Q1 2022 Alimentation Couche-Tard Inc Earnings Call
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Good morning, everyone I would like to walk them, everyone to this web conference presenting out not that sounds <unk> financial results for its first quarter of fiscal year 'twenty 'twenty two.
All lines will be kept on mute to prevent any background noise. After the presentation. We will answer questions that were awarded to us before and 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 Kathy.
These cabinets are risks and uncertainties are outlined in our financial reporting.
For our future results could differ from the information discussed today.
Our financial results will be presented by Mr. Brian punish President and Chief Executive Officer, and Mr Quote Tasty Chief Financial Officer.
Ryan you May begin your conference.
Thank you Matthew and good morning, everyone. Thank you for joining us for our presentation of our first quarter 2022 results.
Overall across our global network, we had a solid first quarter, both in convenience and fuel even when we compared to a very strong quarter last year.
Same store sales were especially good in Europe and across all regions, we've seen positive growth in food as the ease and the quality of offers are resonating with our customers.
While remaining impacted by COVID-19 traffic patterns fuel volumes are improving we continue to achieve healthy margins as well as expand our circle K fuel rebranding efforts.
No doubt as the pandemic continues to present operational and supply chain challenges I remain incredibly proud and grateful for the care and commitment to the business shown by our team members, our customers and our business partners.
I'm also pleased to report we made note of noticeable strides in the growth of our network this quarter.
On the acquisition.
You should front, we entered into a definitive agreement to purchase Wilson gas stops and go.
Our network of 226, corporate owned and dealer locations and fueled terminal, allowing us to expand our presence in Atlantic Canada.
This transaction is expected to close in the first half of 2022 calendar. We're excited to welcome. Many of these strong sites and dedicated team members to Costar family.
We also announced a binding agreement to acquire 35 sites currently operated under the porters brand predominantly in Oregon, and Washington DC.
Do you assume convenience assets are high quality locations and have a track record of growth and a network of experienced employees.
And the network optimization front, we completed the divestment of older locations, primarily in the U S Midwest and the South and we've added 30, new build stores shop portfolio, which better support organic platforms and brand promise.
Growing the size and scale of the network is essential to our strategic ambition is there.
As always we remain disciplined in our approach to create value for our shareholders.
Yeah.
Before moving to the results of the quarter I want to take a moment to address the recent rise in Covid cases, especially the Delta Marriott very.
Much of the quarter I was optimistic that where we're seeing the waning days of the pandemic yet now we're once again carefully watching the spread of the virus and again reinforcing health and safety measures in our stores.
Well as promoting vaccination to protect our team members and our customers.
This renewed situation as I mentioned continues to impact our supply chain.
As it is doing so across the retail landscape.
It was also put a greater pressure on the labor situation, particularly in the United States, which is the most difficult labor market I've ever seen in my career.
In the face of but we're working hard to maintain staffing levels, including a heavy focus on online hiring and we've put centralized recruiting and hiring resources in place in each of our U S business units.
In early May we advertise for 20000 open positions and during that period hired nearly 19700 by the end of the quarter.
We've also put in place retention bonuses and focused on better training and Onboarding, making sure that those who want to come in the door understand the job and are able to do it.
No silver bullets, but it's a constant battle as we work to get to this labor situation.
I also want to say a few words about hurricane either a catastrophic category for them that battered, Louisiana Gulf Coast States. The last few days.
Most of our stores have reopened at last count we had approximately 50 still close generally for a lack of power.
I'm thankful that most of our stores could reopen quickly to support the communities in need and currently we're confirming the safety of all of our team members.
Damage to those locations that we've not been able to reopen.
The magnitude of the storm it could have been much worse for so many in our thoughts and prayers go out to all those impacted.
Yeah.
Let's turn to our results beginning with convenience as we cycled against the quarter fully impacted by COVID-19 results varied by region as the pandemic and restrictive measures were at different levels year over year.
Compared to same quarter last year same store merchandise revenues decreased 2% in the U S and nine 6% in Canada, while increasing five 9% in Europe and other regions.
Convenience performed well on a two year basis with same store merchandise revenues, increasing at a compound annual growth rate of three 7% United States four 9% in Europe, and four 2% in Canada.
Category, most impacted categories, most impacted by Covid, such as food continue to show positive trends.
I should also note that we believe based on our analysis at our U S same store growth would've been up slightly more excluding the impact of the colonial pipeline disruption, which affected a large number of our sites in the southeast U S. Early in the quarter.
Yeah.
Globally, we maintained our focus on expanding our fresh food fast program added nearly 500 stores in the U S and Canada, Denmark, Sweden, and Lithuania, bringing the total to about 2000.
As we've expanded the offer we continue to gain valuable insights and believe we are building the right production platform. One that's taking into account a very tight labor market and supply chain challenges.
We're preparing additional new initiatives that simplify operation and execution reduce labor and allow us to create a full full food culture, our team members and our customers.
Okay.
And our dispense beverage category, we launched a new Sip and save beverage subscription offering is now active across the entire United States network here, we have an innovative offer a great value proposition for our customers.
Chip and save is receiving very positive feedback and we're in the process the process of enhancing the program to make it easier to enroll and participate well working to drive broader awareness of the program.
Yeah.
Overall growth in packaged beverage remains positive even when cycling against a strong comparable quarter last year with the closures of the bars and restaurants.
Energy and sports drinks remain the bright spots, while bulk purchasing and larger packages continue to be key drivers of growth.
The supply chain issues noted earlier has been a clear pressure point in this category as manufacturers are challenged to keep up with the heightened demand and drivers are in short supply to get the items to our stores on a DSD basis.
And the age restricted category cigarette sales were down slightly our margins slightly improved with our U S business showing the largest increase.
The other tobacco price continuing to show growth, particularly in Europe.
To enhance the in store customer journey, we completed over 122 line installs queue lines continue to bring sales growth in several key impulse categories and there are clear basket builder and create more visibility for our private brands and private label brands.
Yeah.
And our data analytics work five additional business units went live during the quarter with our localized pricing efforts, which add to the 11 business units that were previously lives. We're looking at finalizing this rollout towards the end of the year and additionally through the quarter expanding the categories and skus in scope in each of these businesses.
We're also in the early stages of our work to better optimize our promotional activity in our assortment.
Rising similar analytical approaches and machine learning models.
Initial results indicate a positive value case in these areas. We see this as a big opportunity legacy, making us even better and more localized retailer.
Moving to our fuel business same store road transportation fuel volumes increased 11, 8% United States six 3% in Europe.
And 10, 4% in Canada due to higher fuel demand compared with the comparable quarter when lockdowns were in place across much of the network.
On a two year comparison same store road transportation fuel volumes decreased at a compound annual rate of six 1% in the U S.
Three 3% in Europe, and nine 4% in Canada.
Fuel volumes continued to be challenged by work from home trends and changes in local restrictions.
As I mentioned earlier fuel margins have remained healthy across the network compensating for the loss in volume.
And our circle K feel rebranding work over the quarter. We completed 79 additional re brands, bringing our total site count with circle K fuel to nearly 2900 stores in the North America.
Results continue to be encouraging and we will complete an initial 680 sites in the U S and Canada by the end of the fiscal year.
We're also formally launching our circle K premium claim double the cleaning detergent and supporting it with various campaign initiatives.
Early pilots have shown that this message resonates with our premium customers.
Yeah.
In Europe, and our <unk> work, we've had strong start this quarter with trading trading with volumes and card and bulk segments. Both trending ahead of prior year.
Work continues to upgrade our core b to B car transaction platform as we launch new solutions in several key markets, which substantially increase our customer value proposition and digitize the experience for our customers.
We made good progress also in our electric vehicle work this quarter, adding 44, new fast Chargers in Europe, bringing the total to 876 charge points primarily in Scandinavia.
We also continue to develop and expand the offer completing our first destination charging installation within Norwegian hotel chain.
Circle K owns and operates a charging service at this hotel and will further expand this change with this chain going forward.
We're now in the process of summarizing the learnings from our Norway E. D lab to facilitate further expansion, including building the foundation for our journey in North America.
Our efforts within E mobility continue to play an important part of our sustainability journey.
It's part of that sustainability work. This quarter, we were the first in the industry to issue Green bonds to finance your efforts and further our commitment to their success.
You can find out more in our third quarter, our third sustainability report published this quarter and available on our web site.
Have you also see that we more clearly defined our ESG framework with three clear pillars people planet and prosperity.
Probably at a diversity and inclusion to our sustainability efforts with the ambition of creating equity will pay and representation in our workplace.
Turning to innovation after a successful launch across Sweden are pay by plate Frictionless license plate payment recognition system, we're now starting to deploy that platform in Denmark Stony in Norway.
In the U S. We've also added 400 self checkouts in three of our business units this quarter.
We gather the learnings from these areas, we are preparing to introduce more easy checkout solutions across the network globally.
Finally, I want to touch on developments and delivery this quarter in Canada, we expanded our deployment with door to ash from nearly 30 stores to over 400 across three business units.
Customers in those areas can now order hadn't have their goods delivered to their home or office via the door at ash out.
Overall, we continue to explore the most optimal delivery suite solutions for both the business and for making our customers' lives easier.
Some of the pause there and let cool I'll take you through more of the detailed quarter results call.
Thank you, Brian ladies and gentlemen, good morning.
For the first quarter of fiscal 2022, we're happy to report net earnings of $768.0 million or 71 cents per share on a diluted basis.
Excluding certain items for both comparable periods adjusted net earnings were approximately $758 million compared with $795 million for the first quarter of fiscal 2021.
Adjusted diluted net earnings per share were 71 cents unchanged compared to the corresponding quarter of fiscal 2021.
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 first quarter of fiscal 'twenty to increase by approximately $92 million or two 4%.
This increase is primarily attributable to the contribution from acquisitions, which amounted to approximately $304.0 million sorry, partially offset by a decline in same store merchandise revenues in North America as we compare against a very strong quarter last year.
On a two year basis same store merchandise revenue has increased at a solid compounded annual rate of three 7% in the United States four 9% in Europe, and four 2% and Canada.
For the first quarter.
Fiscal 2022, excluding the net impact from foreign currency translation merchandize and service gross profit increased by approximately $39 million or two 9% mainly attributable to the contribution from acquisitions, which amounted to approximately $45 million.
Our gross margin decreased by <unk>, 1% in the United States to 34, 2%, but excluding the accelerated recognition of deferred credits in the prior year quarter.
Our gross margin in the United States would have increased by <unk>, 8% favorably impacted by change in product mix and pricing initiatives.
Our gross margin decreased by two 2% in Europe, and other regions with 38, 4% mainly due to <unk>.
Integration of Circle, K, Hong Kong, which has a different product mix from our European operations <unk>.
Excluding circle K, Hong Kong, our gross margins in Europe in other region would've been 41, 8% an improvement from 46% during the fiscal first fiscal quarter last year impacted by a favorable change in product mix in Canada, our gross margins increased by one 2%.
32, 3% also impacted by favorable changes in product mix.
We now move on to the fuel side of our business in the first quarter of fiscal 2022 are in road transportation fuel gross margin was $36.75 per gallon in the United States.
A decrease of $69.0 per gallon.
In the U S. A 10.32 cents per liter in Europe, a decrease of 19 cents per litre.
I appoint 19th sensitive curled eater, sorry, mainly driven by the unusual higher margins in the comparative quarter.
Canada. It was a $102.0 Canadian cents per litre an increase of 67 Canadian per liter.
Fuel margins remain healthy driven by favorable market conditions that procurement initiative and pure rebranding.
For the first quarter of fiscal 2022 normalized operating expenses increased by three 5%.
Driven by an increased level of marketing activities and other discretionary expenses, which were significantly reduced in the prior year quarter due to the beginning of the pandemic as well as by normal inflation.
Higher labor costs from minimum wage increase and pressure from low employment rates in certain region and incremental investments in our stores to support our strategic initiatives.
This increase was partly offset by lower COVID-19 related expenses compared to the corresponding quarter of the previous fiscal year.
On a two year basis, we maintained our strong cost discipline as demonstrated by a compound annual rate growth rate of only one 2% in normalized expenses.
Excluding specific items are described in more detail in our MD&A. The adjusted EBITDA for the first quarter of fiscal 2022 decreased by $2.0 million or 21% compared with the corresponding quarter of the previous fiscal year, mainly due to the lower road transportation ensure gross margins.
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Due to the net positive impact from translation of our Canadian and European operations into U S dollars, which amounted to approximately $41 million.
Income tax rates for the first quarter of fiscal 2022 was 21, 3% compared with 27% for the corresponding quarter of fiscal 2021 the.
The increase in the income tax rate is mainly driven by a lesser use of unrecognized capsule losses compared with the corresponding quarter of fiscal 2021.
As of July 18, 2021, our return on equity remained strong at 22, 9% and our return on capital employed stood at 15, 8%.
During the quarter, we continued to generate strong free cash flows and our leverage ratio stood at 123 times.
During the quarter, we successfully issued U S dollar dominated seniors unsecured notes totaling $1 billion at favorable terms that included a 350 million Green bond tranche.
The net proceeds of the green bonds will be used to finance or refinance our existing environmental friendly projects and community initiatives, which further our commitments for more sustainable and responsible for sure.
During the same period, we also fully repay the 1 billion U S. Dollar denominated senior unsecured notes that were set to mature in July 26.2022.
As of July 18, 2021, Yeah Abe.
We have Abel hempel salary balance sheet too.
Stability with $7.0 billion in cash and an additional $7.0 billion available through our revolving credit facility. In addition, during the quarter, we repurchased close to $300 million of our shares.
Our new program and continuing to provide value to our shareholders.
Finally on August 31, 2021, the board of director declared the declared a quarterly dividend of $83.0, Canadian cents per share and improve its payment effective September 23rd 2021.
To close I would like to highlight the work of our teams.
And what they've accomplished two of the past quarter, ensuring that we remain in a strong financial position and ready to accelerate capital deployment towards our strategic initiatives, while always remaining focused on driving value creation for our employees customers and shareholders. Despite still operating in a challenging environment impacted by Covid.
With that I. Thank you all for your attention and turn the call back over to you Brian.
Thank you Claude.
I said at the beginning of my remarks, you know early this summer I've been optimistic.
<unk> would be in our rearview mirror, however, recent developments, especially with the Delta very show. This is not the case.
We're digitally.
Diligently monitoring the situation you were updating your guidelines of procedures and putting the health and safety of our team members and their customers at the forefront of our decision making.
Despite the ongoing challenges I am proud that we continue to meet our strategic goals to grow the network, both organically and through M&A.
Once again, our thoughts and prayers go out to those employees and communities and the path of Hurricane Ida.
I want to thank all of our team members, our customers and our partners for their continued commitment and support as we move forward on our journey.
With that now answer the questions we received from our analysts.
Yeah.
Great. Thank you, Brian So first two questions come from Bonnie Herzog at Goldman Sachs.
First question how has the dogs got volume surge impacted your business in terms of customer traffic fuel volumes until March.
And could you share some quarter to date trends.
Have you had to adjust or hours or labor scheduling as a result, how disruptive has the delta Virgin been for recovery in Europe more rural versus urban market given wider vaccination gaps there.
And Bonnie with regard to the Delta.
Monitoring the situation and we've updated guidelines, we're mandating vaccines for people in their offices et cetera.
Trying to make sure that we're keeping both our team members and our customers safe.
We've been actively supporting vaccinations and vaccination rates are generally above the general population and the majority of our markets.
And we continue to push on education in that in that side.
Our stores continue to be open, but the delta is magnified in already difficult staffing environment. This.
This has been particularly acute in the southern U S. You know think Texas, Florida, the Carolinas and really for the first time, we've really seen supply chain challenges across those markets. Most affected by Covid, There's just compounding the labor shortage, so critically our DSD vendors getting deliveries.
On time or at all in some cases, it's been a challenge so our out of stocks had been higher than certainly we'd like to see them.
And I would say that the Delta search is clearly also going to delayed many employers return to work plans. We've seen a lot delaying into January so that meant morning day part, which continues to be the weakest part of recovery trend.
Lee to be pushed into the fall.
Yeah.
Thank you. So the second question can you give us an update on cost inflation pressures youre seeing and the impact on consumer demand, especially as government stimulus funds dry up in the U S.
Are you still able to effectively pass on material cost increases to consumers without significant impact on demand at your stores.
Yeah, we've seen cost increases across literally every single category and quite honestly I expect more to come.
To date, we've been able to pass along those costs into our retail while maintaining unit margin unit volume and margin dollars.
We strive to continue to provide customers value through smart multi pack pricing offering larger pack sizes and working with our vendors to provide exclusive.
Innovative product values with the use of our scale.
Based on supplier information you know it looks like we continue to perform well versus our peers and as you can see in the quarter. Our margins have remained very solid.
We are also seeing pressure on the cost side, particularly with wages and costs are increasing on the construction side for new sites Remodels.
Prior to these pressures we activated a large number of cost saving initiatives across our value chain and we believe we can mitigate a big part of these pressures in the coming quarters.
Our next two questions come from Irene <unk> at RBC capital markets.
Can you share any reaction or commentary with respect to the disclosure that the apparel Federal trade Commission and tend to take a closer look at flow margins and trends and particularly at transaction and implications on pure profit.
Okay.
Yeah, I mean, I I'd say, we operate in one of the most fragmented and competitive industries in the world. It's the only industry I can think of that we put our prices on big signs at the street.
You know what the price increases referenced in these articles it releases can almost be entirely explained by increases in underlying product costs.
Margins that we see in the U S are in line or lower than what we see in other markets around the world.
So yeah, I think that's just part of normal up and down of of our prices.
Driven by product costs.
With regard to M&A you know I think there was a recent transaction that got the attention of the government. Despite our size in the U S. We still have single digit market share.
And we believe we have a lot of room to grow in the U S. So we will strive to be collaborative with the FTC and any other parties in any transactions that we do in the future.
Same store sales looked quite good as you noted in your remarks can you give us more color around category and regional performance.
Particularly where.
We're reopening is further along and related to that how do you see normalization of the part traffic and demand, particularly in food.
I mean, we can see positive growth in foodservice categories, including our dispense beverages, you know a lot of those programs were closed or really impaired during COVID-19 last year. So a good recovery, but still below pre COVID-19 levels.
Overall growth in packaged beverages has remained positive even when cycling against the strong comps last year and despite some of the challenge we have in the supply chain.
So within that energy and sports drinks.
Remain the brightest spots in large package purchasing has also continued to be a key driver of growth. Despite a more openings in other channels.
Our traffic patterns are improving however, we remain cautious with the Delta Varian of Covid now impacting many of our markets in the U S.
Canada, and Europe or not is experiencing the same pressure so far.
The next two questions come from Michael Vanilla at TD Securities.
Can you elaborate on which categories are providing you with the favorable.
Mix improvement in all three divisions.
Is this mostly a return to pre COVID-19 product mix.
Higher fresh food lowered tobacco and smaller package sizes.
And you also mentioned pricing initiatives that the margin driver in the U S.
In Europe business unit in the U S and globally now have localized pricing and promotion capability deployed.
Yeah Michael.
Packaged beverage.
Cooler overall, even alcohol continues to be strong despite bars and restaurants being closed last year.
With regard to localized or data driven pricing in the first quarter. We did add five additional be us. So now we on top of the 11 that we're lives. So we have a total of 16.
But there's two metrics one is how many be used but then also whats.
The percentage of the Skus inside of each of those that are on the program and that continues to grow. So we're probably at about 50% of the skus in scope being activated.
There'll be a big push this quarter as we add tobacco in North America.
Which will add significantly to the percentage of our sales covered by localized pricing now.
Also during the quarter, we launched a series of pilots across the U S, Canada and Europe.
Looking at two optimizing both promotions and assortment using data and analytics and our early.
Early results from the pilots are very encouraging as I mentioned in my in my remarks earlier.
Yeah.
Yeah.
Turning to U S. Quote can you give an estimate maybe in percentage terms as to how much lower marketing and other discretionary expenses, where in the quarter compared to pre COVID-19 levels.
And when do you see them returning in full also are you seeing any improvement in labor it bill yet or can you at least yet improving aston with rolls off in the coming months.
So Michael the increase in expenses was driven by our increased level of marketing activities and other discretionary expenses and as far as the discrete discretionary expenses that were affected by the decrease there were mostly our maintenance supplies and marketing so expenses that we.
Good.
Contract.
When we were in the midst of the Covid outbreak in 'twenty 'twenty. One. So we have seen these categories of expense a decrease close to 10% in terms of spending quarter over quarter in fiscal 'twenty versus fiscal 2021.
Most of these expenses I've come back to pre Covid levels.
We are all wherever we're still are in a fluid environment with the variance and remain cautious in managing our stores.
As far as the labor as labor is concerned Brian mentioned earlier in his comments that it was has been a difficult labor market in early may we advertise for 20000 open positions and hired nearly 19700 by the end of the quarter and where it was speaking now where we're almost.
21000.
Our sales position so.
However, it remains a difficult market and we still have stores that are affected by the labor disruption and we can also see the effect of this labor shortage in many areas of our supply chain in North America like Oh, I already mentioned.
We're trying to mitigate those those are those impacts our network.
Okay.
Thank you next.
Next two questions come from methane harmony at Stifel.
Your results in Canada were impacted by significant lockdown measures, which abated before quarter end.
Can you discuss the evolution of the trends during the quarter in Canada as the lockdown measures debated, especially in terms of same store fuel volume and merchandise same store sales.
Yeah.
Yeah for Canada same store merchandise declined nine 6% and volume increased 10.4 during the quarter on the merchandise side last quarter, we had strong growth in tobacco and alcohol as other channels were closed.
These categories were lower as others reopened this quarter. If you look at a two year basis same store merchandise increased four 2% and volume declined 94, but we did clearly see Martin and improvement as the quarter progressed significantly better at the end of the quarter than at the beginning on both fuel and merchandise.
Yeah.
In Europe, the adult care volumes seems to have impacted the region earlier than in North America as.
As such could you discuss what you have seen post quarter and in terms of traffic trends and to Europe and of course.
Okay.
Yeah, I'd say just at a macro level despite delta.
Hitting their earlier the vaccination rates are generally high in most of our markets in Europe. If you look at Scandinavia and Ireland.
Significantly higher than what we see in the U S or in North America in general.
A bit lower in the eastern Eastern Europe markets that we have.
So we're going to continue to monitor the impact of Delta we've been fortunate to not have experienced as much disruption in Europe.
We're pleased with the same store sales performance in Europe, We've had an increase of five 9% and six 3% in fuel volume for the quarter on top of a strong performance last year. We've also seen our gross margin in Europe, excluding Hong Kong improved from 46% in the first quarter of last year to 41, 8% this year again.
Impacted by favorable changes in mix primarily.
The next two questions come from quickly and Theres nothing securities.
And deriving your fiscal 'twenty 'twenty three organic EBITDA target.
The U S fuel fuel volume will fully recover to pre COVID-19 level or do you expect fuel demand will remain structurally lower.
So of course, Oh, we're currently cautious because of the possible impact from the Delta variant.
Covid, we do believe volumes post COVID-19 should mostly to recover to pre COVID-19 levels.
So as we look at and in reference to our 2023 and you bid so as we look out at our targets.
We expect that it will come from a combination of pure margin and volume so driven by some of the fuel Nitpick initiative that we've been offline that ive been outlined in our last Investor day. So.
So that's that's where we stand as far as are expected the.
Fuel volumes and our margins.
Chris says the second question do you see any attractive in many opportunities within the <unk> market and is that many part of the growth strategy in North America.
You know, Chris the BW businesses is a hugely important part of our European business and we've seen it hold up very well during COVID-19.
Hum.
In the U S or in North America in General I'd call. It an early stage development, yet we've got some pockets of strength.
The key enabler for us to.
To grow to be to be in North America is growing a circle K fuel brand and having a consistent value proposition for those customers in our key markets.
Historically, how we built the company, we had a myriad of supplier brands and a lot of great brands, but are very difficult to provide a clear value proposition.
With with multiple brands out there so as we can see that rebranding effort, you'll see us double down on our <unk> efforts in North America.
In terms of M&A, you know, we're really not focused on M&A as part of this growth journey in B to B I wouldn't take it off the table, but right now we're again focused on making sure we have a clear value proposition for these need to be drivers.
Okay.
So the next question question comes from Derrick lay at Canaccord Genuity.
Given your healthy balance sheet, how do you think about capital allocation in the absence of any larger acquisition should we expect costar to remain active with the share buyback.
As part of our overall strategy.
You should expect that we will use our free cash flow for many opportunities and we will report in a sick when you repurchase our shares.
Our policy has not changed and we will look into opportunistic buybacks as long as our leverage ratio is below 225 times.
So we remain committed to investment grade rating and like to maintain a strong balance sheet to be prepared for future revenue opportunity and also allocate capital to our organic growth initiatives like new stores move up in digital.
I T and commercial programs.
Thank you Nick next question comes from Graeme Kreindler at eight capital.
The company has recently announced a number of tuck in acquisitions like Wilsons in quarters.
Can you please discuss how this transaction fit within the companies larger M&A strategy can we expect additional transaction of this size moving forward what does the current valuation landscape for larger target looks like.
Sure.
Yes, Graham we're going to continue to look for opportunities of various sizes that include quality stores in talent with the infrastructure of the bones. If you will to enable us to deliver our key programs to our customers.
With these two recently announced transactions, we're acquiring strong fuel and convenience assets in specific northwest in Atlantic, Canada, and both great fits for us.
As we experienced a new normal.
We're seeing elevated deal flow and all three of our platforms and then cautiously optimistic we'll get some deals done in the coming quarters.
As I said you know our focus is on being disciplined in our approach we have a clear set of criteria for the assets. We're looking for and will continue to strive to do the right things for our shareholders.
The valuations they have remained surprisingly held at elevated given a lot of businesses have been impaired, but you know.
Again, we're we're optimistic with the level of deal flow that will be able to participate.
Okay.
Moving to Mark Petrie questions at CIBC World markets.
As you look at fuel volume trends across regions, where behavior patterns have returned closer to normal do you have a 10th of the structural impact of shifts such as work from home until volume.
Yeah.
Yeah, Mark you know, we're still not back to pre COVID-19 levels close in Europe.
Little further way in North America, and Thats I think purely focused on you know people staying at home and working from home and then some local restrictions are still in pair.
Driving you know I believe when we start the start of the summer we thought we'd get a better answer to your question by now regarding whether that's a structural or a new normal if you will a hybrid with the Delta variant present, you know I'd just say the situation is very fluid and at this point I am I'm hesitant to call anything structural.
U S merchandise gross margin percentage Eldon well lapping a strong result last year and was up materially accrued in the accelerated recognition of deferred credit.
Can you help bridge the performance and share some context on the impact of ship and tells me.
As well as the contribution of your various initiatives, most specifically dynamic pricing and promotion and fresh food pack.
Yeah, Mark here, we did see strong performance during the quarter I would say the primary driver was mix I would say.
We have a new partnership with our AI in the U S. That's enabled us to be.
Even more so because consistently price competitive with their products, while providing us with a better margin. So that certainly helped that category and then localized pricing.
Yeah, I'd say, we talked earlier I call that third place.
Benefit here this quarter I think we're just starting to see the benefits of our localized pricing efforts.
Up in margin, but again very encouraged with the results so far.
The next question comes from Patricia Baker at Scotia Bank can you talk about what you are anticipating for fuel volume recovery as we move through the back half of calendar 2021 and into 2022.
There are certain lean mix experiences across market with respect to returning to work mandate.
And there is a broad return to school movement, both of which will impact right.
So Patricia we did see some improvement in same store volumes during the quarter. If you look at a two year basis as I said earlier, we're still down low single digits.
With Europe being the closest to pre Covid supported by our B to B business.
Yes.
Back to school certainly will help.
And we're cautiously optimistic that we'll continue to see a recovery in fuel volume over the next six to 12 months. However, as we all know Covid makes us a very fluid situation.
Our next question comes from Bobby Griffin at Raymond James.
Since the start of the pandemic pushed hard to kill <unk>.
The margin on <unk>.
<unk> versus the U S industry average as notably increased compared to the pre pandemic.
Do you believe your outperformance is sustainable given some of the field related initiatives. The company is working on.
Yeah, Bob we continue to be pleased with our overall growth in fuel gross profit.
In regards to fuel margin itself, our focus is on leveraging our scale and our initiatives to outperform the industry. We do believe somebody initiatives, we've outlined including our move to our circle K brand.
Driving more value from our supply chain utilizing data analytics for a sharper pricing.
Evan will create.
Create sustainable benefits to our fuel margin versus most of our competitors.
Our last two questions for today comes from Karen short at Barclays Capital.
Please provide your latest thoughts on labor costs in the U S going forward what does the labor picture look like in states that no longer had the federal unemployment benefits versus states that continue to have it.
How should we think about potential pressures on opex for the remainder of the year.
Central offset.
So Karen again, that's us.
Brian mentioned it has been very difficult labor markets. However.
We're working hard to maintain staffing levels, including a heavy focus on online hiring and online visibility and have put the centralized recruiting and hiring resources in place in each of our U S business units.
We mentioned earlier and that helped us to achieve what we mentioned earlier so.
Now we've been able to hire 21000 condition in the U S.
We also do have to react to competitive pressures for labor to maintain employment levels in our stores and we are using variable measures to compensate and ensure adequate employment and are monitoring closely.
The situation to remain a preferred employer.
As far as total Opex, while we did see a two 5% increase in our normalized operating expenses for the quarter. The CAGR was one 2% on a two year basis, maintaining our strong cost.
So wherever we continue to see some cost pressure from the inflation.
High labor cost and the incremental investment in our stores.
And we do expect to offset.
Some of these expenses with our cost optimization efforts at all.
All playing into FES sits right business process optimization.
And our operational excellence.
Program, where we are reducing repair costs maintenance costs construction costs and also credit card fees, but most importantly, we're putting us push some other cost.
Activities that are allowing us to help relieve the pressure on labor at the store level. So in activities such as labor scheduling elimination.
Back office and others, So that's where our big focus is to make sure that we're providing a proper help to our stores in this difficult environment.
Thank you Claude and our last question, we have seen several e-commerce.
The retailer such as such as Gopal Gorilla Dash MX benchmark at Europe pop up in Europe and market.
Markets with delivery time below 30 minutes of C store types of products, how well insulated do you think the urban stores are from share gains by these retailers and all where are you thinking about the ongoing development of your own delivery capabilities in light of what appears to be more competition in that market.
Yeah.
Yeah I'd say.
We relative we have relatively small urban presence.
We sell time to people and as other people find ways to become convenient.
Two customers, whether it's our skus or more broadly we're committed to understanding it.
In terms of what we're doing today, we continue to look at the overall e-commerce landscape and.
And expanded and understand home delivery and our network as we talked about earlier, but at the same time, we are watching the emergence of quick commerce in the urban markets in Europe, and the U S. GAAP.
So as you mentioned.
There's a lot of VC money space feeling these expansions.
Closely watching the ability to be profitable and do well.
Continuing to study it and stay close.
In terms of outside of urban.
Seems clear on the surface the same delivery windows, which you know can be 10 minutes or less are not economic in less dense markets, but again. This is early and we're committed to watching and watching it closely and you know our mission is to provide our customers what they want when they want it where they want it and the will to participate as we see fit.
Thank you Brian. Thank you quote that covers all of the questions for today's call are a reminder, for our audience that the replay of the call will be available on our website under events and presentation in the investors section with that said, we thank you all for joining us today.
We wish you a great day and hope you'll join us for our annual General meeting in just a few hours from now thank you everyone alright.
Thanks, everyone to everyone.
Thank you. This concludes today's conference call you may now disconnect Sushi misfire local films O'shaughnessy was.
And a coffee.
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