity. .

In terms of the acquisition pipeline, there are plenty of acquisition opportunities out there. And as we are coming together with CrossAmerica from a filter standpoint, I've described it to many as the Venn diagram.

You have one circle of what CST would like and what CrossAmerica would like in the other circle, and it's that middle part that we're really focusing our activities. Looking for networks in geographies that have strong economic conditions, the Upper Midwest, for example.

The Erickson transaction, I think, is a very good example of what we are looking for, strong network in terms of stores, where there's either an opportunity for growing inside store sales as we bring in our offering or a strong store sales, like we see in Nice N Easy to begin with where we can learn from and bring across -- scale across the networks themselves.

The beauty of the partnership with CrossAmerica, as we look at networks that have a combination of both company-operated stores and wholesale stores, we now have a place to put and grow the wholesale volume along with growing the retail side as well. .

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

Sure, sure, absolutely. I think that we'll be continuing to ramp-up activity for the years to come. That's certainly our expectation. .

Okay. And then I have a question on broadly traffic which was good in the quarter, and I believe you ran a lot of tactical promos.

So could you drill down a bit more on this and then how you'll be balancing driving future traffic and promos? And then, for instance, I guess something about it because it seems like you're starting to ease up a bit on the promos since you're guiding to higher March margins in Q2. .

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

And you're keen in noticing that we've guided our merchandise margin for the next quarter higher than what it is for this quarter because we have eased up on the promotional tactics that we were using in the fourth and first quarter. We really promoted fountain drinks at a great price in the fourth and first quarter, and it worked for us really well.

We've eased up on that, and we're seeing that we've hung onto our increased traffic in the stores. So we're happy with the tactics we've used, and our stores are doing a great job at servicing and delighting our customers in the stores. .

And our next question comes from John Lawrence from Stephens. .

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

Great, thanks, John. Well, one of the things we're really excited about is, in March, we completed the installation of 160 freestyle fountain units in the San Antonio area market. We've partnered with Coca-Cola on this unique way to deliver fountain drinks to our stores.

And as you know, fountain plays a key role in growing food and growing snacks in our stores, and we're really interested in seeing how installing this in a market-wide basis is able to allow us to move the needle on these high-margin products.

So as you can see with our guidance for second quarter sales, we remain enthusiastic on what those results are and what they will be. So that's probably the most exciting thing that we've had going in the last couple of months. We continue to play with our afternoon food offering in our advance food stores, and growing that one-handed food.

We've introduced about a year ago the pot pie and empanada type item that we're pleased with the results so far with, and growing our afternoon food business.

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

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

So I think it's fair to say that we're very bullish in proprietary food programs, especially with the embrace of the Nice N Easy model in New York.

And as I mentioned last call, we're busily working on getting a number of those concepts inserted into some stores here in the Southwest so we can begin to play with them and understand how the customers embrace that idea. So we really embrace the proprietary food program idea in our stores. .

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

Well, we certainly like the filling in our existing footprint. In particular, Texas is 60% of our U.S. marketplace, and a substantial number of our new store builds are in Texas. The Landmark acquisition that we did in January was very quickly integrated into our system within about 2.5 to 3 weeks.

So we now have Corner Stores in San Antonio, Austin selling Shell-branded fuel, which is helpful from a Corner Store brand identity standpoint. So to the extent that we find the right networks in our footprint right now, that's an easy, easy acquisition approach and integration approach.

And then as I said earlier, the Upper Midwest area is interesting as well. I think Erickson Oil certainly gives us a nice footprint with CrossAmerica to evaluate further expansion in that area. .

And our next question comes from Theresa Chen from Barclay's Capital. .

My first question is in relation to your comments about the drop downs for the rest of the year, and specifically, referring to the fuel supply drop.

So given the magnitude and pace of third party acquisitions that you've done year-to-date, plus the planned drop downs of the NTI real estate assets, I mean, I wouldn't necessarily think that you would need a drop down of fuel supply imminently.

I understand that it makes a lot of sense to do the NTI drops regularly because you don't have a depreciated cost basis for those, and thus, no tax bill.

But for fuel supply, are you planning to execute this drop because you think you'll need it to support distribution growth or should we think of it more as a set schedule drop-down strategy?.

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

Okay, that's helpful. And then in terms of the breakdown in the partnership's cash flow between variable and non-variable pricing contracts, I believe, and please correct me if I'm wrong, about 20% of the pricing is variable.

And I was just wondering if you're looking to bring that number down further over time or do you think that this is the right balance?.

I think we are moving towards a more consistent everyday price just partly with the way we do with CST, like $0.05 a gallon or the contracts that we have between the partnership and other -- like we have with -- we're trying to bring down less variability and more predictability, so that we have less variable move to the price of a gallon.

So I would say that, that percentage will decline over time as a percentage of our total business. .

Understood.

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

There's an irrational exuberance for buyers and sellers going on right now. .

So I don't know that the deal flow and the deal opportunities have necessarily increased so substantially in the last quarter of the last year. I think we've had -- it's been a very active acquisition market, I think, now for the last 12-months plus.

But to Joe's point, there are more players on both buyer and seller side, and I think we still present a very attractive buyer of these networks. We are -- we know how to run core stores. We've done it for years and decades.

We have the wholesale strength from CrossAmerica coming into it, and in that combination, I think we're very attractive buyer as CST CrossAmerica continues to participate in the acquisition market. .

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

And our next question comes from Matthew Boss from JPMorgan. .

This is Esteban, on for Matt.

On the M&A front, how should we think about higher rates on your overall business, and specifically, the value of CrossAmerica units and your ability to finance acquisitions and drop downs going forward?.

I don't think we have any problems to finance acquisitions going forward, as long as we buy them at accretive multiples. I think -- I don't want to comment on the share price because it's inappropriate for me to comment on the share price, other than I bought shares personally myself in March, and I'm looking forward to other opportunities.

I think there are many ways for us to finance things, whether it's through our credit facility, whether it's through a high-yield offering. So I'm not necessarily worried or concerned about the share price today. I'm looking for ways to make the share price go higher for everybody. .

Got it, and now that you're past your May spin restriction date, have you given any thought to either additional store divestitures above the 100 that you did recently or any other strategic options that weren't available previously?.

As the 2-year mark has come and gone, we're just -- our job is to continue to show up every day and continue to increase shareholder value. In terms of things that we could do today that we couldn't do a week ago, we really -- we moved into the MLP space with our transaction with CrossAmerica.

And so the one thing that we were -- probably stopped from doing prior to May 1 in terms of forming our own MLP. We are able to get there and I think we certainly brought value to both unitholders and shareholders as a result.

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

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Got it.

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

Sure, well, I'll let Hal give details, but we're thrilled with the new distribution center. We are able to move operations over a weekend into the center. We got there early.

We were able to, I think, capture some savings as a result of the early move, and from -- certainly, from my corner, it looks like things are going very well, but Hal's more deeply into that too. .

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

Our growth and our expansion in that business and our utilization of that center was just causing the old center to be busting at the seams. Now we are moved into a place where we have got plenty of room for growth, plenty of room to handle the volume that we're handling today and just makes the logistics a lot more efficient.

So we're pleased with it. We're glad we got into it before spring, like Kim said, ahead of schedule, and it's humming and we haven't missed a beat. .

And our next question comes from Betty Chen from Mizuho Securities. .

My first question, I was wondering, I think we've now seen 2 consecutive quarters of gallons per site per day increase, and the guidance in the second quarter also reflects additional growth.

Can you talk a little bit about what's driving that? Is it a change in consumer behavior, your strategy around fuel margins, et cetera?.

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

Sure. .

this is Tony, I'll take the fuel question first. There's 2 things, really, driving the increase in gallons. One is the continued NTI growth that we're having. Those stores are pumping over 8,000 a day today versus our average that you see around close to 5,000 a day on average. So there continue to be an incremental add.

The second piece of that is the rationalization that we did of the roughly now 70-plus stores that were at lower volume numbers. So the combination of what's left is what's causing -- really causing that increment there. .

Sure, and then in terms of NTI -- I'm now looking at the drops, the candidates for the drops are -- we're really looking at our most recently constructed stores, primarily those that we've constructed since we spun out in the U.S., that's 40 or so stores that we're looking at there.

And so those candidates, because the depreciation is still -- they're still pretty high-level basis, and those stores are good candidates for the drop as well. .

And our next question comes from Sharon Lui from Wells Fargo. .

Just wondering if you could provide, I guess, a little bit more detail on the target growth rate for the partnership. I believe it's 7% to 9%.

Is that on a distribution per unit number or did you say dish rolled [ph] cash flow?.

It's on a distribution per unit. .

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

It's -- well, it will be a combination. It's just what we're targeting on an annual basis for 2015. So, excuse me, the partnership has completed some acquisitions.

There are some in the pipeline, and then, obviously, we've talked about the asset drop and that is -- that is significant for both, both entities, and it's recurring, and it's something we've talked about. So this is looking at -- we wanted to give some guidance to the investing public on what we are actually currently seeing and targeting.

So that's where we got the number from. .

Okay, that's helpful.

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

Well, that's how we're modeling at right now. .

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

We're still in the process of truing up and finalizing our model, so we're not in a position to be providing guidance on G&A at this present time.

But I think we will -- there were some one-time items and you can compare those in the distributable cash flow table that was in the earnings release, and I would not expect it to be significantly different from the recurring rate that was incurred in the first quarter. .

And our next question comes from Damian Witkowski from Gabelli & Co. .

Question going back to your guidance for Q2 on the gallons per store per day, obviously, moving up nicely as you've seen in the last 2 quarters.

But in that number, can you talk about what your expectation is for same-store sales? Is it still negative or would that positive 3 sort of imply positive same-store sales as well?.

Damian, it's Tony again. At the same-store levels, we're managing those a little bit differently, and we're trying to push -- maximize gross profit in those cases. So I'm not overly concerned.

We would like to see us maybe move to -- stay to flat -- around flat if we could, but I'm not overly concerned because those are also our older units, and also continuing to look at where those may end up ultimately, right. We've talked a little bit about rationalization earlier.

Some of those are stores may end up moving into that category at a later date. So I'm not overly concerned about it, and so I think we should all be happy with it for the most part and staying close to it. .

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

The 600-plus stores in Texas alone, we had, I think, very positive numbers in the first quarter. You should expect that a lot of that came from Texas, and 60% of it comes from Texas for the U.S. side. So really, we're not seeing any significant impact.

If anything, I think the Texas economy, as we said before, has gotten even more diversified over the last several years. We tend to be centered in urban markets, like San Antonio and Dallas and Houston and Austin, that all have different industries driving growth in those areas.

Only about 2% of our stores are in the Eagle Ford area, and I would say we're still pleased with the result of those stores. As we said earlier, we've opened a few of them. The results initially were extraordinary during kind of heyday in Eagle Ford.

And while we'd say we've probably not seen extraordinary results we saw a couple of years ago, we're still very pleased with the results of those stores as well. .

Okay. And then lastly, we've been talking about drop downs in sort of in the short term, but can you just go back to when you did the acquisition of the MLP back in August of 2014, I think the idea was to, over a 5-year period drop down the entire 1.9 billion or so in U.S.

fuel gallons, and what's -- how should we think about the cadence of that drop-down? You did 5% at the beginning of this year.

Are you going to do more? And when -- is 5 years still the timeframe we should think about? And then also remind me what determines the sort of the multiple that the MLP pays for those gallons?.

Clay. Damien, I think we've guided 5-plus years, and so it's a minimum of 5, and it can go obviously much and longer, and the amount and cadence isn't set in stone. Obviously, it can change, but I think the initial expectation was that there would be at least one a year, and we did a drop -- a fuel drop only in January.

One of the primary reasons for doing the drop, and it wasn't a big one, was to provide some metrics that the investing public could use to sort of triangulate and quantify what the drops might be in the future, especially with respect to the fuel supply. So I would say your -- the expectation is over 5 years, which is a 20% cadence per year.

That's probably pretty -- that's probably on the heavy side. It's not impossible, but probably, on the heavy side. And in terms of the number per year, probably, at least one, and we -- so actually, what we're doing, other than the January fuel drop, is right in line with what we have modeled out internally.

We haven't disclosed that, but it's modeling right in line internally with what we thought when we acquired the GP and the IDRs.

Now with respect to the purchase prices and the multiples between CST and CrossAmerica, those are determined through, what I would call, very robust negotiation between CST and the independent Board of Directors members at CrossAmerica, which have hired -- each of them hire independent appraisers and consultants to determine what the fair value of those are, and so it's not a dictated price.

It is truly a market-driven price based on a number of different factors, and I would say that it is a very robust and spirited negotiation between both. .

And our next question comes from David Hartley from Crédit Suisse. .

Just -- could you reiterate the cash you have in Canada right now? I missed that number. .

Alright, just I think over about $300 million. .

No, in Canada it's close to $200 million. I think it was like $198 million. .

Okay, so there are no plans to repatriate that down to the U.S.? What is your thinking with that cash in Canada? What are your options for that?.

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

Okay, that's great. Just on the core store same-store information for the U.S., noticing the merchandise sales were up year-over-year, but it looks like a good portion of that, maybe 70% of it, is coming x cigarettes.

Could you give us a sense of how these sales increases, and I assume they're related to food service predominantly, how is that cadence of sales versus dollar profits trending now? Are sales growing much faster than the operating -- or the gross profits for food service at this point in time in its early days, and do you expect that to catch up and surpass sales growth over time?.

David, this is Hal. Obviously, when you look at total store sales, cigarettes come at a lesser percent margin than x cigarettes business does. So it's helpful for us to grow the x cigarettes business faster than the cigarette business, and so that's our strategy.

And things like beverage and food and snacks come at a higher full margin than things like general merchandise, grocery and milk. So we've got lots of levers to pull, and we're pulling all of those different levels at different cadences to make sure that we're growing sales and gross profit at the same time.

But as we said before, we're very concentrated on gross profit growth, regardless of what happens to the revenue. So we're very focused on growing penny per customer out the door. So you're right, food service -- as food service grows, it pulls up the total margin percent in the pool and we benefit from that.

So our focus is on food service, beverage and snacks, and growing those categories because they pull up our pool margin. .

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

Good, thanks for clarifying your question, David. So as I -- as we mentioned earlier on the call, we did in the fourth quarter and -- late in the fourth quarter and all during the first quarter, we ran a very heavy promotion in our fountain category, which did increase our traffic, but did have a decline on our percent margin over all.

So that's what you're seeing as an anomaly for this one quarter. But if you look at the guidance for next quarter, you'll see that we normalized that percent and it begins to grow again, and that would be -- that's our strategy and that would be what our intention is.

So what you're seeing is a onetime hit to the margin percent in fountain, which had a big impact because of its large percentage base. .

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

Thank you. .

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