Zabka Group S.A. (ZAB) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Couche-Tard and Zabka creating the next-generation convenience retail platform. [Operator Instructions] This webcast will be recorded, and an archive of the webcast will be posted on the company website. By participating in the Zoom call, you are agreeing that recordings made during the event may be shared by Zabka Group. [Operator Instructions] I'd now like to hand the call over to Filip Paszke.

Thank you. Hello, everyone, and welcome. My name is Filip Paszke. I'm the Director of Zabka Group responsible for Corporate Development and Capital Markets. This call was initially scheduled to discuss our Q2 results, though we intend to spend most of our time today on the transformative transaction that was just announced this morning. We are pleased to be joined by the senior leadership from Couche-Tard, who will be sharing their perspectives on the announced transaction. I would now like to hand over to Mr. Tomasz Suchanski, CEO of Zabka Group.

Thank you, Filip. My name is Tomasz Suchanski. I'm CEO and Chairman of the Board of Zabka Group, and I'm joined today by Marta Wrochna, our Group CFO; Tomasz Blicharski, our Chief Strategy and Development Officer; and my successor in the role of the CEO. We are very pleased to be joined today by Alex Miller, CEO of Couche-Tard, who in a few moments will share his perspectives on the highly strategic combination between our 2 companies that we announced this morning. Before we move on to the transaction, I would like to invite our CFO, Marta, to share a brief update on our strong Q2 results.

Thank you, Tomasz. Good morning, everyone. Let's start with the key financial highlights for the second quarter of 2026. We delivered another solid quarter with growth across sales, profitability, cash flow and net profit. Sales to end customers reached PLN 9.2 billion, up 13.2% year-on-year. Like-for-like growth was 4%, improving versus the first quarter. We also continued to expand the network. At the end of June, we operated more than 13,000 stores across Poland and Romania, with 1,368 gross openings over the last 12 months, including 303 new stores opened in Poland and 40 stores opened in Romania in the second quarter of this year. Like-for-like growth ahead of the market in Poland and traffic expansion helped us to accelerate our market share growth even further. Profitability also improved. Adjusted EBITDA exceeded PLN 1.2 billion, up 16.2% year-on-year and the margin increased to 13.3% by 34 basis points. This reflects continued efficiency improvement, disciplined cost management and the strong performance of our Polish operations. Reported EBITDA was PLN 1.163 billion, also up 16.1% year-on-year after the recognition of PLN 51 million of noncash LTIP-related costs. Finally, we delivered a strong free cash flow of over PLN 1.2 billion, and we continue to strengthen the balance sheet. Net debt to adjusted EBITDA decreased to 0.7x, down 0.5x year-on-year. Looking on the key financial metrics, I would highlight a few points. First, the top line growth remained solid. Sales to end customers increased by 13% in the second quarter and 12.6% in the first half of this year. This was supported by continued network expansion and an improvement in like-for-like versus the first quarter. Second, gross profit and adjusted EBITDA both grew faster than sales, more than 16% with the gross margin up 47 basis points and EBITDA margin up 36 basis points versus the last year. This improvement was driven mainly by stronger terms of trade, growing sales of QMS and continued efficiency gains in logistics and store openings. And third, on franchisee margin, we see a year-on-year decrease in the second quarter. And as you recall, there was an increase in the first quarter of this year. As we have discussed before, quarterly movements in franchisee margin may be affected by seasonality, calendar effects and inventory phasing. Therefore, the year-to-date view is more representative of the underlying trends. For the first half of this year, franchisee margin has slightly -- was slightly above last year, reflecting the growing share of QMS, our strategic category and commitment to build relationship with our franchisees. The last point is net profit. Below EBITDA, we also saw a clear improvement. Net financial costs declined year-on-year, supported by lower leverage and improved margin on our debt following bond issuance last year and refinancing completed in September last year. This helped adjusted net profit increase to PLN 366 million in the quarter, up 66% year-on-year. On cash flow, the second quarter again shows the strength of our cash generation. Free cash flow reached PLN 1.2 billion in the second quarter with conversion above 130%. This was supported by higher EBITDA, disciplined CapEx and a strong working capital inflow. As you remember, Q2 is structurally and seasonally a strong quarter from a working capital and cash flow generation perspective, which contributed to these results. CapEx remained focused on growth and efficiency projects with capital allocation staying disciplined. And finally, strong cash generation translated into further balance sheet improvement. Net debt to adjusted EBITDA, excluding leases, decreased to 0.7x as at the end of June compared to 1.2x a year ago, on the back of higher EBITDA and stronger working capital dynamics in the quarter. As a result, net financial debt, excluding leases, decreased by almost PLN 1 billion year-on-year to PLN 2.3 billion. Our liquidity position also remained very strong with cash of more than PLN 1.6 billion as at the end of the quarter. And given this position, we decided to accelerate the repayment of PLN 100 million under the SFA loan, which was originally scheduled for the fourth quarter of this year. So to wrap up, the key takeaway is that our cash generation continues to support growth, financial flexibility and further deleveraging. Given this strong balance sheet position, we feel confident and fully ready to proceed with dividend payment, which is planned for today. I will now hand over to Tomasz to cover the transaction in more details.

Thank you, Marta. Before we move to the transaction, I would like to take a moment to share my reflections on the remarkable journey Zabka has taken to date. I'm incredibly proud of what we have achieved at Zabka. Over the past 25 years, we have transformed the business from a single chain of corner stores to Poland leading convenience ecosystem, growing our sales at 23% CAGR. We have over 13,000 modern convenience stores today, and we are continuing to expand our network, adding 1,300-plus new stores per annum. We have delivered significant innovation in our modern convenience proposition, including our recent street food rollout. We have added successfully to our digital offering across e-grocery, meals and our consumer application. In 2024, we entered Romania, our fifth international market. And currently, we have 250 stores and growing. I'm very proud of what we have built at Zabka, and I think today's announcement with Couche-Tard is a recognition of the strength of our business. This would not have been possible without the commitment, passion and hard work of everyone who has contributed to this journey. A special thanks goes to our employee base here in Poznan and across all of Poland and Romania as well as Zabka franchisees who deliver excellent service to the consumer day in and day out. We also thank CVC and Partners Group, who have been excellent partners over many years as we have grown and transformed the company to the European leader it is today. I will now pass it to Tomasz Blicharski to share a few remarks. Tomasz?

Thank you, Tomasz. I'm Tomasz Blicharski, Chief Strategy and Development Officer and incoming CEO of Zabka Group. Pleased to be here with you. Zabka today is Europe's leading convenience retail platform, serving time-sensitive customers across physical and digital channels and designed around one simple mission, helping our customers free up their free time. We have a network of over 13,000 modern convenience stores in Poland and Romania. We're adding over 1,300 stores per year with a disciplined payback of roughly 1 year, and our estate generates a robust mid- to high single digit like-for-like. More importantly, we see a long runway for continued expansion and plan to sustain this pace of growth, targeting more than 1,300 new stores opening annually over the medium term. In our current markets, our business has generated $8.5 billion in sales and $1.1 billion in adjusted EBITDA in the 12 months to March '26. And our ambition remains exactly as it was at IPO, to double sales to end customers between 2023 and 2028. Now at the halfway point, we are firmly on track to deliver on that commitment. Today, almost 18 million customers live within 500 meters of Zabka store, and we serve approximately 4.3 million customer missions every day. Importantly, Zabka is much more than just the physical store network. Over the years, we have built a powerful digital platform, including e-grocery and meals. We have the Zappka app at the center of how we engage with our customers. As a management team, we're very excited for the next chapter of Zabka in partnership with Couche-Tard. I echo Tomasz's sentiment that today's announcement is a powerful recognition of the strength of the Zabka business, the power of our brand and our people. We believe the combination of Zabka and Couche-Tard will create a leading pan-European convenience platform with aligned strategic priorities. Our partnership will allow us to accelerate the delivery of long-term ambitions, benefiting from the enhanced scale, capabilities and growth opportunities. Having spent time with the Couche-Tard team, I believe we have a highly complementary culture built on a commitment to innovation, convenience and customer centricity. The quality and dedication of our people have been core to the success of Zabka. We are committed to continue investing in our people and creating even greater value for customers, franchisees and the communities we serve. We're excited about the opportunities ahead and look forward to working closely with our partners in Couche-Tard. With that, it is my great pleasure to welcome Alex, who will share their perspective on the transaction and the opportunities we see together going forward. Over to you, Alex.

Thank you, Tomasz. What you've just heard from the Zabka team captures exactly why we're here. This is a transformational investment for Couche-Tard, the largest acquisition in our history and one of the most important milestones in our growth journey. For us, this is a unique and extraordinary opportunity to invest in a business we deeply admire, one that is already operating at the leading edge of where we believe convenience is heading. What stands out most is the quality of the platform, the strength of the people and how closely Zabka aligns with the future we're building through our Core + More strategy. They are strong at their core, highly productive stores, deep customer relevance, high frequency and an entrepreneurial franchise model with solid economics. But what makes this combination especially powerful and compelling for us is their leading capabilities in food, digital engagement, loyalty and personalization. In many respects, Zabka embodies the true potential of Core + More. And culture matters here, too. Part of our DNA is welcoming strong businesses into our organization while preserving what made them successful in the first place. That mindset is very much at the heart of this partnership. So for the next few moments, I'll walk you through 5 things. First, an introduction to Couche-Tard, followed by an overview of the transaction and the rationale behind it. We'll discuss the financial framework, our approach to execution and integration, and then we'll open it up for questions. Many of you know us as Circle K through the nearly 400 service stations we've operated across Poland since 2012. What you may not know is that Circle K is part of a much larger global network. Today, we operate roughly 17,300 sites across 27 countries and 29 business units, coast-to-coast in Canada, in 48 of the 50 U.S. states and with leading positions across many European markets. That global scale, reach and operating expertise is part of what we bring to the partnership. That global network you just saw didn't happen by accident. It was built through partnership over 4 decades. And a defining chapter in that journey was 2012 when we expanded into Europe with the acquisition of Statoil Fuel & Retail, a leading Scandinavian fuel and convenience retailer. That's the acquisition that first brought us to Poland, and those stores were later rebranded to Circle K, the global brand we launched in 2015. We've continued that momentum ever since. We acquired Topaz in Ireland and more recently, TotalEnergies across Germany and the Benelux. But the key to our success has never been simply adding stores. It's that we bring on the best leadership, talent and ideas from each of these businesses and scale them across our network. That same approach, humility, respect for local expertise and a commitment to learning in both directions is exactly how we'll approach Zabka. This is about bringing together 2 complementary convenience leaders that share the same priorities: convenience leadership, digital innovation, operational discipline, a growth mindset and a focus on value creation, but that bring different complementary strengths. Couche-Tard adds global scale, mobility expertise, procurement leverage and a proven global operating model. What Zabka brings is genuinely best-in-class. Food, an expanded quick meal solutions offer accounting for roughly 1 in 5 transactions, which is a level of food penetration that's rare at this scale. Digital and loyalty, a digital-first data-rich ecosystem anchored by the Zappka app and a leading loyalty program and advanced personalization and retail media capabilities. Innovation from Zabka Nano, autonomous stores to AI-enabled operations. They built the kind of tech-powered convenience experience that's driving the industry forward. Put those together and you have a platform positioned to accelerate growth and innovation across Europe and beyond. Let me summarize the key terms. This is an all-cash offer for up to 100% of Zabka at PLN 32 per share, implying an equity value of roughly USD 8.6 billion. We'll proceed through a voluntary tender offer expected to launch in August, and we already have irrevocable commitments from CVC, Partners Group and a key Zabka managers representing approximately 57% of shares. So we are establishing control upon completion. We're targeting close by end of Q4 2026, subject to customary conditions and regulatory approvals. The case for this combination really comes down to 3 things. First, Zabka is an established leader in a large, growing Central and Eastern European market and its geographies and capabilities complement our own. But this isn't simply about adding stores. It's about adding a differentiated growth platform that accelerates exactly where we want to go. Second, a historically strong financial profile with a pathway for continued compounding, a capital-efficient franchise model with attractive unit economics, 25-plus years of consistent growth and meaningful white space still ahead. And third, disciplined execution, a high-quality management team with a deep bench and a proven operating model powered by data, scale and AI across the value chain. Taken together, these are what give us real confidence in the value this creates over the long term. The scale of the opportunity really comes through in the numbers. A few summary points drawn from the pro forma and key takeaways. Significantly expanded footprint. The combination would operate roughly 30,300 stores, extending our reach into dense neighborhood convenience formats we don't have today. A step change in European presence and scale. Europe and other regions jumps to about 60% of the combined store base, up from roughly 30% for Circle K alone, a genuine step change in a priority region. Increased diversification outside of fuel, a meaningfully higher share of merchandise and service revenue, which strengthens the resilience and quality of our earnings mix. And last, higher margin, higher growth and focused on Core + More. Pro forma revenue of $83.9 billion and adjusted EBITDA of approximately $7.8 billion before synergies with a stronger blended margin. Finally, I want to close on what matters most in all of this, and that is people. Our guiding principle through integration is continuity, and that starts with keeping employees, franchisees and customers at the center of every decision we make. Practically, that means Zabka will continue to operate independently with no disruption to day-to-day business, led by its existing management team who are reinvesting alongside us and remain responsible for executing Zabka's strategy and growth. We deeply respect the expertise, innovation and customer focus of the Zabka team and its franchisees. And we see this partnership as creating new opportunities for them, not disruption. We'll support that with a clear governance structure that preserves local accountability and dedicated integration teams focused on capturing best practices and long-term value on both sides. But through the line is simple: protect what makes Zabka special and keep its people and customers front and center.

Thank you, Alex. That concludes our presentation. We will now move to Q&A.

[Operator Instructions] Our first question will come from Richard Trainor with Bernstein.

First question on the deal. Is the price being offered high enough for the public market shareholders of Zabka?

I guess we'll determine if it is, Michael -- or excuse me, Richard. That's for them to decide.

Fantastic. And one more, if I may. Where will the synergies come from in this deal?

The synergies are going to come from all the things you just heard us describe. We see Zabka, for us in our Core + More strategy, we talk about more, which food, own brands, private brands, merchandise supply chain, digital solutions, all the things you heard me reference in the commentary. Those are things that Zabka is extremely good at and I think leading in our industry. We will be looking to apply those things across the Couche-Tard base.

Our next question will come from Michal Potyra from UBS.

I have 2 questions, if I may. So the first one is, I understand there is a commitment from shareholders representing 57% of the shares committed to the tender. I wanted to ask, is there a level of additional shareholder acceptance for the offer to succeed? And are you considering to buy a controlling stake in Zabka, but to keep it listed as well or only 100% is what interests you?

Yes. I think as we outlined, we have irrevocable commitments for 57% ownership of Zabka, which gives us a controlling stake. We will then proceed with the tender offer, and we will see what percentage tenders in that process. We are open to continuing to run Zabka as a public company listed here on the Polish Stock Exchange. And we are also open to taking -- to tendering all of those shares and bringing Zabka inside the broader Couche-Tard Group.

So there is no clear answer, I understand, right, from what you just said.

I mean, Michal, there is no conditions, no conditions are planned for, in terms of thresholds other than Alex just described. Irrevocables for 57% and then it's up for the market to decide whether to tender the shares or not.

One more, if I may, just to make things clear because you mentioned, but I didn't got that really, about the dividend. So the bid price will be PLN 32 after the dividend is paid, right? So the dividend is on top.

Yes, we will pay the dividend as planned today and the share price as announced.

[Operator Instructions] Our next question will come from Elena Jouronova with JPMorgan.

Well, congrats on this, first and foremost. Secondly, a bit of a follow-up from Michal's question. So in the event that minority investors choose not to tender shares and remain the shareholders of Zabka, is it more likely that Couche-Tard would prefer to increase the price on the tender offer? Or you're very happy to just, as you said, run it as a public business and reconsider in the future? What's your appetite to potentially increase that tender offer price if no one wants to sell it, no one except for the 57% that you've already secured?

The tender offer will be done at PLN 32 per share, and we will let shareholders decide if they wish to tender. As I stated earlier, we are open and willing to continue to run Zabka as a public company listed here on the Polish Stock Exchange. We're also very open to -- should the tender come in over the threshold, we would delist Zabka and bring them inside the Couche-Tard Group.

Understood. How do you plan to change the Board of Directors? How many Board seats will Couche-Tard have post the acquisition of the controlling stake? And what are your initial thoughts about capital allocation and financial leverage of Zabka as it stands currently?

Elena, I think it's way too early to answer these questions. Obviously, some of the things that you mentioned are conditional on the shareholding percentage that Couche-Tard holds after the tender is done. So we'll surely come back on this at a kind of later stage.

Well, that's fair. But then on financial leverage from how the balance sheet looks like right now, does Couche-Tard consider this as adequate financial leverage or potentially consider levering up more in order to fund growth expansion?