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

Good morning. My name is Joelle, and I will be your conference operator today. [Foreign Language] I will now introduce Mr. Mathieu Brunet, Vice President, Investor Relations and Treasury at Alimentation Couche-Tard. [Foreign Language]

[Interpreted] Good morning. I would like to welcome everyone to this web conference presenting Alimentation Couche-Tard's agreement to acquire a controlling stake in Zabka Group. [Operator Instructions] This webcast presentation will be available on our website for a 30-day period. Also, please remember that some of the issues discussed during this webcast may be forward-looking statements which are provided by the corporation with its usual caveats. These risks and uncertainties are outlined in our financial reporting and in our press release of July 31, 2026, announcing the transaction and in the presentation materials made available today. Such documents also contain important information relating to historical and pro forma financial details being shared today in respect to Zabka Group and the corporation. Our speakers today are Mr. Alex Miller, President and Chief Executive Officer; Mr. Filipe Da Silva, Chief Financial Officer; and Mr. Tomasz Blicharski, Group Chief Strategy and Development Officer and incoming Chief Executive Officer of Zabka. Alex, you may begin your conference.

Thank you, Mathieu. Good morning, everyone, and thank you for joining us today. This is a transformational investment for Couche-Tard and one of the most important milestones in our growth journey. I'm particularly pleased to be joined today by Tomasz Blicharski who will become the incoming CEO of Zabka Group. Tomasz is here with us today, and I'm excited about what our teams can build together. We are uniting 2 exceptional organizations with a shared passion for customers, innovation, operational excellence and growth. For Couche-Tard, this is a unique opportunity to invest in a business we deeply admire, one that is already operating at the leading edge of convenience in areas such as food, digital engagement, supply chain and innovation. This partnership represents the largest acquisition in our company's history, bringing together a high-quality business, talented people and capabilities that fit naturally with our Core + More ambitions. Today, Zabka operates approximately 13,000 stores with roughly 4.3 million transactions every day and has established itself as Poland's leading convenience retailer with a strong track record of growth. What makes this opportunity particularly attractive is that many of the capabilities we believe will define the future of convenience already exist at scale within Zabka. At its core, Zabka has built a business that consistently delivers anchored by highly productive stores and engaged customer base and an entrepreneurial franchise model with solid economics. What truly sets Zabka apart is the depth of its more. Zabka excels across food, loyalty, digital engagement, advanced data and analytics and retail media. More than 10 million customers engage with its digital ecosystem annually and approximately 1 in 5 transaction includes a quick meal solution product. Zabka has become Poland's leading provider of warm snacks and street food, selling more than 16 million pizzas annually and continually expanding its proprietary food offer. Supporting those capabilities is a highly sophisticated operating engine. Zabka manages approximately 99% of store distribution through its own network, supported by more than 90% automated replenishment, 8 distribution centers, 19 cross-docking facilities and industry-leading service levels. In many respects, Zabka is a reward example of where Core + More can go. It brings complementary capabilities that can advance our strategy, which is why we view this opportunity as much more than simply adding stores. But ultimately, what gave us the greatest confidence in this partnership was the people and culture behind the business? Throughout this process, we developed tremendous respect for the Zabka team and its franchisees, their entrepreneurial mindset, customer focus, speed of execution and passion for innovation are qualities we deeply admire. At Couche-Tard, we have always believed the best partnerships start with great people and a shared focus to customers. This is not about one company teaching another. It is about bringing together complementary strengths and a common ambition to better serve our customers and make their lives a little easier every day. We look forward to supporting Zabka's continued growth. while also learning from the capabilities it has built across food, digital engagement, loyalty, supply chain, private brand and innovation. Together, we believe we can further advance Core + More, strengthen both organizations and create lasting value for customers, franchisees, employees, business partners and shareholders. With that, I'll turn it over to Filipe.

Thank you, Alex. This partnership represents a unique opportunity to advance our long-term growth strategy through high-quality platform that complements and strengthens Core + More. From a financial perspective, we believe the transaction is attractive for 3 reasons: the quality of the business; the long-term value creation opportunity; and the disciplined framework supporting the investment. First, the quality of the underlying business. Zabka is one of the strongest retail growth stories in Europe. For more than 25 years, it has consistently expanded its network, evolved its customer proposition and deliver strong track record of growth. Today, it generates approximately USD 7.4 billion in revenues, approximately USD 1.1 billion in adjusted EBITDA and approximately USD 300 million of net profits. What stands out to us is the combination of growth, profitability and capital efficiency. The franchise model support attractive unit economics, strong cash generation, scalability and significant runway for continued expansion. It is supported by a diversified set of growth drivers across retail, food, digital capabilities, sophisticated supply chain network and customer engagement. Second, this transaction strengthens our long-term growth profile. As Alex mentioned earlier, we are not simply acquiring a store network. We are adding a differentiated platform with strengths that directly complement and advance Core + More. On a pro forma basis, the combination will represent nearly USD 84 billion in revenue and approximately USD 7.8 billion in adjusted EBITDA, excluding the impact of synergies. It also expands our Orbeon scale and increase our exposure to higher margin merchandise and service revenues, further diversifying the business. Importantly, we believe this combination is well aligned with the ambitions outlined at our business strategy update. It adds a highly complementary platform and capabilities that can support sustainable long-term earnings growth. Third, we see meaningful value creation opportunities. We have initiated more than $250 million of run rate synergy opportunities across cost and revenue with the ability to fully achieve by the third year following closing as we assume the gradual acquisition of Zabka Group. These synergies span across procurement, logistics, price label, loyalty food program, digital data and technology. At the same time, one of the most attractive aspects of this combination is the opportunity to leverage the strength of both organizations. Zabka has built advanced capabilities in digital engagement, loyalty and analytics while Couche-Tard brings scale, mobility expertise, procurement leverage and a proven global operating model, together with the opportunities that extend well beyond the initial synergy plan. As always, we will remain disciplined. The transaction is fully funded through committed financing and supported by a disciplined capital allocation. While leverage will increase following closing to approximately 3x net debt to EBITDA. We have a clear path towards deleveraging and expect to maintain the financial flexibility that has long been a hallmark of Couche-Tard capital allocation approach. In fact, we expect our leverage to return within our framework range of 2 to 2.5x by the second year following closing. The transaction is expected to be EPS accretive and to generate double-digit return on invested capital within a fourth period of time while supporting a clear path back towards our long-term leverage objectives. Considering acquisition-related costs, higher depreciation and incremental financing, we expect the combination to be dilutive to our earnings per share in the first year, but accretive by the second year following closing. We also expect the return on invested capital to reach double-digit return by the third year following closing. This is based on a few assumptions today, including the ownership percentage, we will acquire Zabka Group and at which pace we do so based on the voluntary tender offer. As such, when this completes, we'll be able to firm up the impact on our earnings per share. Finally, we see that the overall -- we see that the overall framework is entirely consistent with how we have always approached capital allocation. We look for opportunities that strengthen the business, improve our long-term growth profile and create attractive returns for shareholders. We believe this transaction accomplishes all 3. With that, I turn it over to Tomasz.

Thank you, Filipe, and thank you, Alex. Good morning, everyone. This is a special moment for me personally. I first got involved with Zabka more than 16 years ago when it was a much smaller business with roughly $25 million of EBITDA. In fact, my kids were born after I joined the company, so my wife always jokes that Zabka is actually my first, and watching this company growth has been one of the great privileges of my career. I'm incredibly proud of what we achieved together. But what excites me most is what is ahead of us. the next chapter and opportunities ahead. For nearly 3 decades, our team, franchisees and partners have worked to build a business focus on making everyday life easier for millions of customers. What makes this partnership important for Zabka is that it brings us together with a company that understands retail, understands operators and understands the importance of serving customers every day. From our first conversation with Couche-Tard, what stood out was the respect they showed for our business, our brand, our franchisees and our people. Their approach was humble, curious and highly collaborative. We felt that the Couche-Tard team came in not only to understand what Zabka is, but also to listen carefully how and why we build the business the way we have. That was very important to us. I remember meeting Alain and Alex for the first time and thinking these guys are a lot of like us. We're both obsessed with customers and focused on making everyday life a little easier. In fact, we discovered that our companies have independently landed on almost exactly the same mission about making life easier. When businesses on different continents arrive at the same idea on their own, it usually says something about the values behind them. For me, that was an early sign that our teams would work well together and that we have a real opportunity to build something special together. Zabka has a very strong identity, our brands, franchise model, customer relationship, innovation, culture and local expertise remain at the heart of our business. At the same time, becoming part of the Couche-Tard family gives us access to broader global platform, additional expertise and new opportunities to accelerate the growth further. We see many areas where both organizations can learn from each other. Zabka brings deep experience in digital engagement, loyalty, food service, analytics and the new retail formats. Couche-Tard bring global scale, operating expertise, mobile, mobility, leadership, supply chain reach and proven ability to grow across many markets. Together, we believe we can create even more value for customers, franchisees, employees, partners and shareholders. Most importantly, this partnership allows us to continue building on what has made Zabka successful while opening new possibilities for the future. We're proud of where we are and energized about what we can achieve together. I thank you all for your attention. I will turn the call over again to Alex.

Thank you, Tomasz. I'll leave you with a few final thoughts. This is a growth partnership. It accelerates Core + More, expands our European platform and brings together 2 organizations with complementary strengths and a shared ambition to better serve our customers. Together, we believe we can create long-term sustainable value for customers, franchisees, employees, business partners and shareholders. We are excited in the opportunity ahead and look forward to sharing more as we move through the process. With that, let's open up the line for questions.

[Operator Instructions] Your first question comes from Irene Nattel with RBC Capital Markets.

Congratulations on the transaction. Just wondering, clearly, you've been looking at a lot of things for quite a while. Understand what you've outlined with respect to Zabka in terms of the appeal. Can you just talk about how long you've been speaking in the background, how the transaction came together? And then how to think about -- it's going to be operating independently but there's a lot of things to learn over time. So how should we think about the integration of the evolution over the next, let's say, 2 to 3 years?

Irene, thanks for the question. I think Alain and Brian and I have been looking at Zabka for 15 years, at least. And so over the years, we have seen the journey they've been on. And I can tell you recently, within the past couple of years, Alain visited here, when he was on vacation. And he came back and he said, you guys need to go look at Zabka again. And so from our perspective, in our Core + More strategy, I don't think there's a better fit for the more part and the enablers, the growth trajectory that they've shown and delivered on many -- over many, many years. there was nothing that was more attractive to us. So when we understood that private equity was potentially looking to exit, we engaged with Tomasz and the private equity companies, and we worked through that process arriving today with this announcement and very pleased to get to that state. I think when you talk about the tender offer, I think we have irrevocable commitments for 57% of Zabka exists today. We'll put the tender offer out. Obviously, we don't know the outcome or the timing of that. But I think regardless whether it's through arm's length agreement with Zabka continuing to run as a public company on the Polish market or whether we reach the 95% threshold and delist them and bring them inside of Couche-Tard, I think we will get after -- I don't really view this as integration like we normally would, Irene. This is really about capabilities and how we share those capabilities and bring value to both Zabka and into Couche-Tard. Timing, you asked for timing?

Yes, please.

Yes, for timing, Irene, I think we've got time between now and our December close. I can tell you we're going to spend that time to further hash out our priorities, and where we see the best benefit. And then we'll have a plan together. And I think in upcoming quarters and calls as we get closer to that date, we'll be able to provide you some more specificity.

But just to build on Alex, Irene, you have heard talking about the $250 million synergies. We are clearly taking into account what Alex was saying about the voluntaries and the offer and the fact that yes, we are taking control, but we don't know at what -- at which level we'll be in terms of stake. But the synergies actually ramp up, take that into account. So we've, I would say, a slow start and ramping up and expecting to deliver the $250 million synergies on year 3. That's how we see also the combination of the 2 platforms.

Your next question comes from Chris Li with Dejardins.

Congrats on the deal. I was wondering if you can please talk a little bit about how the business has operated in the last few years through the macroeconomic and geopolitical challenges. And then what is sort of the outlook going forward? And maybe a related question is if you can also talk a little bit about the competitive dynamics within the Polish market. I know Zabka is #1, but who are your key competitors? And how has that evolved over the years?

Thanks for the question, Tomasz here. So if you look at the entire history of the company so last 28 years now. We always grew top line double digit, and we always increased our EBITDA. We've been very consistent in growth in the last -- well, the whole 28 years, but also in the last several years. Throughout COVID, we continue to expand, continue to open new stores, continue to grow like-for-like on average, and continue to increase our EBITDA. During the inflationary period that followed the COVID and also the energy crisis a few years ago, we always managed to come out on top. I mean there are multiple reasons behind it, but we're effectively one of the most known and loved brand in Poland, like 90-plus percent brand recognition. We touched millions of lives on a daily basis with millions of customers coming to our stores for their small shopping or their hot food or their services on a daily basis. And of course, we've executed incredibly well throughout the years. Two years ago, when we IPO-ed on Warsaw Stock Exchange, we gave out a midterm guidance to the growth, which was to more than double the sales of the company within the next 5 years, so 3 years to come on top of that. And to slightly increase our profitability. And obviously, to invest capital with the benchmarks that we historically have. And 2 years on that forecast, we are exactly bang on, on all the key aspects. In fact, we have managed to accelerate slightly the growth base in terms of store numbers. Last year, we opened more than 1,300 stores. This year, also, we're going to open similar figure. Our original forecast was roughly 1,000 per year. So in summary, we are a predictable growing business with very stable business model. And we are on track to achieve our forecast that we gave. And to finalize, maybe the last part of your question was around the competition. So certainly, we have close to 13,000 stores in Poland in modern convenience, the second closest competitor, which is Carrefour, has less than 500, and it is actually not opening stores. If you look at our broader competitive peer set, it's certainly the mom-and-pop store operators, which still roughly 40,000 to 50,000 of them exist in the marketplace. And I think that's a fair summary of -- and hopefully, that answers your question.

And I hope to be able to visit your stores 1 day.

Your next question comes from Derek Lessard with TD Cowen.

Echo the congratulations on the deal. Maybe just more of a strategic question to start. Just wanted to get your view on whether Zabka remains sort of a highly successful local platform? Or is it really a potential playbook that you guys think you can export across the network? And then maybe how should we think about the franchise economics and some additional color maybe on the franchisee profile and the prospective pipeline of franchisees you have?

So I'll take the first part. And Tomasz, why don't you take the second part. Zabka has been growing very consistently over many years, as you heard Tomasz say, and they recently entered Romania in 2024. I believe they just hit their 250th store in Romania. So they have quite a bit of runway, both still here in Poland and in Romania. But to answer your question, we absolutely believe the model will travel, as do they. So I think part of what we'll do over the coming months is determine that plan and how we might be able to accelerate the growth of Zabka and the plans that they have today. And with that, Tomasz, I'll hand it over to you on the franchise model.

Yes. One of the things that we really have in common with Couche-Tard is the growth mindset. We've -- as I mentioned before, we've always been growing, and we've always been developing and trying to improve our business, never satisfy with the status quo, and I think that really is a complementary and same mindset that we share. That's why we're so excited about this partnership because you all find someone that has very similar to our business. And answering your question around the franchisees, Obviously, for us, the success of is effectively -- is fundamental for success of the business. Inside of our company, we have a saying for employees saying that we have 2 hearts. One is beating for the customers, and the other 1 is beating for the franchisees. And we're very mindful about creating a win-win model with our franchisees. And over the years, we have done a lot to do so, last few years, especially. The churn has been declining churn of franchisee has been low single digit, voluntary churns around 7% per annum. And we see that the pipeline of franchisee candidate is high. It's sufficient for our growth plans and more. And in fact, the situation there is favorable and could you see to achieve our plans. The malls that we have to give you more color with the is that typically has one store or sometimes 2 stores, if they're close to each other. So these are like microoperated operators. The is not dissimilar to what you see in some convenience operators in Asia, generally speaking. But effectively, a reliance on the being present at the time in the store. And with their engagement, with the training that we provide to them, with the support that we have of them throughout the digital tools, Alex mentioned about the automated replenishment, but we have apps for them to run the store. I think we create a great support and a great combination for them to drive.

Your next question comes from Luke Hannan with Canaccord Genuity.

And I'll echo the congratulations as well. It seems like a really good deal. I just wanted to unpack if we can. The levers for the like-for-like growth that Zabka would have seen over the course of the last 2 or 3 years? And then also just for my second question as well here is if we can just unpack the new growth engine segment, what exactly is in there? And then how do you plan to leverage the 2 entities around the Couche-Tard and the history, the information, the data, et cetera, be able to leverage that in order to accelerate that growth trajectory going forward.

Yes. Great questions. So you -- if you look at the first -- let's touch on like-for-like. So if you look at our long-term like-for-like trends, we always grew like-for-like in most -- almost all the quarters other than maybe 1 or 2 in the last 10 years ahead of inflation. Now when you analyze last few years, we've been coming off inflationary period. The inflation in Poland of 2023 was closer to 20%, -- which obviously -- and then has been coming down to 2% in the last quarter or so. So effectively, you've seen a period that it makes an analysis of like-for-like more challenging than a regular moment because there was a lot of noise in the numbers. But having said that, in all these quarters, we have been able to grow the volumes and grow ahead of the inflation. And the main reason behind this is really our push with quick meal solutions. And this is something that we started 10 years ago. It's effectively fresh daily food as well as the hot food and fast food combined into one kind of name that we use, quick meal solutions. We started from 0, 10 years ago or roughly 0, and we're now getting to a level of every fifth transaction is about this assortment, right? So that's been -- that enabled us to grow ahead of the wider market, so to say. And that is effectively a derivative of changing consumer megatrends, people are not cooking at home, any more eating out. There is obviously a correlation between the wealth and convenience and Poland has been the fastest-growing country in Europe in the last 20, 30 years, right? So I think of the bigger global countries only second to China. So in fact, we've benefited from that. We benefit from the changing trends, and we benefited obviously from the actions that we took, especially in this side of the assortment. The other thing that we are very well known for in the market is product innovation. We introduced a lot of new products, several hundred last year, I think, 600 new products, and we have 2,500 products in -- on average in any given store. So think about it like we always innovate with respect to new products. We have private brands that we develop constantly. We have exclusive products that we bring in from other markets. We worked with the CPGs, we have branded CPGs to create new products. We're trying to create excitement for the customers to come more often. And I think these 2 are really the key and both of them are leveraged through our digital capabilities. Our app is one of the most downloaded and used app overall, up to 2 million people on a daily basis, use the app, for the loyalty program, for individualized promotions, for the service that we have in layup. So all that enables us to call the like-for-like faster than the market sees. And the second question was around I think -- let me just speak you make because there was a second part around. I can't recall now what it was. Sorry.

Yes. It was just on new growth engines and how...

New groth engine. Got it. Got it. Sorry. The new growth engines is a business -- separate business units that effectively are focused on driving longer-term bets or businesses that we grow with a view for -- to stimulate growth of the entire organization in the longer term. And these comprise of 2 buckets at the moment. So 1 bucket is the Romania business. So as Alex mentioned, we opened the first international country for us 2 years ago, Romania which we now operate in between a city stores after 2 years. We accelerate the growth there, with view in a very long term, we got to roughly 7,000 stores in the market. So that's number one. Number two is the digital repo businesses that we have. So we're one of the leaders in e-commerce and the rapid delivery commerce in Poland. Certainly, a number of quarters. And secondly, we're the leaders in those, and we produce our meals, so we're actually vertically integrated, but we also sell the meals in a subscription basis readings for customers that don't want to come to stores. I mean this is a bit of a specific business for about enables us into vertical integration. And those businesses are growing fast and we believe in the longer term, they create value for us.

Your next question comes from Martin Landry with Stifel.

I just want to touch on the financing from what we can read. I assume this is all debt. If you can confirm that is there an intention at some point to issue equity or if this is all going to be financed with debt? And then for our modeling purposes, is it fair to assume that you're going to repay all of Zabka's debt and you're going to use your own credit facilities? And if that's the case, what kind of interest rate should we assume on the new debt?

Filipe, you got that?

Yes, yes, yes. I have it. I was on mute. So we are, yes, fully financing this transaction for that mark. So as I mentioned earlier, so we expect at closing to have our leverage close to 3x. And I would say within the 2 years, we will come back to our leverage comfort on between 2.5. We -- on your question regarding the debt at Zabka level, we'll continue to refine our strategy there. The idea for now is to keep it at Zabka level. And we'll see if we finance it at Couche-Tard or at Zabka level in the future. But for now, don't expect any change there. More to come, I would say, in the next coming months in that respect.

Okay. And just to be clear, what interest rate should we use in our modeling to -- for your new debt that you're going to issue?

I would say it's in line with what we have done in the last quarter, a few quarters. So it's roughly not good that we should not expect something very different to that.