Good morning. I would like to welcome everyone to this web conference presenting Alimentation Couche-Tard financial results for the fourth quarter and fiscal year 2022. All lines will be kept on mute to prevent any background noise. After the presentation, we will answer questions from analysts asked live during the web conference. We would like to remind everyone that this webcast presentation will be available on our website for a 90-day period. Also, please remember that some of the issues discussed during this webcast might be forward-looking statements which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. Our financial results will be presented by Mr. Brian Hannasch, President and Chief Executive Officer, and Monsieur Claude Tessier, Chief Financial Officer. Brian, you may begin your conference.
Thank you, Jean-Philippe, and good morning, everyone. Thanks for joining us for the presentation of our fourth quarter 2022 results. We're pleased to report really a remarkable year, despite some of the most difficult operating conditions in my career, nonetheless, a pandemic, a war in Europe, supply chain, staffing challenges, and now inflation. With our unique geographic diversification, scale, and operating resilience, we had record-breaking results across many key metrics and made good progress on our strategic goals. During this quarter, we saw growth inside the store accelerate, as well as innovating for the future, including beginning our e-mobility journey here in North America and launching the rollout of our Smart Checkout technology in the U.S. and in Scandinavia. I'll go into these initiatives in a bit more detail later in the presentation.
Before moving to results, I also wanna take a moment and comment on the broad impact of inflation hitting a 40-year record high this quarter. No doubt, consumers are feeling the pressure both at the pump and the checkout line. You know, thankfully, in most of our geographies, unemployment remains very low at really record lows. We remain committed to providing good value to our customers across the network and to our localized pricing efforts and fuel promotions. We're working hard to make sure our customers' lives are a bit easier every day, even during these difficult times. Now turning to our results, beginning with convenience. Compared to the same quarter last year, same store merchandise revenue increased 2.3% in the U.S., 6.2% in Europe, and 0.1% in Canada.
In the U.S., the quarter cycled against a very strong comp last year at +8.1%, and food was very positive compared to prior year with strong double-digit growth. Across the network, our Fresh Food, Fast program is now in over 4,000 stores around the globe, meeting our objective for the fiscal year. We're excited about the acceleration sales and engagement of our operators as we refine our offer for our customers. During the height of COVID, we struggled with supply chain, and we were not reliably able to source chicken as one of our key SKUs. Happy to say today as we sit here that we're in the chicken business. We launched a variety of great tasting chicken items in the quarter, and they're generating very strong incremental growth in our stores, and we're expanding that across North America.
We continue to optimize our assortment as we identify new items that are desired by our customers and increase purchase frequency. While supply chain issues have been a challenge in some items, our expanded supplier relationships and duplicate supply sourcing have enabled us to improve our in-stock positions versus prior quarters. We're pleased with the progress we are making on our food journey, and we're excited with the additional opportunities and new items in our pipeline. In our dispense beverages, our Sip & Save beverage subscription continues to attract new users to the program. With inflationary pressures, customers are seeking deals, and Sip & Save is truly an amazing offer. We currently have over 450,000 active subscribers in the program that are now visiting our stores with more frequency.
We continue to refine our online enrollment experience and make it easier for our customers to sign up and renew monthly and enjoy their favorite drinks at a great value. Packaged beverage growth increased through the quarter, led by substantial growth in immediate consumption, soda, and sports drinks, largely due to innovation and a first-to-market opportunity, including our Mountain Dew proprietary flavor that we launched in conjunction with Pepsi, which has just shown great results. Strong national activities continue to drive year-over-year growth in energy drinks. Supply chain continues to be a core focus to ensure our needs are met in the marketplace as immediate consumption increases as our markets come out of COVID. In our age-restricted category, beer sales showed mixed results, with European beer business exceeding prior year sales.
Across the network, wine and liquor finished the year with a positive performance, and we continue to see good results from our upgraded wine display and selection where we've rolled that out. Thanks to our localized pricing initiatives, we're creating new data and analytics tools to make our category managers' lives easier and allow them to respond more rapidly to changing cost environment. In our assortment optimization effort through new ways of working in conjunction with more sophisticated analytics, we're aiming to more effectively identify products that are top and bottom performers across the network on a store-by-store basis and adjust our assortment more quickly to better meet our customers' needs. We also want to provide an update on the rollout of our loyalty initiatives.
In Europe, the Extra program has been alive for many years in seven of our BUs and has been a key driver for the growth of our business this year. At the same time, we've finished scaling an improved program concept, which we piloted last year with great results and feedback from customers in three of our BUs in Europe and a small market in South Carolina. The goal is to continue to expand this concept across the remaining European BUs over the coming quarters. In the U.S., while we see promising results in the test sites. We're at the tail end of development of our new global infrastructure, loyalty infrastructure that will make us able to roll this out on a scalable basis throughout North America. Moving to the fuel side of the business.
Same-store road transportation fuel volume decreased 1.7% in the U.S., impacted by high retail prices and some of our fuel branding rebranding activity that we'll get into in a bit later. Fuel increased 3.7% in Europe as we continue to take share and show very strong performance, and increased 4.3% in Canada. In our Circle K fuel rebranding work over the quarter, we completed about 300 rebrands, bringing the total for the year to 680 additional sites and the overall number to nearly 3,500. The Circle K brand ambassador program nearly has 900,000 activations, and our brand ambassadors continue to educate our customers about the brand value proposition, a quality guarantee, and premium claim.
The Win Free Fuel for a Year U.S. campaign wrapped up this quarter with 288 winners announced, and we're pleased with the growth of our Premium Thursday program and the increased transactions in our Easy Pay program, which give a great discount in these times of high prices. Based on the test results, we do believe that the rollout of our enhanced loyalty program later in the year in North America will also deliver enhanced value for our customers and drive incremental visits and fuel volume. Like our peers in the industry, you know, we are experiencing pressure in different areas of our supply chain, particularly the fuel supply chain. However, we've been able to maintain reasonable inventories with our strong sourcing capabilities.
Now, with over 1,000 drivers in our U.S. fleet for fuel, we're working hard to maintain reliable supply for our customers during the challenging time, both in the trucking industry and also in terms of U.S. supply overall, with inventories being at record lows in many of our products. Like all participants, we're impacted by the inflationary pressures in labor and fuel. Yet, having our own internal fleet, we're able to accurately measure these effects and mitigate these cost pressures where possible. In Europe, volume for both cards and bulk fuel are trending ahead of prior year. Card volumes have again trended ahead of pre-COVID levels, driven by a strong recovery in the fleet and B2B sectors, and continued very robust performance in the transport sector. We've also seen continued improvement in card operational margin across most of our markets.
Our European charging EV network now consists of over 1,100 charging units, up 11% versus prior quarter and covering more than 250 stations, primarily in the Scandinavian countries. In May, building on our relationship to bring electric mobility solutions to our customers in Europe, we announced our first Circle K branded charging station in South Carolina, and our plans are to bring EV charging to 200 Circle K and Couche-Tard stores across North America in the next 24 months. As we expand EV charging availability in the U.S. and Canada, we'll be taking a strategic approach, building a network for the future by looking at areas with strong EV adoption rates and electric delivery infrastructure to enable us to provide convenient charging options for our customers, whether that be in town or on the highways.
We anticipate deploying both our own charging assets to serve the growing EV customers as we do in Europe, and also to partner with other participants in the emerging EV mobility economy. Turning to innovation, we're excited about the rollout of our pioneering easy-to-use Smart Checkout. At the end of the quarter, we had 90 stores live in Sweden and over 450 sites in the U.S. We recently announced that Smart Checkout will be expanded to 7,000 stores over the next three years. We've also added one more frictionless site in Arizona, bringing that total to eight, and our license plate recognition, which is a pay by plate, where the customer does not need to insert or tap at the pump, is now active at over 800 locations, and Net Promoter Scores remain very robust.
This past year was also a record one in terms of our new store builds. The ongoing strengthening of our network real estate team, combined with our efforts to improve our design, development, and entitlement processes, have resulted in a robust pipeline for future store openings. During the quarter, we completed the construction of 42 stores, reaching a total of 333 since the beginning of the fiscal year. We currently have another 58 sites under construction that will open in the coming quarters. Despite supply chain challenges combined with cost increases, our teams have worked very hard in renovating existing stores and developing a new prototype, we are value engineering to deliver reduced costs and quicker build times. In Europe, we now have over 350 locations with our Horizon brand look and feel.
These sites have new fixtures to offer grab and go fresh food sales, and we're seeing increased traffic and basket in these locations. Before turning it over to Claude, I wanted to address the staffing challenges, particularly that we've felt in North America the past year. It's truly been a pain point throughout the year in all of retail. I'm pleased to report that we've seen steadily increase in candidate flow over the last quarter and currently into this quarter due to increased social media outreach and engaging employee branding campaigns. We're encouraged by the higher ratio we saw in May, which looked much better than previous months. It's allowing us to be more selective in the candidates that we bring on board. It should also result in reduced overtime as we go forward.
As we're looking to hire additional 25,000 team members this year as we reach our summer season, and we're at a good trend to hit this goal. I'm gonna pause there and let Claude take you through more of our fourth quarter financial results.
Thank you, Brian. Ladies and gentlemen, good morning. For the fourth quarter of 2022, we're happy to report net earnings of $477.7 million or $0.46 per share on a diluted basis. Excluding certain items described in more detail in our MD&A, adjusted net earnings were approximately $573 million or $0.55 per share on a diluted basis for the fourth quarter of fiscal 2022, compared with $564 million or $0.52 per share on a diluted basis for the fourth quarter of fiscal 2021, an increase of 5.8% in the adjusted diluted net earnings per share. Adjusted net earnings for fiscal 2022 were approximately $2.8 billion compared with $2.7 billion for the previous year, which represent an increase of $54 million or 2%.
Adjusted diluted net earnings per share were $2.60 for fiscal 2022 compared with $2.45 for fiscal 2021, an increase of 6.1%. Our results for both the fourth quarter and fiscal 2022 have exceeded our expectation on many fronts, especially in light of a challenging global environment. Inflation was particularly notable during the fourth quarter, impacting mainly many aspects of our business. We once again diligently managed through these challenging conditions and were able to mitigate the impact from a higher inflation level and continued pressure on wages. We have also continued to reinvest in our operations while maintaining a particularly strong balance sheet, allowing us to return capital to our shareholders during the quarter, including the completion of our upsized 2021-2022 share repurchase program.
As we look ahead to fiscal 2023, our healthy financial position and strong capital structure, including our newly implemented U.S. commercial paper program, position us well to continue delivering strong results and return further value to our shareholders as we remain focused on our ambitious Double Again strategy. I will now go over some figures for the quarter. For more detail, please refer to our MD&A available on our website. During this most recent quarter, excluding the net impact from foreign currency translation, merchandise and service revenue has increased by approximately $75 million or 2%. This increase is particularly attributable to organic growth and to the contribution from acquisitions, which amounted to approximately $27 million while being partly offset by the disposal of stores following the strategic review of our network.
During fiscal 2022, excluding the net impact from foreign currency translation, merchandise and service revenues increased by approximately $623 million or 3.9%. Excluding the net impact from foreign currency translation, merchandise and service gross profit increased by approximately $72 million or 5.9%. This is primarily due to organic growth, including the positive impact from our Fresh Food, Fast program, as well as to pricing initiatives. Our merchandise and service gross margins increased by 1.3% in the United States to 33.1%, by 0.2% in Europe and other regions to 38.3% and by 1.4% in Canada to 32.4%.
Our merchandise and service gross margin in the U.S. and Canada were also impacted in the prior year by unfavorable adjustment, inventory adjustments related to a net realizable value provision on personal protective equipment of $26.4 million or $3.2 million, and sorry, $3.2 million respectively. For fiscal 2022, excluding the net impact from foreign currency translation, merchandise and service gross profit increased by approximately $318 million or 6%. Our gross margins increased by 0.6% in the United States to 33.7%, decreased by 0.9% in Europe and other regions to 38.2%, and increased by 0.8% in Canada to 32.2%.
The decrease in Europe and other region is due to the inclusion of Circle K Hong Kong for the full year in fiscal 2022. Moving on to the fuel side of our business. In the fourth quarter of fiscal 2022, our road transportation fuel gross margins was $0.4612 per gallon in the United States, an increase of $0.1167 per gallon. In Canada, it was CAD 0.1341 per liter, an increase of CAD 0.0249 per liter. Fuel margins remained notably healthy throughout our North American network due to the favorable market conditions, a higher fuel break even margin in the industry and the continued work on the optimization of our supply chain, including our Circle K fuel rebranding initiatives.
In Europe and other region, our road transportation fuel margins was $0.51 per liter, a decrease of $0.334 per liter. Fuel margins were impacted by increases in crude oil prices, supply chain challenges from the current geopolitical context as well as volatility in the diesel market. For fiscal 2022, the road transportation fuel gross margin was $0.3962 per gallon in the United States, $0.0986 per liter in Europe and other region, and CAD 0.1174 per liter in Canada. Now looking at SG&A. For the fourth quarter of fiscal 2022, normalized operating expenses increased by 15.6% year-over-year, excluding a 3.1% an unfavorable impact of higher electronic payment fees.
This 15.6% increase on a normalized basis is driven by prior year government grants of $41 million, necessitated by the impact of the labor shortage and the need to improve employee retention and increase of marketing initiatives and other discretionary expenses that were significantly reduced in the prior year quarter. Inflationary pressures, including higher utility costs in Europe, higher costs from rising minimum wages, as well as incremental investments in our stores to support our strategic initiatives. This increase was partly offset by lower COVID-19 related expenses compared to the corresponding quarter for the fiscal year 2022.
When considering the cost of the retention measures implemented, which totaled approximately $19 million, the employees related COVID-19 costs in the prior year, such as thank you bonuses of $5.2 million as well as government grants of $41 million, the normalized operating expense increased year-over-year 15.6% is further reduced by 4.3%. For fiscal 2022, normalized operating expenses increased by 9.4% compared with the previous fiscal year, mainly due to the factors similar to the one described for Q4.
Despite the challenges, we have deployed strategic efforts in order to mitigate the impacts of a higher inflation level and continued pressure on wages, which is demonstrated by a compound annual growth rate of 3.4% of our normalized growth of expense compared to 2020, including employee-related costs below inflation, despite the challenging market conditions. Excluding specific items described in more detail on our MD&A, the adjusted EBITDA for the fourth quarter of fiscal 2022 increased by $50.8 million or 4.7% compared with the corresponding quarter of fiscal 2021, mainly due to the higher road transportation fuel margins in the United States and Canada and organic growth in our convenience store operations, partially offset by higher operating expenses.
The translation of our foreign currency operations into U.S. dollars had a net negative impact of approximately $15 million. During fiscal 2022, the adjusted EBITDA increased by $261.3 million or 5.2% compared with fiscal 2021, mainly attributable to factors similar to the one described for Q4. The variation in exchange rate had a net positive impact of approximately $27 million. From a tax perspective, the income tax rate for the fourth quarter of fiscal 2022 was 22.6% compared with 18.5% for the corresponding period of fiscal 2021. The income tax rate for fiscal 2022 was 21.5% compared with 19.5% for fiscal 2021.
The increase is mainly stemming from impact of gains and losses taxable or deductible at a lower income tax rate between current and prior year, and a different mix in our earnings across the various jurisdictions in which we operate. As of April 24th, 2022, our return on equity remains strong at 21.8% and our return on capital employed stood at 15.4%, which includes an unfavorable impact of 0.3% caused by one-time impairment costs incurred during Q4. During the quarter, we continued to generate strong free cash flows and our leverage ratio stood at 1.39 times, only six basis point higher than Q3, despite having repurchased more than $800 million during the quarter under our NCIB.
We also have strong balance sheets, liquidity with $2.1 billion in cash and our additional $2.5 billion available through our revolving credit facility. Turning to the dividend, the board of directors declared yesterday a quarterly dividend of CAD 0.11 per share for the fourth quarter of fiscal 2022 to shareholders on record as at July 8th, 2022 and approved its payment effective July 22nd, 2022. With that, I thank you all for your attention and turn the call over to Brian.
All right. Thank you, Claude. In the context of a difficult year in so many ways, you know, we had clearly one event in the year that was the highlight for me. You know, Gallup, who we've used as a partner, to work with us and measure our engagement, named us an exceptional workplace, the only convenience retailer on this year's list. According to Gallup, as workplaces worldwide face continued historic upheaval, we stood out in our ability to engage and develop our people amid this disruption. We're far from perfect, but we do have a clear goal, and that's the goal to create a culture in which our team members feel valued, heard, and respected, and have opportunities to grow together within the business.
It's through their hard work and engagement that we're fulfilling our vision to be the world's preferred destination for convenience and mobility. My sincere gratitude goes out to all of our team members, our customers, our partners, and shareholders for another record-breaking year and continued commitment to our business. With that, I'll take some questions from the analysts. Operator, over to you.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please slowly press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have a question. Your first question will be from Peter Sklar at BMO. Please go ahead.
Hi, good morning. Can you talk a little bit more about how, you know, cost of living inflation and these high fuel prices is impacting consumer behavior as you see it in your business? You know, how is it impacting your in-store sales? Have you adjusted your assortment? You know, the impact on fuel volumes and, you know, what trends you're seeing, you know, in the current quarter, the first quarter to date.
Yeah. Peter, thanks for the question. I'll take a shot at it and welcome Claude to chip in. You know, inflation is taking different forms depending on where we're at in the world. When we look at Europe, really our wages have been, you know, relatively flat compared to what we see in North America. We've seen significant spikes in food and energy, particularly from the Ukraine situation in Europe. You know, in the U.S., you know, we're you know, we all read the same papers. You know, we're seeing 7%-8% hourly rate inflation on top of commodities and fuel. In terms of what we're seeing, I would say that, you know, we're clearly seeing an impact on fuel demand, that's taking shape in a couple forms.
You know, I think the most recent data is showing that we are seeing some softening in miles driven. We certainly view this as temporary, but a fact. As you look at the consumer behavior, you know, our average fill pre-COVID and, you know, really up until recent quarters would have been, you know, 10-12 gal per visit. That's declined to 8 gal. That's a signal to us that, you know, there's some pressure on consumers. It likely results in increased visits, but I think that's a sign that there are some pressure. You know, we're very fortunate to see unemployment levels remain at historic lows. We think the consumer, you know, relative to where we were in 2008, 2009 is in a much better condition.
Inside the box, you know, traffic actually remains pretty robust. We're happy with what we're seeing, both last quarter and what we're seeing into this quarter. We're seeing some trade downs. You know, we've seen, you know, conversions from premium beer to budget beer as an example. Same in the cigarette category, where people are looking for value. We're pleased. You know, we've really worked on private label the last three years, and we're seeing very, very strong growth in private label as, you know, again, people are looking for value. You know, with our private label program, we've been able to provide, you know, good value to the customer and actually have a higher penny profit typically on most of those items. You know, we're seeing private label up in the U.S., strong double digits.
That's again a sign that consumers are, you know, heightening their look for value. Claude, anything to add?
Yeah. Well, maybe one thing on Canada. When we're looking at the performance in Canada, we've seen a bit more pressure on our cigarette category. There seems to be a shift down to back to the black market in Canada.
Okay. Thank you.
Yeah.
Thank you. Next question will be from Karen Short at Barclays. Please go ahead.
Hi. Thanks very much. I wanted to just see if you could talk a little bit about what the actual inflation contribution is to your in-store comp in the U.S. and how you're thinking about that, just overall pricing going forward in terms of narrative on maybe pushing back on vendors on price increases, a little bit more than you maybe have been over the last couple of months. It's contribution to the comp in store and then thoughts and philosophy on how you're, you know, having conversations with the vendors.
Yeah. I'll start with the vendor piece first. You know, I think COVID has certainly changed our view a little bit from transactional to, you know, they're so important just from a supply chain and reliability standpoint, truly been partners during COVID. That said, you know, they've got pressures, and we have pressures. As we have a dedicated procurement group largely based in Ireland, we get to see globally, you know, what vendor behavior looks like. We, I think, have views maybe that some other retailers don't around what the underlying cost structures they have, whether that be transportation, aluminum, you know, corn syrup. You know, we are pushing back.
You know, we're trying to be fair, but at the same time, if we see suppliers getting greedy, that conversation's being had. So there's a fair amount of tension. You know, we're focused on being able to provide a good value for the customer, at the same time recovering the cost increases. So it's a fine balance and, you know, daily conversations around that. You know, in terms of the basket itself, we've actually been pleased. We've more than recovered the cost increases inside the store with our price moves. You know, we kind of artificial basket that we create, and we measure that on an ongoing basis. So our gross profit dollars are intact.
If you kind of break it down, you know, you would see on average across the world, you know, our basket's probably up in the 3%-4% range while our traffic's relatively flat to maybe down a bit in Canada, where we've got, as Claude said, some pressure on the tobacco transactions.
Great. Thank you.
Sure.
Thank you. Next question will be from Patricia Baker at Scotiabank. Please go ahead.
Yeah. Good morning, everyone. Thank you for taking my question. I just wanna ask you know, on the labor shortage, and you called out the costs associated with retention activities. Just curious about how you're looking at labor going forward. You indicated that you're looking to hire another 25,000 people. Should we think about the extra costs associated with employee retention as something that will be ongoing?
I would say, you know, knock on wood, I think we see the light at the end of the tunnel. We've really rolled back a lot of the retention products that we have in place. You know, we're currently contemplating some variable products, you know, programs. You know, take, for example, the, you know, gift cards with fuel for some of our customers attempting to keep this pressure on wages on a variable basis and maybe moderating, you know, the wage rate increases that we're pressured to give in the marketplace. As we've seen the last really few weeks, our higher rates are significantly higher than our termination rates. Staffing is returning to normal levels even as we go into the summer season.
That should result in a significant increase in overtime as we look at the coming quarters, which has been another key part of the inflation. Claude, maybe a little more specifics on the numbers there.
Yeah, when we're talking about the impact on our costs, there's probably a third of it from the 15% that's due to the inflation and 3.4% of that 5%-ish is due to wages. We understand that one-third of that is overtime. As you're saying, that trend might be reduced in the future with better workforce in our stores.
I would add two things. You know, we continue to work on efficiency in the store. If you look at our hours used, you know, we're actually negative versus prior year on the same-store basis. Then with the Smart Checkout rollout that I commented on earlier, you know, our focus on that product is really around the customer experience. It's faster, it's easier. We're seeing really strong uptake on eligible transactions, but there's also a labor mitigation opportunity. You know, if we can get 30%-40% of the transactions going through those machines, you know, we're able to either reduce labor or reallocate that labor to other things. That'll take quarters to show up, but it's a big push and a big initiative on our side.
Okay. Thank you very much.
Mm-hmm.
Thank you. Next question will be from John Royall at JP Morgan. Please go ahead.
Hey, good morning, guys. Thanks for taking my question. Can you talk about the M&A market in U.S. c-stores right now? I know you've been taking a more disciplined approach on multiples than some others have. With the uncertainty building in the economy today, are you starting to see valuations come down to levels where you might consider transacting?
Thanks for the question, John. You know, I would say, in theory, what you said should happen. You know, we've got, you know, certainly higher interest rates, you know, high yield markets, you know, much higher, if not closed. You know, I don't think we're seeing a lot of private equity opportunity or activity. There's not been a ton of deal flow either, so I think we need to see a couple of quarters to see what happens. There is some activity, but, you know, on our side, you know, we're seeing more right now in Europe and in Asia than we are in the U.S. That'll come and, you know, I've been waiting four years for this.
You know, the balance sheet's ready and, you know, we're confident there will be some opportunities and probably less competition than what we've seen over the past few years, and I think lower multiples as a result.
Thank you.
Thank you. Next question will be from Bobby Griffin at Raymond James. Please go ahead.
Yep. Good morning. Thank you for taking my questions. Brian and Claude, just curious, fuel margins here this quarter materially outperformed the industry average, and even you guys have typically been outperforming, but the performance was really notable. Just curious if you could unpack. Was there any drivers or anything unique to this period? You know, when we look at the May period, we've seen some pressure. Maybe just any comments on what you've seen in May and in June in fuel margins.
Yeah. Thanks, Bobby. You know, really there's a few things happening. One, I think, you know, there's a few key players in the industry that have, you know, the supply capabilities we do. When we look at the industry, it's still largely independents in the U.S., Canada, and maybe a little more balanced in Europe. Continue to be able to procure fuel better, and I think that really manifests itself when you see volatility in the market. You know, that's both in location arbitrage and also, you know, just the construct of our contracts. So, you know, I think that delta that we've seen versus the industry has been strong, and we expect it to continue to pay benefits as we invest and realize benefits from our partnership with Musket.
You know, it's really extraordinary when you look at the quarter and you think about crude going from $80- $120 during the quarter, and normally that is just the worst environment we could have. To deliver this level of margins, I think is really shows the market's disciplined, first of all. Then two, there's some things underneath it I think need to be thought about. One is credit card fees. You know, as you look at, let's call it $5 gas just for easy math, and let's say the average independent is paying 2% on a Visa or Mastercard, you know, that's $0.10 a gallon they need to recover just in credit cards.
You know, some of the scaled retailers like us, you know, we'll be able to, you know, source credit cards a little more economically than the average, dealer or independent out there. I think that also widens our advantage a little bit in the market. It also supports the need for, you know, higher than historical margins as we face these higher retails 'cause, you know, not only the, you know, the inflation we all see every day, but, you know, that credit card fee is very material, particularly to the independent operator. When you talk about recently, I do see the OPIS data. You know, we feel good about our margins. You know, we feel good, you know, really across the network, you know, how we've held up during again, a very volatile period.
You know, recent weeks we've been pleased.
I appreciate. Best of luck. Thank you.
Yep. Thank you.
Thank you. Next question is from Irene Nattel at RBC Capital Markets. Please go ahead.
Thanks, good morning, everyone. I wanna come back to the Double Again target of $5.1 billion in FY 2023. Can you walk us through the key pieces in your mind that will underpin your ability to achieve that number despite everything that we're talking about on the call, fuel volatility, pressure on wages, pressure on spending, et cetera?
Well, Irene, thank you for the question. Well, I have to say that we're optimistic about our ability to reach our $5.1 billion target. Our organic initiatives are going very well in our stores. Like Fresh Food, Fast, we're really happy about the performance of the program in the last quarter. It continues to grow and be stronger as traffic is back into our stores. We think that we're gonna do well and achieve what we committed to do on that Fresh Food, Fast program for fiscal 2023. Merchandise pricing, promotion, local pricing, that's all on track with what we shared with you.
That's another initiative also that despite all the challenges, you see the improvement in our margins, gross margins, for merchandise, and they're there. Brian just talked about fuel and the ability for us to continue to deliver good margins and also the improvement that we're doing in procurement. That's still there. I would add to what Brian mentioned, that our rebranding also is contributing also to our improved margins when we're looking at our margins compared to history. That is a good thing as we're continuing our rollout in our and rebranding our stations, we're benefiting from that upside and that's in line with what our expectations when we did our strategy.
Finally, like North American development, you've seen the quarter. For us, it's a record year in terms of new stores, even if at the end of the quarter we maybe have been challenged a bit on the opening of our NTIs, but we've opened a record number of NTI this year with 133. This target also is in line. Finally, cost optimization. We're pressured on cost, but we're still working hard on our program to deliver all our cost optimization initiatives. Overall we feel pretty good about our objective and what we shared with you and optimistic about achieving our 5.1%.
Yeah. I'll just add, I share Claude's optimism for hitting the target. You know, certainly we think a lot about the consumer out there today, you know, with the prices at the pump. Again, I view that as transitory. What fixes high prices is high prices. This too will pass. You know, is there a recession or not? You know, we have to remind ourselves, you know, we've gone back and looked at our performance over the last couple of recessions and, you know, I would never say our industry is recession resistant, but we're pretty resilient. You know, we're pretty much a part of people's everyday lives. And so as we look back at, you know, the last two major recessions, you know, we actually performed very well.
You know, again, I think, share Claude's optimism that we're on a good track.
That's great. Thank you.
Thank you. Next question will be from Bonnie Herzog at Goldman Sachs. Please go ahead.
All right. Thank you. Good morning, everyone. I wanted to circle back to OpEx since it really was quite a bit higher than expectations in the quarter. I guess I wanted to better understand the key drivers behind the pressure. If you could walk through those drivers, you know, that would be helpful. Then also, could you talk about your expectations for OpEx this year, given you know, your comments about the labor market and certainly the broader inflationary environment? I guess I'm just, you know, trying to get a sense if we should think about normalized OpEx to remain as elevated as what we saw last year. Or do you know, have any levers you can pull, such as, you know, the cost optimization program that you just mentioned to, you know, help offset some of these pressures? Thanks.
Thank you, Bonnie. If we start and we wanna understand a bit the 15.6% increase that we have in our SG&A, I think we need to break it up in three buckets. Which would be one-third, one-third, one-third, let's say 5% each. The first bucket is really how we performed last year. Remember last year on SG&A, we were -2.5% in terms of growth for the quarter. We are facing a quarter where we were very low in expense, and that was mostly driven by COVID related subsidies and also retention measures.
When we're comparing that, there's 5% in our growth in SG&A that's coming from countering a really good quarter last year and also measures that were there and that we benefited from with COVID. The second third of it or the second bucket, it's inflation. We talked earlier about 3.4% inflation on wage. A third of it is inflation. We see that potentially being better in the future. Expenses also are under pressure. Like everyone, I think you need to think about 2% maybe of that coming from expenses. We're challenging expenses in Europe.
Energy prices are very high in Europe, and it's been like that for a couple of quarters. Also, maintenance and all the contractors are increasing prices. That puts a bit of pressure also on our expense. Finally, the last third of it in our increased expenses is really composed of two things. One is our organic growth initiatives, where we're pushing a lot on our data and workforce and putting a workforce together, having help also of professionals to put that team together, but also fuel marketing. We've talked about the rebranding earlier, and the positive impact on margins.
While you need to think about U.S. branding also and selling our own fuel and putting marketing at work also to support that effort. Overall for fuel
Let me just emphasize that one, I mean, that's material. You know, when we look at the brand fees we would pay to a Shell, a BP, an Exxon, you know, they were very material. If you said 5-6 billion gallons, you know, it was a big number. You know, it was over $100 million for sure. Now we've got largely Circle K fuel brand out there. You know, that was always in cost of goods, right? That was just part of our cost of the fuel. Now as we spend money to promote our fuel brands, whether that be loyalty, fuel promotions, other things, you know, that's showing up in OpEx. That's something that, you know, it's not changing the bottom line.
Actually, it's very positive the bottom line for us, but, it just shows up in a different way in the P&L. Sorry, Claude, go ahead.
Yeah. Net, net positive on this. Going back to it, the thing about 1/3 is really COVID-related and then low quarter last year. The other 1/3 is really wages and expenses. 5% is impact, and the other 5% is fuel marketing and the initiatives that we have. In terms of mitigation, I think our... We have a lot going on. We've talked about Mashgin, our point of sale self-checkout that we're deploying in 2,500 stores. We have also a program that we've called Easy Office. We were able to reduce the number of hours worked in the back office with automation.
We have those initiatives also going on, so we have another goal on that this year to reduce further this year. Also, our Smart Save program. We're reaping the benefits of rolling out this program in our network last year. We are continuing to push on our cost optimization program. I would say that we're really looking into it with the new situation, the new pressure that we have to really relaunch our program and bring it to another level.
Okay. Just to summarize, that was super helpful. Just so the pressures will remain elevated, but not probably as much as what you saw last year, given some of the factors you just talked through.
Yeah, exactly. Yeah, the year-over-year
Second quarter will cycle comps too.
Yeah.
We expect that pressure to mitigate a bit.
Yeah.
Again, if we can get overtime down, you know, that's, you know, as we faced and the industry faced staffing shortages last year, we expect that to moderate, if labor trends continue.
All right. Thank you.
Yeah.
Thank you, Bonnie.
Next question will be from Mark Petrie at CIBC. Please go ahead.
Hey, good morning. Thanks. You've touched on it a few times today, but given the importance of tobacco in your business, can you just give us some more detail about the performance by region, basket and traffic, the impact of trade down there, and as well, the specific performance of OTP and the impact thus far and what your view is on the potential impact of regulatory change? Thanks.
Yeah, a lot in there, Mark. Thanks. You know, just in terms of overall trends, we're actually growing share in Europe. Our business there just continues to click really on all cylinders. In Canada, I think Claude mentioned, and we've seen really as the markets have reopened, you know, the Indian reservations and the black market have regained share. I think there's temporary pressure there. You know, inflation prices, price pressure in general on the consumer, they're probably gaining a bit of share from the marketplace. Then I think the second thing in Canada, and it's the same in the U.S., is, you know, we certainly saw consumption rise a bit in COVID. Now that COVID's open, I think people are smoking a bit less.
You know, when you look at Reynolds American and Altria Group's reports, I think you would see the same thing broadly. Both in Canada and the U.S., when we look at our trends, you know, we're holding market share. So while units are down, you know, somewhat significantly in Canada and a little bit in the U.S., sales continue to be positive, and again, you know, maintaining share. In terms of behavior, you know, we have seen lower tier brands gain in strength. We have a product that we're really focusing on the U.S. called Seneca, which, you know, provides really one of the lowest costs to the consumer of anyone in the United States selling tobacco.
We believe we're in a good place to help that consumer find good value if they do choose to trade down. Then the last thing on, you know, the non-combustible, if you will, you'll continue to see that grow, you know, whether that be the white space. Then the vaping, you know, there's been some noise with Juul, you know, being taken off the market for a few hours and now back. You know, we're working hard with our suppliers to make sure that we've got adequate inventory of alternative brands and also working with Juul to make sure that, we're providing inventory and those products, as long as it makes sense for both of us. Again, you know what?
I think when we think about nicotine delivery, I think our expectations align with what we see in, you know, in that industry. As you know, combustibles continue to have pressure, but, you know, there's good uptake on a much higher margin product around white nicotine, vape, and moist. You know, we continue to focus on making sure that we've got the right selection and pricing in those areas.
Thanks for that.
Yep.
Thank you. Next question will be from Michael Van Aelst at TD. Please go ahead.
Thank you. You've covered a lot, but I'm just wondering on the fuel volumes in North America and particularly in the U.S., where it still seems to be trending kind of mid-teens below 2019 levels and getting a little bit worse the last few quarters. I'm wondering if you could talk a little bit about, you know, the competitive challenges within that market. How much of this is just, you know, people not buying as much fuel and not driving as much, and how much is it, you know, the discounters like Costco and Walmart gaining share? Do you see any pressures or any cracks in some of the traditional C-store operators and starting to, you know, maybe discount themselves to try and maintain some volumes?
Yeah, it's a good question. I think there's a couple things going on when we focus on the U.S. You know, one, I'd say we measure our competitiveness in a pretty sophisticated way with deltas to main and low competitors. So we understand our price position site by site at all times. You know, we remain very consistent in our price position. I think it's fair to say that when you look at high prices, you know, the focus that the Costcos of the world would receive are real, and I would expect they're gaining a bit of share. There's only 500 Costcos though, so they've only got so many pumps. You know, I think that impact, while real, is limited.
I think third, in terms of our performance, when we look at it, you know, we've got markets that are better than 2019, and we've got markets that are worse than 2019, as you alluded. So it's not a consistent story across the U.S. I'd say the fourth thing in there is, you know, our fuel rebrand has had an impact. You know, we've got significant disruption at sites when we rebrand our sites. Again, this economic equation is tremendously profitable for us. We make more money, and it's the right thing to do long term for our brand and consumer awareness. We're tearing our sites up hundreds at a time, so there is some disruption that we're imposing on ourselves.
As we, you know, have a transition with a customer, you know, a customer that may be used to buying from a major, and that's got a certain credit card or loyalty program associated with that, you know, it's up to us to make sure that, one, we're providing the right value, the right experience, but also, you know, with some urgency, getting our loyalty products and payment programs in place and making sure that we engage those customers. You know, long term, I liken it to what we did in Europe. We took Statoil, which is the number one fuel brand in the majority of the countries we operated in, you know, took it down and converted it to Circle K.
You know, early on disruption, but you know, long term, you know, five years later, it's just been a tremendous success and, you know, we're confident we can achieve the same thing in the U.S. over time.
The U.S. competitors then, they're kind of looking at the Costcos of the world and realizing their limited capacity and staying disciplined and passing through the higher costs?
I would think so. I would think that's how they're thinking about it. I can't speak for them obviously, but when we look at the behavior, you know, again, in the quarter, crude went from $80 to a high of $120. Normally that is a very, very difficult margin for retail. You know, you've seen the margins the industry has continued to maintain. As we look at the current quarter, as I mentioned earlier, you know, we feel good about the margin profile. Again, I think we benefit when there's volatility. You know, we feel good about that.
Okay. Thank you.
Yep.
Thank you. Your next question will be from Chris Li at Desjardins. Please go ahead.
Good morning, everyone. Hi, Brian. Maybe just a question on a follow-up question on the tobacco regulatory landscape. Can you share with us your thoughts around the FDA's plan to reduce the nicotine levels? What do you think is the potential impact, and do you think people will simply just smoke more, or could it push more people to other tobacco products? Thank you.
Yeah, good question, Chris. I think I'm reading what you're reading there. I think it really depends on the approach, and also the timing. You know, my belief is the industry will fight back, and there will be litigation, and there will be multiple years of conversation negotiation before anything would really happen. That's my speculation, based on talking to suppliers. I think there's a couple different approaches out there. One is, you know, a gradual phasing of nicotine, and the other scenario is a more significant drop in nicotine early on. I think it depends which way the industry would go. Again, in the coming years, you know, I just think this is gonna be tied up in conversation.
You know, we continue to focus on the alternative products, which again, you know, we're seeing strong growth and, you know, it's quite honestly a lower risk way of consuming nicotine. Near term, we don't think it's a big threat, and then we're certainly watching for how do we think this is gonna come into the industry.
Great. Thanks and all the best.
Thank you. Next question will be from Vishal Shreedhar at National Bank. Please go ahead.
Hi, thanks for taking my questions. With respect to the European fuel margins, can you give us a sense of specifically what the issue was? Was it just the increase in oil price and was that a transient issue or is it behind us now?
One second. Go ahead, Claude.
Yeah. For European fuel margins, obviously there's a lot going on in Europe last quarter with Ukraine, this Ukraine situation. We have to reshuffle our supply to find alternative source of supply and also the volatility in the diesel market also in Europe was strong. We had to reshuffle all that, and that had an impact on our margins in Europe for the quarter. We see that as something that's temporary for us to recreate those new relationship to procure our fuel for our network. And the impact that you've seen also in the margins for the quarter.
I'll add a little clarity. I mean, you know, Russia supplied a significant amount of both, you know, petroleum, particularly diesel into the market. You know, you guys all read about the natural gas saga that continues there. You know, we, like many, had to, you know, we moved away from Russia quickly. Today, we have no Russian product in our portfolio, but it caused significant disruption. When you think about the price increases we've seen in the U.S., you know, it's been magnified in Europe just because of significantly more supply disruption and shortages. The consumer price, you know, continued to rise more quickly. You know, retail did not move as fast as costs.
you know, we did see a margin squeeze during the quarter, but, you know, we have no reason to believe this isn't temporary and that, you know, industry margins should return to more normal levels as costs stabilize.
Thank you.
Sure.
Thank you. At this time, Monsieur Lachance, we have no further questions. Please proceed.
Thank you, operator. Thank you, Brian. Thank you, Claude. That covers all the questions for today's call. Thank you all for joining us. We wish you a great day and look forward to discussing our first quarter 2023 results at the end of August.
Thanks everyone. Have a great Canada Day and Fourth.
Yeah, have a good summer. Bye.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call. We now ask that you please disconnect your lines.