Q4 2021 Alimentation Couche-Tard Inc Earnings Call
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Good morning, I would like to welcome everyone to this web conference presenting them about personal cash towards financial results for its fourth quarter and fiscal year 'twenty 'twenty 1.
All lines will be kept on mute to prevent any background noise.
For the presentation, we will answer questions that were for it to us before and by analysts.
Would like to remind everyone that this webcast presentation will be available on our website for 90 day periods.
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 cabinets.
And these caveat and risks and uncertainties are outlined in our financial reporting.
And 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.
Okay.
Thank you Matthew and good morning, everyone. Thanks for joining us for this presentation of our annual and fourth quarter 2021 results.
Overall, we had a remarkable year pulp.
In terms of financially and operationally.
Despite the pain and we all felt through this last year and persistent pressures.
<unk> and our customers our team members and our supply partners.
Across our network, we made notable progress and our strategy of accelerating organic growth by expanding our fresh food offer to 2000 stores.
Rolling out more frictionless payment options.
And our data and analytics work and our fuel procurement and transport capabilities.
Also expanded our brands, particularly online and on the for CT and making them increasingly more modern and recognizable and every part of our customers' journey.
Through the acquisition of Circle K, Hong Kong, we made a long planned entry into dynamic Asian market and to our Norway lap, we push for the ambition to become a world leader and electric vehicle solutions.
Despite all the challenges brought on by the pandemic, we remain focused and committed to our long term strategy hitting key milestones and all of our key work streams and throughout the year.
I'm also pleased to report that we had a solid fourth quarter with results strengthening where we're seeing COVID-19 restrictions.
Across the board, we've had positive trends and same store sales and volumes as traffic is returning to our locations with rural and suburban recovering at a faster rate than urban.
Fuel volumes remained impacted by restrictive measures and steady improvements carried through parts of the network, especially in the us where we're seeing and returned to more normal driving patterns.
We also continue to realize good fuel margins and all other regions of the business, despite significant increases and product costs during the quarter.
15 months after the start of the pandemic the continued commitment for the business and care for our customers and that's been exceptional and during my almost 7 years as CEO of this company I've never been more proud of our team members and this past year.
Yeah.
Well I'll take a moment to address the recent cyber attacks and the colonial pipeline.
What happened after the quarter. It did caused significant disruption and the U S supply as you know the pipeline was completely shut down for several days, which especially impacted our fuel supply and our business and for the industry spanning all the way from Texas up through the North and Great Lakes regions.
I want to thank our fuel and operational teams and our supply partners for their tireless work over the course of these many weeks actually buying products and alternative locations.
Shuffling resources with areas with limited product availability and over longer hauls, and putting and massive efforts to get our sites wet for our customers, especially prior to the memorial day holiday.
And I'm glad to report what were fully operational and ready for the summer holiday driving season.
Turning to the results for the quarter same store sales growth was 8.1% and the U S, 1, 6% and Canada, and 9.7% and Europe.
Compared with the same quarters last year.
During the last weeks for the quarter restrictions.
Began to be lifted and parts of our network, particularly in the US and we are cautiously optimistic that us vaccination ramps up across the world. We will continue to see traffic improve.
Along the way if we continue to make sure that we have the right value propositions, including our Sip and saves and Christian beverage program for smart value program or lift, which is a basket building tool and gamify promotions to keep our customers engaged with us and driving traffic to our locations as people get out and about.
This quarter, we've expanded the reach of our fresh food fast program, bringing the offering camber and <unk>.
<unk> remains on the quality and ease of our operational execution and we continue to optimize our program by launching new items.
Customer feedback remains strong and is morning commute to presume we expect the offer will become even more popular.
While food and general has been impacted by the pandemic and Greece decreased traffic when we look at our new program and isolation. It continues to perform very well compared to sites that are not on the program and the same markets.
Based on these results and fiscal year 'twenty, 2 we plan on adding more than 3000 additional stores across the network.
And Europe, we continue to develop the new fresh food fast concept as a platform for future growth for the gold and maintain our high level of food quality and sales, while reducing our labor requirements.
And all of a pilot and Denmark, where the new self service options and and introduced more freshly produced and hot food choices. The service option is making it easier for our customers to have a fast overview the offerings as well as more simplified ordering and picking up a full meal, including cold drinks.
Yeah.
And Q4, we piloted our new Sip and say beverage subscription across 122 state stores, allowing customers to redeem 1 beverage of their choice topical.
For every day for a monthly cost of $5.99, the Sip and <unk>.
Subscription and includes all dispensed and us redeemable for any size, including resales up to 64 ounces based.
Based on very early positive results for the program has now scaled nationally and we're growing our subscription base.
Base rapidly.
And now exceeding over 500000 enrolls.
Overall packaged beverage continues.
Remained strong over the quarters, we have seen a shift away from larger packages pops and during the pandemic and back to more normal instant consumption single serve packages.
Our alcohol business continues to be strong, especially in Canada, which is showing the highest increase over plan and last year.
We expect sales to moderate a bit as we see obviously more restaurants and bars for yield.
Yeah.
During the quarter.
And we expanded our queue line and systems to about 900 U S stores, creating a clear path to purchase and the ability to place high impulse items in front of the customers immediately before checkout.
We continue to progress with this initiative and we see as we see accretive growth and future categories, including private label. Our plans this fiscal year to expand this judicial 3500 sites.
And other age restricted products cigarettes sales remained strong and the quarter, although margins continued to be pressured due to more multi style multi unit sales excuse me.
Other tobacco product sales remained strong, especially driven by European business and modern white oral nicotine products continue to show strong growth in both us and Europe markets.
Over the year, we committed to be a more data centric convenience business and again this quarter, we worked hard to develop our capabilities. This is 1 of our top strategic initiatives and we're pleased with the results so far and our store by store pricing, we're seeing improvement in gross margin dollars and with significant learnings and place, we're expanding and scope skews next.
And the agenda will focus on the data and analytics teams and optimizing assortment and promotional activities at the local store level with multiple pilots in place and feel this is a very material opportunity for our company.
Moving to the fuel side of the business for the quarter same store road transportation fuel increased 5.4% and the U S.
And 3.6% and Europe, and other regions and for 9% and Canada due to higher fuel demand compared to the comparative quarter.
However, fuel volumes continue to be challenged by work from home and local restrictions and the various geographies and which we operate and as I mentioned earlier fuel margins remains healthy really across the network.
Okay.
Turning to our FERC circle K fuel supply from the course of the year. We converted 450 refiner branded sites just circle K fuel at the end of the quarter, we had nearly 2800 sites and the us with our circle K fuel brand and this coming fiscal year, we will rebrand over 800 additional sites. Please.
And these conversions dramatically increased brand awareness Inc.
Prove underlying costs and give us the ability to control and simplify the customer journey.
We're also on a journey to create additional consumer benefits for the brand..1 examples we're piloting various premium claim strategies and specific markets and.
Over 780 sites here, we're pleased with initial results and are planning for a national rollout of this.
Promotional activity.
Over the past year, we've also been investing and our fleets and building more optionality, our fuel procurement with our partnership with basket. We believe this relationship will dramatically accelerate our supply and trading capabilities again further differentiate and how we procure and deliver fuel from other competitors and the industry.
And also through our partnership with Bose musket and Trillium, leading provider of alternative fuels. We briefly recently began converting our company owned and fuel delivery tankers, and California to renewable natural gas as part of our sustainability efforts to reduce methane emissions.
Despite the general impact on traffic by the pandemic our E mobility business continued to grow throughout the year in Norway EV charging now currently makes up approximately 13% of all energy transactions that our store.
8.880000 monthly charging transactions.
We're also growing out our in home charging business and expanded this offer outside of Norway to all of our Scandinavian countries.
Our <unk> mobility offer has been especially well received since its launch this year and this business now accounts for more than 20% of all transactions and public Chargers.
With the recent introduction of our circle K Pro digital platform, we've made it easier for our valued fleet customers to get charging services combined with fuel and convenience essentially getting all their certain kidneys.
At the lowest total cost and mobility.
We also opened this year this quarter and exciting flagship store in concert, Norway with our first full for Cortez fully electric.
With 300 kilowatt speed charges under large canopy covered and solar panels.
This is the first electric for court and our history. There's 2 level store also has extensive food offers large dining and a back area offering a full section and fuels biofuels and add blue for internal combustion customers.
Our experienced and Norway has shown us that convenience and fuel sites have a role to play and the build out of EDI infrastructure and we continue to explore how we will apply our experiences to participate at the right level at the right time in North America.
And sure we made significant strides and frictionless capabilities and this quarter, we're especially proud of our work on the for court with the expansion of our pay by plate program.
Following a successful pilot and Norway, we launched pay by plate is a frictionless payment method to our fuel customers across our entire Swedish network.
Can you just play by play customers simply driving and the for court fill up with fuel.
Number plate recognition automatically and safely pay on the circle K easy App.
For the first retailer and the world for launches technology, and our National scale and we recently won the next European convenience retail Technology Award for our work in this area.
And the coming months, we're looking forward to expand the solution to more European business units.
Our new stores remain an important organic growth lever across the network and we're seeing a solid return on investment.
Across the network. This year, we opened new horizon concepts with a refreshed brand look and feel and the U S, Canada, Sweden and Lithuania.
These new horizons stores enhance the customer experience by showcasing our fresh food fast initiatives are being to cup coffee offer and touch free options and we're pleased with the early performance results.
I'm going to pause there and let <unk> take you through more of the fourth quarter and annual financial results.
Thank you, Brian ladies and gentlemen, good morning, so for the fourth quarter of 2021, we're happy to reported net earnings attributable to shareholders of the corporation of $563.9 million or <unk> <unk> per share on a diluted basis excluding.
Excluding certain items for both comparable periods adjusted net earnings for the quarter.
Our fourth quarter of fiscal 2021 were approximately $564 million or <unk> 52 per share on a diluted basis.
And bear with 47 per share for the fourth quarter of fiscal 2020, which is which represents an increase of 10, 6%.
Net earnings were $2.7 billion for fiscal 2021, compared with $2.4 billion for fiscal 2020, and an increase of 15%.
Diluted net earnings for per share stood at $2.44, compared with $2.9 for the previous fiscal year.
Excluding certain items for net earnings for both compare verbal periods net earnings would have been approximately $2.7 billion compared with $2.2 billion for the previous year, which represents an increase of $500 million or 22, 6%.
Adjusted diluted net earnings per share would have been $2.44, 45, sorry for fiscal 2021, compared with $1.97 and for fiscal 2020 and increase of 24, 4%.
While we operated in a particularly challenging environment, when and which our fuel business meaningful volume declines and we maintain our focus on returns as well as our discipline on cost control and cash management. We also continue to invest and our business preparing for the future and eventual return.
Pre pandemic traffic levels.
This strong capital structure that we have diligently put in place serves us well during the past year as we had the means to support our team members to protect them as well as our customers and to continue to create value for our shareholders.
I will now go over some key figures for the quarter for more details. Please refer to our MD&A available on our website.
During this most recent quarter, excluding the net impact from foreign currency translation merchandise and service revenues for the fourth quarter of fiscal 2021 increased by approximately $411 million or 12, 7%.
This increase is primarily attributable to organic growth.
And on merchandise and service sales as well as the contribution from acquisitions, which amounted to approximately $165 million.
For fiscal 2021, excluding <unk> revenues as well as the net impact from foreign currency translation merchandise and service revenues and.
Increased by approximately $1.1 billion or 7.6%.
For the fourth quarter of 2021, and excluding the net impact from foreign currency translation merchandise and service gross profit increased by approximately $117 million or 10, 9%.
The continued contribution from acquisition amounted to approximately $44 million.
Our gross margin decreased by <unk>, 7% and the United States to 31, 8% and by <unk>, 1%, and Canada, 231%, mainly due to the inventory adjustment of $26.4 million and $3.2 million respectively.
Mostly related to our net reasons and book value provision on the personal personal protective equipment.
Excluding inventory adjustments gross margins and the us and Canada would have been 32, 8% and 31, 6% respectively favorably impacted by changes in product mix.
Our gross margin decreased by 2.5% and Europe and other regions to 38, 1%, mainly due to the integration of circle K, Hong Kong, which has a different product mix and our European operations.
Excluding circle K, Hong Kong, our gross margin in Europe, and other regions would have been 42, 8% impacted by favorable changes and our product mix.
During fiscal 2021, excluding Cps gross profit as well as the net impact from foreign currency translation merchandise and service gross profit increased by approximately 3 approximately $305 million or 6.2%.
Our gross margin decreased by 2% to 33, 1% and the and got.
And in the United States by 2.4% and Europe and other regions from 39, 1% and by <unk>, 4% and Canada to 31, 4%.
We will now move on to the fuel side of our business and the fourth quarter of fiscal 2021 of our road transportation fuel gross margin was $34.45 per gallon and U S. A decrease of $10.48 per gallon, mainly driven by unusually high margins and the comparative quarter due to the sharp.
And and crude oil price last year.
And Europe and other regions. The road transportation fuel gross margin was 10, 8 and <unk> per litre and increase of 10.18 and since.
U S per liter and in Canada It was that.
$10.92 Canadian sense, sorry per liter and the increase of $2.56 Canadian cents per litre.
Fuel margins remained healthy from favorable market conditions, and improved underlying product cost driven by fuel and rebranding and procurement initiatives.
The road transportation fuel gross margin in fiscal 2021 was $35.28 per gallon and the U S. U S $10.90, and 99 cents per liter and Europe, and then other and other regions and in Canada, 10, 36 cents per litre.
Can you give us sense for.
For the fourth quarter of fiscal 2021 normalized operating expense decreased by $2.50.
1, 9% driven by government grants of $41 million cost and labor efficiencies.
Our level of COVID-19 related expenses as well as rigorous work and activities and.
Initiated to streamline and minimize our <unk> expenses.
These were partly offset by normal inflation and higher labor costs from minimum wage increases and pressure from low employment and rates and certain region and incremental investments and our stores to support our strategic initiatives.
COVID-19 related expenses for the fourth quarter of fiscal 2021 included include and Q bonuses, and Canada, additional cleaning and sanitizing supplies and masks and gloves for our employee as well as the donation of personal protective equipment to the B piece.
These are all of our stores.
During fiscal 2021, and normalized operating expenses decreased by 1.2% compared with the previous fiscal year.
Excluding specific items described in more details in our MD&A. The adjusted EBITDA for the fourth quarter of fiscal 2020, 1 increased by $38.8 million or 3.7% compared with the fourth quarter of fiscal 2020, mainly due to organic growth.
Our convenience activities higher fuel demand and lower operating expenses and the net positive impact from currency.
Foreign currency translation, which had a net positive impact of approximately $25 million.
As well as the contribution from the acquisition, partly offset by lower fuel transportation and gross margins in the us.
During fiscal 'twenty 'twenty, 1 on the scene and basis.
EBITDA increased by $642.4 million or $14.7 per cent compared with the previous fiscal year, mainly attributable to higher road transportation fuel gross margins organic growth of our convenience activities lower operating expenses as well as the net positive impact from foreign currency.
Currency translation, partly offset by the negative impact of COVID-19 on fuel demand and the valuation and extended next change rate at a net positive impact of approximately $45 million.
Also excluding specific items the adjusted and.
<unk> tax rate for the fourth quarter of fiscal 2021 was 18, 5% comp.
Compared with 27 per cent for the fourth quarter of fiscal 2020.
The decrease for the fourth quarter of fiscal 2020..1 is mainly stemming from the impact of the different mix and our earnings across the various jurisdiction and which we operate as well as.
From gains and taxable at the lower income tax rate.
The adjusted net income tax rate for fiscal 2021 was $19.5 per cent compared with an adjusted income tax rate of 19.9% for fiscal 2020.
As of April 26th.
21, and our return on equity remained strong at 24, 3% and our return on capital and towards stood at 15, 9% during the quarter. We continued to generate strong free cash flows and our leverage ratio stood at 132 times.
And as of April 'twenty, 'twenty, and 'twenty, 1 and we have ample balance sheet flexibility with 3 billion and cash and.
And then an additional $2.5 billion available through our revolving credit facility.
It's also important to note that during the quarter and fiscal 2021 and they're on November 2000, and for 2020 share repurchase program, we repurchased $17.4 million and $33.3 million class B subordinate voting shares respectively.
These repurchases were settled for a net amount of $550 million and $1.1 billion respectively.
Also subsequent and subsequent to year end and there are new program, we repurchased approximately $300 million of shares.
Finally.
On June 2019, 2021, the board of director declared and declared a quarterly dividend of $8.75, Canadian cents per share and improve its payments for July 22nd.
And 2021.
To close I would like to highlight and thank our team for their work.
To accomplish and throughout the last year and ensuring that we emerged from the spend and making a strong financial position and ready to accelerate capital deployment towards our strategic initiative, while other ways remaining focused on driving value creation for our employees customers and shareholders.
I also wanted to mention our upcoming Investor day, We hope that you are going to join us for our upcoming virtual event on July 14th and where we will be hearing from several members of our management team regarding our businesses and some of our key initiatives.
With that I. Thank you all for your attention and I'll turn debt.
And call back to you Brian.
Thank you Claude just a couple of remarks and closing certainly when I look back at this year, 1 word comes to mind and that strategy.
And my gratitude goes out to all of our team members for their continued commitment to each other.
And to our business our outstanding operations team kept our employees and customers safe. This past year kept our stores open and share that were part of the solution and communities, where we live and work and the face, particularly in the U S and 1 of the most difficult labor markets I've ever seen in my career.
With the support of our global functions, we did more than maintain the status quo. During this difficult year. We stayed focused and we stayed focused on our strategy, we innovated for the future.
And we expanded into the growing Asian market and.
And then because of the hard work engagement and encourage our team members and our company culture and balance sheet are stronger than ever before and were.
And we're getting ready for the future our future beyond the pandemic, where we continue to make our customers lives a bit easier every day and become the world's preferred destination for convenience and mobility and.
With that 1 answer the questions. We've received this morning from Atlas.
Thank you Brian conclude thank you closed our first question comes from Patricia Baker at Scotia.
And the first question is with US opening up what is your expectation around summer travel this year.
Expect to see a rising fuel volume associated with American and to a lesser degree Canadians traveling more this summer by road.
Compared to last year.
Yes, I think we fully expect to see leisure travel and particularly the grow significantly over last year's levels. We saw that over memorial day, and the us and other levels remain below 2019. They are continuing to grow so us states and borders continue to open we believe theres, a pent up demand and people will hit the road.
That said Theres still borders are closed you can't travel between the U S and Canada as an example, and then parts of Europe had the same restrictions so.
Not at normal yet and then I'd also say, we're seeing and I think the interest youre seeing a lag in the recovery and good morning day part as many office work environments remain either fully or partially remote but so it's a journey, it's a journey, but it is headed and the right direction.
Okay.
Claude you noticed that that's part of your strategic review you have been selling certain locations in order to build and sell sales and the release should we expect to see more such us such sales and the fiscal year and at what point do you believe you will have the net we're best positioned.
So thank you Patricia so we've reviewed with the.
Our asset base and fall 2020, and identify stores that were not longer strategic for us and.
And out of that game.
Sales of 49 sites and Oklahoma for 2 <unk>.
<unk> and also.
Putting per sales of more than 300 sites that are currently being evaluated by potential buyers.
So and also as you know.
And certainly no we were apart from mystic and <unk> and Oh.
And on some of our high value urban sites that we're working up more to a buyer than it would have been for our operations. So we.
And to divest of some of those so it's all over.
And it's an ongoing process and where you know we're always looking for ways to optimize our network and to ensure that our stores are strategically relevant and strategically relevant means us focusing on sites that are able to represent our brand well and also it can accommodate our commercial programs within the store so.
And going to continue to divest as we go along our journey and maintain a nimble and network.
And make sure that we're taking care of our tail and sites.
Yeah.
The next questions come from the methane and.
He has Stifel.
First question your 5 year plan for fiscal year 'twenty 3 calls for a bit that to double from the fiscal year 2018 level of $3 billion.
This suggests that if you reach your objective fiscal year 'twenty to be a bid that could reach $6 billion, which is significantly higher than current consensus expectations for $6 billion.
Do you still feel confident and attaining this goal and what are the risks that could prevent you from reaching your 5 year objective.
Yes, Thanks, Marc Shane just as a reminder, our 5 year plan it was to accelerate organic growth to about 50% of our annual EBIT growth with the remainder being M&A, which has historically been well over half of our growth.
So setting aside the uncertainties of Covid I feel right on track to deliver the organic growth rates, we planned for 3 years ago.
And those include things that we've talked about rolling out our fresh food fast offer.
<unk> pricing fuel initiatives assortment.
Revamped and enhanced loyalty programs are on the agenda.
I guess that turns to the M&A side, we've talked a lot about it and past quarters. The appetite is absolutely there.
<unk> taken some big swings and acquisitions big and small over the past couple of years, but we've been concerned about valuation levels.
We are not going to do a deal for the sake of hitting this target but at the same time, we remain optimistic that M&A can and will be a part of our growth story as part of our DNA.
Good at it I think we integrate.
Well as anyone if not better than anyone in the industry. So it's just a question and finding the right opportunities out there.
So and that paint for the second question.
Very pleased us fuel margins and thats been inversely correlated to fuel prices.
Or in the spring, we have seen an increase in fuel prices at the pump.
But with limited to no impact on fuel margins.
What explains that recent disconnect versus near circle relationship.
Yes, I certainly can't speak for our competitors, but.
We think about it we see fuel volumes have remained below their historical levels.
So I believe fuel retailers in general have been more focused on maintaining gross profit dollars.
In the face of rising cost tobacco pressures et cetera.
So that inherently means a sharper tension and fuel margins and it's been encouraging. These past months as you noted as costs have increased globally to see industry remain rational and fuel margins unit margins remained very strong and compensating for the lack of volume.
The next 2 questions come from Bonnie Herzog at Goldman Sachs.
The industry is facing pressures from higher operating costs coming out of COVID-19, especially higher wages and the tight labor market.
Can you talk through some of the pressures you might be facing and fiscal year 'twenty 2 and if there are opportunities for you to punch and potentially manage these expenses more efficiently than some of your smaller peers given your scale.
Yeah, a few things to share there. So we have seen tremendous pressure to hire.
I wanted to note and this is important it's really a us phenomenon for us we're not feeling the same pressures and Canada or Europe. So that gives me. Some hope that this is a part of economic stimulus and enhanced benefits and.
Created some of the situation.
And the faceless, we're doing a lot to maintain staffing levels and we have a heavy focus online hiring online and visibility.
And we put centralized.
For recruiting and hiring resources in place and each of our U S business units.
We've got retention bonuses out there.
Focused on better training and Onboarding, making sure that those that we do get and the door understand the job and are able to do it.
We certainly can't ignore the wage levels that we're seeing and some of our markets, but we are striving to keep our cost us variables. We can leaving that some of this pressure is short term.
We're seeing some early signs of increased applicant flow Theres 25 states that have either announced or ended supplemental unemployment benefits and the U S and.
And we're seeing again increased applicant flow and those states and with rising vaccine rates, we optimistic that people will be more comfortable returning to work for us. So while trying to remain competitive we're focused on trying to keep these cost us at variable as we can until we truly understand how much of this is short term versus sustained cost pressure.
And that said, we're doing a lot and the cost side and maybe class if you want to share some of the activities that.
We think are able to more than offset this.
Yes, Brian So yeah, Bonnie is that we we have a lot of going on and we have a comprehensive program internally to manage and optimize our costs.
Our focus is on reducing costs at store level and primarily.
Such as us.
Suri labor hours or maintenance or non customer facing activities that could be done otherwise. So for this we are using.
You mentioned our scale and we're using technology are also the strength of our support function to to help reduce our it costs us. Some examples are the consolidation of our vendors for maintenance and that's that.
1 big activity that took place.
They are using our scale and marketing and with our P O P.
Purchases.
Robotics for back office basket and store and also and our shared services and a good example of offsetting technologies that we're using and then our questing our.
And our payback complete the program that we're using and Europe.
We just launched and a very successful he also self checkout that we're testing and multiple stores and the us right now.
And it's been proven.
And for you.
Giving us good results.
Yeah.
Thank you.
A question for you on capital allocation.
Especially given the strength of your balance sheet and growing cash balance as we look ahead to fiscal 'twenty..2 do you plan to prioritize share repurchases, especially and the current M&A environment, where there might not be us many large scale acquisition of fortunate.
Well, we're still feeling very good about our capacity to create value through M&A.
And we still are focusing on the us as our first priority and so U S and convenience that for US is number 1. We also just opened a new platform of growth in Asia with our acquisition of Hong Kong. So that opens up a whole new area for us in terms of M&A and we're <unk>.
And also looking and adjacent sectors as you know and dollar stores, the travel retail and grocery and <unk> are all things that we're looking into.
Patients and ski like Brian mentioned, and we are involved and multiple opportunities and our opportunistic to continue our growth through M&A and the future.
For the capital that equation, we're still going to be opportunistic on our buyback it's a tool.
And our tool belt that we are going to us when we are under our target leverage ratio of 225 times so and.
And anytime we are under that and we're going to consider depend.
And depending on the price of our stock.
And use our buyback program.
Great the next.
Questions come from Irina <unk> RBC capital markets.
Can you give us color on the contribution of key initiatives to driving same store sales growth and how should we think about the evolution or performance of these as we go through reopening.
Yeah, I'd say that we have a lot going on and there is always a balance sheets and we have enough for too much.
Certainly we're excited about our merchandise pricing promotion work.
Packaged beverage as just continue to be a very very strong category up strong double digit year.
Year over year.
Our strong performance and nicotine categories Noncombustible margin dollars have exceeded combustible and some of our key markets for the first time that's big.
And that's a non.
Non cigarettes being greater than cigarette margins and our stores. So there is life and the nicotine category.
People are switching.
And to healthier alternative ways to consume nicotine and will be a part of helping them on that journey and then for the future. We have a lot of things teed up.
We've talked about our fresh food fast big ambition, there to roll that out to 3000 stores. We feel we've got the right offer we think we've got the right production platform.
It's really a journey of.
Creating a full food culture, and our stores that can execute that and and particularly executing to that and a difficult labor market that we're seeing and in North America.
Claude touched on CEP and safe and we think that's pretty innovative great value proposition for our customers and something that we think.
Certainly create loyalty to our brand. So we continue to sign people up.
And the summer, you'll see more around Gamify promotions gamify.
Activity has been strong for us both in Europe, and in North America, and we'll continue that with a strong focus on beverage to the summer months, we all know that 50% of the trips and our industry are focused on.
The beverage and satisfying a thirst needs. So youll see us a lot of activity around Thursday, with some from us and.
We feel good that.
As life returns to normal, though it is hard to understand what that looks like that will continue to grow our share and the industry.
Okay.
Okay.
Second question from.
From Irene Yeah, Yeah.
Margins remain robust can you provide color around the contribution of costar procurement strategies to margin.
How should we think about sustainability to industry metrics.
And I think we remain a leader and the fuels market and we're committed to win.
Believe we can continue to create strategic advantages that allowed the industry can't achieve.
We're certainly seeing benefits early on from a mosque musket partnership combines 1 of the largest gasoline shorts and the world ours with 1 of the largest diesel shorts.
From the left side and you combine those and creates very unique opportunities around the procurements and around creating value for our refining partners.
And accelerates our global training capabilities, enabling us to capture global arbitrage as an example would be H B O.
And which is 100% renewable fuel.
Is mandated and required and many of our European markets.
And this past quarter, we've been able to procure meaningful amounts of that and North America shipping it to our Scandinavian markets cost and manage basis.
Transportation, we've deployed more of our own fleet now approaching I think 900, or so trucks and that allows us to capture location arbitrage is our cross across our geographies and.
And all of this fits, particularly well with our conversion to our own brands, which allows us to b a lot more flex flexible and the supply side and again as I started out saying, we believe it creates some sustainable advantages versus the industry overall.
Good. So our next question is from Derek Blake has kind of core edge and with T.
In regions that are ahead in terms of reopening are you witnessing and normalization in terms of consumer purchasing behavior.
Yes.
Derek I wouldn't call it normal yet for sure but we are.
And are seeing some trends.
Traffic is improving where we've got.
And society opening up and more higher vaccination rates.
And sales mix is trending back more toward normal food, which is shut down to a great degree and some of our markets, particularly Europe.
Is up and operating and growing.
And we're seeing more single serve.
Which both of us help margin.
Basket is declining a bit but still at levels well above pre COVID-19.
And then finally I would I would touch on the morning day, part, which I mentioned mentioned earlier, it's the 1 that is lagging.
As we've got.
Work from home is still in place and many many parts of the world, but we anticipate that recovering as workplaces open up and people return either full time or part time to their places of work.
Yeah.
Good thank you moving to Graeme Kreindler us.
A question from 8 capital.
<unk> for cannabis reforms and the U S has many different pathways can you. Please discuss how the company views a scenario where interstate commerce.
Is allowed and versus a scenario where state markets are ring fenced.
With respect to its strategic relationship with fire and flower.
Okay.
Yeah, I'd start by saying and we're proud of the role that we and our industry plays and selling age restricted products globally.
We're exercising the same focus and responsible retailing as we look at cannabis.
Our focus over the last 2 years has really been to understand the market and develop a consumer offer and associated technologies to win and that market with a goal to have a model and to deploy in the us when the time is right and if we think the returns are there.
So we've been pleased with our partnerships.
With canopy growth and with fire and flower and Canada and.
Pleased with the progress we are.
We're seeing continued sales growth and.
As we open sites that business starts to become material to us.
We're closely watching the regulatory front in North America, and I'm very pleased personally that backs and gauge to lobby for a level and open playing fields on behalf of our industry and the cannabis space.
U S industry today, and those legalized states is extremely fragmented on the retail side. So we believe there will be meaningful opportunities for.
For scaled retailer with the right offer.
And to your point on Interstate versus ring fenced and if we do see bring fence certainly will create the need for partnerships.
Which we've got some foundations in place canopy growth and conversations with others.
We don't see ourselves focused and the growing or extraction pieces and the business. We're very much focused on retail so again partnerships could be a part of that solution and interstate.
And is not allowed.
Okay.
The next question.
<unk> comes from Bobby Griffin at Raymond James on the merchandise side of the business are you seeing any impact from cost inflation.
And if so what are some of the product assortment and is the inflation and having any notable impact on customer demand.
Yeah.
It's just happening now, but we certainly are seeing cost pressures and certain categories. You know you can talk about net.
The cost of aluminum cans and example, I mean, it's really across the board and Youre seeing and proteins and <unk>.
And we can closer monitoring that and always evaluating our price and engaging our analytics teams to watch last just closely and demand is hard to quantify right now is sales and very volatile with COVID-19 openings and re openings.
But at the same time, you'll household income levels are very healthy.
Globally.
So we believe we will be able to effectively pass along any material cost increases without any significant impact on demand and our stores.
And next question is from Chris Lee and Thanks Securities D and a sense of the breakeven fuel margin for the single store and small chain operators has the breakeven point and moderated compared to the height of the pandemic or has it remained largely the same because of rising.
Cost pressures from labor shortages and E&P compliant.
So Chris we don't have industry data at least not current right now and I'd call. It a moving target just the math would say overall breakeven.
B down a bit as volumes are the key driver of that equation and they've.
Recovered a bit.
Certainly these break evens are higher than pre COVID-19 levels due to volume and the cost pressures that you point out whether it would be labor costs EV ENB compliance.
Yes, and emphasize the importance of the initiatives that we've got in place to create sustainable advantages versus the industry, whether it's the initiatives we discussed inside the store our fuel procurement and our branding efforts or the efforts Claude mentioned and to make sure that we're continually taking costs out of the business and being a low cost operator and our space.
Next question is from John Royall at J P. Morgan.
U S fuel same store gallons came in below our expectations based on industry demand numbers.
To the same period of 'twenty, and 'twenty, while CPG and <unk>.
And a bit ahead of our expectation relative to industry averages.
Was there a net for to sacrifice some.
<unk> volume by raising margin or is there another color around the volume.
First and foremost we're focused on providing a consistent value for our customers with our fuel pricing.
So in no way have we consciously decided to sacrifice volume for margin.
We were very analytical and data driven around those.
And those decisions day away.
Say volumes have been very volatile and that's not only across countries and markets as they reopen at different paces, but.
We're also seeing differences within states between rural and urban and suburban with rural recovering at a faster pace and urban for.
And obviously reasons. So it's a it's a moving target, but 1 that we're committed to.
To watching closely and again, just providing a consistent value for our customers as we go forward.
Next 2 questions are from Karen short with Barclays capital.
How are you thinking about the fuel margin uptick this year.
Typically how rationally do you think operators will react to a higher wage and product cost inflation.
How do you view, the sustainability of height and fuel margins and the U S relative to history any structural change to think about that are informing your views.
Yeah.
Yeah, and I'd say fuel margins have always been difficult to predict and the short term, but if you look at the last decade, you'd see a consistent rise in unit margins for the industry yes.
Underlying this is the need to generate and set the level of return and the <unk>.
I used to cost pressures.
Declining cigarettes for some parts of the network or the industry and again fuel volumes. Some players are blood volume out Joe just curious and they've got to make it up.
Covid certainly is magnified these effects and the markets responded pretty rationally.
And the extent these volumes are slow to recover and inflation is there and the short term. We believe the margins will have to remain healthy to offset.
I'm not really concerned about short term volatility.
And a part of our industry forever.
Have our organization focused on widening and advantages that we have versus the overall industry and that includes investing in technology loyalty food.
All the other things that we've talked about to you over the past quarters and.
And compounding that with circle, K fuel, which gives us again more optionality better procurement.
Capabilities better consumer offer and obviously, we don't for those brand fees that we would have with the refiner brand.
Yeah.
With the new localized pricing strategy and more than half of the system. How should we think about and the ability of these new systems to successfully manage this significant price volatility and the highest price inflation. We are seeing some categories. Our gross margins are trending at these stores.
Versus the control group.
Yes.
We're very happy with the progress and seeing clear improvement versus control sites and hopefully we can share more.
During our Investor day, what we do now have this widely deployed across our geographies with the next step to continue to increase the percentage of the categories covered for example, tobacco has been a category that we.
We really haven't deployed this and 2 and we think there's big opportunities. So while we've deployed broadly across geographies categories and Skus covered.
That's still a journey and it's happening quickly.
Currently we're piloting localized assortments and localized promotions and we believe these are both very material opportunities and.
And we'll be learning a lot over the coming quarters with the 3 markets that we've got under pilot and both of those.
Yeah.
The next question is from Mark Petrie at CIBC World markets.
And increasingly spoken about the attractiveness of the business to business fueling.
And the importance of a local presence of the circle K brand could you elaborate on the key steps that could lead to this being a larger part of your offering b capital infrastructure marketing or otherwise.
Yes, Mark B to B has been a great strength of our offer and Europe, and we continue to win and grow market share there and we've seen during COVID-19 that that demand has been very resilient.
Compared to the <unk> business.
And it's been a little bit frustrating because over the 9 years I've watched that since we bought it at all.
But there've been material structural things that blocked our ability to deploy that at the same pace or have that same level of success and North America. The first and foremost us the brands. If you look back 3.4 years ago. If you went to a certain market you might see a circle K with a b piece fuel shell fuel Chevron and.
And literally impossible to get a consistent b to b offer out there to our customers. So the key first step is the brand conversions were well underway and as I said earlier, we will have another 800 sites converted this year.
And that consistency will allow us to create a strong network in many key markets for us and be able to present, a consistent and compelling offer to our customers.
Second I'd add.
And brought in Louise Warner She was a part of Caltech, our ample and all.
Australia. So as we did not end up with that network. We ended up with the next best thing, which is a great leader.
She brings tremendous experience to us and the B to B space from her role, leading this and Cal text and she's focused on plans to grow this material and as we finalize our convergence to our proprietary brands and North America, So more to come there, but it's certainly an area that we see big opportunity for us.
Next question comes from Michael Van else at TD Securities.
Many companies particular deals and the U S have pointed to challenges and attracting and maintaining labor and as well as a as meaningful compensation tied to labor transportation and various materials.
<unk> managed to keep normalized Opex will close to nil and fiscal 'twenty 1.
And it declined 2.9% on a comparable basis in Q4.
How much did the government grants and contribute to lowering cost and do you see the likelihood of Opex requirements rising at an accelerated pace over the next few years because of these and pressure inflationary factors mentioned as well as a return to normal operations as the pandemic states.
Yeah.
So Michael I think Brian you alluded to the labor challenges.
For tracing and U S, particularly.
And.
On your specific question about the grants that we received from the government, we accounted for 41 million and.
And the government grants during the quarter. So if we're looking at it without the grants.
Our Opex would have increased 5.5% and it's still a strong performance and our view.
And some into our cost discipline and our commitment to all of our expenses growth other inflation rate and like.
It's always been our challenge and that we've communicated previously in previous.
[noise] meetings. So we're pleased with the efforts that we're doing to manage our cost base and as mentioned before we have many programs in place to help this performance and.
Talked about them earlier on the call but.
You know, we are using our scale and our technology and all sorts of support functions to make sure that we're maintaining dose and dose costs also index future.
Lower rate and inflation.
Thank you Claude and.
The next question comes from Peter Sklar, and BMO capital markets.
Now Thats Triple K, Hong Kong has been closed for a period of time.
Can you talk more about the potential and many airports these and Asia and which countries are attractive for <unk> chart.
Also what is the M&A environment and in Asia, and how do we evaluate and do valuations compared to North and North America.
Yeah first I'd say, we've been very pleased to bring Hong Kong and my family a lot of innovation a lot of energy a lot of culture. There so despite not being able to meet them in person and since the acquisition.
And we've had some great conversations and they've they've added value back to us already.
That said, we didn't buy that company to have 400 stores and Asia.
As part of our long term commitment.
To try to grow and that part of the region and.
This is a platform for that.
And we've looked at several opportunities since the.
And the Hong Kong acquisition, and having that team on the ground I think 1 brings us credibility and to also brings us meaningful insights into some of the markets. We're looking at.
I'd say, our focus right now it would be and South East Vietnam Southeast Asia countries like Vietnam would be an example, where we've got and emerging.
Class, a just with disposable income, which leads to modern retail needs to convenience.
So again multiple conversations.
But as I've always said, it's a long term play.
So something may happen quickly or it may take a while but.
I think just based on early feedback.
And we're having more conversations as a result of actually being on the ground there today.
Great.
Last question comes from the soft radar at the National.
Bank financial.
Can you explain the nature of the $26 million and inventory adjustment related to merchandise gross profit.
Yes, Michelle so that the net realizable value provision was taken and consequences of the markets reopening and mandatory and mask wearing and many jurisdictions was lifted.
And we see improving conditions also with the Covid restrictions.
Everywhere. So this reserve is mostly for.
Inventories of mask, and hence and advisors that we had in inventory and all the stores.
And you want the mark to market.
And the current and the amendment so.
Great. Thank you Brian. Thank you flow that covers all of the questions for today's call.
We thank you everyone for joining and 1 and wish you a great day, and we really look forward to virtually seeing you at our July 14th Investor Day.
Have a great day everyone.
Thanks, everyone take care, Thank you, everyone and 14th.
Thank you bye.
This concludes today's conference.
Yeah, and I invited to disconnect.
And now whether it be sold as yields or is it medical and medical associated there.