Q1 2021 Alimentation Couche-Tard Inc Earnings Call
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Good morning, I would like to welcome everyone to this web conference presenting how do you want to sell crew starts financial results for its first quarter of its fiscal year 2021.
All lines will be kept on mute to prevent any background noise.
After the presentation, we will answer questions that were forwarded to us beforehand by analysts we would like to remind everyone that this webcast presentation will be available on our website for 90 day period.
Also please remember that some of the issues discussed during this webcast might be forward looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting there for a future results could differ from the information discussed today.
Our financial results will be presented by Mr., Brian Irish President and Chief Executive Officer.
And Mr. closed to see a chief financial officers.
Ryan you May begin your conference.
Thank you Sean Mark Good morning, everyone. Thanks for joining us for the presentation of our first quarter 2021 results.
An exceptional quarter I think both financially and operationally as we see an increase in shopping occasions, and solid execution by our team to take advantage of changing consumer behavior Strictness Koby period.
This led to very strong same store merchandise sales across the network driven primarily by larger basket as consumers are certainly consolidating shopping trips. We believe we've grown market share versus a channel and the majority of our markets.
Fuel volumes continue to slowly improve margins remained strong in most of the areas, which we operate.
During the last six months, we discussed on numerous occasions, the benefits of operating in global network and the shared learnings that have often come from the buried experiences across many of our business units.
That perspective, we find the recent trends and our European markets to be encouraging and consider them Apostle proxy for what to expect and how to react in North America. When the virus is more fully container.
As we continue to cope with the Koby 19 pandemic I'm pleased that we stayed the course summer strategic goals in advanced our journeys bolt on food and customer experience that our locations.
During this unprecedented times I can seem to be inspired by our team members resilience commitments each other into our communities.
Before I turn to results I did want to touch on Hurricane Laura the strongest stormed African Louisiana, which is important market force well, we had damaging flooding in our stores in the worst path. We're fortunate that none of our employees were injured and we've already reopened the vast majority of our locations.
On top of the straight in the pandemic the teams in our Texas in Gulf Coast business units worked hardly ceased to support our communities in those areas, who depend on us from merger supplies supplies and fuel and probably doesn't want to thank them for their dedication and commitment.
Now turning to the results of the first quarter seems to merchandise revenues increased 7.7% the U.S., 3.4% in Europe, and 19.9% in Canada compared to the same quarter last year. This growth was due to the gradual reopening of the economies in which we operate we continue to strengthen the average basket size as customers relied more on the product.
Similarly needs of our locations to fill their needs. This we adapted or offers to address these new demands.
Speaking of or offer we straw strengths across many categories, especially alcohol packaged beverage lottery and various grocery items. In addition, do tobacco specifically in Canada.
We've also worked hard to drive more traffic to our locations through increased awareness of our loyalty programs, ensuring we remain full remain focused on our core value proposition.
A key priority and improving our customer experience in driving organic growth is expansion of our North America.
Fresh food fast program, which we form we described it soon at scale. This maybe the largest endeavor the companies under ever undertaken in my career.
The temporary pause on food store training and openings due to Kobin has ended and we have nearly 875 stores up and running and remain on target that 1500 stores rolled out by October.
Sales of stores with the new offerings continue to significantly outpace those in unconverted benchmark stores and customer feedback has been excellent.
Importantly, we also see Halo effect with positive sales in other categories versus control sites.
With a caveat that certainly Kobin has introduced a lot of noise into our results no doubt developing food culture and executing this each and everyday and every site. It's a big challenge that we don't take lightly.
I'm pleased with the offer we're developing and believe we're never deliver topline and margin improvements in the months in years to come.
Cap like capitalizing on our new coffee equipment U.S., we rolled out last year, we strengthened the message union in store execution to enhance the customer experience specifically with ice coffee separately, we are aggressively expanding the presence of our foster program in Europe, which is now available at over 400 stores. This offer continues to like customers and.
Driving from a trip star sites, especially where we began testing in Ireland, the Baltics, where we've seen really strong consumer response, and actually had one store in Lithuania sell over 550 Cups in one day.
Due to safety concerns related to coated in consumer wanting to consolidate trips we continue to see a switch from dispensed beverage to packaged beverage and larger package sizes a future consumption.
As a result packaged beverage continues its double digit growth during the quarter, driven by energy and carbonated soft drinks, which have maintained strong upward trend.
Nature stricter products alcoholic beverages continues to grow at a rapid pace as consumer shift from on premise restaurant and bar consumption to purchasing from our local our locations more specifically sales of beer and hard seltzer saw very strong performance during the quarter.
Cigarettes, no TP also saw strong demand in the quarter in particular cigarettes sales grew in all geographies, although in the U.S. not at the pace and look for the rest of the categories a in Canada.
Showed the highest increase we continue to see pressure on margins a bit as consumer patterns have shifted toward multi pack and cartons.
Oh, TP or other tobacco products continue to drive positive results as well with all parts of network exceeding our internal sales and margin forecast for that category in the quarter.
And finally lottery. It was also notable traffic driver to our stores over the summer as a obviously people continue to want to to Gamble and a lottery fits that bill will talk a lot of other facilities being closed.
During the quarter. We also pushed continue to push forward their localized pricing initiative using analytics, we now have that up and operating at more than 800 locations in Sweden, The Grand Canyon and they've been very pleased with this initiative and we're forming plans to roll it out globally.
Moving to our fuel result, same store volume in the quarter remain negative to the impact to cope with 90 miles driven.
However, we're seeing some improvement in demand in portions of our network as portions of our network returned to more normal operations, particularly in Europe.
For the quarter same store fuel volumes decreased 21.2%, the U.S., 12.4%, Europe, and 25.6%, Canada compared to last year. Despite these declines we continue to realize healthy fuel margins across the network.
During the quarter, we converted more locations to our circle K fuel brand, bringing the total to more than 20 350 sites in North America. We continued to be pleased with the fuel rebranding effort as a driver traffic to our sites and weight increase overall brand awareness loyalty from our customers.
At the pump, we continued implementation of our damning dynamic pricing strategy using our developing data and analytics capabilities. We now have the ability to offer a more responsive price. It over 2400 locations and we believe help us react more quickly to local market factors increased customer demand changes as we continue to learn and expand this crop.
Mr Network.
[noise] promotional loyalty programs have also benefited our fuel customers easy pay program delivered increased trip frequency in growing transaction size versus not easy page customers and as customers showed strong attachment easy pay is now available and talk across the entire U.S. network, excluding our northern tier or holiday business unit.
[noise] mobility, we're experiencing strong summer Norwegian test markets with almost double the amount of charging transactions that are sites in July compared to say month last year.
This is pretty good due to more holiday travel within the country during the Pandemics borders and closed.
We also push forward circuit brand home charging solutions now have over 1400 Chargers installed at the end of the quarter both in private homes in partnership with residential complexes.
These initiatives continue to push is top of mind for each arguing the country and keep our customers engaged in our ecosystem for all their fueling charging and convenience needs.
Our work with innovation does go beyond mobility to meet growing customer demand with fewer touch points and corporate transactions, particularly during coated we now have over 1000 sites offering home delivery options and another <unk> thousand sites, offering curbside or click and collect pickup.
Our teams are learning and getting insights into what the customers want these offers and whether there's a bottle business model there.
We have also deployed frictionless payment options to more locations, including licensed <unk> license plate recognition at the four court in Norway and leverage mobile payments on mobile App and prepaid across the network as part of a core strategy to serve the customer anywhere anytime and anywhere they want it.
As part of that we just announced a partnership to pilot autonomous checkout solutions and our Grand Canyon business unit. This is an exciting development as an emerging technology aims to make her checkout experience.
It is just walking in and out.
And it's also uniquely designed to work with our existing store layouts of factor, we think will help us scale. This it proves successful.
[noise] gamification else also an increasingly successful way to reach our customers and this quarter. We had no one's games played per week with high redemption rates were also using gamification as a training tool for our store members Europe training as Gamified training has over 90% completion rate with excellent in play feedback and over there.
Summer, we launched this initiative into our U.S. divisions with great success, and the clear positive impact specifically, we leveraged tool to help our team members train their basket building strategies in early results have been encouraging and we certainly plan to roll this absolute rest of our network.
Before turning to our financial results I want to briefly mentioned the meaningful ways in which can we continued to serve our communities in their time a need by the ending the quarter. We'd served over 4 million free drinks to first responders in healthcare workers contributed over 40 me millions not meals skews meta feeding America started an effort to donate 5 million meals to local food banks in Canada.
In July we issued our second sustainability report, where we highlighted the ways in which sustainability has become a lens in our business.
We also set ambitious targets and four areas that we believe we can really make a difference in our communities fuel energy food packaging and waste to workplace safety.
Well, we have Fargo I'm proud of the promise and progress, we're making for our customers employees our stakeholders as we work to make this better and say for world not a pause there and like Claude take you through more of our first quarter financial results.
Thank you, Brian so ladies and gentlemen, good morning.
First quarter of 2021, we're happy to report net earnings attributable to shareholders of the corporation of $777.1 million.
Or 70 cents per share on a diluted basis.
Excluding certain items for both comparable periods adjusted net earnings were approximately $795 million or 71 cents per share on a diluted basis compared with 48 cents per share on the equivalent period last year, representing an increase of 47.9% year over year.
As Brian mentioned, the Colvin 19, pandemic continued to impact traffic patterns and consequently, our business and financial results during the first quarter.
From an operating expense perspective, we pressed ahead with the investments to ensure that health and safety of our employees and customer and our and our proud to have earned the concentration of our communities as a safe shopping destination.
These additional costs were however, fully offset by initiative implemented across our network to reduce our controllable expenses.
I will note will now go over some key figures for the quarter for more details. Please refer to our MD any available on our website.
During this most recent quarter.
Excluding see appeals revenue in the net negative impact from foreign currency translation merchandise and service revenues increased by approximately 304 million or 8.5%.
This increase was primarily attributable to growth in the average basket size with more than and which more than enough said the continued softness in traffic.
On the same basis merchandise and service gross profit increased by approximately $109 million or 8.8%.
This was mainly attributable to strong organic growth despite lower traffic in our network due to the confined with measure aimed at slowing to spread of Coogan 19.
Our gross margin increased by 47% in the us to 34.7% due to the strong service revenues and the recognition of deferred credits.
Our gross margin decreased by 49% and you're up to 40.6% and by 1.2% to 31.7% in Canada.
All of which were negatively impacted by a shifts in product mix towards lower margin categories.
Moving on to fuel side of our business while volumes declined overall, our ROE transportation fuel gross profit excluding see appeals gross profit than the net impact.
It could impact from foreign currency translation.
Increased by 860 $68 million or 17.2%.
Our road transportation fuel gross margin was strong at 42.99 cents per gallon than us.
An increase of approximately 16 cents per gallon, mainly driven by the decline by a decline in fuel product costs.
In Europe, the ROE transportation fuel gross margin was 10 point 51, you a sense for leader at the increase of approximately three to U.S. cents per liter while in Canada. The road transportation fuel gross margin was 10 point 29 comedian cents per liter.
An increase of approximately three Canadian Centsper leader driven by changes in the competitive dynamic and improved supply conditions.
Normalized operating expenses decreased 43% driving driven by cost and labor, if such as efficiencies as well as the various measures enacted to streamline and minimize our controllable expenses.
These positive items were partly offset by Govan 19 related expenses normal inflation higher labor cost and incremental investments to support our strategy.
Galvanizing related expenses include an emergency appreciation be of two dollar 50 per hour in North America for our these stores and distribution center employees. Thank you bonuses in North America. Following the end of the appreciation be premium in June additional cleaning and sanitizing supplies and routines as well.
As mask and close for our employees.
As special focus was placed on cost containment initiatives since the start of depend image, allowing us to reduce noncritical expenses without impacting the service we offered to our customers.
Excluding CES specific items described in more detail in our end the any the adjusted EBITDA for the first quarter fiscal 2021 increased by $320.4 million or 30.8% compared with the first quarter of fiscal 2020, mainly from higher road transportation fuel gross margins.
Partly offset by the negative impact of Coven 19 on our traffic in fuel volumes as well as the negative impact from foreign currency translation, representing approximately $12 million.
Excluding specific items described in more detail in there and.
Income tax rate for the first quarter of fiscal 2021 was 20.7% compared with an income tax rate of 19.5% in the same quarter last year.
From a profitability and capital efficiency standpoint, we continue to improve our key measure and measurement ratios with a return on equity of 25.3% and their return on capital employed of 16.4%.
Importantly, we maintained our significant free cash flow generation during the quarter inside our leverage ratio declined further to a level of one point 26 to one.
As of July 19th 2020, we have ample balance sheet flexibility with access to 5.8 billion dollar in liquidity through our cash balance and available revolving credit facility.
Finally on September Onest 2020, the board of director declared quarterly dividend of seven convenience centsper share and approve its payment for September 25th.
The year 2020.
Before I conclude I would like to express a program to see our company delivered another solid quarter in the face of such as challenging in Unprecedent microeconomic environment.
Our first quarter performance once again demonstrates both financial and operational resilience of our of our high Joel Agile business model, we generated record free cash flow continue to strengthen our balance sheet than stand ready to invest in our growth initiative as the various economies in which we operate gradually ramp up.
This crisis as reinforce our belief that only through this discipline, both inorganic driving organic growth in pursuing M&A opportunities.
We'll pushed out successfully preserve and continue to deliver sustainable value for employees customers and shareholders.
With that I think I think you all the way for your attention and turn it back to Brian.
Alright, Thank you Claude.
We had a very strong quarter, we fully recognize a significant uncertainty ahead. Both in the course of the pandemic and the global economy will therefore can you'd be prudent operate with long term mindset as we keep a clear focus on the strategy.
Always continue adapting to different consumer and customer demands, whether thats for larger basket future consumption items different assortment or changing or different shopping experiences.
And we're cautiously optimistic that fuel volumes will continues improvement across the network as economies reopened.
Over the last several days, we've been hard at work certainly our communities in the areas devastated by the Fury of Hurricane Laura and our thoughts certainly go out to those suffering from the virus or taking care of loved ones.
Collusion I want to thank our customers our employees our partners and shareholders for their continued support our journey become the world's preferred destination for convenience and fuel and with that will now answer questions. We receive from analysts.
Great. So the first question comes from Patricia Baker at Scotia capital.
The same store sales trends across the board in Q1, we're very impressive I would assume that you have certainly attracted new customers to your stores and that your locations and proximity to consumers really served you well while one cannot expect this to be fully sustainable are you engaging and any special tactics, we're thinking of strategy to try to convert the proportion of the new customers.
To become loyal circle K shoppers.
Yes, Great question and we certainly are I think covance taught us that we can be relevant in.
Certain categories in certain package sizes that we probably ignored a bit as we.
I forgot about those customers over the years.
Larger packaging product sizes in key categories like alcohol salty.
Huge consumption CSD and performed very well and we believe we can demonstrate sale fair value and variety endeavor to keep those customers.
We had more health and safety products, which unfortunately are now just a part of everyday life during coated and we certainly expanded our offerings within the grocery category.
Well again continue develop our frictions capabilities, which help customers helped attract customers to one quick and easy purchases.
We've been promoting our loyalty options to help retained new and existing customers.
We develop new ways of training our staff to better use our lift platform, which continues delivered very strong results and delivering better value and offers for customers.
We focused on driving brand awareness.
Through both our community involvement and also with Gamified marketing.
An increased presence on social media, while we did cut back spending on traditional media.
And finally, our focus on food the rollout of our fresh food fast offer in North America. We believe that goes beyond just food and that makes the brand even more relevance to our customers. So again, a lot of uncertainty, but cautious cautiously optimistic as we believe we outperformed the channel during the quarter that we can see some of those that momentum in the future.
The next question comes from Vishal Shreedhar at National Bank financial.
Can you talk about the particular strength in U.S. fuel margins and if this gap versus OPIS data is sustainable.
Yeah, first and foremost I think we're always looking to optimize the balance between fuel volumes and margins to get the best results. We've actively in the quarter restored many markets with success I think the market said, but more rational.
During co bid what the uncertainty of a volumes.
It's hard to say what the future holds in this environment, but we're pleased with the results for the quarter.
We did see a benefit of our geographic mix, where some of the regions, where we had stronger fuel margin saw smaller declines in volume and region, where clients for the largest.
They have had some softer fuel margins. So again that the globally. The global diversification. We think has benefited this year and finally, we believe we have a best in class fuel procurement team that is consistently whiting, our cost advantages versus the overall industry.
Second question from Vishal Shreedhar.
You talked about the strength in Canadian merchandising same store sales growth in particular, what categories drove the performance and if tobacco was a key driver of strength with stockpiling a factor also that performance sustain or moderate through the quarter.
Yes, maybe things happened in Canada, I, certainly I don't think stockpile was material issue.
We saw new customers as first nation reserves and made shops in Canada were mostly closed outside customers for portion of the quarter.
Of course, this could be beneficial to us long term, if we can be successful retaining those customers. The reserves have been open for several months and we've seen some stickiness with some of these new customer staying with us although the pace of growth while still strong has slowed as we as we went through the quarter and entered the next quarter.
We also saw bigger pack purchases, but again, we'd not quantify this is stockpiling, but rather in line with the trends, we're seeing of making larger purchases and producing frequency of trips for certain certifications.
The next question comes from Derek delay at Canaccord Genuity.
Can you discuss if you have witnessed any changes in the competitive environment in North America in Europe in terms of promotions or product assortment and have your peers into convenience store space and an exemplary channels like grocery channel or dollar store channel adjusted their product assortment or promotional strategy.
It's difficult to answering the question on competitive environment is there's just so many moving parts and things happening at the same time, but I think I can say, it's been fairly fairly rational.
Environments with I think less price competition in the most of the channels we compete in.
On our side in terms of promotions I think like many we scaled back our marketing we've been more targeted in our initiatives.
We leaned heavily on social media to launch our frost or in the Baltics as an example, and as I mentioned earlier use gamified marketing throughout our network helped drive traffic to our stores.
Terms of assortment to I think we got out early.
In lot of key categories. In responded so again, when we looked at our supplier sport scorecards, we think we've taken share but.
Our competition will learn so I think the channel overall, well adapted different pace as to what the customers are looking for.
As mentioned, we do we had cleared moves into larger packages product sizes at a more supplies mass and ties grocery.
And we think again there is some stickiness to that well, we're going to remain sharp on pricing sure. We keep up with the value proposition than the needs as we probably are likely to see economic strains in particular, North America, where some of the government programs are cycling off.
The second question from Derek delay given the large scale consolidation announced by one of your competitors. During the quarter has this altered the acquisition environment are you seeing greater opportunity surface and is your focus still in North America and Pan Asia ahead of Europe.
Our strategy is focused on driving significant and sustainable organic growth, while doing M&A. When we believe we create shareholder value.
The transaction, you referenced which traded at value quite asset can't understand.
Will flow has been relatively quiet and quarter. We believe people just focused on dealing with Cowen.
Another covance become a bit of the new normal we are starting to see a little more deal flow and again, we'll engage as cost in the balance sheets in great shape. So we'll engage in its the values. There will certainly take advantage of those opportunities in terms on the markets.
Still remains a very fragmented market, we see many chains that remind us of our holiday acquisition that we didn't number of years ago.
These are material and size simple denigrate on regional basis, and if it's anything like how do you bring strong expertise and capabilities complimentary and when I look at North American particular out in the US. It's just our largest source of synergies, we just got a very scalable platform.
Touching on Canada.
We've got significant share in the east so material acquisitions be difficult but.
We've got significant opportunities to strengthen our network in the western half of the country.
Yes, Asia Pac we've talked about that.
For a while now it remains a strong area of focus.
You see long term growth potential.
Our exploring several opportunities actively there.
In Europe or Europe is many different things that are markets that over nine years that we've been there we've learned we'd want to expand in their markets, we would likely never enter.
Well, certainly keep an eye out for opportunities at attractive prices, but that that region is not a priority for us today.
No I wouldn't want touched on Australia, which I guess, you can call part of Asia.
We pursued ample which is now called.
Because it was a strong strategic fit we'd like to story in Australia, and we've confirmed that during our due diligence process early in calendar year.
We pause because the uncertainty created by Cobot 19, we want to put our focus and operating our business, ensuring the safety of our employees and our customers.
Having said that the recent results released by ample were weaker than we expected in the headline seem to be more around financial engineering, it's really hard to understand the underlying performance of their business during the coven environment.
The refinery Litton has the experience strong and persistent pressure on margins, which I guess likely raised some questions as to the near term viability that plants.
Retail volumes slightly North America were all significant also impacted materially it's hard to say, whether the backcourt strategy is gaining direction and Thats cobot environment. So can you put all these factors, it's just given us a pause.
The next question comes from Irene the talent RBC capital markets.
You delivered outstanding inside store sales across all regions, especially in Canada can you. Please talk about key drivers cadence of basket size as you move through the quarter and exit rates relative to same store sales as reported what level do you think are sustainable.
In terms of cadence in the growth of basket.
Declined slightly through the quarter as we.
All geographies really.
But still strong the basket remain significantly higher than the same time last year.
While we don't know the future and whats sustainable given the uncertainty around co bid and its impact on our markets. We're focused on delivering our strategy balancing short term organic growth initiatives that are ongoing with longer term big bets like food and localized pricing that assortment.
Second question from Irene the Tout M&A in the space continues at a strong clip and at very rich valuations. What are your current thoughts around M&A and do you think we start can successfully negotiate transactions at a reasonable valuation in the current environment what would be the alternative uses of excess.
Cash flow.
And so you saw picture I read for the question and Brian has had a lot of the.
To answer that question in the previous question, so, but I'm going to.
They'll do that as you probably know overall to the activity in M&A is currently so slow, but we're confident that it will change and eventually will create deal flow and there will be opportunities for us.
Also do think that supported these will rise to provide us with their return that we seek as long as were patient and remain fact financially disciplined.
In the meantime, our focus is through a maintaining a healthy balance sheet to allow us to seize those opportunities and in terms of capital allocation. We will continue to continue to make sure that we are maximizing shareholders return to shareholders return.
To do that we will continue to support the maintenance and of our business and growth initiatives in our strategy and be ready for any M&A opportunity that could arise.
And the remaining remaining excess capital with the appropriate to use for debt repayment dividends or stock repurchase as we we've done in the past.
The next question comes from Peter Sklar at BMO Nesbitt Burns in the U.S. Your merchandise same store sales growth was 7.7% and your motor fuel same store volume declined 21.2%.
Can you. Please elaborate on how these growth metrics trended through the quarter, where the exit rates for the quarter and how are they trending in the second quarter.
Yes, Peter I think we've hit the merchandise to I'll touch on the fuel a little more.
We're still seeing negative trends, but those trends did improve through the quarter.
If you look in the future is really just dependent on what happens with Coca cases, the degree which.
Economies reopen or don't Reopener go backwards.
In Europe.
Most of our geographies the.
Covance largely under control and the economy's had been opening we've seen recent trends encouraging we've actually had days weeks, where we've had positive.
Same store leader growth in Europe.
So we're optimistic that when the world normalizes those customers and we back.
But we'll continue to monitor that and balance.
Yes and volume.
We're not going to chase something thats not there.
We actually think X. I would add to that's also been difficult to understand what good looks like so we certainly focused both on merchandise side fuel side, a gathering public and private data points and we'll make sure to maintain a balanced approach as we always have.
The next question comes from Karen short at Barclays Capital can you provide any color in terms of how the fresh food fast programs helped drive higher baskets and can you also provide color on how stores with the program are comping compared to the stores that are not yet up and running.
Yes. So you mentioned earlier freshly pass program and probably the biggest endeavor we've ever undertaken I'm pleased with the early results both in the pilots and as we scale it up through the 875 sites that we have live today.
Specifically in the basket, we're seeing customers pick up more items during the transactions and we're also seeing halo effect on other categories compared to our benchmark stores were seeing improvement both in sales and margin and the results of trended higher an average as a stat is stores rollouts mature.
And really hasn't this point to give anymore color on the majority of our stores are still very much in the ramp up phase.
And we've got a lot of code that effect is created so much noise in the results. So hopefully in coming quarters, we can get more specific color there.
Just in terms the program itself, if you haven't seen it.
Our us leadership team, we couldn't gathered the Europeans are Canadians.
We all went to store and actually executing program ourself and so we're focused on making that program very easy to execute in the store.
Low touch for our customers with packaged products that lend themselves very well in a pandemic environment, you will certainly enabling customization for local pace. So that we appealed as many customers as possible. So again early very encouraged.
Okay.
The next question comes from Bobby Griffin at Raymond James.
M&A opportunities be harder to come by due to the high valuations that we're seeing currently is there further opportunity to accelerate your organic growth initiatives, such as organic store openings foodservice dynamic pricing and others.
As we communicated last quarter, you just with the uncertainty the environment, we have reduced our capital plans for the year at the same time, we tried to balance that with a long term view of the business and we stay committed to funding in driving our most important strategies to drive organic growth.
I'll hit on a few of those.
We certainly maintained our focus on building buying in building new stores, so that that goal of doubling the number in T.I.s or new stores that we build is still very much on on track.
As we talked about with food service, we've rolled up we will have rolled out by next month. The committed 1500 sites and prepared to continue invest there assuming we continue to see the results that we expect.
Dynamic pricing I touched on earlier very pleased with our pilots. So we're making significant investments in rolling that out to the remainder of the network.
Hopefully most of that completed this fiscal year, if not it'll it'll maybe go a little bit into next year. So those are examples I'd say the other one is continuing to roll out the circle K fuel brand, we've rebranded the significant number locations and we had plans to roll out to several hundred more this fiscal year. We've just been very pleased with the results. There. So those are examples of areas that weve.
You to fund that we think we'll continue to drive organic growth for us in coming quarters.
The next question comes from Mark Petri at CNBC World markets.
How is having the consolidated circle K banner health Chew through the course of the Pandemics. So far can you give an example of how this has benefited you in the recent months.
And as you look forward what are the most material opportunity that you can leverage.
Yes, I really hadnt reflected on it but it'd be hard to go throw what we've done for the last eight months with the family of five different brands that we had.
We certainly been able to show.
That were part of our communities.
Touched on earlier, but 4 million beverages to our for frontline first responders 40 million Nielsen feeding America 5 million Nielsen Canada.
On and on and on some we look at our online brand metrics brand tracker, well being recognized for that were being recognized for being a part and solution to our community and I think thats just help strengthen that global global brand.
Internally just common calls to action.
Around our brand promise to our customers.
Our employees feel really good about us being a part of the solution.
I just think as you go through this I think it's helped them cover a very strong culture and in some ways continue to strengthen that strengthen our resolve to be one family one team inside the company.
Then I would see digitally.
You know, it's hard to draw boundaries.
In the digital world today, so being under the umbrella one brand while it does have some risks I guess.
It's helped us unify our messaging.
Take advantage of scale, there and just in on the fuel space, where I've talked about rebranding circle K fuel brand just dramatically simplified the ITC agenda, which allows us to be much more nimble much more quickly, bringing innovations to our fuel customers.
The second question for Mark Petri.
Given the material shifts in sales mix in your merchandise business could you. Please discuss the gross margin percentage within the major categories and how that trended in the quarter.
So overall, we have seen the similar trends and gross margins so growth in the cigarette category.
Where margins are typically typically lower and softness in food category, where margins are higher both negatively impacted the product mix.
In the in the cigarette category, we saw declines in margins as customer purchase larger pacsun part and so I think we referred to that earlier and in Europe. The negative impact on margin was larger was larger due to the higher penetration of the food category, while in the U.S. the growth in the service revenues.
And then specifically lottery positively contributed to the mix impact.
The U.S. margins also were positively impacted by a onetime deferred credit recognition.
Gross margins the trended higher as the quarter progress and the with the gradual reopening of the activities in the different markets. We've seen the mix of fresh food, improving thus, having a positive impact on the gross margin.
The next question comes from Chris Lee addition, securities.
Has the pandemic impacted the company's five year ambition of doubling its earnings is the end period of the five year strategy still fiscal 2023 as previously communicated or has it been pushed back due to the pandemic.
I'd say five years still five years were two years in.
Our five year plan remains on track and that we actually ticket deep dive quarterly his leadership team to check our progress and.
I'm pleased that we continue to make good progress on most of our initiatives. While the pandemic has had an impact short term on traffic patterns and behaviors.
As a lot of pushes and pulls.
We slowed some initiatives for example, Remodels, we had a big remodel agenda. This year, just being prudent with capital that's one of the items that.
We pulled back on but we can accelerate that at the right time.
If you look at an item that are an area that we would have an accelerated to that come to mind one would be.
The localized pricing, we talked about that just good results. There so making a heavier investment there will be ahead of plan in that space. The other would be not and non fuel non fuel locations.
Unfortunately, when the consequences as coven is there's a lot of retail space available. So we see this is an opportunity to accelerate any dramatic way, our our non fuel low penetration to new stores.
We are measuring performance frequently we have open discussions about how this.
Covance impacting our environments.
The last piece I guess I touched on would be innovation, certainly frictionless and touch points are more top of mind didnt, even before so we remain focused on being a part of the innovation and trying to change the consumer shopping experience and our in our industry.
So overall again pleased with.
The focus that the teams had during coded as everybody spoke personal professional as had been impacted.
Second question from Chris Lee.
When Canada band the sale of menthol cigarettes, a few years ago, how did it impact tobacco sales overall did many menthol smokers switch to other brands or was there a material decline tobacco sales as smokers either switched to contraband or quit.
Finally, what are your thoughts on California binding menthol cigarettes, and other flavored tobacco.
Yes overall, you we prefer that we not see localized legislation.
Dictating what consumers have access to where we've had menthol bands would that be.
Minneapolis or in Canada, we certainly do see short term impacts, but as I look back over results.
I think theres a.
Shift on the products for large portion of those those smokers menthol customers whether that be in traditional.
Cigarettes or other other products like moist smokeless fate.
The white nicotine products that are out there today so.
Really hard to say the net net result.
With regard to California.
Yes, the governor signed the band when I did see this morning with several.
Institutions filed for a boating referendum, so that could have an effect of delaying that.
Band for up to two years, so stay tuned there I think theres a.
Process, whereby people left they have to go out and get a certain number of.
Signatures to make that go to a referendum, but it seems to be it likely direction for California.
I would add California, not large presents for us and.
Just being a west coast market tobacco is a much smaller part of the mix than most of our other markets.
The next question comes from Michael Van out that TD Securities.
Operating expenses were down 5.6% year over year and down on a more normalized basis.
Can you give us an idea of what the total corporate related costs, where and how much you benefited from reduced man hours travel and promotional activity during the pandemic.
So most of our corporate expenses of the quarter were related to more specifically to the appreciation be in North America, which.
Ended in mid June to the thank you bonus also in North America that were paid also in July.
So in addition to those costs associated with labor, we incurred also significant costs to venture to say few of our employees most the for basket to be used in our stores.
Overall, we estimate that we estimate that the cost of all corporate related expenses to be around 80 million you would understand to have the precise number is difficult because of the mooted multitude of expense that we we needed to take but we estimated that to be around 80 million dollar.
In terms of normalized Opex, they were down by 43%.
And if not normalized the for credit card fees, they would have been down 2.1%.
Overall, we were able to scale back a lot of expenses our business model is giving up the flexibility to adjust in a short period of time. So accordingly, we were able to quickly adjust labor hours with the support of our busy label Labor model, sorry to match the demand and traffic we were seeing.
Without impacting our customer service.
On the operational side, we carefully selected the which expenses were required without impacting our performance.
And the we were also able to defer marketing expenses without hurting our value proposition and brown and finally on the corporate side, we eliminated all known essential travel related expenses and professional fees. So a lot of the initiatives that took place.
On another front through we also continue to work on cost optimization and all the areas of our business with a particular.
Fortunately these into in the goods.
That are not for resale. So we are focusing a lot on these these two to make sure that.
We are using our scale and reduce our cost base.
Finally in light of the current situation.
Deal that we see more stability, we will continue to scrutinize. Our expenses use are you a usual financial discipline and make sure that we are taking the appropriate measures to adapt to the situation. So we're going to still be financially disciplined and be careful about expenses.
Great. Thank you quoted thank you Brian that covers all the questions for today's call. Thank you all for joining US we wish you a great day and look forward to discussing our second quarter 2021 results in November.
Hi, Thanks, everyone have a good day.
Thank you everyone. This conference call you may now disconnect.
Okay, so something.
Thanks, Hi, crushing yes.
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