Q3 2023 Alimentation Couche-Tard Inc Earnings Call
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Good morning, I would like to welcome everyone to this web conference presenting add them up that's all pushed out financial results for the third quarter of fiscal year 2023.
All lines will be kept on mute to prevent any background noise. After the presentation. We will answer questions from analysts life during the web conference we.
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 may be forward looking statements, which are provided by the corporation with its usual caveat. These caveats or risks and uncertainties are outlined in our financial reporting and therefore, our future results could differ from the.
Information discussed today.
Our financial results will be presented by Mr. Brian Harris, President and Chief Executive Officer.
Mr. Claude Stacey Chief Financial Officer, Brian You May begin your conference. Thank you John Philip and good morning, everyone. Thank you for joining us for this presentation of our third quarter 2023 results.
Pleased to report solid results this quarter and I want to begin by sincerely thanking our great team members around the world for their hard work and focus on our customers.
As a global markets face persistently high inflationary conditions, particularly in Europe , where energy prices spiked materially in the quarter, we've remained focused and committed to delivering a strong and consistent value to our customers and maintain cost discipline inside of our operations.
And convenience across the network with strong double digit growth in our food program as well as in our private label items, both offering high quality at a great value.
Throughout the quarter, we continue to be pleased with the resilience of our customers and to our localized pricing efforts and ongoing fuel promotions, we're providing them with further benefits.
While mobility results are still impacted by stay at home work and higher prices, we continue to generate very healthy fuel margins offsetting the softness in volumes.
Before I turn to the results I wanted to over the announcement from earlier. This morning of our proposed acquisition of certain European assets from total energies.
We submitted a firm in every bookable offer and then entered into exclusive negotiations to acquire 100% of total energy's retail assets in Germany, and Netherlands, as well as a 60% controlling interest in the Belgium and Luxembourg companies.
The proposed acquisition would include 2193 sites with 1195 of those being located in Germany, 566 in Belgium, 387 in Netherlands, and 45 in Luxembourg. These.
These are high quality locations with very strong market positions in each country and in close proximity to our current footprint in Europe .
Following my presentation, Claude will cover in more detail the financing for this proposed offer which is also detailed in our presentation on this proposed acquisition available on our website.
Our next step is to enter into a consultation process involving employee representative bodies and the four countries outlined as well.
All of the relevant competition authorities.
We're beginning these meetings in the upcoming days, it's expected that the proposed transaction will be completed before the end of the calendar year 2023.
For some time, we've been seeking a sizeable acquisition and this one will grow our European network by close to 80%, bringing value to our shareholders and being a strong geographic and strategic fit.
We're truly excited to bring these assets from total LNG into the three star family, having a deep respect for the operations management and employees in the four countries involved as well as a great confidence of the benefit of having them joined forces with our leading global retail operations.
By growing into Europe's largest market, Germany, and other European markets near our successful Scandinavian Irish Polish and Baltic networks. We believe we can generate material synergies and create additional growth opportunities in some of Europe's strongest economies.
While adding total energy's assets will be game changing growth for our network I also want to highlight other exciting recent announcements first we closed the acquisition of True-blue Carwash, which currently at 65 Carwash locations conveniently located in our core markets in high traffic areas in Arizona, Texas, Illinois, and Indiana.
And with a strong pipeline of future new to industry sites planned and under development.
We see this acquisition as a natural extension of our current Carwash business more than 2500 locations and a part of our commitment to lead and innovate and fast growing segment that meet your customers' mobility needs.
Adding <unk> high quality Carwash sites has already presented compelling opportunities for cross promotion and loyalty building, which began immediately underclothes and 30 twos. After 32 days after close we're very pleased with the early results.
We've also entered into a binding agreement for the acquisition of the fuel and convenience retail sites from Big Red stores. These are modern high quality well located sites across the state of Arkansas.
With our growth ambitions in that area.
They are predominantly large format sites, we will have ample space to enhance our food fresh food programs and product assortment and services in these sites.
Finally, following the settlement of obligations with the competition Bureau in Canada, We're now able to bring the benefits of the Wilson acquisition to our Canadian market.
Now, let me turn to our results for the quarter dignity beginning inconvenience.
Impairments in the same quarter last year same store merchandise revenues increased four 8% United States three 5% in Europe , and two 3% in Canada, driven by strong results in our fill programs as well as by our diversified offering our beverage categories and partly offset by continued softness in cigarette revenues from both Elisa.
Melissa competition in Canada, and just overall softness in the category across the industry.
Across our network, our fresh food fast program continues to grow with over 4500 locations opened globally sales were up 23% on a same store basis and processor accelerating with the customers in our store team members strongly engaging and our products are.
$5 Pizza and fresh baked cookie programs are in high demand and as we introduce new items, such as our general take sandwiches, we're getting very positive feedback from our customers and we're seeing it in sales.
For dispense beverage, we've made improvements that will enhance our customer experience and drive sales in the U S. We launched a national coffee rebrand initiative to better communicate the quality of our coffee and bring coffee house feel to our stores. We've also launched a free coffee day in the U S with over four 450000 cups.
Coffee, giving away that day.
Mountain Dew Purple Thunder sales continue to drive growth in our core profit now exceeded 11 million cups year to date.
And packaged beverage our private brand drinks continue to provide accretive double digit growth highly competitive products at great values to our consumers.
And age restricted global alcohol sales had a strong performance with European sales, leading the way up strong single digits.
Our upgraded why mall displays are exceeding expectations, resulting in increased unit movement as well as the launch of our new private label brand, one which is now selling in 2004 hundred locations in the United States.
Lotteries also performed well during the quarter driven by large U S jackpots as well as a well executed holiday selling season.
Across the network, we continue to see inflationary pressure on our packaged goods and supply costs and we've been working in collaboration with our vendors on cost and investments to help deliver value back to our customers.
And our global merchandise supply chain, we still have had some isolated challenges, but overall our in stock and on time delivery rates are materially improved from previous quarters.
Turning to our data driven work and pricing, we now have that running in all be use in Europe , and North America, and we're evolving our tools to be more responsive to the inflationary market conditions, we've seen over the past quarters.
Promotions, we're in the final preparatory stage of piloting our approach to integrate price and promotion analytics, together, which will allow us to simultaneously optimize both regular and promotional items that are frequently bought in multiples by our customers.
And then the assortment side, we are now live across all of our major categories in North America with a focus on identifying strong performing products getting them shelves onto our shelves quickly while eliminating those slow moving items.
Okay.
Moving to our fuel business same store road transportation volumes decreased two 3% in the U S by one 2% in Europe , and other regions and increased by 5% in Canada overall demand remained unfavorable impacted by high prices delivered driven by the higher crude prices compared with the corresponding quarter in 2022 as well as <unk>.
Rebrand activity on our part in the quarter.
As I mentioned earlier, we continue to generate very healthy fuel margins offsetting the decline in market about these volumes.
And our circle K fuel rebrand work, we completed over 300 locations during the quarter and now have over 303800 circle K fuel branded sites in the U S. While this is disruptive in the short term, it's absolutely positive for both our consumers and our profitability over the long term.
We continued this quarter with local fuel promotion days in the U S to help alleviate some of the cost pressures at the pump, including over 70 events with a range of 25% to 40 cent per gallon price drops during prime driving hours.
We're seeing significant lift in volume as well as value valuable engagement and brand building.
Our store offerings and in the fourth quarter.
Our EV fast charging network now consists of 1380 charge installs covering more than 300 locations. Following the opening of the biggest chunk of truck charging site in the Nordics. This October we've opened four more truck charging sites in Sweden, and 15 more will open in the coming year.
To date this fiscal year, we've had over 1 million charging transactions on several K charges in Europe , which is definitely not at the same time last year.
This increase was driven both by network expansion and continued growth of utilization in our Chargers.
And renovation work, we make great progress in smart checkout, which is aimed at providing our customers with the quickest and easiest checkout experience.
We hit a major deployment milestone recently with over 2000 Smart checkout is now live in the U S and we have approximately 120 smart checkouts up live in Europe .
We believe this is a materially faster and easier transaction and traditional self checkout and will lead to higher customer satisfaction overtime and the net promoter score is certainly support that so far into this journey.
And our proprietary pay by plate program in Europe , we passed $1 5 million transactions, where we offer the service.
And now before I turn it over to Claude I wanted to note significant recognition for our sustainability work over the quarter, including being recognized as a 2023 comprehensive ESG performer by sustainability as well as emcee MSCI ESG.
In addition, we reward the bronze eco valdis metal for our sustainability efforts in Europe , and in Canada women governance honored us with a bronze or a parity certificate certification for our progress towards gender parity in our workplace.
I'll pause here and let <unk> take you through move or more of our third quarter financial results. Thank you, Brian ladies and gentlemen, good morning.
Before we turn to our third quarter results I would like to offer more details on the proposed transaction of certain of our European assets from total sooner energies.
The purchase price of $2 1 billion euros to be paid in cash and on the debt free cash free basis will be financed using available available cash existing credit facilities. Our U S commercial paper program and the new term loan.
This purchase price correspond to an EV to EBITDA multiple of approximately eight times, including leases, which amount to $515 million, which isn't that threat of an accretive multiple for our shareholders.
For calendar 2022, EBITDA for these entities to be carved out from the child was Brooks.
Approximately 500 million euros, or a cross sell with the 455 million euros, excluding the noncontrolling interest.
This proposed transaction will have a modest impact on our pro forma leverage ratio as we estimate that our main leverage ratio on a pro forma basis would reach approximately two one times as opposed to approximately one five times at the end of the third quarter of fiscal 2023 still.
Below our comfort zone of 225 times.
Synergies to be realized over a three year period are estimated at $120 million euros, mainly coming from our top line growth and merchandise uplift.
Back to our quarterly results for the third quarter of fiscal 2023, we are happy to report net earnings of $737 $4 million or <unk> 73 per share on a diluted basis.
Excluding certain items described in more detail in our MD&A adjusted net earnings were approximately $741 million or <unk> 74 per share on a diluted basis for the third quarter of fiscal 2023, compared with $746 million or <unk> 70 per share on a diluted basis for the third quarter of fiscal.
2022, an increase of approximately five 7% in the.
And the adjusted diluted earnings per share.
Our results for the third quarter of fiscal 2023 reflect the effective execution of our cost optimization initiatives as well as our disciplined approach to deploy capital.
On the cost side, our efforts have helped to mitigate the impacts from higher inflation across our network and we were pleased with the improvement we observed at the quarter progressed.
On capital allocation, we have repurchased almost 27 million shares during the third quarter and almost 62 million shares.
Past four quarters.
I will now now go over some key figures for the quarter for more details. Please refer to our MD&A available on our website.
During the third quarter, excluding the net impact from foreign currency translation merchandise and service revenues increased by approximately $279 million or five 8%.
This increase is primarily attributable to organic growth and to the contribution from acquisitions, which amounted to approximately $41 million.
Excluding the net impact from foreign currency translation merchandise and services gross profit increased by approximately $86 million or five 3%.
This is primarily due to organic growth.
Our gross margins decreased by four 4% in the U S to 33, 2% impacted by the promotional efforts to support our fresh food fast program.
In Europe and other regions are gross margins decreased by <unk>, 5% to 37, 3% and in Canada increased by 7% to $37 32, 3% both impacted by a change in product mix.
Moving onto the fuel side of our business in the third quarter of fiscal 2023, Our road transportation fuel gross margin was $46.85 per gallon in the United States and increasing an increase of $7.22 per gallon.
In Canada, It was $12.52 Canadian per leader, an increase of 74 cents Canadian per leader in Europe and other regions are road transportation shell volume was 8.01 cents per leader a decrease of $2 82 per liter driven by the impact of the translation of <unk>.
Our foreign currency operations into U S dollars as well as by <unk> European fuel markets.
Fuel margins remain healthy throughout our network due to the favorable market conditions and our continuous efforts to optimize our supply chain.
Now looking at SG&A for the third quarter of fiscal 2023 normalized operating expenses increased by seven 8% year over year.
This is mainly driven by inflation inflationary pressures, notably on energy or energy costs.
Our European operations costs from rising minimum wages.
The increased usage of software as a service solution combined with the impact of change in accounting policy as well as.
Incremental investments in our stores to support our strategic initiatives, while being partially offset by the impact of lower pressure.
In the employer market.
Despite the challenging market conditions, we have continued to deploy strategic efforts in order to mitigate the impact of higher inflation level and continued pressure wages on wages, which is demonstrated by our normalized growth of expense that was in line with the average inflation observed throughout our network.
Excluding specific items described in more details in our MD&A. The adjusted EBITDA of nearly $1 $5 billion for the third quarter of fiscal 2023 decreased by $2 $6 million or 2% compared with the corresponding quarter of fiscal 2022, mainly due to the transfer.
<unk> of our foreign currency operations into U S dollars, which had.
A net negative impact of approximately $43 million.
As well as higher operation expenses, partly offset by higher road transportation fuel gross profit and organic growth in our convenience store operation.
To be noted the translation of our foreign currency operations in U S dollars had a negative impact of <unk> on the earnings per share for this quarter.
From a tax perspective now.
The income tax rate for the third quarter of fiscal 2023 was 21, 9% compared with 21, 3% for the corresponding period of fiscal 2022.
The increase mainly stems from the impact of.
Different mix in our earnings across the various jurisdictions in which we operate.
As at the January 29, 2023, our return on equity remained strong at 23, 3% and our return on capital employed stood at 16, 6% both figures higher sequentially compared to the second quarter.
During the quarter, we continued to generate strong free cash flows and our leverage ratio stood at $1 46, despite having repurchased $1 $2 billion during the quarter under our in CIB.
Subsequent to the end of the quarter shares were repurchased to do optimistic securities purchase plan for an amount of $373 million.
We also had.
Our strong balance sheet and liquidity with $1 $1 billion in cash and an additional $2 5 billion available through our main credit facilities.
Turning to the dividend the board of director declared yesterday a dividend of.
14th Canadian per share for the third quarter of fiscal 2023 to shareholders on record as of March 23, 2023, and approve its payment effective April six 2023.
With that I. Thank you all for your attention and turn the call back over to Brian .
Thank you Claude.
To finish my remarks, where I began by thanking our customers and shareholders for their continued support of the business, especially our team members for their hard work and focus on our customers as.
As we all know the past three years has not been easy ones from a global pandemic to labor shortages historic inflationary conditions.
And our team members remain highly engaged with one team spirit and we continue to play to win in our industry.
In closing, we feel good about our core business and the trends we're seeing both in the store naphtha for core bolt during the quarter and in recent weeks and our teams are excited about the value creation opportunities. We have in front of us with the integration of our recently announced transactions.
Finally, our teams are very excited to welcome total energies into the Costar family.
I believe we're one of the best retailers in Europe , and I am confident that combining our companies in Europe will create great value for our customers and for our shareholders.
With that I'll turn it over to the operator and answer analyst questions.
Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one you will then hear eight Sweden 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 ask that you. Please lift the handset before pressing any keys. Please go ahead and press Star one now if you have any questions.
And the first question will be from Irene <unk> at RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
Congratulations on the transaction can you walk us through please what it is in particular.
The hotel network that you are acquiring that was compelling to you and.
How you came about the valuation.
That you paid and how we should think about the evolution of the assets and the areas. The key areas in which you see upside from the transaction.
Questions in there Irene thanks for the congratulations by the way.
We've been working on this for approaching two years.
As we said in our strategy we have been.
Intend to be opportunistic in Europe and be very selective. This is a network that has really strong positions in each of the four countries.
That were entering and also leaving room for growth.
In all four countries, and particularly Germany by far the largest economy in Europe . So excited about those opportunities and we just feel again these are winning assets theyre.
Theyre doing a lot of things right, there's 1000 car washes in the network.
I look at our offer that we have in Europe I think it's one of the best in the industry.
Binding those two brands and concepts, we think we can have.
We have a winning formula in these four countries. So excited about that piece of it in terms of valuation I'll, let clive comment on.
And how we thought about that.
Yes.
In terms of valuation.
You know that.
We were going to pay eight times multiple on that so.
Devaluation is very attractive to us.
And.
And yes.
After synergies it brings evaluation to levels that we liked here in terms of the transaction.
Thanks could you could you talk about where you see in particular the areas of potential synergies.
And notably in light of the fuel supply agreement with shell.
Yeah, Let me say a few agreement.
Yes.
A lot of commercial flexibility in it but <unk> is also very well positioned to be a very competitive supplier for this geography. So we think it's a natural fit in a very strong brand.
In terms of synergies as we talked about top line, we think is very material.
We think they're doing a lot right on the fuel side, we think there's more to do on the BCD side. We think there is certainly more to do inside the store.
And then there is more to come on the other areas, we'd like to believe that the scale. We now have in Europe will yield significant procurement synergies.
But again some of those just really hasn't been quantified yet and obviously, we're in the middle of a process with the work counsels. We've been pleased over the years that we've grown our employment.
In Europe as we've grown.
And we'll continue to look to optimize the business center.
And look forward to the next step is really engaging with the team members and welcome them into the family.
That's great. Thanks, I'll hand, it off to someone else to continue.
Thank you next question will be from Mark Petrie of CIBC World markets. Please go ahead.
Mark could you on mute your line please.
Hello, Hi, Jeff. Thank you might go to the next.
Thirdly, we will go to Vishal back tomorrow.
National Bank.
Please go ahead Vishal your line is open.
Hi can you hear me.
Yes, Hello, Okay great.
I think you may have already suggested this that if we look at the actual synergy number as a percentage of EBITDA it looks lower than your prior deals.
Deals of this size I know youre still going through it.
The details but.
Is that because you haven't really reflected in your synergies the fuel procurement opportunity, which is typically a quick win for you guys.
And if so how should we think about the fuel, which you have an opportunity.
The fuel procurement.
I don't think initially it will be as big as what we would have some other files given that we've got a strong commitment to a very strong brand and strong partner.
I'll emphasize the word partner here with hotel Theyre maintaining.
Some ownership in both Belgium, and Luxembourg, and that is a signal that we.
Yes, we hope it is very early part of our partnership and we continue to grow and do other things together.
In terms of synergies overall again, we're starting by communicating that topline opportunities I believe procurement opportunities are material as we get into costs.
How we operate the site things like that we'll continue to Peel back the layers over the coming months as we work to get regulatory approval and work with the work Council on the approval of the project and we'll continue to refine that estimate.
Okay.
Thanks, and I'll get back in the queue.
Thank you next question will be from Michelle's demand at Scotia Bank. Please go ahead.
Yes, good morning, Brian and claw that congratulations on the acquisition I want to talk a little bit about the merchandise piece of total energy could you talk a little bit about how that's performing versus kind of our operations in Europe in may.
Can you talk about the opportunities to potentially improve that maybe some more detail I think you mentioned some more detail on how we can improve that.
On a go forward basis.
Great question, Yeah, I'll go back to 10 years ago with Statoil.
The Devil's in the details.
All the way from how do we procure our category management processes assortment.
Emphasis on certain categories versus others promotional intensity.
And you know this is all we do.
<unk> Energy's obviously.
An integrated oil company and they do a lot of things and they do a lot of things very well, but we believe the focus that we have we believe our European model that we have both on the food and merchandise side that we've evolved over the last decade.
Will resonate in these markets either adjacent when you think about where we're at we're in we're in Denmark, which is right next to Germany. So culturally we think we've got a decent understanding of whats working we spend a lot of time in the competition and understand where they are winning and where they're not and so it's going to be really a comprehensive.
<unk>.
Overview and overhaul of the stores George and we've got some time and I think the flexibility to pilots and things.
Total energy before the closing so we're optimistic we can hit the ground running.
Yes.
Operator are we still there yes, so demand do you have any further questions.
That's it for me thanks, Okay, alright, thanks George.
Next question will be from Mark Petrie at CIBC. Please go ahead.
Yes, good morning, I wanted to actually ask about but the U S merchandise business and specifically on the margin side, obviously theres a lot of different moving parts here with regards to sales mix and price and promo effectiveness trade down.
And fresh food, but im hoping you could help us sort of understand the impact of those different moving parts and and how to think about the gross margin performance for the quarter and then your outlook for the next few quarters.
Alright, Thanks, Mark I'll take a shot at that actually.
Actually pleased with merchandize margin percentage in general.
Obviously, some heavy inflationary pressure during the quarter when we look category by category. We think we're very effective at keeping up and exceeding the cost increases. So when you just back away and strip out food food and beverage coffee, specifically, our margins are actually sequentially up a bit versus prior quarter.
Pretty significant impact from the food category and that's really two things one is as I talked about in my remarks pretty heavy promotional activity around coffee that combined with our second base subscription.
<unk> grown units, but depressed the percent margin the bigger impact is on our fresh food SaaS program.
Introduced another 350 sites in the quarter and have grown very rapidly in the middle of Covid. So we're kind of building a plane while were flying it and we.
Covid has kind of opened up now we've really shifted the pretty heavy promotional activities.
Sampling promotions and I mentioned opening new outlets. So you put all that together and margins, while our sales are actually exceeding plan and as I said up 23% for the quarter year over year margins are short of where we.
Our plans are and certainly short of where our pro form is.
But I have a lot of confidence in our northern tier business has been in relatively the same program for a decade and we very much can see the profitability, we get out of that piece of the business and out of the top performing sites. Our focus right now continues to be on growing sales, while continuing to put the right tools and disciplines in place to control shrink and other.
Things over time, so again, not where we wanted to be on a pro forma basis, but very pleased with the topline and confident the bottomline will follow.
On the trade down the March if I may add.
We continue to see a good performance from our private label program. So private label program.
Over 25% so all our skus are performing very well in our stores. So.
That is bringing.
Bringing a good sales in our stores.
Okay I appreciate the comments and congratulations on the deal as well.
Thank you thank you Mark.
Next question will be from Bonnie Herzog of Goldman Sachs. Please go ahead.
Thank you good morning, everyone.
A question on margins I guess I was hoping.
You could help us understand the cadence of your fuel margins throughout the quarter, possibly on a month by month basis and then.
Along those lines.
China, So far this quarter in general any color you can provide on your outlook for fuel margins.
Whether you guys think they are starting to normalize it would be helpful. Thanks.
Sure Bonnie.
For the quarter I think the U S and Canada continued to perform very well in terms of fuel margins.
We had weakness in Europe for the quarter driven by really two things we had about <unk> <unk> a liter impact just on currency as Claude mentioned, the up and down the P&L that just had a material impact on the quarter, but again that's transitory.
There was a sharp decline in crude during the quarter crude went from $92 60 to $79 70.
We have a longer supply chain in Europe , we have terminal operations, we have compulsory stock inventories.
So the impact of the devaluation or reduce value those inventories is more material in Europe and shows up but if you look at our cost basis, you know margins continued to be strong in Europe .
We continue to see that.
Post the quarter the market remains very disciplined.
So no I couldnt be more pleased with the trends we're seeing really.
And maybe.
Follow up on your question in the U S.
The trends in the U S have been during the quarter I've been.
Similar to previous quarters, but we've seen during the quarter a.
Period of six weeks and I think everyone noticed that the opus was a bit down during a certain period of time, we noticed that also in our results but the.
In terms of.
And margins have to come back.
Two two.
Previous levels after that short period.
And we know and we continue to think and to <unk>.
Sure.
We feel that U S margins are.
Level are influenced by the SG&A and the cost pressures that.
The channel is experiencing everywhere, so we're still on that.
On depth.
Notion for the U S margins in the future.
Okay.
And then just to clarify because that was helpful. Do you think going forward as you know.
There continues to be pressure on gallons you feel confident that the margin will be more than enough to offset that on an ongoing forward basis. Thanks.
Hey, Bonnie on any short term basis margins can be volatile.
<unk> been forever, but if you charted the last decade.
C. A persistent increase in unit margins and I think thats that pressures accelerated deal. When you look at the you take maxed out and look at the bottom quartile of the industry.
In terms of.
Smaller same towards the smaller box sales lower volume they've had the same inflationary pressures around credit card fees energy and labor that the industry has.
Their cost their breakeven.
Needs have gone up materially.
And so our goal is to continue to widen our gap versus the industry, that's our focus and we believe that.
I can't say that this margin last forever, but it's not going back to where it was not for any long period of time.
Okay definitely makes sense. Thank you so much.
Next question will be from Chris Lee.
Go ahead.
Hi, Good morning, guys. Congrats on the deal Bryan I think you already touched on this already but I was hoping if you can maybe elaborate more on what makes these countries are attractive and I think it might be helpful. Maybe Andrew or along the lines of hotels competitive positioning and as we transition within the countries and also the regulatory.
Environment. Thank you.
Yeah, So just in terms of regulatory or.
We're not in these markets. So from a competition Bureau standpoint, we think it's not an issue.
Country at scale.
Hard to do that across a couple of countries. You can go in with 100 200 sites that we're having.
Number one number two in a couple of markets number four in Germany.
Behind <unk>.
Really solid competitors.
Good transparent markets with governments that arent picking winners and losers.
Culturally.
No. We don't think it's a big stretch from the other markets that we deal in Europe . So we think we can understand the customers.
Spent a lot of time in the market for a long time with the competition a lot of time with our CPG partners understanding their business in the countries.
Just feel it's a good fit.
Geographically a good fit in terms of just people using our sites and a network that is well positioned to compete and to win in many ways, especially when you combine the expertise we have at running the sites with some of the things that total does very very well.
So we feel real good about the opportunity.
Okay. That's helpful. Thanks, a lot and best of luck.
Thank you.
Next question will be from Peter Sklar BMO capital markets. Please go ahead.
Hi, good morning still on his hotel.
Ryan can you benchmark what are typical.
Hotel corporate site.
You know how it would benchmark against say a typical corporate site you would have been.
U S or Canada in terms of square footage fuel volumes.
Sales in the box merchandise mix et cetera.
Okay.
I'll do it high level.
We need to understand that these are not our assets today. So it will be a little careful but.
High level, they would average higher fuel volumes than our European business.
They would have a deeper carwash penetration, we're pushing almost a thousand car washes in this network.
Which all cars getting getting dirty.
Yes, there are they're on the same journey, we are in terms of installing EV.
Sure.
Ability both in liquid and.
On EV.
The box is probably tend to be a little more variable get some big motorway sites with <unk> et cetera.
And then there are some smaller ones, but on average I guess, there are a bit smaller but sales inside the box materially lower probably with the exception of Luxembourg.
Say.
30%, 40% lower across the board than what we'd experienced inside that is significantly lower food penetration food as we've grown that almost 25% of the business revenue wise.
In our European business and it would be significantly lower here. So you know across all categories, we see opportunities to combine what we do well with what they do well and.
And create synergies for the customer.
No. That's good thank you.
Thank you.
Next question will be from Karen short of Credit Suisse. Please go ahead.
Hi, Thanks, very much I wanted to just a final one to tell you.
You please be planning on rebranding to the circle K banner and then I did want to just ask on the relationship between sales and EBITDA.
You mentioned promotions, obviously as an impact Q1, EBIT margins or EBIT growth I guess overall, but that relationship definitely depth in terms of total sales growth versus EBIT growth. So is that just a function.
The higher comp allergen sampling this quarter is that something that we may expect in the coming quarters as more of a like.
Like flattish EBIT topline being around eight 8% with what you had this quarter.
Karen just a question on total revenue or inside the store when you talk about the EBIT ratio just to be clear answering your question.
I was just asking that total sales versus total EBIT growth.
Yes.
Total EBIT growth.
Again, as Claude said heavily impacted by.
Currency this year or this quarter, but when you look at.
Our merchandise gross profit grew by five 3% ex FX.
If that's a word.
And then same on fuel fuel grew.
On a post FX basis, a pre FX basis, almost 10%. So we feel good about the gross profit growth.
I'm cautious when you look at EBIT as a percent of revenue just given the volatility in fuel prices.
It can really skew the ratio so we feel good even despite the inflationary pressures that.
Our top line gross profit continues to go to a healthy level.
Okay and the rebranding.
Rebranding to be determined we have a lot of respect for all the brands we buy.
We've been very clear circle K as a global brand so.
We will make the right decision at the right time.
If we did anything I think it would more likely show up on the store as opposed to the four court in the near term but.
Again over the coming months, we will firm up those plans.
Okay. Thanks very much.
Yes.
Thank you next question will be from Michael Van <unk> at TD Securities. Please go ahead.
Yes, hi can I just start with a quick clarification on the synergy number did you say that the.
Merchandize procurement synergies are not part of that.
<unk> number you gave us so far.
They're part of it Michael.
I clarifying I think we the 120 really focuses on topline growth.
I think there's more work to do Michael on operating expenses and on procurement opportunity so more to come there and as I said earlier in the remarks, we'll refine those but I don't think we have any significant quantum of procurement opportunities in that number yet.
Okay. Thank you and then so your operating expense was up close to 8% and.
In the quarter on a normalized basis similar to what it was in the first half of the year.
Earlier in the year, you guys had been talking about it trending lower.
A lot of that growth slowing as we got into the back half of the year. So I'm curious where the pressures increase to two.
Okay cause it to continue to rise and if you could.
Explain that.
Software as a service accounting change and how much that impacted.
So Michael in terms of how operating expenses.
That changed during the quarter I think we still feel the insulet inflationary pressure.
But we feel the Australia.
If you remember I was talking about three buckets previously seen in the other calls and on the first bucket, which was wage increase we're starting to see a bit of easing on that side. So the market conditions are better.
The stores are feeling better about.
The ability to fulfill the shifts in D C with less pressure on the employment side.
So that that is easing in our mind, but what has been the whole thing is inflation. So we've during the quarter we've had a significant.
Inflation.
Europe .
And also in the U S and that's our expenses and electricity is still a big factor was a big factor in the beginning of the quarter, but what we're seeing at the end of the quarter, we're seeing an easing.
Utility in electricity prices.
In Europe , which is relieving a bit there pressure in beginning of the quarter was was a bit difficult on that side.
Finally sold.
Yeah.
That bucket is taking a bit more importance in our seven seven.
Seven 8% increase in terms of.
The rest is for the 25%.
From the wage inflation.
Inflation.
Yes.
Essentially you mentioned SaaS, that's part of that debt.
That increase.
Its probably one third of that.
Bucket thats coming from SaaS solution that we're putting in our stores are.
SaaS accounting change that are getting into the equation.
So.
This is all its breakdown so I would say 25% of the increase is coming from wages. Instead of 33% previously inflation is probably 50% of the increase and the rest 25% of the increase so the strategic and also the SaaS.
The SaaS.
Cost into our equation.
We continue to put significant program in place to mitigate that I think we are.
And we were.
Expanding on our initiatives cost saving.
In our stores and also in our in our functional groups in.
Over our cost.
One thing that.
Also I think was fairly material in the quarter.
We have a very disciplined.
Approach to how we allocate labor to our sites this quarter, Yeah, we had nice traffic trends.
But our our usage actually outstripped, what we would normally expect and that's just a reality of that a year ago. We couldn't find people. We were short staffed a year ago. Today, we're back its tech normal staffing levels and I think thats the right thing from a customer service standpoint and to support long term sales growth.
That certainly had an impact versus prior year. When we were probably short six seven hours of store versus what we wanted to model.
People. So that's transitory that'll be able kind of a one time event will cycle.
But we're in a much better place, but it does show up in weight and labor side.
Alright, thank you.
Thank you next question will be from Martin Landry at Stifel. Please go ahead.
Hi, good morning, and congrats on your acquisition.
I I was wondering if you can talk a little bit about the historical growth profile of the network you are acquiring.
In terms of revenues and profitability over the last 10 years.
And just maybe what do you expect in terms of EPS accretion for the transaction.
I'll take the first piece here, we can get 10 years of history.
Again, please reference the last three or four it's been pretty consistent very consistent really.
When I look at how that business is compared to our business over that period I think fuel performance has been relatively similar to our experience, but we've grown.
He has grown inside merch sales.
Probably a 200 point basis faster clip over that period of time.
It's a very stable network. These are obviously mature markets.
So we feel good about the stability and we feel good that we understand what we're getting into.
And Martin.
In terms of EPS accretion I think we could.
Think about mid single digit.
For.
The acquisition and just looking at this year EBITDA number.
You're a bit of a perspective there.
Okay, Alright, perfect. Thank you.
Thank you.
Next question will be from John while at J P. Morgan. Please go ahead.
Hey, guys. Good morning, Thanks for taking my questions.
So in terms of capital allocation your pro forma balance sheet is still in.
Very good shape post this deal.
And below your target level, which I think Claude mentioned, so how should we think about the buyback going forward can you continue the program or do you view. It is more prudent to kind of pull back and do you ever for a period of time post acquisition.
Yeah.
Jonathan I think nothing's going to change in terms of what we've been saying to you for capital allocation and how we're going to use our buyback so.
Still going to be if we're under $2 25, we're going to make sure that we have in NCI in place.
If there is any opportunity for us to buy shares at a price that we feel is a.
Is compelling for us and we're going to do so so that's over 225 times that we said that we would be really.
Pulling back on our in CIB, so that transaction is going to pull our leverage to two one.
And so we're going to still have it in CIB in place and use it.
Thank you.
I think to use it.
I'd add 2.1.
Balance sheet still in great shape with a lot of firepower left so we're still in the M&A business and looking for the right opportunities.
I think thats been our best use of capital for many decades and will continue to look hard.
That these are alike.
9% to $10 billion of dry powder on our balance sheet.
Thank you.
Thank you next question will be from Bobby Griffin.
James Please go ahead.
Good morning, Bobby Thank you for taking my question I guess, just two questions for me one now with Europe , potentially becoming a bigger piece of the overall business is just for our knowledge or the structural drivers of fuel margins that have driven them higher here in the U S. The same as they are in Europe .
And then secondly for me on the on the food program in the U S.
As a long term opportunity once this program gets to scale for the program to not only be dollar accretive, but also margin accretive or is the underlying promotional environment required for that category or different than what you and I would have thought about two or three years ago.
The second piece of that first.
If we look at our northern tier business.
The food program, which again mirrors, what we're rolling out elsewhere in North America is absolutely accretive to our margin on a percentage basis, probably by almost 10 points over where we'd run in aggregate. So that journey will continue and we're confident we can get to very similar performance across the rest of the U S over time.
But you won't get the piece in terms of structural driver for their margins in Europe , and if you look at our business in Europe , it's been impacted.
A bit the same way that the U S and North American business, where are those still the increase in costs, it's maybe not coming from the same places it's more.
<unk> costs.
And store cost driven than wage driven in Europe , but.
But still the cost pressure that are in Europe and also the.
The traffic at stores.
In line with what we're seeing in the in North America. So there is still <unk>.
Pressure.
On the margins in Europe to be at that elevated level compared to pre COVID-19.
Yes, I would add to that I agree with everything Claude said just pointed out.
Typically the average site in Europe is lower volume than what we see in North America sort.
So to the extent that we've got.
Similar inflationary pressures as we experienced in rest of the world.
The CPL and Patrick actually needs to be a bit bigger.
Dominate or smaller.
We absolutely believe thats consistent.
Thank you best of luck going forward.
Thank you. Thank you.
Next question will be from Derek delay of Canaccord Genuity. Please go ahead.
Yeah, Hi, thanks.
Just wondering is there is there an opportunity to convert any of that the dealer on sites at total.
And then from that from a systems perspective across the tea business.
Are they well integrated there is around a one system is that compatible with what you have currently in Europe or would you have to implement something.
To bring that up.
Take the first piece of that I think our reputation has to be a company know Coco model company op model, but.
We operate a deal or a colo model both in Canada.
And I believe all of our European countries. So that's not a concept that's foreign to us.
You'd have a hard time going into one of our stores in Scandinavia, and telling the difference between a kudos to earn a cocoa store.
And that makes us feel good about this business as well we understand that.
<unk>.
Thousand dealer partners out there that we're looking forward to meeting and we will assess the right channel decisions over time based on where we see the opportunities.
Yes in terms of system.
They're on this solid platform.
So on ERP platform, we are on the ERP platform also in Europe . So there's a TSA in place and we're going to look at.
It's early days still we're going to look at the transition of the systems.
And see.
Which is going to be the system of choice at the end of that transition, but obviously, we're going to.
We're going to want to make sure that we can provide all the tools that we've developed in our networks all across.
And the.
Customer offer also in Europe , and we're going to take the decisions around the system to make sure that we're going to be able to operate that and also maintain the good.
The good customer.
Program that they have.
On their side also show that the combination of both I think is going to be making a winning combination product customer and those decisions are going to be taken in the next few months.
As a reminder, this is really a partnership in many ways with total and as Claude and his team structured the TSA, it's got a lot of flexibility and the ability for us to extend this out for a significant time, if we need it. So there's no fire sale here when we've got a rush and do something that risk the customer experience. So we feel good about the about that journey.
Okay terrific. Thank you very much.
Thank you next is a follow up from Michael.
TD Securities. Please go ahead.
Hi, My question for Scott.
Thank you.
And at this time, we have no further questions. Please proceed with closing remarks.
Thank you operator, thank you Brian Thank you.
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 fourth quarter 2023 results in June .
Since the methodical if at all digital Z <unk>.
With the one negative average only <unk> is or does kept CN zoom invent LNG work.
It may not aimed at the end because I think I said that Beth thanks, everyone. Thank you and good day. Thank you ladies and gentlemen. This does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your line.
[music].
Okay.