CST Brands Earnings Call Insights: Merchandise Side and Q2 Details

CST Brands Inc (NYSE:CST) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Merchandise Side

Ben Bienvenu – Stephens Inc.: So, when we look at the merchandise side of the business, there are number of levers that you all can pull to improve. Could you give us a sense of what some of those initiatives could be? And then also, maybe a realistic timeframe over which those could occur? And then to any extent you could give us a sense of magnitude that might help as well, so that we could maybe monitor progress over the course of next year or so.

Kim Bowers – Chairman, President and CEO: I’ll start off and then I’ll get Hal Adams who’s our Chief Marketing Officer to weigh in as well. We are looking at couple of things kind of at the high level. We have a very strong private label brand offering here in the U.S. Fresh Choices brands. And we are working currently to identify those products to roll into the Canadian marketplace. In Canada we do not have a private label program active right now. And so our folks are teaming up together to begin to roll that out into Canada and we would expect, that happening in six to 12 months. Then separately as we continue to talk about food and look at food with our new store growth it certainly gives us the capacity inside the store for food offerings. And we are looking at our food programs and like to increase those. We’ve added some additional talent, we just recently hired a seasoned executive from the foodservice industry and he’s going to help us certainly look at our stores differently and our food offering differently and bring some fresh perspectives to the table for us. Hal do you want to add into that?

Hal Adams – SVP and Chief Marketing Officer: This is Hal Adams. Obviously in marketing and merchandising we always have several things flying around in the air to get new customers, but I’ll just outline five things I think are important that we are doing. Number one we are attacking the cigarette category on a micro market basis, with some information that we have by (Zipco). We are evaluating each of our stores to determine whether we are capable of adding share to that category by using the lever of price or whether we should be taking margin in the category depending on what’s happening in that micro neighborhood. So we’ve been successful in that in the last three to four months and I would expect that we continue to use that, we are kind of using it as 100 stores at a time, so right now we have about 200 stores that we are playing with in our network. The second is we have become pretty dedicated to attacking customer account on a micro market basis, more so than we had in the past. So for example in certain areas where we might see that we have core customer traffic problems, we’re attacking that using non-traditional categories that we might not have used in the past for example energy drinks, milk, ice. So we’ve used these things in different markets around our network to attract core customer account increases. So we like the results that we’ve seen with that in the last 100 days or so, so I would expect that we would continue to use that kind of as a guerrilla marketing technique. Third I would tell you that we are playing with the fountain category in San Antonio. We’ve got 22 stores that we’re partnering with Coca-Cola to test their free style technology in the fountain category, fountain is an important touch point for our consumers in our stores. And we are interested in finding out if we can have some break through understanding of what the – how the fountain customer react to 120 choices at the fountain machine, when we put those in. So we are very excited about that and that’s been in our store now for about 45 days. So it will take about four or five months to track back to see how we like it before we understand what place that takes in our network. Then number four I would tell you that we are getting ready to play more heavily in the e-cigarette category. We have kind of been in that category and around it. We in the next two weeks about 400 of our stores will be playing in that category more fully, to try to attack that whole tobacco business and the changing of customers to that category. Then lastly I would reinforce what Kim said about foodservice. We think that we have an opportunity immediately in the next 90 days to six months, in balancing our labor and our foodservice programs to get deeper into the daypart we’re traditionally very good in the morning and I think we’ve talked about that in the past with a few of you guys and what we are looking for is to take that morning expertise and get it deeper into the day, with the same equipment that we have in our stores. So we think that presents us a big opportunity. So those are kind of the touch points that we are using right now to attack same-store sales…

Ben Bienvenu – Stephens Inc.: Then when we look at cash on the balance sheet you touched on what the free cash would be and then obviously you are ramping store growth next year, looks like about $5 million per store that’s about $190 million there for stores. Could you talk about the balance of that cash maybe prioritizing that?

Clay Killinger – SVP and CFO: When you say the balance of cash I think we certainly have more cash on the balance sheet than we had initially anticipated to the Form 10 a lot of that is free cash. So we have between that and our revolver plenty of capital liquidity to be able to expand. So I don’t necessarily foresee any issues from a capital liquidity program standpoint to be able to meet our NTI growth next year.

Ben Bienvenu – Stephens Inc.: But beyond NTIs obviously you are looking at a dividend, are there other areas acquisitions that you might be looking at. How do you rank order the balance of that free cash flow, where you might deploy it?

Clay Killinger – SVP and CFO: I would probably say Kim you can jump in on the acquisition standpoint. But our strategic plan as we have outlined internally is primarily focused on internal NTI growth and it’s because we can place the stores where we want them. We can design them the way we want them and we have an adequate land bank to be able to do that. As acquisitions come about and they are presented to us all the time we do critically look at those but we are not chasing acquisitions for acquisitions sake and we want to be smart about it.

Kim Bowers – Chairman, President and CEO: We also – our term loan is also amortizing so some of the cash really to address the debt repayments there.

Ben Bienvenu – Stephens Inc.: I guess lastly, when we look at the Canadian dealer business are there any significant barriers to bringing that model to the U.S.? Obviously there would be some CapEx that will have to be deployed to fill out perhaps some wholesale assets. But what level of – how easy will it be to get that business to work in the U.S.?

Kim Bowers – Chairman, President and CEO: Sure. Certainly one of the things that we talked about when we went on the road in April is, that one of the benefits of the separation from Valero is that we could grow our wholesale business here in the U.S. Our wholesale business in Canada as you mentioned is very robust and we would anticipate and we plan to continue that here in the U.S. as well. We started it on a very small scale with a handful of stores from our Crackerbox acquisition that we did last summer are now in dealer hands and we are working with them in that segment. So we certainly will continue to focus on that. As it is an opportunity that we didn’t have pre-spend that we do have today and we look forward to growing on that.

Q2 Details

Benjamin Brownlow – Raymond James: Just to clarify I guess on the second quarter numbers. Did the second quarter numbers include a full quarter of public operating costs and the new fuel arrangement or is that only reflected for two months of the quarter?

Clay Killinger – SVP and CFO: It’s a full quarter.

Benjamin Brownlow – Raymond James: So the new fuel arrangement is reflective throughout all three months?

Clay Killinger – SVP and CFO: Yes.

Benjamin Brownlow – Raymond James: Just thinking about the footprint longer term, you touched on closing some of the underperforming stores. Can you give us an idea of the number or the percentage of store base that you see underperforming your expectations at this point and can’t divest in that longer term?

Kim Bowers – Chairman, President and CEO: Yes. I mean as we said remember on the road in April it will probably be ones and twos here and there as market conditions change around the particular store on Corner. What we see is sort of over the next six to 18 months is really we are evaluating lease expirations in Canada more of our property is leased up there and so as a result we have more opportunities to review those leases and in some cases the landlord decides not to renew those leases as well. But it is not a significant number. I think Clay, you and I talked about it yesterday. It’s in the 10, 15 range over the next 18 months.

Benjamin Brownlow – Raymond James: Just last question, the fuel margins are obviously very difficult to predict and you gave a four year range there. Last year’s third quarter seemed abnormally low. Can you give some color around that fuel margin last year’s third quarter and any more color you can give on the quarter to-date trends for the current quarter?

Kim Bowers – Chairman, President and CEO: So I am going to let Tony handle that one.

Tony Bartys – SVP and COO: This is Tony Bartys. Yes. Ben it’s – we look at crude last year, we saw almost a $24 decrease from the end of March all the way through the quarter. As a result we were able to sit up there with nice margin territory, drive some volume and our competition was doing the same thing. However, it has flipped around on us right, it went from $82 at the end of June up to $94. We had a $12 increase. What we are seeing this year, we don’t – we still have some increase coming at us. We are looking at about $10 increase in crude. But we think there is a lot more stability. We are not going to be as volume driven. We used to be part of Valero and (joint) fuel from our refinery was a big issue and we had a more holistic viewpoint of how we ran our fuel with them. It was more profit maximization for Valero, not just for us at the Store segment. So this year being a separate company we are going to have a little bit different viewpoint on how we do that and we are coming off – we are not going to have that big, steep crude run, we are going to have to overcome from a price standpoint as well. So I think we would be better positioned this year than we were last year.