Q4 2022 Alimentation Couche-Tard Inc Earnings Call
Good morning, My name is Sylvia and I will be your conference operator today.
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Good morning, I would like to welcome everyone to this web conference presenting at least not that got pushed out financial results for the fourth quarter and fiscal year 2022.
All lines will be kept on mute to prevent any background noise. After the presentation, we will answer questions from analysts.
During the web conference, we would like to remind everyone that this webcast presentation will be available on our website for a 90 day period.
Please remember that some of the issues. During this webcast might be forward looking statements, which are provided by the corporation with its usual caveat.
These caveats are risks and uncertainties are outlined in our financial reporting.
Therefore, our future results could differ from the information discussed today.
Our financial results will be presented by Mr. Brian <unk>, President and Chief Executive Officer, and Mr. Claude DC, Chief Financial Officer, Brian You May begin your conference. Thank you John Philip and good morning, everyone. Thanks for joining us for the presentation of our fourth quarter 2022 results.
I'm pleased to report really a remarkable year. Despite some of the most difficult operating conditions in my career.
None the least to a pandemic award in Europe supply chain staffing challenges and now inflation.
With our unique geographic diversification scale and operating resilience, we had record breaking results across many key metrics make good progress on our strategic goals.
During this quarter, we saw growth inside the store accelerate as well as innovating for the future, including beginning our E mobility journey here in North America, and launching the rollout of our smart checkout technology in the U S and Scandinavia.
I'll go into these initiatives in a bit more detail later in the presentation, but before moving to results I also want to take a moment and comment on the broad impact of inflation hitting a 40 year record high this quarter.
No doubt consumers are feeling the pressure both at the pump and the checkout line thankfully in most of our geographies unemployment remains very low at really record lows.
We remain committed to providing good value to our customers across the network into our localized pricing efforts and fewer promotions were working hard to make sure our customers lives a bit easier every day, even during these difficult times.
Now turning to our results beginning with convenience.
<unk> to the same quarter last year same store merchandise revenue increased two 3% in the U S six 2% in Europe , and 1% in Canada and.
And you asked the quarter cycled against a very strong comp last year at plus eight 1% and food was very positive compared to prior year with strong double digit growth.
Across the network our fresh food fast program is now in over 4000 stores around the globe meeting our objective for the fiscal year. We're excited about the acceleration in sales and engagement of our operators as we refine our offer for our customers.
During the height of Covid, we struggled with supply chain and we're not we're not reliably able to source chicken is one of our key skus happy safe today as we sit here that we are in the chicken business, we launched a variety of great tasting chicken items in the quarter and they're generating very strong incremental growth in our stores and we're expanding that across North America.
We continued to optimize our assortment as we identify new items that are desired by customers and increased purchase frequency while supply chain issues have been a challenge in some items are expanded supplier relationships and duplicate some supply sourcing have enabled us to improve our in stock positions versus prior quarters.
We're pleased with the progress we are making our food journey and we're excited with the additional opportunities in new items in our pipeline.
And our dispense beverages, our Sip and say beverage subscription continues to attract new users to the program with inflationary pressures customers are seeking deals since it can save is truly an amazing offer. We're currently have over 450000 active subscribers in the program that are now visiting our stores with more frequency.
We continue to refine our online enrollment experience and make it easier for customers to sign up and renew monthly and enjoy their favorite drinks at a great value.
Packaged beverage growth increased through the quarter led by substantial growth in immediate consumption, so water and sports drinks largely due to innovation in our first market opportunity, including our mountain Dew proprietary flavor that we launched in conjunction with Pepsi, which has just shown great results.
Strong national activities continue to drive year over year growth in energy drinks supply chain continues to be a core focus to ensure our needs are met in the marketplace as immediate consumption increases as our markets come out of Covid.
In our age restricted category. Your sales showed mixed results with European beer business exceeding prior year sales across the network wine and liquor finished the year with a positive performance and we continue to see good results from our upgraded wine such display and suction, where we've rolled that out.
Thanks to our localized pricing initiatives were creating new data analytics tools to make our category managers lives easier and allow them to respond more rapidly to changing cost environment.
And our assortment optimization effort to new ways of working in conjunction with more sophisticated analytics, we're aiming to more effectively identify products that our top and bottom performers across the network on a store by store basis, and adjust our assortment more quickly to better meet our customers' needs.
We also want to provide an update on the rollout of our loyalty initiatives in Europe . The extra program has been alive.
For many years in seven of our be use and has been a key driver for the growth of our business. This year at the same time, we finished scaling and improve program concept, which we piloted last year with great results and feedback from customers in three of our views and Europe and a small market in South Carolina.
The goal is to continue to expand this concept across the remaining European views over the coming quarters in the U S. While we see promising results in the test sites with a tailwind to the development of our new global input infrastructure loyalty infrastructure that will make us able to roll this out on a scalable basis throughout North America.
Moving on the fuel side of the business same store road transportation fuel volume decreased one 7% in the U S impacted by high retail prices and some of our field Brandon <unk>.
Rebranding activity that will get into in a bit later.
Two increased three 7% in Europe as we continue to take share in stroke show very strong performance and increased four 3% in Canada.
And our circle K fuel rebranding work over the quarter. We completed about 300 rebrand is bringing the total for the year to 680 additional sites and the overall number to nearly 3500.
Circle K brand Ambassador program nearly has 900000 activations.
Brand ambassadors continue to educate our customers about the brand value proposition.
Quality guarantee and premium claim.
The wind free fuel for year U S campaign wrapped up this quarter with 288 winners announced and were pleased with the growth of our premium Thursday program and the increased transactions and our easy pay program, which give a great discount in these times high prices.
Based on the test results, we do believe the rollout of our enhanced loyalty program later in the year in North America will also deliver enhanced value for our customers and drive incremental visits in fuel volume.
Yes.
Like our peers in the industry, we are experiencing pressure in different areas of our supply chain, particularly the fuel supply chain wherever we've been able to maintain reasonable inventories with our strong sourcing capabilities now with more than power over 1000 drivers in our U S fleet for fuel, we're working hard to maintain reliable supply for our customers. During this challenging time.
Both in the trucking industry and also in terms of U S supply overall with inventories being at record lows in many of our products.
All participants were impacted by the inflationary pressures in labor and fuel having.
Having their own internal fleet, we're able to accurately measure these effects and mitigate these cost pressures where possible.
Okay.
In Europe volume for both cards and bulk fuel are trending ahead of prior year card volumes have again trended ahead of pre COVID-19 levels, driven by a strong recovery in the fleet and <unk> sectors and continued very robust performance in the transport sector.
We've also seen continued improvement in card operational margin across most of our markets.
Our European charging EV network now consists of over 1100 charging units up 11% versus prior quarter and covering more than 250 stations primarily in the Scandinavian countries.
In May we are building in our relationship to bring electric mobility solutions to our customers in Europe , We announced our first circle K branding branded charging station in South Carolina, and our plans are to bring EV charging to 200 circle K Costar stores across North America in the next 24 months.
As we expand EV charging availability in the U S and Canada will be taking a strategic approach to building a network for the future by looking at areas with strong <unk>.
Adoption rates and electric delivery infrastructure to enable us to provide convenient charging options for our customers whether that be in town or on the highways.
Anticipating deploying both our own charging assets to serve the growing EV customers as we do in Europe and also to partner with other participants in the emerging EV mobility economy.
Turning to innovation, we are excited about the rollout of our pioneering easier to use smart checkout.
At the end of the quarter, we had 90 stores live in Sweden and over 450 sites in the U S. We recently announced smart checkout will be expanded to 7000 stores over the next three years.
<unk> also added one more frictionless site in Arizona, bringing that total to eight and our license plate recognition, which is a pay by plate.
Where the customer does not need to insert or tap at the pump is now active at over 800 locations and net promoter scores remain very robust.
This past year was also a record one in terms of our new store builds the ongoing strengthening of our network real estate team combined with our efforts to improve our design development and entitlement processes have resulted in a robust pipeline for future store openings.
During the quarter, we completed the construction of 42 stores, reaching a total of 333 since the beginning of the fiscal year.
We currently have another 58 sites under construction that will open in the coming quarters. Despite supply chain challenges combined with cost increases our teams have worked very hard in renovating existing stores and developing a new prototype.
We are value engineering to deliver reduced cost and quicker build times.
In Europe , we now have over 350 locations with our Horizon brand look and feel these sites have new fixture to offer grab and go fresh food sales and we're seeing increased traffic in basket in these locations.
Before turning it over to Claude I wanted to address the staffing challenges, particularly that we felt in North America the past year.
It's truly been a pain point throughout the year in all of retail I am pleased to report that we've seen steadily increase in candidate flow over the last quarter and currently into this quarter due to increased social media outreach engaging employee branding campaigns. We're encouraged by the higher ratio, we saw in may which look much better than previous months and solar.
Allowing us to be more selective in the candidates that we bring onboard.
It also resulted in reduced overtime as we go forward.
So we're looking to hire additional 25000 team members. This year as we reach our summer season, and we're on a good trend to hit this goal.
Pause there and let <unk> take you through more of our fourth quarter financial results.
Thank you, Brian ladies and gentlemen, good morning for the fourth quarter of 2022, we're happy to report net earnings of $477 $7 million or <unk> 46 per share on a diluted basis.
Excluding certain items described in more details in our MD&A adjusted net earnings were approximately $573 million or <unk> 55 per share on a diluted basis for the fourth quarter of fiscal 'twenty, two compared with $564 million or <unk> 52 per share.
On a diluted basis for the fourth quarter of fiscal 'twenty, one an increase of five 8% in the adjusted diluted net earnings per share adjust.
Adjusted net earnings for fiscal 'twenty, two we're approximately $2 $8 billion compared with $2 $7 billion for the previous year, which represented an increase of $54 million or 2%.
Diluted net earnings per share were $2 60 for fiscal 'twenty, two compared with $2 45 for fiscal 'twenty, one an increase of six 1%.
Our results for both the fourth quarter and fiscal 'twenty, two or have exceeded our expectations on many fronts, especially in light of a challenging global environment inflation was particularly notable during the fourth quarter impacting mainly many aspects of our business.
We once again diligently manage through these challenging conditions.
We're able to mitigate the impact from a higher inflation levels and continued pressure on wages.
We have also continued to reinvest in our operations, while maintaining a particular strong balance sheet, allowing us to return capital to our shareholders during the quarter, including the completion of our Upsized to 2021 2022 share repurchase program.
As we look ahead to fiscal 2023, our healthy financial position and strong capital structure, including our newly implemented U S. Commercial paper program position us well to continue delivering strong results and return further value to our shareholders as we remain focused on our ambition our ambitious double digit.
Again strategy.
I will now go over some figures for the quarter for more detail. 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 revenue was increased by approximately $75 million or 2%.
This increase is particularly attributable to organic growth and to the contribution from acquisitions, which amounted to approximately $27 million, while being offset.
Partly offset by the disposal of stores following the strategic review of our network.
During fiscal 2022, excluding the net impact from foreign currency translation merchandise and service revenues increased by approximately $623 million or three 9%.
Excluding the net impact from foreign currency translation merchandize and service gross profit increased by approximately $72 million or five 9%.
This is primarily due to organic growth, including the positive impact from our fresh food fast program as well as two pricing initiatives.
Our merchandise and service gross margins increased by one 3% in the United States to 33, 1%.
2% in Europe , and other regions to 38, 3% and by one 4% in Canada to 32, 4%.
Our merchandise and service gross margin in the U S and Canada were also impacted in the prior year by unfavorable adjustment inventory adjustments related to the net realizable value provision personal protective equipment of $26 4 million or $3 $2 million and $3 2 million.
Respectively.
For fiscal 'twenty, two excluding the net impact from <unk>.
Foreign currency translation merchandise and service gross profit increased by approximately $318 million or 6%.
Our gross margins increased by.
6% of new United States to 33, 7% decreased by <unk>, 9% in Europe , and other regions to 38, 2% and increased by 8% and can add up to 32, 2%.
The decrease in Europe in other region is due to the inclusion of circle K Hong Kong for the full year in fiscal 2022.
Moving onto the fuel side of our business.
In the fourth quarter of fiscal 2022, our road transportation fuel gross margins was $46 12 per gallon the knee without even states an increase of 11 67 cents per gallon.
In Canada, It was $13 44 41.
If you're a leader an increase of $2 49.
Canadian per liter fuel margins remained notably a healthy throughout our <unk>.
North American network due to the favorable market conditions, a higher fuel.
Fuel breakeven margin in the industry and the continued work on the optimization of our supply chain, including our circle keeps you will rebranding initiatives.
In Europe and other regions are road transportation fuel margins was $5 51 per leader a decrease of $3 34 per liter fuel margins were impacted by increased.
Creases in crude oil prices supply chain challenges from the current geopolitical context as well as volatility in the diesel market.
For fiscal 2020 due the road transportation fuel gross margin was $39.62 per gallon in the United States $9 86 per liter in Europe , and other regions and 11 74 Canadian per liter in Canada.
Now looking at SG&A for the fourth quarter of fiscal 2020 to normalized operating expenses increased by 15, 6% year over year.
Excluding a three 1% unfavorable impact of higher electronic payment fees.
This $15 six increased 15, 6% increase on a normalized basis is driven by prior year government grants of $41 million measure necessitated by the impact of the labor shortage and the need to improve employee retention and increase of marketing any.
<unk> and other discretionary expenses that were significantly reduced in the prior year quarter influential inflationary pressures, including higher utility costs in Europe are your cost in the from the rising minimum wages as well as 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 for the fiscal year.
The 2022.
When considering the cost of the retention measures implemented which totaled approximately $19 million the employees related COVID-19 cost in the prior year such as thank you bonuses of $5 $2 million as well as government grants of $41 million the normalized operating expense increase year.
Over a year up 15, 6%.
Sent is further reduced by four 3%.
For fiscal 2022 normalized operating expenses increased by nine 4% compared with the previous fiscal year, mainly due to the factors similar to the one described for the Q4.
Despite the challenges we have deployed strategic efforts in order to mitigate the impacts of <unk>.
Higher inflation level and continuing pressure on wages, which is demonstrated by a compound annual growth rate of three 4% of our normalized growth of expense compared to 2020, including employee related costs below inflation, despite the challenging market conditions.
Excluding specific items described in more details in our MD&A. The adjusted EBITDA for the fourth quarter of fiscal 2022 increased by $58 million or four seven.
Compared with the corresponding quarter of fiscal 2021, mainly due to the higher road transportation fuel margins in the United States, and Canada and organic growth in our convenience store operations, partially partially sorry.
Set by operating higher operating expenses.
The translation of our foreign currency operations into U S dollars had a net negative impact of approximately $15 million.
During fiscal 2022, and the adjusted EBITDA increased by $261 3 million or five 2% compared with fiscal 2021, mainly attributable to factors similar to the one described it for Q4 the variation in the exchange rate had a net positive impact of approximately 27.
Million.
<unk>.
From a tax perspective income tax rate for the fourth quarter of fiscal 2022 was 22, 6% compared with 18, 5% for the corresponding period of fiscal 2021.
The income tax rate for fiscal 2022 was 21, 5% compared with 19, 5% for fiscal 2021 the.
The increase is mainly stemming from the impact of.
Gain and loss losses taxable are deductible at the lower income tax rates between current and prior year and a difference in different mix in our earnings across the various jurisdictions in which we operate.
As at the April 2004 to 2022, our return on equity remained strong at 21, 8% and our return on capital employed stood at 15, 4%, which includes a net unfavorable impact of 3% caused by onetime impairment costs incurred in Q4.
During the quarter, we continued to generate strong free cash flows and our leverage ratio stood at 139 times.
Only six basis points higher than Q3, despite having repurchased more than $800 million during the quarter under our and CIB.
We also had strong balance sheet liquidity with $2 1 billion in cash and are an additional $2 $5 billion available through our revolving credit facility.
Turning to the dividend the board of director declared yesterday, a quarterly dividend of 11 cents Canadian per share for the fourth quarter of fiscal 2022 to shareholders on record as at July eight 2022, and the approved its payment effective July 22020.
With that I. Thank you all for your attention and turn the call back over to Brian Alright, Thank you Claude and the context of a difficult year in so many ways.
We had clearly one one event in the year that was the highlight for me Gallup, who we've used as a partner.
To work with us and measure our engagement named US say, an exceptional workplace the only convenience retailer on this year's list.
Gallup as workplaces worldwide face continued historic upheaval, we sit out and our ability to engage and develop our people amid this disruption.
We're far from perfect. We do have a clear goal and Thats our goal to create a culture in which our team members feel valued and respected and have opportunities to grow together within the business is through their hard work and engagement that we're fulfilling our vision to be the world's preferred destination for convenience and mobility my sincere gratitude goes out to all of our team members our customers our partners and share.
Holders for another record breaking year and continued commitment to our business and with that I'll take some questions from the analysts operator over to you.
You Sir.
Ladies and gentlemen, if you would like to ask a question. Please slowly press star followed by one on your Touchtone phone you will then hear a three Tom prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two.
Using a speaker phone, we do ask that you. Please lift the handset before pressing any keys. Please go ahead Crestar. One now is you have a question and.
And your first question will be from Peter Sklar with BMO. Please go ahead.
Hi, good morning.
Can you talk a little bit more about how cost of living inflation in these high fuel prices is impacting consumer behavior as you see it in your business.
Is it impacting your in store sales have you adjusted your Assortments the impact on fuel volumes.
And what trends Youre seeing.
In the current quarter, the first quarter to date.
Yes, Peter Thanks for the question I'll take a shot at it and welcome Claude to chip in inflation is taking different forms depending on where at in the world. When we look at Europe really our wages have been relatively flat compared to what we see in North America, but we've seen significant spikes in food and energy, particularly from the <unk>.
Train situation in Europe .
In the U S. We all read the same papers were seeing 70% hourly rate inflation on top of commodities and fuel.
In terms of what we're seeing I would say that we are clearly seeing an impact on fuel demand that's taking shape in a couple of forms.
I think the most recent data showing that we are seeing some softening in miles driven.
We certainly view this as temporary.
Effect and then as you look at the consumer behavior.
Our average fill pre COVID-19 and really up until recent quarters would have been <unk>.
10 to 12 gallons per visit that's.
Thats declined to eight so that's a signal to us that.
There is some pressure on consumers likely increased likely results in increased visits.
I think thats a sign that there are some pressure in <unk>.
We're very fortunate to see unemployment levels remain at historic lows.
So we think the consumer relative to where we were in <unk> nine is in much better condition inside the box traffic actually remains pretty robust.
Happy with what we're seeing both last quarter and what we're seeing into this quarter.
We're seeing some trade downs we've seen.
Conversions from premium beer to budget beer as an example, the same in the cigarette category.
People are looking for value.
And we're pleased we've really worked on private label in the last three years.
And we're seeing very very strong growth in private label is again people are looking for value.
With our private label program, we've been able to provide good value to the customer and actually have a higher penny profit typically most of those items. So we're seeing private label up in the U S strong double digits. So that's again a sign that consumers are heightening their look for value.
Got anything to add yes.
Yes, maybe one thing on from Canada.
Looking at the performance in Canada, we've seen a bit more pressure on our cigarettes category there seems to be a shift.
Down to back to the black market in Canada.
Okay. Thank you.
Okay.
Thank you next question will be from Karen short of Barclays. Please go ahead.
Okay.
Alright, thanks, very much I wanted to just see if you could talk a little bit about what the actual inflation contribution is to your in store comp in the U S and how youre thinking about that.
Overall pricing going forward in terms of Meredith, maybe pushing back on vendors on price increases.
A little bit more than you maybe have been over the last couple of months, but so its contribution to comp in store and then thoughts and philosophy on how you are.
No.
How you are having conversations with the vendors.
Yes, I'll start with the vendor piece first.
One I think Covid has certainly changed.
Our view a little bit from transactional to there is so important just from a supply chain and reliability standpoint.
Truly been partners during Covid, but that said you know they've got pressures and we have pressure so as we.
I have a dedicated procurement group largely based in Ireland, we get to see globally, what vendor behavior looks like and we I think have views maybe some other retailers don't around what the underlying cost structures, they have whether that be transportation aluminum.
Corn syrup, so we are pushing back.
We're trying to be fair, but at the same time, if we see suppliers getting greedy that.
Conversations being had so there's a fair amount of attention we're focused on being able to provide a good value for the customer.
At the same time recovering the cost increases so it's a fine balance.
Daily daily conversations around that in terms of basket itself.
We've actually been pleased with more than recovered.
The cost increases inside the store with our price moves we kind of are.
Artificial basket that we create and we measure that on ongoing basis. Our gross profit dollars are intact. If you kind of break it down you would see on.
On average across the world our basket is probably up in the 3% to 4% range, while our traffic's relatively flat to maybe down a bit in Canada, where we've got to as Claude said some pressure on the tobacco transactions.
Thank you.
Sure.
Thank you next question will be from Patricia Baker at Scotia Bank. Please go ahead.
Yes. Good morning, everyone. Thank you for taking my question.
I'm asking.
On the labor shortage.
The cost.
Associated with the retention.
Just curious about how you're looking at labor going forward, you indicated that you're looking to hire another 25000 people should we think about the.
Extra cost associated with <unk>.
Employee retention is something that will be ongoing.
I would say I should knock on wood I think we see the light at the end of the tunnel, we've really rolled back a lot of the retention products that we have in place.
We're currently contemplating some variable products.
Programs take for example.
Gift cards with fuel for some of our customers attempting to keep this pressure on wages on a variable basis, and maybe moderating the wage rate increases that were pressured to given the marketplace.
As we've seen the last really few weeks are higher rates are significantly higher than our termination rates. So staffing is returning to normal levels, even as we go into the summer season and that should result in a significant increase in overtime as we look at the coming quarters, which has been a.
Another key part of the inflation so call it maybe a little more specifics on the numbers there.
So when we.
We are talking about.
Impact on our cost there is probably a third of it from the 15% that's due to the inflation.
Three 4% of that 5% ish.
Due to wages so and.
We understand that one third of that is over time and as you are seeing that trend.
B reduce in the future with better workforce.
In our stores.
<unk>.
I would add to two things we continue to work on efficiency in the stores. So if you look at our hours used.
I actually negative versus prior year on a same store basis, and then with the smart checkout rollout that I commented on earlier, our focus on that product is really around the customer experience, it's faster it's easier.
We're seeing really strong uptake on eligible transactions, but theres also a labor mitigation opportunity.
If we can get 30%, 40% of the transactions going through those machines, we're able to either reduce labor or reallocate that labor to others. Other things so that will take quarters to show up but that's a big push and a big initiative on our side.
Well, thank you very much.
Yes.
Thank you next question will be from John Royall at J P. Morgan. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
Can you just talk about the M&A market and USC stores right now I know you.
<unk> been taking a more disciplined approach on multiples and some others have and with the uncertainty building in the economy. Today are you starting to see valuations come down to levels, where you might consider transacting.
Thanks for the question John I would say in theory, what you said should happen we've got.
Certainly higher interest rates.
High yield markets.
Much higher if not closed.
I don't think we're seeing a lot of private equity opportunity or activity.
But theres not been a ton of deal flow either so I think we need to see a couple of quarters to see what happens.
There is some activity.
On our side, we're seeing more right now in Europe and in Asia than we are in the U S, but that will come in.
I've been waiting for years for this the.
Balance sheet is ready and.
We are confident there will be some opportunities and probably less competition than what we've seen over.
The past few years, and I think lower multiples as a result.
Okay. Thank you.
Thank you next question will be from Bobby Griffin at Raymond James. Please go ahead.
Good morning, and thank you for taking my questions.
Brian just curious the fuel margins here this quarter materially outperformed.
The industry average and even you guys have typically been outperforming but the performance was really notable so I'm. Just curious if you can unpack was there any drivers or anything unique to this period and when we look at the May period, we have seen some pressure. So maybe just any comments on on what you've seen may and June in fuel margins.
Yes, Thanks Bobby.
Yeah really there is a few things happening one I think.
There's a few key players in the industry that have the supply capabilities, we do.
When we look at the industry is still larger.
Largely independents in the U S, Canada, and maybe a little more balanced in Europe , and when we look at the continued to be able to procure fuel better.
And I think that really manifest itself when you see volatility in the market.
That's both in location arbitrage and also just the construct of our contracts.
I think that delta that we've seen versus the industry has been strong and we expect it to continue to pay benefits as we invest and realized benefits from our partnership with musket.
It's really extraordinary when you look at the quarter and you think about crude going from $80 to $120 during the quarter and normally that is just the worst environment, we could have.
So to deliver this cough or this level margins I think is really shows the market's disciplined first of all and then two there are some things underneath that I think need to be thought about one is credit card fees as you look at.
Let's call it $5 gas just for easy math.
Let's say the average independent is paying two 2% on a visa or Mastercard, that's 10 cents a gallon they need to recover just in credit cards.
Some of the scaled retailers like us and we'll be able to <unk>.
Source credit cards, a little more economically than the average.
<unk> or independent out there. So I think that also widens our advantage a little bit in the market, but it also supports the need for higher than historical margins as we face these how retail because not only does.
The inflation, we all see every day, but that credit card fee is very material, particularly the independent operator.
And when you talk about recently.
Do see the opus data.
We feel good about our margins we feel good.
Across the network.
We've held up during the again, a very volatile period so.
Our recent weeks we've been pleased.
Okay I appreciate it best of luck. Thank you. Thank you.
Thank you next question is from Irene <unk> at RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
I'll come back to capital again target at $5 1 billion and 23 can you walk us through the key pieces in your mind that will underpin our ability to achieve that number despite everything that we're talking about on the call fuel volatility pressure on wages pressure on spending et cetera.
Well Irene Thank you for the question.
I have to see.
Say that we're optimistic about our ability to reach our $5 $1 billion target.
Our organic initiatives are going very well in our stores. So like fresh food fast, we're really happy about the performance of the program in the last in.
In the last quarter and it continues to grow and be stronger as traffic is back into our stores. So we think that we're going to we're going to do well and achieve what we committed to do on that fresh food fast pro program for fiscal 'twenty three.
Merchandising pricing promotion local pricing.
That's all.
On track with what we shared with you. So thats. Another initiative also good that despite all the challenges.
You see the improvement in our in our margins gross margins for merchandising there there.
Brian just talked about fuel and the ability for us to continue to deliver good margins and also the improvement that we were doing in procurement that is still there.
And I would I would add to what Brian mentioned that our rebranding also is contributing also to our improved margins when where we are.
We're looking at our margins compared to history. So that is a good thing is we're continuing our rollout and our Andrew.
And rebranding our stations were benefiting from that upside and that that's in line with what our expectations. When we did our strategy.
Finally.
North American development <unk> seen the quarter and we had so for us it's a record year in terms of new stores, even if at the end of the quarter and we may be have been challenged a bit on the opening of our ntis, but we've opened a record number of MTI. This year at 100 with a 133. So this this target also is.
In line and finally cost optimization.
We're pressured on cost, but we are still working hard on our program to deliver all of our cost optimization initiatives. So overall, we feel pretty pretty good about our objective and what we shared with you and are optimistic about achieving our $5 one.
I'll, just add I'm sure clouds optimism for hitting the target.
Certainly we think a lot about the consumer out there today with the prices at the pump.
Again.
That is transitory what fixes high prices is high prices and so that this too will pass and then is there a recession or not.
We have to remind ourselves and we've gone back and looked at our performance over the last couple of recessions.
I would never say our industry is recession resistant, but we're pretty resilient, we're pretty much a part of people's everyday lives.
So as we look back at the last two major recessions and we actually performed very well so.
Again, I think sure cause optimism that we're on.
We're on a good track.
That's great. Thank you.
Thank you next question will be from Bonnie Herzog of Goldman Sachs. Please go ahead.
Alright, Thank you and good morning, everyone.
I wanted to circle back to Opex, it really well.
Rise quite a bit higher than expectations in the quarter.
I guess I wanted to better understand the key drivers behind the question. If you could walk through those drivers that would be helpful. And then also could you talk about your expectation for Opex. This year given your comments about the labor market and certainly the broader inflationary environment I guess I'm just trying.
Trying to get a sense, if we should think about normalized opex to remain as elevated as what we saw last year or do you.
Have any levers you can Paul such as the cost optimization program that you just mentioned to help offset some of these pressures.
Thank you Bonnie.
Thank you.
If we start a new we want to understand a bit the 15 point.
6% increase that we have in our SG&A I think we need to break it break it up into three buckets.
Which would be one third one third one third let's say 5% each.
The first bucket is really how we performed last year remember last year. Our SG&A, we were minus two 5% in terms of growth for the quarter. So we are facing a quarter, where we were in that and we were very low in expense and that was mostly driven by COVID-19 related subsidies and also retention.
So when we're comparing that there is a 5% and our growth in SG&A, that's coming from countering.
Really good quarter last year and also measures that were that were there and that benefited from with.
With Covid.
The second third of it or the second bucket.
Inflation. So we have we've talked earlier about three 4% inflation on wage.
Third of it is inflation, we see that potentially being better in the future expenses also are under pressure like everyone. I think you need to think about 2% maybe of that coming from expenses were challenging expenses in Europe and energy prices are are very high in Europe and it's.
Like that for a couple of quarters.
And also maintenance and all of the contractors are increasing prices so that puts a bit of pressure also on our expense.
Finally, the last third of it.
Our increased expenses is really.
It is really composed of two things one is our organic growth initiatives, where we are pushing a lot on our data and workforce and putting our workforce together.
Having help also of professionals to put that team together, but also fuel marketing we've talked about the rebranding earlier.
The positive impact on margins, while the you need to think about US branding also are in selling our own fuel and putting marketing at work also to support that effort.
And overall for <unk>.
And just to emphasize that one to me that's material when we look at the brand fees, we would pay to shell or BP and Exxon.
They were very material. So if you said $5 6 billion gallons.
It was a big number it was over $100 million for sure and now we've got largely circle K fuel brand out there. So that was always in cost of goods right. I was just part of our cost of the fuel. So now as we spend money to promote our fuel brands whether that be loyalty.
Fuel promotions other things.
That is showing up in opex and so that's something that.
It's not changing the bottomline actually it's very positive the bottom line for us, but it just shows up in a different way in the P&L. So sorry go ahead. So net net positive on this so going back to it. So think about one third is really COVID-19 related and low quarter last year. The other third is really wages and expenses so 5% is <unk>.
<unk> and the other 5%.
Sure sure marketing initiatives that we have.
So in terms of mitigation I think are.
We have a lot going on.
We've talked about <unk>, our point of sale.
Self checkout that we're deploying in 2500 stores.
We have also a program that we've called easy office, we we were able to reduce the number of hours worked in the back office with automation.
We have those initiatives also going on so we have another goal on that this year to reduce.
Furthermore, this year and also our smart safe program, we're reaping the benefits.
Rolling rollout this program in our network class last year. So we are continuing to to push on our cost optimization program.
Say that we're really looking into it with the new situations.
A new pressure that we have to really relaunch our program and.
Bring it to another level.
Okay. So just to summarize that was super helpful.
So the question is will remain elevated but not probably as much as what you saw last year, Kevin kind of accuracy.
Yes, exactly so as yet since the early <unk>.
Second quarter will cycle comps, so we expect that pressure to mitigate a bit and again, if we can get over time down.
That's it.
We faced and the industry face staffing shortages last year, we expect that to moderate.
If labor trends continue.
Alright, thank you.
Thank you Bonnie.
Next question will be from Mark Petrie at CIBC. Please go ahead.
Hey, good morning. Thanks.
On it a few times today, but given the importance of tobacco in your business can you just give us some more detail about the performance by region.
Basket and traffic the impact of trade down there.
And as well the specific performance of Otp.
The impact thus far and what your view is on the potential impact of <unk>.
Regulatory change.
Yes, a lot in there Martin thanks.
And just in terms of overall trends and we're actually growing share in Europe . Our business. There just continues to click really on all cylinders.
In Canada, I think Claude mentioned and we've seen really is the markets have reopened.
Indian reservations in the dark market have regained share and I think there's temporary pressure there.
Inflation prices price pressure in general on the consumer they're probably gaining a bit of share from the marketplace and then I think the second thing in Canada and it's the same in the U S.
We certainly saw consumption rise a bit in COVID-19 and how that Covid open I think people are smoking a bit less than when you look at Reynolds and Altria is reports I think you would see the same thing broadly.
Both in Canada, and the U S. When we look at our trends, we're holding market share.
So while units are down somewhat significantly in Canada, a little bit in the U S sales.
Sales continued to be.
Positive and again maintaining share in terms of behavior, we have seen lower tier brands gain in strength, we have the product.
That we're really focusing on the U S called Seneca, which.
Provides really one of the lowest costs.
To the consumer of anyone in United States selling tobacco.
So we believe we're in a good place to help that consumer find good value if they do choose to trade down and then the last thing.
The non combustible if you will you'll continue to see that grow whether that be the white space.
Space.
And then the vaping, you know theres been some noise with fuel.
Being taken off the market for a few hours and now back.
We're working hard with our suppliers to make sure that we've got adequate inventory of alternative brands and also working with fuel to make sure that we're providing inventory and those those products as long as it makes sense for both of us.
So again I think when we think about nicotine delivery.
I think our expectations align with what we see.
In that industry as combustibles to continue to have pressure, but theres good uptake on a much higher margin product around white nicotine vaping moist and so we continue to focus on making sure that we've got the right selection and pricing in those areas.
Thanks for that.
Thank you next question will be from Michael Van <unk> at TD. Please go ahead.
Alright. Thank you you've covered a lot, but I'm just wondering on the fuel volumes in North America and particularly in.
In the U S. We're still.
<unk> seems to be trending kind of mid teens below 2019 levels.
Getting a little bit worse in the last few quarters I'm wondering if.
If you could talk a little bit about that.
The competitive.
Challenges within that market how much of this is just.
People not buying as much fuel and are driving them.
Margin, how much is that the discounters like Costco and Walmart gaining share and do you see any.
Any pressures or any cracks and some of the traditional C store.
Operators and starting to maybe discount themselves to try and maintain some volumes.
Yes, it's a good question I think there's a couple of things going on when we focus on the U S and one we do see.
One I would say we measure our competitiveness.
Pretty sophisticated way with Delta has two main and low competitors. So we understand our price position site by site at all times.
We remain very consistent in our price position.
I think it's fair to say that when you look at high prices that focus that the cost goes to the world would receive are real and I would expect they are gaining a bit of share.
There is only 500 costco's wholesale and they've only got so many pumps and so I think that.
That impact while real is limited.
Third in terms of our performance when we look at it we've got markets that are better than 2019, and we've got markets that are worse than 2019 as you alluded.
So it's not a consistent story across the U S.
And I would say the forest for thing in there is our fuel rebrand has had an impact we've got.
Significant disruption at site when we rebrand our sites again this economic equation is tremendously profitable for us we make more money and it's the right thing to do long term for our brand and consumer awareness, but again, we're turning our sites up hundreds at a time.
So there is some disruption that we're imposing on ourselves and as we havent transition with a customer a customer that may be used to buying from a major and that's got a certain credit card and loyalty program associated with that.
Up to us to make sure that one we're providing the right value the right experience, but also with some urgency getting our loyalty products and payment programs in place and making sure that we engage those customers long term I would liken it to what we did in Europe , We took Statoil, which is number one fuel brand and the majority of the countries we operate in.
Took it down and converted it to circle K and early on disruption, but long term five years later, it's just been a tremendous success.
We're confident we can achieve the same thing in the U S over and over time.
So.
So the.
The U S. Competitors, then theyre kind of looking at the cost goes in the world and realizing their limited capacity.
Staying disciplined in passing through the higher cost I would think so I would think thats, how theyre thinking about it I can't speak for them, obviously, but when we look at the behavior again in the quarter crude went from 80 Bucks to a high of 120 normally that is a very very difficult margin for retail but.
You've seen the margins the industry has continued to maintain and as we look at the current quarter as I mentioned earlier, we feel good about the margin profile and again I think we benefit when theres volatility. So we feel good about that.
Alright, thank you.
Yes.
Thank you. Your next question will be from Chris Li Zhang. Please go ahead.
Hi, Good morning, everyone, Hi, Brian maybe just a question on the follow up question on the tobacco regulatory landscape can you share with us thoughts around the SBA.
To reduce nicotine levels. What do you think is the potential impact and do you think people will simply just smoke more or could it push more people to two other tobacco products. Thank you.
Yes, good question Chris.
I think I'm reading, what you're reading there.
I think it really depends on the approach.
Also the timing I think.
My belief is the industry will fight back and there will be litigation and there will be multiple years of conversation negotiation before anything would really happen that's my speculation.
Based on talking to suppliers buyers and then I think theres a couple of different approaches out there as one is.
A gradual phase phasing of nicotine and the other scenario is a more significant drop in nicotine early on.
So I think it depends which way the industry would go but again in the coming years.
Just think this is going to be tied up in conversation.
So we continue to focus on the alternative products, which again, we're seeing strong growth and it's quite honestly a lower risk.
Way of consuming nicotine so.
Near term, we don't think it's a big threat and then we're certainly watching for how does how do we think this is going to come into the industry.
Okay, Thanks, and all the best.
Thank you next question will be from Vishal Shah of National Bank. Please go ahead.
Hi, Thanks for taking my question with respect to the Euro earmarked.
Can you give us a sense there.
It's typically what the issue was increase.
Chris Noe pipe without a transient issue and it's behind Us now.
Go ahead.
So our European actual margins, obviously, theres a lot and there was a lot going on in Europe last quarter with Ukraine.
This new credit situation.
And so we need to do we have to reshuffle our supply.
Find alternative source of supply and also the volatility in the diesel market also in Europe was strong. So we have to reshuffle all of that and that had a.
Impac.
On our margins in Europe for the quarter, So we see that.
Is this something thats temporary for us to recreate those those new relationships.
Two.
Broker our fuel for our network.
And the impact that <unk> seen it also in the.
And on the margins, but I'll add a little clarity I mean, Russia supply the significant amount of both.
Trolling, and particularly diesel into the market and then you guys all read about the natural gas.
Saga that continues there so we like many we moved away from Russia quickly.
Today, we have no Russian product in our portfolio.
It caused significant disruption when you think about the price increases we've seen in the U S.
Been magnified in Europe , just because of significantly more supply disruption and shortages and so the consumer price continue to rise more quickly.
Retails did not move as fast as cost.
So we did see a margin squeezed during the quarter, but we have no reason to believe this is temporary and that.
Industry margins should retain should return to more normal levels as cost stabilize.
Thank you.
Sure. Thank.
Thank you and at this time Mr. <unk>, we have no further questions. Please proceed.
Thank you operator, thank you Brian . Thank you flow 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 first quarter 2023 result at the end of August .
<unk> newest with all its negative average only <unk>.
<unk>, yes.
No question.
<unk> asset.
Thanks, everyone have a great Canada day and fourth of the goods.
Number five.
Thank you ladies and gentlemen, this does indeed conclude your conference call. We now ask that you. Please disconnect your lines.
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