U.S. Markets open in 8 hrs 5 mins

Edited Transcript of ATD.B.TO earnings conference call or presentation 14-Mar-17 6:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Alimentation Couche Tard Inc Earnings Call

LAVAL Mar 14, 2017 (Thomson StreetEvents) -- Edited Transcript of Alimentation Couche-Tard Inc earnings conference call or presentation Tuesday, March 14, 2017 at 6:30:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Mathieu Descheneaux

Alimentation Couche-Tard Inc - VP of Finance

* Brian Hannasch

Alimentation Couche-Tard Inc - President & CEO

* Claude Tessier

Alimentation Couche-Tard Inc - CFO

* Geoffrey Haxel

Alimentation Couche-Tard Inc - SVP of Operations

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

Presentation

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

Operator [1]

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

Good afternoon. My name is Solie, and I'll be your conference operator today. (Spoken in French). I will now introduce you to Mr. Mathieu Descheneaux, Vice President, Finance, Alimentation Couche-Tard. (Spoken in French).

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [2]

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

(Spoken in French). I would like to welcome everyone to this web conference presenting the third-quarter financial results for 2017 of Alimentation Couche-Tard.

(Caller Instructions)

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 the 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; as well as by Mr. Claude Tessier, Chief Financial Officer. Brian, you may begin your conference.

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

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

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

Thanks, Mathieu, for the introduction. Good afternoon, everyone. Appreciate you joining us for the presentation of our results for the third quarter of FY17. Let me start by presenting our net earnings. Excluding certain items for both comparable periods, net earnings for the third quarter of 2017 were approximately $303 million compared to $301 million for the third quarter of FY16, an increase of 0.7%, while adjusted diluted net earnings were $0.53 for the quarter.

This performance was driven by our acquisitions, continued organic growth, a solid expense control, as well as by the impact of a lower income tax rate for the quarter. The performance was offset by lower fuel margins, primarily in the US but also in parts of Europe, as we saw persistent increased product costs through the quarter while increases in retail prices lagged.

In Europe and Canada, merchandise and service store profits were up, and we also increased our road transportation fuel volumes through contributions from our acquisitions as well as solid organic growth in both the US and in Europe. For Europe, I'm happy to say that we're approaching across the five-year anniversary of our acquisition, and this is the 15th consecutive quarter of both positive same-store convenience and fuel sales.

In the quarter in October, specifically, Hurricane Matthew did directly affect more than 500 of our stores in the US, impacting their hours of operation or forcing them to be totally closed, which resulted in the loss of sales and incremental expenses including inventory losses and cleanup costs. Our teams did a great job minimizing the impact of it on our earnings, but we estimate the direct negative impact to be $3 million for the quarter, which obviously excludes the impact of demand destruction and other factors associated with events like this.

On the fuel side, same-store road transportation fuel volumes increased in the US and in Europe. And we're seeing positive response from our customers through our rebranding initiatives and micro-market strategies, as well as to the growing contribution of premium fuels. In both the US and Europe, we're very pleased with what we feel is top-quartile performance on same-store fuel volume, particularly in the faces of challenging conditions like Hurricane Matthew, heavy rainfall on the West Coast, and an unusually mild winter in much of Europe. In Canada, the challenging economy in Western Canada did impact our same-store road transportation fuel volumes in the quarter, showing a decrease.

On the convenience side, same-store merchandise revenues increased in both the US and Europe, while declining slightly in Canada. Sales in the quarter did slow from previous trends, but we still have seen positive traffic and basket growth in the majority of our geographies. Merchandise and service gross margins decreased in the US and Europe, while gross margins increased in Canada. This is due to an impact of a different product mix in Ireland, as well as to different product mix in our recently acquired Esso stores, which Claude will give more detail on later. We continue to work on improving our supply terms, our merchandising strategy, in order to bring them in line with the market and make sure that we're balancing our pricing and promotional activities with the needs of traffic.

As we continue to roll out our Simply Great Coffee program in North America, we've seen this potential come to life as customers are responding very well to the offer. We've continued to work on other key categories such as car wash and cold beverage by identifying opportunities to drive same-store sales through category and product development, and you'll see more pilots in those areas come to life in the very near future.

Touching on acquisitions. On the CST side, as the deal is now anticipated to close in early FY18 along with our Cracker Barrel acquisition in Louisiana, our teams continue to work hard, actively planning the transition and identifying potential synergies and best practices. We have confirmed there's a lot of talent at CST, and we're getting great collaboration from the CST management and their teams, which has been a key factor in the process and situates us very well to close and hit the ground running.

I'll touch on integration of a couple of our other files. As you know, we're a growth-oriented company and successful acquisitions are based on one element. That's getting full integration, especially when it comes to anticipated synergies. I'm pleased to announce the transaction of the Esso sites which was completed, all 278 stores, and the integration is already showing very positive results. The transition went very smoothly, and we've experienced very positive results from consumers to our rebranding and merchandising initiatives, and we anticipate delivering very solid gains in the months to come from this acquisition.

In addition, we're proud to announce that we've reached and will surpass our targeted synergies for The Pantry acquisition, which is in alignment with our 24-month objective. The integration was a real success story of which our teams can be proud of. The rebranding of the fuel and the stores has also gained momentum, and will be largely complete by the end of this fiscal year. Sites that have been fully rebranded on both the fuel and the store brand are showing very strong trends. Finally, we're at the one-year anniversary of our acquisition in Ireland, and I'm pleased to report that we're well ahead of plan in both in terms of synergies and top-line results.

On the global front, our Companywide Circle K rebranding is a continued success in Europe and we're accelerating the pace here in the US. We're close to 2,000 stores rebranded globally, with more than 1,000 in North America and over 910 in Europe. That effectively completes Scandinavia, and is the -- the 1,000 that are complete to date are largely in the Southeast US around The Pantry geography.

In the coming quarters, we'll keep our momentum and continue rolling out our brand, namely in Europe where the rebranding -- where more and more countries will proudly display the Circle K brand starting as early as next month. Now I'll turn it over to Claude to take you through some of our results in more detail. Claude?

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

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

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

Thank you, Brian. Ladies and gentlemen, good afternoon. For the third quarter, we report net earnings of $287 million, or $0.50 per share on a diluted basis. Once specific items described in our MD&A are factored in, adjusted net earnings are approximately $303 million, an increase of 0.7% compared to Q3 2016.

Adjusted diluted net earnings would have been approximately $0.53 per share, driven by the contribution from acquisition, by our continued organic growth, as well as by the impact of our lower income tax rate, offset by lower fuel margins in the US and in Europe.

As in previous quarters, we continue to accelerate the depreciation of signage equipment and of the Statoil frame name in connection with our global brand initiatives. During the third quarter, we incurred an incremental depreciation of amortization expense of $8.4 million.

During the third quarter, as part of our cost-reduction initiatives and the search of synergy, we proceed with the restructuring of certain activities of our European operations and recorded a restructuring provision of $6 million. We also announced our decision to terminate some of our benefits disability plans, which resulted in a curtailment gain of $2.7 million.

I'll now quickly run through some of our key figures for the quarter. For more details, please refer to our MD&A, which is available on our website. For the third quarter, the growth in our merchandise and service revenues, excluding the impact of foreign exchange, was $174 million, or 6%. This increase is attributable to the contribution from acquisition, which amounted to approximately $121 million, as well as to our organic growth. Same-store merchandise revenues increased by 1.9% in the United States and by 2.5% in Europe. In Canada, same-store merchandising revenues decreased by 0.9%, still impacted by the challenging economic conditions in the western part of the country.

Excluding the net impact from currency translation, our consolidated merchandise and service gross profit grew by $65 million, a solid 6.6% increase, which is attributable to the contribution from acquisitions for approximately $62 million, as well as to organic growth. The gross margins decreased by 0.4% in the United States to 32.9% because of a change in our revenue mix in favor of lower margin categories, and by 1.4% in Europe to 42.5% because of the impact of a different revenue mix in Ireland. In Canada, the gross margin increased by 1.4%, to 33.8%, because of a different revenue mix in our recently acquired Esso store network.

Total fuel grew by 15.7% in the third quarter through the contribution from the acquisition and organic growth. Same-store volume growth in the US was 2.8%, while it was 1.8% in Europe. Overall, this performance was driven by the positive response from customers to our fuel-rebranding initiatives and micro-market strategies, as well as to the growing contribution from premium fuel. In the US, fuel volumes were negatively impacted by disruption caused by our fuel-rebranding activities in the southeastern of the US in addition to negative impact of Hurricane Matthew. In Canada, same-store road transportation fuel volumes decreased by 0.8%, still impacted by a challenging economy in the western part of the country.

In the third quarter of 2017, the road transportation fuel gross margin was $0.1833 per gallon in the United States, a decrease of $0.0157 per gallon while it was $0.0751 per liter in Europe, a decrease of $0.0118 per liter in Europe. In the United States and in Europe, the decrease in the margin is attributable to the volatility created by increasing crude oil price. In addition, the decrease in the margins in Europe is also attributable to the impact of the lower margins in Ireland compared with our margins in Continental Europe. In Canada, the road transportation fuel gross margin was at CAD0.0820 per liter, an increase of CAD0.0191, attributable to a higher margins in our newly acquired Esso stores network into a more favorable competitive environment.

As you know, rigorous cost control throughout the organization is part of our DNA. This has been a key focus area for several years, and we intend to keep it that way. Our discipline, as well as the realization of additional synergies, allowed us to keep the year-to-year organic growth and expense at 1.9% during the third quarter and since the beginning of the fiscal year also. This is near normal inflation. Despite higher advertising and marketing activities in connection with our rebranding projects, strong top-line growth, a higher average number of Company-operated stores, and the proportionally higher operational expenses in our recently built stores due to their larger (inaudible).

Now back to our financial results. Excluding specific items described in our MD&A, adjusted EBITDA for the third quarter of FY17 increased by $24.4 million, or 3.9%, to $646.4 million. Our income tax rate for the third quarter of FY17 decreased to 25.2% compared with a normalized income tax rate of 26% for the third quarter of FY16. The decrease in the income tax rate stems from the proportionally lower earnings in the United States where our [statutorial] income tax rate is the highest.

Now let's take a brief look at our financial results for the three quarters of FY17. Barring any foreign exchange effects, our merchandise and service gross profit are up by $160.4 million, or 6.1%, and fuel gross profits are up by $96.1 million, or 5%. Excluding specific items, adjusted EBITDA increased by $65.4 million, or 3.6%, reaching over $1.9 billion.

Our income tax rate for the first three quarters was 26.7%, and adjusted for specific items, net earnings stood at $958 million, or $1.68 per share on a diluted basis, compared to $1.70 per share for the corresponding quarter of 2016, a slight decrease of 1.2%.

As of the end of the quarter, our balance sheet and indebtedness ratio were solid and the acquisition of the Esso sites were completed without significant impact on our leverage structure and ratios, thanks to our strong cash flows and usual financial discipline. Our adjusted net debt to EBITDAR stood at 2.15 on a pro-forma basis for the acquisition of the Imperial Oil assets in Canada, which puts us in a good position for the CST acquisition.

Our return on equity remains strong at 22.6% on a pro-forma basis. As at January 29, we had $614 million in cash and $1.6 billion available to our revolving credit facilities, providing us ample flexibility to fund future investments. Thank you for your attention and now back to you, Brian.

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

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

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

Thank you, Claude. In the quarter, I think we've all observed some soft financial results for numerous companies across multiple retail channels. In spite of the market, as the leader in our space, the convenience store industry, Couche-Tard continues to deliver positive results to its investors.

We continue to build on our solid reputation, on three key elements: first, our expertise in acquiring and integrating companies, which will continue to develop with Esso, The Pantry, and CST; second, our organic growth; and third, our ability to control expenses. Namely, we think this is another solid performance this quarter, and we have continued determination and focus as to what differentiates us and allows us to continue to generate growth for our investors. We will continue to focus on these three success factors.

I'm proud of the work the teams have been doing throughout the network, all working with one goal in mind, which is to make Couche-Tard and the Circle K brand the world's preferred destination for convenience and fuel. On that note, we'll now answer the questions sent by us -- by analysts earlier in the day.

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

Questions and Answers

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [1]

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

Thank you, Brian. Our first question comes from Patricia Baker at Scotia Capital. With the [nick] picture in Q3 with respect to same-store sales and margin trends, can you review for us the level of competitive activities that you're seeing across your three major markets of Canada, US and Europe and perhaps what you expect over the next 12 to 18 months?

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

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

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

There are some themes this quarter, so I'll spend some time on this because I think this question or related questions were asked multiple times so we'll try to add some color. First of all, the quarter was not the same picture month to month. We saw January like we've seen some of our other competitors be the weak point in the quarter, and in some areas surprised us with the weakness.

I'll touch on our core three geographies. In Canada, traffic was relatively weak compared to the US and Europe. It was our only market with negative traffic growth and negative traffic.

The East being stronger, the West, particularly the oil sands, Alberta, being the weak point, and that trend has continued really since we saw the decline in crude oil prices from the low $100s to as low as the $20s and now it's sitting in the $40s and $50s. The East has been stronger. Gross profits increased in the core business, and then certainly been assisted by the acquisition of the Esso network and we'll talk about that in a little bit more detail.

In Europe, traffic remains positive and we've seen nice slow steady growth there. The basket has also been positive, and we've seen gross profit and I'll talk about ex-Ireland for a second. Ex-gross profit percentage ex-Ireland grew in the quarter when compared to the prior year. Ireland does have a negative effect on our European results. That's really two factors.

We've got a legislated margin around cigarettes, which drives the margin down. And we do not have the same penetration of car wash business in Ireland that we do in the rest of the market. So net-net, we have a lower gross profit but higher throughputs in Ireland than many other countries.

Then I'll switch to the US. Traffic for all four periods in the quarter, all four months in the period, were positive across the US. January was weaker, as I mentioned earlier. When I look at geographies within the US, Texas and Oklahoma, the shale country, we see weakness in that part and that's consistent with some of the metrics we've seen out of some of our competitors.

And then the West Coast really in the last two periods which we think was affected by two things. One, a very unusually wet period as they've recovered from a five-year drought. And also we saw the smoking age change specifically in the State of California from 18 to 21 in this period. So we have to see how that plays out, but certainly we've seen some softness in the tobacco category in California.

When you switch to gross profit, if we exclude cigarettes, gross margin in all other categories is actually up quarter over quarter by about 20 basis points. The decline you see in aggregate is the result of two things. One is, it's increasing mix in cigarettes, and that's largely our Pantry stores. We felt they under indexed the market, under indexed us specifically in terms of volume or cartons per store per week. So we've had a concerted strategy to grow tobacco and cigarette volume in those stores.

And secondly, we've seen compression really across the US in our cigarette gross profit, as we've not been as effective at passing through cost increases from RJR and Altria to the consumer. So that's really the picture across all three of those geographies.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [3]

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

Thank you. Second question from Patricia Baker is related to the first question. Can you comment on how you see the consumer behaving? Do you see any difference vis-a-vis the consumer in each of your respective markets?

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

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

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

I'd start by saying there's a lot of noise in the quarter. So we're reluctant to knee jerk or call anything a trend at this point, particularly when January seemed to be a little bit of an outlier and we're seeing some strength as we get into March.

Around the noise, we had elections, hurricanes, ice storms, thunderstorms in the west. We aren't a big Company to talk about weather results, but again it did introduce a lot of noise into the quarter. So I'm not drawing strong conclusions about the consumer at this point.

We'd see very strong traffic in some of our geographies and weaker in others. I've touched on in the US the weakness being, particularly for us, focused on the West Coast, Oklahoma and Texas.

And as I mentioned, Europe has been very steady. We couldn't be happier with the rebranding to Circle K, taking down the 100-year old Statoil brand. We've seen very consistent and positive traffic trends in Scandinavia as we've rolled out the Circle K brand, so feel very good about our business in Europe.

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

Claude Tessier, Alimentation Couche-Tard Inc - CFO [5]

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

Thank you. The next question from Derek Dley at Canaccord Genuity. Can you comment on the recent concern surrounding changing RINs legislation? And recognizing this impacts only to US volume which are blended with ethanol, can you help quantify any impact you may or may not have as it relates to your fuel gross profit per gallon?

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

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

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

I'd start by saying what I've repeated in previous quarters that we believe it's impossible to quantify the exact value of RINs. It's impossible to say how much of that is making it into the competitive market, specifically the racks today. That being said, I think with our scale we believe we buy fuel very well, and there are markets where the RINs do bring us an advantage. Although in the context of our fuel business, not overly material.

I would also say that there's been a lot of press around changing the points of obligation. We buy fuel differently than some of our big public competitors. We're heavily involved with, our major brands, the Exxons, BPs, Shells of the world, and they tend to be the refiner and terminal owner/operator or have the space.

So in many of our relationships, if the point of obligation were changed to the terminal, we don't see it materially impacting whatever advantages we may have in the market. Then finally I'd say that based on our understanding of the legislation, there would be a long legislative process necessary for any change in how RINs are handled or RFS is handled overall. So we don't anticipate any near-term impacts around the RINs.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [7]

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

Second question, can you provide an update to your synergy expectation related to the Esso and Topaz acquisitions, and how much have been identified or achieved to date?

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [8]

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

Sure, I'll touch on both, and I also want to start by making it clear that both are not just self-contained synergies. We've got reverse synergies also in play here, both in terms of allowing us, for example, in Canada and I'll start with Esso. To purchase better for all of our sites across Canada in many of our categories.

So we've seen benefits in merchandise cost of goods sold, our freight costs for hauling fuel. We've been able to leverage our warehouse in Quebec to service much of the Esso network.

We've seen strong merchandise growth out of the Esso network, and we're also very excited about how the Esso brand is performing. And particularly as we prepare to rollout synergy fuels which we've seen deliver very strong results in other markets. So we feel we're well ahead of our plans with the Esso network in Canada, and again very confident we'll see strong results out of that file.

Topaz just came back from their, actually a few weeks ago, on a market tour. Our synergies are higher than we expected when we consummated the transaction in some similar categories, fuel and hauling, merchandise, our OpEx. We've uncovered opportunities there.

There's really one delay or one big synergy to capture and that's integrating the IT platform. Ireland ran an SAP installation, we run JD Edwards. So there's probably a year that it will take to integrate that business onto our platform which will release some additional synergies.

But then I would also be remiss in not saying that Topaz is full of a lot of great practices. Whether that be private label or food, where I would say they're if not the best business unit we have in the world in terms of food, very high on the list. And there are certainly products and offerings we're excited to take first to some of our other markets in Europe, but hopefully soon in North America as well.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [9]

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

Great. The next questions are from Christopher Li at Bank of America Merrill Lynch. Recognizing that it's still very early days, in Norway, where you have installed charging stations for electric cars in certain sites, can you share with us the experience so far? How is the performance of those stores compared to the traditional fuel stores?

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

Claude Tessier, Alimentation Couche-Tard Inc - CFO [10]

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

So we have now over 95 stores with charging station in Scandinavia, and most of them are in Norway and Sweden, and we have also 17 in Denmark. So it is still early days for us to come in and draw definitive conclusion, but what we see as far as behavior and most of the consumers are stopping at our charging station are mostly doing top half in terms of charging their cars. And it's usually what we encounter is a stop that would last between 15 and 20 minutes.

So during that pause, usually the customer takes the opportunity to take a good coffee and come into our store. So it has an impact and we've seen the impact in our stores of those customers spending a bit more time in our station. So but it's still early days for us to draw a definitive conclusion. We are monitoring it closely though, and we're trying to see how we could make those stop at our in-service station benefit to our business model.

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [11]

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

Just to put it in context of let's say a site did 1,000 customers a day inside, the penetration is still so small. The volumes to the charging stations really is hard to detect in any individual site's results so far.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [12]

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

Second question, did the US merchandise gross margin this quarter benefit much from procurement cost savings from the new supply contract for the tourists in the Southeast?

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

Claude Tessier, Alimentation Couche-Tard Inc - CFO [13]

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

So the transition for the stores in the Southeast for the new supply contract took place at the very end of the quarter, so probably the two last weeks of the quarter. So there wouldn't be a minimal impact on the margins on the transition to the new contract.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [14]

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

Thank you. Next questions are from Irene Nattel at RBC Capital Market. Although Q3 same-store sales growth in the US and Europe was strong, the offset was pressure on margins.

While here in Canada, the recently acquired Esso stores seem to be having a positive impact on volumes and margins in both gas and inside stores. Can you talk about the competitive dynamics and consumer spending trends across regions, and also the impact of acquisitions on reporting margins and any opportunities you've identified for (inaudible) synergies?

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [15]

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

I think we've got some overlap with my first question, but I'll add a little more color, particularly around the Canadian fuel margins. We do have in our heritage network a mix of what we call commission sites where we're paid a commission.

We don't actually own the fuel in the ground, maybe not even set the retail price and we're paid a commission for handling it. So when you look at our margins on our legacy network versus what you see now with Esso or even looking at Ultra Mar, you get a truer picture of the fuel margins that we would expect to see longer term both in Quebec and Ontario.

Second I would say in recent years, we've seen stronger margins out of Ontario than some of the other parts of Canada. And so to the extent that the Esso network has a good concentration of sites, particularly in the GTA, we see positive margin impact from that as well.

I think I've touched on the traffic trends. And again I would say Canada was flat without Esso, and you saw about 140 point increase quarter over quarter with Esso and that's again largely related to the fuel.

And Europe I touched on earlier, ex-Ireland was up. Ireland -- with Ireland included about 150 points down, and again that's largely just the mix with less car wash penetration and a regulated tobacco market. Claude, anything to add to that? All right, thanks.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [16]

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

Second question, can you please provide us with an update on two key initiatives, the Circle K rebranding and food?

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [17]

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

So as Claude touched on in his comments, our goal was to do Scandinavia, so 910 sites, and that is complete and delivering very strong results. Particularly I'll point out Denmark. Denmark is a market where it was taking down not only the Statoil brand but Shell, our Shell acquisition.

And that market traffic is actually up 4% in the quarter, and again that's taking down a 100-year old Shell brand and a very well known Statoil brand. So very pleased particularly with Scandinavia, and we'll start the rest of Europe kicking off as early as next month.

On the US, our goal was 1,900 locations. We've got about 1,000 complete, so we are behind. As I said last quarter, significant permitting issues and also some weather issues, and the third dimension would be supply chain issues in getting fully ramped up in the Southeast.

We expect to close the majority of that gap before the end of the fiscal year, finishing about 1,700 of the planned 1,900 locations in the US. Then we'll continue, obviously, as we enter our new fiscal year with another 2,500 or so locations planned for the coming year.

On the food side, FFI, which to remind everyone is prepared fresh foods with a third-party commissary and frequent delivery via either our supply chain or a third-party supply chain. We've now got 1,229 sites on this program, and for this year our goal was to rollout 202. To date, we rolled out 156 so I think we're in good shape to meet our target there.

On Simply Great Coffee, Europe is done. We're now rolling out Ireland. My visit showed that some very encouraging results in the 20 or so sites that we put Simply Great in already, so we'll focus on finishing Ireland. And then in the US, we had a plan this year of 505 locations, and through the third quarter we've rolled out 409.

Made To Go, that's our concept with really a kitchen in the store with a fairly extensive prepared-on-site menu. We've now got 10 sites open, primarily Texas, Arizona, and the North Carolina markets.

The final category I'll touch on is bakery, a concept we've called 2.0. So a bakery step up program. It's been rolled out to all of our sites now in Europe and delivering very strong results there.

In the US, we have a plan this year of 580 locations with fresh pastries. We've completed 140, but we have a very large install with a third-party provider that we used in Arizona and have brought to the East Coast. So we expect to meet our goal of 580 additional sites with fresh bakery here in the US by the end of the year.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [18]

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

The two next questions are from Martin Henri at GMP Securities. Mr. Henri's first question was about same-store sales in Canada, I think we already covered that so we'll skip to the second question.

What explains the significant increase in fuel margins in Canada? Are they sustainable at $0.08 per liter?

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

Claude Tessier, Alimentation Couche-Tard Inc - CFO [19]

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

So yes, we think they are sustainable and that they are mostly due to two factors. So the first factor is really a growth in our margins in the legacy Max network. So we had a good quarter there, and also in Eastern Canada.

And also the second factor is mostly Esso. So the bulk of the increase is coming from the Esso contribution to the network. So we are now more exposed to central Canada markets for the margins, and so more influenced by the central Canada margins pattern.

And we are also benefiting mostly from the Esso brand, and what it brings to the consumer. So as far as offer for the regular and also mostly premium fuel offerings. So we think that those margins are going to be sustainable, and we're going to be able to maintain those margin's level.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [20]

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

The next two questions come from Peter Sklar at BMO Capital Market. Your SG&A expenses increased by 8.5% year over year due to acquisitions.

Can you elaborate on the structure of the relationship with the Esso dealers and Canada for both fuel and merchandise, and indicate whether or not you expensed [your] SG&A for accounting purposes? Also, was there any corporate SG&A that you would have generated as a result of the Esso acquisition?

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

Claude Tessier, Alimentation Couche-Tard Inc - CFO [21]

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

So last quarter, if you look at our results, we were showing a 4% year-over-year increase for acquisition, and that was mostly driven by Topaz integration. So integrating the network of Topaz into our operations.

We are now integrating this quarter Esso, and also our smallest [tone-in] acquisition that we've done, so as well as Topaz. So combining those three acquisitions, this is bringing our year-over-year expense to 8.5%.

So furthermore also, I would also like to refer you to our MD&A to other details on how we are dealing with the Esso integration and transaction. So as you are going to be able to see a car wash commission is included in our merch margin, and a commission also for our stores are included in our store merch margin. So that influences positively our margins.

Fuel is operated as corporate, and also we are supporting some store expenses like tax, utilities and credit cards. So we're being affected by the integration of Esso as we're taking on some expenses, store expenses. Also as far as corporate SG&A, there's only a small number of people that we are taking over to manage the network in Ontario and also in Quebec, so it's not a material integration in terms of corporate SG&A.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [22]

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

Mr. Sklar's second question was about fuel margins in Canada. I think that we've already covered that.

So the next two questions are from Mr. Michael Van Aelst at TD Securities. US merchandise same-store sales were the weakest in almost four years. You mentioned Hurricane Matthew as one impact, are you able to quantify its impact on same-store sales and same-store volumes.

Some other C store operators blamed weak trends on the ice storms in the Southeast. How much of a factor was this for Couche-Tard? What other factors do you believe negatively and positively impacted same-store sales?

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [23]

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

I think we touched on quite a bit of it earlier, and it's something we strive not to talk about a lot internally because good and bad things do happen every year. This year in addition to the Matthew and certainly the ice storm which affected a lot of our sites in the Southeast, we had the very wet experience in Arizona and the West Coast. There's been delayed tax refund, it's hard to say what impact that's had on consumers.

On the positive side, we've had a mild winter in a lot of the US. So in theory, that's a benefit to people getting out and being in our stores.

And then the other one that would be a negative, we had a very large lottery draw in January last year as we approached that billion dollar prize. And certainly we didn't have a repeat of that and that's certainly impacted traffic year over year. But again, we're focused on building on the things that we think create sustainable competitive advantages for our Company, and try not to get caught up in the noise of these events.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [24]

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

Mr. Van Aelst's second question was about RINs, and I think we covered this question. So moving to Keith Howlett's questions from Desjardins Securities.

His first question was about SG&A at Esso. I think we covered this.

The second question from Mr. Howlett is the following. The impact of growing private label sales and food service sales were not evident in convenience store gross margins. What factors offset the positive impact on gross margin of those two trends?

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [25]

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

So I would say first of all in private label, very pleased with the development. Our volume same-store sales in private label are up over 25% year over year in the US, and over 20% year over year in Canada and continue solid growth in Europe.

And then we're excited about CST in that regard. We think they are a couple of years ahead of us. When you look at the penetration at CST, we are in that 5% to 6% range.

We think they are closer to 10%, and there's some SKUs that we're very interested in understanding our ability to put those into our network and generate positive margin contributions. So more to come on the private label, but we're on a good path and more to come with CST.

On food service, I'd leave you with the fact that both in the US, Canada and Europe, food grew at a faster rate on a same-store basis than overall merchandise sales did within the stores. That being said, as we talked about earlier, the impact in the US of both growing tobacco in the southeast in The Pantry network at a faster rate and then margin compression overall for the category really swamped those results. It's just the cigarette category being a larger category.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [26]

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

Thank you. The next two questions are from Mark Petrie of CIBC. His first question was about OpEx and expenses as related to acquisitions, and I think you covered this.

So the second question is about outside of issues related to volatility in the oil prices and the inclusion of the lower margin Topaz business, what factors can you highlight in the performance of the European fuel business? Any change in the competitive dynamics in any particular market?

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [27]

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

I'd repeat by saying the Circle K brand is doing great. We had certainly a traffic risk we thought, but then also a quality risk as Statoil was consistently ranked across most of our countries as the highest quality fuel. But our premium penetration has held and continues to grow in Europe, which is a significant piece of our margin contribution there. So pleased with that.

We recently launched our first mile site in Ireland as we introduced the brand there, and I'll put a little color into Ireland margins. I would characterize them as being very healthy by EU standards, but we do deliver and sell a lot of bulk and wholesale fuel that's to commercial customers and also to other retailers at very low margins. But it's synergistic with our terminal infrastructure and supply capabilities into the country.

So it's a solid business for us to be in, but it certainly does skew the cent per liter when you look at margins. But again, the core retail margins are very strong. So overall, I'd characterize Europe as being very steady and consistent across the core markets.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [28]

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

Next questions are from Jim Durran of Barclays Research. Mr. Durran's first question was about same-store sales in the US, and we already covered this.

So moving to the second question, was the Esso integration the primary contributor to the significant increase in reported Canadian merchandise margins and gas margins? Do you include car wash revenues and gross profit in the reported merchandise revenue and gross profit or is this in the other category?

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

Claude Tessier, Alimentation Couche-Tard Inc - CFO [29]

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

So we already covered most of the questions, so I'm going to bring a bit more color. But like the core merchandising, yes, with what we already mentioned. The commission on food is part of the merchandising margin, so the store's commission that we're receiving is part of a merchandising margin.

Fuel also is a strong contribution of the Esso brand in the Ontario market, so it's contributing to our margins. And we're [treating] that as corporate stores. And finally concerning if car wash revenue and gross profit is in the equation, no it's not part of the equation. It's the commission that the agents are giving us that it's booked in our merchandising and their service gross profit.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [30]

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

The next two questions are from Vishal Shreedhar at National Bank Financial. The Imperial Oil acquisition has high value real estate. Can you give us some of your thoughts on the real estate strategy? Will there be divestitures, if so, what is the timing and how significant could the divestitures be?

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [31]

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

Just to expand on that question a bit. Shareholder value is first and foremost the priority. We don't view ourselves as a real estate company, so if a property has a higher and better use we will certainly try to harvest that.

With Esso specifically, we do believe there are a number of properties that have a higher and better use than being a fuel and convenience store. At this point, I think that it's difficult to quantify that. It just depends how far we want to take it in the process.

For example, if a site in Montreal should be a high rise, you could sell it to a developer or you could do a little work yourself and get the zoning cleared to get rid of height restrictions as an example. So I would say early, but there will be some divestments harvested.

And then I would also broaden it to in the context of CST, we've taken a project on to really look at our entire real estate portfolio globally and take a hard look at any non-strategic assets that may be sitting out there. We do a good job I think year to year, but in the context of bringing CST on we're going to take a really hard look and you'll see us in the coming months come out with a strategy to divest some non-core assets as part of that purchase.

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

Claude Tessier, Alimentation Couche-Tard Inc - CFO [32]

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

Could you give us an update on fuel purchasing and vendor concessions? Where are we with this initiative?

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [33]

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

I'm not quite clear what that refers to, but I'll take a shot at it. Because I think in a prior quarter, we had given an update on our fuel relationships in Europe, specifically with Statoil, as that agreement is expiring next January.

Since last quarter, we've run what we think is a very successful process where I think we created some win wins, both for us and our supply partners in Europe. Statoil will remain a very important partner, but we're also broadening and diversifying our supplier network significantly. And that will result in improved conditions in a number of markets, but that contract does not -- in transition does not take place till this Fall.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [34]

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

Thank you. Next questions are from Bob Summers at Macquarie Securities Group. So Mr. Summers' first question was about trend, and we've already discussed about this.

So moving to the second question, after roughly eight quarters of gross margin expansion in the US, you posted a modest decline this quarter. Given unevenness across the retail landscape, widening spreads between home-at-home and food away from home pricing and general comments on increased promotions and competition, what was the source of the margin erosion? And was it to the extent it involved price investments proactive or reactionary, and should we expect it to persist?

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

Claude Tessier, Alimentation Couche-Tard Inc - CFO [35]

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

So we already commented on the decline on the margin in the US, and it was mostly driven by our cigarette improvement -- the mix of our cigarettes improving in The Pantry and the regions where The Pantry stores were. So it's basically the impact on the margins.

Excluding that, I think the margins were maintained comparable to last quarter or even last year. So we're pretty confident with the margins as they stand, and it was not any competitive or reactionary response in that lower margin. So it essentially makes issue and counter in the quarter.

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [36]

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

Next two questions are from Tal Woolley at Ace Capital. Following the CST deal, you will have closed your largest transaction to date and will still be integrating several meaningful sized deals.

With the potential for even larger US assets like Speedway to be available to buy, can you comment on the Company's appetite for larger scale M&A in the US post CST? Is it still high or are your priorities focused more on entering new geographies around the world after CST? Yes, I certainly won't comment on any specific files or opportunities, but I think our structure and discipline around integration positions us well to do additional deals, really depending on where they're at. The way we structure our business units and our shared service centers, which include IT and accounting, we are able to take on files in different geographies concurrently without significant risk on that side.

So I'd say one, the capability is there. Two, I think North America is still a very attractive market for us to develop in. We like the consumer, we like the environment here.

That said, we're watching files also in Europe. And as we've said in the past, while it's not a priority today, if the right opportunity were to arise in Asia we would love to have a platform very similar to Statoil to participate in Asia on an equity basis.

So again, we're continuing to watch for opportunities. And as long as we don't feel that we're risking the integration of an existing network, which is first and foremost our priority, we would certainly take a look at other deals.

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

Mathieu Descheneaux, Alimentation Couche-Tard Inc - VP of Finance [37]

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

Great, thank you. And Mr. Woolley's second question was about margins in the US, and we've already talked on this. So that's all we had for today. Thank you, everyone, for joining us on this call. Have a nice day and you may now disconnect.

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

Brian Hannasch, Alimentation Couche-Tard Inc - President & CEO [38]

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

Thanks, everyone.

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

Claude Tessier, Alimentation Couche-Tard Inc - CFO [39]

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

Thank you.

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

Geoffrey Haxel, Alimentation Couche-Tard Inc - SVP of Operations [40]

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

Thank you.

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

Operator [41]

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

This concludes today's conference call. You may now disconnect.