Alimentation Couche-Tard Inc. (ATD) Earnings Call Transcript & Summary

Good morning. My name is Julie, and I will be your conference operator today. [Foreign Language] I will now introduce Mr. Jean Marc Ayas, Manager, Investor Relations at Alimentation Couche-Tard. [Foreign Language]

[Foreign Language] Good morning. I would like to welcome everyone to this web conference presenting Alimentation Couche-Tard's financial results for its first quarter of its fiscal year 2021. [Operator Instructions] We would like to remind everyone that this webcast presentation will be available on our website for a 90-day period. Also, please remember that some of the issues discussed during this webcast might be forward-looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. Our financial results will be presented by Mr. Brian Hannasch, President and Chief Executive Officer; and Mr. Claude Tessier, Chief Financial Officer. Brian, you may begin your conference.

Thank you, Jean Marc. Good morning, everyone. Thanks for joining us for the presentation of our first quarter 2021 results. We had an exceptional quarter, I think, both financially and operationally, as we've seen an increase in shopping occasions and solid execution by our teams to take advantage of changing consumer behaviors during this COVID period. This has led to very strong same-store merchandise sales across the network, driven primarily by larger basket as consumers are certainly consolidating shopping trips. We believe we've grown market share versus the channel in the majority of our markets, and fuel volumes continue to slowly improve while margins remain strong in most of the areas in which we operate. During the last 6 months, we've discussed on numerous occasions the benefits of operating a global network and the shared learnings that have often come from the varied experiences across many of our business units. From that perspective, we find the recent trends in our European markets to be encouraging and consider them a possible proxy for what to expect and how to react in North America when the virus is more fully contained. As we continue to cope with the COVID-19 pandemic, I'm pleased that we stayed the course on our strategic goals and advanced our journeys, both on food and the customer experience at our locations. During these unprecedented times, I continue to be inspired by our team members' resilience, commitment to each other and to our communities. Before I turn to results, I did want to touch on Hurricane Laura, the strongest storm to ever hit Louisiana, which is an important market for us. While we had damaging flooding in our stores in Laura's path, we're fortunate that none of our employees were injured, and we've already reopened the vast majority of our locations. On top of the strain of the pandemic, the teams in our Texas and Gulf Coast business units worked tirelessly to support our communities in those areas, who depend on us for emergency supplies and fuel. And I'm proud of them and want to thank them for their dedication and commitments. Now turning to the results of the first quarter. Same-store merchandise revenues increased 7.7% in the U.S., 3.4% in Europe and 19.9% in Canada compared to the same quarter last year. This growth was due to the gradual reopening of the economies in which we operate, the continued strength in the average basket size as customers relied more on the proximity and ease of our locations to fill their needs, and as we adapted our offers to address these new demands. Speaking of our offer, we saw strengths across many categories, especially alcohol, packaged beverage, lottery and various grocery items in addition to tobacco, specifically in Canada. We've also worked hard to drive more traffic to our locations through increased awareness of our loyalty programs and ensuring we remain focused on our core value proposition. A key priority in improving our customer experience and driving organic growth is the expansion of our North America Fresh Food Fast Program, which we formally described as food at scale. This may be the largest endeavor the company's ever undertaken in my career. The temporary pause on food store training and openings due to COVID has ended, and we have nearly 875 stores up and running and remain on target to have 1,500 stores rolled out by October. Sales at stores with the new offerings continue to significantly outpace those in non-converted benchmark stores, and customer feedback has been excellent. Importantly, we also see a halo effect with positive sales in other categories versus control sites, with a caveat that certainly COVID has introduced a lot of noise into our results. No doubt, developing food culture and executing this each and every day at every site is a big challenge that we don't take lightly. However, I'm pleased with the offer we're developing and believe it will deliver top line and margin improvements in the months and years to come. Capitalizing on our new coffee equipment in U.S. that we rolled out last year, we strengthened the messaging and in-store execution to enhance the customer experience, specifically with iced coffee. Separately, we're aggressively expanding the presence of our Froster program in Europe, which is now available in over 400 stores. And this offer continues to light customers and drive incremental trip star sites. Especially where we began testing in Ireland and the Baltics, where we've seen really strong consumer response and actually had one store in Lithuania sell over 550 cups in 1 day. Due to safety concerns related to COVID and consumer wanting to consolidate trips, we continue to see a switch from dispensed beverage to packaged beverage and larger package sizes future consumption. As a result, packaged beverage continues its double-digit growth during the quarter, driven by energy and carbonated soft drinks, which have maintained a strong upward trend. In age-restricted products, alcoholic beverages continue to grow at a rapid pace as consumers shift from on-premise restaurant and bar consumption to purchasing from our local -- our locations. More specifically, sales of beer and hard seltzer saw very strong performance during the quarter. Cigarettes and OTP also saw strong demand in the quarter. In particular, cigarette sales grew in all geographies, although in the U.S., not at the pace of the rest of the categories. And Canada showed the highest increase. We continue to see pressure on margins a bit as consumer patterns have shifted toward multipack and cartons. OTP, or other tobacco products, continue to drive positive results as well with all parts of the network exceeding our internal sales and margin forecast for that category in the quarter. And finally, lottery was also notable traffic driver to our stores over the summer as obviously people continue to want to gamble and lottery fits that bill with lot of other facilities being closed. During the quarter, we also push -- continue to push forward our localized pricing initiative using analytics. We now have that up and operating at more than 800 locations in Sweden, the Grand Canyon, and we've been very pleased with this initiative, and we're forming plans to roll it out globally. Moving to our fuel results. Same-store volume in the quarter remained negative due to the impact of COVID-19 on miles driven. However, we're seeing some improvement in demand in portions of our network -- as portions of our network return to more normal operations, particularly in Europe. For the quarter, same-store fuel volumes decreased 21.2% in the U.S., 12.4% in Europe and 25.6% in Canada compared to last year. Despite these declines, we continue to realize healthy fuel margins across the network. During the quarter, we converted more locations to our Circle K fuel brand, bringing the total to more than 2,350 sites in North America. We continue to be pleased with this fuel rebranding effort as a driver of traffic to our sites and way to increase overall brand awareness and loyalty from our customers. At the pump, we continue the implementation of our dynamic pricing strategies in our developing data and analytics capabilities. We now have the ability to offer a more responsive price at over 2,400 locations, and we believe will help us react more quickly to local market factors and customer demand changes as we continue to learn and expand this across our network. Promotional and loyalty programs have also benefited our fuel customers. The Easy Pay program delivered increased trip frequency and growing transaction size versus non-Easy Pay trip customers and -- as customers showed strong attachment. Easy Pay is now available across the entire U.S. network, excluding our Northern Tier or Holiday business unit. In mobility, we're experiencing a strong summer in our Norwegian test markets with almost double the amount of charging transactions at our sites in July compared to the same month last year. This is particularly due to more holiday travel within the country during the pandemic as borders are closed. We also push forward with Circle K brand home charging solutions, now we have over 1,400 chargers installed at the end of the quarter, both in private homes and in partnership with residential complexes. These initiatives continue to push us top of mind for EV charging in the country and keep our customers engaged in our ecosystem for all their fueling, charging and convenience needs. Our work with innovation does go beyond mobility. To meet growing customer demand with fewer touch points and quicker transactions particularly during COVID, we now have over 1,000 sites offering home delivery options and another 1,000 sites offering curbside or Click & Collect pickup. Our teams are learning and gaining insights into what the customers want in these offers and whether there's a vital business model there. We have also deployed frictionless payment options to more locations, including license plate recognition at the forecourt in Norway and leverage mobile payments, our mobile app and prepay across the network as part of our core strategy to serve the customer anywhere, anytime, in any way they want it. As part of that, we just announced a partnership to pilot autonomous checkout solutions in our Grand Canyon business unit. This is an exciting development as an emerging technology aims to make our checkout experience as easy as just walking in and out. And it's also uniquely designed to work with our existing store layout, so a factor we think will help us scale this if we prove successful. Gamification is also an increasingly successful way to reach our customers. In this quarter, we had millions of games played per week with high redemption rates. We're also using gamification as a training tool for our store members. And Europe training -- gamified training has over a 90% completion rate with excellent employee feedback, and over the summer, we launched this initiative in 2 of our U.S. divisions with great success and a clear positive impact. Specifically, we leverage the tool to help our team members training our basket building strategies and early results have been encouraging, and we certainly plan to roll this out to the rest of our network. Before turning to our financial results, I want to briefly mention the meaningful ways in which we continue to serve our communities in their time of need. By the end of the quarter, we served over 4 million free drinks to first responders and health care workers, contributed over 40 million meals to feeding America and started an effort to donate 5 million meals to local food banks in Canada. In July, we issued our second sustainability report, where we highlighted the ways in which sustainability has become a lens in our business. And we also set ambitious targets in 4 areas that we believe we can really make a difference in our communities; fuel, energy, food packaging and waste and workplace safety. While we have far to go, I'm proud of the promise and progress we're making for our customers, our employees and our stakeholders as we work to make this a better and safer world. I'm going to pause there and let Claude take you through more of our first quarter financial results. Claude?

Thank you, Brian. So ladies and gentlemen, good morning. For the first quarter of 2021, we are happy to report net earnings attributable to shareholders of the corporation of $777.1 million or $0.70 per share on a diluted basis. Excluding certain items for both comparable periods, adjusted net earnings were approximately $795 million or $0.71 per share on a diluted basis compared with $0.48 per share on the equivalent period last year, representing an increase of 47.9% year-over-year. As Brian mentioned, the COVID-19 pandemic continued to impact traffic patterns and consequently our business and financial results during the first quarter. From an operating expense perspective, we pressed ahead with the investments to ensure the health and safety of our employees and customers and are proud to have earned the consideration of our communities as a safe shopping destination. These additional costs were, however, fully offset by initiatives implemented across our network to reduce our controllable expenses. I will now go over some key figures for the quarter. For more details, please refer to our MD&A available on our website. During this most recent quarter, excluding CAPL's revenue and the net negative impact from foreign currency translation, merchandise and service revenues increased by approximately $304 million or 8.5%. This increase was primarily attributable to growth in the average basket size with more than -- which more than offset the continued softness in traffic. On the same basis, merchandise and service gross profit increased by approximately $109 million or 8.8%. This was mainly attributable to strong organic growth despite lower traffic in our network due to the confinement measure aimed at slowing the spread of COVID-19. Our gross margin increased by 0.7% in the U.S. to 34.7% due to the strong service revenues and the recognition of deferred credits. Our gross margin decreased by 0.9% in Europe to 40.6% and by 1.2% to 31.7% in Canada, both of which were negatively impacted by a shift in product mix towards lower-margin categories. Moving on the fuel side of our business. While volumes declined overall, our road transportation fuel gross profit, excluding CAPL's gross profit and a net impact -- negative impact from foreign currency translation, increased by $168 million or 17.2%. Our road transportation fuel gross margin was strong at $0.4299 per gallon in the U.S., an increase of approximately $0.16 per gallon, mainly driven by a decline in fuel product costs. In Europe, the road transportation fuel gross margin was USD 0.1051 per liter, an increase of approximately USD 0.02 per liter, while in Canada, the road transportation fuel gross margin was CAD 0.1029 per liter, an increase of approximately CAD 0.03 per liter, driven by the changes in the competitive dynamic and improved supply conditions. Normalized operating expenses decreased 0.3%, driven by cost and labor efficiencies as well as the various measures enacted to streamline and minimize our controllable expenses. These positive items were partly offset by COVID-19-related expenses, normal inflation, higher labor costs and incremental investments to support our strategy. COVID-19-related expenses include an emergency appreciation pay of $2.50 per hour in North America for hourly stores and distribution center employees Thank you bonuses in North America following the end of the appreciation pay premium in June, additional cleaning and sanitizing supplies and routines as well as mask and gloves for our employees. A special focus was placed on cost containment initiatives since the start of the pandemic, allowing us to reduce noncritical expenses without impacting the service we offer to our customers. Excluding specific items described in more detail in our MD&A, the adjusted EBITDA for the first quarter of fiscal 2021 increased by $320.4 million or 30.8% compared with the first quarter of fiscal 2020, mainly from higher road transportation fuel gross margins, partly offset by the negative impact of COVID-19 on our traffic and fuel volumes as well as the net negative impact from foreign currency translation, representing approximately $12 million. Excluding specific items described in more detail in our MD&A, the income tax rate for the first quarter of fiscal 2021 was 20.7% compared with an income tax rate of 19.5% in the same quarter last year. From a profitability and capital efficiency standpoint, we continue to improve our key measurement ratios with a return on equity of 25.3% and a return on capital employed of 16.4%. Importantly, we maintained our significant free cash flow generation during the quarter and saw our leverage ratio decline further to a level of 1.26:1. As of July 19, 2020, we had ample balance sheet flexibility with access to $5.8 billion in liquidity through our cash balance and available revolving credit facility. Finally, on September 1, 2020, the Board of Directors declared our quarterly dividend of CAD 0.07 per share and approved its payment for September 25 of the year 2020. Before I conclude, I would like to express how proud I am to see our company deliver another solid quarter in the face of such a challenging and unprecedented macroeconomic environment. Our first quarter performance once again demonstrates both the financial and operational resilience of our agile business model. We generated recurred free cash flow, continue to strengthen our balance sheet and stand ready to invest in our growth initiative as the various economies in which we operate gradually ramp up. This crisis has reinforced our belief that only through this discipline, both in driving organic growth and in pursuing M&A opportunities, will Couche-Tard successfully preserve and continue to deliver sustainable value for our employees, customers and shareholders. With that, I thank you all for your attention and turn it back to Brian.

All right. Thank you, Claude. Although we had a very strong quarter, we fully recognized a significant uncertainty ahead, both in the course of the pandemic and the global economy. We, therefore, continue to be prudent and operate with a long-term mindset as we keep a clear focus on our strategy. We'll always continue adapting to different consumer -- customer demands, whether that's for larger basket, future consumption items, different assortment or changing -- or different shopping experiences. And we're cautiously optimistic that fuel volumes will continue their improvement across the network as economies reopen. Over the last several days, we've been hard at work serving our communities in the areas devastated by the fury of Hurricane Laura, and our thoughts certainly go out to those suffering from the virus or taking care of loved ones. In conclusion, I want to thank our customers, our employees, our partners and shareholders for their continued support on our journey to become the world's preferred destination for convenience and fuel. And with that, we'll now answer questions we received from analysts.

Great. So the first question comes from Patricia Baker at Scotia Capital. The same-store sales trends across the board in Q1 were very impressive. I would assume that you have certainly attracted new customers to your stores and that your locations and proximity to consumers really served you well. While one cannot expect this to be fully sustainable, are you engaging in any special tactics or thinking of strategies to try to convert a proportion of the new customers to become loyal Circle K shoppers.

Yes, great question, and we certainly are. I think COVID's taught us that we can be relevant in certain categories and certain package sizes that we probably ignored a bit as we forgot about those customers over the years. Larger packaging and product sizes in key categories like alcohol, salty, future consumption, CSD have performed very well and we believe we can demonstrate fair value and variety in an effort to keep those customers. We add more health and safety products, which, unfortunately, are now just a part of everyday life during COVID, and we've certainly expanded our offerings within the grocery category. And we're going to continue to develop our frictionless capabilities, which help customers -- helped attract customers who want quick and easy purchases. We've been promoting our loyalty options to help retain new and existing customers. We've developed new ways of training our staff to better use our Lift platform, which continues to deliver very strong results and delivering better value and offers for our customers. We focused on driving brand awareness through both our community involvement and also with gamified marketing and increased presence on social media, while we did cut back spending on traditional media. And finally, our focus on food, the rollout of our Fresh Food Fast offer in North America, we believe it goes beyond just food and it makes the brand even more relevant to our customers. So again, a lot of uncertainty, but cautiously optimistic as we believe we outperformed the channel during the quarter that we can see some of that momentum in the future.

The next question comes from Vishal Shreedhar at National Bank Financial. Can you talk about the particular strength in U.S. fuel margins? And if this gap versus OPIS data is sustainable?

Yes. First and foremost, I think we're always looking to optimize the balance between fuel volumes and margins to get the best results. We've, actively in the quarter, restored many markets with success. I think the market's have been more rational during COVID with the uncertainty of volumes. It's hard to say what the future holds in this environment, but we're pleased with the results for the quarter. We did see a benefit of our geographic mix where some of the regions where we had stronger fuel margins saw smaller declines in volume and regions where declines were the largest may have had some softer fuel margins. So again, the global diversification, we think, has benefited us here. And finally, we believe we have a best-in-class fuel procurement team that is consistently widening our cost advantages versus the overall industry.

Second question from Vishal Shreedhar. Can you talk about the strength in Canadian merchandising same-store sales growth? In particular, what categories drove the performance? And if tobacco was a key driver of strength, was stockpiling a factor, also did performance sustained or moderated through the quarter?

Yes. So many things happened in Canada. I certainly -- I don't think stockpiling, it was a material issue. We saw new customers as first nation reserves and vape shops in Canada were mostly closed outside customers for a portion of the quarter. Of course, this could be beneficial to us long term if we can be successful at retaining those customers. The reserves have been open for several months, and we've seen some stickiness with some of these new customers staying with us. Although the pace of growth, while still strong, has slowed as we went through the quarter and entered the next quarter. We also saw bigger pack purchases. But again, we'd not quantify this as stockpile, but rather in line with the trends we're seeing of making larger purchases and reducing frequency of trips for certain occasions.

The next question comes from Derek Dley of Canaccord Genuity. Can you discuss if you've witnessed any changes in the competitive environment in North America and Europe in terms of promotions or product assortment? And have your peers in the convenience store space and in auxiliary channels like grocery channel or dollar store channel adjusted their product assortment or promotional strategy?

It's difficult answering the question on competitive environment. There's just so many moving parts and things happening at the same time. But I think I can say it's been fairly rational environment with, I think, less price competition in most of the channels we compete in. On our side, in terms of promotions, I think like many, we scaled back our marketing, and we've been more targeted in our initiatives. We've leaned heavily on social media to launch our Froster in the Baltics, as an example. And as I mentioned earlier, we used gamified marketing throughout our network to help drive traffic to our stores. In terms of assortment, I think we got out early in a lot of key categories and responded. So again, when we look at our supplier scorecards, we think we've taken share, but our competition will learn. So I think the channel overall will adapt to different paces to what the customers are looking for. As mentioned, we had clear moves into larger packages, product sizes, added more supplies, masks, sanitizers, grocery, and we think, again, there is some stickiness to that. And we're going to remain sharp on price to ensure we keep up with the value proposition and the needs as we probably are likely to see economic streams, particularly in North America, where some of the government programs are cycling off.

Second question from Derek Dley. Given the large-scale consolidation announced by one of your competitors during the quarter, has this altered the acquisition environment? Are you seeing greater opportunities surface? And is your focus still on North America and Pan Asia ahead of Europe?

Our strategy is focused on driving significant and sustainable organic growth while doing M&A when we believe we can create shareholder value. Other than the transaction you referenced, which traded at value, quite honestly, I can't understand. Deal flow has been relatively quiet in the quarter. We believe people just focused on dealing with COVID. Now that COVID has become a bit of the new normal, we are starting to see a little more deal flow. And again, we'll engage, as Claude said, the balance sheet's in great shape. So we'll engage. And if the value is there, we'll certainly take advantage of those opportunities. In terms of the markets, the U.S. still remains a very fragmented market. We see many chains that remind us of our Holiday acquisition that we did a number of years ago. These are material in size, simple to integrate on a regional basis. And if it's anything like Holiday brings strong expertise and capabilities for complementary. And when I look at North America, in particular, in the U.S., it's just our largest source of synergies. We just got a very scalable platform. Now touching on Canada. We've got significant share in the East, so material acquisitions will be difficult, but we've got significant opportunities to strengthen our network in the western half of the country. Asia Pac, we've talked about that for a while now. It remains a strong area of focus due to long-term growth potential. We are exploring several opportunities actively there. In Europe -- Europe is many different things. There are markets that over the 9 years that we've been there, we've learned we'd want to expand in, there are markets we would likely never enter. We'll certainly keep an eye out for opportunities at attractive prices. But that region is not a priority for us today. And then I wouldn't want to touch on Australia, which, I guess, you can call part of Asia. We pursued Amoco, which is now called -- because it was a strong strategic fit. We like the story in Australia. And we'd confirm that during our due diligence process early in the calendar year. And we paused because the uncertainty created by COVID-19. We wanted to put our focus on operating our business, ensuring the safety of our employees and our customers. Having said that, the recent results released by Amoco were weaker than we expected, and the headlines seemed to be more around financial engineering. It's really hard to understand the underlying performance of their business during the COVID environment. Their refinery Lytton has experienced strong and persistent pressure on margins, which, I guess, likely raises some questions as to the near-term viability of that plant. Retail volumes, like in North America, were also impacted materially. And it's hard to say whether the backcourt strategy is gaining direction in this COVID environment. So you put all these factors, it's just given us a pause.

The next question comes from Irene Nattel at RBC Capital Markets. You delivered outstanding inside store sales across all regions, especially in Canada, can you please talk about key drivers, cadence of basket size as you move through the quarter and exit rates relative to same-store sales as reported? What levels do you think are sustainable?

In terms of cadence in the growth of basket, it's declined slightly through the quarter as we -- in all geographies, really -- but still strong. The basket remains significantly higher than the same time last year. While we don't know the future and what's sustainable, given the uncertainty around COVID and its impact on our markets, we're focused on delivering our strategy and balancing short-term organic growth initiatives that are ongoing with longer-term big bets like food and localized pricing and assortment.

Second question from Irene Nattel. M&A in the space continues at a strong clip and at very rich valuations. What are your current thoughts around M&A? And do you think Couche-Tard can successfully negotiate transactions at a reasonable valuation in the current environment? What would be the alternative use of excess cash flow?

Yes. So thank you, Irene, for the question. And Brian has hit a lot of the -- answered that question in a previous question, but I'm going to tell you that, as you probably know, overall, the activity in M&A is currently slow. But we're confident that it will change, and it eventually will create deal flow, and there will be opportunities for us. We also do think that opportunities will arise to provide us with the return that we seek, as long as we're patient and remain financially disciplined. In the meantime, our focus is to maintain a healthy balance sheet to allow us to seize those opportunities. And in terms of capital allocation, we will continue to make sure that we are maximizing shareholders' return. To do that, we will continue to support the maintenance of our business and growth initiatives in our strategy and be ready for any M&A opportunity that could arise. Any remaining excess capital will be appropriately used for debt repayment, dividends or stock repurchase, as we've done in the past.