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

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

[Foreign Language] Good morning. I would like to welcome everyone to this conference call and webcast to discuss Alimentation Couche-Tard acquisition of Circle K Hong Kong and entry into the Asian market. We would like to remind everyone that this webcast and presentation will be available on our website for a 90-day period. Also, please remember that some of the issues discussed during this call 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, future results could differ from the information discussed today. Details of the acquisition will be presented by Mr. Brian Hannasch, President and Chief Executive Officer; and Mr. Claude Tessier, Chief Financial Officer. Following the formal presentation, we will open the lines to analysts for Q&A. [Operator Instructions] Please note that this webcast will end at 8:30. Brian, you may begin your conference.

Thank you, Jean Marc, and good morning, everyone. I'm touring stores this morning. So hopefully, everyone can hear me well. Over the last 2 years, we've spoken at length about our strategy to double the company, our 5-year plan. And to do that in a balanced manner with more growth from organic but also M&A being an important part of that journey. And probably for 30 years, we've announced our desire to enter the growth part of the world being Asia, Southeast Asia, in particular. So today, we're very happy to be announcing we've entered into an agreement to acquire Circle K Hong Kong. Our license partner in the region for approximately USD 360 million. And while the transaction is not only material from an EBITDA standpoint, it's strategically meaningful as is provides us an entry point into the Asian market and positions us well to grow more significantly in the region. We believe a platform in Asia provides Couche-Tard with a new growth runway as well as exposure to favorable economic and demographic trends for the decades to come. With Circle K Hong Kong, who we've known for many years, we now have the second largest chain in the Hong Kong region and happy to bring into the family, a network that's operated under the banner for I guess, almost 35 years. And more importantly, it's a team that's been able to win in the market, very highly respected there and remains the convenience store chain of the year by Max in 2018. And again, just showing that they can win in their marketplace. And so using their expertise is really the biggest asset that we're acquiring here. If we go to the next slide. The key transaction highlights continued. Hong Kong provides us with exposure and expertise in high-density small footprint retail, which is obviously very common in most of Asia. And we think it's highly complementary to our existing operations in North America and Europe as we grow more nonfuel locations in the urban centers. We love to fit with our company, our culture. Again, we've known these people for a long time. We consider Circle K Hong Kong's credo of speed, tidiness and friendliness, which has led to the company achieving multiple awards being very consistent with our own mission of making our customers' lives a little bit easier every day. We're excited to add this network to the team and our existing global presence. We've also been very impressed over the years with their merchandising expertise, which plans its source down to the square inch to optimize productivity. The team has shown strong rigor around category management and a big focus on premiumization of the assortment by being active on the import front and bringing international brands, particularly from Japan, South Korea and Europe into the markets to enhance their sales. And finally, Circle K Hong Kong counts on the leading digital loyalty platform, which we believe can be leveraged in the future as we expand across new markets in Asia. Next slide. I just want to go back in time and kind of reflect on the journey a bit. I think it's important to consider where we've come from as a company and how we've gotten there. Starting 4 years ago this year in Laval, Québec and subsequently consolidating the Canadian market in '80s and '90s. In 2001, so 20 years later, we entered the U.S. market with the acquisition of Bigfoot. And I'll remind you, Bigfoot was only 160 stores and significantly less EBITDA than what we're talking about here today. But it served as a platform and a strong management team from which to grow the U.S. market. So 11 years later, we turned our attention to Europe, and we actually had looked for 3 or 4 years. But establish our third growth platform with the acquisition of Statoil Retail. And again, a focus on strong management team, which is largely still in place today. Getting feedback, if everyone would be on mute, I'd appreciate it. And finally, here we are 8 years later after entering Europe, we're proud to begin our journey in Asia with our acquisition in Hong Kong and on the road to building the world's preferred destination for Convenience and fuel. Claude, I'll turn it over to you to talk a little bit more about Hong Kong specifically.

[Foreign Language] We are now moving on to the question period. And your first question [Foreign Language] Peter Sklar at BMO Capital Markets.

Filling in for Peter. My question is, that it appears that the economics for Circle K Hong Kong stores are lower than -- sorry, am I hearing playback? It appears that the economic of Circle K Hong Kong stores are lower than that of well operator stores in North America, even after taking into account lower mix of fuel retailing given the real estate constringent in Hong Kong. Can you comment on how store economics compare between the 2 regions?

Yes. I mean, I think you'll see that throughout in the Asia entry. Per capita GDP, per capita income is lower. Cost of entry of these sites are lower, these are typically much, much smaller. What is important here in Hong Kong is we're capturing almost 1,000 customers a day, which is on the high end per store for what we achieve globally. But it is smaller rings, smaller basket size. And so on a per-store basis, EBITDA will be lower even when we do adjust for fuel. But again, very, very stable, robust EBITDA that we think we can build from.

Next question will be with Bobby Griffin at Raymond James.

Just curious seen in here that they focus on, as you mentioned, on nonfuel, initially, as you look to expand your footprint. Yes. It's Bobby. They obviously focus first on non fuel, but as you look to initially expand your Asian footprint, will most of the growth organically or through M&A beyond kind of the Convenience-only store assets? And then -- and not look to expand into fuel offering?

I think it really depends on the country and the opportunity. I'm getting feedback, if everybody could be on mute, I would appreciate it.

Mr. Tessier, could you please mute your line?

Thank you. Some countries fuel is privatized and open. Other countries, it's controlled by the government, for example, Vietnam. We have a very strong presence for licensee there. But the fuel business is nationalized. So I think it will be country specific. We certainly would not shy away from the right entry into a combined fuel and convenience business. We think we've got great expertise with a global footprint there. But I think in Asia, the expectation would be we would do a lot more non-fuel locations than in fuel and convenience together.

We will now return to the presentation. Mr. Hannasch, please go ahead.

Claude, I think you were up. If you want to go back to Hong Kong.

So let's now bring your attention to a higher level view of the Circle K's Hong Kong business, a Convenience-only network that is already operating under the Circle K banner. It has roughly 30% market share in convenience in Hong Kong with 340 company-operated stores as well as 33 franchise stores in Macau. We see a significant organic growth potential and expect that with access to Couche-Tard Claude's capital, Circle K Hong Kong may be able to accelerate the meaningful organic growth opportunity that lies ahead. Recent results have been impressive despite the number of headwinds. Same-store sales in 2019 grew a strong 5.9%. And this continued so far in the first half of 2020 with 5.7% rise in comparable stores across the network. In December of 2020, Circle K Hong Kong expects to enumerate its new distribution center, which will have embedded robotics to increase fix speed in accuracy as well as improved shipping logistics. This new distribution center will support up to 600 sites and help unlock the efficiencies for their business to deploy. If we switch to the other side, in terms of stores, the following slide helps frame some of the formats that are deployed across the network, from stores in shopping malls and commercial places, close to metro and train stations, to those in mixed users residential complexes. Circle K Hong Kong is really well positioned in high-density and high-traffic areas and has reflected the small store [indiscernible]. With more than [ 90% ] of customers has been [indiscernible] on food, multiple clients [indiscernible] even multiple times per day. Circle K Hong Kong has developed a high productivity [indiscernible] model which make much room to keep growing. Moving on to the product offering. Cirlce K Hong Kong has really managed and easily manages to pack a lot of punch in a small [indiscernible]. Stores are already serving Simply Great Coffee, and we believe this -- there is meaningful growth in the coffee category in Asia. As I mentioned at the start of the presentation, Circle K Hong Kong has developed a very strong merchandising and promotional program with the frequent introduction of seasonal products and imports from Europe, Japan and South Korea. The company has done a great job in getting customers to trade up onto their purchases towards higher product -- margin product, whether it's in bakery, beverages, ice cream or snacking. Enhanced category analysis leveraging proprietary analytics has allowed the company to improve the relevancy of it's software and to optimize with [indiscernible]. These factors are very important considering that customers visit stores at a high frequency. So lastly, on the food front, Circle K's Hong Kong's [indiscernible] to go brand has attracted a solid following its signature dishes such as stir fry noodles, my favorite, curry fish balls, at this [indiscernible] station or even it's freshly baked pizza made with Japanese cheese. So that gives you a bit of a high-level view of what the network look like. And on this, I would turn it back to you, Brian.

All right. Thanks, Claude. And apologies everyone for the technical difficulties. Claude, if you could mute again, please. So just to recap, we're excited about our fourth platform of growth. This fulfills a major objective of landing a qualified tenured management team that will give us not only the opportunity to grow in Hong Kong, but give us credibility to do M&A and do partnerships in that part of the region. And their success has been evidenced again, if you compare per store throughput with a major competitor being 7-Eleven in the market significantly outperforms and being named community store retailer over the year in Asia twice in the last 5 years. We do -- it brings us relative capabilities. It's a scale in Europe. They've got a very successful food offer. They've got unique private label and import capabilities and very strong omnichannel loyalty platform that we think can't be leveraged outside of Hong Kong. And finally, the advanced innovation capabilities, including gamification, which is something that we still would try to bring into North America. And then in terms of just other best practices, we think Hong Kong is a logical place for us to land. It's a central hub for global trading and for sourcing across Asia. So we think the location itself just makes a lot of sense. And finally, and not a major reason for this transaction. But Convenience, Circle K, Hong Kong did have the rights to a good part of China with the Circle K brand, and now we repatriate that back in the company and we'll have more decisions, flexibility on how we deal with China in the future. Just real quickly on timing. I'll leave you with pretty clear timing and next steps. So we've got to have approval of the transaction by the CRA shareholders, which we anticipate in early December, followed by the completion of the transaction in the second half of the month. So we do believe this will close yet in 2020. So with that, that concludes our full presentation. And I'll go back to any remaining questions that you may have.

Thank you, Mr. Hannasch. Your next question will be from Martin Landry at Stifel GMP.

Wondering if you could just talk quickly on valuation metrics and accretion, if there are any?

Claude, I'll let you take that if you're on.

Okay. Can you not disclose it [indiscernible] the multiples that were being but CRE is a publicly traded company that has most of the business that we operate are really the convenience store, we have also business, a small business bakery and [indiscernible]. So you can look at the financials there and try to [indiscernible]. In terms of the accretion, it's very -- not material in terms of what it's going to create for us. But most of the synergies that are going to be driven into the business that's going to be [indiscernible] for us [indiscernible] creating the growth platform and the growth platform in growing [ MTIs ] in Hong Kong and also growing in other areas in Asia. And also, there's going to be also some meaningful reverse synergies that could come out of that acquisition with potentially the O2O program, which is the loyalty program online and offline program that they have that could be also applied as -- in the network. So we see -- very excited about the potential synergies and that [indiscernible], about that acquisition and also the [indiscernible].

We joke internally sometimes if the companies that call things strategic. This is not only strategic for us. This is a solid return for our shareholders as well.

Next question will be from Karen Short at Barclays.

I actually just wondering if you could talk a little bit about what this means for M&A in the U.S., meaning our -- does this kind of take you out of shrinking of M&A in the U.S.? And if so, is it a function of where multiples are? Or how are you thinking about further opportunities in the United States?