Earnings Call: Q1 2022

Sep 1, 2021

Good morning. My name is Sylvie, and I will be your conference operator today. I will now introduce Mr. Mathieu Deschenes, Vice President, Finance at Alimier Good morning, everyone. I would like to welcome everyone to this web conference presenting Alain Basins CoStar's financial results for its Q1 of fiscal year 2022. All lines will be kept on mute to prevent any background noise. After the presentation, we will answer questions that were Forwarded to us beforehand by Alan. 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 Hanish, President and Chief Executive Officer and Mr. Cole Tessy, Chief Financial Officer. Brian, you may begin your conference. Thank you, Matthew, and good morning, everyone. Thank you for joining us for our presentation of our Q1 2022 results. Overall across our global network, we had a solid first quarter, both in convenience and in fuel, even when we compared to a very strong quarter last year. Same store sales were especially good in Europe and across all regions, we've seen positive growth in food as the ease and the quality of our offers are resonating with our customers. While remaining impacted by COVID-nineteen traffic patterns, fuel volumes are improving and we continue to achieve healthy margins as well as expand our Circle K fuel rebranding efforts. No doubt as the pandemic continues to present operational and supply chain challenges, remain incredibly proud and grateful for the care and commitment to the business shown by our team members, our customers and our business partners. I'm also pleased to report we made noticeable strides in the growth of our network this quarter. On the acquisition front, We entered into a definitive agreement to purchase Wilson Gas Stops and Go, a network of 226 corporate owned and dealer locations and a fuel terminal, Allowing us to expand our presence in Atlantic Canada. This transaction is expected to close in the first half of twenty twenty two calendar. We're excited to welcome many of these strong sites and dedicated team members to the Couche Tard family. We also announced the binding agreement to acquire 35 sites currently operated under the Porter's brand, predominantly in Oregon and Washington. These shoe and convenience assets are high quality locations and have a track record of growth and a network of experienced Employees. On the network optimization front, we completed the divestment of older locations primarily in the U. S, Midwest and the South And we've added 30 new build stores to our portfolio, which better support our organic platforms and brand promise. Growing the size and scale of the network is essential to our strategic ambition. As always, we remain disciplined in our approach to create value for our shareholders. Before moving to the results of the quarter, I want to take a moment to address the recent rise in COVID cases, especially the Delta variant. During much of the quarter, I was optimistic that we're seeing the waning days of the pandemic. Yet now, we're once again carefully watching the spread of the virus And again, reinforcing health and safety measures in our stores, as well as promoting vaccinations to protect our team members and our customers. This renewed situation, as I mentioned, continues to impact our supply chain as it is doing so across the retail landscape. It has also put a greater pressure on the labor situation, particularly in the United States, which is the most difficult labor market I've ever seen in my career. In the face of this, we're working hard to maintain staffing levels, including a heavy focus on online hiring and we've put centralized recruiting and hiring resources in place in each of our U. S. In early May, we advertised for 20,000 open positions and during that period hired nearly 19,700 by the end of the quarter. Also put in the place retention bonuses and focused on better training and onboarding, making sure that those who want to come in the door understand the job and are able to do it. No silver bullets, but it's a constant battle as we work to get to this labor situation. I also want to say a few words about Hurricane Ida, a catastrophic category form that battered Louisiana and our Gulf Coast states the last few days. Most of our stores have reopened. At last count, we had approximately 50 still closed generally for lack of power. Thankful that most of our stores could reopen quickly to Support the communities in need and currently we're confirming the safety of all of our team members, assessing damage to those locations that we've not been able to reopen. Given the magnitude of the storm, it could have been much worse for so many. And our thoughts and prayers go out to all those impacted. Let's turn to our results beginning with convenience. As we cycled against the quarter fully impacted by COVID-nineteen, Results vary by region as the pandemic and restrictive measures were at different levels year over year. Compared to same quarter last year, merchandise revenues decreased 0.2% in the U. S. And 9.6% in Canada, while increasing 5.9% in Europe and other regions. Convenience performed well on a 2 year basis with same store merchandise revenues increasing at a compound annual growth rate of 3.7% in the United States, 0.9% in Europe and 4.2% in Canada. The category most impacted categories most impacted by COVID such as food continue to show positive trends. I should also note that we believe based on our analysis that our U. S. Same store growth would have been up slightly more excluding the impact of the Colonial Pipeline disruption, which affected a large number of our sites in the Southeast U. S. Early in the quarter. Globally, we maintained our focus on expanding our food fast program adding nearly 500 stores in the U. S. And Canada, Denmark, Sweden and Lithuania, bringing the total to about 2,000. As we expanded the offer, we continue to gain valuable insights and believe we're building the right production platform, one that's taking into account a very tight labor market and supply chain challenges. We're preparing additional new initiatives that simplify operation and execution, reduce labor and allow us to create the full food culture for our team members and our customers. In our dispensed beverage category, we launched a new Sip and Save beverage subscription offer that's now active across the entire United States network. Here we have an innovative offer and a great value proposition for our customers. Tip and Save is receiving very positive feedback and we're in the process of enhancing the program To make it easier to enroll and participate, while working to drive broader awareness of the program. Overall growth in packaged beverage remains positive even when cycling against a strong comparable quarter last year with the closures of the bars and restaurants. Energy and sports strengths remain the bright spots, while bulk purchasing and larger packages continue to be key drivers of growth. The supply chain issues noted earlier have been a clear pressure point in this category as manufacturers are challenged to keep up with the heightened demand And drivers are in short supply to get the items to our stores on a DSD basis. In the age restricted category, cigarette sales were down slightly, while margins slightly improved with our U. S. Business showing the largest increase. Other tobacco products continued to show growth, particularly in Europe. To enhance the in store customer journey, we completed over 11 20 Q Line installs. Q Lines continue to bring sales growth in several key impulse categories And our clear basket builder and create more visibility for our private label brands. In our data analytics work, 5 additional business units went live during the quarter with our localized pricing efforts, which add to the 11 business units who were previously live. We're looking at finalizing this rollout toward the end of the year and additionally through the quarter, expanding the categories and SKUs in scope in each of these businesses. We're also in the early stages of our work to better optimize our promotional activity and our assortment, utilizing similar analytical approaches and machine learning models. Initial results indicate a positive value case in these areas. We see this as a big opportunity making us even better and more localized retailer. Moving to our fuel business. Same store road transportation fuel volumes increased 11.8% in United States, 6.3% in Europe and 10.4% in Canada due to higher fuel demand compared with comparable quarter when lockdowns were in place across much of the network. On the 2 year comparison, same store road transportation fuel volumes decreased at a compound annual rate of 6.1% in the U. S, 3.3% in Europe and 9.4% in Canada. Fuel volumes continue to be challenged by work from home trends and changes in local restrictions. As I mentioned earlier, fuel margins have remained healthy across the network compensating for the loss in volume. In our Circle K Fuel rebranding work over the quarter, we completed 79 additional rebrands, bringing our total site count with Circle K Fuel to nearly 2,900 stores in North America. Results continue to be encouraging and we'll complete an initial of 6 80 sites in the U. S. And Canada by the end of the fiscal year. We're also formally launching our Circle K premium claim, double the cleaning detergent and supporting it with various campaign initiatives. Early pilots have shown that this message resonates with our premium customers. In Europe, in our B2B work, we've had strong start this quarter with Trading with volumes in card and bulk segments, both trending ahead of prior year. Work continues to upgrade our core B2B card transaction platform as we launched new solutions In several key markets, we substantially increased our customer value proposition and digitize the experience for our customers. We made good progress also in our electric vehicle work this quarter, adding 44 new fast chargers in Europe, bringing the total to 876 charge points primarily in Scandinavia. We also continue to develop and expand the EV offer completing our 1st destination charging installation Norwegian hotel chain. Circle K owns and operates a charging service at this hotel and will further expand this chain with this chain going forward. We're now in the process of summarizing the learnings from our Norway EV lab to facilitate further expansion, including building the foundation for our journey in North America. Our efforts within eMobility continue to play an important part of our sustainability journey. As part of that sustainability work, this quarter we were the in the industry to issue green bonds to finance our efforts and further our commitments to their success. You can find out more in our 3rd quarter Our 3rd sustainability report published this quarter and available on our website. Here you also see that we more clearly defined our ESG framework with 3 clear pillars: People, Planet and Prosperity and proudly added diversity and inclusion to our sustainability efforts with the ambition of creating equitable pay And representation in our workplace. Turning to innovation. After successful launch across Sweden, our pay by plate frictionless license plate payment recognition system. We're now starting to deploy that platform in Denmark, Estonia and Norway. In the U. S, we've also added 400 self checkouts in 3 of our business units this quarter. As we gather the learnings from these areas, we are preparing to introduce more easy checkout solutions across the network globally. Finally, I want to touch on developments and delivery this quarter. Canada, we expanded our deployment with DoorDash from nearly 30 stores to over 400 across 3 business units. Customers in those areas can now order ahead and have their Goods delivered to their home or office via the DoorDash app. Overall, we continue to explore the most optimal delivery solutions for both the business and for making our customers' lives a bit easier. So I'm going to pause there and let Claude take you through more of the detailed quarter results. Claude? Thank you, Brian. Ladies and gentlemen, good morning. For the Q1 of fiscal 2022, we're happy to report net Earnings of $764,400,000 or $0.71 per share on a diluted basis. Excluding certain items for both comparable periods, adjusted net earnings were approximately $758,000,000 compared with $795,000,000 for the Q1 of fiscal 2021. Adjusted diluted net earnings per share were $0.71 unchanged compared to the corresponding quarter of fiscal 2021. I will now go over some key figures for the quarter. For more details, please refer to our MD and A available on our website. During this most recent quarter, Excluding the net impact from foreign currency translation, merchandise and service revenues for the Q1 of fiscal 2022 increased by approximately $92,000,000 or 2.4%. This increase is primarily attributable to the distribution from acquisitions, amounted to approximately $154,000,000 partially offset by a decline in Same store merchandise revenues in North America as they compare against a very strong quarter last year. On a 2 year basis, Same store merchandise revenues increased at a solid compound annual rate of 3.7% in the United States, 4.9% in Europe and 4.2% in Canada. For the Q1 of fiscal 2022, excluding the net Impact from foreign currency plantation. Merchandise and service gross profit increased by approximately $39,000,000 or 2.9%, mainly attributable to the contribution from acquisitions, which amounted to approximately $45,000,000 Our gross margin decreased by 0.1% in the United States to 34.2%, but excluding the accelerated Recognition of deferred credit in the prior quarter, our gross margin in the United States would have increased by 0.8% favorably impacted by change in product mix and pricing initiatives. Our gross margin decreased by 2.2% in Europe and other regions to 38.4% mainly due to the integration of Circle K Hong Kong, which has a different product mix from our European operations. Excluding Circle K Hong Kong, our gross margins in Europe and other region would have been 41.8%, an improvement From 40.6% during the fiscal 1st fiscal quarter last year impacted by favorable change in product mix. In Canada, our gross margin increased by 1.2% to 32.3%, also impacted by favorable changes in product mix. We now move on to the fuel side of our business. In the Q1 of fiscal 2022, our road transportation fuel gross margin was dollars 36.75 per gallon in the United States, a decrease of $0.455 per gallon And U. S. Dollars 0.10.32 per liter in Europe, a decrease of 0.19 dollars per liter 0.19 dollars per liter, sorry, mainly driven by the unusual higher margins in the comparative quarter. In Canada, it was at CAD0.1092 per liter, an increase of CAD0.67 per liter. Fuel margins remain healthy, driven by favorable market conditions, procurement initiative and fuel rebranding. For the Q1 of fiscal 2022, normalized operating expenses increased by 3.5%, driven by an increased level of marketing activities and other discretionary expenses, which were significantly reduced in the prior The year quarter due to the beginning of the pandemic as well as by normal inflation, higher labor costs from minimum wage increase And pressure from low employment rate in certain region and incremental investments in our stores to support our strategic initiatives. This increase was partly offset by lower COVID-nineteen related expenses compared to the corresponding quarter of the previous fiscal year. On a 2 year basis, we maintain our strong cost discipline as demonstrated by a compound annual rate growth rate of only 1.2% in normalized expenses. Excluding specific items described in more detail in our MD and A, The adjusted EBITDA for the Q1 of fiscal 2022 decreased by $1,100,000 or 0.1 percent compared with the corresponding quarter of the previous fiscal year, mainly due to the lower road transportation fuel gross margins I'm sorry, Mr. Peces, we're having difficulty hearing you at this time. With the is this better? It seems to be. Please proceed. So just to finish the phrase, it was Due to the net positive impact from translation of our Canadian and European operations into U. S. Dollars, which amounted to approximately $41,000,000 The income tax rate for the Q1 of fiscal 2022 was 21.3% compared with 20.7% for the The increase in the income tax rate is mainly driven by a lesser use of unrecognized Capital losses compared with the corresponding quarter of fiscal 2021. As of July 18, 2021, our return on equity remains Strong at 22.9 percent and our return on capital employed stood at 15.8%. During the quarter, we continue to generate strong free cash flows and our leverage ratio stood at 1.23 times. During the quarter, we successfully issued U. S. Dollar dominated seniors unsecured notes totaling $1,000,000,000 At favorable terms that included a $350,000,000 green bond tranche. The net proceeds of the green bonds which further our commitments for a more sustainable and responsible future. During the same period, we also fully repaid the US1 $1,000,000,000 Denominated senior unsecured notes that were set to mature in July 26, 2022. As of July 18, 2021, we have ample balance sheet flexibility With $3,400,000,000 in cash and an additional $2,500,000,000 available through our revolving credit facility. In addition, during the quarter, we repurchased close to $300,000,000 of our shares through our new program continuing to provide value to our shareholders. Finally, on August 31, 2021, the Board of Directors declared a quarterly dividend of CAD0.875 per share and approve its payment effective September 23, 2021. To close, I would like to highlight the work of our teams and what they've accomplished throughout the past quarter ensuring that we remain in a strong financial position and ready to accelerate capital deployment towards our strategic initiatives While always remaining focused on driving value creation for our employees, customers and shareholders, despite Still operating in a challenging environment impacted by COVID. With that, I thank you all for your attention and turn the call back over to you, Brian. Thank you, Claude. As I said at the beginning of my remarks, early this summer, I've been optimistic that the pandemic would be in a rearview mirror. However, recent developments, especially with the Delta variant show this is not the case. We're diligently monitoring the situation. We're updating our guidelines and procedures and putting the health and safety of our team members and our customers at the forefront of our decision making. Despite the ongoing challenges, I am proud that we continue to meet our strategic goals to grow the network both organically and through M and A. Once again, our thoughts and prayers go out to those employees and communities in the path of Hurricane Ida. I want to thank all of our team members, Our customers and our partners for their continued commitment and support as we move forward on our journey. With that, now I'll answer the questions we received from our analysts. Great. Thank you, Brian. So our first two questions come from Bonnie Herzog at Goldman Sachs. First question, how has the Delta variant surge impacted your business in terms of customer traffic, Fuel volumes until March. And could you share some quarter to date trends? Have you had to adjust for hours or labor scheduling as a result? How disruptive has the Delta variant been for recovery in your more rural versus urban market given wider vaccination gaps there? And Bonnie, with regard to the Delta, we're monitoring the situation and we've updated guidelines. We're mandating vaccines for people in our offices, etcetera, trying to make sure that we're keeping both our team members and our customers Safe. We've been actively supporting vaccinations and our vaccination rates are generally above the general population in the majority of our markets. And we continue to push upon education in that side. Our stores continue to be open, but the delta is magnified in already difficult staffing environment. This has been particularly acute in the Southern U. S, think Texas, Florida, the Carolinas. And really for the first time, we've really seen supply chain challenges Across those markets most affected by COVID, that's just compounding the labor shortage. So particularly our DSD vendors Getting deliveries on time or at all in some cases has been a challenge. So our other stocks have been higher than certainly we'd like to see them. And I'd say that the Delta surge is clearly also going to delay many employers return to work plans. We've seen a lot of delaying into January. So that morning daypart, which continues to be the weakest part of recovery trend, is likely to be pushed into the fall. Thank you. So the second question, can you give us an update on cost inflation pressures You're seeing and the impact on consumer demand, especially as government stimulus funds dry up in the U. S. Are you still able to effectively pass on material cost increases to consumers without significant impact on demand at your stores? Yes. We've seen cost increases across literally every single category and quite honestly, I expect more to come. To date, we've been able to pass along those costs into our retails, while maintaining unit volume and margin dollars. We strive to continue to provide customers value through smart multi pack pricing, offering larger pack sizes and working with our vendors to provide exclusive Innovative product values with the use of our scale. Based on supplier information, it looks like we continue to perform well versus our peers. And as you can see in the quarter, our margins have remained very solid. We are also seeing pressure on the cost side, particularly with wages and costs And we believe we can mitigate a big part of these pressures in the coming quarters. Our next two questions come from Irene Nattel at RBC Capital Markets. Can you share any reaction or commentary with respect to the disclosure that the Federal Trade Commission intend to take a closer look at Irene, I'd say we operate in one of the most fragmented and competitive industries in the world. The only industry I can think of that we put our prices on big signs at the street. The price increases referenced in these articles or releases can almost be entirely by increases in underlying product costs and margins that we see in the U. S. Are in line or lower than what we see in other markets around the world. So I think that's just part of normal up and down of prices driven by product costs. Yes. In regard to M and A, I think there was a recent transaction that got the attention of the government. Despite our size in the We still have single digit market share and we believe we have a lot of room to grow in the U. S. So we'll strive to be collaborative with the FTC and any other parties In any transactions that we do in the future. Same store sales looked quite good, As you noted in your remarks, can you give us more color around category and regional performance, particularly Where reopening is further along. And related to that, how you see normalization of daypart traffic and demand, particularly in food? Irene, we've seen positive growth in foodservice categories, including dispensed beverages. A lot of those programs were closed or really impaired during COVID last year. So good recovery, but still below pre COVID levels. Overall growth in packaged beverages has remained positive, even when cycling against the strong comps last year and despite some of the challenge we have in the supply chain. Within that energy and sport drinks remained the brightest spots. And large package purchasing has also continued to be A key driver of growth despite more openings in other channels. Traffic patterns are improving. However, we remain cautious With the Delta variant of COVID now impacting many of our markets in the U. S, Canada and Europe are not experiencing the same pressure so far. The next two questions come from Michael Van Aelst at TD Securities. Can you elaborate on which categories are providing you with the favorable mix improvement in all three divisions? Is this mostly a return to pre COVID product mix, such as higher fresh food, lower tobacco and smaller package sizes? And you also mentioned pricing initiatives as the margin driver in the U. S. How many of business units in the U. S. And globally Now have localized pricing and promotion capability deployed? Yes, Michael, as I said, packaged beverage, The cooler overall, even alcohol continues to be strong despite bars and restaurants being closed last year. With regard to localized or data driven pricing, in the Q1, we did add 5 additional BUs. So now we on top of the 11 that were live, so we have a total of 16. But there's 2 metrics. The one is how many BUs, but then also what's the percentage of the SKUs inside of each of those that are on the program. And that continues to grow. So we're probably at about 50% of the SKUs in scope being activated. There'll be a big push this quarter as we add tobacco in North America, which will add significantly to The percentage of our sales covered by localized pricing. And also during the quarter, we launched a series of pilots across the U. S, Canada and Europe, Looking at optimizing both promotions and assortment using data and analytics. And Early results from the pilots are very encouraging as I mentioned in my remarks earlier. Well, turning to you Claude, can you give an estimate maybe in percentage terms as to how much lower marketing and other discretionary Expenses were in the quarter compared to pre COVID levels. And when do you see them returning in full? Also, are you seeing any improvement in labor availability yet? Or can you at least see it improving as stimulus rolls off in the coming months? So Michael, the increase in expenses was driven by the increased level in marketing activities and other discretionary expenses. And As far as the discretionary expenses that were affected by the decrease, they were mostly maintenance, supplies and marketing. So expenses that we could contract when we were in the midst of the COVID outbreak in 2021. So we have seen these categories of expense decrease close to 10% in terms of spending quarter over quarter in fiscal 20 versus fiscal 2021. Most of these expenses have come back to pre COVID levels. However, we are still in a fluid environment with the variance and remain cautious in managing our stores. As far as the labor as labor is concerned, Brian mentioned earlier in his comments that it was has been a difficult labor market. In early May, we advertised for 20,000 open positions and hired nearly 19,700 by the end of the quarter and we're Speaking now, we're almost at 21,000 failed position. So However, it remains a difficult market and we still have stores that are affected by the labor disruption and we can also see the effect of this labor Shortage in many areas of our supply chain in North America like I already mentioned. And we're trying to mitigate those impacts in our network. Thank you. Next two questions come from Martin Andree at Stifel. Your results in Canada were impacted by significant lockdown measures, which abated before quarter end. Can you discuss the evolution of the trends during the quarter in Canada as the lockdown measures abated, especially in terms of same store fuel volume And merchandise same store sales. Yes. For Canada same store merchandise declined 9 point percent and volume increased 10.4% during the quarter. On the merchandise side, last quarter, we had strong growth in tobacco and alcohol as other channels were closed. These categories were lower as others reopened this quarter. If you look at a 2 year basis, same store merchandise increased 4.2% and volume declined 9.4%. We did clearly see, Martin, an improvement as the quarter progressed, significantly better at the end of the quarter than at the beginning on both fuel and on merchandise. In Europe, the delta variant seems to have impacted the region earlier than in North America. As such, could you discuss what you have seen post quarter and in terms of traffic trends into your opinion stores? Yes. I'd say just at a macro level, despite Delta hitting there earlier, the vaccination rates are Generally high in most of our markets in Europe. If you look at Scandinavia and Ireland, significantly higher than what we see in the U. S. Or in North America in general, A bit lower in the Eastern Europe markets that we have. So we're going to continue to monitor the impact of Delta. We've been fortunate to not have experienced as much disruption in Europe. We're pleased with the same store sales performance in Europe. We've had an increase of 5.9 percent and 6.3% in fuel volume for the quarter on top of strong performance last year. We've also seen our gross margin in Europe excluding Hong Kong improved from 40.6% in the Q1 of last year to 41.8% this year, again impacted by favorable changes in mix primarily. The next two questions come from Quitley at Desjardins Securities. In deriving your fiscal 2023 organic EBITDA target, do you assume fuel volume will Before you recover to pre COVID level or do you expect fuel demand will remain structurally lower? So Chris, while we're currently cautious because of the possible impact from the Delta variant Of COVID, we do believe volumes post COVID should mostly recover to pre COVID levels. So as we look and In reference to our 2023 EBITDA, so as we look at our targets, we expect that it will come from a combination of Fuel margin and volume, so driven by some of the fuel initiatives that we've been outlined that have been outlined in our last Investor Day. So that's where we stand as far as our expected volumes and our margins. Chris, the second question. Do you see any attractive M and A opportunities within the B2B fuel And is M and A part of the growth strategy in North America? Chris, the B2B business is a hugely important part of our European business and we've seen it hold up very well during COVID. In the U. S. Or in North America in general, I'd call it an early stage development yet. We've got some pockets of strength. The key enabler for us To grow to B2B in North America is growing our Circle K Fuel brand and having a consistent value proposition for those customers in our key markets. If you think historically how we built the company, we had a myriad of supplier brands and a lot of great brands, but very difficult to provide Clear value proposition with multiple brands out there. So as we continue that rebranding effort, you'll see us double down on our B2B efforts in North America. In terms of M and A, we're really not focused on M and A as part of this growth journey in B2B. I wouldn't take it off the table, but Right now, we're again focused on making sure we have a clear value proposition for these B2B drivers. So the next question comes from Derek Lay at Canaccord Genuity. Given your healthy balance sheet, how do you think about capital allocation in the absence of any larger acquisition? Should we expect Cushtar to remain active with its Share buyback. Well, as part of our overall strategy, You should expect that we will use our free cash flow for M and A opportunities and we will opportunistically repurchase our shares. Our policy have not changed, and we will look into opportunistic buybacks as long as the leverage ratio is below 2.25 times. So we remain committed to investment grade rating and like to maintain a strong balance sheet to be prepared for future M and A opportunity and also allocate capital to Our organic growth initiatives like new store development, digital, IT and commercial programs. Thank you. The next question comes from Graeme Kreindler at 8 Capital. The company has recently announced a number of tuck in acquisitions like Wilson's and Porter's. Can you please discuss how these transactions Within the company's larger M and A strategy, can we expect additional transaction of this size moving forward? What does the current valuation landscape for larger Yes, Graham, we're going to continue to look for opportunities of various sizes that include quality stores and talent With the infrastructure of the bones, if you will, to enable us to deliver our key programs to our customers. With these two recently announced transactions, we're acquiring fuel and convenience assets in Pacific Northwest and Atlantic Canada, they're both great fits for us. As we experienced a new normal, We are seeing elevated deal flow in all three of our platforms and I'm cautiously optimistic we'll get some deals done in the coming quarters. As I said, our focus is on being disciplined in our approach. We have a clear set of criteria for the assets we're looking for and we'll continue to strive to do the right things for our shareholders. In terms of valuations, they have remained surprisingly elevated, given a lot of businesses have been impaired. But Again, we're optimistic with the level of deal flow that we'll be able to participate. Moving to Mark Petrie's questions at CIBC World Markets. As you look at fuel volume trends across regions where behavior patterns have returned closer to normal. Do you have a sense of the structural impact of shifts such as work from home on fuel volume? Mark, we're still not back to pre COVID levels, close in Europe, A little further away in North America and that's I think purely focused on people staying at home and working from home and then some local restrictions that still impair Driving. I believe when we started the summer, we thought we'd get a better answer to your question by now regarding whether that's a structural or new normal, if you will. However, with the delta variant present, I'd just say the situation is very fluid. And at this point, I'm hesitant to call anything structural. U. S. Merchandise gross margin percentage held in well, lapping a strong result last year And was up materially excluding the accelerated recognition of deferred credit. Can you help bridge the performance And share some context on the impact of shift in sales mix as well as the contribution of your various initiatives, Most specifically, dynamic pricing and promotion and fresh food fast. Yes, Mark, we did see strong performance during the quarter. I would say the primary driver was mix. I would say We have a new partnership with RAI in the U. S. That's enabled us to be more Consistently price competitive with our products, while providing us with a better margin. So it certainly helped that category. And then localized pricing. I'd say we talked earlier, I'd call that the 3rd place benefit here this quarter. I think we're just starting to see the benefits Our localized pricing efforts show up in margin, but again very encouraged with the results so far. The next question comes from Patricia Baker at Scotiabank. Can you talk about what you are anticipating for Fuel volume recovery as we move through the back half of calendar twenty twenty one and into 2022. There are certainly mixed experiences across markets with respect to returning to work mandate. And there is a broad return to school movement, both of which will impact rising. Patricia, we did see some improvement in same store volumes during the quarter. If you look at a 2 year basis, as I said earlier, we're still down both single digits With Europe being the closest to pre COVID supported by a B2B business, the back to school certainly will help And we're cautiously optimistic that we'll continue to see a recovery in fuel volume over the next 6 to 12 months. However, as we all know, COVID makes this a very fluid situation. Our next question comes from Bobby Griffin at Raymond James. Since the start of the pandemic, push start fuel U. S. Fuel margin outperformance versus the U. S. Industry average has notably increased compared to Pre pandemic, do you believe the outperformance is sustainable given some of the fuel related initiatives the company is working on? Bobby, we continue to be pleased with our overall growth in fuel gross profit. In regard to fuel margin itself, our focus is in leveraging Our scale and our initiatives to outperform the industry. We do believe some of the initiatives we've outlined, including our move to our Circle K brand, Driving more value from our supply chain, de utilizing data and analytics for sharper pricing, cabin will create Sustainable benefits to our fuel margin versus most of our competitors. Our last two questions for today come from Karen Short at Barclays Capital. Please provide your latest Thoughts on labor costs in the U. S. Going forward. What does the labor picture look like in states that no longer had the federal unemployment benefits So Karen, again, as Brian mentioned, it has been a Very difficult labor markets. However, we are working hard to maintain staffing levels, including a heavy focus on online hiring and online I've put the centralized recruiting and hiring resources in place in each of our U. S. Business units. I mentioned earlier and that helped us to achieve what we mentioned earlier. So up to now, we've been able to hire 21,000 position in the U. S. We also do have to react to competitive pressures for labor to maintain employment level in our stores, and we are using variable measures As far as total OpEx, while we did see a 3.5% increase in our normalized operating expenses for the quarter, the CAGR It was 1.2% on a 2 year basis, maintaining our strong costs. So however, we continue to see some cost pressure from the inflation, High labor cost and incremental investment in our stores, and we do expect to offset some of these expenses With our cost optimization efforts that I have outlined in the past, such as business process optimization And our operational excellence program, where we are reducing repair costs, maintenance costs, consumption costs and also credit card fees. But most importantly, we are putting a special focus on all the cost reduction activities that are allowing us to help relieve the pressure on labor at store level. So activities such as labor scheduling, elimination, back office and others. So that's where our big focus Thank you, Claude. And our last question, we have seen several e commerce immediacy retailers Such as GoPOP, Gorilla, DashMart, etcetera, pop up in urban Marcus, with delivery times below 30 minutes of C store type products, how well insulated do you think your open stores are from Share gains by these retailers. And how are you thinking about ongoing development of your own delivery capabilities in light of what appears Be more competition in these dense markets. Yes, I'd say, we have relatively small urban presence. That said, yes, we sell time to people. And as other people find ways to become convenient to customers, whether it's our SKUs or more broadly, We're committed to understanding it. In terms of what we're doing today, we continue to look at the overall e commerce landscape And expand and understand home delivery in our network as we talked about earlier. At the same time, we are watching the emergence of quick commerce in the urban markets In Europe and the U. S, like the Grille, as you mentioned. There's a lot of VC money in the space fueling these expansions. We're Closely watching the ability to be profitable and we'll continue to study it and stay close. In terms of outside of urban, It seems clear on the surface, these same delivery windows, which can be 10 minutes and less, are not economic and less dense markets. But again, this is early And we're committed to watching it closely. And our mission is to provide our customers what they want, when they want it, where they want it, and That covers all of the questions for today's call. A reminder for our audience that the replay of the call will be available on our website under Events and With that said, we thank you all for joining us today. We wish you a great day and hope you'll join us for our Annual General meeting in just a few hours from now. Thank you, everyone. All right. Thanks, everyone. Have a good day. Thank you. Merci.