Alimentation Couche-Tard Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
September 7, 2023

There are 12 speakers on the call.

Operator

Would like to welcome everyone to this web conference presenting Alimortasen Couche Tard's financial results for the Q1 of fiscal year 2024. All lines will be kept on mute to prevent any background noise. After the presentation, we will answer questions from analysts as live during the web conference. We would like to remind everyone that this webcast presentation will be available on our website for a 90 day period. Also, please remember that some of the issues discussed during this webcast might be forward looking statements, which are provided by the corporation with its usual caveats.

Operator

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. Felipe da Silva, Chief Financial Officer.

Operator

Brian, you may begin your conference.

Speaker 1

All right. Thank you, John Philip, and good morning, everyone. Thank you for joining us for this presentation. We're pleased to announce a good start to our year and a good Q1 with our Canadian operations leading the way with strong performances in both convenience and fuel. Same store sales continue to grow in all Canadian business units with our packaged beverage category performing exceptionally well.

Speaker 1

Fuel volumes also grew significantly in this region. And across North America, we're seeing the benefits of our promotional initiatives, including our reoccurring fuel days, which are contributing to our volume growth. At the end of August, we had our very first ever Global Couche Tarcercircle k Fuel Day with limited time food and fuel discounts across our network from Hong Kong to Europe and coast to coast in North America. With inflationary conditions continuing around the globe, Our focus has remained on providing value and ease our customers both inside our stores and on our forecourts. This quarter we're especially excited to have launched our Inner Circle loyalty program.

Speaker 1

Early in the summer we went live with the program in nearly 4 stores across the Florida business unit. Inner Circle is a free membership program with fuel rewards, food rewards and much more. We're also providing new personalized experience to our most loyal and most valuable customers. We could not be more pleased with the rollout so far. In a few short weeks, we have over 2,700,000 enrollees.

Speaker 1

In terms of customer adoption, we've had very positive feedback and growing popularity with our app. This past quarter, we also accelerated our rollout into the Grand Canyon business unit and we Plan to expand to more business units as the year progresses, starting in the southeast part of the U. S. In the upcoming days and working our way across the continent. No doubt, Inner Circle is important milestone in our personalization journey to see our members behave and to what and how we're able to reach them with more relevant meaningful communications and offers that drive repeat visits and loyalty.

Speaker 1

I want to thank the many cross functional team members for bringing this to life. This is a very unique program that's targeted at making it easier and more rewarding for our customers. During the quarter, we also started the next stage of our strategic journey, having successfully completed Double Again at the close of fiscal 'twenty three, and we look forward to presenting to you at our Analyst Investor Conference in a few short weeks in Phoenix on October 11. Now let me return to the results for the quarter, beginning in convenience. Compared to the same quarter last year, same store merchandise revenues increased by 2.1% in

Speaker 2

the U. S,

Speaker 1

2.7% in Europe and other regions, and by 6.4% in Canada, all driven by our diversified offer in the beverage category as well as continued growth in our fresh food program and private label. As I mentioned in my opening remarks, we're very pleased to see the strong performance in our Canadian markets especially. Across the network, our Fresh Food Fast program is now in nearly 4,980 stores globally and sales and profits continue to grow double digit as our store teams focus on optimizing pricing and assortment to maximize profitability. Assortment localization is increasing And we're introducing more operational innovations, which are bringing savings to the program, such as an equipment energy saving initiative this year that we anticipate will save us more than $4,000,000 as student electricity consumption. North America packaged beverage sales continue to be Strong with new product lines in sports drinks, water, energy and ready to drink coffees accounting for the majority of the growth.

Speaker 1

Also in North America, we're seeing success in cold and frozen dispensed beverage with good promotional activity and the continued popularity of our Mountain Dew Purple Thunder, which launched in Canada during the quarter. In Europe, iced coffee performed well supported by our summer stock campaign. In age restricted, total company alcohol sales were up and in tobacco, we're seeing continued pressure on cigarettes 6 globally. Here we have initiatives underway with our supply partners and we're focused on maintaining our market share. In Canada, sales performance is improving compared to prior year.

Speaker 1

OTP continues to drive sales in the category in both the U. S. And Europe. And in lottery growth was driven by large Mega Millions and Powerball jackpots in the United States during the quarter. On the overarching supply chain landscape, we still have some isolated challenges.

Speaker 1

However, our in stock and on time delivery rates continue to Proved from previous quarters. The bulk of the issues in supply chain remain upstream with manufacturers where production, labor and packaging shortage are still driving some of the outages. But overall, we're continuing to see ongoing improvements in the overall merchandise supply chain and thus our in stock continue to improve at our locations. Moving to the And promotional activities in our stores. Same store road transportation fuel volumes decreased by 1.5% in Europe, unfavorably impacted by challenging macroeconomic conditions, including persistently high inflation in many of our countries.

Speaker 1

In our Circle K fuel rebranding work, we've now completed nearly 4,200 Circle K branded sites in the U. S. And Canada. We've also continued with our promotional events during the quarter and had over 7,000 sites in North America hosting local fuel days to alleviate some of the cost pressures of the pumps for our customers. These fuel events, including our 1st ever Global Fuel Day held on August 31st are leading to percentage growth fuel volumes as well as increased exposure of the Circle K fuel brand, at the same time bringing significant value to our customers.

Speaker 1

In our EV fast charging network in Europe, we've deployed nearly 160 fast charging points during the quarter, bringing the overall total to around 7 25 site points in more than 3.40 of our stores. We also now have over 30 charges for heavy trucks in Sweden. In Q1, we had nearly 70% increase in charging transactions from the same period last year, driven by both network expansion and improved utilization of our existing chargers. We continue to expand the charging network in Europe with increased focus on Ireland and pilots in the Baltics and Poland. In North America, including partners, we have over 80 EV sites in operation.

Speaker 1

Our footprints in Canada now cover Quebec, Ontario and BC and the U. S. We have charging sites in California, North Carolina, South Carolina, Virginia, Florida and New Hampshire and Colorado. We remain committed to our 200 dB site target for 2 in the next 2 years, which we communicated in the spring of 2022. Now before I turn it over to Felipe, I want to discuss the continually improving labor situation in North America.

Speaker 1

Candidate flow and our ability to hire remain strong. We're averaging over 25,000 applicants per week, which is a 6,000 applicant per week increase over the same time last year. Turnover in North America for our frontline store teams is trending materially better than the same time last year and just improving our ability to operate our stores both effectively from a customer service standpoint, but also to control our labor costs. We also continue to utilize our smart Smart checkout units in around 2,200 stores with about 40% of our in store Payment transactions running through the Smart checkout at these sites. More importantly, the equipment makes payment faster and easier for our customers as well as making it easier for our store team members to focus on serving them.

Speaker 1

I'm going to pause here and let Felipe take you through more of our Q1 results.

Speaker 2

Thank you, Brian. Ladies and gentlemen, good morning. I'm delighted to report that our focus on cost reduction has yielded favorable outcomes during this quarter. Our disciplined approach to expense management and streamlining processes has positively impacted our results, which include a normalized growth of expenses of 3.7%, lower than the average inflation observed throughout our network. The strong sequential improvement underscores our dedication to financial discipline and reflects and our commitment to delivering sustainable value to our various stakeholders.

Speaker 2

I am thankful for our team's continued pursuit of operational excellence, which enabled us to deliver strong results across our key metrics. At our upcoming Analyst and Investor We look forward to communicating our new multi year strategic plan, which will include a renewed focus on cost reduction initiatives. Finally, in terms of capital allocation, the recent private buyback transaction, which took place shortly after quarter end, highlights a great use of our excess cash and will further enhance our Qbital metrics. I will now go over some key figures for our quarter. For more details, please refer to our MD and A available on our website.

Speaker 2

For the Q1 of fiscal 2020 We are happy to report net earnings of $834,100,000 or $0.85 per share on a diluted basis. Excluding certain items described in more detail in our MD and A, adjusted net earnings were approximately $838,000,000 or $0.86 per share on a diluted basis for the Q1 of fiscal 2024 compared with $875,000,000 or $0.86 per on a diluted basis for the Q1 of fiscal 2023, an increase of approximately 1.2% in the adjusted diluted earnings per share. During the Q1, excluding the net impact from foreign currency translation, merchandise and service Revenues increased by approximately $228,000,000 or 5.6 percent. This increase is primarily driven by organic growth as well as by the contribution from acquisitions, which amounted to approximately $52,000,000 Excluding the net impact from foreign currency translation, merchandise and service gross profit increased by approximately 100 $5,000,000 or 7.5 percent. This is primarily due to organic growth as well as by the contribution from acquisitions, which amounted to approximately $28,000,000 Our gross margin increased by 0.4% in the United States to 34.3% in Europe and other regions by 1% to 39.9 percent and in Canada by 0.8% to 33.9%, all impacted favorably by a change in product mix.

Speaker 2

Moving on to the fuel side of our business. In the Q1 of fiscal 2024, our road transportation fuel gross margin was $0.505 per gallon in the United States, an increase of CAD0.015 per gallon. In Canada, it was CAD0.135 per liter, a decrease of CAD0.79 per liter. Fuel margins remained healthy throughout our network North American network due to favorable market conditions and the continued work on the optimization of our supply chain. In Europe and other regions, Our Road Transportation Fuel gross margin was €0.0821 per litre, a decrease of €0.045 per litre, mostly driven by the volatility of the global fuel market more impactful to our European gross margin due to a more integrated supply chain model in this region.

Speaker 2

Now looking at SG and A. For the Q1 of fiscal 2024, normalized operating expenses increased by 3.7% year over year. This is mainly driven by the impact of costs from rising minimum wages, inflationary pressures and incremental investment to support our strategic initiatives, while being partly offset by the continued strategic efforts to control our expenses. This control is evidenced by our normalized growth of expenses remaining lower than the average inflation observed throughout our network. Excluding specific items described in more detail in our MD and A, The adjusted EBITDA for the Q1 of fiscal 2024 increased by $10,700,000 or 0.7 percent compared with the corresponding quarter of fiscal 2023, mainly due to organic growth in our convenience stores, convenience As well as the contribution from acquisitions partly offset by lower road transportation fuel gross margin in our European operations as well as higher expenses.

Speaker 2

The transition of our foreign currency operation into U. S. Dollar had a negative impact of approximately $6,000,000 From a tax perspective, the income tax rate for the Q1 of fiscal 2024 was 22.8% compared with 21.9% for the corresponding period of fiscal 2023. The increase is mainly stemming from the impact of a different mix in our earnings across the various jurisdictions in which we operate. At the end of the Q1, our return on equity remained strong at 23.8 percent and our return on capital employed stood at 17%.

Speaker 2

During the quarter, we continued to generate strong free cash flows and our leverage ratio stood at 1.39 times despite having repurchased 4,700,000 shares for $230,000,000 under our CIB program. Subsequent to the end of Q1 of fiscal 2024, We repurchased 10,800,000 shares through a private agreement for an amount of $529,700,000 We also had a strong balance sheet liquidity with $2,000,000,000 in cash and an additional $3,000,000,000 available through our main revolving credit facility, net of USCP borrowings. Turning to the dividend. The Board of Directors declared yesterday a quarterly dividend of CAD0.14 Canadian per share for the Q1 of fiscal 2024 to shareholders on record as of this September 15, 2023 and approved its payment effective September 29, 2023. With that, I thank you all for your attention and turn the call back over to Brian.

Speaker 1

Thank you, Felipe, and it's been a pleasure working with you this quarter in your new role as our Chief Financial Officer. I look forward to many of you having the opportunity to meet Felipe at our Analyst Investor conference in October. The 2 of us will be joined on stage by several of our team members and we're excited to show you the achievements we've made during the 5 years of Double again and And how we'll continue to build upon that during the next stage of our strategic journey. Now with that, I'll turn it over to the operator to answer analyst questions.

Speaker 3

Thank you, sir. And your first question will be from Mark Petrie at CIBC.

Speaker 4

Yes, good morning. I wanted to start with fuel margins, if we could, specifically on the U. S. It's now 6 quarters of sort of upper 40s and now $0.50 a gallon. So can you just help us with how to think about that range?

Speaker 4

It's clearly a material step up from Previous levels and even the early days of the pandemic. So is it just that the breakeven for the smaller operators has sort of continued to rise Or your company specific efforts contributed materially more in the last year than in the prior year? And maybe put another way, what sort of factors should we be on the lookout that could reset the margins lower? Thanks.

Speaker 1

Thanks, Mark. I'll take a shot at that. I think it's a mix of the 2. We continue to see pressure On the industry in several fronts, inflation is not gone. Certainly, there's some wage pressures there yet.

Speaker 1

And we'll talk about tobacco in a bit, but A lot of the industry, particularly the smaller players rely very heavily on the tobacco category, which after a couple of years of pause during COVID, We've seen an acceleration in volume decline in that category. So I think you put those things together along with some of that The bottom half of the industry losing gallons to larger and more modern facilities. I think the pressure builds. So I think the breakeven needs of that independent just continue to rise. And then conversely, I think we just continue to double down on the benefits That we think we can bring in terms of our scale, whether that's continuing to grow our private fleet.

Speaker 1

I was just in Europe and met our new trading team in Geneva, Our partnership with Musket, all the things we're doing to try to really optimize every last gallon of fuel that we buy, We just think those 2 things come together. And then I would say, 3rd, just continuing to work really hard on our pricing decisions. It's the biggest commercial decision we make each and every day and just bringing more data, more analytics to those decisions to make sure that we're balancing delivering value to our customers And also maintaining the appropriate amount of volume versus gross profit. So we feel good about it. The Last quarters have been solid and we continue to see the market remain very disciplined.

Speaker 1

So as we enter kind of halfway through our next quarter, We feel good about where we're at on the fuel side.

Speaker 4

All right. Appreciate the comments. I'll pass the line. Thank you.

Speaker 1

Thanks Mark.

Speaker 3

Next question will be from Tamy Chen at BMO Capital Markets.

Speaker 5

Good morning. Thanks for the question. I wanted to talk about merchandise gross margin. So I think I get the sense that Recently some good performance out of there from all your regions. Sounds like it's more of the favorable mix of lower cigarette sales and more beverages and private label.

Speaker 5

So One thing I wanted to drill more on though is the fresh food program. You talked about it a little bit. It still sounds like it's early days aside from the holiday business. And I'm just wondering, can you talk about how that's progressing maybe versus last quarter or even 2 quarters ago? I'm just trying to think incrementally How are you feeling about the progress of that business in both the size as well as the gross margin?

Speaker 5

Because I think you're trying to bring that closer to what the holiday stores are doing? Thank you.

Speaker 1

Yes, happy to address that. And you're right. If you look at the strength we've had globally, we've grown the car wash business, so that shouldn't be lost. We've got almost 2,500 car Globally, so it's a pretty material business for us and it's performing very, very well. And then our new acquisition with Clean Freak Continues to perform well in the U.

Speaker 1

S. And beverages are 2 as you noted, both continue to be strong. On the Fresh Food Fast, Yes, we've seen great growth in sales as we launched this during COVID, continue to have very high customer satisfaction. But I think the teams should be very proud. We've taken And grown the discipline around running a food business and building a food culture.

Speaker 1

Not saying we've won that journey, we're on that journey. But if you look at the last 6 months or 2 quarters, We've grown the profitability of that program over 7.50 basis points. So again, I always point to sales being the priority, but we've become more disciplined in the operation. There's always that balance of having the right amount of product out there and making it available versus having too much. We continue to provide tools that help people make better decisions there.

Speaker 1

And again, I think we're seeing a better balance than we've had in the last year on Both profitability and sales. So strong improvement in margin out of that program and we think there's more to do.

Speaker 6

Great. Thank you.

Speaker 3

Thank you. Next question will be from Michael Van Aelst at TD Cowen. Please go ahead.

Speaker 7

Hi, good morning. Thank you. I wanted to get your insight on the U. S. Same store sales trends.

Speaker 7

We did see slower growth sequentially at Couche Tard, just like we did for all your peers, at least in the U. S. So I'm wondering What's the consumer behavior that you're seeing that would explain the differences in your performance in Canada versus the U. S. And what is it going to take to get that U.

Speaker 7

S. Same store sales back to a 3% plus rate?

Speaker 1

Hi, Michael. I'll take a shot at that and happy to have Felipe jump in as well. We're watching the consumer closely. There's it's no secret that We've had pressures on that cluster, stimulus kind of working its way out of the system, saving rates declining a bit, SNAP benefits in the U. S.

Speaker 1

It's expiring and higher fuel prices versus a year ago. So those are headwinds. At the same time, we've got Reasonably good unemployment rates. We've got our customers have jobs, which is just huge. And there's been real wage growth in many of our markets.

Speaker 1

So kind of 2 competing things. When we look at our sales in the U. S, we're seeing Certainly some trading down to more budget and price conscious decisions. We continue to see double digit growth year over year on private label. So that tells me a certain segment of our customer base is stretched and stressed a little bit.

Speaker 1

And so we're focused on providing Then with consistent value and leading first with high visibility value. I'd also want to point out the cigarette piece of this. We've got significant headwinds there. The industry does, not just Couche Tard. If you look at what Altria or BAT are reporting, STIX Units, while fairly stable during COVID, they've had a pretty hard year, minus 7%, minus 8% And that results in soft traffic and certainly a big headwind on same store sales in certain markets where we rely more heavily.

Speaker 1

If you took out cigarettes, we'd be up mid single digits. So the bulk of our business, I think, is still very healthy and the consumers there being led by beverages as we talked about earlier. So as we look forward, you'll see us continuing to invest a bit In that category to make sure that we're staying relevant with that tobacco consumer and we're maintaining our share. In terms of Canada, I think there's a couple of things It happens. When lockdowns lasted a little bit longer, so some of that cycling.

Speaker 1

And then, 2, we've just we've done a nice job blocking and tackling. And The consumer just seems to be a bit stronger north of the border than in the U. S. And so we continue to see that be a bright spot in our business.

Speaker 8

Great. Thank you.

Speaker 3

Thank you. Next question will be from Irene Nattel At RBC Capital Markets.

Speaker 5

Thanks and good morning everyone. Would you be able to give us a little bit more color please on what's Going on in Europe, both on the volume and within the supply chain that's having a negative impact on profitability in the region?

Speaker 1

Reena, I'll take that. Profitability has been fine. We've got A longer supply chain. So if you look at North America, our average inventory held is a little under 5 days. In Europe, because of the nature of the beast, we've operated 15 terminals.

Speaker 1

We've got product on the water En route to our countries all the time. So we average closer to 15 days of inventory. So as prices fluctuate, the valuation of our inventories fluctuates along with it. If you looked at our cost over replacement cost, if you said, hey, I'm buying today, Our margins are absolutely very stable quarter over quarter and even year over year. So again, I would point to this just largely being a timing And it's showing up more than it does in North America just because we've got longer supply chain.

Speaker 1

So the market remains very disciplined there and we're very happy with the performance. On the volume side, we have a couple of soft markets. Poland continues to be stressed. There's some political Issues around the leading player there and being owned by the government and elections coming up. And so that's been a market that's been under some strain.

Speaker 1

And then Scandinavia was a bit soft in the quarter, not great weather there. So I hate to call out weather, but it just wasn't Heavy rains throughout the northern part of Europe. And so those are 2 the big two factors. Again, margins, I'd say are just Absolutely normal. It's just more of an accounting and timing issue.

Speaker 2

And yes, the bit of color as we Sorry, Eileen. But on the as you know, the region is Europe and others, just want to highlight also that Europe performance as highly convenient. Yes, on the convenience is very strong. And Here, you have also some impact coming from Hong Kong. The Hong Kong business actually is going through some macro factors that are impacting the performance.

Speaker 2

The first one is the implementation of a new tax in cigarettes and cigarettes is a very important The category in our stores there. And the second one also, we are in Hong Kong, we are lapping the lockdown period. And during The government was distributing coupons and the vouchers to the customers, and that's also impacting, I would say, the comparison. So I think it's very important to separate Europe as a region doing pretty well And the Hong Kong where we have those impacts, excellent factors.

Speaker 5

Thank you.

Speaker 3

Thank you. Next question is from Chris Lee at Desjardins. Please go ahead.

Speaker 9

Hi, good morning everyone. When I look at 2 of your bigger initiatives, Fresh Food Fast and your fuel rebranding, It seems like you have already or close to achieving the store target, Fresh with Fast, we're almost at 5,000 stores And then rebranding at 4,200 stores compared to the targets you set out a couple of years ago at the Investor Day. And I don't want to steal any thunder from the upcoming Investor Day, but I Just wondering if you can share with us what is your longer term rollout target both for Fresh with Fast and rebranding stores? How many stores are still left to go over the next few years? Thank you.

Speaker 1

Yes, Chris, I don't have an exact number in mind. Our penetration on food It's still relatively small in Canada, so that journey continues there. I won't go into details, but there's certainly supply chain issues, getting The same product availability and things like that in the Canadian market that we have in the U. S. So more work to do there.

Speaker 1

The U. S, I would say we're close to being complete. There's I'd call it hundreds of sites, not thousands of sites left to go. And that just could be the traffic What we have inside or the size of the box or what we plan for that site longer term that would impact that. But in terms of profitability of the program, We're still very early in that journey.

Speaker 1

As I talked about earlier, sales as we look at pro form a versus our Northern Tier business, which is A decade in, we have a lot of runway to grow there yet. On the fuel side, we couldn't be more excited. We know when we started this journey 5 years ago that people were confused When we had a partner brand out front Circle K on the back and now having almost 5,000 locations, we're growing the awareness of that Circle K brand. And As we roll out our Inner Circle program in Florida and now in Arizona, we're seeing strong uptake, strong consumer enrollment and the ability for to make that brand come to life and be more valuable, more important to our consumers is a great opportunity for us and We think we'll take that all day, Bobby.

Speaker 2

Oh, yes.

Speaker 9

Great. Thank you. And all the best.

Speaker 3

Thank you. Next question will be from Georges Doumet of Scotiabank.

Speaker 1

Yes. Good morning, Brian, Felipe. Just wondering if you're satisfied with striking the right balance of promo in the U. S. When it comes to fuel?

Speaker 1

And Where are we in terms of premium penetration? What are you seeing in competitive environment today? And maybe anything you can share on market share in the quarter? Thanks. Yes.

Speaker 1

I mean, I'd say positive growth is In the wheelhouse, we're kind of striving for right now. A lot of our promotional activity has been kind of gorilla tactics. It's paper coupons, it's been fuel days, but it's been great for building awareness of the Circle K fuel brand and we've seen a halo effect as we run those events. So we think as we cycle through some of the partner brands we had and some of their associated loyalty programs, Which quite honestly were very strong that you will continue to see strength in the volume profile of the Circle K branded sites. And then again, you play our inner circle on that where we can really target larger discounts toward those most valuable customers.

Speaker 1

Yes, we think the ability to both attract new customers, heavy users and also to Increase the loyalty or minimize the switching of those customers is an opportunity in front of us. And We feel good. We feel good about where we're at. And then we've talked about AI pricing and the ability to bring more technology and Data to those decisions. And so when we talked to you guys in October, that's an area I'm not pleased with where we're at, but we've got a roadmap I think that's very promising in front of us to just continue to optimize those decisions each and every day and improve our profitability.

Speaker 3

Next question will be from Vishal Shreedhar At National Bank, please go ahead. Hi.

Speaker 10

I just want to follow-up on that last question in terms of market share in the U. S. I'm just looking over the last several years post COVID. Is management strategy to sacrifice market Sure to boost margins, is that a conscious effort that management is making saying we value margin more? And how has organic fuel margin ex acquisition trended over the last several years?

Speaker 10

I'm talking particularly in the U. S.

Speaker 1

I think, again, we'll talk to you guys in October. But on the fuel side, we would So we believe we need to grow our market share in the fuel category globally. That's a big goal for us and you'll see more tactics around how we plan to do that. That said, the market's been very disciplined in the last 3 years. We're not Here to disrupt that.

Speaker 1

We're here to provide very consistent value to our customers. When I look at the data, it's cloudy. Whether you look at EIA data, OPUS data, there's big discrepancies both nationally and also state to state. So again, when we look at our results versus some of our public peers, we feel pretty good about where we're at. But absolutely, our goal Over time is to systematically take share in that space.

Speaker 1

Thank you.

Speaker 3

Thank you. Next question will be from Bonnie Herzog at Goldman Sachs.

Speaker 6

All right. Thank you. Good morning, everyone. I had a question on your OpEx, which was pretty low in the quarter on a per store basis. So Hoping you could talk about the key drivers of this and then maybe how we should think about OpEx for the remainder of your fiscal year.

Speaker 6

I guess I'm asking or thinking about in the context of inflation potentially easing further. And then could You highlight some of the key initiatives maybe you've implemented that have been contributing to better OpEx performance and really how sustainable that might be moving forward? Thank you.

Speaker 2

Hi, Bonnie. Thanks for the question. Yes, on the OpEx, we feel Pretty good on our performance on Q1. And I think here, we have to recognize the work done by the operators and across all the regions. At Of all the regions, at corporate level also, we are really seeing all the focus that we approved, the recent offer, just Making sure that we get the expenses on control.

Speaker 2

And yes, we have seen those results in Q1. You wanted me to point it out on some of the initiatives? So in stores, definitely, we are seeing great improvement in terms of productivity, so Lower number of hours, so some automation there. That Medellin rollout is doing pretty well, so helping us there. Also on the energy side, so we are seeing nice initiatives in Europe where we see construction going down Quite significantly.

Speaker 2

So really seeing good momentum. Also we had Kind of this idea to do some reorganization at corporate level, so just to make sure that we are fit and you're ready To face this inflation. So to your point, we are seeing this inflation kind of easing a little bit, and we see this trend Continue in the next coming quarter. And overall, we feel that this trend on bidding inflation As OpEx growth is something that we feel comfortable for the next quarters. And yes, that's I'm going to say that that's not the guidance, but where we feel comfortable of that we are able to achieve for the next quarters.

Speaker 1

And then 2 more. Labor has been a challenge for the industry over the last couple of years. So as that stabilized now, our Our staffing levels are much more normal and over time is way, way down. So that's significant on the cost side. And then again, we'll share more in October, but both at store level and in our support offices, there's a heavy focus.

Speaker 1

It's more of a medium term payoff, but heavy focus is on automation, Just making our operations more efficient at site level, getting managers out of the offices and just streamlining our help desk and really all the points of contact. So again, we'll share more with you guys next month.

Speaker 6

All right. Thank you.

Speaker 3

Thank you. Next question will be from Antonio Bonadillo At Wells Fargo, please go ahead.

Speaker 8

Hey, good morning guys. Congrats on the nice quarter. So I just wanted to talk a little bit more about the loyalty program.

Speaker 2

I realize it's still early days here, but

Speaker 8

I guess more Deepgram, I realize it's still early days here, but I guess more broadly, one, how has that evolved so far versus your expectations, especially as we think about Things like lift to same store sales in gallons? And then 2, how should we think about the cadence of the rollout and gating factors in terms of getting it out more quickly?

Speaker 1

Antonio, thanks for the question. We're excited. This has been 3 years in the making, so too long. But we also were pretty committed to say we're not just going to be any other key fob in your wallet. We really want something that differentiates and resonates and our I'll let's say we conducted around tier based loyalty versus more of a club style, which is kind of typical in the industry, we think It is the right approach for our customers and really focuses our dollars where you can get a good financial return on those customers that really will move the needle for us versus kind of treating everybody Same.

Speaker 1

So we're pumped about it. I can call it too early. I'd ask us next quarter that question about results. We're very pleased with sign ups. We're well ahead of our sign up projection.

Speaker 1

Again, in weeks, we're up to 2,700,000 enrollees. We're seeing good penetration both at the forecourt and in the store. In terms of usage, if you looked on The Apple website, I think we're rated one of the highest rated websites out there or apps, excuse me, apps out there. It's a good consumer experience. And then we've done some basic NPS scoring, net promoter scoring and getting very, very good reviews there as well.

Speaker 1

So Again, early to call success, but I don't know that I could be more pleased with the launch.

Speaker 8

Thank you.

Speaker 3

Thank you. Next question will be from Bobby Griffin at Raymond James.

Speaker 1

Good morning, everybody. Thanks for taking my questions. I was just curious if we could circle back on U. S. Merchandise.

Speaker 1

If you kind of look at the business Ex the cigarette decline, what are you seeing volume versus pricing? Is the inflation related price increases still flowing through? Are those largely leveled out at this point? Baskets still positive and I'd have to separate Tobacco out of there, but basket is still positive, traffic is a bit negative. If you do the math, at least my back in the envelope math on the Traffic impact of the lost units in tobacco, that largely explains the softness in the traffic.

Speaker 1

And so Take tobacco out, I'd say we're probably pretty stable on traffic and we've got pretty nice basket growth, again in that 4% plus range In the U. S. And even stronger in Europe, as fleet based share really Europe's been impacted by Hong Kong being in the mix there. So Again, you take tobacco out, we feel pretty good about it. But that's not dismissing the fact that we do believe there's pressure on that consumer today.

Speaker 1

So we're very,

Speaker 2

very closely watching that and just making sure

Speaker 1

that we're consistently balancing Matching that and just making sure that we're consistently balancing the need for basket and profit growth with the need for a value proposition to those that segment of our Thank you and congrats on a strong start to the year.

Speaker 2

Thank you.

Speaker 3

Next question will be from Luke Cannon At Canaccord, please go ahead.

Speaker 1

Thanks. Good morning. I just wanted to ask about what you're seeing as far as the strength Of the Morning Day part, curious to know if it's back to pre pandemic levels. If not, how far is it? And are you seeing any material Differentiation across each of your operating segments?

Speaker 1

It's a great question. I'm not sure I've got specific data on that available, but Just anecdotally, that morning day part is important. And when we look at both gallons and morning traffic, I'd say we're not back to pre COVID levels. We've still got you guys you read the same stuff we do. You still got a lot of employers that have people coming in 2, 3, 4 days a week versus Pre pandemic was 5.

Speaker 1

And so, while miles total miles driven have increased, I think that morning day part is still soft for us. Continues to improve, continues to come back to normal, but we're still not at pre COVID levels for sure. That's why Fresh Food Fast, quite honestly, is so important. It's got a great morning offer and we think being able to differentiate that morning day part which is a key for our long term success. It's helpful.

Speaker 1

Thanks for the color. Sure.

Speaker 3

Thank you. Next question will be from Martin Landry at Stifel. Please go ahead.

Speaker 11

Hi, good morning guys. With TotalEnergies, your acquisition expected to close in the coming months, Just trying to get a bit of sense as to your acquisition appetite In the months following total, is there going to be a focus more on integration? Or Do you have enough capacity to continue to look for large deals? And while you're there, I'm wondering if You could just discuss a little bit your acquisition pipeline.

Speaker 1

Martin, thanks for the question. We're excited to close both MAPCO, which We received FTC clearance during the quarter and should close next month. And then we feel good about Total Energy's closing in December, both very, very nice In terms of our ability to integrate or maintain focus, I mean, I think one of the beauties of our decentralized model is that we're able to do M and A and not just stop the machine. It's we're able to use local teams to help bring the businesses on, bring the teams in. And So I think about Total certainly we'll be busy in Europe, but our ability to do M and A either in Asia or North America or another part of the world remains fully intact.

Speaker 1

And I'll let Felipe talk about the balance sheet piece. But for me, I'm 20 some years into this and I've seen the cycles and I'm excited that we've got an environment where quite honestly it's a little more difficult Whether that's raising capital, raising affordable capital, those types of things. So I'm optimistic that the M and But it will continue to improve for us and that we'll be ready for it when it is. But Felipe, a little more color on the balance sheet?

Speaker 2

Yes. So for my including Total Energy and MAPCO completion, our leverage would be at 2.15. So that will leave still a lot of room actually to And great power to do some M and A. And as we have mentioned already a few times is that We see a more favorable environment, people slowing down. So yes, we remain disciplined.

Speaker 2

But at the same time, If we see opportunities, we'll have the balance sheet to go for it, and that's what We have as an ambition. Okay. That's helpful. Thank you and good

Speaker 1

luck. Thank you.

Speaker 3

Next question will be from Daniel Silverstein at Credit Suisse. Please go ahead.

Speaker 7

Good morning. Thanks for taking the question and congrats on a nice quarter. My question is on the U. S. Fuel business.

Speaker 7

Just given the promotional days that you guys cited, what are you seeing in terms of underlying comp gallon trends today, whatever you can share versus earlier in the summer when it sounded like there was a solid level of pent up travel demand. Curious to see if the momentum has continued heading into the fall. Thanks very much.

Speaker 1

Sure, Daniel. Thanks for the question. Really continue to see trends being pretty consistent. We've had solid demand across most of the geographies, a little stronger in the West And then in the Midwest, but it just continues. No big variations as we look forward into kind of halfway through the Q1.

Speaker 1

And again, as I mentioned earlier, margins continue to remain very solid. So again, we feel good about it. And even I think there's an opportunity with our Inner Circle loyalty to continue building on the volume momentum that we have and continue to capitalize on the guerilla tactics that we have out there. Again, we have a segment of our customers are feeling the pinch. I'm glad that we're able to be there for them and provide meaningful discounts and at the same time build the awareness of the Circle K increased our brands in our markets.

Speaker 7

Thanks.

Speaker 3

Thank you. And at this time, we have no further questions. Please proceed with closing remarks.

Speaker 1

Now, we just want to thank everybody for attending today. Thank you for your interest and hopefully we'll see all of you on October 11 in Phoenix. Thanks everyone.

Speaker 2

Thank you.

Speaker 3

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today.

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Alimentation Couche-Tard Q1 2024
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