Q2 2021 Alimentation Couche-Tard Inc Earnings Call
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Good morning, I would like to welcome everyone to the swap conference presenting anymore and so we stopped financial results for the second quarter of fiscal 2021 on.
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 on.
So 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 caveat.
These caveats on risks and uncertainties are outlined in our financial reporting there for our future results could differ from the information discussed today on.
Financial results will be presented by Mr., Brian Heinisch, President and Chief Executive Officer, and Mr. Cook to see Chief Financial Officer, Brian You May begin your conference.
Thank you John Mark Good morning, everyone for those yourself on the border on happy Thanksgiving.
Thanks for joining us for a presentation of our second quarter 2021 results.
Across our network, we really had a strong performance during the day in the quarter and our stores and then are for courts, even with the continuing impact on Cobi 19.
New customers and associated share gains since the start of the pandemic have continued as customers are taking advantage of the convenience and proximity or of our channel.
On the solid same store sales and all other regions.
Your volumes remain negative across networks, and we did see some sequential improvement and our three geography, particularly in Europe with favorable weather more consumer travel during the quarter and us more stable b to B business.
Overall, we continue to achieve healthy fuel margin, which have allowed us to Austin for volume declines and grow our fuel gross profit dollars.
Earlier this month, we announced we have entered into an agreement to acquire the convenient store business Circle K, Hong Kong, which operates and network of 340 convenient stores across Hong Kong and franchises and additional 33 stores and Macau.
Just actually five okay. Hong Kong has been a licensee it's absurd, okay brand and we follow closely the progress for almost two decades.
On closing the transaction, which is expected by the end of this calendar year, Okay. Hong Kong its management team and employees will officially become part of Costar family and our journey.
We're excited about this transaction as it provides us for the strategic platform and Asia, which launch a regional growth ambition.
We will undoubtedly benefit greatly from circle K, Hong Kong's experienced team to understand the many opportunities and the region and to navigate the tremendous potential and some of the world's largest and fastest growing economies.
We're also looking forward to sharing best practices as a circle K Hong Kong team has developed solid expertise and operating small footprints convenience only stores and dense urban areas as well as advanced merchandising loyalty and supply chain capabilities.
For move on I want to add that I'm truly pleased by the strides we've made this quarter on a strategic goals from entering the Asia Pacific market, JD milestones and our fresh food fast program, even as we continue to cope with the increasing severity and Danny.
Our teams in the stores and support offices remain focused on growing the business and making our customers lives a little bit easier every day and I'm continually inspired to their commitment to each other.
Our customers and our shareholders.
I'm now going to turn for the results for the second quarter and same store merchandise revenues increased 4.4% U.S. eight.
8.6% and Europe, and 11.4% on Canada compared to the same quarter last year.
This increase is primarily attributed to growth and basket, which more than offset continued softness and traffic due to the pandemic restrictions across the network.
The alternative nicotine packaged beverage alcohol and grocery categories continued to perform well across the business, while and Europe, our fresh food category. So I did see a slight increase year over year.
Also worked hard to drive more traffic and our locations through increased awareness for loyalty programs.
Gamification and by ensuring that we remain focused on our core value propositions.
We continue to be very pleased with the developments and North American food program, which is the biggest project ever undertaken by two star and.
The United States, we met our target of introducing 1500 fresh food fast locations by this fall and now and the offer and 11 of our us business units.
Our focus remains on the quality and east of our fresh food off for both for our store team and our consumers.
Stuart's stores with freshly faster and performing very well relative to test stores for control stores and the same markets and.
We're also tailing, they're all for to meet the taste and preferences of our local communities.
Based on these results to date, we plan to roll out the program to additional 3000 locations by the end of next fiscal year.
Europe also program saw increased demand this quarter spiked <unk> cobot. During this time, we kicked off a pilot for self serve hot and cold food and several of our locations and Denmark. This is targeting and more grab and go self serve offer with a goal and provide a quicker and easier experience, while allowing us to optimize store labor.
And Norway. This quarter, we launched new pizza offer with in collaboration with the country's biggest pizza chain, we sold for 120000 pizzas and for six weeks following the program and adoption.
Interestingly. This initiative is providing a big boost our circle K app and to our click and collect ordering option. It's pizza is a very popular hopper.
The changes and driving habits, and softer traffic patterns, especially during the morning commute dispensed beverage categories continue to be challenged during the second quarter other volumes outpaced the market. Thanks to some innovative product extensions.
We've introduced for flavors for coffee assortment as well as enhanced water and energy on reported pop offer.
For us crossed a program and Europe is now available and more than 400 sites and get used to show very strong sales.
Since the onset of cold and 19, we've seen consistent market share increases and packaged beverage as customers continue to favor larger sizes and quantities also trading up to more premium products within the category.
Alcohol remains a bright spot and good to see robust growth as well as growing COVID-19 cases further impact on premise restaurant and bar sales. In addition to beer emerging segments like Selzer's are showing very strong demand.
And other age restricted products nicotine sales continue to show strong performance versus prior year, particularly in Europe.
Other tobacco products showed solid sales growth due to expanded selection and modern white and vapor products in line with changing consumer trends net.
You asked on back Bar program, which is really expanding our back bar and allowing us to have additional assortment.
We've been able to expand our selection and modern white products and position US circle K is a leader and the white nicotine and bay for segments.
Well so side that we're advancing our journey to become a more localized retailer with a very data centric merchandising pricing effort, we've ramped up our in house and loose capability, which will enable us to begin the rollout of this initiative to nine additional business units touching all three of our platforms after having successfully rolled out and Sweden and.
They are Grand Canyon business unit.
We think this is a really important step to build out and enterprise wide capability and we plan to further expand the program and to our main business units by the end of fiscal 22 and in parallel we're going to begin to tackle data driven assortments and promotions.
Moving to the fuel business same store volume growth. This quarter remained negative due to the cold and 19 impact on miles driven however.
However, we did see some improvement in demand is portions of our network returned to more normal operations during the quarter.
Particularly in Europe, but we do remain cautious given the recent rise and COVID-19 cases globally and the return of stricter social distancing measures for this quarter same store fuel volume decreased 15.5 per cent U S, 4.5% in Europe, and 11.8% and Canada compared to last year.
Despite these declines we have continued to realize healthy fuel margins across the network benefiting from rational market dynamics in many areas as well as great execution at retail.
During this quarter, we converted more locations to our circle K fuel brand, bringing the total to nearly 2600 sites and North America. We're also piloting and more than five and insights across various look geography is to build a circle Kate fuel brand awareness and clean the premium fuel customer and us.
And the pilots are still early but we're pleased with the initial results.
Additionally, we furthered our fuel procurement and transportation capabilities, adding more trucks to our fleet and launching and trading operation and Houston, which we expect will lead to improvements and the value chain and our margins over time.
We also continue with the fast pace and our mobility network and in Norway. We launch additional products. This year tailored to our b to b customers, most notably noticeable notable excuse me feature is a combined fuel and charge card, which consolidates all purchases from fuel merchandise Carwash and electric.
Onto a single bill for the businesses.
Okay as a first mover and this product and we believe will give us a competitive advantage being a partner for b to b customers using both liquid fuels and electric charging.
We've now also hit a milestone in home charge, and Norway, selling more chargers and the last quarter and for all the quarters combined since we launched the program.
We take this is a clear sign that we can grow our position and customers' homes and where they work. They are looking to build on that momentum.
North America, we're continuing our preparations to place more charters and our circle K sites for EDI markets and the near term and could back and California will be or like we starting points.
I also want to briefly mention our continued efforts to expand and network through new store builds on this work has been slowed a bit during cove and 19.
We have restarted and continue to invest heavily and this organic growth lever.
We had a solid return on these investments and we are looking to accelerate openings in the back half of the fiscal year.
Shifting to innovation or working on innovation is progressing we're seeing some things come to life and our sites and.
Were progressing on both the for core and inside the stores, Norway. We've expanded our license plate recognition paint system and the for core to more locations and planning and launch in Sweden and.
And across the network, we continue exploring gaining insights into what the consumer wants in terms of curbside pickup and delivery options.
And we're evaluating these models for further deployment.
This quarter, we expanded our home delivery kit capacity wood door, and Ashley breach and continue on delivery work with favor in Texas. We now have approximately 1200 sites off and home delivery and we've tripled the number of transactions since the beginning of the pandemic.
We're moving from pilot phase of a limited number of stores in a region, where to testing and tire markets, particularly in our northern tier, Florida, and Texas business units.
A partnership for these third party providers is bringing new and different customers for the brand and we're seeing that or locations are gaining traction as late night destination for the home delivery customer.
We're committed to take and the friction other shopping experience and providing and offered our customers and.
Anywhere and anytime that is most convenient for them.
On the pause there like Claude take you through more of the second quarter financial results. So I'll.
Thank you, Brian ladies and gentlemen, this morning for us.
<unk> second quarter of 2021, and we are happy to report net earnings.
For Imitable to shareholders other corporation of $757 million or 68 cents per share on a diluted basis.
Excluding certain items for both comparable periods adjusted net earnings for the second quarter of fiscal 2021 were approximately $735 million or 66 cents per share on a diluted basis.
And with 50 cents per share for the prior year.
Which represents an increase of 32%.
Net earnings on a net earnings were $1.5 billion for the first half of fiscal 2021, compared with $1.1 billion for the first half of fiscal 2020 and increase of 37.3%.
Diluted net earnings for per share stood at a $1.38 compared with 99 cents the previous year.
Excluding certain items from net earnings for both comparable periods net earnings were approximately $1.5 billion compared with $1.1 billion for the previous year.
This represents an increase of $413 million or 37%.
Adjusted diluted net earnings per share were $1.37 for the first half of fiscal 2021, compared with 99 cents for the first half of fiscal 2020, an increase of 38.4%.
Our business continues to show a lot of flexibility and resilience, despite the disruption inch and on shopping and commuting behaviors caused by the pandemic once again.
We executed well on during the second quarter on our cost optimization initiatives, including solid labor efficiencies savings on good not for resale and strong control on district and discretionary expenses.
This has allowed us to stay the course when it comes to investing in the health and safety of our employees and customers as we strive to remain relevant and their time of need and good steward of their trust.
I will now go over some key figures for the quarter for more details. Please refer to the mdna available on our website.
During this most recent quarter, excluding CPL revenue and net impact from foreign currency translation merchandise and service revenue was for the second quarter of fiscal 2021 increased by approximately $208 million or 5.9%. This increase is primarily attributable to the growth in basket.
Size, which more than offset.
Continued softness and traffic.
The tobacco packaged beverages alcohol and grocery categories.
Continued to perform well across all our regions.
For the first half of fiscal 2021 on the same basis merchandise and service revenue was increased by approximately $512 million or 7.2%.
For the second quarter of <unk>.
2021 on the same basis merchandise and service gross profit increased by approximately $72 million of five or 5.9% mainly attributable to the strong organic growth despite lower traffic in our network due to go live in 19.
Our gross margin increased by 8.1% in the United States to 34%, while it decreased by 1.1% in Europe to 40.1.
To 40.2% and due to a shift in our product mix towards lower margin categories, with tobacco, and particularly strong contributor to that and and Canada. The gross margin remained steady at 32.6%.
During the first half of 2021 on the same basis merchandise and service gross profit increased by approximately $181 million or 7.4%.
The gross margin increased by 8.4% to 34.4% in the United States, while it decreased by 1% and Europe to 40.4% and by 5.6% and Canada to 32.1%.
We now moving on to the fuel side of the business.
And the second quarter of fiscal 2021, our road transportation fuel gross margin was 37 point 48 cents per gallon and us an increase of more than nine cents per gallon.
In Europe the road transportation fuel gross margin was 11.1 us cents per liter and the increase of almost three us cents per liter and in Canada. It was 10.05 Canadian cents per liter an increase of more than two Canadian cents per liter.
Growth in road transportation.
Fuel gross margin across our three geographies was driven by changes in the competitive landscape and improve supply conditions.
The road transportation fuel gross margin for the first half of fiscal 2021 was 40 point 14 cents per gallon in the US 10 point 82 cents per liter in Europe, and 10 point 16, Guinea and sense for a leader in Canada.
For the second quarter of fiscal 2021 and.
Normalized operating expenses decreased by 8.8%.
We achieved this decrease while maintaining investments in our stores to support our strategic initiatives, even as we continue to see higher labor costs from minimums for minimum wage increases in certain regions normal inflation and Cove and 19 related expenses. This.
This decrease this decrease was the result of cost and labor efficiencies as well as rigorous work and activities initiated to streamline and minimize our controllable expenses.
Excluding specific items described in more details and our mdna. The adjusted EBITDA for the second quarter of fiscal 2021 increased by $223.5 million or 20.9 per cent compared with the prior year, mainly from a higher road transportation fuel gross margins organic growth on merchandise.
Ladies and service sales as well as us from the net positive impact from foreign currency currency translation, we are presenting and prospects approximately $11 million, partly offset by the negative impact of COVID-19 on our traffic.
During the first half of 2021 on the same basis, you adjusted EBITDA increased by $543.9 million or 25.8% year over year, mainly attributable to the similar factor as those of the second quarter.
The variation and exchange rate I have and net negative impact of approximately $1 million.
Excluding specific items described in more details and R&D anyway, you adjusted net income tax rate for the second quarter of fiscal 2021 was 20.4 per cent compared with 19.5 per cent for the second quarter of fiscal 2020.
The adjusted income tax rate for the first half of fiscal 2020, and 2021 was 20.5 per cent compared with 19.6% for the first half of fiscal 2020.
The increase for both the second quarter and the first half of fiscal 2021 is mainly stemming from the impact of different mix in our earnings across the various jurisdictions in which we operate.
As at the October and 11 2020, our return on liquidity remained strong at 25.7% and our return on capital employed stood at 17.3% during.
During the quarter, we continued to generate significant free cash flows and so our leverage ratio declined further to one point 13 to one.
As of October 11, 2020, we have ample balance sheet flexibility with $3.5 billion and cash and an additional $2.5 billion available through our rebuilt revolver credit facility.
Finally on November 24, 2020.
We announced the renewal of our share repurchase program for up to 20 to 30.3 million class B shares or 4% of the public float beginning on November 27, 22 and.
As well the board of directors declared a quarterly dividend of eight point 75 Canadian cents per share an increase of 25% and improve its payment for December 17 2020. This.
This represents our second dividend increase of 2020 after raising the dividend by 12% on March 17th.
While our business continued to deliver strong financial results and record free cash flows through the pandemic, we're not letting down our guard and realize that we are living through a fragile situation that can change rapidly accounts.
Sequentially, we are maintaining our disciplined approach to managing cost and deploying capital to ensure that we are we come out of this credit is stronger for our employees and customers.
Our balance sheet with 6 billion dollar of cash on hand, and available under our credit facility remains well positioned to support our global growth ambition and to drive value creation for our employees customers and shareholders with that I. Thank you all for your attention and I'll turn it back to Brian.
All right. Thank you Claude.
We finally got some good news this past two weeks there is a light at the end of the tunnel with some.
Some successful vaccine. So I think as Claude said Youre approach of taking a long term view and staying focused on our strategies and served us well.
No doubt, though and in the meantime code 19 is persisting and measure it and Marriott many areas, we're seeing renewed weighted the pandemic.
Thoughts certainly lots of those who are suffering from the virus or taking care of loved ones.
For the last quarter on proud of how our teams and successfully navigated the business for the long term mindset as I said, okay, and customers and employee safety and the for funded their decision making.
Lots and we remain prudent on our capital and investments while staying committed to our double again strategy. We're excited to acquire circle K, Hong Kong and begin our growth journey and the Asian markets and we're cautiously optimistic about getting organic sales growth targets for the year.
As Carl noted, we've got a very healthy balance sheet, putting us on a strong position for future opportunities as they may arise and most of all our culture is shown itself to be resilient during the crisis and we've been able to provide an even better stronger for the foundation for our vision to become the world's preferred destination for convenience and fuel.
With that we'll now answer questions we've received from us.
Thank you Brian So the first question comes from Irene the tell at RBC capital markets.
Can you give us some color on the impact of fresh food fast and the stores in which you have rolled that out what kind of customer behavior are you seeing in those stores. What is the magnitude of any lift and basket and traffic and lastly, what type of customization or you're doing how should we be thinking about the impact on same store sales.
Yes, thanks, sorry.
Obviously, the pandemic concern on a lot of noise into this so some of the the data we are looking at to make our decisions.
Our pre pre Cove, and where we had some significant number of pilot sites out and also pleased with the results during Cove and as the sales continue to outperform control sites.
And the impact it will be important not only on our top line, but on gross margin as we scale. This.
We typically see margins and the 30% to 60% for the types of products we're introducing.
Our initial results again, despite the pandemic amend very promising when we compare stores with and without and the same markets and our business units reach and more important scale and that rollout, we will be able to turn on some meaningful market and this year as we've done no promotion, we know standpoint.
To support and grow these programs, obviously because of coated.
And we'll continue to work on refining the business.
It's a cultural shifts and our stores, we want to make sure.
Our teams are well supported and have their best chance of success. So.
We're working on improving the Kinks worked.
Working on supply chain we've.
We've had some disruptions through coated with some of our providers.
So again as we work those out despite all that.
We are comfortable that way.
We're seeing a solid business and.
I guess, the biggest testament to its our belief and this and confidence as we emerged and co that day.
Second quarter third quarter next year is that you're committing to rollout additional 3000 stores and.
Fiscal 2022.
And then on post code it will certainly be able to give you.
Clearly look at the true impact on profitability topline growth in that category and then the Halo effect were seeing and rest of the story.
The next question comes from my Pen on the DS Stifel GMP.
Could you discuss the findings of your click and collect pilots has this proven to be a viable business model what would be the hurdle to prevent you from offering it to all your locations and how long would it take to rollout.
Yes, I guess, just starting I'd say our vision our mission is to make our customers lives easier over and we focused on the solutions that help them on this journey getting the right products for the right place, where they want it and when they want it.
On a pandemic us certainly had a change in customer shopping behavior. I think there is a big question out there as to what persist post Cove and what doesn't.
We know there will be a continued desire for touches payment and we're investing in those areas testing customer adoption.
We're also looking at other waste and service a customer and remove friction inside the store.
And then to for courts, we talked about click and collect is still on to pile and mode and our Grand Canyon business unit home delivery, we scaled and moved and larger market tests with different partners as I said and the remarks favor and Europe, our favor and Texas excuse me who.
The breach and door at Ash in Florida, and on northern tier business units and currently have about 1200 sites on it.
We're seeing a good basket and differentiated customer usually bit younger.
Certainly a different day part for US is it's generally at night.
And.
Actions are growing and I would say today, it's still not a meaningful piece of the business I think what we really need to watches.
Is this sticky consumer behavior or not.
And and react accordingly, but so the good news is we've got the capability and technologies and placed to do this and to scale very quickly if it works.
Yes.
And some related questions, we'll talk about eliminating friction at the at the for court and the inside the box as well, but we just for you. This is one of the bets along that journey and we want to be prepared us that consumer debt.
Demand for this type of service continues to grow.
The next question comes from Derek delay at Canaccord Genuity. Your balance sheet continues to deleverage meaningfully what are your capital allocation priorities and what is your comfort level in terms of leverage ratio.
Thank you there and for the question on where we're very happy with our progress and strong execution by our teams on driving the topline and gross profit dollars as well as controlling the cost. So this is allowing us to drive for record cash flows and then and repay debt when required.
So from a capital allocation perspective, we want to keep reinvesting in the growth and maintenance of our business and frankly, our priority number one is the allocation of capital towards our strategic priorities and.
And then on the inorganic growth initiatives also such as M&A, our immediate priority secondly, we want to grow and continue to grow our dividend that this studies base and each year.
And we also and we increase at the 25% this quarter after a raising and by 12% earlier this.
This march so finally.
Using our share repurchase as an extra tool in our tool belt through a return cash to shareholders. So we've been and we have been approved for a 4% buyback and look to buyback share on an upward and this the basis.
And we feel it will be beneficial to our shareholders.
So and.
So.
I will remind you also that our comfort level remains around two point 25 times leverage with the possibility of expanding that by one to 1.53rd and the dead through thick and an exit to execute and acquisition depending on the outcome of our discussion with credit agencies, our lender, but as we are sitting to.
The other one point 13 time this leaves us a great deal of flexibility for future acquisitions acquisition, and we feel we have a pretty strong balance sheet right now.
The next question comes from Graham Kreidler at eight capital.
Can you. Please discuss recent trends surrounding customer loyalty as consumer baskets continue to consolidate has there been increased sticking us from customers and merchandise revenue given sustained same store sales growth how sustainable do you think this trend will be in the future, particularly as you continue to optimize merchandise mix within the store.
For and roll out new offerings like fresh food fast.
I think what we'll see some of the behavior that we're experiencing today, because we're a quick easy and now will stick and then the other parts of that won't.
As customers revert back to more normal behavior, but we're certainly not.
Sitting here and looking for one silver bullet when it comes to increasing customer stickiness royalty.
We're working on improving the whole customer journey and side of our stores for the basics and keeping our stores clean safe and well stocked.
Staying sharp on our pricing and we think there is a huge opportunity out there, which and truly get localized pricing and assortment right.
Working hard on staff training and being very innovative and how we're attracting new employees and train them.
Our food program, we know that's going to create stickiness. We know there is demand there and we think long term that will drive repeated trips and loyalty and then on the innovation side, we're continuing to look at how can we play a role changing.
How are customer pays checks out and.
Just the overall experience and our store and and and and our for court. So it's a it's a multi pronged effort to retain these customers attract new ones.
The next question comes from Bobby Griffin at Raymond James.
And company operated site count has declined year over year for a few consecutive quarters with closures outpacing the number of organic openings is that a result of COVID-19 delaying Newstar project should we expect company operated sites to begin growing again in calendar year 2000.
Hi.
Yeah within a five year plan to double the business, we have a target to grow our new to industry store count from on approximately 100, where we're at today to.
Over 200 by the end of fiscal 2023.
And we are nicely on track, we paused a bit during the pandemic until we were more secure and on the condition of our balance sheet and industry.
But we fully resumed construction.
Fiscal 21 has been challenging.
Again, we think we've got the team to execute that and we've got a very good pipeline in terms of store count change, we had a significant impact from the transactions. We did with Crossamerica, but you can you'll see more of that you were going to continue to harvest our weaker sites in the network.
And we'll continue to build big strong new sites that we think and win in the marketplace over decades.
And we'll be more active than that at that and we probably have been and past year. So not focused on total store count just the message that yes.
The ones, we're adding theyre doing three for ex the business of the ones that we would be taking out.
The second question from Bobby Griffin can you provide additional details on how fuel volumes trended throughout the quarter and how are these volumes performing in the third quarter to date.
Yeah, just going back on the comments, it's great news vaccines on the way. So there is a and ended this and we fully expect it to fuel for fuel volumes will return to much more normal levels. After the next six to nine months, but would you say six to nine months of restrictions potential lockdowns and we've seen some happening in parts of cash.
And in the us in Europe. So other lockdowns are temporary they will impact fuel demand as people stay at home and less pure kilometers or driven.
That said you on trends were improving through the quarter and all three regions.
Net restriction started impact, particularly the Toronto market as we exited the quarter.
Yes, it's held pretty stable and Europe had net us a slight improvement and we've been very pleased with the for the B to B business in Europe, holding up very very well.
But you know again with the Lockdowns, we do expect to Canada, and Europe to get a bit worse in the coming quarter is restrictions are put back in place. So good trends during the quarter, but we remain cautious.
The next question comes from Patricia Baker at Scotiabank, the second quarter saw a nice recovery and the merchandise margin and Canada can you address the specific dynamics, there and what led you to post the steady rate year over year.
And the benefit in Canada, and really came from mix mainly in the service side. Your lottery has been strong globally people a lot of casinos and things closed and lotteries really performed very well globally.
Tobacco grew over year, but it was a smaller portion of our total merchandise sales as other categories grew faster packaged beverage and particular and growth rate, which who areas that are higher margin and really showed strong growth. So thats bolstered overall net margin in Canada.
The second question from Patricia Bakers, you're noting the Mdna that you opened 13, new stores 38 since the beginning of the fiscal year and have a further 52 sites and the construction pipeline can you discuss the new store program and specifically what unique feature feature they might have how do store openings and calendar years 2012.
Moving and 2021 differ from new store cohorts from five years ago.
Sure and touch on this a bit but.
Starting in March we really froze all capital as we paused construction.
For about 90 days, but we presume that we've got 52 under construction and we've got roughly another 150 sites in various phases zoning and permitting and North America, and probably 30 or 40 in Europe on.
In terms of how the sort of changing if you bundle holiday store where incorporating.
Some of the key attributes of those networks.
They are unique in that they have done it and in and outdoor and they really guide the customer journey through starting with food and.
And then very exposed to the package beverage and then ending and the checkout area.
Heavy exposure to impulse and we piloted that some existing circle K sites.
Retrofit and it showed strong growth, so we believe and that format and.
The new boxes, we have coming other brown will start to flow to show those characteristics. Obviously, there is a a piece where we've got an early on and permitted so it's really over the coming months, we'll start to see that show up and then we've agreed on a net.
Harmonized image, we call horizon, so they'll have a refresh new look new color sort of taste tested very well.
With customers both in us and in Europe.
Our new circle, K stores, and Europe, we've been at that a bit longer we're seeing higher traffic and higher food penetration at those sites. So it's a good ROI and it's something we think we can scale when the time is right pretty cost effectively.
Into our existing network.
And then the I think and touch on our urban markets and we've never been a big player in the urban centers on but with Covance and there are on.
See vacancies accumulating as we've seen other retail not fare as well and so we think theres a window of opportunity for us to accelerate that expansion into non fuel sites and the urban centers. So you'll see more activity from us and in the coming year and some of our big Metropolitan areas and North America Europe.
The next question comes from Karen short at Barclays Capital fuel margins in the us exceeded those us close by Opus again was the geographic mix benefit you saw last quarter again, a benefit in the second quarter. If so can you maybe provide more color on what exactly is driving that benefit.
Yes. This this quarter really geography didn't play a material factor it was pretty spread evenly across particularly.
Particularly us.
Yes, I wouldn't say geographic mix was was material.
And we certainly understand the logic behind the desire to use opus as a guide you on particularly for a company like us for the national footprint.
But we do have a lot of initiatives that we're working on that I.
I think our unique to companies of our size, we were able to leverage resources and scale.
As I mentioned earlier, we set up and trading office and Houston.
We think there's opportunities with the.
Only one and a lot longer shorts, and the fuel industry and the world the.
It creates unique opportunities for us and we've increased our investment in our fleets.
Of trucks to capture geographic arbitrage opportunities.
Capitalizing on volumes that are coming up for renegotiation and continue to push for improved costs and a along quite nicely along value chain topic for today.
So again, we were working on improving our procurement abilities were building optionality and our contracts when possible and then on the sell side Weve continue to rollout AI fuel and we pause it for about six months during the pandemic as it was really hard for anybody to understand what good looks like but we spent that time build.
And new capabilities and to that system, and we think its a.
Even stronger and smarter than it was before so weve reintroduced.
Our AI pricing initiative back and at the Street and.
And we think long term, that's going to be very very strong for us and allow us to outperform and much of the industry in terms of fuel margins.
And finally, I'd say, our circle K fuel brand, it's 2600 locations we've.
We just on approximate well in process and other 500 this year and other.
There is no doubt that we see enhance margins when we're able to do that.
The second question from Karen short.
You've talked about accelerating the localized pricing strategy can you provide some color on what you've learned about the elasticity of the assortment based on pilots in Sweden and in the Grand Canyon can you also provide more color on the clustering of stores and finally can you talk about the timeline and cadence of the rollout to different business units globally.
Yes, we've been working on this a while for.
For some significant time before we started to talk about it just kind of validate our vision here, but our our belief is that theres, a very large price to truly execute localized pricing assortment and promotions.
Ill touch on pricing, because we're well underway. After two successful pilots, we're adopting our pricing for the local markets and I say markets, it's really site level.
Based on on data driven clustering this isn't an exercise.
Aimed at raising prices, it's an exercise and targeting the optimal price.
Bye Bye cluster and also maximizing gross profit dollars. So we've seen many skews that remained flat.
Others have gone up and others have been reduced.
And again that varies by geography, and by clusters, I really cant stereotype and given category or even skew.
It's an investment and data analytics to better understand.
And last 50 by skew by cluster.
And includes just a lot and get you a lot of variables that.
People that I talk to and are a joke that we put it on our basement.
So we don't understand.
And it's exciting it's an exciting.
And Jerry that we're on.
After two successful.
Pilots, we've rolled out to an additional nine business units this quarter.
Across all three of our geographies and will be income increasing the scope not only in terms of number of skews that are in that in that pricing program, but also in parallel launch you work on assortment assortment and promotion in the coming quarters.
The next question comes from Mark Petri at B.
Road market share.
You. Please update us on the shift the circle K fuel brand, how many sites are converted and what impact do you see to your volumes and customer loyalty. When you switch can you quantify the margin lift from branded to to on brand fuel.
Or if not how and how material and factor. This in your relative outperformance versus opus in fiscal 2021.
Yes, I'd say this is an important journey for us and we've got great relationships and partnerships with the brand and we'll continue to do a lot of business with the the shells and b piece and exxons of the world but to us.
We started for me a consumer standpoint, we did consumer studies and we showed that when we had a circle K site at the back court and a.
Major brand or a brand and non circle K brand at the for court there was confusion.
So we think this is an opportunity to absolutely dramatically increase the awareness of the brand, particularly in North Americas were largely we are 100% or on brand and in Europe, but it's also the ability to control and simplify the consumer experience and our site.
Today, we will own those technologies and circle K versus having to share software.
From the major oil companies. So again controlling that consumer experience is important as we look for the future and and our ability to innovate to that that journey for CT. Its day, we got 2600 sites that are operating and the brand.
Mentioned all of Europe is that way and then anything new that we're building today is on the circle K brand as well and as I said earlier, we'll convert additional roughly 500 sites this year.
Youre for that brand will work on the strategy and drive loyalty and volume on.
Much and brown much of its around building awareness and also seeing can we can we resonate with customers with our premium fuel offering.
Over time, we think there theres a clear benefit both in terms of volume and margin and since we create a simpler experience.
In terms of quantifying that it really varies dramatically by geography and by the brand were switching from.
So more.
For more to come there, but net net a positive it's a good ROI for us and that will continue to invest in that direction.
The next question comes from Peter Sklar of BMO capital markets now that you've acquired circle K Hong Kong can you talk more specifically about other markets in Asia that you would be interested for Costar. For example, do you still have an interest and the Australian market would you ever consider and acquisition in China.
And just like Europe, Peter Asia is on large market share.
For those countries that have their own dynamic.
We mentioned and the path that we find many markets attractive and most in southeast Asia, So the Philippines, Indonesia, Vietnam could be tile and also to name a few so our focus is to enter a market with favorable demographics, a good population growth GDP growth and.
Increasing earnings power and and then expanding Middle class also is very favorable to our stores. So.
As well as a country that already counted on a good C store infrastructure as we are not looking to spend years building from the ground up or Greenfield our operations in each country. So we're looking for networks that have a meaningful footprint on their markets, but also as strong growth potential.
To revert to you on the part of your question on China, It's a market that we need to learn more about I understand what the regulations are for four and the companies to operate there and our new family member and Hong Kong is going to be a great help for us to better understand the China and also in the rest of the region also.
As far as trade area and.
We continue to find the market is attractive, but as we mentioned many times, we're waiting for us to see how the countries and will fare as it eventually exit the pandemic and with our son and what I said that the.
Look like.
What are the assets are good and looks like and at that time, when they are going to exit dependent so.
It's and we're still on pause for for a straight.
The next question comes from Vishal Shreedhar at National Bank Financial you disposed of a property for $55 million. What was the reason for the disposal and should we expect more disposals across the network.
Oh, it's important to stress that these actions happening and a more normal course of business. We always look at the capacity of a site to generate operational cash flow is versus the real estate value. So this is also one of the reason why we like to on our own store.
So it's also our duty to shareholders to consistently evaluate our assets and we have teams that are always looking at optimizing our real estate and our store portfolio.
So I find the value today is were making a deal versus operating the assets and long term and we will always ensure that we are allocating our capital efficiently.
And investing and in years and that will provide us with our best return with best return and and while staying focused on our long term strategy.
These transaction are common and our network, but the Marriott and the materiality of this transaction for US It suggested the additional disclosure for this one.
The next question comes from Chris Lee and did you have that securities since.
Since b to B is a relatively small part of pushed us fuel business in the US is there and opportunity to grow the b to b business to take advantage of the structural growth and fuel demand by trucks and fleets driven by ecommerce.
Yeah, I'd say the short answer is yes, we are very strong and b to B in Europe, and it's we've seen and hold up very well during the pandemic. On these drivers are also great C store customers. The key to activating this opportunity is really having a harmonized network and our own brand since day its little bit of the checks on to the AG is we're evolving from a.
A major brand marketer to more of our on brands. So today and many markets. We would fly multiple brands circle, K, Exxon shell and that and Thats confusing for the customer and and you were not able to provide.
A common offer so as we have done more transitions to circle K Youre now, having some very large markets, where we are leading and share and able to have our own brand. We absolutely feel that need a b is a big opportunity for us here in the United States and you will see us focusing on more on that and the coming years.
The next question comes from Michael Van out that TD Securities normalized operating expenses declined 8.8% and you attributed that labor efficiencies lower cost of goods not for resale and lower discretionary expenses.
Can you provide the relative importance of each so we can get a feel as to how much of this will return when traffic increases can we also assumed that the rollout of fresh food fast doors and does not add much to operating expenses.
So Michael the labor efficiencies were an important factor this quarter, so, but our success and controlling operating costs is a constant discipline and Weve mentioned many times that we have a long term objective to optimize cost and our business when we talk about cost optimization.
It is mostly about leveraging our scale and we have built a form up and formal structure to ensure that we are developing the right model in place and and that the benefits will be a long lasting.
Savings are expected to be significant throughout 2023, and part of those savings will be reinvested in our businesses and.
And either in dollar terms towards returning return generating generating initiatives or and labor by relocating towards more value added tasks.
Our decentralized model is our strength and this will not change, but there always there's ways and to work together across businesses and sometime even within the given business unit. So to drive cost optimization and use our scale is very important and that program is all about that so.
And this relates to areas like.
Goods not for resale so Jan fr, we refer to that often SGN fr like marketing goods real estate and construction costs maintenance labor and parts.
We've spoken about US smart sales also in the past, which permit time saving on cash Register reconciliation and bank deposits and we also mentioned smart AI enabled cameras that help our teams reduce the amount of time that required to review phase two spot for older Test These time savings on.
Are being reinvested into more front facing activities that ultimately benefit service levels and sales.
Our label model, which was initially developed at the holiday gives us control over the labor allocation of each test with our stores and allow us to to adjust to traffic and and demand patterns, making sure. We maintain service excellence, while optimizing the distribution of labor across the stores.
And off guard and of course US road, depending on mix, we took a very close look at all non critical expenses wetter and marketing travel our consulting fees and while these are not to be permanent it's demonstrated the ability that our team has and adjusting our business model to maximize.
Cash flow was during more challenging times.
Finally, a fresh food fast program will be driving are relatively low increase and hours worked at store level, but as we're looking at the total contribution of the of the program and of the program on their return on capital lease basis, where we're including all these components. The two delivered a desire return of the program, which is in line with our on.
Typical.
And for these types of program.
Our next question comes from John ROI on JP Morgan Securities.
Are you dealing with restrictions and any locality is that our inhibiting the rollout of the fresh food program have you noticed any hesitation in terms of consumer behavior to this type of offering or are they generally comfortable with the safeguards you have put in place.
A good question, John and I think.
That part of our programs one of the things we're very excited about this program.
Has been rolled out successfully to our 1500 stores and I'm not aware of any local rules that prevented the vast majority.
You already and the products and this program are wrapped at that production facilities and never touched by other stores. So we think thats really fits in well with consumer wariness.
Wariness, if you will and particularly if those some of those behaviors and concerns persist post endemic.
More traditional categories like hot dogs, and bakery, and certainly been impacted by Cove and local rules on many of close to at the height of the pandemic.
And both in Canada and the us.
Cold beverages continued to perform well and Europe and in North America. Despite the restrictions. So we don't and it doesn't appear on our customers and shying away from the hot and cold side of the business.
We are seeing.
Increases in these categories, but they are are they are dependent on traffic and the routines of our customer's going to work and those certainly been disrupted so we're.
We're optimistic that the post cove and that the normal traffic patterns and habits and figuring that morning day part will come back.
And it's a good opportunity and to the.
But this is a low touch program.
From both and employee and customer perspective, and that's important from a customer standpoint, but also food safety as customers want to get in and grab and go.
We think the trends.
More snacking less meals will continue post go live and we think this program very well fits into those those trends.
We received a lot of questions on the easy market, how is that evolving what trends were seeing in Norway and elsewhere and what initiatives. We're working on that are allowing us to learn and build our strategy. So perhaps Brian you can speak to our investors about what we're seeing and what we're doing on that front.
Yes, I think we started this journey I guess nine years ago, when we bought status oil and this journey was underway in Norway.
Which had a lot of factors in place to accelerate that journey on one very wealthy country overall heavy government subsidies.
To assist the adoption lower electricity cost and clean grid, it's largely a hydro.
Grid in Norway.
And the structure in place to handle that load and the consumption. So we've seen EDI growth there over the years now just 13% of the fleet and the most recent year and 50% or more on the cars being sold being.
Being E. B. So we're certainly very in tune and these trends and we're taking advantage of what we think is a leadership position in the country to test different strategies to see how we can participate in this journey.
There is a journey and see who on these customers and we think our industry is well positioned versus utilities or others to create an ecosystem for our customers mobility and energy.
We've mentioned that we partner with and and Tesla and particularly to and high speed charging stations. Our networks. We've also rolled out circle K brand and Chargers and Norway. We now have over 1000 Chargers on our sites, including.
Including more than 500, those and Norway.
We have 2700 circle K Chargers in People's homes, and offices, we added more and the last quarter than we did and the previous year for the home charging.
We now have 90000 customers have signed up for our circle K charging app on their phone.
And so we continue to develop new sites were caught contemplating how we lay EDI into those and include dose without fuel pumps on a car washes and making sure that we've got the EBITDA right location.
We're focused on a wash rooms were focused on the food offer us to make sure that and that.
Continues to be relevant for those customers look for places to charge, we know that the conversion rate of a charge into the store is actually higher than fuel conversion approaching 40%.
Those occasions shopping in the store. So we think Theres business, there and we're very pleased to be on this journey and Norway working to see how we can be a total solution here.
And your North America, you were working with different partners.
To strategically deploy chargers in some areas. The on the go will likely starting in Qubec, which also has a very clean read and then in California, but.
But we absolutely believe that the the learnings.
From Europe are transferable, and we're going to continue to focus on us.
Winning model, there and be able to quickly adopt that North America and the times right.
Great. Thank you Brian. Thank you for road that covers all the questions for today's call. Thank you everybody for joining US we wish you a great day and look forward to discussing our third quarter 2021 results in March.
Thanks, everyone. Good day.
This concludes today's conference call you may now disconnect.
For Sina Sanuk off balance sheet.
Net mm facet that day messy.