U.S. Markets closed

Edited Transcript of ATD.B.TO earnings conference call or presentation 10-Jul-19 12:00pm GMT

Q4 2019 Alimentation Couche-Tard Inc Earnings Call

LAVAL Jul 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Alimentation Couche-Tard Inc earnings conference call or presentation Wednesday, July 10, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brian P. Hannasch

Alimentation Couche-Tard Inc. - President, CEO & Director

* Claude Tessier

Alimentation Couche-Tard Inc. - CFO

* Jean Marc Ayas

Alimentation Couche-Tard Inc. - Manager of IR

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Jessa, and I will be your conference operator today. (foreign language)

I will now introduce Mr. Jean-Marc Ayas, Manager, Investor Relations at Alimentation Couche-Tard. (foreign language)

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [2]

--------------------------------------------------------------------------------

(foreign language) Good morning. I would like to welcome everyone to this web conference presenting Alimentation Couche-Tard's financial results for its fourth quarter and fiscal year 2019. (Operator Instructions) 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 Hannasch, President and Chief Executive Officer; and Mr. Claude Tessier, Chief Financial Officer.

Brian, you may begin your conference.

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Jean Marc, and good morning, everyone. Thanks for joining us for the presentation of our fourth quarter and year-end results for fiscal 2019. I'll begin by going over the highlights of the quarter and the year, and following my presentation, CFO, Claude Tessier, will go over the financial details.

I'm pleased to report that we've had a fantastic year of fiscal 2019, and I'm truly immensely proud of the entire team for the work that's been done in our stores and in our support offices. We have record bottom line, generated impressive cash flows, surpassed our CST synergy target and are far along in the integration of Holiday into our network.

This year we have also once again proved our commitment to organic growth by initiating a pipeline of activities focused on bringing more customers to our locations and becoming more strategically aligned to the company than ever before. As our rebranding efforts moving full steam ahead, more and more customers are getting to know the Circle K brand across the globe and how we make our customers' lives a little bit easier each and every day. I will touch on all of this during my presentation as well as highlights of our strong results for this quarter.

Let me begin with some more details on our same-store sales during the quarter, which were up across the network despite fuel shortages in some parts of our region. In the U.S., we saw an increase in same-store merchandise revenue of 3.4% compared with the same quarter last year with good performance in all the business units. In Canada, same-store merchandise revenues increased by 4.2%, continuing improving trends over the last quarters. And in Europe, same-store merchandise revenues increased 4.7%.

We continue to see positive benefits of increased interest in our tobacco products, food and beverage categories as well as the impact of marketing and promotional activities including tactical loyalty programs, all of which are driving more excitement with our offerings and traffic to our stores across the network.

Shifting to fuel mobility. In the U.S., same-store road transportation fuel volumes increased by 0.3% compared to the same quarter last year, continuing the trend of 4 quarters in a row of positive same-store gallon growth in the U.S. While we have good same-store gallon results this quarter, our overall volume was impacted by one major fuel shortage in Texas and Arizona triggered by our supplier issue. This underlying issue has been resolved, and we do not anticipate this will affect our future quarters. In Canada, same-store road transportation fuel volumes decreased by 0.4%, which continues the sequential improvement in this region driven by the momentum of our new loyalty program at our Esso locations.

Finally, in Europe, same-store fuel volumes were down by 1.8% for the quarter due to the competitive landscape in the Baltics and some unfavorable weather in Scandinavia. Also in Europe, we're making steady progress in our mobility work with electric vehicle charging stations, now in nearly 150 of our locations in Europe, and we have plans to reach over 200 by the end of this fiscal year. At these locations, the food offer and store layouts have been redesigned to drive more customers into the store and encourage larger basket purchases while customers are waiting for their charging to be complete. Small locations have a handful of speed charges, while we also have opened the first Circle K highway locations with large charge parks offering up to 20 and 30 speed chargers at the same locations.

Back to fuel. The move to our Circle K fuel brand continued its growth in the quarter. In Europe, we are nearing the completion of the conversion to Circle K fuel at all of our former Statoil, Topaz and Shell locations. In the U.S., by the end of the fiscal 2019, we had nearly 900 sites offering the Circle K fuel brand. This unification of the Circle K fuel brand inside our stores net our fuel loans is contributing to top line growth and our Easy Pay-ACH program, which gives customers a discount on fuel, is growing in penetration each and every day.

On the topic of rebranding, we've made tremendous progress this year expanding our Circle K brand across the globe to more than 5,600 stores in North America and more than 2,000 stores in Europe, which now probably display the new brand. The most exciting benchmark this quarter is the finalization of the rebranding project in Europe as Ireland is now complete. In the U.S., the march West is proceeding at a rapid pace with about 98% of the sites rebranded in the Rocky Mountain business unit and 550 stores or 80% completed in our Texas business unit, which were former -- largely former CST sites. Texas expects to finish the rebranding in fiscal 2020, and our Grand Canyon business unit, which is formally our Arizona business unit, is well over half complete.

This ambitious rebranding strategy which began about 3.5 years ago continues to be a real win for our business. With our key partners we're now able to leverage national promotional campaigns and gain penetration in our private-label products. For our customers, both aided and unaided awareness across the globe has been astounding, and for our team members, there is now a foundation for our shared employee culture in private Circle K, which is probably the best pay off at all -- of all on this journey.

Now I'll turn to where we are with CST and Holiday. The performance of same-store sales in the CST network, both in the U.S. and in Canada, continued to be a strong network leader throughout the year. And almost exactly 2 years after the acquisition of CST, our annual synergies run rate surpassed our target of $215 million over the 3 years following the transaction, which is 1 year earlier than planned. I want to thank all of our team members directly involved in this impressive achievement, including our operations, shared services, finance and HR teams. As we continue down this road, I'm confident we'll realize even more synergies.

Next to the Holiday network, where we have many reverse synergy initiatives, are well underway with measurable results now impacting our bottom line in the broader network. Over the years, several North American business units adopted best practice products, including the integration of Holiday's popular private jerky and crispy treats programs and implemented some of Holiday's top performing promotional offers. During the quarter, most North American business units introduced the first wave of Holiday's smart value marketing program. Based on early results and limited SKU participation, this program looks to be capable of delivering significant return on incremental sales growth once fully implemented network-wide.

We continue to work actively on operating -- sorry, integrating operational excellence programs from Holiday, including a key focus on its storefront tool that help store managers have the resources and information it needs in one place in a well structured and prioritized way so that it can be effectively executed.

Finally, we've also begun piloting Holiday's food-only concept or grab-and-go concept in select markets using the full array of Holiday's food offers, including menu assortment, equipment theater and operating model.

Let me talk a little bit about what's going on at the stores in our key categories. Over the year, we made great strides in bringing our highly successful Coffee on Demand program to new markets, and we now have over 2,600 total stores installed to date in the U.S. As I mentioned before, this program takes our simply great coffee platform to the next level as every cup is fresh ground from whole beans and brewed in under a minute with a full-body quality taste that customers are clearly enjoying. This quarter, Coffee on Demand once again had strong double-digit unit growth and significant improvement in margins.

The cold dispensed category is seeing healthy sales in unit growth this year with frozen volume -- frozen dispensed volume showing double-digit growth versus prior year. We're also seeing increased customer loyalty to frozen beverages in Canada and have begun a faster frozen beverage pilot in Ireland.

In previous quarters, I've highlighted the noteworthy growth coming from our packaged beverage categories, particularly energy, water and ready-to-drink coffee. Energy remains a star here, thanks to number of merchandising and promotional initiatives as well as space refinement driven by our segmentation work. Nationally coordinated promotions spanning energy, isotonics and several high-affinity centered store categories have delivered solid incremental sales to the U.S. during the quarter.

In our North American food program, we're ramping up the rollout of our signature hotdog program, including expanding at this quarter to the Grand Canyon, West Coast, coastal Carolina and Gulf Coast business units. At the end of fiscal '19, we now have over 330 new sites and the total store count of about 500 sites in this program. These new locations are exceeding sales targets with customers excited about our unique roller grill offerings.

In Europe, the newly designed Circle K store layout is in 74 locations. These new stores with a big step up and look and feel are improving the customer experience and they're already showing an increase in traffic and basket size. With the new concept, we are introducing attractive new food products, including new Mexican options, we expect next year in Europe that almost 0.5 million customers will have one of our burritos.

In Europe, we'll also continue this year to develop the food-to-go offer across 9 markets to strengthen overall food position. Here sandwiches are the fastest-growing category, with market increases in units and gross profit driven by great results from introducing fresh prepared on-site sandwiches, which have proven very popular with our European customers.

In other European business units, we're also full speed ahead with developing new food packaging, rollout of Coffee on Demand and several other initiatives to bring more traffic into our stores.

Alternative tobacco products continue to be a strong performer over the quarter, positively impacting our overall same-store sales result with minimal impact from Juul pulling its flavors. We're seeing a variety of innovation in this space both in terms of new products and improvements, and our back bar layout bringing more visibility to these products.

Tobacco was also a key product in our Lift digital upsell platform, which continues to contribute to growing our market basket and delivering engagement -- engaging content to our customers. We've expanded Lift now to over 5,700 sites in the U.S. with over 7 million unique loyalty members. All the CST sites now have Lift, and we've reached approximately half of the Holiday network, and we have plans to install in Canada later this year. Our tactical loyalty clubs have grown beyond our adult tobacco consumers in the tobacco club to include beverage and snacking clubs. We're building a very large database of loyal store visitors to engage with in the future as we continue to make our customers' lives a bit easier.

I'll pause here and let Claude take you through more of our fourth quarter, end of the year financial results.

--------------------------------------------------------------------------------

Claude Tessier, Alimentation Couche-Tard Inc. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Brian. So ladies and gentlemen, good morning. We're happy to report for the fourth quarter of 2019 net earnings attributable to shareholders of the corporation of $293.1 million or $0.52 per share on a diluted basis. Excluding certain items, adjusted net earnings for the fourth quarter of fiscal 2019 would have been approximately $295 million or $0.52 per share on a diluted basis compared with $0.59 per share for the fourth quarter of fiscal 2018, which is a decrease of 11.9%. For fiscal 2019, net earnings were $1.8 billion compared with $1.7 billion for fiscal 2018, an increase of $163 million or 9.8%. Diluted net earnings per share stood at $3.25 compared with $2.95 per share for the previous year, an increase of 10.2%. Excluding certain items from net earnings for fiscal 2019 and fiscal 2018, net earnings would have been approximately $1.9 billion compared with $1.5 billion for the previous year, an increase of $402 million or 27.3%.

Adjusted diluted net earnings per share would have been approximately $3.32 compared with $2.60 for fiscal 2018, which is an increase of 27.7%.

I will now go over some key figures for the quarter. For more details, please refer to our MD&A which is available on our website. During this most recent quarter, excluding CAPL's revenues as well as the negative net -- net negative impact from the translation of our Canadian and European operations into U.S. dollars, merchandise and service revenues increased by approximately $133 million or 4.1%. This increase is primarily attributable to continued strong organic growth. For fiscal 2019, excluding CAPL's revenue as well as the net negative impact from the translation of our Canadian and European operations into U.S. dollars, merchandise and service revenues increased by approximately $1.6 billion or 12.7%. This increase is mostly attributable to the contribution from acquisitions of approximately $1 billion as well as to organic growth.

For the fourth quarter of fiscal '19, excluding CAPL's gross profit as well as the net negative impact from the translation of our Canadian and European operations into U.S. dollars, merchandise and service gross profit increased by approximately $39 million or 3.5%. This rise is mainly attributable to our organic growth.

Our gross margin increased by 0.3% in the United States to 33.9% and decreased by 2.2% in Europe to 41.8% due to a different product mix. In Canada, our gross margin decreased by 1.4% to 33%, mainly as a result of the conversion of our Esso stores from the agent model to the corporate model and a different product mix also.

During fiscal 2019, excluding CAPL's gross profit as well as the net negative impact from the translation of our Canadian and European operation in U.S. dollars, consolidated merchandise and service gross profit increased by approximately $583 million or 13.1%. The gross margin was 33.8% in the United States, an increase of 0.5%, and it was 41.8% in Europe, a decrease of 0.8%. In Canada, it was 33.6%, a decrease of 0.9%.

The road transportation fuel gross margin for the fourth quarter of fiscal 2019 was $0.1851 per gallon in the United States, an increase of $0.0122 per gallon. In Europe, the road transportation fuel gross margin was $0.0828 per liter, a decrease of $0.0044 per liter, negatively impacted by last year's sales of compulsory stock obligation inventory in Sweden. In Canada, the road transportation fuel gross margin was CAD 0.0813 per liter, a decrease of CAD 0.0131 per liter due to competitive pressure in some of our markets and to the impact of the newly implemented carbon tax in some regions, which resulted in an increase of cost, while selling price remained stable.

During fiscal 2019, the road transportation fuel gross margin was $0.2360 per gallon in the United States, USD 0.0861 per gallon -- per liter, sorry, in Europe and in Canada CAD 0.0838 per liter.

While this quarter had higher than usual operating expenses, these were partly driven by the impact of changes to certain provision and assumptions caused by external factors as well as the Esso dealers' model change similar to what we've discussed in previous quarters. It should be noted that operating expense for the year were on plan, and for the fourth quarter of fiscal 2019, growth in normalized operating expense was 5% and 3.7%, respectively. Excluding the conversion of our Esso stores from the agent model to the corporate model as well as the impact from changes in some assumptions used to determine our provision, the remaining variance for the fourth quarter and fiscal 2019 would have been 3.6% and 3.4%. As always, we remain committed to our customary financial discipline and increasing value for our shareholders.

Excluding specific items described in more detail in our MD&A, adjusted EBITDA for the fourth quarter of fiscal 2019 decreased by $61.3 million or 8.7% compared with the corresponding period of the previous year, driven by increase in expenses due to the high level -- higher level of initiatives throughout the organization and the net negative impact from the translation of our Canadian and European operations into U.S. dollars, partly offset by organic growth. The adjusted EBITDA for fiscal 2019 increased by $540 million or 18.1% compared with fiscal year 2018, mainly through the contribution of higher fuel margins in the U.S., acquisitions and organic growth, partly offset by a higher level of expenses and the net negative impact from translation of the results of our Canadian and European operations into U.S. dollars. Acquisition contributed approximately $269 million to the adjusted EBITDA of fiscal 2019, while the variation in exchange rates had a net negative impact of approximately $45 million.

The income tax rate for the fourth quarter of fiscal 2019 was 13.5% compared with 17.5% for the corresponding period of fiscal 2018 when excluding the net tax benefit of $69.7 million stemming from the impact of the U.S. Tax Cuts and Job Acts of the fourth quarter of fiscal 2018. The decrease in the income tax rate of the fourth quarter of fiscal 2019 stems from the impact of different mix in our earnings across the various jurisdictions.

For fiscal 2019, the income tax rate was 16.9% compared with 20.6% for fiscal 2018, when excluding the net tax benefit of $288.3 million stemming from the U.S. Tax Cuts and Job Act as well as an adjustment for a tax benefit stemming from an internal reorganization of fiscal 2018.

As of April 28, 2019, our return on equity remained strong at 22.3% on a pro forma basis, and our return on capital employed was at 14.1% also on a pro forma basis.

During the quarter, we've continued to generate significant free cash flows, allowing us to accelerate our deleveraging plan as evidenced by our adjusted leverage ratio of 2.21:1 -- sorry, 2.29:1. Since the beginning of the year, we repaid net amount of approximately $1.4 billion on our revolving unsecured operating credit, and we repaid net amounts of $413.5 million on our acquisition and unsecured credit facility.

Our liquidity position remains strong. We have $706 million in cash and approximately $2.5 billion available to our revolving credit facility, providing us the flexibility to continue our strategic growth plan as well as rewarding our shareholders.

Our quarterly dividend remains at CAD 0.1250 per share for a total of dividend of CAD 0.45 per share in fiscal 2019, a 21.9% -- 21.6% increase.

Thank you for your attention, and now back to you, Brian.

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

All right. Thank you, Claude. Before I conclude today, I want to talk a little bit more about the work we've done in 2019 to become a strategically aligned company than ever before. You'll read in our annual report and hear more going forward about the strategic plan we initiated this year. The goal is to double the bottom line of the company in 5 years and while undoubtedly ambitious and proud of how the strategy remains true to our core business and values providing laser focus while maximizing our strengths and build a solid platform as a springboard for the future. It's founded on the understanding of the current and future market dynamics, upcoming trends in convenience and fuel as well as our deeply rooted aspirations to improve the customer journey and drive more traffic into our locations.

This strategy also recognizes the importance of organic growth and positioning ourselves for future acquisitions as the right opportunities emerge while maintaining our customary financial discipline in creating values for our shareholders. Most importantly, this strategy involves every aspect of our business from operations, marketing, finance, technology, construction, fuel, mobility, and it's grounded on our people, who are the key differentiator in how we are and will remain an industry leader.

I'm honored this year with the annual report. We'll issue our first-ever sustainability report as part of our public commitment to communicate more transparently on the company's sustainability efforts. We've reported a great job, highlighting the fundamental ways in which our teams across the globe are driving clear and impactful actions to protect and improve the communities where we work and where we live.

Let me conclude by offering my sincere thanks to our nearly 135,000 global team members, our partners and our vendors for this fantastic year that we're helping us grow together on our journey to become the world's preferred destination for convenience and fuel.

And with that, we'll now answer questions we received from our analysts.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [1]

--------------------------------------------------------------------------------

Thank you, Brian. The first set of questions comes from Patricia Baker at Scotiabank. One notable highlight in Q4 is the strong organic growth evidenced by solid same-store sales across all geographies. Canada in particular saw very nice comps against the good trend in the prior year. Canada is starting to deliver same-store sales that rival the strength you've consistently delivered in Europe. The release notes the impact of rebranding, product offer and traffic building initiatives. Can you comment on the relative contribution of these and more importantly, with respect to the latter 2 drivers, do you have more to come that should see Couche-Tard able to sustain this momentum?

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [2]

--------------------------------------------------------------------------------

Sure. I'll take that one. Patricia, I think the introduction of Juul and iQOS have undoubtedly been very strong for us. Customer adoption has been fantastic. I think within 2 weeks, Juul had taken #1 position in our other tobacco category. We've also seen solid performance of beverages supported by our promotional strategies, and we've variety of initiatives to drive traffic: direct mailers, gamification, which is an engagement tactic we have that we've been very successful with in Europe last couple of years. We've launched that in the western half of Canada and seen very good early results. We had a fantastic summer weather-wise last year. So very pleased to see top -- strong growth on top of growth from last year.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [3]

--------------------------------------------------------------------------------

The second question from Patricia Baker. I would appreciate some broader commentary on the tobacco category and how you think things will play out over the next year or so? We have seen as of the beginning of July, Walmart move to enforcement of selling tobacco to only those over the age of 21, and I know Couche-Tard have endorsed such a move. How large a role do you think to C-store industry can and should play in ensuring better controls over tobacco and tobacco-related products? And how can Circle K play a leading role here?

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [4]

--------------------------------------------------------------------------------

The convenience channel is the largest channel for tobacco and other nicotine-related products. And I think as such, I believe our industry needs to play an active role in ensuring that proper controls are in place. Overall, I think our industry does a great job and based on the data I've seen, our track record is better than other channels. But that said, we can always be better. Here at ACT, we've refocused our efforts in training on mystery shopping, our age-restricted products, and we -- quite honestly, we've probably gotten little relaxed in some areas. So with this called action of refocusing, I think, it's been good for us, and we'll continue to support the age 21 initiative and will support legislation in this direction.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [5]

--------------------------------------------------------------------------------

The next set of questions comes from Irene Nattel at RBC Capital Markets. Q4 saw strong same-store sales momentum despite tougher comparable, although gross margins were pressured in Canada and Europe. Can you please talk about your same-store sales outlook for fiscal 2020 and key initiatives you are implementing to drive traffic and basket? And your view on gross margin percentages versus gross margin dollars, and how we should be thinking about it?

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [6]

--------------------------------------------------------------------------------

Well, I won't share specific target in terms of sales. I'll say that we do continue to target at least 100 basis points over inflation. We've learned a lot this year on what works and what doesn't. We also learned there is not a silver bullet out there, but really myriad of tactics that are needed to connect with all our customers that we're trying to drive to our sites, whether that be the fuel customer or other segments. Key initiatives include fresh food, deploying easier ways to pay, tactical loyalty, our Lift program being a part of that, national promotional campaigns, which have enabled by our move to one brand and customer engagement, I mentioned, gamification before. We're offering subscription pilots in a number of markets and seeing good uptake in that, particularly in the car wash category.

Shifting to margins, you have to remind a lot of people internally we deposit dollars not percentages, that's important internally as it's easier to raise margins by losing focus on key but lower-margin categories like alcohol and tobacco. That said, I believe we continue to grow our margin rate with our focus on high margin categories like coffee, beverages and food and look to maintain the right balance between basket and traffic.

Specific to your question on Europe, we had 2 major impacts this quarter, one Claude mentioned earlier, was a -- the exchange rate, which had a 9% impact in the quarter, and we also had a onetime true-up in the Ireland, which Claude will detail a bit later. In Canada, our largest impact is from the conversion of our operating model of the Esso locations, with Claude will also elaborate on.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [7]

--------------------------------------------------------------------------------

The second question from Irene Nattel. Your balance sheet has improved significantly with the $1.8 billion of debt repayments in fiscal 2019. What do you see as your current balance sheet capacity in dollars? And how would you describe the current M&A environment?

--------------------------------------------------------------------------------

Claude Tessier, Alimentation Couche-Tard Inc. - CFO [8]

--------------------------------------------------------------------------------

So our balance sheet is healthy as we mentioned before and would return to -- which returned a leverage ratio of 2.29x and that's a bit below our -- the level of 2.5x, which is our comfort level. So we're feeling very strong about that. And that allows us to look at opportunities as they present themselves to us. Our revolving credit facility is paid down, and we have $700 million of cash on hand and that gives us a lot of room to maneuver. We also feel comfortable in leveraging as we always done in the past to take advantage of any opportunities that may arise.

And finally, on this subject, there is a lot of activity currently in the market and we typically get to look at everything that is available, and we're taking a hard look at it. Valuations remain elevated, and we will continue to be disciplined in our approach with a focus on driving meaningful synergies and also achieving our target in terms of returns.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [9]

--------------------------------------------------------------------------------

The next set of questions comes from Jim Durran at Barclays. We would appreciate any insight you can provide about total nicotine and tobacco sales trends at your stores in each region. Industry sources such as Nielsen and IRI show tobacco revenues ex e-cigarettes are down low- to mid-single digits and e-cigarette growth slowing presumably due to the myriad of government-induced restrictions on the retail offering. How was your total nicotine and tobacco category performing? Are you taking share? Have you been able to expand the tobacco club program into new markets and/or to include additional brands?

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

Yes. Same-store cigarette volumes, I think we're doing well relative to the industry. We're seeing flat to slightly positive sales in terms of dollars in the category, and our data shows, we're taking share from our competitors. We're committed to the category. We've invested significant amounts this year in expanding the back bars not only to better display the tobacco cigarette category but to make room for new innovations. In terms of other tobacco products, they do continue to deliver very strong growth in a much higher margin than cigarettes, driven by moist smokeless and the vape products. Certainly, I would have sat here 2 quarters ago, being very concerned about the flavor removal by Juul, although I do support that effort, but we continue to see those products grow in real terms.

Lift has been deployed across much of our U.S. network at this point, while not complete, it will be shortly in the U.S. We've added approximately 1,500 stores in recent months and now have a critical mass, and we still see more benefits to come as we grow the customer base in that. In terms of Canada, we are planning to begin rollout in November of this year, pending technical pilots and Europe firming up plans to see the full deploy of that program there.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [11]

--------------------------------------------------------------------------------

The second question from Jim Durran. What impact did the new bean-to-cup program having on coffee sales? Can you provide us with any update on the 6 markets fresh food test in the U.S.? Or when can we expect an update?

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [12]

--------------------------------------------------------------------------------

As I mentioned in the comments earlier, we're seeing strong double-digit growth in units and sales and a significant improvement in margin in the stores where we've installed the bean-to-cup machine. While delivering a fresh cup every time, which is certainly a unique and -- not only for our channel but any retail to get a fresh cup of coffee any time of the day, we also see it takes lower labor to execute the products. We're very excited about the program, the returns, and we've deployed so far in about 3,000 stores and will complete the U.S. by the end of this year.

In terms of the fresh food pilot, I'd say it's too early to comment as we've really just gotten the technical pilots underway, but we'll update you when we complete the pilots and have more information.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [13]

--------------------------------------------------------------------------------

The next set of questions come from Mark Petrie at CIBC World Markets. Could you, please, quantify the impact of tobacco on merchandise same-store sales growth in both the U.S. and Canada? In particular, it would be helpful to learn how other tobacco performs both year-over-year as well as how the Q4 growth rate compared to Q3?

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [14]

--------------------------------------------------------------------------------

We continue to see healthy double-digit growth in the category both in the U.S. and in Canada. In the U.S., growth is a bit slower than in Q3 due to restrictions on the sale of the flavored products, but again still strong growth, and not the negative impact we anticipated. As I mentioned earlier, we are seeing new brands gain traction in this space. In Canada, the results have been very, very strong led by our introduction of Juul and also iQOS and we have been also very active introducing these products overseas where we were allowed in other markets in Europe, for example, Ireland just launched recently.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [15]

--------------------------------------------------------------------------------

The second question from Mark Petrie. Could you, please, summarize the most material drivers of the year-over-year changes in merchandise gross margins by region? What do you expect to be the biggest factors influencing merchandise gross margins in fiscal 2020?

--------------------------------------------------------------------------------

Claude Tessier, Alimentation Couche-Tard Inc. - CFO [16]

--------------------------------------------------------------------------------

So if we take them region by region and let's start with the U.S. So the impact in the U.S. was mostly driven by product mix and mostly by other tobacco products with an increase also in cigarette margins. Looking forward, we expect next year to be factors like coffee and food development to outburst positive EBITDA margins for the U.S. In Canada, the change in margin was mostly driven by Esso store conversions through the -- to the corporate model. And we know that, that change is going to continue to Q3 of next year. For Europe, product mix was a factor as well as the impact of the conversion of systems in Ireland, like Brian referred earlier. We are -- in Ireland, we are finishing the implementation of the European -- on the systems there to our European platform and this implementation triggered a onetime adjustment to margins that was booked in Q4. For the outlook, we are expecting through the deployment of our new store format in Europe that puts more emphasis on food, positive impact on the margins in the future from that store concept.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [17]

--------------------------------------------------------------------------------

The next set of questions comes from Peter Sklar at BMO Capital Markets. As you know, San Francisco is banning the sale of e-cigarettes in the city. If this were to become pervasive throughout the U.S., can you provide an estimate of the negative impact on your U.S. merchandise same-store sales?

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [18]

--------------------------------------------------------------------------------

I'll start by saying we have very few stores in San Francisco, which is a city that has often taken stances on many issues that are not consistent with the rest of the country. And I can't speculate on whether that will spread through any other geographies. That said, our focus is on selling these products in a responsible manner, and we anticipate continued growth in these low-risk innovations.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [19]

--------------------------------------------------------------------------------

The second question from Peter Sklar. The SG&A this quarter was at an elevated level in part due to Esso conversions to corporate stores. When did this impact begin? And when will the conversions be completed?

--------------------------------------------------------------------------------

Claude Tessier, Alimentation Couche-Tard Inc. - CFO [20]

--------------------------------------------------------------------------------

So conversions began in mid-Q2 of last year, so December -- started in September to December and continued to Q3. And we expect to see a continued impact as we cycle through those months this year.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [21]

--------------------------------------------------------------------------------

The next set of questions come from Derek Dley at Canaccord Genuity. The first question from Derek Dley was already addressed in a prior discussion on e-cigarettes. The second question from Derek Dley, could you discuss in a little more detail what assumptions and provisions impacted SG&A this quarter? And if they were one-time in nature?

--------------------------------------------------------------------------------

Claude Tessier, Alimentation Couche-Tard Inc. - CFO [22]

--------------------------------------------------------------------------------

So globally changes and assumptions accounted for approximately 1% of SG&A growth. So changes were related to the discount rate used to account for our environmental provisions and also actuarial assumptions for our general liability provision in the U.S. We're not satisfied with the current level of OpEx growth and are focused on bringing this back closer to our historic level. And while we are definitively making specific investments in our new strategy with initiatives in digital insights, marketing, we are also identifying areas of cost reduction opportunities, like robotics, use of AI, and also improved use of our scale in procurement to offset these increases.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [23]

--------------------------------------------------------------------------------

The next set of questions come from Vishal Shreedhar at National Bank Financial. Can you explain the benefit of the Esso dealers model change? Management noted higher expenses, but was it accretive to EBITDA and cash flow?

--------------------------------------------------------------------------------

Claude Tessier, Alimentation Couche-Tard Inc. - CFO [24]

--------------------------------------------------------------------------------

So as you recall, probably, Vishal, the main difference is that we now own and manage the inventory. We choose the merchandise that will be sold and the weight will be presented decided on promotional strategy, and we ensure also in step positions. This permits higher gross profit dollars, but also incurs higher OpEx. So on a net basis, it is accretive to EBITDA and cash flow, and we have done the proper analysis beforehand to ensure that it would be the case and we're happy about that change.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [25]

--------------------------------------------------------------------------------

The second question from Vishal Shreedhar has already been addressed in a prior discussion on e-cigarettes. The next set of questions come from Keith Howlett at Desjardins Securities. The company's objective is to double the business in 5 years, 50% by internal growth. Our acquisition synergies accounted in internal growth. What underlying growth of food service is necessary to reach the internal growth goal of doubling?

--------------------------------------------------------------------------------

Claude Tessier, Alimentation Couche-Tard Inc. - CFO [26]

--------------------------------------------------------------------------------

So when we were looking at acquisition synergies, they are not accounted for any internal growth. But as you know, we're really focused on cost synergies, so there is all sorts of reverse synergies and also potentially when years are passing, growth that are coming from those acquired assets is accounted a bit into our internal growth. For the second part of your question, we're looking to get close to industry levels as far as food service by the end of 2023 in terms of penetration and as a percentage of merchandise sales.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [27]

--------------------------------------------------------------------------------

The second question from Keith Howlett, what is the company's target rate of marketing and advertising expenses to convenience revenues? And what is the current percentage?

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [28]

--------------------------------------------------------------------------------

Keith, we do have a target rate, but I'm not going to share that for competitive reasons. But that said, for the full year, we were in line with this target, but we did see much of it weighted to this quarter, Q4, in preparation promotions during the summer months that we're obviously in the middle of now. I would say traditionally our industry, including us, has been very traditional in terms of using POP, billboards and radio. We're trying to shift that. We're investing in a much more targeted channels at our core segments. And if we can consistently demonstrate success, we'll be happy to continue to invest in this space.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [29]

--------------------------------------------------------------------------------

The next set of questions come from Michael Van Aelst at TD Securities. Reported total European fuel volumes fell 8.7% in Q4, which was much more than the 1.8% drop in same-store volumes and the 0.6% fewer stores year-over-year. How do you explain the other 6.3% drop in fuel volumes not accounted for by the lower same-store volumes and store count? Can you also provide some color around European fuel and store traffic trends?

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [30]

--------------------------------------------------------------------------------

Yes. There really wasn't any loss of additional volume. The decline you're seeing was triggered by our sale last year in this quarter of our compulsory stock obligation, which is a requirement by the Swedish government to maintain a minimum stock and hold it in storage. We sold this inventory obligation last year in Q4 to free up inventory and reduce price exposure. So in terms of traffic, Europe was our strongest market for the year. The volume picture was a bit mixed, however, with Ireland showing strong results with the rebranding from Topaz and Esso to Circle K. Others were a bit weaker for a variety of reasons, as Claude mentioned earlier, including weather and some tax issues in the Baltics, which has shifted some volume.

--------------------------------------------------------------------------------

Jean Marc Ayas, Alimentation Couche-Tard Inc. - Manager of IR [31]

--------------------------------------------------------------------------------

The second question from Michael Van Aelst has already been addressed in a prior discussion on operating expenses, so this covers all the questions. Thank you for joining us. We wish you a great day, and look forward to speaking to you again in our September call for the first quarter 2020 results.

--------------------------------------------------------------------------------

Brian P. Hannasch, Alimentation Couche-Tard Inc. - President, CEO & Director [32]

--------------------------------------------------------------------------------

Thanks, everyone. Have a great day.

--------------------------------------------------------------------------------

Claude Tessier, Alimentation Couche-Tard Inc. - CFO [33]

--------------------------------------------------------------------------------

Thank you. Have a great day.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect. (foreign language)