Q2 2022 Alimentation Couche-Tard Inc Earnings Call
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Good morning, I would like to welcome everyone to this web conference presenting element, that's all pushed our financial results for its second quarter fiscal year 2022.
All lines will be kept on mute to prevent any background noise.
After the presentation, we will answer questions that were forwarded to us beforehand by analysts we would like to remind everyone that this webcast presentation will be available on our website for a 90 day period.
Also please remember that some of the issues discussed during this webcast might be forward looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting.
Therefore, our future results could differ from the information discussed today.
Our financial results will be presented by Mr. Brian <unk>, President and Chief Executive Officer.
Mr. Claude <unk>.
<unk> Financial Officer, Brian You May begin your conference.
Thank you John Phillippe and welcome to the team.
Morning, everyone. Thanks for joining us for the presentation of our second quarter 2022 results.
Overall ground, our global network, we once again had solid results, both the convenience and fuel.
Same store sales were particularly solid and our U S and European markets as we continue to see growing momentum with our key initiatives, including our food programs.
Fuel volumes continued to be strong and Europe, while North America remains impacted by COVID-19 traffic patterns, but they do continue to improve versus 2019 levels.
Has the board, we continue to achieve healthy fuel margins and I'm, particularly proud of the work we did this quarter to improve and innovate the customer experience and drive traffic to our stores, which I'll elaborate more on later in my presentation.
Before moving to results I wanted to take a moment to comment that like our peers across the retail and convenience landscape in North America, we continue to face unprecedented labor supply chain challenges this quarter.
No doubt isn't the most difficult labor market in recent history and certainly in my career.
As we've been working hard to mitigate the situation, we've instituted hiring and retention initiatives, including bonuses and other offers and increased recruitment capacity and pipeline visibility across the network.
We are also focused more intensely in training engagement to be recognized employer of choice.
We're meeting our summer goal of hiring over 20000 store team members. This year, we're starting to see some stabilization and reference have ensure business continuity and success. Unlike a lot of other retailers, we remain open for business and ready for our customers.
Labor shortages is also impact the supply chain across the industry, particularly in the U S from shortage of truck drivers to warehouse staffing issues with our suppliers.
Our vendors have also experienced significant disruption in receiving raw materials, causing delays in production.
We've been working closely with our partners to find solutions and we have seen recent improvement situation.
The optimistic the worst is behind us and I am pleased that we as we face these labor and supply chain obstacles head on we continue to deliver solid quarter and kept on track with our strategic goals.
This is a testament to the dedication of our teams across the organization.
Worked tirelessly and creatively to come up with viable options in the face of these obstacles.
I'm grateful for their continued commitment to our business and our customers.
Let me turn to our results beginning with convenience.
Compared to same quarter last year same store merchandise revenue increased one 4% in the United States three 9% in Europe.
Decreased two 1% in Canada.
Can you just activities performed well on a two year basis same store merchandise revenue increased at a compound annual growth rate of two 9% in the U S six 3% in Europe, and four 5% in Canada.
Okay.
Across the network, we continue to drive growth and expansion with our fresh food fast program.
The end of the quarter wasn't behind the offer in nearly 2700 stores in North America.
Close to 190 stores in Europe.
In addition to increasing store count we focused on the development of our food culture, including extensive training of our North American operations team in both execution and food safety.
The global supply chain issues have led us to work more closely with our partners in the food space and we're working to diversify our supply base and adapt to these challenges.
And our dispense beverage category <unk> beverage subscription offers now expanded includes over 380000 active subscribers.
Feedback from our customers has been overwhelmingly positive as we can do is continue to expand the software across the U S.
Improvements have been made to our website, which makes signing up and rule quick and easy and we're working on enhancing product quality for our customers.
It's also also worth highlighting that in Q2, we received the hot dispense innovator of the year Award for this unique subscription program as well as moving to a 100% sustainably sourced coffee in the U S.
Another traffic driver to our locations quarter ended we've entered into a pioneering global partnership which will bring over 9000 of our stores like the leading augmented reality game and the <unk>.
First five year five days excuse me alone. This product has brought in over half a million visits to our locations with customers redeeming.
Special in game rewards and offers.
We're excited to realize the full potential of this partnership in the weeks and months ahead as the experience gains momentum and awareness.
Okay.
Overall growth in.
Packaged beverage remains positive with good unit growth continuing through Q2 energy drinks continue to drive the category with water and sports drinks also being bright spots.
<unk> continue to shift back to immediate consumption packaging to purchasing more units driving overall sales growth.
Again to combat the supply issues, we've been rapidly adjusting assortments as a priority.
Overall, the age of sugar category was not as strong as the same quarter last year, when the restrictor pandemic restrictions on restaurants and bars.
Europe continues to have good results in other tobacco products in our U S business units focused on opportunities with wine, including the fast growing single serve wide products.
To enhance the in store customer journey maximizing impulse purchases. We now have over 1302 line installation is complete in North America and over 230 in Europe.
Q lines continue to show very strong value in building basket will push deeper into our network in the coming quarters.
And our data and analytics work, we completed last wave of our rollout of localized pricing with.
With your entire network now live with the capability, we're focused on going deeper into particular categories and continuing to optimize the work based on our learnings.
Our data driven merchandise efforts.
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Through Q2, we were able to glean significant learnings from initial efforts across the U S, Canada, and Europe, where we're seeing meaningful opportunity to utilize more effectively in store promotions and tailor, our assortment, making us even better and more localized retailer.
Looking at the fuel business same store road transportation fuel volumes increased three 3% in the U S. Two 8% in Canada, while decreasing <unk>, 3% in Europe and other regions.
On a two year basis same store road transportation fuel volumes decreased at a compound rate of 565% in the U S, 2% in Europe, and core 9% and Canada.
Fuel volumes continued to be challenged in parts of our network by work from home trends.
However, we continue to see volume strengthen each week versus our 2019 baselines.
As I mentioned earlier fuel margins remained healthy through the network compensating for the loss in volumes during the quarter.
And our circle K fuel rebranding work over the quarter. We've now completed 121, new sites, bringing the year to date to 200 locations and the total site count with circle K fuel in North America of 3000.
By the end of the year, we expect to have 60% of the in scope North American network with circle K fuel brand.
Also in our fuel category, we're pleased with our strong sourcing and efficiency and growing and our skilled transportation operations across the network, we see them continuing to deliver value.
In Europe, and our <unk> network.
Had another strong quarter with volume with both card and bulk segments trending ahead of prior year.
Driven primarily by continued positive performance across the fleet segments.
We've heard that the focus on the customer journey with improvements in our <unk> mobile payment App and self service solutions.
It is easier for those customers to manage drivers and control their costs.
We've also made good progress in our electric vehicle work this quarter.
Our European fast charging network now consists of 935 charges covering more than 230 locations.
We're continuing to expand the charging network from Norway across Scandinavia, as well as we started deploying in the Baltics in Ireland.
We've also continued to develop and expand our partnerships in Europe, with Tesla and IMT as well as a growing number of circle K Chargers.
As we develop our approach in North America, we now have 20 fast Chargers installed in Canada 12 of those sites being in our Quebec business unit and will begin installation in the U S and targeted Martin excuse me in targeted markets in the coming quarters.
Turning to innovation after a successful launch across Sweden, our payback plate frictionless payment solution for fuel, we continued deploying that network into Denmark dystonia in Norway, and we're now preparing or other markets for launch in coming quarters.
In the U S. This quarter, we retrofitted seven stores in Arizona with full frictionless checkout technology.
And these Tampa and Tucson locations customers have the option of a fully frictionless experience or a more traditional register checkout. This.
This marks the next step in our journey to incorporate innovative solutions and technologies that help our customers get in and out quickly.
Our store teams to focus their time and talents of better serving our customers.
Moving forward, we'll continue to explore a variety of checkout innovation and experiences getting feedback from these customers and our team members as we make decisions about further network deployment.
Returning to the labor issue, where you're doing some innovative tools to help fill our shiseido locations. We now have over 300 stores in the U S.
Mobile apps to higher gig workers to cover needed hours and help with non customer facing tasks, such as stocking shelves and keeping the stores in core courts claim.
I'm going to pause here and let cloud take you through more of our second quarter financial results Claude.
Thank you, Brian ladies and gentlemen, good morning for the second quarter of fiscal 'twenty. Two we are happy to report net earnings of $694 $8 million or <unk> 65 per share on a diluted basis.
Excluding certain items for both comparable periods and.
Adjusted net earnings were approximately $693 million or <unk> 65 per share on a diluted basis for the second quarter of fiscal 2022, compared with $735 million or <unk> 66 cents per share on a diluted basis for the second 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 increased by approximately $183 million or four 9%. This increase is primarily attributable to the contribution from acquisitions, which amounted to approximately 170 million.
On a two year basis same store merchandise revenues increase had a solid compounded annual growth rate of two 9% in the United States.
Six 3% in Europe, and four 5% in Canada.
Excluding the net impact from foreign currency translation merchandize and service gross profit increased by approximately $72 million or five 6% mainly attributable to the contribution from acquisitions, which amounted to approximately $49 million.
Our merchandise and service gross margins increased by 2% in the United States to 33, 8% and 4% in Canada with 32, 3%, mainly due to the favorable changes in product mix as customer are favoring smaller sized packaging, including circle single serves.
As well as the positive impact from our localized pricing initiatives.
Our merchandise and services gross margin decreased by one 8% in Europe and other regions to 38, 4%, mainly due to the integration of circle K, Hong Kong, which has a different product mix than our European operations.
Excluding circle K, Hong Kong, our merchandise and service gross margins in Europe, and other regions would have been 42, 2% impacted by favorable changes in product mix.
Moving on to the fuel side of our business in the second quarter of fiscal 2022 Odd Road transportation fuel gross margin was $36.39 per gallon in the United States and the increase of 18th 18 cents per gallon in Canada. It was 11.0 to <unk>.
Canadian per leader, an increase of 1.02 cents Canadian per leader.
Finally in Europe, and other region decreased by <unk> 50, <unk> 53 per liter to $10 57 per liter.
<unk> fuel margins remained healthy throughout our network as a result of our strong strong sourcing efficiencies and market conditions.
Now looking at SG&A for the second quarter of fiscal 2020 to normalized operating expenses increased by seven 7% year over year driven in part by measures. This is stated by the impact of the labor shortage and the need to improve.
Employee retention as well as by an increased level of marketing activities and other discretionary expenses that were sitting there.
<unk> significantly sorry reduced in the prior year quarter.
We would also note the impact of inflation inflationary pressures higher costs from rising minimum wages and incremental investments in our stores to support our strategic initiative, partially offset by lower COVID-19 related expenses compared to the corresponding quarter of the previous fiscal year.
Excluding the cost of the retention measures implemented.
Which totaled approximately $24 million the remaining variance for the second quarter of fiscal 2022 would have been five 7%.
On a two year basis, excluding the cost of those retention measures. We maintained our cost discipline as demonstrated by a compounded annual growth rate of only two 2% of the more normalized expense.
While remaining focus on our cost optimization initiatives.
The rising Harley wedge in our industry are expected to pressure operating expense for the foreseeable future.
Excluding specific items described in more detail in our MD&A. The adjusted EBITDA for the second quarter of fiscal 2022 decreased by $16 $8 million or one 3% compared with the corresponding quarter of fiscal 2021, mainly due to the higher operating expenses, partially offset by organic <unk>.
In our convenience and road transportation fuel operations and the contribution from acquisition as well as the net positive impact from foreign currency and currency translation.
From a tax perspective, the income tax rate for the second quarter of fiscal 2022 was 21, 3% compared with 24% for the corresponding period for fiscal 2021.
The increase in the income tax rate is mainly stemming from the impact of different mix in our earnings across the various jurisdictions in which we operate as well as from prior year gain taxable at a lower income tax rate.
As of October 10th 2021, and our return on equity remained strong at 21, 2% and our return on capital employed stood at 15, 1%.
During the quarter, we continued to generate strong free cash flows and our leverage ratio remained unchanged at $1 23.
We also had strong balance sheet liquidity with $3 $4 billion in cash and an additional $2 $5 billion available through our revolving credit facility.
In addition, we repurchased close to $240 million under our <unk> and CIB during the quarter as well as another 50 million.
Subsequent to the end of the quarter continuing to provide value to our shareholders.
Turning to the dividend.
The board of director approved yesterday, an increase in quarterly dividend of $2.25 Canadian per share, bringing it to 11 cents Canadian per share an increase of 25, 7%.
During the same meeting the board of directors declared a quarterly dividend of 11 cents Canadian per share for the second quarter of fiscal 2022 to shareholders on record as of December 2nd 2021, and approve its payment effective December 16th 2021.
Finally, a reminder, that Friday December 17th.
We will be the last business day on which our class B shares will be trading on the Tia six.
Our youngest founder will turn 65 on Saturday December 18th triggering the Sunset clause.
Therefore on that date, all class B shares will be delisted effective Monday morning, the 20th of December following an automatic conversion on a one for one basis only one class of share will be traded on the Tia six and all shares will then carry 10 votes.
We intend to amend the terms of our and CIB to purchase for cancellation. The same amount of such class of shares rather than currently approved class B shares.
This will all be inconsequential for the business as well as for our final founders will continue to be involved in the organization as they have been for over four decades.
With that I.
Thank you all for your attention and turn the call back over to Brian.
Alright, Thank you Claude before I conclude I want to address the continuing presence of the pandemic, albeit at different levels across our network early in the quarter.
The delta varying the virus was spreading it really an alarming speed in the U S, particularly in the south and southwest where we have a significant number of stores.
We're seeing the situation much more under control, we have seen a spike in eastern Europe.
Particularly the Baltics in Poland, where we have low vaccination rates and relatively high Covid cases, so we've seen some shutdowns that have the potential to impact our business in those smaller markets.
Our larger markets in Scandinavia and Canada.
We continue to have very low number of cases very high vaccination rates and also in the U S. We're assessing the preparing for the vaccine testing rules from Osha.
Affecting businesses with over 100 employees, we continue to monitor that situation updating their guidelines and procedures and continue to push internally for higher vaccination rates and we put the health and safety of our team members and our customers at the forefront of all of our decision making.
Despite these ongoing challenges we are steadfast steadfastly meeting our strategic goals.
And progressing on our journey to become the world's leader in convenience and mobility.
Finally, most of you would be happy to hear that next quarter.
And very long standing tradition of asking for your questions before the conference call.
Starting in our third quarter's conference call in March 2022.
We will change the format of the call and welcome and answer all of your questions live.
So at this time, we will answer the questions that we've received from Atlas.
Thank you, Brian and closed just a reminder, that a replay of the call will be available on our website in the events and presentations of the investors section.
Are now ready to answer the questions received in advance from the analysts.
On the topic of labor availability and our first question comes from Michael Van <unk> at TD Securities.
The labor situation is a challenge for all employers at this stage of the pandemic.
Couche tard appears to have been more successful than many in attracting and retaining employees, but it is coming at a cost can you discuss the initiatives used to attract and retain employees as well as the associated cost of these programs and how much longer you believe these costs.
Could continue to be required Brian.
Yes, Thanks, Michael.
First and foremost proud of where we're at we are open we have.
A very small number of sites, where we have reduced hours due to labor.
When I compare it to a lot of the other retail I see around the U S.
I think our teams have done a great job.
Like our peers across retail and convenience in North America, we have continued to face labor and also supply chain.
No doubt this is the most difficult labor markets and we've been working hard to mitigate it.
We found is there's not a silver bullet.
Not all about all about money, but rather we've been taking a comprehensive approach hiring and retention initiatives, including bonuses and other offers with the goal to keep as much as we can of this variable and performance based.
We've increased dedicated recruiter capability and capacity.
We've upped our online visibility.
We've dramatically simplified and shorten the time between applications and job offers which is important is we're fighting for.
We've also focused more intensely in training and engagement to be recognized as an employer of choice.
It's a lot easier to keep them than it is to hire people. So.
After meeting our summer goal of hiring over 20000 store team members, we're starting to see some stabilization while turnover is higher than historical norms and most of our markets. We've been successful in recent months and hiring more people than we're losing and staffing levels are slowly creeping back to more normal levels.
We believe that the portion of these costs will continue into next fiscal year.
And while it's unclear what portion will stay with US long term, we are actively taking mitigating actions to minimize their impact on the bottom line and we'll talk more about that in some of the coming questions.
On the same topic. Our second question comes from Vishal <unk> at National Bank.
Labour challenges slowing down management, various improvement initiatives, such as ntis and fresh food rollout Bryan.
Yes, Michelle.
We are tracking generally in line with our plans on ntis as well as on fresh food fast implementation, but theres no doubt that labor shortage adds to the challenges we're seeing longer lead times for almost everything we do.
With regard to these two big programs that really are driving a lot of value for us and we're fortunate that our current pipeline of projects had been well planned out well in advance and we are not anticipating any material slowdown in those two areas.
People turnover and shortages is making everything harder with.
With regard to the question fast in addition to the rollout we've doubled down on training and offer simplification and we're working to create supply chain redundancy for those products.
Got an issue in the past quarters.
This has been an unprecedented challenges we talked about earlier and our teams are working very hard to keep us up with a big plan strategic goals.
Okay.
Moving on to the topic of supply chain.
The following two questions will be answered two simultaneously.
Our first question from Martin Landry at stifle there have been media reports, especially in the U S about retailer enduring challenges to replenish their shelves with product.
Has this been an issue for you and did it impact your same store sales during the quarter.
And the second question from Patricia Baker at Scotiabank can you discuss what you are experiencing from a supply chain perspective in each of your market and to what degree you might be impacted by supply chain disruptions are you seeing any issues with product availability as we are hearing from.
Others Brian.
Yes, Martin and Patricia.
Just overall as an industry I think we're well positioned versus other channels. If you think about our supply chain. It typically is significantly shorter without a lot of overseas imports that.
A lot of other channels rely on but that's it.
Theres no doubt supply chain has led to challenges with product availability and this is really taken two forms one is.
SKU availability due to production issues or ingredients exam.
An example could be Pepsi instead of 25.
Sparkling skus they may have half of that available as they focus on.
Their best sellers, Yeah, Theres been driver availability, whether that's been warehouse our direct store delivery.
It's getting deliveries and getting deliveries on time, that's been difficult.
This issue has certainly been a key more acute in some markets than others parts of the U S being the most impacted while Europe and Canada relatively unaffected.
Same store sales have been impacted during the quarter, but very difficult to quantify as I said earlier when I started we know other retailers are facing similar challenges. So net net we think we've left sales on the table, but.
Again.
Vaccination rates continue to rise we're.
We're seeing more stability with many of our key supplier partners and are cautiously optimistic that the worst of that situation is behind us today.
Thank you.
Moving on to the topic of inflation. Our first question comes from Bonnie Herzog with Goldman Sachs can you touch on your overall pricing strategy in light of all right creases, we're seeing from many different manufacturers and how successful have you been in taking pricing.
Ahead of these increases.
Furthermore, I'd be curious to hear how these higher prices have impacted consumer behavior.
Finally are you at all concerned that the low income consumer might be pressured next year. Given this consumer demographic has disproportionately benefited from government stimulus much of which will likely be going away next year could this potentially have a negative impact.
Both in store and fuel demand Brian.
Yeah.
Yeah, Bonnie we certainly seen cost increases across literally every single category in our business.
I don't think we're unique there I think thats affected really all retail.
And quite honestly I expect more to come.
To date, we've been able to successfully pass along these costs into our retail prices, while maintaining unit volume or dollar margin.
We have comprehensive plans in place in all of our business used to move prices to both maintain margin, but beyond that to mitigate the cost increases we're seeing across the value chain. One example, certainly being later.
We're seeing retail price movements broadly across all channels. So I believe that we are remaining competitive on a relative basis, we strive to continue to provide our customers value through smart <unk>.
Multi pack pricing offering different assortments and working with our vendors on private label and other exclusive and innovative values.
Ideally leverage our scale.
Based on our supply information it looks like we continue to perform well versus our peers.
As you can see in the quarter on margins that remained very solid.
We are also seeing pressure on the cost side I talked about labor, but also it's across other utilities.
Instruction of new sites Remodels.
When we launched our double again strategy, we have a goal to dramatically reduce our costs across the value chain and prior to these.
Current situations, we'd activated a large number of cost saving initiatives across our value chain, which I think has helped us on a relative basis, we're certainly going to give some of that back but.
Without those actions that we had starting as early as two years ago.
We'd be feeling more of that impact today.
Finally on the low end consumer question.
It's possible that after the removal of the government and ways that could be a negative impact on both in store and fuel demand, but I think there is offsetting things on the other side and it's hard to measure the net deposit side.
Two years of Covid, we believe Theres a lot of pent up demand as people get out of their homes, we've seen personal savings rates at historic highs and we have full employment and we're seeing wages rise at the lower end of the wage scale. So net net neutral.
Optimistic that consumer demand will remain strong in the face of increased prices and it's more offices and schools reopen in normal commuter patents return we feel good about the future.
On the same topic. Our second question comes from Vishal <unk> at National Bank can.
Can you provide greater perspective on labor inflation challenges have we seen the worst of the pressure in Q2 or is the pressure expected the magnify in coming quarters.
Thank you for your shiela during the quarter normalized operating expenses increased by seven 7% year over year, driven by the measure necessitated by the impact of the.
The labor shortage and increased level of marketing activities.
And other discretionary expense that they have been reduced significantly in the prior year.
We also note the impact of inflation our it.
Costa from rising minimum wages and incremental investments in our store to support our strategic initiatives, partially offset by the lower COVID-19 related expense that we incurred last year.
It's a difficult it's difficult to estimate whether or not we.
<unk> seen the worst of the pressure in the second quarter has the environment in which we operate changes quickly.
Various initiatives all allow us to adapt quickly and mitigate some of these invention aerie headwinds.
We're seeing labor pressure slightly easing with the turnover.
Turnover rates coming down slowly towards the end of the quarter.
This is not over.
But.
We are seeing signs of slight improvement right now.
Thank you.
Moving on to the topic of fuel. Our first question comes from Karen short at Barclays.
Are you thinking about the next 12 months with respect to fuel volumes in light of the rapidly rising fuel price environment in the U S and Canada and if this pressure.
Gallon comps how will you mitigate this as it relates to preserving growing in store comps in the U S and Canada Brian.
Yeah, Karen I think overall our performance based on the data we gather will elaborate from the EIA the credit card companies et cetera.
We're performing at or better than the industry in Europe, clearly I think we're taking market share, but that said you know fuel volumes continued to be challenged in parts of our network by work from home trends.
Changing local restrictions.
Still not back to pre Covid levels were close in Europe, a bit further way in North America, and then and that I think is largely focused on people staying at home and working from home.
And then there are some local restrictions that are still inherent travel, particularly as I mentioned in eastern Europe.
More recent weeks, we've seen some of our North American markets reached 2019 levels, not declaring victory, but certainly encouraging to see.
I'd like to see retail prices lower.
I, just think about us as a large tax that affects disposable income overtime.
That said, we believe there's a lot of pent up demand to get out and we will see traffic continued to improve as action Asian rates rise in Kobe concerns mitigate.
In terms of our mitigating actions, we're working actively on building the circle K fuel brand in the U S.
We've been piloting an entirely new loyalty concept.
In North Carolina, and in Denmark that has a strong fuel component.
Finally, we are investing in communication.
Key value propositions around our fuel quality to our customers. Our testing shows this messaging is resonating and driving results overtime.
And then finally I think when I think about commodity prices, what fixes high oil prices and high oil prices. So in the scope of the timeframe of 12 months that you mentioned, Karen certainly a lot can change in that.
We hope that.
Retail pricing does mitigate but.
We're pleased that despite the rising increases and cost we've seen over the last months that fuel margins remained strong and volumes continue to improve.
On the same topic, our second and third questions to which we will answer simultaneously come from Irene <unk> at RBC capital markets and Graeme Kreindler at eight capital. So Irene's question is over.
The past six quarters, you have generated extremely robust fuel margins on the last call you outlined some of the key initiatives, but can you. Please walk us through these again relative contribution how far along you might be with these and the degree to which it might be sustainable based on these initiatives.
<unk> do you view your 28 to 30 cents per gallon fuel margin objective as conservative and Grahams question is the company outlined at fuel margin expectation on its recent investor day, it affects margins to revert to 2019 levels and slowly increase from there.
Given the sharp rise in fuel prices does this outlook still hold can you discuss the ongoing competitive dynamics and comment on how it will impact fuel margin trends Directionally Brian.
Yeah, I read Graham Thanks for the question.
I'd say the last six quarters have been challenging in terms of fuel demand as we talked about.
With the impact from Covid and the government measures, we discussed earlier as outlined in our Investor day presentation margins have had to rise to compensate for the reduced volume experienced by all operators in these quarters.
As well as the increased cost of doing business. We believe this economic effect will continue and we note that the industry volumes remain below pre COVID-19 levels in many of the markets we operate in.
We are pleased with the progress of our various tool initiatives, we're approaching the deliberate these initiatives in a structured way.
It will allow us to sustainably outperform on fuel earnings which is our focus.
We note that the markets. We operate in are extremely competitive and we remain focused on providing our customers with the best value.
Overall, we stand by the information shared at our recent Investor day based on the outlook of our fuel initiatives and our performance fuel margins continue to be very healthy across the network as a result in part of our favorable competitive landscape.
Landscape compensating for the fuel volume loss at the industry has experienced.
We're pleased with our strong sourcing efficiency and growing in house fuel transportation operations across the network, including our venture with musket, which is a division of laws, we've seen that cooperation dramatically improve our ability on the sourcing and supply side.
And finally, we continue to be pleased with our overall growth in fuel gross profit in regard to fuel margin itself. Our focus is on leveraging the scale and our initiatives to outperform the industry regardless of the of the margins. We do believe in some of the initiatives, we've outlined including a move to circle K brand drives more value driving more value from our supply chain.
Rising data and analytics are sharper pricing.
And we have a walker create sustainable benefits to our fuel margin versus most of our key competitors.
Okay.
Thank you moving on to the topic of convenience. Our first question comes from John Royall at J P. Morgan can you talk about your progress in the fresh food fast program and how that is tracking your expectations is the business negatively affected by stay at.
Home trends Brian.
Okay.
Yes, John we continue to see growing momentum in the U S and in Europe.
Weekly or daily sales. However, you want to quantify that continue to grow.
<unk> been focusing on the development of the food culture, So all hands on deck around training.
Around execution around food safety.
We now have 2600 sites in North America.
And well on our path to 4000 stores this year.
We're at 190 stores in Europe, and I think we're in a good place to reach 500 by the end of the year as we committed.
Certainly this initiative has been impacted by home trends, particularly in the morning commutes we've got.
Great array of breakfast sandwiches, they tend to be.
Top sellers.
We need that morning customer back for our coffee pastries and our fresh food.
First item. So is that is that returns to normal we expect that she just only strengthen the performance we're seeing in crush it fast and in terms of bottom line. We still believe we're on track to deliver our fiscal 'twenty three EBIT target contribution from quest food fast even in the face of Covid labor and supply chain challenges. So again.
Despite the challenges feel we're in a good place and have a good track.
On the same topic, our second and third questions to which we will respond simultaneously come from Chris Lee at <unk> and Bobby Griffin at Raymond James.
This question is can you talk about the factors that influenced merchandise same store sales and margins. This quarter. It seems there was a slight slowdown in the U S. At least on a two year stacked basis, while Europe remained strong.
Bobby's question is are there any areas of the in store business that are still below pre COVID-19 levels and if so are these areas, having an outsized impact on gross margins Brian.
I'd say no.
In our Europe business, we are clicking on all cylinders, there and the data is saying that we're winning in those markets that we've not had the same supply chain challenges or labor challenges, but that said, we're still outperforming the markets and.
Continuing to gain traction there.
Look at North America, specifically the U S.
Last year, we sold a lot of PPE PPE equipment masks hand sanitizers.
And that certainly slowed down and created some of the sales drag we feel.
Alcohol sales in the U S. Also declined this year versus last certainly look good versus 2019, but with the reopening of bars and restaurants in many of our markets.
We've got some headwinds in the alcohol side those are the kind of the two big ones around sales and then the third is supply chain, which I talked about we have not tried to quantify it but.
Certainly with the difficulties.
Many of our supply partners have had we certainly think we've left some sales on the table in parts of the U S. In particular.
In terms of margin.
We were up 20 basis points in the U S from 33, 6% to 33, 8%.
In the quarter largely.
Explained by favorable mix as customers turn more to single serve products I'd say the other driver we continue to be excited about around margins setting aside the <unk>.
Cost increases from.
From inflation is there a localized pricing we've got a large data and analytics team stood up.
<unk> now and I'll be use and we're expanding deeper into categories every month.
Versus control sites, we continue to see strong performance. So I'll continue to believe that's a very big price for us and.
We're piloting beyond pricing into assortment assortment and promotion as we speak.
Yeah.
Thank you.
Moving on to the topic of operating expenses. Our first question comes from Peter Sklar at BMO capital markets.
Operating selling administrative and general expenses grew at a seven 7% net of the various adjustments you identified.
You indicated that part of the high growth rate can be explained by employee retention measures.
Please outline in order of significance. The other factors that resulted in this growth in operating costs.
Peter.
You're correct on an herbalife normalized basis expense grew seven by seven 7%.
As disclosed 2% out of that seven 7% is related to the employee retention measures.
Five 7% is mainly related to the growth in our early right investments in our strategic initiatives.
Marketing initiatives that we're significantly reducing the prior year quarter as well as the overall growth in other discretionary expenses like we've outlined earlier on.
On a two year basis, we maintain our cost discipline is amongst rated by the normalized.
Expenses growth.
Compounded annual growth annual rate of growth of only two 2%. So we continue to work on our cost optimization program to reduce cost in our stores by pulling non customer facing hours in trying to make the lives of our store easier every day.
Thank you our second question on the same topic comes from John Royall at Jpmorgan can you talk about your outlook on Opex for the remainder of the year and into fiscal year 'twenty three.
<unk> have you managed to grow expenses at such a low rate on a two year basis and can that continue into this inflationary period.
Yes, John.
As far as total Opex, while we did see an increase in our normalized operating expenses for the quarter. The CAGR was two 2% on a two year basis, maintaining our strong cost discipline. So however.
However, we continue to see some cost pressure from inflation high labor costs and incremental investment in our stores and we do expect to offset some of these expenses with our cost optimization efforts.
Offline in the past such as business process optimization, and our operational excellence program, where we are reducing repair costs maintenance costs among others.
But most importantly, we are.
We're putting a special focus on all the activities that are allowing us to help relieve the pressure on labor at store level.
The activities such as labor scheduling eliminating back office task and others are at the center of our initiatives.
That's where our big focus is to make sure that we're providing proper helped to our stores in these difficult moments, but finally, we are also.
Working on our retail prices to mitigate some of the impact. So we're bringing we're looking to pass on some of those increases also so finally these pressures are not going away immediately despite all the work that we're doing and we expect them to continue in the foreseeable future.
Thank you.
Moving on to the topic of M&A. Our first question comes from Mark Petrie at CIBC, you have spoken about an improving pipeline for acquisitions could you. Please update us on the landscape and pipeline today and comment on the outlook for tuck in versus more material transaction.
Uh huh.
Our evaluation multiples looking today versus the elevated levels that we have seen for the last several years Brian.
Yeah. Thanks, Mark we continue to look for opportunities in various sizes that include quality stores and the right talent to our infrastructure. If you will to compete going into the future.
With these two recently announced acquisitions, we're acquiring a strong group of fuel and convenience assets in the Pacific Northwest and Atlantic, Canada that we announced in the quarter. They are both great fits for us and I put them on the tuck in category. We now also have in Dublin, Ireland and acquisition on the table.
Concentrated I guess for 10 stores.
We announced during the quarter that we anticipate closing before the end of the calendar year.
So as we experience a new normal we are.
Seeing all the the deal flow in all three of our platforms and I'm cautiously optimistic we will get some deals done in the coming quarters.
I always say you know we remain disciplined in our approach we have a clear set of criteria for the assets we're looking at.
We will continue to try to do the right thing for the shareholders.
Evaluations.
They range widely depending on the asset quality, but have remained surprisingly elevated given the law.
The challenges that we've all experienced with COVID-19, but.
That aside I'm optimistic we've created structural.
Sustainable advantages against a lot of our industry.
And we're optimistic with the level of deal flow that will be able to participate.
Thank you <unk>.
Moving on to the doubled again strategy. Our first question comes from Chris Li at <unk> over the last four quarters EBITDA has totaled almost <unk> dollars 5 billion close to your $5 $1 billion target by fiscal 2023.
Do you believe there is upside to your target and what are the key factors required to exceed your target.
Thank you Chris.
I know you're referring on the organic portion of our target by referring to the $5 1 billion in fiscal year 'twenty three.
Probably as you have seen during the call. We are satisfied with our progress to date on our key initiatives would it be fresh food fast logo localized pricing are dual sourcing. So we continue to execute on our key strategic initiatives and are confident that we're going to continue to perform on these we also.
On cost optimization and efficiency initiative and customers remain at the top.
And we remain this initiative, we remain at the top of our priorities. However.
However, we recognize that supply chain and the labor challenges are behind us and we need to continue to monitor these that these impacts and to stay ahead of these challenges.
She'll dynamics could also change.
And have an impact on our upcoming results, but we continue to believe in the optimization of the fuel gross profit.
<unk> dollars in the future. So overall, though we remain cautiously optimistic that we will reach our EBITDA targets by fiscal year 2023.
Yes.
Thank you moving.
Moving on to the next topic Covid. Our first question comes from Irene <unk> at RBC capital markets.
It appears that Covid continues to be disruptive to traffic both at the pump and inside the store and basket patterns can you talk about how these are evolving the exit rate at quarter end and what Youre seeing now Brian.
Yes, Thanks, Larry.
You've covered a lot of this but.
I'll give a little bit of a view on what we're seeing the situation in North America has improved pretty significantly since early in Q2.
When delta is spreading pretty rapidly we see vaccination rates continue to rise.
We continue to see improving traffic and sales trends.
More recent weeks continued to be strong so we're optimistic that we.
We've got good trends in most of our key markets.
We got some markets, where we continue to see disruption as I mentioned earlier eastern Europe, while not big markets for US you know they recently have had very high number of cases in some societal shutdowns that will likely impact our operations in those countries for some period of time.
Also our new instructions in Ireland could also impact our results, but again, our bigger markets Scandinavia U S Canada.
We're seeing a lower number of cases, improving and high vaccination rates and.
Much more of a return to normalcy.
We do continually continue to diligently monitor the situation.
Bush actively internally for higher vaccination rates.
And putting those decisions that we make around our team members and our customers at the forefront.
<unk> been actively supporting vaccination and our rates I'm proud of that are generally above the general population and the majority of markets and we continue to push the education.
Our vaccines internally.
This remains fluid and we will continue to closely monitor and as the cold weather approaches and we're prepared for.
Hopefully the optimistic side getting better but also with if we see some reversion back.
In terms of traffic Irene.
Traffic continues to be impacted as we talked about from work from home.
We're like a lot of businesses, we've announced that after the holidays, we're going to actively be getting people back to their offices.
I hope that we can all get there and we're optimistic that that will certainly help our morning commute and the traffic from that day part.
Our basket continues to perform well despite soft traffic in the morning, and again when traffic becomes more back to normal.
We feel good about the future and good about the sales trends that we're seeing in more recent weeks.
Okay.
Thank you.
Finally on the topic of balance sheet and leverage our last question comes from Derek delay with Canaccord Genuity with your adjusted leverage position at 123 times can you remind us where you would be comfortable leveraging up to for the right acquisition.
And in the absence of a major acquisition should we expect a continued return of capital to shareholders as we have witnessed over the first half of this fiscal year.
Thank you for the question so as part of our overall strategy you should expect that we will use our free cash flow for M&A opportunities and we will look for it to be repurchased our shares our policy has not changed and we will look into opportunities opportunistic buys.
Backs as long as the leverage ratio is below 225 times.
We remain committed to our investment grade rating and like to maintain a strong balance sheet to be prepared for future M&A opportunity and also allocate capital to our organic initiatives like new store development digital innovation.
And commercial programs.
We also are finally, we also believe that we could easily add at least $10 billion of new debt to our balance sheet for the right acquisition. So this combined two.
Our position in cash position.
Make us ready for any future opportunity.
Be raised in front of us so thank you.
Thank you Brian. Thank you Claude that covers all the questions for today's call. Thank you all for joining US we wish you a great day and look forward to discussing our third quarter 2022 results in March.
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Thanks, everyone happy Thanksgiving to our American friends out there take care.
Okay.