Q2 2020 Earnings Call

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Good morning, I would like to welcome everyone to this web conference presenting any market soccer stars final financial results for second quarter 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 before hand by analysts.

We would like to remind everyone that this webcast presentation will be available on our website for 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 Heinisch.

Then chief Executive Officer, and Mr. closed to see Chief Financial Officer, Brian You May begin your conference. Thank you John Mark and good morning, everyone. Thank you for joining us from presentation of our second quarter 2020 results.

Before we start like to briefly address the announcement of our proposal to acquire Caltech <unk>, a leading Australian convenience and fuel retailer.

We have long viewed the Asia Pacific region, as a massive market with a lot of potential in the coming years in decades.

We looked at this region for sometime and we've identified a number of potential opportunities for future growth in the area.

South Texas one of these opportunities.

Australia, New Zealand are both stable promising markets that in many ways resemble North America in Europe .

We see Caltech says essential springboard to expand our presence in Asia Pacific should the Caltech board choose to engage with us on a proposal.

The Caltech sport still considering considering its proposed its position on our proposal and we believe this proposal fully values Cal techs and is very compelling for Celtic shareholders.

We remain hopeful to engage with the Calix board progressing this to due diligence, but that's reason I'm not taking any questions on capex today.

I do want to reinforce that could start is a disciplined investor inexperienced operator across multiple markets with the acquisition of stat, all fuel and retail just to take one example, we've shown our capacity to successfully entered new markets learn from our acquisitions and create value for our shareholders.

We always be guided by our shareholder returns in our decision making.

But also I can mention a change that occurred in our network. After the end of the quarter as announced on November 19th we sold or 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 cross Americas.

17.5% interest in CST fuel supply.

We believe this transaction is beneficial for both companies allows the seeks to focus on growing our core business unimpeded by geographic overlap.

Proceeds from the sale will help us accelerate organic initiatives.

Now I will highlight what we believe is a very strong second quarter. It and following my presentation, our CFO Claude test It will go over the financial results.

We continue to experienced steady results in our overall business with strong fuel performance and merchandise sales. We saw solid increases in same store merchandise revenues across CIRCOR geographies, even as we cycled strong numbers last year.

On the coming side, we're seeing good traction from a number of different prod projects that we've launched examples would include our new being a cup of coffee and Gamified promotional activities.

In the U.S. thing for 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 cigarettes seal sales, even more of Boston, the 3.2% topline number.

Canada thing for 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 overcome close to 200 newly designed circle K stores.

Nine different countries with the addition of Russia. This quarter all of our European businesses now have stores with modern sophisticate look and feel.

That appeals to their local markets the track to design and food offers are appealing the customer and feedbacks impossible to date.

Sales and traffic both have shown significant improvement over control stores.

But the ended the quarter, our digital up sell platform, which we called lift will have been deployed in 7000 sites in North America, which now includes 1000 sites in Canada.

We continue to see strong up sell results to the platform and we intend to deploy it in all of Arcadian sites by the end of the can't current calendar year.

In Texas, we've expanded our home delivery pilot, which was launched in July from approximately an initial 160 stores to more than 550 stores today.

Early results demonstrate that orders from the partnership appear to be additive to our typical traffic.

In this offer customers can order of wide variety 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 was clear to us as that customers want this type of service.

As a purveyor of time inconvenience, 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 and driving traffic in Europe in past years and happy to bring those two North America.

Shifting to fuel U.S. same store transportation fuel volumes increased by 0.6% to the same quarter last year and margins were even stronger than 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 8.2%.

Well this represents a slight sequential decrease from our first quarter performance. A 0.4, we've seen a two year improvement in trend for a second consecutive quarter.

The market Canada's remain difficult from a margin perspective 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 and in the face of these pressures.

In Europe , our fuel business declined 0.6% on a same store volume basis in the quarter.

As was the case in Canada, our two year trend is continues to improve.

In that context, we're pleased with the overall fuel margin as essentially flat year over year, when you remove effect effects of currency.

As we enter our fourth year 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% a 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 Heartlands, Texas in West Coast, and now moving into Canada with more than 600 locations in Central Canada in 250 locations complete in Western Canada.

Both business units expect to complete the full scope of the work by the end of this fiscal year.

As a previously said operating on what 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.

We're still in the early phases of the roll out we're seeing strong attachment to the program, which is delivering increased trip frequency and growing transaction sizes.

Howdy integration catering excellent reverse synergies and learnings and best practices across our system.

Couple of examples one is a smart value program, which has been rolling out across North American pilot in Europe , seven good success, allowing us to optimize the balance between gross profit dollars in margin.

Carwash 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 the next phase with Rollouts in our Florida business unit for just the subscription program.

And 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 and our merchandise same store sales for this pilot stores versus control sites and 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 them the process of scaling this type of a rollout.

As past experience has shown us most note recently with our rollout of coffee and 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've made tremendous strides and laying out the foundation for this program from building out our team.

Setting our targets of strategies, optimizing the menu and packaging and equally important identifying a scalable supply chain.

Given the size of our network in imports of this levered our future growth, we feel it's proven 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 12000 of our new being to cut machines and approximately 5500 stores in United States.

Customer feedback some very positive and we're seeing strong unit growth and margins with seasonal blends.

And limited time flavors generating strong interest in the offer.

Installations on track to be completed by the end of this calendar year.

In cold beverages, we've exported our us based and foster 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's 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 same success.

Turning to the back of we remain focused on the tobacco category, 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 geography showed increased sales as new products were introduced.

While this is largely been driven by making products were 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 long long issues and concerns about under-age vaping.

We continue to follow the situation closely and reiterate a position as responsible retailer of age restricted products and we also stated that were in favor of.

Fact based measures cigarette miners from accessing bait products, such as raising the legal age to 21.

I'll pause there and let Claude take you through more detail of our second quarter financial results, but thank you Brian .

Ladies and gentlemen, good morning.

For a second quarter of fiscal 2020, we were happy to report net earnings attributable attributable to shareholders of the corporation of $578.6 million or 51 cents per share on a diluted basis.

Excluding certain items for both comparable periods adjusted net earnings for the second quarter of fiscal 2020 would've been approximately 571 million.

Or 51 cents per share on a diluted basis compared with 41 cents per share for the second quarter of fiscal 2019, which is an increase of 24.4%.

Net earnings were $1.1 billion for the first half of fiscal 2020, compared with $928.7 million for comparable period of fiscal 2019, an increase of 20.3%.

Diluted net earnings per share stood at 99 cents compared with 82 cents the previous year.

Excluding certain items for the net earnings of the fiscal first half of fiscal 2020 in fiscal 2019 net earnings would have been approximately $1.1 billion compared with 955 million for the previous year, which represent an increase of 163 million or 17.1.

Percent.

Adjusted diluted net earnings per share would have remained at 99 cents for the first half of fiscal 2020, compared with 85 cents for the corresponding period of fiscal 2019, an increase of 16.5%.

I will now go over some key figures for a quarter for more details please refer to our and DMD available on our website.

During this most recent quarter, excluding cbls revenue as well as the negative impact from foreign currency translation merchandise and service revenue increased by approximately $163 million were 3.6%.

This increase is primarily attributable to the continued strong organic growth and partly offset by the impact of the conversion of corporate stores into dealers stores due to your asset exchange, which CPL.

For the first half of 2020 on the same basis merchandise and service revenues increased by $218.5 million or 3.1%.

For the second quarter fiscal 2020 on the same basis merchandise and service gross profit increased by approximately 28 million or 2.3% mainly attributable to our organic growth.

Our gross margin decreased by 44% in the United States to 33.9%, partly driven by cost increase in coal dispensed beverages, not immediately passed on to consumers.

In Europe , our gross margin increased 5.2% to 41.3%, while it decreased by 1.1% to 32.6% in Canada results that is completely attributable to the conversion of our stores from the agent model to the corporate model.

During the first half of fiscal 2020 on this same basis consolidated merchandise and service gross profit increased by approximately 63 million or 2.6%.

The gross margins the gross margin was 34% into United States, an increase of 0.1%. It was 41.4% in Europe , a decrease of 44% and it was 32.7% in Canada, a decrease of 1.4%.

Onto the fuel sector now.

In the second quarter of fiscal 2020, the road transportation fuel gross margin was solid at 28 point 2009 cents per gallon in the United States and an increase of six point 41 cents 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 it.

Eight point 34 cents, you Whisper leader a decrease of 41 cents us per liter entirely explained by the net negative impact from the translation of our European operations into us dollars.

In local currencies, our margins in Europe were stable.

In Canada The road transportation fuel gross margin was at seven point 89 cents Canadian for our leader a decrease of 50 to 53 cents per liter, mostly due to competitive pressure in some of our markets in Canada.

The road transportation fuel gross margins in the first type of fiscal 2020 was 27 point 57 cents per gallon than United States.

Eight point 39, Usthree cents per liter in Europe , and seven point 64 Canadian cents per liter in Canada.

For the second quarter fiscal 2020 growth in normalized operating expenses was 2.7% excluding the.

Conversion of our stores from the agent model to corporate model.

The remaining variance for the second quarter 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, describing our deep in more detail in our Mdna you adjusted EBITDA for the second quarter and first half of 2020 increased by $129.3 million or 13.7% and by 187.6 million or 99.7% 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. inorganic growth in was PARP, partly offset by the net negative impact from foreign currency translation, representing approximately $13 million and $28 million respectively.

Excluding specific items described in our morfin in more detail in R&D. It needs. The income tax rate for the second quarter fiscal 2020 was 19.5% compared with an income tax rate of 18%.

Percent for the second quarter fiscal 2019.

The adjusted income tax rate for the first half of fiscal 2020 was up 19.6% compared with an income tax rate of 13.3% for the comparable period.

The increase for both the second quarter in first half of the year is mainly stemming from the impact of different mix in our earnings across the various jurisdiction in which we operate.

As of October 13th 2019, our return on equity remained strong at 22.4% and our return on capital employed improved 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 to one.

In the first half of the fiscal 2020, we repaid 300 million on our secure senior unsecured notes and as of October 13, 2019, our liquidity position remained strong with 1.1 billion dollar in cash and approximately 3.6 billion dollar available cash.

On him on our and our revolving unsecured operating credit facility.

Subsequent to the end of the second quarter fiscal 2020, we fully repaid at maturity, our 450 million Canadian dollar denominated senior unsecured notes.

The board of director also approved.

Two for one split to for all the Corporation issued and outstanding class in class B shares on record as at September 20 of 2019, which was approved by regulatory authorities and became effective on September 27 2019.

During the second quarter in first half of fiscal 2020, we repurchased 4.1 million and 5.7 million of class B subordinated voting shares respectively.

These repurchase were settled for net amount of 126 million and 172.7 million respectively.

During its November 26, 2019 meeting the board of directors declared a quarterly dividend of six point 25 cents per share for the second quarter of fiscal 2022 shareholders on record as at December 15, 2019, and approve its payment for December 19th 2019.

This thank you for your attention and I'll pass it back to Brian Alright. Thank you Claude in conclusion, the second quarter 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 cost efficiencies allowed us to improve our leverage ratio is yet again as Claude.

Said, so we're now poised for new growth when the opportunities do arise.

We believe our shareholders will continue to reap the benefits these initiatives as we advance in our journey to become the world's preferred destination for convenience and fuel.

At this time of 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 crisis actions of our employees.

Wanted to just share a Twitter post from a customer and use this florida that posted.

And I think it's just tells the whole story reminds us of of the business when.

He said we're traveling during the days before hurricane Dorian most of the stations are out of gas.

We're store not only has that gas, but the staff directed to flow traffic to keep it moving safely in swiftly as possible. It's the most organized station we've ever seen during an emergency.

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, our top priorities and we're investing in many areas to make our people function or people processes user friendly automated and is 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 our the new younger smartphone generation that today makes up a large part of our workforce.

So with that will answer questions that we received from the analysts.

Thank you Brian .

The first question comes from dairy delay at Canaccord Genuity.

The U.S. fuel margin came in much stronger than OPIS data suggested was there anything unique this quarter that led to such a strong U.S. fuel margin.

And for longer periods of time, we believe that the scale, we bring to the fuel space in the relationships. We have a major suppliers has enabled us to create advantages versus the overall competitor set.

In short periods of time I think this can be magnified, either driven by higher volatility or areas, where there's price dislocations do supply disruptions or other reasons and we 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 the national rollout what proportion of Costar stores can accommodate the enhanced food program.

While this may be taken longer than what people would have expected theres 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 theirs.

Built a scalable supply chains, 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 were seeing.

We will expand to another 200 locations by the end of January and we think we have a very good read.

On overall impact by the end of Q3.

In our initial results as we've 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.

I think there's always going to be some challenges do include well lower volume locations, we're making sure that we have solid tools to help our shores produced the right food by skew on an hour by hour basis.

Again pleased with the technical pilots and pending.

Results from these larger samples you I'm very optimistic that we have a model in place that we can adapt quickly to the larger more north American network.

The next set of questions come from Irene Nattel at RBC capital markets.

M&A is top of mind. These days can you. Please remind us how you approach M&A. What you look for in terms of assets. How you think about post acquisition value creation and buckets, how you're thinking regionally right now how you determine your price threshold and price value beyond which you will not go.

Irene Theres 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 great synergies. So we remain focused on consulting that market.

We've also publicly said that we're looking for opportunities in Asia Pacific, where we we believe and I think most things that we read would reinforce where most of the GDP growth of next 20 years going to come from.

So really for last three or four years, we've looked pretty hard in that market and you. All saw the press release about our offered to Caltech in Australia, which we think is very consistent with the strategy.

When we do close on acquisition Theres, four big buckets that we'd 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 for fuel procurement space.

In July 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 now that said, it's turning over every rock through that period. So.

Is looking for value anywhere we can find it can finally in terms of pricing value.

You've seen we've been quiet the last couple of years not for lack of trying or interest. It's really been we've we remain disciplined and our pursuit around acquisitions were not prioritizing site count growth.

Detriment to profitability of returns so we need all the entire recipe to come together into something we believe in before we'll pull the trigger but again the balance sheets in great shape and.

Interest level and M&A is still part of our DNA. So it's it it will happen when it happens.

The second question from Irene the town.

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 up. So can you talk about mix category performance and what are you seeing tobacco category right now with respect to margins you called out cold dispensed beverage cost increases did you see any impact of.

Slowing sales to be cigarettes on margins any change in basket composition related to E. Cigarettes. So I'll try to answer part of the question.

On the switch over to Brian for part of its also as its is such a comprehensive question. So first we're really pleased with the results of since the great coffee that impacted the margins.

During the quarter. So 12000 machines are deployed and this in more than 5500 store.

The rollout in the simply rig probably 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 a new program also.

Allow us to reduce shrink and is more profitable than the previous offer.

Sure the challenges in the quarter came from the cost inflation in dispense beverages that was not entirely immediately passed on to the two because customer so impacts disinfect should be transitory and should be.

Should be reducing the for in the next quarters.

One thing to note last year margins also were inflated by nonrecurring items in prior year quarter.

Other than those two impacts more margins for the quarter were inline 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 one we're selling responsibly to those of age and I continue to publicly support from moved 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 that help problems that have been reported.

That said, we remain optimistic with the right regulations around ingredients flavors online availability and youth access that these price can be a path to reduce nicotine consumption for customers.

The next question comes from Patricia Baker at Scotia Capital can you provide an update on some of the initiatives or do you are 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's it going so far.

While I guess, we'd always like it to be faster.

Pleased at this point with the traction, we're seeing and we're seeing meaningful reversed synergies really across the globe at this point.

Give me a few examples and this is not a comprehensive list.

One labors, our largest investment at over $3 billion a year.

How he brings a best in class labor model, which breaks down the time needed to accomplish literally every single task from certain customers re stocking shelves empting trash spins, putting restrooms et cetera, we have scaled this on new technical platform and it is rolling out across our entire network and.

We will have that completed the next four months.

Combining this with the labor scheduler, we think will be better place than ever to optimize our investment in people provide higher levels customer service, making sure we have the people and capacity there when our customers are in front of us.

Now that 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 applied.

Has allowed us to increase basket size when its 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 offsite grab and go model that we think is against scalable across our network last my touch on the smart sheet. It's a home grown homegrown application that holiday had deployed that gives a store employees very good visibility to what activities are needed to implement.

Promotional activities other programs are coming that would impact our operations, so that nobody surprised and we continue to deliver great service and execute around those things that we need so again more and more that's a long list of things, but those are some that were seeing broadly adopted across the network.

I would also say that it's a two way street and when we do an acquisition well thats the way it should work.

I will touch on a couple examples of things that circle K has put into holiday.

In addition to a broader private label platform.

We've launched a lift into holiday, we clearly see lift driving basket and market share gains in key categories like tobacco when its executed well.

Coughing demand holiday degree 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 streets and and gaining traction some pleased there.

The next set of questions come from Michael Van enough that 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 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.

I will touch on pieces, 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 day port. They 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 is a nice mix of skews 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 that we have the right processes procedures, we've tested a variety of different layouts and equipment configurations.

Not to give specific numbers at this point, but we've seen strong growth not only in the food line up. 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 it come along when optimizing menu and packaging.

So we think in Q2 0, Q1 of 2020 based on the results from these next 200 sites that are going in now you will have very clear view a read of this.

Given the size of the networking importance of the levers and future growth, we're going to make sure. We do get it right, but were concurrently preparing to scale. This rapidly if we think we got it right.

The second question from Michael barrels.

How many European stores now have the new design how many in totaled 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 two 100 stores in our nine business units right now in Europe most.

Most recently with store, having being rolled out in Russia. So.

We expect to to complete the calendar year with roughly 285 stores and a good amount of rather we run we 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 had a different approach will be 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 are 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 American coming coming quarters.

The next set of questions come from key talent additions our debt securities. What does 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 near by regions, such as Heartland, Great Lakes and Rocky Mountains.

So thank you Keith sort of question, but as as you know we won't go into the specifics for Bu of our performance, but I.

I can give you a rough idea that when we're looking at northern tier gross margin performance at our excluding the cigarettes. We can certainly see that northern tier is enjoying stronger performance in gross margin than our or their views. So.

This is driven mostly by the food program performance and the mix also and this store so as well as this strong margins performance. The program is also that's what you have to two to not to forget when we're talking about in order to in the program and the food program. The program is bringing higher traffic to the stores.

Also and I are sales. So we often said in the past that northern tier stores were close to twice as productive than the rest of our network is we're looking up merchandise sales for stores. So we can we can definitively CCGT. This impact so thats a bit of the flavor of the difference between northern tier and the harder.

Use.

The second question from Keith how it 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 brand gas and circle K stores offering a brand of gas from one of the major oil companies.

It's a complicated answer so I'll try to Peel back some layers on this and I'll start with saying, yes, we have a longstanding and strong relationships with our major oil partners and 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.

So one of the journey to date ensures our brands have a high lever hi, our brands Circle K brand Costar 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 all of US 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.

Today, 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'll 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 entire value quick creation, what happens to traffic what happens to leaders unit margins premium grade penetration payment type loyalty.

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 21 can 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 say opened with overall pleased with the quarter, particularly in the in.

In the reflection that cigarettes were relatively flat we've not seen.

Just until recently recent weeks actually.

Our normal increases next size taxes and cost. So when you look at sales ticket cigarettes were literally almost zero for the quarter. So.

Again.

Strong performance some other categories will give us some examples cooler clearly led the way.

Yes, it's our large second largest.

Destination after the fuel islands, and we see a lot of innovation driving growth.

We're also seeing strong growth and ODP as we mentioned earlier salty snacks and confectionary. 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 vendor show, we're gaining share and we'll continue to use tools like lift to drive gains.

Broadening the use of lift in the penetration of lift we can see clear correlations between traffic penetration and basket growth end 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.

Ask in the context of your long term at intermediate term goals of growing SGN, a below inflation and in the context of merchandise comps exceeding inflation by 100 basis points.

So far in in terms of the normalized engineering expense growth.

Of 2.2%. This is in line with the inflation next synergy and food the 2.2%. So in us if we're excluding nonrecurring expenses that happened as a quarter to quarter. We can see that the underlying inflation of our cost base is lower than inflation roughly around 1.7% so something seems.

Store sales growth in us.

As you know it was at 3.2% so thats roughly a 100 basis points better than inflation next synergy that was <unk>.

0.3, you, 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 result, and although we see inflation on wages and some of our views.

We're still working hard at putting in place activity to take cost out of our stores. So example of these are our labor scheduling rollout.

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 the peikar, our arden cough out and keep our cost base really low.

The second question from Karen short can you provide some color in context on competitive environment, we counted that both in store with 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 declined 116 points that you see was entirely from our conversion of our Esso acquisition.

I had an agent model, where the operator actually on the inventory and so in the past we would have reported really 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 see inventories and now you're seeing a full margin or normal margin effect there going from.

100% down to more typical margin. So that explains the margin declined 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 Thats 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 mid try to mitigate the impact.

And I'll remind this just to is one of the benefits of being very geographically diversified.

Not an overall a large impact on us and we believe longer term.

This is not structural and the margins will return to more normalized levels.

The next set of questions come from Vishal Shreedhar National Bank financial can you talk about the benefits for shareholders and the rationale for the exchange agreements with Crossamerica partners.

Yeah, what we brought strong synergies to Crossamericas a general partner.

We don't have the same needs. The CSD key did in terms of a balance sheet or funding source. So as you look the most recent exchange we dropped what we call noncore assets in exchange for Crossamericas ownership in one of our supply entities, so, allowing for a clean break in clean relationship going forward.

This will allow us and crossamerica to optimize our restocked effective networks and focused 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&A or continued exchanges of assets.

The second question from Vishal Shreedhar in the us 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 us and if you see it a stable or more challenging quarter over quarter.

Yes, you all read what I read.

Retail did a lot of earnings releases over last two weeks and.

Overall, a good quarter the us consumer I think continues to underpin the economy.

Confidence remained strong and plummet remains low we're seeing real wage growth growth.

Which was missing from the economy for long period of time, so overall I feel good about.

Our position in the us and the runway we have.

We do continue see channel glory.

We're all fighting for traffic would that be quick serve restaurants grocers dollar.

But this isn't new and this is this is.

Our competitive environment, we're prepared to compete in it.

The next set of questions comes from Mark Petri at CNBC 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 holidays labor scheduling platform.

Well 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 consistent 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 those increases and it's rolled out in two of our views and we're envisioning to roll it out to in other abuse rapidly after that so so we're working on that diligence.

On the right now the labor model that allows us to better understand what and what is needed in each store in terms of.

Workforce and is really.

Great way for us to two to standardize on the Dutch workforce and make sure that were.

We're reducing our costs in our store. This gives us the schedule for itself tells us when we do we have to perform each task in our stores and this is already rolled out in.

Almost 95% of Us network.

So we're also implementing other initiatives implementing a cost optimization program to leverage our scale and reduced the other expenses in the stores. So this allows us to 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 too.

Just a number of hours spent in our stores.

Second question for Mark Petri.

Other than the pressure on cold dispense beverages, where the material drivers of us 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 dispense beverages do you believe that you have an opportunity to reduce product costs.

Or raise prices yeah. So most of this question.

There was answer earlier.

Mark so, but as I've previously mentioned, we believe that this slight decrease related to cold dispense beverages was mostly a timing item that we don't expect it to be Riesberg representative of the future trend. We're also constantly working to find the right value proposition for our customers and adjusted regionally in our different views.

According to their market so.

So and also the margins was mostly in line with previous quarters. So we're not.

We're feeling optimistic that the ducks.

The leaving the margin this quarter was is.

Not to be repeated in next quarter. So we performed.

Typically has a higher margin profile. So also as the its should contributed in the future positively to the margin.

And the as we're moving forward with our very used to prepare food initiative, we should see this favorable or unfavorable impact.

On our margins in the future.

Thank you quote to 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 alright. Thanks, everyone.

Good day.

This concludes today's conference call you may now disconnect to seem that Sanuk wholesale social deep was at midnight you may begin next question.

Yes, Stephen Shlomi.

Okay.