CST Brands (CST) Kimberly S. Lubel on Q2 2016 Results - Earnings Call Transcript

| About: CST Brands (CST)

CST Brands, Inc. (NYSE:CST)

Q2 2016 Earnings Call

August 05, 2016 8:30 am ET

Executives

Randy Palmer - Executive Director – Investor Relations

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

Charles A. Adams - President, Retail Operations

Stéphane Trudel - Senior Vice President-Growth & Strategy

Analysts

Benjamin Bienvenu - Stephens, Inc.

Christopher Mandeville - Jefferies LLC

Ben Brownlow - Raymond James & Associates, Inc.

Damian Andrew Witkowski - Gabelli & Company

Alvin Caezar Concepcion - Citigroup Global Markets, Inc. (Broker)

Bonnie L. Herzog - Wells Fargo Securities LLC

Bob Summers - Macquarie Capital (NYSE:USA), Inc.

Operator

Welcome to the CST Brands Second Quarter 2016 Earnings Call. My name is Jason, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded.

I'll now turn the call over to Randy Palmer, Director of Investor Relations. Mr. Palmer, you may begin.

Randy Palmer - Executive Director – Investor Relations

Thank you, operator. Good morning, and thank you for joining the CST Brands second quarter 2016 earnings call. With me today are Kim Lubel, CST Chairman and CEO; Clay Killinger, Chief Financial Officer; Hal Adams, President of Retail Operations; and other members of our executive leadership team.

Kim will provide an overview of the CST operational performance for the second quarter along with the general update on business initiatives. Clay will then discuss the CST financial results. And then, Kim will provide some closing remarks. At the end, we will open up the call for questions. I should point out that today's call will follow some presentation slides that our team will utilize during this morning's event. These slides are available as part of the webcast and they are posted on the CST Brands' website.

I'd like to remind everyone that today's call, including the question-and-answer session, may include forward-looking statements regarding expected revenue, future plans, future operational metrics and opportunities and expectations of the organization. There can be no assurance that the management's expectations, beliefs and projections will be achieved or that actual results will not differ from expectations. Please see filings with the Securities and Exchange Commission, including Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for a discussion of important factors that could affect our actual results. Forward-looking statements represent the judgment of the company's management as of today's date and the organization disclaims any intent or obligation to update any forward-looking statements.

During today's call, we may also provide certain performance measures that do not conform with the U.S. Generally Accepted Accounting Principles, or GAAP. We've provided schedules to reconcile these non-GAAP measures with our reported results on a GAAP basis as part of our earnings press release. We should also note that the results provided today by CST represents the business operations of CST on a standalone basis before the consolidation of CrossAmerica Partners LP, but include the income associated with CST owning a percentage of the outstanding common units and all the IDRs of CrossAmerica. Full consolidating information is included in the second quarter 10-Q, which will enable you to arrive at our complete consolidated financial results. Today's call is being webcast and a recording of this conference call will be available there for a period of 60 days.

And with that, I'll now turn the call over to Kim Lubel.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Well, thank you, Randy, and good morning, everyone, and welcome to our second quarter 2016 earnings call. I am pleased with our continued and impressive growth this quarter. We've shown solid improvements both inside the stores and at the fuel pump. And we continued to expand our number of new stores and successfully integrated our recent acquisitions. I could not be more proud of our team members this quarter, who have shown laser focus in growing the company and delighting more customers every day.

You can see some of the key highlights from the quarter on slide four. CST reported second quarter 2016 EBITDA of $98 million, a 23% improvement over second quarter 2015. We grew gross profits as well to $329 million, compared to $277 million for the second quarter 2015, which represents an increase of 19%.

If you will turn to slide five, you can see the growth that our entire team delivered in the second quarter. U.S. merchandise and services gross profit dollars were up 27% and U.S. fuel gross profit growth was up 24% versus last year respectively. In Canada, merchandise and services grew 10% and motor fuel gross profit dollars grew 9% each versus the prior year when measured in Canadian dollars.

I'm also pleased to report that we achieved another quarter of same-store gross profit growth. Our continued efforts at increasing inside store margin which we grew by 110 basis points in the U.S. over the second quarter of last year, with a 33.7% margin capture for the quarter, enabling same-store gross profit dollar growth of 2.4% despite the headwinds we experienced in same-store sales growth in the U.S.

Year-to-date, our same-store merchandise and services gross profits have increased 6% in both the U.S. and in Canada, excluding the effects of foreign exchange. We also continued to reposition and grow our U.S. network with the closing of the sale of our California and Wyoming stores to 7-Eleven on July 7. As you look at the network comparison table at the bottom right of the slide, with this sale, we've effectively exchanged 79 smaller more fuel-focused stores in growth constrained markets for 165 larger format stores with total second quarter fuel volumes increasing from 47 million gallons at the California and Wyoming stores to 74 million gallons at the Flash Foods stores that we acquired.

We also have higher merchandise sales and gross profit potential with room to grow. In fact, we've already opened two NTIs in Georgia and Florida and broke ground on a third just last week. Already, that's three more in just a matter of months than we built in California in the last two decades. And with the timely closing of the sale of a 7-Eleven, we expect to realize a significant tax benefit from the completion of a like-kind exchange strategy with our Flash Foods acquisition.

I am very pleased with the integration of our Flash Foods network and we are on track to achieve our synergy capture goals for this year of approximately $10 million. We also continued to track store operating expenses. If you exclude property and taxes and rent, I am pleased to report that our same-store operating expenses are basically flat, compared to this time last year.

We also remain focused on organic growth. As of today, we've added 13 NTIs to our U.S. network, five to our Canadian network, and have 39 stores currently under construction, and we'll break ground in three more sites next week. This all puts CST on pace to add 55 to 60 NTI stores to its U.S. and Canadian network in 2016. Clay's going to touch on our NTI store performance later on, but I just wanted to state that we continue to be pleased with the pace and the performance of these sites and the overall returns that we've achieved to-date.

And with that, I'll turn the call over to Clay, to review the CST second quarter financial results.

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

Thanks, Kim. I will provide a brief overview of the second quarter results for CST, and then, turn it over to Kim for some closing remarks.

To recap our results, CST reported net income of $27 million, or $0.36 per share, for the second quarter of 2016. This compares to net income of $25 million, or $0.32 per share, for the second quarter of 2015. For both quarters, we've certain special items that included acquisition expenses, gains on sale of assets, legal expenses and professional fees, as outlined in our earnings release. The after-tax income effect of these items was approximately $2 million in the second quarter of 2016 and $1 million in 2015. Excluding these items, our earnings would have been $29 million, or $0.39 per share, for the second quarter of 2016, compared to $24 million, or $0.31 per share, for the second quarter of 2015.

As I discuss our second quarter CST highlights in more detail, I will be referring to slides for our U.S. and Canadian segment operating results. In regards to CST's U.S. Retail segment, if you turn to slide seven, second quarter 2016 net Motor Fuel gross profit increased by $14 million or 24%, when compared to the second quarter of 2015. This year-over-year increase was attributable to a significant increase in overall fuel volumes sold, primarily driven by the Flash Foods acquisition, NTI stores in operation quarter-versus-quarter, an increase in premium and plus fuel sales, along with a modest increase in our second quarter fuel margin in 2016, resulting from continuing volatility in crude oil and wholesale motor fuel prices.

We experienced an increase in the average cents per gallon fuel margin, net of credit card fees, of almost $0.01 per gallon between the periods. For our core stores, our U.S. motor fuel gallons sold per site per day were comparable to 2015. However, with our total store count increasing, our total gallons sold increased significantly, with over 580 million gallons being sold during the quarter. This represents an increase of 20% quarter-over-quarter.

Moving to Merchandise & Services, our gross profit increased $34 million or 27% in the second quarter of 2016, when compared to the same period in 2015. This increase reflects the impact of the Flash Food stores we acquired on February 1 of this year as well as our new to industry stores and our continuing initiatives to increase in-store margins. Quarter-over-quarter, our Merchandise & Services margin improved by 110 basis points.

Turning to slide eight for our Canadian segment results, please keep in mind that our reported results continued to be impacted by the foreign currency exchange rates between the Canadian dollar and the U.S. dollar, which I will discuss in a moment.

Second quarter Motor Fuel gross profit increased by $2 million or 3%. The cents per gallon fuel margin, net of credit card fees, was approximately $0.24 for the second quarter of 2016, compared to $0.23 for the comparable period in 2015.

Excluding the effects of foreign exchange, our motor fuel cent per gallon would have increased by $0.02. Our motor fuel gallons sold on a per site per day basis increased 1% for the quarter. Excluding the effects of foreign exchange, our Motor Fuel gross profit increased 9%, driven by both the increase in fuel margin and fuel volumes sold. For additional comparative purposes, results on this slide are also provided in percentage change in Canadian dollars. Our reported gross profit for Merchandise & Services sales increased 5% for the second quarter of 2016 compared to 2015. Assuming a constant value for the Canadian dollar, our Merchandise & Services gross profit would have increased 10%. This was driven by both an increase in store sales as well gross profit margin expansion.

Our Other gross profit, which substantially pertains to our commercial and residential fuel distribution business, increased $2 million or 18% for the second quarter of 2016, compared to 2015. The exchange rate for the U.S. dollar relative to the Canadian dollar averaged $0.75 for the second quarter of 2016, versus approximately $0.81 for the comparable period in 2015. This represents a devaluation of approximately 7% between the comparable periods. Overall, the decrease in the value of the Canadian dollar relative to the U.S. dollar resulted in a $8 million reported gross profit decline.

I'll now make a few comments about CST's financial position. Turning to slide nine. At the end of the second quarter, we had $193 million of cash and $80 million of that cash was held in Canada. Subsequent to June 30, we have repaid $19 million of our intercompany payable to the U.S. from Canada. The balance of this note in Canada is currently $141 million. As of August 3, we had approximately $419 million available under our credit facility. We used $297 million of the proceeds from the California and Wyoming stores transaction to repay borrowings under the revolvers. This freed up a substantial amount of availability under our revolver providing ample capacity to fund our 2016 NTI program. In regards to our capital spending, capital expenditures for the second quarter 2016 totaled $85 million; $62 million of this went towards our NTI construction. During the second quarter, we completed seven new stores in the U.S. and one store in Canada.

On slide 10, we have provided some guidance for the third quarter. I will not go through each line item in detail, but I did want to note the following. We are now providing you with an average store count range for our U.S. segment for the third quarter. We understand that there're some moving parts during this particular quarter with the sale in transition of the California and Wyoming stores to 7-Eleven along with NTI build, and we thought this would be helpful for you as you model the business. We do not currently expect to see such movement in our Canada store count, so the second quarter statistics should provide you with a good baseline to work from.

Please note that we will be posting our July fuel margins in the next few weeks. We're not prepared to comment on the specific margins today, but recent decline in crude oil and wholesale gasoline prices have been very favorable for our retail fuel margins when compared to our recent second quarter margins.

Finally, on slides 11 and 12, you'll find a schedule that presents the economics associated with our U.S. and Canadian NTIs on a same-store basis. The slides also present our total investment in these sites. When looking at the U.S. NTI same-store results for the 12 months ended June 30, while a few sites located in the South Texas Eagle Ford Shale area did negatively impact period-over-period comparable results, as we stated in the past, our mature NTIs are generating at or greater than 15% cash flow returns. Our Canadian NTIs are generating even higher returns as a large portion of these stores are on leased land and are therefore leveraged.

With that, I will turn it back over to Kim for some closing remarks.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Well, thank you, Clay. And before we open the call to questions, I do want to note that with respect to the strategic review we announced in early March, the special committee of independent directors continues to work with both management and our advisors to explore and evaluate strategic alternatives to maximize value for our stockholders. The process is active and continuing and we're not in a position to provide any comments on it at this time.

That said, the strategic review is top of mind for us and we know it is for you too. However, our management team, the employees here at the service center and those on the frontlines at our stores, continue to focus on the work at hand: managing costs, pushing for increases in sales and gross profits, creating and expanding our unique identity and leveraging our consumer experience by delighting more customers every day. I want to thank everyone for their continued hard work and dedication to our company.

And, with that, I'll open it up to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. And our first question comes from Ben Bienvenu from Stephens Inc.

Benjamin Bienvenu - Stephens, Inc.

Yeah, thanks. Good morning. A question on total U.S. merchandise gross profit. It looks to me so relative to our estimates, merchandise margin was quite a bit better, merchandise sales as you know were a little bit softer. But I'd just be curious to hear maybe how you're thinking conceptually about balancing margin versus sales and then maybe sort of a promotional backdrop of the quarter? And then, what you have slated going forward for promotions on the merchandise side of the business?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Sure. Well. Good morning, Ben, and I think I'll tag-team with Hal here on the response to that question. But we're very pleased with our gross profit improvement, both in U.S. and Canada for the quarter. And a lot of it is not as much pricing and there was pricing in some categories, but it's more of a shift to our new to industry stores, our larger store format and really a mix shift in terms of what's part of the sales.

So, as we open more NTIs and continue to grow that program, our ability to offer higher margin items through foodservice and grocery is really helping benefit this 110 basis point improvement in our margin capture in the U.S. in particular. And so, we continue to focus on that, we did some pricing early in the year on packaged beverages, which has also helped us to capture more of that margin, but I think the results certainly speak for themselves. You can see by our third quarter guidance that we're guiding it to slightly down to about a 90 basis points improvement from a guidance standpoint, so it won't always be 110 basis points improvement, but we're continuing to work on capturing more of that gross profit margin as well as watching the sales side of the equation too. Hal, you want to add to that?

Charles A. Adams - President, Retail Operations

Yeah. Good morning, Ben. One thing I would say is, one of the benefits that we have operating in such a wide geographic area is it allows us to surgically promote in certain areas where we need to spur traffic, when traffic is soft and other areas we can harvest margin when we don't have those same issues. So you can – all the time, we're running promotions in different parts of the country where we need to bring more customers into the stores and we're able to do that without affecting the total margin across the company. So, our promotional philosophy won't change that much quarter-to-quarter, it might just move from area-to-area. So, I hope that's helpful.

Benjamin Bienvenu - Stephens, Inc.

Yeah. It's very helpful. Thanks. And then it looks like your expenses were nicely controlled in the quarter and then going forward, it looks like we'll see further expense control. Just curious on some of the things that you're working through there and areas of opportunity for continuing on expense reduction?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Sure. We know this is one of our key focus areas in particular from the operations team. On the operating expense level, really looking at our labor model, we've updated the labor model for the stores and we've seen some nice reductions in our costs there. And then really a lot of focus on maintenance too and putting more processes around, dividing between the things that are nice to do and the things that we need to do from a stay-in-business standpoint and just having tighter controls around that opportunity there. So, continue to focus on it, Hal and Tony and group continue to focus on operating expenses. And G&A are continuing to level off, so you can see that, as we go forward, obviously three years out now where we need to be from a public company standpoint and are continuing to focus on areas we can reduce G&A too.

Benjamin Bienvenu - Stephens, Inc.

Okay, great. And then, I appreciate the color that you provided on California relative to Flash Foods, it's helpful. If I look at the implied fuel margin for the California and Wyoming stores, looks like it's about $0.15 per gallon for the quarter and that's relative to say OPIS data around $0.35 per gallon for the state of California. That's a pretty pronounced differential and not congruent with the typical differentials and OPIS data relative to the rest of your chain on fuel margin in 2Q or historically. So just hoping to get a little bit of color there and understand why this might be the case?

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

Ben, I would say I think your estimate on the margin we got in California is not quite right.

Benjamin Bienvenu - Stephens, Inc.

And so the...

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

We have better margins than that.

Benjamin Bienvenu - Stephens, Inc.

Got it. So the $7.2 million of gross profit in the quarter versus the 47 million gallons?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Right. We are looking at it, so in terms of just margin there, you are right, Ben, at West Coast has historically been higher margins. The numbers reported there are net numbers from a margin standpoint?

Benjamin Bienvenu - Stephens, Inc.

Okay. Thanks.

Operator

Thank you. And our next question comes from Chris Mandeville from Jefferies.

Christopher Mandeville - Jefferies LLC

Yes. Hi, good morning.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Good morning.

Christopher Mandeville - Jefferies LLC

So, Kim, if I could just look to the Flash Foods' merch margins, as you outlined in slide five there, 34.5% for the quarter and so I guess, maybe I always – I'm misremembering here, but I thought initially you had mentioned that Flash Foods had merch margins below your store base average. Maybe you could just help clarify that for me? Second, if the margins are in fact already above your store base average, where do you think you'd take them over the long-term or maybe what steps are you taking to drive them higher? And then third, maybe for Hal here, with those new NTIs already opened, have you introduced any of your new initiatives into these locations?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Yes. So, Chris, let me tackle some of that and then turn it over to Hal as well. I think what you see there in our margin improvement in the second quarter in Flash Foods really reflects the efforts that we've put into since we closed on that February 1 and (22:21) pleased to see improvement there. We are bringing in more of our programs. We've introduced our Grab and Go (22:27) stores so far and are really pleased with the results there.

So I think it's just continued focus and bringing together best practices from what Flash Foods' doing and then what we're doing as well, and working very quickly to integrate and capture those synergies. As I mentioned in my commentary, we are on track to achieve our synergy targets for this year and in the coming years as well. So very pleased with the acquisition and very pleased with how quickly we're getting the integration up and going.

Charles A. Adams - President, Retail Operations

Yes, Chris, this is Hal. Just to piggyback on Kim, again, very pleased with Flash Foods; great people, great assets, large stores allow us to integrate things like our private label, Grab and Go food program. They really didn't have very much food inside the store. They have a number of QSRs that came with the stores and so that helps of our food business and our margin, but there is room inside the stores for roller grill, Grab and Go and our other proprietary food programs and our integration team led by Steve Lattig has really jumped on that right away to get a quick start on that.

So we expect margin expansion to continue, but, more importantly, we expect the dollars per day in the sales to continue to grow in that region as well. And in the new stores that we've opened there, definitely, adding our food program, we'll be introducing our MTO program from New York and Texas in there, and just being able to synergize those things that we've learned into those large format stores as well, so big opportunities that we see ahead.

Christopher Mandeville - Jefferies LLC

Okay. And then, I guess, maybe seeing how you just brought up the MTO program, any update in regards to what you've been seeing in your Texas market thus far?

Charles A. Adams - President, Retail Operations

Yeah. Thanks for asking. So we continue to be very bullish on that program. Right now, as you might expect from us, we're spending a lot of time working on processes and making sure that it's an efficient, both from the labor standpoint and the menu standpoint. We're looking forward to the end of this year, where we open another 15 to 16 stores in the Southwest here, NTIs with the MTO program. So right now is a great period for us to get really, really good at it. So as we open those stores, we open them with a bang, so more to hear about that, more in the fourth quarter of this year.

Christopher Mandeville - Jefferies LLC

Great. And then, Clay, could just remind me, did Flash Foods roll directly into the core store stats in Q3?

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

They did effective April 1.

Christopher Mandeville - Jefferies LLC

Okay. And so in terms of your guidance, that would be inclusive of this now elevated or higher Flash Foods merch margin, right?

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

That is correct.

Christopher Mandeville - Jefferies LLC

Okay. And then, I guess, maybe last one for me, I guess I was under the impression that we would be hearing something in regards to your real estate JV come Q2. So is there any update there or is that something that's been kind of put on the backburner while the board goes through its strategic review? Thanks.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Sure. As we said earlier, that's been added to the strategic review process itself, so it's just covered by the umbrella review.

Operator

Thank you. Our next question comes from Ben Brownlow from Raymond James.

Ben Brownlow - Raymond James & Associates, Inc.

Hi, good morning.

Charles A. Adams - President, Retail Operations

Good morning.

Ben Brownlow - Raymond James & Associates, Inc.

On the acquisition fees, the $0.04 EPS impact, was all of that in G&A? And can you just go briefly back through what the year-over-year G&A movement was excluding those one-time items?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

You want to take that one?

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

Yes, they do represent the acquisition fees. And I think when you look at G&A, it's fairly comparable to last year and has been into (26:31) our guidance. So we continue to exercise cost control restraints over our G&A activities, as part of just our normal process of controlling costs, but I think we did experience some one-time items with respect to the strategic review in Q2. I would expect there to be continuing expenses in Q3 as well. We will outline those special items in the future.

Ben Brownlow - Raymond James & Associates, Inc.

Great. And, Kim, I know you don't intend to give details around the strategic review, but can you give us any indication just from a timing standpoint or how far along you are in that process?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Yes, Ben. Thank you for the good question, but we really can't give any update at this time.

Ben Brownlow - Raymond James & Associates, Inc.

Understood. Great. Thank you.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Thank you, Ben.

Operator

Thank you. And our next question comes from Damian Witkowski from Gabelli & Company.

Damian Andrew Witkowski - Gabelli & Company

Hi. A question on Canada, it seems like it's turning, and I'm wondering if it's the economy itself, the regions where you are or is it something that you're doing specifically to turn the same-store sales in the right direction?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Damian, good to hear from you. And yes, we're very pleased with the results in Canada. Stéphane's here with me, so I'll let him speak up. He's usually doing this call from Montreal, so he joined us today. But really pleased with the results from Canada. About a year or two year ago, we integrated operations in Canada and the U.S. so the marketing teams are working together and have been really pleased to see a number of our U.S. programs now being rolled out in Canada, inside the store a lot of focus around balancing, obviously, fuel volume and fuel margins to capture the most gross profit dollars. And I think they've done an excellent job in the quarter. And really focusing on new initiatives inside the stores, too. So it's been reaffirming and great to see the results there. Stéphane has done a great job leading that team up in Canada and I don't know, Stéphane, if you want to take credit for some Canada's success as well, so...

Stéphane Trudel - Senior Vice President-Growth & Strategy

I think that generally speaking, the economy of where we operate has been very strong and the programs we've been putting in place have been supporting the growth of the Canadian operations in that geography, so we're very pleased with the results.

Damian Andrew Witkowski - Gabelli & Company

And then looking at the U.S., any noticeable differences in regional performances, and obviously, I'm focused on the Texas market. And your competitor yesterday, I think, reported some numbers and in the Texas region they were less than stellar. And so I'm just wondering if you're seeing a big difference between regions?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Right. No, it's a great question, Damian. And obviously, half of our U.S. stores are in Texas and we heard in reports yesterday, and while we did see some softness in the oil patch area, the softness was not quite as pronounced is what we heard yesterday. When we look at Texas, if you think about it, it's a very diversified state, and particular stores are spread out from Dallas to Austin, San Antonio and Houston, and South Texas, as well as El Paso. Each of those markets have their strengths to it.

For example, even in Dallas, we continue to see growth both on revenue and gross profit lines there. And while we don't break down by market within Texas, we do like the diversity, and so when we get some softness in areas like South Texas, as we've said before, it really doesn't have a significant impact on the overall results themselves.

We stay focused on growing gross profits and as Hal said, given our diversity from a geographic standpoint, we're able to pivot our promotions around and really target areas that we're seeing a little bit of softness to try to improve the number of customers coming in those doors. So if you took out the Houston, Eagle Ford area, where we are seeing a little bit of softness, we have low single-digit same-store revenue growth, but however if you include all of our markets together for the quarter, we still have same-store gross profit growth of 2.4%, year-to-date 6%. So continue to focus on on really maximizing gross profit dollars through focus on both the sales side as well as the gross margin capture.

Damian Andrew Witkowski - Gabelli & Company

Okay. And then just one more. If I look at your guidance for the third quarter, the only line item that's down versus year-over-year is the gallons per store per day in the U.S. And I'm just wondering what is your thinking in terms of why that should come in lower than, I know it's been the trend, but I mean, is it that you're still – is it the value focus, value over volume or is it really due to some softness that you're seeing in certain markets?

Charles A. Adams - President, Retail Operations

Yeah, Damian, this is Hal. Thanks. We should have mentioned this before, but there is a bit of a difference in the gallons per store per day in the trade from California to Flash. And so, there is not a change in our trend, it's just a change in the mix of our stores.

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

Right. And we estimated that to be about 100 gallons per store per day. So, if you added that to the current year guidance, you get basically a flat.

Charles A. Adams - President, Retail Operations

That's right.

Damian Andrew Witkowski - Gabelli & Company

Okay.

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

A flat number.

Damian Andrew Witkowski - Gabelli & Company

Thanks and congratulations on the quarter.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Thanks, Damian.

Charles A. Adams - President, Retail Operations

Thanks.

Operator

Thank you. Our next question comes from Alvin Concepcion from Citi.

Alvin Caezar Concepcion - Citigroup Global Markets, Inc. (Broker)

Hi, good morning. Just following up on that Texas question. I'm just wondering if you're able to quantify how much of a sales impact it was from being exposed to some of those oil producing regions or even for weather like in Houston for example?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Sure. Sure. We obviously saw some weather in Houston, I think we counted 39 rain days in Houston alone. But, as we've said before, weather is part of that business. So, we need to continue to focus on it, and not use it as an excuse to make explain it. But we need to keep working at it. When we look at the overall, again, if you take out Houston, Eagle Ford, we have low-digit positive same-store revenue growth, but again all included, we still got a total same-store gross profit growth of 2.4%.

So, we do see some dips in South Texas and Houston starting to show those signs. But, overall, when you look at Houston, it's still the fourth largest city in the U.S. It's got a huge presence from a commuter consumer standpoint. Long-term it's expected to continue to grow from a population standpoint. It's just three hours away from a distribution center, if you're in San Antonio. And so, they continue to benefit from our efficient supply chain. And so, while we may see little slight softness in the economy in Houston, unlike 20 years ago, when we went through cycle there, the Houston economy is much more diverse and flexible and I think, less dependent on the energy sector to prosper. So, I think in the long run, Huston will still continue to be a strong market for us and we continue to focus our promotional opportunities to try to draw more customers into those doors.

Alvin Caezar Concepcion - Citigroup Global Markets, Inc. (Broker)

Got it. Thank you. And question about fuel growth margins in the U.S., it did sound like – and correct me if I'm wrong, it did sound like it was growing in third quarter to-date year-over-year. But as you look into the back half, overall would you expect the fuel gross margins to be a headwind?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Yeah. We don't guide on fuel margins, but that is one of the reasons why we've been posting our monthly fuel margins and we should have our July margins up here in the next couple of weeks and you can expect the same for August and September. So it's obviously a volatile market, crude goes up and goes down and does give us opportunities to improve our margin and make sure that we're balancing again volume and margins to maximize gross profit dollars at each corner, but we really don't guide to the outer months.

Alvin Caezar Concepcion - Citigroup Global Markets, Inc. (Broker)

Thank you. And then my last one, speaking of that balance that you just spoke about, on an annual basis just longer term, I mean would you expect the industry or yourself to be able to sustain a $0.15 gross margin or should it be especially higher now because of changing industry dynamics?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Again, we look at it, from a planning standpoint we simply just take historical averages and roll them out. We take a five-year historical average and roll it out and look at it that way. So as that has turned out it has increased $0.01 a year kind of pace and so from our planning purposes, that's how we roll it out going forward.

Alvin Caezar Concepcion - Citigroup Global Markets, Inc. (Broker)

Okay. Thank you.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Bonnie Herzog from Wells Fargo.

Bonnie L. Herzog - Wells Fargo Securities LLC

Good morning.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Good morning, Bonnie.

Bonnie L. Herzog - Wells Fargo Securities LLC

I wanted to circle back on your G&A and OpEx as you did touch on, some progress has been made to bring these expenses down, but headwinds are increasing, such as higher wages, so I'm really curious to hear your level of confidence to be able to really make further progress in reducing expenses going forward?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Certainly it is a key focus for us, for the operations team. I think you're referencing the new exempt – non-exempt changes that are coming up towards the end of this year. Given our store mix, that we tend to be a larger store mix, it's probably less impactful of a wage change for us than it might be for others with smaller store mixes there. And we're modeling it, but don't expect to see any material impact from a wage increase associated with that. We're constantly looking at benefit mix and also just expenses inside the store. As I said, a key area of focus for the quarter has been around maintenance expenses, tightening the labor model to make sure that we're getting our store folks in the stores at the times they need to be there and working around that as well.

Bonnie L. Herzog - Wells Fargo Securities LLC

So, if you think about all the progress you've made, I mean do you still see considerable opportunities going forward in terms of what more you can reduce to kind of keep bringing those expenses down?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Yeah, I mean the countervailing is there is we're going to continue to open new NTIs and so with the ramp up in NTIs that continues across this year and next year as we projected it, you do get more expenses there. But I'm pleased to see that our store count grew by close to 20%, but our OpEx trailed that by more around 16% growth. And those are the numbers we like to see.

Charles A. Adams - President, Retail Operations

And Bonnie, this is Hal. The other thing that is a key metric for our operations team is month-over-month making sure that on a same-store basis, we grow our inside gross profit dollars faster than our OpEx, right. So, we're pushing that gross profit dollar growth and making sure that it is growing at a faster pace, adding more to the bottom line than an increase in OpEx. So as long as our operations keep laser-focused on making sure that that spread becomes wider and wider, we win.

So even in a time of OpEx growth because of wages or just inflation, it's really our responsibility to make sure that that gross profit dollar growth continues to be there to pay for those expenses.

Bonnie L. Herzog - Wells Fargo Securities LLC

Okay. That makes sense. And then, I guess my last question, I was hoping you guys could drill down a little further on some of your key merch categories such as tobacco and then packaged bevs.

Charles A. Adams - President, Retail Operations

Sure. So our packaged bev continues to be very healthy for us in our stores, but it's been a big, big focus for us. And, of course, so many stores in the Southwest, it's a key category for us. So year-to-date, we're still growing that category at plus 3% on a same-store basis, and our profit in that category is growing double digits in gross profit dollars.

Cigarettes continued to be about 1% down on a year-to-date basis, but we're up around 4% in profit. And then, beer is up about 1% on a sales basis year-to-date. But, gross profit dollars again double digit growth in that category. Something that I thought you might be particularly interested in, so I looked into last night is, the OTP category is really continuing to gain momentum in the stores. And that category for the year-to-date basis is about 7% up with about 14% growth in gross profit dollars. And, Bonnie, that's being driven largely by the cigar category, moving away from the low $0.99 cigars more into the two-pack, five-pack cigar business. And then, the e-cigs, even though it's only about 10% of that business, is growing at a 20% rate. So I thought you might think that was interesting.

Bonnie L. Herzog - Wells Fargo Securities LLC

Yeah, no, definitely I appreciate that color. And that's broadly consistent, although it sounds like you're doing a little bit better than the overall industry in terms of OTP. So, that's good. And then, just a quick follow-up question, you'd mentioned your cig gross profit margins were up. Is that primarily due to price increase that was taken in the quarter by the manufacturers and you partially passed that onto consumers?

Charles A. Adams - President, Retail Operations

Yeah. As we mentioned before, we don't necessarily use cigarettes as a traffic-driving piece of our business. So our goal is to maintain our units and make sure that the category isn't a drag on our growth, but to grow the gross profit dollars. So you would be correct in how we managed that at that time.

Bonnie L. Herzog - Wells Fargo Securities LLC

All right. Thanks so much for the color.

Randy Palmer - Executive Director – Investor Relations

Thanks, Bonnie.

Operator

Thank you. And our next question comes from Bob Summers from Macquarie.

Bob Summers - Macquarie Capital (USA), Inc.

Good morning. I wanted to come at the strategic review from a different angle, acknowledging you're not going to talk on timing and outcome. But could you maybe discuss given the duration, what kind of impact it's having on the organization? And then from an external perspective, is it impacting any of your partners in specifically addressing capital (41:13)?

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Great question, Bob, I think you can see by our results, that's not having an impact. I mean, we continue to grow the company from a gross profit standpoint in particular. Grow the store count, certainly no slowdown on our NTI process, we've got 39 under construction, by the end of next week we'll have three more added to that mix. So we're on track for NTIs to be opened by – for the most part almost by November and we're now working on the 2017 NTIs permitting those and keeping those going. So everyone has been laser-focused on the business. And I think we've got a great network and a lot of great employees in the stores as well. And some really very loyal customers that continue to grow with us. So, I think it's had almost no impact on our outlook. If anything it's probably gotten everyone working even harder to show we can do this.

Charles A. Adams - President, Retail Operations

Yeah. It's mostly back office focus. So it's not operational.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Right.

Bob Summers - Macquarie Capital (USA), Inc.

Okay, great. And then just a second question, what's the right way to think about the tax base with Canadian assets either sort of in absolute terms or relative to the U.S.

Charles A. Adams - President, Retail Operations

The inside basis is large. It was a taxable spin from Valero. So the inside basis, so the basis that's in Canada is a large basis. But the outside basis, which is a basis that CST has in its investment in Canada is very low. And our cash repatriation strategy will basically remove that basis entirely. So once that no payable is paid-off, there will be no basis at all in Canada from a U.S. standpoint.

Bob Summers - Macquarie Capital (USA), Inc.

All right. Got it. Thanks.

Kimberly S. Lubel - Chairman, President & Chief Executive Officer

Great.

Operator

Thank you. And e we have no further questions. I will now turn the call back to Randy Palmer for closing remarks.

Randy Palmer - Executive Director – Investor Relations

Yes, operator, I think we want to – let's do one clarification to the question of Ben, you had at the beginning of the call.

Clayton E. Killinger - Chief Financial Officer & Executive Vice President

Yeah. Ben, this is Clay. I presume you're still on the call. But in regards to your question earlier on the California and Wyoming fuel margins, I just want to remind you one, that we show all of our margins net of credit card fees. And two, the California margins that are presented are net of the $0.05 per gallon wholesale fuel markup that we've put into place, that's at CST fuel supply markup. And when we purchased Flash Foods, that fuel supply is not in the CST wholesale fuel. So the Flash Foods numbers do not show the $0.05 markup netted off it, but California does. So I just wanted to remind you of that.

Ben Brownlow - Raymond James & Associates, Inc.

Okay.

Randy Palmer - Executive Director – Investor Relations

Hopefully that clarifies that. And we appreciate you being with us today. If you do have any follow up questions, please feel free to contact us. Thank you very much.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!