Q3 2021 Alimentation Couche-Tard Inc Earnings Call
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Good morning, My name is Sylvia and I will be your conference operator today.
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Good morning, I would like to welcome everyone to this web conference presenting all of your market pushed out the financial results for its third quarter 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 a 90 day period also please remember that some of the issues discussed during this webcast might be forward looking statements, which are provided by the corporation with its usual caveat. These.
These caveats of risks and uncertainties are outlined in our financial reporting therefore, our future results could differ from the information discussed today, our financial results will be presented by Mr. Brian <unk>, President and Chief Executive Officer, and Mr. <unk> <unk> Chief Financial Officer, Brian You May begin your conference.
Thank you Jean Marc and good morning, everyone. Thank you for joining us for this presentation of our third quarter 2021 results.
One year after the start of the COVID-19 pandemic I am pleased to report that across our global network. We continue to have solid results. Our customers continue to utilize the convenience the proximity of our channel or the every day day needs with total.
Raw basket size remaining strong.
<unk> business, we achieved healthy margins.
By the persistent increase in product costs throughout the quarter.
The fuel volumes like traffic, we're highly variable with areas of renewed locked down during the quarter, particularly in the urban areas. Those areas showed very soft demand while other areas of strengthened.
In our strategic ambitions, we made notable strides as we evolve our model to become a more innovative and differentiated retailer.
This included development of our fresh food program as we prepare for the second wave of the implementation as well as the advancements in our innovation journey with the opening of our first frictionless store.
The expansion of our data driven localized pricing initiatives and mobility journey.
During the quarter, we closed on the acquisition of our circle K, Hong Kong and I am excited by the collaboration with our new talented team members and the potential for growing together in Asia.
We also just Scott had further discussions concerning the operation of partnerships with CLARCOR, which we announced in January.
We're looking at areas of cooperation, including fuel merchandise purchasing private label development data analytics and improving the customer journey through innovation.
I am pleased with the preliminary discussions and how possible collaboration with car four has the potential to create value for both companies.
The formula share results I want to add some thoughts.
On the catastrophic storm that recently shut down the state of Texas. After the end of the quarter with millions of without power and water I'm proud to say Theyre of Texas team work day of nights keep our stores opened by the essentials to our customers.
At one point, we had over 50 per cent of our stores closed, but we're back in full operation with within days.
I heard many stories of team members, who went above and beyond the call of duty to help our customers and our communities.
I'm now going in terms of the results for the second quarter.
Same store sales growth was two 9% in the U S. Four 7% in Canada, and two 8% in Europe and other regions compared to the same quarter last year.
In particular in the U S alcohol beverages showed strong growth as did the tobacco category, specifically and the white nicotine and baby products. They all benefited from increased promotional efforts that aimed at driving traffic to our locations.
No doubt the renewed escalation of the pandemic during the quarter, including strict stay at home and curfew orders from some of our key markets.
Where we operate impact of visits to our stores.
As said, we continue to work hard to drive more visits to the stores through increased awareness of our loyalty initiatives are smart smart value program.
Gamification promotions and by ensuring that we remain focused on our core value proposition and I'm being responsive to our customers' needs.
We're happy with the progress of our North American food program and assortment as we prepare for a second stage of the implementation.
Having completed the first stage of opening 500 fresh food stores will now expand the program to an additional 3000 stores in the coming months.
Well continue to improve and simplify the offer and our focus remains on quality and the ease of the offer of both for the customer and for our store team members.
Stores with fresh food fast had been performing well relative to installs control stores within the same markets based on these results we plan to leverage the learnings and look forward to expanding throughout North America during our fiscal 2022.
In Europe, we continue to develop the new fresh food fast concept as the platform for future growth.
Making it easier for our customers by introducing the self service option and the grab and go elements to the freshly prepared offers that we have in all stores.
Also in Europe, we have piloted of horizon store layout in Sweden, and Lithuania, where the brand look and feel as well as additional touch free service and payment solutions that we've developed during the pandemic.
And throughout the year dispense beverage sales were behind prior year during Q3.
But our performance continue to outpace that of the market and our coffee program. We've made progress in our sustainability journey journey during the quarter and our commitment to becoming the more environmentally responsive retailer.
And our U S market, we transition to a 100% sustainably sourced coffee across our stores, meaning it doesn't just tastes good it actually does good.
Coffee program give us tools training and services to coffee farmers to help build long term sustainability.
We're proud that across Europe, we offer rainforest alliance certified coffee and we'll be implementing the RFA certified coffee, our Canadian sites by the end of the fiscal year.
Overall packaged beverage remained strong during the quarter introduction of new products, along with a variety of scaled national and global promotional initiatives propelled the energy drink share of the market sports drinks also continued impressive momentum versus prior year with new offers and increased focus on take home packages.
Alcohol sales also continued strong improvement versus prior year with imports and hard hard seltzer is being the brightest spots in the category.
[noise] assortment enhancements and the expansion of larger packages of also provided a lift of sales during the pandemic.
During the quarter, which standard our queue line program two initial 600 stores, creating a clear path to purchase and the ability to place high impulse items in front of the customers immediately before checkout. We're very pleased with the release of results and have plans to expand this concept across North America and Europe in the coming months.
In Asia and other age restricted products nicotine once again showed solid performance the prior year, especially in Europe.
The tobacco products continued sales growth due to expanded selection of body in white and paper products in line with changing consumer trends.
The promotional activities in the in the cigarette category. We're also noticeable traffic driver for the quarter.
Yeah.
We remain excited by the impact of our data centric localized merchandising pricing efforts.
At this point about 60% of our network is now live.
With new pricing capabilities, and we're seeing results that meet or exceed internal projections.
As a result, we're looking at of rollout plans for the remainder of the company in the upcoming fiscal year. We're also piloting the use of store specific data enhanced product assortment and promotional activity.
We continue to believe Theres, a very large price to optimize the locally.
Assortment and promotion along with pricing.
Moving to our fuel business same store fuel volume growth during the quarter remained negative due to the impact of the worsening pandemic on miles driven and there are many areas as they were impacted by significant lockdowns again, particularly in our larger metropolitan markets.
For the quarter of same store fuel volumes decreased $15 seven per cent in the us.
The 10, 3% in Europe, and 19, 9% in Canada compared to last year.
Despite these declines and the increasing product costs during the quarter, we continued to realize healthy fuel margins across the network benefiting from irrational dynamics in many regions as well as solid execution at retail.
Yeah.
During the quarter, we converted more locations to our circle K fuel brand, bringing the total now to over 2007 hundred sites.
In North America and results continue to be encouraging.
Feeding our projections.
The over 850 sites, we're currently piloting various strategies to build.
Circle, K fuel brand awareness and grow premium sales and we're pleased with the initial results of these pilots as we invest in the circle K brand.
Yeah.
In addition to drawing the circle K brand, we continue to further our capabilities in fuel procurement and transportation.
Now fully launched trading operation out of Houston, Texas, and a rapidly growing of proprietary free fleet to maximize sourcing flexibility.
We are of a newly formed partnership with love supply and trading arm musket. It creates a very unique entity in the industry with tremendous scale, both on gasoline and diesel that we believe will continue to improve our competitiveness and margins over time.
In the fall, we opened circle K logistics in Riga, which is the centralized 24, seven operations and controls sorry call center responsible for much of the network fuel related logistics.
Plans all of our in House truck fleet from North America in terms of operations for our terminals in Europe.
The improved our operational performance and obviously it reduced the operational cost with.
With great talent and the lower cost in Riga.
For the quarter. We also saw much attention to the advancements in mobility, including Gm's clever Super Bowl campaign to challenge, Norway. The World leader in EV developments, we seize that opportunity to show our pride in our Norway lap, which has made us of leaving leading EV charger in that country.
We've also expanded our home and workplace solutions to 4500 charging points in Norway.
North America, we continue preparations for circle, K and partner charging at our sites and key markets. This year, beginning in Quebec and California.
This quarter, we advanced our innovation journey with the opening of our first section of the store to stock connect from the Mcgill campus. The stores the unique retail laboratory in partnership with Mcgill University in Montreal <unk>.
And in January on the Mcgill campus and is receiving very positive feedback from our customers were impressed by the technology.
And how we're delivering a fully frictionless experience in a timely manner and with great accuracy.
Store team members have been outstanding and Bachelors and playing a key role in the successful location.
The store not only helps us from the technology and research front, but also supports sustainability sustainability efforts in many ways. It will clear provide important insights and information as we expand our frictionless capabilities.
We will be piloting many technologies in the coming months, both inside the store and in the forecourt and feel we can differentiate our offer and truly making make the shopping experience of circle K easy in the future.
I also want to mention our efforts to expand the network through new store builds will continue to bleed since the great investment and we're investing in this organic growth lever and plan to ramp up further of capacity considering it a solid return on investment. This goes hand in hand, with our network optimization initiatives to upgrade the size and scale of our.
Locations, allowing for the best utilization of our footprint programs improve store layouts, and also identifying stores that no longer fit our strategic objectives being proactive and getting them out.
So with that I'm of the pause here in the cloud take you through more of the second quarter financial results Claude.
Thank you, Brian ladies and gentlemen, good morning.
For the third quarter of fiscal our fiscal 2021, we are happy to report net earnings attributable to shareholders of the corporation of $675 million or <unk> 65 per share on a diluted basis.
Excluding certain items for both comparable periods adjusted net earnings for the third quarter of fiscal 2021.
Were approximately $622 million or <unk> 56 per share on the diluted basis compared with 62 per share for the third quarter of fiscal 2020, which represents an increase of 7.7 per cent.
We maintained solid momentum during the quarter in the face of challenging environment. Our business continued to generate strong cash flows as we stay true to our unusual cost discipline and focus on the operating efficiency.
We also return further cash to our shareholders by way of higher dividend payments year over year as well as well as are the share repurchase program.
The true, which we have opportunistically bought back.
The 60.
$16 million of our class B shares for more than $513 million during the third quarter and a further 12 4 million shares.
From the end of the quarter until March 12.
For a total spend of nearly $900 million since renewing the program last November.
I went from golf.
We will now go over our key figures for the quarter from.
For more details please refer to <unk> Europe.
Our NPS the available.
I'm sorry.
During this most recent quarter, excluding the net impact from foreign currency translation.
Merchandise and service revenues for the third.
Quarter of fiscal 2021 increased by approximately $192 million score of $4 five per cent.
This increase is primarily attributable to the growth in basket size, which more than offset continued softness in traffic as well as the contribution from acquisitions, which amounted to approximately $83 million.
Several categories continued to perform well across all the regions, including tobacco packaged beverages alcohol and grocery products.
For the third quarter of fiscal 2020, one on the same basis merchandise and service gross profit increased by approximately $13 million or 0.9%.
The contribution from acquisition amounted to approximately $24 million.
Our gross margin decreased by 1% in the United States to 33% and by <unk> seven per cent in Canada to 32, 2%, mainly due to various COVID-19 related impacts such as shifts the word larger package size of within the tobacco and beverage categories.
<unk> from the four of bringing personal protective equipment products to the lower of their cost and net realizable value promotional activities to drive traffic to our store as well as the lower margin on prepared food given bullets old traffic patterns.
Our gross margin decreased by three 8% in Europe and other reaches from 38, 5% due to the change in product mix towards lower margin categories as well as the integration of circle K, Hong Kong, which has a different product mix in our European operations.
Excluding the circle K, Hong Kong, Hong Kong, our gross margin in Europe would have been important per cent.
We now move on the fuel side of our business in the third quarter of fiscal 2021, a road transportation show of gross margins was $31.86 per gallon in the US an increase of nearly five cents per gallon.
In Europe and other regions. The road transportation fuel gross margin was 11 36 U S cents per litre an increase of nearly three U S cents per liter and then Canada.
10, 36 Canadian cents per liter and the increase of more than two Canadian per liter.
Healthy road.
Transportation fuel gross margins were driven by the competitive landscape.
By of flexible sourcing strategy that allow us to benefit from favorable supply of the Portuguese.
For the third quarter of fiscal 2021 normalized operating expenses decreased by four 1% driven by cost and labor efficiencies as well as the rigorous work and activity initiated to streamline and minimize our controllable expenses.
These positive items were also currently offset by COVID-19 related expenses normal inflation higher labor costs, and searching the region and incremental investments to support our strategy.
More specifically on COVID-19 related expenses.
These included thank you for serving bonuses additional cleaning and sanitizing supplies as well as mask and gloves for our employees.
Excluding specific items described in our in more details in our MD&A the.
Adjusted EBITDA for the toward quarter of fiscal 'twenty, 'twenty, one increased by $59 $6 million or four 9% compared with the third quarter of fiscal 2020, mainly due to higher road transportation fuel gross margins good cost control as well as from the net positive impact from foreign currency translation.
Representing approximately $18 million, partially offset by the negative impact of COVID-19 onshore the there.
Also excluding specific items the adjusted income tax rate for the third quarter of fiscal 2021 was 17, 6% compared with 19, 6% for the third quarter of fiscal 2020.
The decrease for the third quarter is mainly stemming from the impact of different mix in our earnings across the various jurisdictions in which we operate.
Is that the January 31, 'twenty or 'twenty, one of our return on equity remained strong at 24, 6% from a return on capital employed stood at 16, 4%.
During the quarter, we once again generated solid free cash flows and ended the period with the leverage ratio of 136 to one well below our comfort level of $2 25 to one.
As of January 31st 2021, and we have ample balance sheet flexibility with $2 $7 billion in cash and an additional $2 $5 billion available to a rig.
Credit facility.
Finally.
On March 17, 2021, the board of directors declared.
The dividend quarterly of $8 75, Canadian cents per share in the crude its payment of poor April bank 2021 to.
To close I would like to highlight the work our teams have accomplished throughout the last year.
During the we emerge from the pandemic in a strong financial position and you're ready to accelerate capital deployment toward our strategic initiatives, while always remaining focused on driving value creation for our employees customers and shareholders.
With that I. Thank you all for your attention I'll turn the call back to you Brian.
Thank you Claude.
I want to reaffirm that despite COVID-19, we remain laser focused on the strategy and I'm pleased with the progress we've made while navigating the pandemic.
Lot of work over the last two years across our customer offer are starting to come of life in our stores.
In closing I'd like to talk about what we're doing as a company in terms of the COVID-19 vaccinations. We've made it clear of our team members that we believe in the promise of the vaccine.
And help to move our communities and of businesses. The other side of this pandemic while the.
The availability of the administration of vaccines differ substantially across our network, we're working hard to make it easy for all of our team members to get vaccinated and more proprietary the thing prioritizing our frontline essential workers.
We're strongly encouraging vaccinations, incentivising, where appropriate and providing information on how that can be attained in each market no cost to our employees.
I noticed one of the lose another family member of a friend or colleague to this virus.
We've also had frequent reminders of cross business to not let our Covid guard down by wearing masks continuing to wash your hands and maintain social distancing.
Optimistic that we're seeing of light at the end of the tunnel in their lives and operations will Bertrand from new normal in the coming months.
We're staying committed to our long term strategy and evolving retail model.
As Claude said, our balance sheet is very healthy putting us in a strong position for future opportunities as they may arise.
And finally, and most importantly, and the one year anniversary of the pandemic I want to thank all of our team members, especially those in our stores for their incredible resilience during these challenging times.
For their continued commitment to the business, it's making our customers' lives a little easier every day now answer questions that we've received from analysts.
Thank you Brian the first question comes from Graeme Kreindler at eight Capex.
I'll just pushed out of view its ability to generate customer loyalty and stickiness as of reopening begin.
But the trend of basket consolidation of appear to be durable I'll have the merchandise mix changed in the states that have begun to open up to reflect changes in consumer preferences.
And as I, just said you know during the pandemic.
We've taken a long term view and remain laser focused on the strategy and the core of that strategy is really a multi pronged approach to creating loyalty you know.
That includes the customer journey and include piloting.
Piloting several initially.
The initiatives both at the four quarters I said at the store that we think can significantly change the shopping experience.
We want to ensure that we've got the right pricing the right assortment and the right promotional activities and a very very localized basis using big data.
We want to make sure we've got the right value propositions are examples would include our smart value program or lift tool.
Our AI fuel pricing tool.
We want to keep our customers engaged with us so of game of find the promotions is a great example of us doing that to us to drive traffic.
Working on innovative ways to train our staff to ensure that they are able to provide a.
The high quality and customer high quality and consistent customer service.
We've rolled out in the in during the pandemic of food offer that.
We believe it's resonating with our customers and we're investing in our fuel brand.
So with regard to what we're seeing in reopening.
Believe it's a bit early to draw conclusions, but certainly alcohol as Claude mentioned in beverages continued to be strong and us traffic improves with the particularly the morning day part we are seeing a slow improvement of our key food and dispense beverage categories.
Second question from Graham can you provide an update on your customer loyalty, including digital.
Yes, I'd be happy to touch on that a lot of activity in the space. Some of it just very foundational about how the brand.
Appears as communicated the online.
The more tangibly lift, which we've talked about we've now got that complete in North America for a year and we're piloting in Europe and the analytics talent that we have developed both in North America and now in India has done some post audits and we feel that there is at least the 4% incremental sales growth utilizing lift.
And we know we've got the opportunities used the tool even smarter.
Today about 14% of all transactions.
We were able to drive an incremental item and you know we know there's upside of that as well.
The circle K extra and easy rewards continue to grow but candidly, we don't think are industry or us of crack the code and.
And we have and that has something that truly engages the customer so in parallel with the rebranding efforts on the fuel which opens up the technological path.
It opens the door to more comprehensive and innovative approach the loyalty and the other consumer offers that can be incorporated like mobile payment click and collect subscription.
Subscription so the focus of the new program that we're developing in parallel with the rebranding efforts is really going to focus on east <unk>.
Connection in value versus the traditional clubs earn and burn approach.
We plan to of pilots up in the next few months.
Uh Huh, followed by rollout assuming we get the customer response, we expect so again a lot of activity in the digital space.
The next question comes from John Royall at J P. Morgan Securities Inc.
Store fuel gallons in Canada had a significant acceleration in pace in the pace of decline from Q2.
Is there anything you can call out a particular source of weakness and how did that decline progressed through the quarter and into the February March period.
Yes, first and foremost I think we've done a good job at retail the providing of consistent value and price positioned customers.
Canada was a challenging environment in Q3 because of tightened restrictions around the pandemic.
Our two main markets, Toronto, Montreal, where we have high concentration of sites.
Both put in place tougher measures, which dramatically restricted travel and us kilometers driven income.
We had stay at home orders stay at home orders in place in October and November were all nonessential stores were closed for periods during that time and then after that we had a curfew put in place starting at eight P. M.
Ontario, while there was no curfew, we had closures of businesses in the entertainment that impacted travel.
And that progression.
Worsening through the quarter.
Moving slightly quarter to date from the exit rate, but remains very challenged the other.
So I think that's just the reality, Canada us light lagged in vaccinations. The good news is it's ramping up rapidly now and we expect the trends of both of our traffic and our fuel volume to follow those as the society reopens.
Second question from John Royall.
We're executing on your share buyback quickly relative to the cold water on the authorization could we read this as opportunistic given the move.
Or do we expect the relatively ratable pace going forward and perhaps in the early completion on the authorization.
Thank you John.
For your question last November when we put the buyback in place we said that we would act on that other.
Opportunistic basis.
We continue to have a strong cash flow generation, our leverage is low and that creates the setup the to act.
Drop in share of prices. So we got more aggressive with the recent pullback on our share price. Despite the strong earnings Europe.
Fortunately the two presented itself. So Furthermore, also we believe in our strategy and the execution of all of it.
By our team.
We also see value in our stock right now.
And nonetheless.
We are still very active on the acquisition from but Thats you know we have not been successful in finding the right match of the right price.
So finally, we see a two day, our valuation as a very solid way for us to return value to our shareholders.
I cannot speak to the to.
The complete the completion of the authorization, but we already spent close to 900 million from the renewal of data.
The November to March 12.
We are almost there already so.
Yes.
Confident of American question, the kind of makes.
Or is it.
The next question comes from Patricia Baker of Scotiabank.
Have there been any further discussions with careful around partnering on a number of initiatives to drive value for both parties. If so have you made any decisions on where you might start and when.
Yeah.
Patricia I would say the project is very active we've got teams formed.
Theres five or six areas that we think have meaningful opportunities, but just to stay focused we challenge. The teams to let me start with three net being around fuel procurement operations merchandising procurement and private label.
We don't have outcomes, yet and I think I anticipate it's going to be several months or more before we see definitive opportunities, but I'm optimistic given the scale of both organizations in these in these key areas that we can add value to each other.
The next question from Patricia you noted higher promotional activity to drive traffic from the stores in Q3 can you discuss how effective the promotions might've been are there any differences in effectiveness in Canada versus the United States and do you envision higher promotional activity.
Through the coming quarters as traffic remains impacted by COVID-19.
Yeah. It's the promotional investments were made during the quarter, primarily in the tobacco categories, we self invested.
In the category.
What's the Gulf really wanted us to grow membership in our tobacco club.
Particularly in the premium segment and the second was to drive traffic.
Margin percentage come down and.
It did help drive traffic and basket. So when we look at the postmortem, we see a net gain in gross margin dollars versus areas, where we did not make that same investment. So we think there's a good return there.
While top line, we generally don't didn't like the results.
Look at our peer group, particularly in the US we're generally pleased with how we performed during the quarter again, given some of our core markets.
Experiencing significant lockdowns during the quarter.
In the U S traffic was challenged in the first half of the quarter. It got worse in P. H P. Nine I would say it's stabilized in the second half of the quarter as you know the promotions manage the two studies of the decline.
Recent weeks have been encouraging and barring any changes in COVID-19, where cash cautiously optimistic that the.
As vaccinations continue to ramp up.
We will see traffic improve.
In Canada, you know traffic did worsen throughout the quarter as I mentioned earlier with the curfews and robotics restrictions largely explaining our results both on the fuel side and in the in the merch side.
Yeah.
The next question comes from Derek delay of Canaccord Genuity can you comment on the drivers of the merchandise same store sales or alcohol in consumer goods still the key drivers.
Yeah, I'd say in general Merch sales were strong in the alcohol category.
I think we're still seeing bars, and large sulphate social gatherings compared so.
I think our channel continues to play a role in meeting demands and the law.
Larger packages of certainly been a part of that.
Packaged beverage has also been strong.
Alternative nicotine.
Including white nicotine of shouldn't really just tremendous growth well cigarettes per week for the quarter and actually held back same store sales, but we injected some deflation as we invested in price in the quarter.
But we're pleased with the underlying unit performance and then in the other March you know really candy salty snacks.
The new performed well as people really I think still consolidated shopping trips and we saw a strong basket.
The food.
Obviously, the weak spot across the board due to trips we just need to see society opened in particular that morning commute.
It's just so important to us.
And in terms of geographies, we think the we saw trends very similar in the us and Canada and Europe.
During the quarter.
With the Europe, having a bit stronger per.
<unk> and food being down just a couple of percent and that's really a testament to our strong <unk> business, which has really shown a lot of a lot of resilience during the pandemic.
The next question comes from Michael the announced at TD Securities.
While so far better than same store volumes merchandise same store sales in all geographies slowed from the past few quarters and have basically returned to more normal levels can you describe the changes youre seeing in consumer behavior in terms of traffic basket size and category mix as compared to the past two quarters that explained the slowing trend where are the food.
Fresh foods sales today as compared to pre COVID-19 levels and have you seen the substantial pickup from the rollout of the holiday food program across North America.
I'd say, Michael in the us while highly variable overall traffic was flat compared to Q2.
And we did see a slight decline in basket that largely.
Explains the difference quarter over quarter, Inc.
Canada as we mentioned several times of that traffic was challenged because of the curfews b.
It was flat so a little different dynamic there.
In Europe, the traffic has strengthened actually during the quarter, but we did have a second wave, particularly Ireland, which was locked down very tight.
That made it difficult to compare versus Q2.
And basket continued to be strong in Europe.
In terms of category mix.
You know what I described earlier for the U S has been fairly consistent across the network in the U S. A.
<unk> food as I mentioned has been the primary challenge you off of double digits and that linked strongly to the traffic.
Canada cigarettes remain higher than normal, but have come down from the time, where the Indian reservations for clothes, but getting that explains a lot of the basket.
The strength there.
And then food in general again impacted by traffic, but when we look at our new program in isolation. It continues to perform very well compared of sites that are not in the program.
We continue to work on refining the operational side.
Stores with the program are comparing favorably to those without in the same markets, we're seeing lift in sandwich units.
And we did the some minor communication the quarter really the pilot what.
Enable to do during the pandemic, which is communicate the offer and sample.
So we did that on a very very small pilot basis into the very pleased not only with the the spike in demand for the food program, but also the the.
Tail as we quit promoting we continued to see our salespeople to be very strong in that pilot so optimistic that when the time's right, where we're going to be able to start talking to consumers about that offer.
Michael second question prior to Covid Opus was a relatively good indicator for us fuel margins most quarters, but over the past four quarters. Your U S fuel margins have been radically different than data reported by opus.
Once the volumes rebound to 2019 level is it reasonable to assume that pushed out will continue to outperform the opus data and therefore the industry in general by at least five per gallon and that some factors that you mentioned in past quarters will play a role.
The question there [laughter].
I'd first start by saying that Youll Opus says is a good indicator, but not a perfect indicator of.
The fuel margin given just mixes.
The geographic differences of different competitors that you look at the industry.
But there's other factors you know when we look at ourselves and we think we bring unique scale to the to the equation.
Thank you know different companies have different levels of operational execution.
We've done a good job balancing margin and fuel volumes.
We're not chasing something that may not be there in certain markets.
We're benefiting on the margin side from the rollout of the circle K fuel brand.
We're investing in our fleet and building more optionality in our procurement with our partnership with musket, which is the supply of arm of gloves and that that relationship. We think has the opportunity to dramatically accelerate our supply and trading capabilities again for the further differentiating.
How we deal with fuel from other competitors in the industry.
The next question comes from Mark Petrie at CIBC World markets with regards to the M&A can you help us understand your criteria with regards to deal structure is the minority interest something you would be interested in what steps can you take to achieve meaningful value creation.
<unk>, our synergy realization without integration and control.
Yes, Mark we've always had a controlling interest in our main acquisitions.
To your point, primarily to ensure we can drive results.
Yes, I think it's a it's a core skill set of Couche <unk> over the years.
Yeah, we did recently make a minority investment in fire and flower, we now 19, 9% of that company and there is a path to control but.
Now that said, we would be open the minority interest, but it would really be a case, where we'd really be comfortable that we're aligned with the partner their capabilities and their vision for the business and then secondly, and equally important b.
Business opportunity that we really have to love and believe deliver significant shareholder value.
The second question from Mark.
You highlighted that store by store pricing is in the 60% of the network, but there is still significant opportunity what are the key steps from here how far along the value in terms of realizing benefits and can you help shape expectations for how material that benefit could be.
I think it's important right off the top to mention too.
The state that we're committed to being a more data centric company and working hard to develop our capabilities. We built out the team starting in Tempe, but then a second team doing more of the core.
The work in India, and the debt teams currently being built out now, but we think we've brought some great talent of the last 18 months.
At the high level I'd called Us the top five initiative in our strategy.
We launched the first piece, which was localized pricing and our Sweden and grant cadence of Arizona business.
Pleased with the results the improvement in gross margin dollars is exceeding our projections.
So we're rolling this out to nine more b us this year.
It's not 100 per cent of the Skus and again as we cycle.
Test and learn test and learn model, but we think it's going to continue to get better and better.
Again, we started the limit number of stores the number of Skus to make sure. We're doing it writes a benchmarking constantly and we will gradually in Q increase the skus and number of stores.
And then equally excited about.
About localized assortment promotion.
The big data to really tailor, our assortments and of promotional activity to what the local site and the local customer needs. So.
Excited committed and we will be able to communicate more in the coming quarters.
The next question comes from Karen short of Barclays Capital.
How are you thinking about the industry broadly regarding EV penetration in the US given the new administration of new policy initiatives that have come out and as it seems like more mandates will be forthcoming whether the infrastructure is there or not.
It's the Karen.
Acacia is reality I'm not sure everybody in the industry, our industry generally believes that yet but.
We do and we're preparing to face it head on.
<unk> can create opportunities for those of the prepared nor.
The Norway shows us that convenience and fuel sites have a role to play in the build out of the infrastructure and that there is a business model.
Still too early to discuss the economics of that model, but important to see how we can continue to make our customers lives easier and be a part of that electric cars have to be washed. The majority of our trips are still convenience the only.
But it does it does change the model. So we've got many of the successful ingredients in place in Norway.
But also recognize Norway and the pace at which <unk> developed.
Like some other countries in Europe had cheap renewable hydro power.
And the government is fairly wealthy and had the ability of aggressively subsidize the purchase of vehicles and buildout of the infrastructure.
Not every market is the same and we're learning about the U S and seeing how we can apply our experience from Norway to make sure we participate at the right level in North America.
We will also begin to do work to strengthen our <unk> position in the US as we see in Europe that has just been very very resilient in the face of BV.
And finally, and I think most important we're building out capabilities. It will give us the ability to consolidate what's just tremendous demand in a very fragmented industry for years to come our focus is building out of top tier network with top of your capabilities and being a part of our customers' lives for years and years of tick up.
Yeah.
Second question from Karen <unk>.
You called out of the merchandise gross margin pressure in Europe, and other regions of nearly 400 basis points due to a change in product mix towards lower margin categories related to the integration of circle K Hong Kong should we anticipate pressure of this magnitude the purpose.
And the forward quarters until you cycle the acquisition.
Does the timing of the acquisition play into the pressure or asked differently should we expect greater pressure when taking into account of full quarter impact of circle K Hong Kong.
Okay.
So Karen.
Gross margin in the Europe, and other region was pretty good points, 5% to 40% of Europe. If you don't factor in.
Hong Kong units, our business units over there.
Hong Kong had an impact of about 150 basis points or six weeks out of the 16 weeks in the quarter. So you should.
The proportional impact for a full quarter.
Give you more colors of Hong Kong stores that have a higher cigarette mix in the.
And the high foot thrust of your Gary of the operating.
And you know that cigarettes of the lower margins than the average store margin.
There was also a higher cigarette mixed during the pandemic caused by growing cigarette sales into the orphan product penetration.
The way or to what we see in other regions.
Furthermore, circle K, Hong Kong incurred startup expenses with the opening of the new automated center of <unk>.
Brand, new automated centered of interest launch.
Late fall. So these logistics expenses hit the margin during the quarter and should not be recurring in the future.
So excluding the Hong Kong Europe was impacted also by mix.
For the remaining decline.
The decline was coming mostly.
Because of the end of March and speaking of the work.
With the lower sales and prepare food and the higher cigarette.
Mix also but the margin was most of the inline with previous quarter trends.
The next question.
<unk> comes from Bobby Griffin at Raymond James.
When you talk about the outlook for operating expenses in calendar year 2021, especially in the context of potential U S. Wage inflation do you see a portion of the $2 50, an hour of the emergency appreciation pay becoming permanent on an ongoing basis.
Okay.
While as you know.
We are not giving any outlooks, but clearly if the minimum wage war to rise it would impact of all through all of the other retailers.
We have the necessary scale and resources to invest in our business and drive productivity and we have in <unk>.
Place of broad program of cost optimization, that's driving significant cost reduction drove the business.
This program helps helps offset the higher cost inflation adjusted into the business. It also focuses on the store to reduce as much as possible in the administrative burden on the stores.
We also are staying disciplined on cost.
We continue to leverage our labor model. So all of the neighbor models with all of the two was around labels or scheduled the training also optimization of our labor so.
And finally as far as the emergency appreciation.
It was timely in nature. So we.
Consistently reevaluate the needs of our business and benchmark with the market and we'll react accordingly.
To put some back of it will put some back book, we're going a couple of the markets.
The next question from Bobby your leverage ratio continues to trend below the comfort level of $2 25 to one without a meaningful acquisition in calendar year 2021, you expect leveraged the stayed below the 225 of one target.
Well, it's important for us to maintain the strong balance sheet, then to optimize our capital allocation.
To the extent that we continue to generate the group as cash flows and theirs.
We believe we will examine all of the tools available to us stock buybacks remain an important way to return cash to shareholders and to support our our stock Opportunistically.
But that said we are active also on the.
On many of many trials.
The need to give it time. So this is so important for us to preserve the flexibility like I said earlier to be able to execute it and execute on the acquisition that we feel are of good strategic fit for us.
Okay.
The next question comes from Chris Li of <unk> Securities last quarter, you mentioned that the beta B fuel market is the big opportunity in the US how far has pushed our away from expanding into that market as the industry structure similar to the consumer market with a high degree of fragmentation and consolidation opportunities.
Yes, I'll take that so we love our <unk> business in Europe, and we've consistently grown at the nine years, we've been there.
An added benefit it showed great resilience during COVID-19 and specific of Norway, where we're seeing EV penetration the.
<unk> business has held up very very well.
The opportunity the us really opens up as we convert our fueled of the circle K brand and deliver a clear value proposition to these important customers. This year will will complete close to another 500 conversions with another 700 planned next year. So as you see entire markets are largely entire markets with the circle K.
Brand, you'll see us invest against B to B.
Grow this customer base, we think that's a strong opportunity for us in the coming years.
The second question from Chris can you please update us on the opportunities in the retail cannabis space over the next few years would this be another adjacent retail channel that fits your M&A criteria.
Yeah I'd say this is certainly an interesting adjacent channel.
We've got great expertise in the retailing of age restricted products alcohol and tobacco being the two obvious ones.
When we took our position in fire and flower it was with the clear goal that we identified.
Our management team and that was capable of developing a differentiated and winning customer value proposition.
And I guess two years and approximately I'm pleased with the results to date.
They've got a very unique operating model and also a very unique.
Platform that uses data to.
To both the gauge customers, but to help the operators are.
Understand their business a very deeply.
If we look at the bigger opportunity certainly, we're not yet legal and some of our big markets like the U S. B.
But to the extent that they become fully open and to the extent that we believe we have a better mouse trap. We will certainly look consider it a good adjacency and look to expand either by consolidating existing.
<unk> organic growth or building out our properties.
Yeah.
The next question comes from Irene the talent RBC capital markets.
Recognizing it's early days what are you seeing with circle K, Hong Kong and maybe some insights into the elements of their business model that could have an impact on the rest of the network.
As we said when we acquired that business I mean, we see it is of great platform.
To be in the conversation and grow in Asia.
We entered the U S, where the 200 store acquisition of 21 years ago, I guess and that gave us the ability to grow of multiple times over the next two decades.
We know of some of the same recipe in place we've got a management team that's got a strong track record and the solid reputation in the region.
No we've got credibility, whereas we didnt before to approach potential targets and we've got some.
Conversations in different countries us.
The way at this time in terms of what it does for us on top of that.
We know that convenience only as an area of that.
We will invest in and their capabilities in small format type of urban traffic footprints.
The inch merchandising and literally interchange merchandise and if you've been the Hong Kong.
All of our applicable.
They've got some advanced the DC capabilities with the highly automated facility.
That enables them to have daily inventory deliveries, which are necessary for the small formats and then I think they've got one of the best the Omnichannel loyalty programs out there in the industry today, and certainly that's going to play.
Role in helping us develop the program that I mentioned earlier.
The last question comes from Bonnie Herzog <unk> Goldman Sachs.
A few months now since the car for transaction was first proposed.
Now that some time has passed do you have any updated thoughts on your M&A strategy, especially as it relates to possibly moving into other retail growth.
Also can you update us on which geographies do you think are most important for you from an M&A standpoint.
Okay.
Yes, Bonnie I'd say that we continue to prioritize the us in Asia The U S.
It's because we've got scale.
We understand the market and we have a lot of synergy potential in almost any deal. We do so we'll continue to look while remaining disciplined.
We engage the number of opportunities over the last couple of years, but we.
We just don't believe the valuations of irrational.
That will change in time, and then Asia because of the majority of <unk> of the global GDP in the next couple of decades will come from.
That region as well as the Africa, and we've taken that initial step with Hong Kong and hope to have meaningful engagement with other opportunities in the coming months and years.
Europe.
Europe is very different country by country with different dynamics and so as I've said in the past that you know that is going to be a more opportunistic approach in terms of adjacent channels. We spent several years looking at grocery and the omni channel opportunities. We think it provides with convenience and E. Commerce will continue to be disciplined and look for opportunities.
That we believe create synergies with our core business whether that be.
In grocery or in other adjacent channel.
But we're active and as Claude said earlier the balance sheets ready.
Finding the right opportunities that we think are.
Our scalable and can provide value for our shareholders.
Great out of the last question Thanks, Brian in cloud.
That covers everything for today.
Thanks, everybody for joining us we went from a great day and look forward to discussing our fourth quarter and the annual 2021 result next June.
Thanks, everyone and have a great day. Thank you everyone. Thank you everyone bye.
Thank you. This does conclude today's conference call. You may now disconnect Maxi may Dan from misuse of CMS illegal channels of LNG, who is that not every day.
As of that Battle.
Yeah.
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