Randy Palmer - Investor Relations Kim Lubel - Chairman and Chief Executive Officer Clay Killinger - Executive Vice President and Chief Financial Officer Jeremy Bergeron - President Hal Adams - Senior Vice President and Chief Marketing Officer.

Ben Bienvenu - Stephens Inc. Bonnie Herzog - Wells Fargo Securities Ben Brownlow - Raymond James Esteban Gomez - JPMorgan Damian Witkowski – Gabelli & Co. Sharon Lui - Wells Fargo Securities Nathan Judge - Janney Montgomery Scott David Hartley - Credit Suisse Alvin Concepcion - Citigroup.

Welcome to the CST Brands and CrossAmerica Partners Third Quarter 2015 Earnings Call. My name is Eric and I will be your operator for today’s call. At this time all participants are in a listen-only. Later, we will conduct a question-and-answer session. Please note that this conference is being records.

I will now turn the call over to Randy Palmer, Director of Investor Relations. Mr. Palmer, you may begin..

Steven Stellato, Chief Accounting Officer at CrossAmerica Partners; and other members of our executive leadership team. Kim will provide an overview of the CST third quarter operation performance and current strategic initiatives and then we will turn the call over to Clay to discuss the CST financial results.

Jeremy will follow with an overview of the operational and financial performance for CrossAmerica Partners, and at the end we will open up the call for 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 are posted on the CST Brands and CrossAmerica websites.

Before we begin, I would like it 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 projects will be achieved and 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 to 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 US Generally Accepted Accounting Principles or GAAP.

We have provided schedules that will reconcile these non-GAAP measures with their 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 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 consolidating information is included in the third quarter 2015 Form 10-Q which will able 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 it Kim Lubel..

Thanks, Randy. Good morning everyone and welcome to our third quarter 2015 earnings call. CST had a very strong third quarter by all measures reporting gross profits of $378 million and adjusted EBITDA of $294 million as reflected on slide 4.

These strong quarterly results were driven by year-over-year increase of inside sales, fuel margins and fuel volumes. Our culture and strategic focus are delivering the results that we expected.

Our efforts to maximize fuel gross profit dollars through more site-specific fuel margin and volume balancing helped us achieve near historical high fuel margin in the US in the third quarter.

And as our third quarter performance reflects, we much more than just a fuel business as our strong inside-store performance across our network contributed more than $139 million in gross profits to our results, a more than 10% increase over the third quarter last year.

I’d now like to spend a few minutes updating you on the progress we have made with our 2020 vision which is focused on our key growth planks of organic growth, inside-store growth and acquisition growth.

We continue to focus considerable efforts on strengthening our inside-store offering and expanding our 300-plus item grocery sets, including fresh produce to an additional 50 stores by the end of this year.

And in two weeks, we will be opening our first of many new-to-industry stores in Texas with expanded made to order food program first developed in the Nice N Easy store network that we purchased just one year ago this week.

Delivering on our focus on inside growth on a same-store basis, our team members delivered strong 4% growth in same-store inside sales and while a portion of this growth be contributed to our continued new to industry store growth, the new stores represent only 7% of our same-store population today.

And as more and more of our new stores join the same-store measure, this strong sales growth is expected to continue. Turning to organic growth on slide 5, in 2016, we intend to open a total of 55 to 65 new stores in the US and Canada.

We anticipate our new store growth pace to continue through 2020, at which time we could see the large format stores representing over 30% of our network of roughly 1,700 stores. This growth in large-format stores could grow the average size of stores in our network by more than 30% by 2020.

Our new stores allow us to continue to meet the needs of our strong legacy customer base and at the same time afford us the opportunity to broad our merchandise and our food mix to meet the needs of millennial customers and all of our great corner store customers.

On slide 6, you will see how the shift towards new stores will improve our gross profit mix in five years and this doesn’t affect our potential divestitures or acquisitions in the calculation. By 2020, our store profitability will shift from a fuel-dominated mix to a higher-margin, more stable, inside-store dominated mix.

From 48% of gross profit contribution from non-fuel sales in the US this quarter to potentially a 70% gross profit contribution from non-fuel sales in 2020, we intend to deliver stronger and more stable gross profits across the network as we grow over the next five years.

Turning to slide 7, an important part of our strategic plan is CST’s continued focus on markets that offer long-term growth potential including the ability to build our large new to industry stores and continue to increase our inside store sales.

In keeping with the strategic focus, we are announcing today our decision to evaluate strategic options for our California network in an effort to enhance shareholder value.

These 76 stores included is this network have historically produced strong fuel results but consistently under index on inside-store sales and gross profit dollars given that their average square foot size is half the average size of our US network.

The small store size significantly inhibits CST’s ability to implement our grocery and food expansion programs which are critical to increasing inside-sales gross profits. Moreover, the much smaller average lot size effectively blocks our efforts to expand our store offering through to raze and rebuild efforts on existing sites.

Our new to industry store strategy is focused in those markets where there is a significant new store growth opportunity. Increasing California real estate prices coupled with a stringent permit and regulatory environment preclude us from implementing our new store growth program in California.

And yet with fuel sales of over 6,000 gallon per store per day at many of these stores and long tenured loyal team members, the California network has been a solid contributor to CST and should provide us with the opportunity to evaluate several strategic options through our review and pursue the best course of action for our company and our shareholders.

One of these options as you flip to slide 8 is potentially doing a tax efficient like-kind exchange for properties in Georgia and Florida. As you probably saw earlier this morning, we’ve announced our intention to purchase Flash Foods which is a chain of 164 convenience stores in the Southeast.

We are in exclusive negotiations with the Flash Foods sellers, and hope to finalize a definitive agreement here shortly. I am excited about the prospect of Flash Foods becoming part of the CST family.

With a 3,000 average square foot size and great team members with a strong customer-focused culture, this acquisition fits both our 2020 vision and also opens up new growth markets where we would expect to be able to continue to build our large format new to industry stores.

In fact, as part of the transaction, we would be acquiring a land bank that would give us a great start to that new build process.

This transaction will effectively allow us to shift our resources from the growth-constrained California market to the Southeast, where we can expand not only through new stores, but also through expanded food and grocery offerings in the existing Flash Foods stores.

And we will acquire approximately 290 million gallons of fuel supply which provides us additional fuel supply assets that can potentially be dropped down to CrossAmerica at a later time. Of course, we look forward to providing you with more details as we work through this transaction.

And with that, I’ll turn the call over to Clay to review the CST third quarter financial results..

Thanks, Kim. I will provide a brief overview of the third quarter results for CST and then turn it over to Jeremy to cover CrossAmerica. Today, CST reported net income of $85 million or $1.12 per share for the third quarter of 2015. This compares to net income of $63 million or $0.83 per share for the third quarter of 2014.

For the third quarter of 2014, we had certain one-time charges and expenses as outlined in our earnings release. The after-tax income effect of these items was approximately $5 million for the third quarter of 2014. So excluding these items, our earnings would have been $68 million or $0.90 per share for the third quarter of 2014.

There were no similar one-time items in the comparable quarter of 2015. As I discuss our third quarter CST highlights in more detail, I will be referring to our US and Canadian segment operating results.

In regards to CST’s US segment, if you turn to slide 10, third quarter 2015 net motor fuel gross profit increased by $33 million or 28% when compared to the third quarter of 2014.

The year-over-year increase was primarily attributable to an increase in the average cents per gallon fuel margin nets of credit card fees of $0.06 per gallon between the periods. For our core stores, our US motor fuel gallons sold per site per day increased by approximately 6% quarter versus quarter.

Our gross profit from merchandise sales increased $14 million, or 13% in the third quarter of 2015 when compared to the same quarter in 2014.

Our motor fuel and merchandise gross profit increases reflect the impact of our new to industry stores period versus period along with our Nice N Easy and Landmark stores we acquired as well as the exclusion of lower performing stores we divested in the fourth quarter of last year and the first quarter of this year.

Total core stores decreased between the comparable periods reflecting the divestiture of stores as I just mentioned. Now, turning to the next slide for our Canadian segment, third quarter motor fuel gross profit decreased by $8 million or 12%.

The cents per gallon fuel margin net of credit card fees was approximately $0.24 for the third quarter of 2015 compared to $0.26 for the comparable period in 2014. This reduced fuel margin and resulting motor fuel gross profit was result of the Canadian dollar devaluations over the comparable period.

For additional comparative purposes, results on this slide are also provided in percentage change in Canadian dollars. Our reported gross profit from our merchandise sales and other category declined $3 million for the third quarter of 2015 compared to 2014, again primarily attributable to foreign currency exchange.

The Canadian dollar continued to devalue relative to the US dollar during the third quarter of 2015 versus the comparable periods in 2014.

As noted in our earnings release, the exchange rate for the US dollar relative to the Canadian dollar averaged approximately $0.76 for the third quarter of 2015 versus approximately $0.91 for the comparable period in 2014. This represents a devaluation of the Canadian dollar by approximately 16% between the comparable periods.

Overall, excluding the effect of foreign exchange rate changes, our gross profit for the Canada segment in the third quarter of 2015 would have been up $7 million when compared to the third quarter of 2014.

So excluding the effects of foreign currency, we believe our Canadian operations performed quite well, especially given the current Canadian economic environment. Turning to the next slide, slide 12, I’ll now make a few comments about CST’s financial position.

At the end of the quarter, we had $442 million of cash and approximately $296 million available under our credit facility. At the end of the quarter, we had $254 million of cash in Canada. Our total debt is $982 million and our trailing 12 months debt-to-EBITDA coverage ratio is less than two times.

This favorable coverage ratio means that we have plenty of debt capacity on the balance sheet to fund our future capital needs for organic growth and acquisitions. In regards to our capital spending, capital expenditures for the third quarter of 2015 totaled $117 million.

We expect a very active new store opening schedule in the fourth quarter of 2015 with approximately 25 new stores scheduled to open in the United States and nine in Canada. I’d also like to provide an update on the status of our CrossAmerica unit purchases and our CST share repurchases.

We have, as of the date of this call, utilized approximately $11.5 million of the $50 million CrossAmerica unit purchase authorization and have purchased over 470,000 units. We have also utilized $86 million or nearly half of our $200 million CST share repurchase authorization and have purchased just over 2 million shares.

Slide 13 provides some guidance for the fourth quarter. I’m not going to walk through each of these items, but I did want to note the following.

We are expecting an increase in our operating expenses driven by the timing of our remaining 2015 NTI completions and an increase on our general and administrative expenses driven by increases in professional fees associated with our corporate development activities and personnel increases to support our strategic growth.

With respect to our US fuel and merchandise guidance for the fourth quarter of 2015 versus the comparable quarter in 2014, the midpoint of our guidance represents a 2% increase in gallons per site per day and a 9% increase in merchandise sales per site per day for the US segment.

Our Canadian guidance after adjusting for foreign currency is comparable between the fourth quarters of 2015 and 2014. All-in-all we are expecting a relatively healthy fourth quarter. With that, I will turn it over to Jeremy..

Thank you, Clay. If you would please turn to slide 15, I would like to touch on our overall third quarter results. Today, we reported a very strong third quarter with adjusted EBITDA of $31 million, up 65% compared to last year.

Underscoring the rapid growth we experienced over these past 12 months despite our common units outstanding increasing over 70%, we were still able to grow our DCF per unit by 8% for this period.

As we look at how each of our segments contributed on the next slide, you will see that while our wholesale volume increased 8% in the period, we continue to see an impact from the reduction in our terms discount due to wholesale gasoline prices averaging approximately $1 below where they were trading last year.

You can also see that our rental income contribution increased approximately $14 million in the quarter. This is due to the recently acquired assets that we are leasing to CST in addition to the rental income we are now achieving as we execute on our strategy to convert many of the [indiscernible].

A significant contributor to our large increase in cash flow this quarter is the success of our recent third-party acquisitions. The retail operations of the Erickson and One-Stop chains performed very well as we continue to integrate those operations and were able to take advantage of the strong retail margins in the quarter.

Turning to the next slide, we have detailed a chart to demonstrate the differences between the performance of this quarter compared to the comparable period last year.

As I was just saying, you can see that we are experiencing significant contribution from our recent acquisitions which also include the CST fuel supply and real estate drops completed earlier this year.

Other significant changes include the impact to our terms discount that I mentioned earlier due to the large decline in crude oil and wholesale gasoline prices period over period. Finally, as you would expect, as we increase the size of our organization, we saw an increase in our operating, general and administrative expenses.

As we turn to the next slide and focus on our results in the third quarter compared to the second quarter of this year, you can once again see the evident contribution of our acquisitions, including our strategy to operate a lean business model by finding third-party dealers for the company-operated locations that we obtained through acquisitions.

Throughout 2015 we are dealerized over 70 stores, lowering our operating expenses, establishing qualified rental income while maintaining a strong wholesale fuel margin at these sites.

In addition to these charts, you can also see the positive impact we experienced from having approximately 20% of our wholesale volume variably priced based on a rack to retail or dealer tank wagon margin.

As we have mentioned, while our wholesale margin is negatively affected by lower absolute wholesale price, we do see a benefit as DTW margins expand as the prices are moving down. Finally, I would like to draw your attention to the $2.3 million reduction we achieved in our quarterly expenses.

This is the result of the concerted efforts by our team to execute on our goals to integrate our acquisitions by leveraging our existing back-office team and systems to reduce corporate expenses.

Going onto slide 19, as we announced this morning, the Board of Directors of the General Partner has declared a distribution of $0.5775 per unit related to our third quarter results. This is a $0.015 per unit or 2.7% increase over the second quarter of 2015.

We continue to expect a rate of CrossAmerica’s distribution per units attributable to 2015 will be between 7% to 9% over 2014 levels and continue to expect our 2015 annual coverage ratio to be over 1.0 times with a long-term distribution coverage at or above 1.1 times Regarding our debt position, we have revolver capacity at the end of the quarter of approximately $125 million available for future borrowings.

As such, we have immediate capital available for additional acquisitions as they arise.

Turning to the next slide, as we forecast into 2016 and beyond, you can expect that we will continue to execute on our successful wholesale and real estate core competences, grow through strategic acquisitions, recognize synergies and cost savings through our integration process, increase our unit holder distributions, and improve our coverage ratio over time.

In addition to the third-party acquisitions, we are targeting an additional 10% to 12% increase in our equity interest in CST Fuel Supply in 2016.

It is important to note that due to the organic NTI growth plans and our sponsor, the volume of CST Fuel Supply is expected to grow over time as will our ownership interests helping ensure long-term volume growth for the partnership into the future.

Finally, we fully recognize that our business is seasonal and that third quarter is typically our strongest operating quarter of the year, but we truly believe we have a supportive drop-down sponsor in CST and with the continued acquisition opportunities in the marketplace, a capital structure flexible enough to take advantage of these opportunities, and the continued improvement we are seeing in our operations, we are in a position to continue to deliver value and growth for our unit holders for many years to come.

With that, we will now open up for questions..

[Operator Instructions] And our first question comes from Ben Bienvenu from Stephens..

So maybe first just in reference to some of the NTI new store builds.

I’d be curious to know since you guys spun out, how, if at all, have the new store build formats evolved? Have there been any changes or tweaks that you have been able to make over the course of the last two years or so there?.

We continue to build on a format that’s 4500 to 5500 square foot print. One of the things we have been doing is introducing our made to order food program that we launched in our Nice N Easy acquisition. And our first NTI with that made to order food program is opening up here in San Antonio in two weeks, so we’re very excited about that.

I think we have another four or five stores that are set to get that as well here shortly..

And then maybe just around your pricing strategy in the quarter or you achieved really, really strong fuel margins, but you also managed to achieve really strong gallon and merchandise sales and margins. I’d be curious to know many how your pricing strategy played out during the quarter.

And then also did you have the opportunity to reinvest any of that margin into promotions during the quarter, despite having a really strong merchandise margin as well?.

We’ve continually spoken about this before, but since the spin, we have really continued to work on that balancing between the volumes sold and the fuel margin that we capture to maximize the gross profit dollars at each of the site and continue to be more site-specific on how we balance that margin and volume goals.

And some of our new to industry stores may have a different approach as we open those and try to attract new customers into those stores. But I do think we’re doing a good job in managing our sites and I think the results that you saw in the quarter certainly reflect that fact.

In terms of promotions, we have been working on our brand strategy and we will continue to push that as well, but we’re very pleased with both our inside store margins and gross profit dollars and what we achieved out at the pumps as well..

And then just lastly quickly, I noticed you guys have been pretty ratably buying back CAPL stock and Clay touched on that. I also noticed that there was a little bit of over $2.5 million of newly issued units to CST, looks to be in part some compensation for the $8 million management fee.

What are the parameters around that and could CAPL pay all of the $8 million management fee with newly issued shares?.

It could payback down the discharges in cash or with newly issued shares and it’s been our practice recently to increase our ownership interest in the partnership and continue to support them.

So we’re supporting them by taking as many units as we can in all the transactions that we have partnership as well as having the CrossAmerica unit purchase plan implemented..

Our next question comes from Bonnie Herzog from Wells Fargo..

I have a two-part question on your new to industry builds. First, it looks like the pace of opening the new stores has slowed considerably with your guidance suggesting around 26 to 31 stores need to be opened in Q4.

So could you help us understand if something has happened to slow this down or were you always planning to have them back-end loaded? And then second I wanted to see if you could give us some more color on the performance of the NTIs, especially relative to your legacy stores since it seems like the performance for these continues to lag, especially when I look at the fuel gallons sold, which was down 6% for NTIs..

In terms of our construction pace is more back half weighted as we came into 2015. Part of that is just the timing of when we got the properties. We really ramped up our build post the spin date and our plans for the builds, but to do that you have to gets the property into the queue and get the permitting process done.

And so for the 2015 builds, we knew they were second half weighted. We had a lot of rain that has pushed some of them into the fourth quarter, but I think we’re still on pace. We got a lot of openings this quarter in particular, the fourth quarter. I’m very excited about it. Certainly, it’s not a reflection of any slowing on our part.

It’s just Mother Nature intervening in that process. And then secondly, I think we still continue to be very pleased with the performance of our new stores. When you think about it over half of our stores or close to half of our stores out there are less than two years old.

And as we’ve said all along, it takes about three years to ramp-up to pace and so they continue to still deliver strong volume. But on average twice our overall network; our merchandise sales continue to be strong, 69% greater than our overall network.

Our merchandise margins are greater than our overall network, so we continue to be very pleased with the NTI program and look to continue to develop that over the years to come..

And then I did have a question on your acquisition that you announced this morning.

Broadly, I think it’s very positive and seems like a great opportunity to gain some best practices, especially in QSR, so I was hoping you could talk a little bit more about the real opportunities there? And then curious to hear how much you can leverage the DC and Georgia? And what could be a realistic lift in merch margins from this? And then the final question on the acquisitions from me is why wasn’t this acquisition done with CAPL and does this suggest maybe a strategic shift for future acquisitions?.

In terms of your first question to the acquisition, we’re very excited about where we stand on this process and really look forward to being able to announce the final terms of the agreement and having them join our family. It is a strategic growth market for us as we talked all along.

We’re looking for markets where we can build our NTIs and come to some sort of scale on our market and clearly with this as our store base there and the opportunities to build new stores all around will really make I think a terrific acquisition for us. Great cultural fit.

I just can’t say enough good things about how excited we are about the Flash Foods network joining the CST network.

So in terms of where we see in terms of merchandise lift and margin lift and things like that, it’s still too early to tell, Bonnie, but we’re very excited about the opportunities both from the distribution center and being able to leverage that not only for us but also for CrossAmerica and some of the stores that their dealers operate in that area as well.

I think there are some real opportunities for us from a growth standpoint not just existing stores but from an NTI standpoint as well. So for us, a very exciting day to be able to announce that we’re almost across the finish line on that front..

I will answer your question about signal change in terms of how we look at acquisitions and it really does. I think it demonstrates the ability we have with both organizations to continue to execute on our growth strategy while still being considerate of today’s market conditions.

With the partnership’s yield, where we’re currently trading, we’re looking to grow but at measured pace and drops from CST and acquisitions can be timed and ensure we are most effectively utilizing of our capital sources including our debt revolver capacity and even the significant real estate we have in our portfolio.

So that is really the power of having a strong MLP/sponsor relationship is to continue grow through almost any market cycle..

And then if I could circle back on something, Kim, you mentioned, with the acquisition of land bank of 15 real estate sites.

So if I’m thinking about the guidance this year for NTI, is it fair to then assume that your guidance for next year could ramp considerably for NTI if I think about how much of your planning on building versus buying in the future?.

We continue to want to add to the NTI profits and build on numbers that we built this year as well and so you will see those add to it and I think that this gives us new markets to build them in. Our focus has been in our existing footprint, particularly here in Texas.

But we had several was stores opened in Louisiana and Phoenix as well, so this is just another growth market for us and I think you will see us continue to add to the NTI numbers that we open each year..

And our next question comes from Ben Brownlow from Raymond James..

Just wanted to follow up on some of the last questions in terms of the Flash acquisition. Can you just give us a little bit more color in terms of the reason why those sites went to the market? Any additional color on the real estate profile in terms of asset ownership, location, street corner, highway, et cetera..

There is significant ownership of the real estate that’s there. So we’re excited about that, it really fits our overall market structure and our approach to building NTIs on properties that we own the real estate. In terms of the motivation for the sellers really, that’s not something I can speak to.

I think that is certainly a great cultural fit between what they have developed and the legacy that they have developed and I am honored that they have chosen us to continue that legacy to build on that legacy. We have said all along I think that we are a great acquirer and aggregator of a lot of these great family businesses that are out there.

I think the Nice N Easy network, Erickson family, and now we have Flash Foods to add to that mix. So it’s certainly starting to bear out and culture is a huge piece of it..

And I guess just to ask maybe Bonnie’s questions a little bit differently, in terms of the DC, is the intent to continue operating that internally or do you think you will outsource that or possibly divest it or any initial thoughts on that facility?.

We’re certainly going to evaluate all alternatives associated with it, but we own our own distribution center in Texas and a lot of that out of that center for all of our stores here in the States and I would think that we would continue to look at that distribution center in Georgia the same way..

And then just one last one for me, in terms of the strategic divestiture with the California store base, can you just talk through maybe the process there? Is there an intent to take that to the market for bids or just any color there?.

We’re evaluating all the various options for it including outright sale, potentially moving into the dealer markets and anything in between that process. I think the reality is we looked at where are we investing our dollars and our resources.

The California market while a great fuel contributor and incredible great core of employees with long tenure with us, the reality was we couldn’t implement either our in-store programs that we have been working hard on and we couldn’t run our NTI build process either.

And so shifting those resources to Georgia and Florida with the Flash Foods is a terrific way for us to redeploy the value and the resources that we have in California right now..

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

This is Esteban on for Matt. Congrats on a good quarter. Just trying to reconcile the funding to go forward NTI store growth, so the Flash acquisition announced today appears to be relatively large on the CST side and your 2020 vision assumes acceleration of your NTI growth.

So in light of the current MLP yield environment, how much of these go forward NTI builds do you expect to be funded by the MLP versus CST’s core free cash flow?.

As you know, CrossAmerica’s unit price has been impacted in the last quarter by the downturn in the MLP market. This is primarily caused by the rapid fall of crude prices, and as a consequence, our cost of capital increased as reflected in its yield which is over 9% right now.

So with this current yield the real estate sale leaseback transactions between CST and CrossAmerica are not in CrossAmerica’s best interest.

As I alluded to in last quarter’s conference call, we have been evaluating numerous options for monetizing NTI real estate and that includes certain legacy real estate as well as acquired real estate that would provide us alternative vehicles to fund our growth CapEx next year and beyond.

There are several other options under evaluation that could provide very good cost efficient capital with minimal tax leakage. Kim mentioned where appropriate we are using or utilizing 1031 lifetime exchange tax elections.

So we’ve also looked at doing tax free spin of our real estate, but as you know or may know the IRS has recently ceased providing private letter rulings on these types of transactions. And they have expressed criticism over their structure. So implementing this type of strategy might be challenging.

So we’re going to review our options with the Board in the next few months and we anticipate making a final decision sometime in the first half of 2016, but we’re very optimistic that future sale leaseback transactions can be done in another alternative form that will provide us a great source of financing..

And then it looks like the cadence has dropped down and fuel gallons should at least until 2020 at the current rate. Just wondering what your plans are now returning to 50% splits at the capital level? I know in the past you have called out 27 to reach these splits.

Is it still the case today?.

I will cover that. I mean the cadence of the drops is obviously going to be determined upon market conditions, what’s going on in the overall MLP market, where is CrossAmerica yield trading at, what are the acquisition opportunities that we can take advantage of.

So I mean we try to give a little bit of color to kind of let you see kind of what we see out into the future. And so we see in 2020 we should at CrossAmerica, pending all these issues, have our ownership interest in CST Fuel Supply grow to up to 75%.

The point we’re trying to make also in the slide is that this isn’t just a static or a declining overall fuel supply. This is a potential to really grow over time as CST continues to execute on their NTI strategies. So that is an additional benefit obviously to the partnership because all of those volumes get added to the top as they continue to grow.

You combine that with this acquisition of Flash Foods and the potential for that to be dropped into the partnership going forward, you can start to see as you move forward both organizations is growing and that fuel continuing to drop and be a good source of good cash flow into the partnership.

So that’s about the best we can give as far as future color, but it’s obviously based on market conditions..

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

Question on your 2020 vision just out of curiosity when you talk about 30% of fuel gross profit, I’m sorry 30% of overall gross profit coming from fuel, what are you using as a cents per gallon in your internal 2020 vision?.

So we said before, we use for purposes of planning a three-year historical average which right now is at $0.72 a gallon. Five year..

Five year average, okay.

And then just my question that I ask every quarter, just in terms of geographically in the US are you seeing anything different in terms of demand in your Texas market versus other markets?.

I mean we continued to believe and are seeing great things in our Texas stores. As we said before, while only about 2% of our stores are down in the Eagle Ford area, that is the one area that we are seeing a slight slowdown versus what we had initially opened those stores.

As I think everyone would have expected to happen, given the impact of the commodity market and on the production activity going on in the Eagle Ford area and other fields as well. But again, those stores are only about 2% of our overall network.

And as I said before, when they first opened, they were extraordinary sales and they settled down to be more strong, very strong NTI sales as well. So that’s where we feel it, but again it’s only a handful of stores about 2% of our overall network in that area. Otherwise, Texas economy and strength we continue to see great growth there.

We’re opening new stores. We’re getting new customers in the doors, and are very pleased with the results that we’re seeing across the state..

And then just lastly on how do you think about – I know you’ve been buying back – not buying back but purchasing shares of CAPL, how do you think about internally using your free cash flow to buy back your own shares which I think have been and continue to be undervalued versus CAPL?.

So we just look at balancing between the two. Clearly, our purchases of the partnership units reflects our belief in the strength of that relationship and our relationship with CrossAmerica. But as you saw, we also did some purchases in the quarter of CST shares as well and I agree with you. I think it’s a good buying opportunity..

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

Just following up on the question on the pace of the drop down, is the targeted 10% to 12% for next year based on CAPL’s current cost of capital and is the plan still to complete all the drop-downs by 2020?.

Yes, that is based upon where CrossAmerica is currently trading.

So we think a 10% to 12% acquisition of Fuel Supply in 2016 is a good cadence for the partnership to continue to make our commitment to our unit holders to continue the growth, while also ensuring we have a strong coverage ratio over time and we continue to manage our business internally, control costs to also grow cash flow.

So that’s based off of where things are today. And the 2020, we’ll see what happens in the market. We have positioned ourselves to weather almost any market cycle.

So we can continue this pace, we can continue deep into 2016 and if the market returns in 2017 and beyond, then we can return to the aggressive nature of our growth strategy, but we have just positioned ourselves to take advantage of any market cycle..

And let me add on to that and some of the questions we got at the last call, with each dropdown, it is a fair market analysis for the price that the partnership pays for that fuel drop and that is determined by two independent committees one at CrossAmerica and one at CST who have used outside financial advisors to advise them as well.

So in each case, I would expect when we do a fuel drop there will be another evaluation from a fair market analysis standpoint. So in this case multiples paid last year are likely not to be the same multiples next year. It’s all dependent on the then-existing market conditions that are there.

And really just to echo what Jeremy said, our pace of dropdown continues out through 2020. I think our acquisitions like the Flash Foods acquisition certainly add to our inventory of items that we can sell to the partnership from a fuel standpoint.

So I think it’s certainly reflective of what I believe is a very strong relationship between CrossAmerica and CST..

I guess just based on this initial target, is there a goal for distribution growth based on this pace of drop-down for 2016?.

We haven’t finalized that yet, Sharon. I mean we look forward to continue to grow distribution into 2016, but the level and the rate of that we haven’t given any further guidance on that..

And I guess with regards to the strategic review for your California sites, how should we think about the impact on CAPL? Are some of the volumes included in that CST Fuel Supply? If you can give maybe a rough estimate of what’s the gallons associated with those sites..

As I said, we are evaluating a variety of strategic options with respect to that network. And simply you’re right, Sharon, we are acknowledging that a portion of the California Fuel Supply is owned indirectly by CrossAmerica through its ownership of 17.5% today of that CST Fuel Supply.

Obviously, that’s going to be factored into any outcome that we get to, but it’s still too early at this stage to say exactly how that will play out..

Sharon, as we mentioned, CST mentioned, it is under strategic review and that opens up a lot of different alternatives to look at what’s going to happen.

So as far as how the fuel is going to be continued to be supplied into the California markets that is something that will continue to be considered regardless it it’s going to be in the stores operated by CST or not.

So it is under strategic review and there’s a lot of considerations to be looked at, so I’m sure we’re going to be looking at them together..

And our next question comes from Nathan Judge from Janney Montgomery..

I had some questions with regard to the CrossAmerica results. Specifically, you all did a great job of cutting costs in the quarter and just wanted to get an idea of how we should think about those lower levels of costs going forward..

So obviously 2015 and starting really in the back half of 2014 has been a pretty aggressive growth cycle for the partnership and so there’s a lot of businesses that we have acquired along the way.

And one of the things that we said before that is a focus of the organization is have a strong integration strategy to ensure we’re bringing those assets into the partnership and moving them when appropriate over into CST.

A big part of that is looking at expenses that are in the underlying business and leveraging our size and scale and our operating capabilities to ensure that we are reducing those expenses where appropriate.

So the cadence of the cost reductions is going to be dependent upon the nature of the acquisitions and when they occur and how effective we are in doing that. So we look forward to continuing to do that. We still think there is an opportunity to further reduce expenses in the partnership and we look forward to doing that into 2016..

Just to be specific, operating cost in the wholesale division was off around 50% from your second quarter, should we expect on an absolute levels these kind of levels to continue unless you do another deal?.

Once again, it’s hard to say. Keep in mind, earlier last year, the partnership acquired PMI assets over in the Virginia market and with that was a lot of other ancillary businesses that wasn’t long-term best fit within the partnership.

So there has been a divestiture of those businesses, some truck hauling business, some home heat business as well as some other commercial fuels business as well. And so there has been through 2015 a concerted effort specific to them to reduce those expenses and to find a better home for those assets.

Once again, I would be hesitant to give you a cadence of what you can expect going forward. Suffice it to say as we go through our acquisitions, you should continue to see reduction in the expenses as we bring those assets into the partnership..

And just on the wholesale margin, if you look at the sequential improvement in the margin, it went from $0.052 to around $0.061 second quarter 2015 to third quarter 2015, and it looks based upon what I’m looking at is this impact from dealer tank wagon pricing. I know you said, had some commentary about that in the quarter.

What I’m confused about, though, is if you look at the third quarter 2014 when fuel was much higher, you didn’t have the impact that you had in the second to third quarter and during that period of time you had some relatively more stable fuel pricing. So I’m kind of wondering how do we look at this margin going forward..

And we’d be happy to kind of go over this with you offline and give you a detailed breakdown of how that happened. But just a general overview, once again when you start comparing year-over-year and you look at the differential and the absolute price of wholesale gasoline prices, there is a drop-off as we have guided.

If there was a big drop-off of that wholesale gasoline price, it will impact our overall terms discount we receive from our suppliers. However, on the movement down because over 20% of our wholesale volume is based off of what we call a rack to retail margin, we do see the benefit like other retail operators in that expanded margin at that time.

So as it moves down, we see the benefit, but when you do the comparison year-over-year and look back, then you can see that there is a difference in that term’s discount. But once again, happy to go over that with you in detail, but that’s just generally kind of how it works..

Let me just ask you just directly why did the margin improve 15% from the second quarter to the third quarter? Is it – I mean, in that period of time you didn’t have the down price that you had – the fuel price was much more stable than it was a year ago..

I do think crude oil fell off over $10 from second quarter to third quarter, and so I do think what we’ve tried to show on slide 18 is the improvement we saw in dealer tank wagon. So that is what occurred over that period and that is the evidence.

As we’ve said before, as the price goes down, we get a bigger benefit from having exposure to rack to retail margins and the negative effect to dealer tank wagon and this is evident of what happened in the third quarter..

Oil prices were much lower this year like $50, $60 a barrel lower in the third quarter of this year than last year. That’s the confusing part to me.

Moving on, though, if we go to the overall, if we look at the CST operations, the review of California, how much does that, if you do divest that business, how much does that get you towards your 70% food target the percentage of gross margins by 2020? What does that do specifically to shift that?.

Clearly [indiscernible] 76 stores on the base of 1000, so in terms of the overall percentage of change, it’s not all that material at the macro level.

But clearly, as you can see just on some of the charts that we’ve provided here, the California network itself today is 70% gross profit from fuel versus the 40% of the remaining network, so that from a directional standpoint we will certainly continue to add to our ability to focus more on the inside store gross profit dollar increases..

So if it doesn’t shift much and just looking at it as a percentage, would imply that the growth of fuel is going to be pretty low over that next three-year, four-year period or is it suggesting that perhaps fuel is going to continue at the pace it had been but food – non-fuel is just going to go at a much faster pace?.

So if I can take a shot at this, I think the second remark you made is more accurate in what we’re saying. We’re still very bullish on the fuel business.

What we’re saying is by moving into the Georgia and Florida market, we not only have the opportunity to increase our merchandise business because we’re going to be in larger stores, but now we’re in more open territory to build new stores around those stores which in turn allow us to put larger stores in that market where we do better with merchandise mix and food.

In general, the strategy is to increase our merchandise sales in our legacy stores, increase our food sales in our legacy stores and build larger stores that provide twice as much merchandise mix than legacy stores.

So the overall strategy is to focus on merchandise inside the stores, not necessarily to deemphasize fuel, but to emphasize the growth of merchandise..

Operator, we – Nathan, we got to move on to the next questions. We still have a few more..

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

Just a question on the acquisition environment and the competitive environment, can you give some color there and how that looks going forward here?.

Just in terms of opportunities, David? Is that your question?.

Yes. So opportunities for acquisitions, what kind of files are you seeing, what are the kind of pricing you might seeing in broad terms and then just competitively across the channel in merchandise or gas or across various channels, i.e., big-box versus your boxes, et cetera..

We continue to see I think some great opportunities from an acquisition standpoint as evidenced by the Flash Foods network coming into play for us here right now.

As we said many times, it is a very disaggregated marketplace, fragmented marketplace with lots of great family-owned businesses out there and I think we are the perfect home for many of those. And so I continue to be very excited about the opportunities in front of us.

Clearly, today, excited to be able to announce on the Flash Foods piece and I think from a strategic standpoint, it gives us a great platform to continue our growth on both inside the store and our organic growth as well.

In terms of the competitive marketplace, as I think anyone would say, it’s going to continue to be a competitive marketplace, but I think that our offering and our stores can compete on any corner anywhere and very pleased with where we stand today..

And just on the acquisition you announced, could you give us some color on the kind of throughput through these stores with the average industry and merchandise and/or fuel or would be greater? And then when you look at these stores, I think the average 3,000 square feet per your release, how much capital do you anticipate investing in these stores or what do you see in terms of raze and rebuilds there?.

David, it’s too early for us to kind of give those specifics out. We do like the average square foot being at that 3000 square foot or bigger because we see opportunities there to bring in our food programs and other items. But in terms of the precise capital spend, we’re not there yet.

I think the stores are well maintained and present very well in the marketplace there as we go forward. In terms of just the total fuel volume, as we said in our release, it’s about 290 million gallons a year, so I think the strong fuel volume as well..

And just two more quick ones. Esso was auctioning off properties in Canada, about 500 stores.

Do you know where they are along in the process? Any idea of when announcements get made?.

I think that’s a better question for Esso..

Pardon me?.

I think that’s a better question for Esso. We’re really not in a position to answer that one. I’m sorry..

And just clarification on an earlier comment, I missed it. Just on real estate monetization I believe was the question. You talked a little bit about some push-back by the IRS on these kind of things.

Could you just clarify what you said there in terms of what’s happening and is that affecting your ability to dropdown real estate into CAPL?.

With respect to Virginia real estate right now, one of the things as we announced for the California properties we do have the opportunity for a like-kind exchange that we are evaluating with respect to the Flash Foods acquisition. I think is a nice way for us to redeploy those resources into the more strategic market for us.

In terms of the comment on the IRS, it’s simply that the IRS has recently indicated they are no longer going to give private-letter rulings on a tax free real estate spend.

And so as a result of that, it makes that process a little bit more complicated and we continue to analyze it [indiscernible] we are going evaluating with the Board and likely be coming be back out with an announcement in the first half of 2016 with respect to recommendations for how to try to get more value out of our real estate in the process..

Operator, last question, please?.

And our last question comes from Alvin Concepcion from Citigroup..

I am just curious about the merchandise same-store sales growth, if you could provide details on traffic versus ticket and any categories that you point out that underperformed or underperformed your expectations..

Let me just say generally, we are very happy to see a 4% increase in same-store sales in Canada and the US and then I will turn it over to Hal to give you any more color on that piece..

Alvin, we have been working hard on the inside of our sales – in-store sales growth in addition to growing our margin percentage. As you know, we’ve been talking about some strategy that we have enacted in the US on milk, bread, and eggs, and improving our traffic count to the large market basket customer that those items attract.

We’ve also been the beneficiary of a very successful market-leading campaign on energy drinks in our stores, particularly in the Southwest that has been very successful. And then in general, our food programs continue to gain steam and food customers generally have a larger market basket as well.

So those three items continue to bring incremental improvements quarter-over-quarter and all of those items bring with them a higher margin percent with them, so we’re able to grow both numbers at the same time.

I also would point out in Canada we have light increases on same-store sales in Canadian dollars year-over-year that we’re very proud of and that will actually using some synergy programs between the US and Canada to grow those businesses as well. And so our customers in Canada are liking our strategy just as much as they are in the US..

And it sounds like favorable mix helped drive the gross margin improvement in merchandise in both the core stores and NTIs.

Do you expect that to continue to improve on a year-over-year basis going forward? And more specifically I guess what kind of margin profile in merchandise do you inspect in your 2020 vision?.

Certainly, it is our job to we continue to grow gross profit dollars both inside and outside the store. So you can expect that to continue and this management team to be very focused on continuing to grow, particularly the inside store.

As we implement more of our food programs, the made to order programs coming from Nice N Easy down to Texas, we are also seeing some of those items up in Canada, I think really driving home the benefits of some of these acquisition. Nice N Easy has got for us a great food program.

The Flash Foods network brings up a lot of innovation around IT that I think will certainly help us look at it differently across our network. So I think the results in the third quarter reflects our strategy and the implementation that we’re happy to bring those numbers to the market and want to continue to bring those numbers to the market..

Okay. That completes today’s conference call. We appreciate each of you joining us today. If you do have follow-up questions, please feel free to contact us. Thanks for joining us..

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