Q3 2023 Alimentation Couche-Tard Inc Earnings Call

Speaker 1: Good morning, my name is Sylvie and I will be your conference operator. Bonjour, je m'appelle Sylvie et je suis votre paratrice pour la conference du journes de jours. I will now introduce Monsieur Jean-Philippe Lachance, Vice President Investor Relations and Treasury at Alimentation Cousteau.

Speaker 1: Je vais medinant pas êtes la parol à Monsieur Jean-Phy

Speaker 2: English will follow. Hello, I'm Reda Barbe, and welcome to the conference which talks about the diffusion of the finite result of 3D increments from the excercis 2.23 to the costar. All links are in the description box.

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Speaker 2: So do we know in the future that not only are these results this running?

Speaker 2: The results of financing are presented by Mr. Brian Anish, President and Chief of the Direction, and Mr. Claude Tacy, Chief of the Direction Financial.

Speaker 2: Good morning. I would like to welcome everyone to this web conference presenting Alimataton Kushta's 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 live during the web conference.

Speaker 2: by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. Our financial results will be presented by Mr. Brian Hanisch, President and Chief Executive Officer and Mr. Claude Tayser.

Speaker 2: Chief Financial Officer. Brian , you may begin your conference. Thank you, Jean-Philippe, and good morning, everyone. Thank you for joining us for this presentation of our third quarter 2023 results.

Speaker 3: We're 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.

Speaker 3: As our global markets face persistently high inflationary conditions, particularly in Europe , where energy prices have 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.

Speaker 3: In convenience across the network, we had strong double-digit growth in our food program as well as in our private label items, both offering a high quality

Speaker 3: Throughout the quarter, we continue to be pleased with the resilience of our customers. And through our localized pricing efforts and ongoing field promotions, we're providing them with further benefits.

Speaker 3: 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 and

Speaker 3: Before I turn to the results, I want to go over the announcement from earlier this morning of our proposed acquisition of certain European assets from TotalEnergies.

Speaker 3: We've submitted a firm and irrevocable offer and entered into exclusive negotiations to acquire 100% of Total Energy's retail assets in Germany and the Netherlands, as well as 80% controlling interest in the Belgium and Luxembourg companies.

Speaker 3: The proposed acquisition would include 2,193 sites with 1,195 of those being located in Germany, 566 in Belgium, 387 in Netherlands, and 45 in Luxembourg.

Speaker 3: These are high quality locations with very strong market positions in each country and in close proximity to our current footprint in Europe .

Speaker 3: Following my presentation, I will cover more detail, the financing for this proposed offer, which is also detailed in a presentation on this proposed acquisition available on our website.

Speaker 3: Our next step is to enter into a consultation process involving employee representative bodies in the four countries outlined, as well as the approval of the relevant competition authorities. We're beginning these meetings in the upcoming days and it's expected that the proposed transaction would be completed before the end of the calendar year 2023.

Speaker 3: For some time we've been seeking a size of a acquisition. This one will grow our European network by close to 80%. Bringing valued our shareholders and being a strong geographic is strategic fit.

Speaker 3: We're truly excited to bring these assets from Total Energy into the Kuchtar 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 join forces with their leading global retail operations. By growing into Europe's largest market, Germany, and other European markets near our six borders, the Kuchtar Government has broken separate Express

Speaker 3: recent announcements.

Speaker 3: First, we close the acquisition of True Blue Car Wash, which currently has 65 car wash.

Speaker 3: locations, communities located in our core markets, in high traffic areas, in Arizona, Texas, Illinois, and Indiana, and with a strong pipeline of each renewed industry sites planned under development.

Speaker 3: We see this acquisition as a natural extension of our current car wash business of more than 2,500 locations and a part of our commitment to lead and innovate in a fast growing segment that meets our customers' mobility needs.

Speaker 3: Adding True Blue's high quality car wash sites has already presented compelling opportunities for cross-promotion and loyalty building which began immediately under close and 32 days after close we're very pleased with the early results.

Speaker 3: 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, aligning with our growth ambitions in that area. As they're predominantly large format sites, we will have ample space to enhance our fresh food programs.

Speaker 3: and product stormant and services in these sites. Finally, following the fulfillment of obligations with the competition bureau in Canada, we're now able to bring the benefits of the wills and acquisition to our Canadian market.

Speaker 3: Now let me turn to our results for the quarter, beginning in convenience. Compared to the same quarter last year, same for merchandise revenues increased 4.8% in the United States, 3.5% in Europe , and 2.3% in Canada, driven by strong results in our food programs as well as by our diversified

Speaker 3: and partly offset by continued softness in cigarette revenues from both illicit competition in Canada and just overall softness in the category across the industry.

Speaker 3: Across the network our fresh food fast program continues to grow with over 4,500 locations open globally.

Speaker 3: Sales are up 23% on a same store basis and profits are accelerating with the customers and our store team members strongly engaging in our products.

Speaker 3: Our $5.00 pizza and fresh baked cookie programs are in high demand and as we introduce new items such as our griddle cake sandwiches, we're getting very positive feedback from our customers and we're seeing it in the sales.

Speaker 3: For expense 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 fields to our stores.

Speaker 3: We've also launched a pre-coffee day in the US with over 450,000 cups of coffee given away that day. Mountain Dew Purple Thunder sales continue to drive growth in our poor pop and now exceed 11 million cups here today.

Speaker 3: In package beverage, our private brand drinks continue to provide a creative double-digit growth and are highly competitive products that great value your consumers.

Speaker 3: An age restricted global alcohol sales had a strong performance with European sales leading the way up strong single digits. Our upgraded wine wall displays are exceeding expectations resulting in increased unit movement, as well as the launch of our new private label brand wine which is now selling in 2,400 locations in the United States.

Speaker 3: Latter is also performed well during the quarter-dream by large USJAC pots 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 costs and investments to help deliver value back to our customers.

Speaker 3: In 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 in pricing, we now had that running in all BUs in Europe and North America.

Speaker 3: we're evolving our tools to be more responsive to the inflationary market conditions we've seen over the past quarters. In promotion, this is one of the final preparatory stage of piloting our approach to integrate price and promotion analytics together, which all will allow us to simultaneously optimize

Speaker 3: that are frequently bought in multiples by our customers. And in the assortment side, we are now alive across all of our major categories in North America with a focus in identifying strong performing products, getting them shelves, onto our shelves quickly while eliminating those slow moving items. And our fuel business, same store road transportation volume.

Speaker 3: as well as heavy rebrand activity on our part in the quarter.

Speaker 3: As I mentioned earlier, we will continue to generate very healthy fuel margins, offset the decline in volume of these volumes.

Speaker 3: In our Circle K fuel rebrand work, we completed over 300 locations during the quarter and now have over 3,800

Speaker 3: While this is disruptive in the short term, it's absolutely positive for both our consumers and our profitability over the long term.

Speaker 3: We continue this corridor with local fuel promotion days in the U.S. to help alleviate some of the cross pressures at the pump, including over 70 events with a range of 25 to 40 cent per gallon price drops during crime driving hours.

Speaker 3: Here we're seeing significant lists and volume as well as value-ing, valuable engagement and brand building in our store offerings and at the forecourt. Our EV Fast Charging Network now consists of 1,380 charge installs covering more than 300 locations.

Speaker 3: Following the opening of the biggest 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. Today, this fiscal year, we've had over one million charging transactions on several day charges in Europe , which is doubling up from the same time last year. This increase is driven both by network expansion and continued growth of utilization in our chargers.

Speaker 3: In our innovation 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 Checkouts, now live in the US, and we have approximately 120 Smart Checkouts, up live in Europe .

Speaker 3: We believe this is a materially faster and easier transaction than traditional self-checkouts and will lead to higher customer satisfaction over time. And the net promoter scores certainly support that so far into this journey. In our proprietary pay-by-plate program in Europe , we've passed 1.5 million transactions where we offer the service.

Speaker 3: And now before I turn it over to Claude, I want to note significant recognition for our sustainability work over the quarter, including being recognized as a 2023 Top-rated ESG performer by Sustainalytics as well as MSCI ESG. In addition, we award the bronze Eco-Valides Medal for our sustainability efforts in Europe .

Speaker 4: Before we turn to our third quarter results, I would like to offer more details on the proposed transaction of certain European assets from Total Energies. The purchase price of 3.1 billion euros to be paid in cash and on a debt-free, cash-free basis will be financed using available cash, existing credit facilities, and other credit

Speaker 4: our US commercial paper program and a new terminal.

Speaker 4: This purchase price correspond to an EV to EBITDA multiple of approximately 8 times, including leases which amount to $515 million, which is an attractive and accretive multiple for our shareholders. For calendar 2022, EBITDA for these entities to be carved out from the top was approximately 500 million euros or approximately 400 million euros.

Speaker 4: of fiscal 2023, still below our comfort zone of 2.25 times.

Speaker 4: 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.

Speaker 4: Back to our quarterly results. For the third quarter of fiscal 2023, we are happy to report net earnings of $737.4 million or 73 cents per share on a diluted basis.

Speaker 4: Excluding certain items described in more detail in R&D&E, adjusted net earnings were approximately $741 million or $0.74 per share on a diluted basis for the third quarter of fiscal 2023, compared with $746 million or $0.70 per share on a diluted basis for the third quarter of fiscal 2023.

Speaker 4: 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 as the quarter progressed.

Speaker 4: On capital allocation, we have repurchased almost 27 million shares during the third quarter and almost 62 million shares over the past four quarters.

Speaker 4: I will now go over some key figures for the quarter. For more details, please refer to our mDNA available on our website.

Speaker 4: During the third quarter, excluding the net impact from foreign currency translation, merchandise and service revenue is increased by approximately $279 million or 5.8%.

Speaker 4: This increase is primarily attributable to organic growth and to the contribution from acquisitions which amounted to approximately $41 million.

Speaker 4: Excluding the net impact from foreign currency translation, merchandise and service growth profit increased by approximately 86 million dollars or 5.3%.

Speaker 4: This is primarily due to organic growth.

Speaker 4: Our gross margins decreased by 0.4% in the US to 33.2% impacted by the promotional efforts to support our Fresh Food Fast program.

Speaker 4: In Europe and other regions, our gross margins decreased by 0.5% to 37.3% and in Canada it increased by 0.7% to 37.3% both impacted by a change in product mix.

Speaker 4: Moving on to the fuel side of our business. In the third quarter of fiscal 2023, our road transportation fuel gross margin was $0.46.85 per gallon in the United States and an increase of $0.722 per gallon.

Speaker 4: In Canada, it was 12.52 cents Canadian per litre, an increase of 74 cents Canadian per litre. In Europe and other regions, our road transportation fuel volume was 8.01 cents per litre, a decrease of 2.82 cents per litre driven by the impact of the translation of our foreign currency operations.

Speaker 4: into US dollars as well as by the volatility of the European fuel markets.

Speaker 4: Fuel margins remain healthy throughout our network due to the favorable market conditions and our continuous efforts to optimize our supply chain.

Speaker 4: Now looking at SG&A, for the third quarter of fiscal 2023, normalized operating expenses increased by 7.8% year over year.

Speaker 4: This is mainly driven by inflationary pressures, notably on energy costs in our European operations, costs from rising minimum wages and increased usage of software as a service solution combined with the impact of change in accounting policy as well as by...

Speaker 4: incremental investments in our stores to support our strategic initiatives while being partly offset by the impact of lower pressure in the employed 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 wedges along button by button arrows of the market. Thanks for joining me on this project. Select Media © 2011 factors going through This Rap Armed persons star up to rapidly improving Ak-makes

Speaker 4: wages which is demonstrated by our normalized growth of expense that was in line with the average inflation observed

Speaker 4: Excluding specific items described in more details in RMDNA, the adjusted EBITDA of nearly $1.5 billion for the third quarter of fiscal 2023 decreased by $2.6 million or 0.2% compared with the corresponding quarter of fiscal 2022

Speaker 4: mainly due to the translation of our foreign currency operations into US dollars, which had a net negative impact of approximately 43 million dollars, as well as higher.

Speaker 4: operation expenses partly offset by higher road transportation fuel growth profit and organic growth in our convenience store operation.

Speaker 4: To be noted, the translation of our foreign currency operations in US dollars had a negative impact of 3 cents on the earnings per share for this quarter.

Speaker 4: 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.

Speaker 4: The increase mainly stems from the impact of a different mix in our earnings across the various jurisdictions in which we operate.

Speaker 4: As of January 29, 2023, our return on equity remains 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 continue

Speaker 4: strong free cash flows and our leverage ratio stood at 1.46 despite having repurchased $1.2 billion during the quarter under our NCIB.

Speaker 4: Subsequent to the end of the quarter, shares were repurchased to the automatic securities purchase plan for an amount of $373 million.

Speaker 4: We also have a strong balance sheet liquidity with $1.1 billion in cash and an additional $2.5 billion available to our main credit facilities.

Speaker 4: Turning to the dividend, the Board of Directors declared yesterday a dividend of $0.14 Canadian per share for the third quarter of fiscal 2023 to shareholders on record as at March 2023 and approved its payment effective April 6, 2023.

Speaker 4: With that, I thank you all for your attention and turn the call back over to Brian .

Speaker 3: Thank you, Claude. I want 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.

Speaker 3: As we all know, the past three years has not been easy ones from a global pandemic to labor shortages to historic inflationary conditions.

Speaker 3: And yet our team members remain highly engaged with a one team spirit and we continue to play to win in our industry.

Speaker 3: In closing, we feel good about our core business and the trends we're seeing both in the store and at the forecourt, both 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.

Speaker 3: Finally, our teams are very excited to welcome Total Energies into the Kuchtar family. I believe we're one of the best retailers in Europe , and I'm confident that combining our companies in Europe will create great value for our customers and for our shareholders.

Speaker 1: With that, I'll turn it over to the operator to 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 a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two. Using your speakerphone, we ask that you please lift the handset before pressing any key.

Speaker 1: Please press star 1 now if you have any questions.

Speaker 1: And the first question will be from Irene Natal at RBC Capital Markets. Please go ahead.

Speaker 5: Thanks and good morning everyone. Congratulations on the transaction. Can you walk us through please what it is in particular about the the total network that you are acquiring that was compelling to you, how you came about to the valuation that you paid.

Speaker 3: 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. A lot of questions in there, Irene. Thanks for the congratulations, by the way. You know, we've been working on this for approaching two years. As we've said in our strategy, we intend to be opportunistic in Europe and be very selective.

Speaker 3: This is a network that has really strong positions in each of the four countries that we're entering and also leaves room for growth in all four countries, and particularly Germany, you know, by far the largest economy in Europe . So excited about those opportunities and, you know, we just feel, again, these are winning assets. They're doing a lot of things right. There's a thousand car washes in the network. And you know, I look at our offer that we have in Europe . I think it's.

Speaker 3: You know, one of the best in the industry and, you know, combining those two, you know, brands and concepts, we think we can, you know, have a winning formula in these four countries. So, excited about that piece of it. In terms of valuation, I'll let Claude comment on kind of how we thought about that.

Speaker 4: In terms of valuation, you know that we're going to pay eight times multiple on that, so the valuation is very attractive to us. And yes, I think after synergies it brings the valuation to a level that we like in terms of transaction.

Speaker 5: Thanks. Could you talk about where you see in particular the areas of potential synergies and notably in light of the fuel supply agreement with Total? Yeah, I mean the fuel agreement has a lot of commercial flexibility in it, but Total hairstyles also.

Speaker 3: We think there's certainly more to do inside the store. And then there's 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 haven't been quantified yet. And obviously we're in the middle of a process with the work councils. We've been pleased over the years that we've grown our employment in Europe as we've grown, but we'll continue to look to optimize the business. As we move forward, those things are going to wellbeing have scale looking. I'd say that for us, you know, the hard way to get this

Speaker 3: But I look forward to the next step is really engaging with the team members and welcome them into the family.

Speaker 1: That's great. Thanks. I'll hand it off to someone else to continue. Thank you. Next question will be from Mark Petrie at CIBC World Markets. Please go ahead.

Speaker 1: Mark, could you unmute your line, please? Hello. Thank you, operator. Can we go to the next? Yes, certainly. We will go to Vishal Sridhar at National Bank.

Speaker 6: feels of this size and I know you're still going through the details but

Speaker 6: 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 procurement opportunity?

Speaker 3: I think fuel procurement, you know, I don't think initially will be as big as what we would have in some other files given that, you know, we've got a strong commitment to a very strong brand and strong partner and I'll emphasize the word partner here with Total. They're maintaining some ownership in both Belgium and Luxembourg and that's a signal that, you know, we hope it's a very early part of our partnership and we continue to grow and do other things together.

Speaker 3: In terms of synergies overall, again, we're starting by communicating that top line opportunities, I believe procurement opportunities are material as we get into costs, how we operate the sites, things like that. We'll continue to peel back the layers over the coming months as we...

Speaker 3: work to get regulatory approval and work with the work councils on the approval of the project and we'll continue to refine

Speaker 6: Okay, thanks and I'll get back to you.

Speaker 1: Thank you. Next question will be from George Dumé at Scotiabank. Please go ahead.

Speaker 7: Yeah. Good morning, Brian and Claude. Congratulations on the acquisition. I want to talk a little bit about the merchandise piece of Hotel Energies. Can you talk a little bit about how that's performing versus kind of our operations in Europe and maybe talk about the opportunities to potentially improve that, maybe some more detail. I think you mentioned food, but some more detail.

Speaker 3: sources, assortment, emphasis on certain categories versus others, you know, promotional intensity. This is all we do. Total Energy is obviously an integrated oil company and they do a lot of things and they do a lot of things very well.

Speaker 3: 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 Denmark, which is right next to Germany. Culturally, we think we've got a decent understanding of what's working. We spend a lot of time in the competition.

Speaker 3: understand where they're winning and where they're not. And so, you know, it's going to be really a comprehensive overview and overhaul of the stores, George, and we've got some time and I think the flexibility to pilot some things with total energy before the closing. So, you know, we're optimistic we can hit the ground running.

Speaker 2: I wanted to actually ask about the US merchandise business and specifically on the margin side. Obviously, there's a lot of different moving parts here with regards to sales mix and price and promo effectiveness, trade down and fresh food. But I'm hoping you could help us sort of...

Speaker 3: understand the impact of those different moving parts and how to think about the gross margin performance of the quarter and then your outlook for the next few quarters. All right, thanks Mark, I'll take a shot at that. I'm actually pleased with merchandise margin percentage in general. You know, obviously some heavy inflationary pressure during the quarter. When we look category by category, we think we're very effective at keeping

the cost increases. So when you just back away and strip out food, food and beverage, coffee specifically, your margins are actually sequentially up a bit versus prior quarter. Pretty significant impact from the food category. That's really two things. One is, as I talked about in my remarks, you know, pretty heavy promotional

That combined with our SIF and SAE subscription as grown units but depressed the percent margin. The bigger impact is on our Fresh Food Fast program. We 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 we're flying it. And I mean that just depends on what's really happening.

COVID's kind of opened up now, you know, we've really shifted to pretty heavy promotional activities. Sampling, promotions, and I mentioned opening new outlets. And so you put all that together and, you know, our margins are, while our sales are actually exceeding plan, and as I said, up 23% for the quarter.

year over year, our margins are short of where we...

our plans are and certainly short of where our pro forma is. But I have a lot of confidence. 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 side. So 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 want to be on a performer basis, but very pleased with the top line and confident the bottom line will follow. And on the trade down the march, if I may add, we continue to see a good performance from our private label.

Okay, appreciate the comments and congratulations on the deal as well. Thank you. Thank you more.

Next question will be from Bonnie Herzog at Goldman Sachs. Please go ahead. Thank you. Good morning, everyone. I have a question on fuel 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.

Along those lines, how have things trended so far this quarter? In general, any color you can provide on your outlook for fuel margins and whether you guys think they're starting to normalize would be helpful. Thanks.

For the quarter, you know, I think the US and Canada continue 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 three cents 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

or reduce value of those inventories is more material in Europe and shows up. But if you looked at an archive basis, you know, margins continue to be strong in Europe and we continue to see that post the quarter. You know, the market remains very disciplined.

So no, I couldn't be more pleased with the trends we're seeing really. And maybe to follow up on your question in the US, the trends in the US have been during the quarter, 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 in terms of margins that come back to the previous levels after that short period.

And we know and we continue to think and to share that we feel that U.S. margins are level, are influenced by the SG&E and the cost pressures that the channel is experiencing everywhere. So we're still on that.

on that notion for the US margins in the future. And then just to clarify, because that was helpful, you think going forward as there continues to be pressure on gallons, you feel confident that the margin will be more than enough to offset that on an ongoing or forward basis. Thanks.

I think on any short-term basis, margins can be volatile. Have been forever, but if you charted the last decade, you'd see a persistent increase in unit margins, and I think that pressure is accelerated. When you look at the, you take NACSTAT and look at the bottom quartile of the industry in terms of, you know,

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 break even 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 lasts 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 at Desjardins. Please go ahead.

Good morning guys, congrats also on the deal. Brian , I think you already touched on this already, but I was hoping you can maybe elaborate more on what makes these countries attractive and I think it might be helpful you begin to maybe answer along the lines of total competitive positioning and if you transition within the countries and also the regulatory environment. Thank you.

Yeah, so just in terms of regulatory, you know, we're not in these markets. So from a Competition Bureau standpoint, we think it's not an issue. Each country has scale. You know, it's hard to do that across a couple of countries. You know, you can go in with 100, 200 sites, but, you know, we're havingChinese techquila laws, Rome and see what happens next.

You know, we're number one, number two in a couple of markets, number four in Germany, you know, behind two really solid competitors. Good transparent markets that, you know, with governments that aren't picking winners and losers. You know, culturally, you know, we don't think it's a big stretch from the other markets that we deal in in Europe . So we think we can understand the customers.

We've spent a lot of time in the markets, a lot of time with the competition, a lot of time with our CPG partners understanding their business in the countries, and, you know, 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, you know, the expertise we have at running the sites with some of the things that Total does very, very well. So we feel really good about the opportunity.

Okay, that's helpful. Thanks a lot and best of luck. Thank you. Next question will be from Peter Sklar at BMO

Good morning, still on Total. Brian Claude, can you benchmark what a typical Total corporate site.

how it would benchmark against say a typical corporate site you would have in US or Canada in terms of square footage, fuel volumes, sales in the box, merchandise mix, etc.

I'll do it high level. We need to understand that these are not our assets today, so we'll be a little careful. But high level, they would average higher fuel volumes than our European business.

they would have a deeper car wash penetration. We're pushing almost a thousand car washes in this network, which you know all cars get dirty. You know they're on the same journey we are

mobility, both in liquid and on EV. The boxes probably tend to be a little more variable. I've got some big motorway sites with QSRs, et cetera, and then there's some smaller ones. But on average, I'd guess they're a bit smaller. It sails inside the box materially lower, probably with the exception of Luxembourg. I would say they're...

30-40% lower across the board than what we'd experience. And inside of that is significantly lower food penetration. You know, food is, we've grown that to almost 25% of the business revenue wise in our European business and it'd be significantly lower here. So you know, across all categories, we see opportunities to combine what we do well with what they do well.

Will you 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 to EBIT margins or EBIT growth, I guess, overall. But that relationship...

definitely dipped in terms of total sales growth versus the growth. So is that just a function of the higher comas and sampling this quarter? Is that something that we may expect in the coming quarters is more of a like flat as she would talk on being around a, you know, eight ish percent was what you have this quarter.

Karen, is your question on total revenue or inside the store when you talk about an EBIT ratio just to be clear answering your question? No, I was just talking about total sales versus total EBIT growth. Yeah, I mean, you know, total EBIT growth, you know, again, as Claude said, heavily impacted by currency this year or this quarter. I think we were right about that.

When you look at our merchandise gross profit, it grew by 5.3% XFX, 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 percent of revenue just given the volatility of fuel prices.

That can really skew the ratio. So we feel good even despite the inflationary pressures that our top line gross profit continues to grow to healthy level.

our global brand. So we'll 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 forecourt in the near term but again over the coming months we'll firm up those plans. Okay thanks very much.

Thank you. Next question will be from Michael Van Elst at TD Securities. Please go ahead. Yeah, hi. Can I just start with a quick clarification on the synergy number? Did you say that the merchandise procurements energies are not part of that?

Michael on operating expenses and on procurement opportunities. So more to come there and as I said earlier in the remarks you know 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

was up close to 8%, which is 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 have been talking about it trending lower, like growth slowing as we got into the back half of the year. So I'm curious where the pressures increased to 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 change during the quarter, I think we still feel the inflationary pressure, but we feel also, if you remember, I was talking about three buckets previously in the other calls, in the quarter was one hundred thousand another and again all we saw is that

easing in our mind but what is been holding is inflation. So we've during the quarter we've had significant inflation in Europe and also in the US and there that's our expenses and electricity 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 on utility.

of the rest, also the 25% that's left from the wage and the inflation, that's essentially, you mentioned SaaS, that's part of that increase. It's probably one third of that bucket that's coming from SaaS solution that we're putting in our stores.

SaaS accounting change that are getting into the equation. So this is how it's 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 that the strategic and also the SaaS.

cost saving in our stores and also in our functional groups and had over cost. I've had 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. In this quarter we had nice traffic trends.

But our usage actually outstripped what we would normally expect, and that's just a reality that a year ago we couldn't find people. We were short staffed a year ago. Today we're back at normal staffing levels, and I think that's the right thing from a customer service standpoint and to support long-term sales growth. But that certainly had an impact versus prior year when...

you know, we were probably short six, seven hours a store versus what we wanted to model just because we couldn't find people. So that's transitory. That'll be kind of a one-time event. We'll cycle that. But we're in a much better place, but it does show up in labor side. 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 was wondering if you can talk a little bit about the historical growth profile of the network you're acquiring in terms of revenues and profitability over the last 10 years.

And just, Claude, maybe, what do you expect in terms of EPS accretion for the transaction? I'll take the first piece. We didn't get 10 years of history, but I can at least reference the last three or four. It's been pretty consistent, very consistent, really.

You know, 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, ACT has grown inside merch sales at, you know, probably at $100,000.

200 point basis, you know, faster clip over that period of time, but it's a very stable network. These are obviously mature markets. You know, so yeah, we feel good about the stability and we feel good that we understand what we're getting into. Martin, I think in terms of EPS accretion, I think there's a lot of

Thank you.

Next question will be from John Royal at JP Morgan. Please go ahead. John Royal Hey guys, good morning. Thanks for taking my question. 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 as more prudent to kind of...

pullback and do you ever for a period of time post-acquisition? Yes. John , I think nothing is going to change in terms of what we have been saying to you for capital allocation and how we are going to use our buyback. So it is still going to be if we are under 2.25, we are going to make sure that we have an NCIB in place and if there is any opportunity for us to buy shares at a price that we feel is reasonable. Good.

is compelling for us and we're going to do so. So it's over 2.25 times that we said that we would be really pulling back on our NCIB. So the transaction is going to pull our leverage to 2.1 and so we are going to still have it NCIB in place and use it.

I think it's the right time to use it. I'd add, you know, 2.1, you know, our balance sheet is 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. And, you know, I think that's been our best use of capital for many decades and we'll continue to look hard. Yeah. That's the use of, like, still at $9 to $10 billion of direct power on our balance sheet. Thank you. Thank you. Our next question will be from Bobby Griffin.

Raymond James. Please go ahead. Good morning, everybody. Thank you for taking my questions. 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, are 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 food program in the U.S.

Is 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 different than what you and I would have thought about, you know, 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, you know, elsewhere in North America, is absolutely creative to our margin on a percentage basis, you know, probably by almost 10 points over, you know, where we'd run an aggregate. So, you know, that journey will continue and we're confident we can get to very similar performance across the rest of the U.S. over time.

Claude, you want the other piece? Yeah, in terms of structural driver for the margins in Europe , if you look at our business in Europe , it's been impacted a bit in the same way that the US and North American business were. So it's still the increase in cost. It's maybe not coming from the same places. It's more in a cost.

and store cost driven than wage driven in Europe , but still the cost pressure that are in Europe and also the traffic at stores is in line with what we are seeing in North America. So there's still pressure on the margins in Europe to be at the elevated level compared to pre-COVID.

So we absolutely believe that's consistent. Thank you. Thanks a lot going forward.

consistent. Thank you. Best of luck going forward. Thank you.

Next question will be from Derek Delay at Canaccord Genuity. Please go ahead. Hi, thanks. I'm just wondering is there an opportunity to convert any of the dealer-owned sites at Total to corporate-owned? And then from a systems perspective across the TE business.

Are they well integrated? Does it run on one system? Is that compatible with what you have currently in Europe or would you have to implement something to bring that under part?

Take the first piece of that, you know, I think our reputation is to be a cocoa model or company-op model, but you know, we operate a dealer or a CODO 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 CODO store and a cocoa store.

And that makes us feel good about this business as well. We understand that there's a thousand dealer partners out there that we're looking forward to meeting and we'll assess the right channel decisions over time based on where we see the opportunities. In terms of system, they're on a solid platform, so an ERP platform. We're on an ERP platform also in Europe . And there's a TSA in place. We're going to look at its early days. Still, we're going to look at the trends.

good customer program that they have on their side also. So the combination of both I think is going to be making a winning combination for the customer and those decisions are going to be taken in the next few months. And I'd add just a reminder, you know, this is really a partnership in many ways with Total and as Claude and his team structure the TSA, it's got a lot of flexibility and the code experience that will help Ter department get all ends. So it's been all the best of the time.

ability for us to extend this out, you know, for a significant time if we need it. So there's no fire cell here when we've got to rush and do something that risks the customer experience. So we feel good about that journey. Okay, terrific. Thank you very much. Thank you. Next is a follow-up from Michael Van Nelt at TD Securities. Please go ahead. My

Thank you. And at this time we have no further questions. Please proceed with closing remarks. Thank you, operator. Thank you, Brian . Thank you, Claude. That covers all the questions for today's call. Thank you all for joining us. We wish you a great day and look forward to discussing our fourth quarter of 2023 results in June .

This is the end of the conference today. We will be back in a few minutes. We will be having a great day and we hope to see you again with our results in the next 4 months. We will now invite you to the stage. Thank you everyone. Thank you. Have a good day. Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending and at this time we do ask that you please disconnect your line.