Earnings Call: Q2 2020

Nov 27, 2019

Morning. I would like to welcome everyone to this web conference presenting Alimenta Saint Couche Tard's financial results for its Q2 of fiscal year 2020. All lines will be kept on mute to prevent any background noise. After the presentation, we will answer questions that were forwarded to us beforehand by analysts. We would like to remind everyone that this webcast presentation will be available on our website for a 90 day period. Also, please remember that some of the issues discussed during this webcast might be forward looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. Our financial results will be presented by Mr. Brian Hanisch, President and Chief Executive Officer and Mr. Claude Tessier, Chief Financial Officer. Brian, you may begin your conference. Thank you, Jean Marc, and good morning, everyone. Thank you for joining us for the presentation of our Q2 2020 results. Before we start, I'd like to briefly address the announcement of our proposal to acquire Kaltex, a leading Australian convenience and fuel retailer. We've long viewed the Asia Pacific region as a massive market with a lot of potential in the coming years decades. We've looked at this region for some time and we've identified a number of potential opportunities for future growth in the area. Caltex is one of these opportunities. Australia and New Zealand are both stable promising markets that in many ways resemble North America and Europe. We see Caltex as a potential springboard to expand our presence in Asia Pacific should the Caltex Board choose to engage with us on a proposal. The Caltex Board is still considering its position on our proposal and we believe this proposal fully values Kaltex and is very compelling for Kaltex shareholders. And we remain hopeful to engage with the Caltex Board progressing this to due diligence. For this reason, I'm not taking any questions on Caltex today. I do want to reinforce that Couche Tard is a disciplined investor and experienced operator across multiple markets. With the acquisition of Statoil Fuel and Retail, just to take one example, we've shown our capacity to successfully enter new markets, learn from our acquisitions and create value for our shareholders. We always be guided by our shareholder returns in our decision making. I'd also like to mention a change that occurred in our network after the end of the quarter. As announced on November 19, we sold our interest in CrossAmerica Partners and entered into an asset exchange agreement under which a portion of our U. S. Wholesale road transportation fuel operations would be traded for CrossAmerica's 17.5% interest in CST Fuel Supply. We believe this transaction is beneficial for both companies. It allows us each to focus on growing our core business unimpeded by geographic overlap. Proceeds from the sale will help us accelerate our organic initiatives. Now I will highlight what we believe is a very strong Q2 and following my presentation, our CFO, Claude Tessier will go over the financial results. We continue to experience steady results in our overall business with strong fuel performance and merchandise sales. We saw solid increases in same store merchandise revenues across our core geographies even as we cycled strong numbers last year. On the convenience side, we're seeing good traction from a number of different projects that we've launched. Examples would include our new bean to cup coffee and gamified promotional activities. In the U. S, same store merchandise revenues were up 3.2% compared with Q2 of last year with strong results broadly distributed across our U. S. Markets. Cigarettes were soft in the quarter making non cigarette sales even more robust than the 3.2% top line number. In Canada, same store merchandise revenues increased 2.1% and in Europe 3.3%. This performance is driven by the combination of again multiple organic initiatives. Improving the customer journey both inside and outside the store remain a priority. In Europe, we now have over close to 200 newly designed Circle K stores in 9 different countries. With the addition of Russia this quarter, all of our European businesses now have stores with modern sophisticated look and feel that appeals to their local markets. The attractive design and food offers are appealing to the customer and feedback has been positive date and sales and traffic both have shown significant improvement over control stores. By the end of the quarter, our digital upsell platform, which we call Lyft, will have been deployed in 7,000 sites in North America, which now includes 1,000 sites in Canada. We continue to see strong upsell results through the platform and we intend to deploy it in all of our Canadian sites by the end of the current calendar year. In Texas, we've expanded our home delivery pilot, which is launched in July from approximately an initial 160 stores to more than 5 50 stores today. Early results demonstrate that orders from the partnership appear to be additive to our typical traffic. In this offer, customers can order a wide variety of products including snacks and beverages receiving them in less than 30 minutes. In addition to Texas pilot, we've recently launched another pilot in Florida. We're monitoring these initiatives closely to measure customer acceptance, purchase behavior and how we think it could play out in other markets. Early on, what's clear to us is that customers want this type of service. As a purveyor of time and convenience, we're seeking solutions that will meet those needs while creating value for us and for our shareholders. Finally, we ran a few national campaigns across our network and gamification. Engagement tactics have been successful in driving traffic in Europe in past years and happy to bring those to North America. Shifting to fuel. U. S. Same store transportation fuel volumes increased by 0.6% to the same quarter last year. The margins were even stronger than the last quarter as we benefited not only from favorable market dynamics, but also some material procurement savings. In Canada, same store road transportation fuel volumes grew 0.2%. While this represents a slight sequential decrease from our Q1 performance of 0.4%, we've seen a 2 year improvement in trend for a 2nd consecutive quarter. The market in Canada does remain difficult from a margin across most of the country. We've seen these cycles before and we're confident that our teams will continue to work hard to defend and even grow our volumes in the face of these pressures. In Europe, our fuel business declined 0.6% on a same store volume basis in the quarter. But as was the case in Canada, our 2 year trend continues to improve. In that context, we're pleased with the overall fuel margin as it's essentially flat year over year when you remove the effects of currency. As we enter our 4th year of the Circle K rebrand project, I couldn't be prouder of the work that we've done across the network. As I mentioned previously, store conversions in Europe have now been fully complete and were more than 80% complete in North America with the sites displaying the new Circle K brand. Notably, many of our business units have achieved more than 90% rebranding levels to date, including Heartland, Texas and West Coast and now moving into Canada with more than 600 locations in Central Canada and 250 locations complete in Western Canada. Both business units expect to complete the full scope of their work by the end of this fiscal year. As I previously said, operating under White Global Brands brings a number of advantages from increased brand awareness with customers, employee pride and then again leveraging our scale across procurement, private label and national marketing campaigns. Turning to loyalty in the U. S, we've been working on improving the customer experience and deepening our loyalty relationship with our customer. We've deployed Easy Pay, which is a loyalty and discount program for fuel. While we're still in the early phases of the rollout, we're seeing strong attachment to the program, which is delivering increased trip frequency and growing transaction sizes. The Holiday integration continues to bring excellent reverse synergies and learnings and best practices across our system. A couple of examples, one is a smart value program, which we've been rolling out across North America and piloting in Europe. It's having good success and allowing us to optimize the balance between gross profit dollars and margin. Car Wash subscription pilots are still developing positively in Denmark as well as in our Heartland business, which is the Chicago, Illinois area. And we're now moving to the next phase with rollouts in our Florida business unit for the subscription program. Within our key categories, our food offers present a tremendous organic growth potential and we're excited about our food pilots. Early customer feedback has been positive and we've seen a meaningful uptick in our merchandise same store sales for those pilot stores versus control sites also previous trends in those locations. We'll continue to leverage our great regional successes on the process of expanding our test to close to 200 locations in the next 60 days in order to better evaluate the process of scaling this type of a rollout. As past experience has shown us most note recently with our rollout of coffee on demand, which I'll touch on shortly, When we have the right recipe, our business unit structure allows us to execute a rapid rollout across our network. Over the last year, we made tremendous strides in laying out the foundation for program from building out our team, setting our targets and strategies, optimizing the menu and packaging and equally important identifying a scalable supply chain. Given the size of our network and the importance of this lever to our future growth, we feel it's prudent to take some time to make sure we get it right before pressing the go button. As for coffee on demand, to date we've installed more than 12,000 of our new bean to cup machines in approximately 5,500 stores in the United States. Customer feedback has been very positive and we're seeing strong unit growth and margins with seasonal blends and limited time flavors generating strong interest in the offer. The installation is on track to be completed by the end of this calendar year. In cold beverages, we've exported our U. S.-based and froster program to approximately 90 sites in Ireland and delighting customers with this new frozen beverage and customer response has been incredibly strong even as the weather has changed and we've seen cooler temperatures. So we're currently expanding these pilots across other business units in Europe to see if we can see the success. Turning to tobacco. We remain focused on the tobacco category and we continue to see stable growth in market share within cigarettes. Innovation within the other tobacco products has once again fueled the growth in tobacco category as a whole. All our core geographies showed sales as new products were introduced. While this has largely been driven by vaping products, we're also seeing white nicotine doing very well in the U. S. And in Europe. As most of you are likely aware, vaping has been under scrutiny from legislators and health officials in the U. S. And Canada due to a number of cases of lung issues and concerns about underage vaping. We continue to follow this situation closely and reiterate our position as a responsible retailer of age restricted products. And we also stated that we're in favor of fact based measures to prevent minors from accessing vape products such as raising the legal age to 21. I'll pause there and let Claude take you through more detail of our Q2 financial results. Claude? Thank you, Brian. Ladies and gentlemen, good morning. For the Q2 of fiscal 2020, we are happy to report net earnings attributable to shareholders of the corporation of $578,600,000 or $0.51 per share on a diluted basis. Excluding certain items for both comparable periods, adjusted net earnings for the Q2 of fiscal 2020 would have been approximately $571,000,000 or $0.51 per share on a diluted basis compared with $0.41 per share for the Q2 of fiscal 2019, which is an increase of 24.4%. Net earnings were $1,100,000,000 for the first half of fiscal twenty twenty compared with $928,700,000 for a comparable period of fiscal 2019, an increase of 20.3%. Diluted net earnings per share stood at $0.99 compared with $0.82 the previous year. Excluding certain items from the net earnings of the first half of fiscal 2020 fiscal 2019, net earnings would have been approximately $1,100,000,000 compared with 955,000,000 for the previous year, which represent an increase of $163,000,000 or 17.1%. Adjusted diluted net earnings per share would have remained at $0.99 for the first half of fiscal twenty twenty compared with 0.8 $5 for the corresponding period of fiscal 2019, an increase of 16.5%. I will now go over some key figures for the quarter. For more details, please refer to our MD and A available on our website. During this most recent quarter, excluding CAPL's revenue as well as the negative impact from foreign currency translation, merchandise and service revenue increased by approximately $3,000,000 or 3.6 percent. This increase is primarily attributable to the continued strong organic growth and partly offset by the impact of the conversion of corporate stores into dealer stores due to the asset exchange with CAPL. For the first half of twenty twenty, on the same basis, merchandise and service revenues increased by $218,500,000 or 3.1%. For the Q2 of fiscal 2020, on the same basis, merchandise and service gross profit increased by approximately $28,000,000 or 2.3 percent mainly attributable to our organic growth. Our gross margin decreased by 0.4% in the United States to 33.9%, partially driven by cost increase in cold dispensed beverages not immediately passed on to consumers. In Europe, our gross margin increased by 0.2 percent to 41.3 percent while it decreased by 1.1% to 32.6 percent in Canada, a result that is completely attributable to the conversion of our Esso stores from the agent model to the corporate model. During the first half of fiscal twenty twenty on the same basis, consolidated merchandise and service gross profit increased by approximately $63,000,000 or 2.6%. The gross margin was 34% in the United States, an increase of 0.1%. It was 41.4% in Europe, a decrease of 0.4% and it was 32.7% in Canada, a decrease of 1.4%. Onto the fuel sector now. In the Q2 of fiscal 2020, the road transportation fuel gross margin was solid at $0.2829 per gallon in the United States, an increase of $0.0641 per gallon, supported by the volatility in crude oil prices as well as improved sourcing conditions. In Europe, the road transportation fuel gross margin was at $0.0834 per liter, a decrease of $0.41 per liter entirely explained by the net negative impact from the translation of our European operations into U. S. Dollars. In local currencies, our margins in Europe were stable and in Canada, the road transportation fuel gross margin was at CAD0.79 per liter, a decrease of CAD0.53 per liter mostly due to competitive pressure in some of our markets in Canada. The road transportation fuel gross margins in the first half of fiscal twenty twenty was $0.2757 per gallon in the United States, US0.839 dollars per liter in Europe and CAD0.764 per liter in Canada. For the Q2 of fiscal 2020, growth in normalized operating expenses was 2.7% Excluding the conversion of our Esso stores from the agent model to the corporate model, the remaining variance for the Q2 of fiscal 2020 would have been only 2.2%. The optimization of our cost base will remain a focus area over the next quarters. Excluding specific items described in more detail in our MD and A, the adjusted EBITDA for the 2nd quarter and first half of twenty twenty increased by $129,300,000 or 13.7 percent and by 187 point $6,000,000 or 99.7 percent respectively compared with the corresponding periods of the previous fiscal year. The growth in EBITDA mainly came from higher fuel margins in the U. S. And organic growth and was partly offset by the net negative impact from foreign currency translation representing approximately $13,000,000 $28,000,000 respectively. Excluding specific items described in more detail in our MD and A, the income tax rate for the Q2 of fiscal 2020 19.5% compared with an income tax rate of 18% for the Q2 of fiscal 2019. The adjusted income tax rate for the first half of fiscal twenty twenty was up 19.6% compared with an income tax rate of 13 point 3% for the comparable period. The increase for both the second quarter and first half of the year is mainly stemming from the impact of different mix in our earnings across the various jurisdictions in which we operate. As of October 13, 2019, our return on equity remained strong at 22.4% and our return on capital employed improved to 13.9%. During the quarter, we've continued to generate significant free cash flows allowing us to further reduce our adjusted leverage ratio to 1.86:one. In the first half of fiscal twenty twenty, we repaid 300,000,000 on our senior unsecured notes and as of October 13, 20 19, our liquid liquidity position remains strong with $1,100,000,000 in cash and approximately $3,600,000,000 available through cash on hand in our revolving unsecured operating credit facility. Subsequent to the end of the Q2 of fiscal 2020, we fully repaid at maturity our CAD450 1,000,000 denominated senior unsecured notes. The Board of Director also approved a 2 for 1 split for all the corporation issues and outstanding Class A and Class B shares on record as at September 20, 2019, which was approved by regulatory authorities and became effective on September 27, 2019. During the Q2 and first half of fiscal twenty twenty, we repurchased $4,100,000 $5,700,000 of Class B subordinated voting shares respectively. These repurchases were settled for net amount of $126,000,000 and 172 $700,000 respectively. During its November 26, 2019 meeting, the Board of Directors declared a quarterly dividend of 6 $0.625 per share for the Q2 of fiscal 2020 to shareholders on record as of December 5, 2019 and approve its payment for December 19, 2019. On this, thank you for your attention and I'll now pass it back to Brian. All right. Thank you, Claude. In conclusion, the Q2 demonstrated that we're on track with our organic growth initiatives and that a rapid enterprise wide deployment of best practices and programs is bearing fruit. Our operational discipline and cost efficiencies allowed us to improve our leverage ratios yet again as Claude said. We're now poised for new growth when the opportunities do arise. We believe our shareholders will continue to reap the benefits of these initiatives as we advance in our journey to become the world's preferred destination for convenience and fuel. At this time of the year, as we enter the holiday season, it seems more often than not in recent years, we've been grateful to ride out another hurricane with everyone safe and sound and for the courageous actions of our employees. I wanted to just share a Twitter post from a customer in Eustis, Florida that posted and I think it just tells the whole story and reminds us of the business we're in. He said, we're traveling during the days before Hurricane Dorian. Most of the stations are out of gas. Your store not only has gas but the staff directed the flow of traffic to keep it moving safely and swiftly as possible. It's the most organized station we've ever seen during an emergency. I can't think of it and say it enough that we're in the people business and deliver on our strategy we need to keep growing and empowering our talent base. Employee engagement and retention are top priorities and we're investing in many areas to make our people function, our people processes user friendly, automated and as easy for our store employees as possible. We did reach a significant milestone in recent months with the seamless and successful launch of the Workday platform into our holiday stores now complete in the United States. Enhancements such as these are proving to be essential to interact with the new younger smartphone generation that today makes up a large part of our workforce. So with that, we'll answer questions that we received from the analysts. Thank you, Brian. The first question comes from Derek Dley at Canaccord Genuity. The U. S. Fuel margin came in much stronger than OPUS data suggested. Was there anything unique this quarter that led to such a strong U. S. Fuel margin? Over longer periods of time, we believe that the scale we bring to the fuel space and the relationships we have with the major suppliers has enabled us to create advantages versus the overall competitor set. In shorter periods of time, I think this can be magnified either driven by higher volatility or areas where there's price dislocations due to supply disruptions or other reasons. We've created some optionality in many of our fuel agreements that allow us to capitalize that on those dislocations and create optionality on how or where we purchase fuel, which can result in results that may differ from what you see in OPUS. The second question comes from Peter Sklar at BMO Nesbitt Burns. Please comment on the performance of the food pilot. Do you anticipate a national rollout? What proportion of Couche Tard stores can accommodate the enhanced food program? Well, this may be taken a little longer than what people would have expected. There's a lot of work behind just the consumer testing. I mentioned in the opening statement that concurrently there's been a lot of product testing. We've built a scalable supply chain. We've identified production partners, transportation partners that can make this come to reality, assuming we like the results. And I would say today, again, through the technical pilots, I couldn't be more pleased at the positive results we're seeing. We will expand to another 200 locations by the end of January and we think we'll have a very good read on overall impact by the end of Q3. In our initial results as we rolled out the food program to large and small sites intentionally to help us understand how we can make this work broadly across the network. I think there's always going to be some challenges doing food well in lower volume locations. So we're making sure that we have solid tools to help our stores produce the right food by SKU on an hour by hour basis. Again, pleased with the technical pilots and pending results from these larger samples, I'm very optimistic that we have a model in place that we can adapt quickly to the larger North American network. The next set of questions come from Irene Nattel at RBC Capital Markets. M and A is top of mind these days. Can you please remind us how you approach M and A? What you look for in terms of assets? How you think about post acquisition value creation and buckets? How you are thinking regionally right now? How you determine your price threshold and price value beyond which you will not go? Irene, there's a lot of questions in there. I think we said publicly, we're focused on the U. S. Market. Despite our size, it's a massive market, healthy economy, healthy consumers and it's probably the market where we can achieve the greatest synergies. So we remain focused on consolidating that market. We've also publicly said that we're looking for opportunities in Asia Pacific where we believe and I think most things that we read would reinforce where most of the GDP growth over the next 20 years is going to come from. So really for the last 3 or 4 years, we've looked pretty hard in that market. And you all saw the press release about our offer to Caltex in Australia, which we think is very consistent with this strategy. When we do close on acquisition, there's 4 big buckets that we look at to drive synergies and that's not new. It's on the merchandise side both in terms of procurement and offering. It's in the fuel procurement space. It's in G and A. We've got what we think is one of the most scalable shared service platforms in the industry. And then reverse synergies. I think we've been uniquely good over the years at learning from the businesses we acquire. That said, it's turning over every rock through that period. So it's looking for value anywhere we can find it. And finally, in terms of price and value, you've seen we've been quiet for the last couple of years, not for lack of trying or interest. It's really been we've remained disciplined in our pursuit around acquisitions. We're not prioritizing site count growth to the detriment of profitability of returns. So we need all of that entire recipe to come together into something we believe in before we'll pull the trigger. But again, the balance sheet is in great shape and interest level and M and A is still a part of our DNA. So it will happen when it happens. The second question from Irene Nattel. On the quarter, we saw strong merchandise same store sales, but some inside store margin pressure in the U. S. You call out Food Pilots digital upsell. Can you talk about mix, category performance And what are you seeing in the tobacco category right now? With respect to margins, you called out cold dispense beverage cost increases. Did you see any impact of slowing sales of e cigarettes on margins? Any change in basket composition related to e cigarettes? So I'll try to answer part of the question and I'll switch over to Brian for part of it also as it's such a comprehensive question. So first, we're really pleased with the results of Simply Great Coffee that impacted the margins during the quarter. So 12,000 machines are deployed and this in more than 5,500 stores. The rollout in Simply Great Coffee should be completed by the end of this year. We can see also the uptick from the new program in terms of sales and also gross margin as the new program also allow us to reduce shrink and is more profitable than a previous offer. Few of the challenges in the quarter came from the cost inflation in dispensed beverages that was not entirely immediately passed on to the customer. So this impact should be transitory and should be reduced in the next quarters. One thing to note, last year margins also were inflated by non recurring items in prior year quarter. Other than those two impacts more margins for the quarter were in line with previous quarter margins. So nothing to worry about on the margin side. And turning to vapor, vapor as well as other alternative nicotine products like the white nicotine category have been key contributors to our other tobacco growth in both the U. S. And Canada over the last two years. With the recent concerns about youth consumption and health impacts of vaping, our focus is squarely on making sure that 1, we're selling responsibly to those of age and I continue to publicly support a move to 21 in this space. We've also removed all open systems from our stores in North America until we better understand the health issues that have been reported as open systems particularly those with vitamin E seem to be a common theme of the problems, the health problems that have been reported. That said, we remain optimistic with the right regulations around ingredients, flavors, online availability and youth access that these products can be a path for reduced nicotine consumption for our customers. The next question comes from Patricia Baker at Scotia Capital. Can you provide an update on some of the initiatives you're deploying throughout the U. S. Stores that have been derived from your learnings from Holiday? How far have they been rolled out? What is planned execution? And how is it going so far? While I guess we'd always like it to be faster, I'm pleased at this point with the traction we're seeing and we're seeing meaningful reverse synergies really across the globe at this point. And I'll give you a few examples and this is not a comprehensive list. 1, labor is our largest investment at over $3,000,000,000 a year. And Holiday brings the best in class labor model, which breaks down the time needed to accomplish literally every single task from serving customers, restocking shelves, emptying trash bins, cleaning restrooms, etcetera. We have scaled this on a new technical platform and it is rolling out across our entire network and we will have that completed the next 4 months. Combining this with the labor scheduler, we think we'll be in a better place than ever to optimize investment in people, provide higher levels of customer service, making sure we have the people and capacity there when our customers are in front of us. Another would be a smart value program, which is a multi product promotional pricing strategy that's got some science behind it in terms of where we apply it and how we apply it, That has allowed us to increase basket size when it's executed well. This has been rolled out across North America, expanding into Canada most recently and is being piloted in Europe also. I touched on the food program and Holiday is absolutely foundational to what we call go north, which is very efficient produced off-site grab and go model that we think is again scalable across our network. Last one I'll touch on is Smartsheet. It's a homegrown application that Holiday had deployed that gives the store employees very good visibility to what activities are needed to implement promotional activities, other programs are coming that would impact their operations, so that nobody is surprised and we can continue to deliver great service and execute around those things that we need. So again, more and more, it's a long list of things, but those are some that we're seeing broadly adopted across the network. I would also say that it's a two way street. And when we do an acquisition well, that's the way it should work. So I'll touch on a couple of examples of things that Circle K has put into Holiday. In addition to a broader private label platform, we've launched Lyft in the holiday. We clearly see Lyft driving basket and market share gains in key categories like tobacco when it's executed well. Coffee and demand. Holiday did a great job with coffee. Coffee and demand has been received very well up there and we see cup growth and margin growth in the Holiday network where we deployed that. So again, a two way street and gaining traction. So I'm pleased there. The next set of questions come from Michael Van Aelst at TD Securities. You said that you're seeing good traction in your food pilots. Can you update us on the number of stores currently in the pilot and what kind of results you're seeing in those pilots? Also, when do you expect to start a more rapid rollout and what decisions are still left to be made before doing so? Touch on pieces of this, so I'll try not to be repetitive. Again, looking at the program itself, I think the results have been led by breakfast sandwiches, that daypart is a strong part of the program and then supplemented with a good mix of other items. We've got a very strong pizza offering, Baked goods, cookies, brownies, things like that continue to do well. And then there's a nice mix of SKUs of better for you items that may be something as simple as cheese sticks, hummus with crackers, things like that. Our technical pilots, which is really testing can we execute this at store level, do we have the right processes, procedures. We've tested a variety of different layouts and equipment configurations. Not going to give specific numbers at this point, but we've seen strong growth not only in the food line, but we also believe we're seeing a positive effect across other categories in stores, including traffic. In terms of the rollout, over last year, we made a lot of strides in laying the foundation for this, built out the team, built out the supply chain. We think we've got to come a long way in optimizing menu and packaging. So we think in Q20 Q1 of 2020 based on the results from these next 200 sites that are going in now, we'll have very clear view or read of this. Given the size of the network and the importance of this leverage in future growth, we're going to make sure we do get it right, but we're concurrently preparing to scale this rapidly if we think we've got it right. The second question from Michael Van Aelst. How many European stores now have the new design? How many in total do you think you can update and over what period? Is the resulting merchandise same store sales increase coming from higher traffic or higher basket? And are there particular categories that are benefiting more? So we have approximately 200 stores in our 9 business units right now in Europe, most recently with stores having been rolled out in Russia. So we expect to complete the calendar year with roughly 2 85 stores and a good amount of runway still to go. Yes, it's a bit of a change for us. We typically did this in a very decentralized basis. I think what we're doing now in Europe represents a little bit of a different approach. We've agreed on core components of a remodel and we're using our procurement to take significant costs out of these investments. So as we make these investments, we're getting more for our dollar and we're seeing strong consumer response in Europe and we plan to do take the same path in North America in the coming quarters. The next set of questions come from Keith Howlett at Desjardins Securities. What is the difference in average merchandise revenues per corporate store and merchandise gross profit rate between holiday station stores in the Northern Tier and corporate stores in the nearby regions such as Heartland, Great Lakes and Rocky Mountains? So thank you, Keith for the question. But as you know, we won't go into the specifics per BU of our performance. But I can give you a rough idea that when we're looking at Northern Tier gross margin performance or excluding the cigarettes, we can certainly say that Northern Tier is enjoying stronger performance in gross margin than our other BU. So this is driven mostly by the full program performance and the mix also at the store. So as well as the strong margins performance, the program is also that's what you have to not forget when we're talking about Northern Tier. The program and the FUM program, the program is bringing higher traffic to the stores also and higher sales. So we often said in the past that Northern Tier stores were close to twice as productive than the rest of our network if we're looking at merchandise sales per store. So we can definitely see this impact. So that's a bit of a flavor of the difference between Northern Tier and other BUs. The second question from Keith Howlett. In the U. S. Market, how do fuel gallons sold per site and fuel gross margin generated per gallon compare between Circle K stores offering Circle K branded gas and Circle K Stores offering a brand of gas from 1 of the major oil companies? Complicated answer, so I'll try to peel back some layers on this. And I'll start with saying we've got a long standing and strong relationship with our major oil partners and a lot of respect for the brand heritage. That said, customers continue to evolve and we want to make sure that our offers are relevant and compelling, whether that be around fuel quality, payment or loyalty. We're on a journey today to ensure that our brands have a high level of our brands Circle K Brand, Couche Star Brand have a high level of consumer awareness and were more in control of the customer experience. We're currently piloting a variety of concepts both in converting some major branded sites to Circle K as well as some modified branding with Circle K and our branded partners with a goal to have both brands be equally recognized at a high level by our customers. To date, we're pleased to see that our Circle K brand performs well. And with regard to the modified branding program, I would say it's a bit early to conclude on that. It will be sometime after the holidays that we'll have a clear look of how results are there. When we look at the results and try to understand more to your question, we do look across the entire value creation. What happens to traffic, what happens to leaders, unit margins, premium grade penetration, payment type, loyalty and cost. So we'll look at all those metrics as we evaluate this journey and our goal is to conclude this work in fiscal year 2021 and have a clear view on how we go forward in the fuel space. The next question comes from Bobby Griffin at Raymond James. U. S. Merchandise revenue showed a nice acceleration during the quarter. Can you please quantify some of the key categories of growth during the quarter? Again, as I opened with, overall pleased with the quarter, particularly in the reflection that cigarettes were relatively flat. We've not seen just until recently, recent weeks actually, our normal increases in excise taxes and cost. So when you look at sales, cigarettes were literally almost 0 for the quarter. So again, strong performance in some other categories. I'll give you some examples. Cooler clearly led the way. It's our 2nd largest destination after the fuel islands and we see a lot of innovation driving growth. We're also seeing strong growth in OTP as we mentioned earlier, salty snacks and confectionery. So I would say those five areas are really the strong performers for us right now. In terms of cigarettes, while being flat in sales, our data and as well as that provided by our vendors show we're gaining share and we'll continue to use tools like Lyft to drive gains. Broadening the use of Lyft and the penetration of Lyft, we can see clear correlations between traffic, penetration and basket growth and market share gains in the tobacco category where we do it well. The next set of questions come from Karen Short at Barclays Capital. Can you give some context on where inflation was broadly in the quarter across the network? I ask in the context of your long term and intermediate term goals of growing SG and A below inflation and in the context of merchandise comps exceeding inflation by 100 basis points? So Karen, in terms of the normalized SG and A expense growth of 2.2 percent, this is in line with the inflation ex synergy and food of 2.2%. So in U. S, if we're excluding non recurring expenses that happened quarter to quarter, we can see that the underlying inflation of our cost base is lower than inflation roughly around 1.7%. So some same store sales growth in U. S, as you know, it was at 3.2%. So that's roughly 100 basis point better than inflation ex energy that was sitting at 2.3%, 2.2% in the U. S. So but however, you know that we stay committed to our cost discipline even if we are enjoying those good results. And although we see inflation on wages in some of our BUs, we're still working hard at putting in place activity to take out cost out of our stores. So example of these are our labor scheduling rollout, the use of AI in our stores and also many initiatives that are taking place around cash management into our stores. So a lot of activity into our store to always take our cost out and keep our cost base really low. The second question from Karen Short. Can you provide some color and context on competitive environment in Canada both in store respect to the margins being down 116 basis points and the fuel margins being lower? Sure. I'll start with in store. Margins are actually flat year over year. The entire decline of 116 points that you see was entirely from our conversion of our Esso acquisition. Esso had an agent model where the operator actually owned the inventory. And so in the past, we would have reported literally 100% franchise margin. In interest of both working capital strain on the operators as well as giving us more control over the offering, we have purchased the inventories and now you're seeing a full margin or normal margin effect there going from the 100% down to a more typical margin. So that explains the margin decline that you've seen. In terms of fuel, it has been competitive for almost a year in Canada. We continue to see aggressive pricing tactics from a couple of players, a couple of competitors across Canada and that's put pressure on both volume and margin to varying degrees. We're working with our supply partners to ensure that we're consistently competitive in our cost of goods. We're working tactically with pricing to try to mitigate the impact. And I'll remind, this is one of the benefits of being very geographically diversified, not an overall large impact on us and we believe longer term that this is not structural and the margins will return to more normalized levels. The next set of questions come from Vishal Shreedhar at National Bank Financial. Can you talk about the benefits for shareholders and the rationale for the exchange agreements with CrossAmerica Partners? Yes. Well, we brought strong synergies to CrossAmerica as a general partner. We don't have the same needs as CST did in terms of a balance sheet or funding source. So as you look at the most recent exchange, we dropped what we call non core assets in exchange for CrossAmerica's ownership in one of our supply entities. So allowing for a clean break and clean relationship going forward. This will allow us and CrossAmerica to optimize our respective networks and focus on what we do best, our core businesses. We do believe we will continue to have opportunities to work across American Future, whether that be on joint M and A or continued exchanges of assets. The second question from Vishal Shreedhar. In the U. S, merchandising margins compressed year over year related to cost increases in certain categories not passed on to the customer. Can you chat about the competitive environment in the U. S? And if you see it as stable or more challenging quarter over quarter? Yes. I mean, you all read what I read. Retail did a lot of earnings releases over the last 2 weeks and overall a good quarter. The U. S. Consumer I think continues to underpin the economy. Confidence remains strong, unemployment remains low. We're seeing real wage growth, which was missing from the economy for a long period of time. So overall, I feel good about our position in the U. S. And the runway we have. We do continue to see channel blurring. We're all fighting for traffic whether that be quick serve restaurants, grocers, dollar. But this isn't new and this is our competitive environment and we're prepared to compete in it. The next set of questions comes from Mark Petrie at CIBC World Markets. Looking forward, what do you expect will be the biggest factors influencing organic operating expense growth? How far have you progressed in rolling out Holiday's labor scheduling platform? For sure, the biggest factors influencing our expenses is wages. That's our biggest expense and the pressure is really coming from minimum wage, which we must manage consistently. So the labor scheduler with the new labor model is rolled out and is one of the way that we're going to fight again those increases. And it's rolled out in 2 of our BUs and we are envisioning to roll it out in other BUs rapidly after that. So we're working on that diligently right now. The labor model allows us to better understand what is needed in each store in terms of workforce and is really a great way for us to standardize that workforce and make sure that we're reducing our costs in our store. The scheduler for itself tells us when we have to perform each task in our stores and this is already rolled out in almost 95% of the U. S. Network. So we're also implementing other initiatives, implementing a cost optimization program to leverage our scale and reduce the other expenses in the store. So this allows us to reduce a lot of cost area. We've mentioned previously a focus on cash management and also all the administrative task in our stores to reduce the number of hours spent in our stores. 2nd question from Mark Petrie. Other than the pressure on cold dispensed beverages, what were the material drivers of U. S. Merchandise gross margin performance during the quarter? Going forward, do you expect previously positive drivers such as growth in Prepared Foods to offset the negative impact seen in Q2? Specifically on cold dispensed beverages, do you believe that you have an opportunity to reduce product costs or raise prices? Yes. So most of this question was answered earlier, Mark. So but as previously mentioned, we believe that the slight decrease related to cold dispensed beverages was mostly a timing item that we don't expect it to be representative of the future trend. We're also constantly working to find the right value proposition for our customers and adjust it regionally in our different BUs according to their market. So and also the margins was mostly in line with previous quarters. So we're not we feel optimistic that believe in the margin this quarter was is will not be repeated in next quarter. So Prepared Food typically has a higher margin profile. So also as it should contribute in the future positively to the margin. And as we're moving forward with our various prepared food initiative, we should see this favorable impact on our margins in the future. Thank you, Claude. Thank you, Brian. This covers all the questions. Thank you all for joining us. We wish you a great day and look forward to discussing our Q3 2020 results at the end of the March. Thanks everyone. Have a good day. Have a good day. This concludes today's conference call. You may now disconnect.