Earnings Call: Q4 2021

Jun 30, 2021

Good morning. My name is Anas, and I'll be your conference operator today. I will now introduce Mr. Mathieu Descheneaux, Vice President, Finance Good morning. I would like to welcome everyone to this web conference presenting Alain Martin Scorsch Tard's financial results for its Q4 fiscal year 2021. 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 analysts. We would like to remind everyone that this webcast 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 and 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 Hanisch, President and Chief Executive Officer and Mr. Claude Tessier, Chief Financial Officer. Brian, you may begin your conference. Thank you, Matthew, and good morning, everyone. Thanks for joining us for this presentation of our annual and Q4 2021 results. Overall, we had a remarkable year, Hope in terms of financially and operationally, despite the pain we all felt through this last year and persistent pressures of the pandemic on our customers, our team members and our supply partners. Across our network, we made notable progress in our strategy of accelerating organic growth By expanding our fresh food offer to 2,000 stores, rolling out more frictionless payment options, Progressing our data and analytics work and our fuel procurement and transport capabilities. We've also expanded our brands, particularly online and on the forecourt, Making them increasingly more modern and recognizable in every part of our customers' journey. Through the acquisition of Circle K Hong Kong, we made a long Planned entry into the dynamic Asian market into our Norway lab, we push forward our ambition to become a world leader in electric vehicle solutions. Despite all the challenges brought on by the pandemic, we remain focused and committed to our long term strategy, hitting key milestones On all of our key work streams throughout the year. I'm also pleased to report that we had a solid Q4 with results strengthening where we are seeing COVID restrictions easing. Across the board, we've had positive trends in same store sales and volumes as traffic is returning to our locations with rural and suburban recovering at a faster rate than urban. While fuel volumes remain impacted by restrictive measures, steady improvements carried through parts of the network, especially in the U. S, Where we're seeing a return to more normal driving patterns. We also continue to realize good fuel margins in all of our regions The business despite significant increases in product costs during the quarter. 15 months after the start of the pandemic, the continued commitment to the business And care for our customers has been exceptional. And during my almost 7 years as CEO of this company, I've never been more proud of our team members in this past year. I want to take a moment to address the recent cyber attacks in the Colonial Pipeline. While it happened after the quarter, it did cause significant disruption in the U. As you know, the pipeline was completely shut down for several days, which especially impacted our fuel supply in our business and for the industry, Spanning all the way from Texas up through the North and Great Lakes regions. I want to thank our fuel and operational teams and our supply partners for their tireless work over the course of these many weeks, Actively buying products at alternative locations, shuffling resources within areas with limited product availability And over longer hauls and putting in massive efforts to get our sites wet for our customers, especially prior to the Memorial holiday. Today, I'm glad to report we're fully operational and ready for the summer holiday driving season. Turning to the results of the quarter. Same store sales growth was 8.1% in the U. S, 1.6% in Canada and 9.7% in Europe, Compared with the same quarters last year. During the last weeks of the quarter, restrictions began to be lifted in parts of our network, Particularly in the U. S. And we are cautiously optimistic that as vaccination ramps up across the world, we'll continue to see traffic improve. Along the way, we continue to make sure that we have the right value propositions, including our Sip and Save subscription beverage program, our Smart Value program, Our Lyft, which is a basket building tool, and gamified promotions to keep our customers engaged with us in driving traffic to our locations as people get out and about. This quarter, we've expanded the reach of our Fresh Food Fast program, bringing the offering to Canva. Our focus remains on the quality and needs of our operational execution, We continue to optimize our program by launching new items. Customer feedback remains strong and as morning commutes resume, we expect the offer will become even more popular. While food in general has been impacted by the pandemic and decreased traffic, when we look at our new program in isolation, continues to perform very well compared to sites that are not on the program in the same markets. Based on these results, in fiscal year 2022, We plan on adding more than 3,000 additional stores across the network. In Europe, we continue to develop the new fresh food fast concept as a platform for future growth With the goal to maintain our high level of food quality and sales, while reducing our labor requirements. We now have a pilot in Denmark with our new self-service options I've introduced more freshly produced and hot food choices. This service option is making it easier for our customers to have a fast overview of the offerings As well as more simplified ordering and picking up of a full meal, including cold drinks. In Q4, we piloted our new Sip and Save beverage subscription across 122 stores, allowing customers to redeem one beverage of their choice, hot or cold, for every day for a monthly cost of $5.99 The Sip and Save subscription includes all dispensed and is redeemable for any size, including refills up to 64 ounces. Based on very early positive results, the program is now scaled nationally and we're growing our subscription base rapidly, Now exceeding over 500,000 enrolls. Overall packaged beverage continues to remain strong over We've seen a shift away from larger packages popular during the pandemic and back to more normal instant consumption single serve packages. Our alcohol business continues to be strong, especially in Canada, which is showing the highest increase over plan in last year. In the U. S, we expect sales to moderate a As we see more restaurants and bars reopen. During the quarter, we expanded our queue line systems to about 900 U. S. Stores, creating a clear path to purchase The ability to place high impulse items in front of customers immediately before checkout. We continue to progress with this initiative and we see it as we see accretive growth In feature categories, including private label, our plans this fiscal year to expand this to an additional 3,500 sites. In other age restricted products, cigarettes sales remained strong in the quarter, although margins continue to be pressured due to more multi unit sales. Other tobacco products sales remain strong, especially driven by European business. And modern white oral nicotine products continue to show strong growth in both U. S. Over the year, we committed to be a more data centric convenience business. And again, this quarter, we worked hard to develop our capabilities. This is one of our top strategic initiatives, and we're pleased with the results so far. In our store by store pricing, we're seeing improvement in gross margin dollars And with significant learnings in place, we're expanding the in scope SKUs. Next on the agenda, we'll focus on the data and analytics teams on optimizing assortment And promotional activities at the local store level. We have multiple pilots in place and feel this is a very material opportunity for our company. Moving to the fuel side of the business for the quarter, same shore road transportation fuel increased 5.4% in the U. S, 3.6% in Europe and other regions and 4.9% in Canada due to higher fuel demand compared to the comparative quarter. However, fuel volumes continue to be challenged by work from home and local restrictions in the various geographies in which we operate. And as I mentioned earlier, fuel margins remains Healthy, really across the network. Turning to our Circle K fuel supply. Over the course of the year, we converted 450 Refiner Branded Sites to Circle K Fuel. At the end of the quarter, we had nearly 2,800 sites in the U. S. With our Circle K Fuel brand. In this coming fiscal year, we will rebrand over 800 additional sites. These conversions dramatically increase brand awareness, Improve underlying costs and give us the ability to control and simplify the customer journey. We're also on a journey to create additional consumer benefits for the brand. One example is we're piloting various premium claims strategies in specific markets at over 780 sites. Here we're pleased with initial results And are planning forward a national rollout of this promotional activity. Over this past year, we've also been investing in our fleet Building more optionality in our fuel procurement with our partnership with Musket. We believe this relationship will dramatically accelerate our supply and trading capabilities, Again, further differentiating how we procure and deliver fuel from other competitors in the industry. Also through a partnership with both Musket and Trillium, a leading provider of alternative fuels, we recently began converting our company owned fuel delivery tankers in California to renewable natural gas As part of our sustainability efforts to reduce methane emissions. Despite the general impact on traffic by the pandemic, Our eMobility business continued to grow throughout the year. In Norway, EV charging now currently makes up approximately 13% of all energy transactions at our store With about 80,000 monthly charging transactions. We're also growing out our in home charging business and And this offer outside of Norway to all of our Scandinavian countries. Our B2B mobility offer has been especially well received since its launch this year This business now accounts for more than 20% of all transactions on public chargers. With the recent introduction of our Circle K Pro digital platform, We've made it easier for our valued fleet customers to get charging services combined with fuel and convenience, since you're getting all their circle k needs At the lowest total cost of mobility. We also opened this year or this quarter an exciting flagship store In Kongsberg, Norway, with our first forecourt that is fully electric, with 300 kilowatt speed chargers under large canopy covered in solar panels. This is the 1st electric forecourt in our history. There's 2 levels store also has extensive food offers, large dining and a back area offering a full selection of fuels, Biofuels and AdBlue for internal combustion customers. Our experience in Norway has shown us that convenience and fuel sites have a role to play in And we continue to explore how we will apply our experiences to participate at the right level at the right time in North America. This year we made significant strides in Frictionless capabilities. In this quarter, we're especially proud of our work on the Forecor expansion of our Pay by Plate program. Following successful pilot in Norway, we launched Pay by Plate as a frictionless payment lid to our fuel customers Across our entire Swedish network. Seize pay by plate customers simply drive into the forecourt, fill up with fuel Through number plate recognition automatically and safely pay on the Circle K EZ App. We're the 1st retailer in the world to launch this technology on a national scale And we recently won the NACHT European Convenience Retail Technology Award for our work in this area. In the coming months, we're looking forward to expand the solution to more European business units. Our new stores remain an important organic growth lever across the network and we're seeing a solid return on investment. Across the network this year, we opened new Verizon concepts with a refreshed brand look and feel in the U. S, Canada, Sweden and Lithuania. These new Verizon stores enhance the customer experience by showcasing our fresh food fast initiatives, our bean to cup coffee offer and touch free options. We're pleased with the early performance results. I'm going to pause there and let Claude take you through more of the Q4 and annual financial results. Claude? Thank you, Brian. Ladies and gentlemen, good morning. So for the Q4 of 2021, we are happy to report net earnings attributable to shareholders $563,900,000 or $0.52 per share on a diluted basis. Excluding certain items for both comparable periods, adjusted net earnings for the quarter of our Q4 of fiscal 2021 were approximately $564,000,000 or $0.52 per share on a diluted basis compared with $0.47 For the Q4 of fiscal 2020, which represents an increase of 10.6%. Net earnings were $2,700,000,000 for fiscal 2021 compared with $2,400,000,000 for fiscal 2020, an increase of 15%. Diluted net earnings per share stood at $2.44 compared with $2.09 for the previous fiscal year. Excluding certain items for net earnings for both comparable periods, net earnings would have been approximately $2,700,000,000 compared with $2,200,000,000 for the previous year, which represent an increase of $500,000,000 or 22.6 percent. Adjusted diluted net earnings per share would have been $2.44 $0.45 sorry for fiscal 2021 compared with $1.97 for 2020, an increase of 24%. While we operated in a particularly challenging environment, 1 in which our fuel business saw meaningful volume declines, we maintain our focus on returns as well as our discipline on cost control and cash management. We also continue to invest in our business preparing for the future and eventual return to pre pandemic traffic levels. The strong capital structure that we have diligently put in place served us well during the past year as we had the means to support our team members To protect them as well as our customers and to continue to create value for our shareholders. I will now go over some key figures for the quarter. Merchandise and service revenues for the Q4 of fiscal 2021 increased by approximately $411,000,000 or 12.7%. This increase is primarily attributable to organic growth and on merchandise and service sales as well as the contribution from acquisitions, Which amounted to approximately $165,000,000 For fiscal 2021, excluding CAPL's revenues, As well as the net impact from foreign currency translation, merchandise and service revenues increased by approximately $1,100,000,000 or 7.6%. For the Q4 of 2021, excluding the net impact from foreign currency translation, merchandise and service gross profit increased by approximately $117,000,000 or 10.9%. The contribution from acquisition amounted to $44,000,000 Our gross margin decreased by 0.7% in the United States to 31.8% And by 0.1% in Canada to 31%, mainly due to the inventory adjustment of $26,400,000 And $3,200,000 respectively, mostly related to a net revenues above value provision on personal protective equipment. Excluding inventory adjustments, gross margins in the U. S. And Canada would have been 32.8% and 31 point percent respectively favorably impacted by changes in product mix. Our gross margin decreased by 2.5% in Europe and other regions to 38.1%, mainly due to the integration of Circle K Hong Kong, which has a different product mix in our European operations. Excluding Circle K Hong Kong, our gross margin in Europe and other regions would have been 42.8% impacted by favorable changes in our product mix. During fiscal 2021, excluding CAPL's gross profit as well as the net impact from foreign currency translation, Merchandise and Service gross profit increased by approximately $305,000,000 or 6.2%. Our gross margin decreased by 0.2% to 33.1% in the United States By 2.4% in Europe and other regions to 39.1% and by 0.4% in Canada to 31.4%. We will now move on to the fuel side of our business. In the Q4 of fiscal 2021, our road transportation fuel gross margin was $0.345 per gallon in U. S, a decrease of $0.1048 per gallon, mainly driven by unusually high margins in the comparative Quarter due to the sharp decline in crude oil price last year. In Europe and other regions, the road transportation fuel gross margin was US0.1085 dollars per liter, an increase of US0.1018 dollars per liter. And in Canada, it was at CAD0.1092 per liter, an increase of CAD0.256 per liter. Fuel margins remained healthy from favorable market conditions and improved underlying product costs driven by fuel rebranding and procurement initiatives. The Road Transportation Fuel gross margin in fiscal 2021 was $0.3528 per gallon in US0.1099 dollars per liter in Europe and other regions and in Canada, dollars 10.36 For the Q4 of fiscal 2021, normalized operating expense decreased by 2 0.9%, driven by government grants of $41,000,000 cost and labor efficiencies, A lower level of COVID-nineteen related expenses as well as rigorous work and activities initiated to streamline and minimize our These were partly offset by normal inflation, higher labor costs from minimum wage increases And pressure from low employment rates in certain region and incremental investments in our stores to support our strategic initiatives. COVID-nineteen related expenses for the Q4 of fiscal 2021 include 10 Q bonuses in Canada, Additional cleaning and sanitizing supplies, masks and gloves for our employees as well as the donation of personal protective equipment to the company and fees around our stores. During fiscal 2021, normalized operating expenses decreased by 1.2% compared with the previous fiscal year. Excluding specific items described in more details in our MD and A, the adjusted EBITDA for the Q4 of 2020 mainly due to organic growth of our convenience activities, higher fuel demand, lower operating expenses And the net positive impact from foreign currency translation, which had a net positive impact of approximately $25,000,000 As well as the contribution from acquisition, partly offset by lower fuel transportation and gross margins in the U. S. During fiscal 2021, on the same basis, the adjusted EBITDA increased by 640 $2,400,000 or 14.7 percent compared with the previous fiscal year, mainly attributable to higher Road transportation fuel gross margins, organic growth of our convenience activities, lower operating expenses, As well as the net positive impact from foreign currency translation, partly offset by the negative impact of COVID-nineteen on fuel demand. The valuation in exchange rate had a net positive impact of approximately $45,000,000 Also excluding specific items, the adjusted income tax rate for the Q4 of fiscal 2021 was 18.5% Compared with 20.7 percent for the Q4 of fiscal 2020. The decrease for the Q4 of fiscal 2021 is mainly Stemming from the impact of the different mix in our earnings across the various jurisdictions in which we operate as well as From gains taxable at a lower income tax rate. The adjusted income tax rate for fiscal 2021 was 19.5% compared with an adjusted income tax rate of 19.9% for fiscal 2020. As of April 25, 2021, our return on equity remained strong at 24.3% And our return on capital employed stood at 15.9%. During the quarter, we continued to generate strong free cash flows And our leverage ratio stood at 1.32 times. As of April 25, 2021, we had ample balance Flexibility with $3,000,000,000 in cash and an additional $2,500,000,000 available to our revolving credit facility. It's also important to note that during the quarter in fiscal 2021, under our November 24, 2020 share repurchase program, We repurchased $17,400,000 $33,300,000 Class B subordinate voting shares respectively. These repurchases were settled for a net amount of $550,000,000 $1,100,000,000 respectively. Also, subsequent to year end, under our new program, we repurchased approximately $300,000,000 of shares. Finally, on June 29, 2021, the Board of Directors declared a quarterly dividend of €0.75 per share and approve its payment for July 22, 2021. To close, I would like to highlight and thank our team for the work they have accomplished throughout the last year, ensuring that we emerge from And we're making a strong financial position and ready to accelerate capital deployment towards our strategic initiative, while always remaining focused on driving value creation for our Employees, customers and shareholders. I also wanted to mention our upcoming Investor Day. We hope that you're going to Join us for our upcoming virtual event on July 14, where we will be hearing from several members of our management team regarding our businesses With that, I thank you all for your attention and turn the call back to you, Brian. Thank you, Claude. Just a couple of remarks in closing. Certainly, when I look back at this year, one word comes to mind and that's gratitude. And my gratitude goes out to all of our team members for their continued commitment to each other and to our business. Our outstanding operations team kept our employees and customers safe this past year, Kept our stores open, ensured that we are part of the solution in communities where we would live and work in the face, particularly in the U. S, One of the most difficult labor markets I've ever seen in my career. With the support of our global functions, we did more than maintain the status quo during this difficult year. We stayed focused. We stayed focused on our strategy. We innovated for the future. We expanded into the growing Asia market And solely because of the hard work, engagement and courage of our team members that our company culture and balance sheet are stronger than ever before We're getting ready for the future, a future beyond the pandemic where we continue to make our customers' lives a bit easier every day And with that, we'll answer the questions we've received this morning from analysts. Thank you, Brian. Thank you Claude. Our first question comes from Patricia Baker at Scotia. And the first question is with the U. S. Opening up, what is your expectation around summer travel this year? Do you Expect to see a rise in fuel volume associated with American and to a lesser degree Canadians traveling more this summer by road compared to last year? Yes, I think we fully expect to see leisure travel in particular grow significantly over last year's levels. We saw that over Memorial Day in the U. S. And although levels remain below 2019, they are continuing to grow. So as states and borders continue to open, We believe there's a pent up demand and people will hit the roads. That said, there's still borders are closed. You can't travel between the U. S. And Canada As an example, and then parts of Europe have the same restrictions. So we're not at normal yet. And then I'd also say, we're seeing and I think the industry is seeing A lag in the recovery of the morning daypart as many office work environments remain either fully or partially remote. But so it's a journey. It's a journey, but it's headed in the right direction. Claude, you noted that as part of your Strategic review, you have been selling certain locations and all those sales in the release. Should we expect to see more of such Sales in the fiscal year and at what point do you believe you will have the network best positioned? So thank you, Patricia. So we've reviewed our asset base in fall 2020 and the stores that were not longer strategic for us. And out of that came the sale of 49 sites in Oklahoma for to Casey's and also putting for sales more than So and also as you certainly know, we were And on some of our high value urban sites that would work not more to a buyer than it would have been for our operations. We elected to divest some of those. So it's however, it's an ongoing process and we're always For ways to optimize our network and to ensure that our stores are strategically relevant. And strategically relevant means focusing on sites that are Able to represent our brand well and also can accommodate our commercial programs within the store. So We're going to continue to divest as we go along our journey and maintain a nimble network and make sure that we're taking care of our tail end sites. The next questions come from Martin Landry at Stifel. First question, your 5 year plan for fiscal year 2023 calls for EBITDA to double From the fiscal year 2018 level of $3,000,000,000 This suggests that if you reach our objective, fiscal year 2023 EBITDA could reach $6,000,000,000 which is significantly higher than current consensus expectations of $4,600,000,000 Do you still feel confident in attaining this goal? And what are the risks that could prevent you from reaching your 5 year objective? Yes. Thanks, Martijn. Just as a reminder, our 5 year plan was to accelerate organic growth to about 50% of our annual EBITDA growth With the remainder being M and A, which has historically been well over half of our growth. So setting aside the uncertainties of COVID, I feel right on track to deliver the organic Growth rates we planned for 3 years ago. Those include things that we've talked about, rolling out our fresh food fast offer, Localized pricing, fuel initiatives, assortment, revamped and enhanced loyalty programs are on the agenda. I guess that turns us to the M and A side. We've talked a lot about it in past quarters. The appetite is absolutely there. We've taken some big swings at acquisitions, big and small over the past couple of years, but we've been concerned about valuation levels. We are not going to do a deal for the sake of hitting this target. But at the same time, we remain optimistic that M and A can and will be a part of our growth story. It's part of our DNA. We're good at it. I think we integrate as well as anyone if not better than anyone in the industry. So it's just a question of finding the right opportunities out there. So Martin's second question. Historically, U. S. Fuel margins have been inversely correlated During the spring, we have seen an increase in fuel prices at the pump, But with limited to no impact on fuel margins, what explains the recent disconnect versus the AirCircle relationship? Yes, I certainly can't speak for our competitors. But as we think about it, we see fuel volumes have remained So I believe fuel retailers in general have been more focused on maintaining gross profit dollars In the face of rising costs, tobacco pressures, etcetera. So that inherently means a sharper tension in fuel margins And it's been encouraging these past months, as you've noted, as costs have increased globally to see the industry remain rational And fuel margins, unit margins remaining very strong and compensating for the lack of volume. The next two questions come from Bonnie Herzog at Goldman Sachs. The industry is facing pressures from higher operating costs coming out of COVID, especially higher wages in the tight labor market. Can you talk through some of the pressures you might be facing in fiscal year 2022? And if there are opportunities for you to potentially manage these Expenses more efficiently than some of your smaller peers given your scale. Yes. A few things to share there. So we have seen tremendous pressure to hire. I want to note, this is important, it's really a U. S. Phenomenon for us. We're not feeling the same pressures in Canada or Europe. So that gives me some hope that this is a part of economic stimulus and enhanced benefits That have created some of the situation. In the face of this, we're doing a lot to maintain staffing levels. We have a heavy focus online hiring, online visibility. We put centralized recruiting and hiring resources in place in each of our U. S. Business units. We've got retention bonuses out there, Focused on better training and onboarding, making sure that those that we do get in the door understand the job and are able to do it. We certainly can't ignore the wage levels that we're seeing in some of our markets, but we're striving to keep our costs as variable as we can, believing that some of this pressure is short term. We're seeing some early signs of increased applicant flow. There's 25 states that have either announced or ended Supplemental unemployment benefits in the U. S. And we're seeing again increased applicant flow in those states. And with rising vaccine rates, We are optimistic that people will be more comfortable returning to workforce. So while trying to remain competitive, we're focused on trying to keep these costs as variable as Can until we truly understand how much of this is short term versus sustained cost pressure. That said, we're doing a lot on the cost side. Maybe Claude, if you want Here, some of the activities that we think are able to more than offset this. Yes, Brian. Yes, Bonnie. So we have a lot of going on. We have Comprehensive program internally to manage and optimize our costs. So our focus is on reducing costs at store level primarily, Such as unnecessary labor hours or maintenance or non customer facing activities that could Otherwise, so for this we're using, as you mentioned, our scale and we're using technology are also The strength of our support function to help reduce our costs. Some examples are the consolidation of our vendors for maintenance. So that's one big activity that took place. Consum, they are using our scale in marketing and with our POP purchases, Robotics for back office task in store and also in our shared services. And a good example of offsetting technologies that we're using in our Testing our pay by plate program that we're using in Europe that we just launched very successfully, also self checkout that we're testing in multiple Stores in the U. S. Right now, it's been proven pretty giving us good results. Thank you. Claude, a question for you on capital allocation, Especially given the strength of your balance sheet and growing cash balance, as we look ahead to fiscal 2022, Do you plan to prioritize share repurchases, especially in the current M and A environment where there might not be as many large scale acquisition opportunities? Well, we're still feeling very good about our capacity to create value through NNA. We still are focusing on U. S. As our first priority. So U. S. And convenience for us is number 1. We also just a new platform of growth in Asia with our acquisition of Hong Kong, so that opens up a whole new area for us in terms of M and A. We're still also looking in adjacent sectors, as you know, dollar stores, travel retail, grocery and QSR Are things that we're looking into. So patience is key. Like Brian mentioned, we are involved in multiple opportunities and are opportunistic to continue our growth Through M and A in the future. For the capital allocation, we're still going to be opportunistic on our buyback. It's a tool In our tool belt that we are going to use when we are under our target leverage ratio of 2.25 times. So Anytime we're under that, then we're going to consider depending on the price of our stock to use our buyback program. Great. The next two questions come from Irene Nattel of RBC Capital Markets. Can you give us color on the contribution of key initiatives to driving same store sales growth? And how should we think about the evolution Or performance of these as we go to reopen it? Yes, I'd say that we have a lot going on. There's always a balance of do we have enough or too much. Certainly, we're excited about our merchandise pricing promotion work. Packaged beverage has just continued to be a very, very strong category, up strong double digit Year over year, strong performance in nicotine categories, non combustible margin dollars have exceeded combustible And some of our key markets for the first time, that's big. That's non cigarettes being greater than cigarette margins In our stores, so there is life in the nicotine category. People are switching to healthier alternative ways to And we'll be a part of helping them on that journey. And then for the future, we have a lot of things teed up. We talked about our Fresh Food Fast, Big ambition there is to roll that out to 3,000 stores. We feel we've got the right offer. We think we've got the right production platform. It's really a journey of creating a full food culture in our stores that can execute that and particularly Executing that in a difficult labor market that we're seeing in North America. Claude touched on Sip and Save. We think that's pretty innovative, Great value proposition for our customers and something that we think will certainly create loyalty to Our brand as we continue to sign people up. This summer, you'll see more around gamified promotions. Gamified Activity has been strong for us both in Europe and in North America and we'll continue that with a strong focus on beverage Through the summer months, we all know that 50% of the trips in our industry are focused on the beverage and Satisfying a thirst need. So you'll see a lot of activity around thirst over the summer from us. And we feel good that As life returns to normal, although it's hard to understand what good looks like, then we'll continue to grow our share in the industry. Second question from Irene. Yes. Fuel margins remain robust. Can you provide color around the contribution of CushStar procurement strategies to margin? How should we think about sustainability to industry metrics? Yes, I think we remain a leader in the fuels market and we're committed to win. We believe we can continue to create Strategic advantages that a lot of the industry can't achieve. We're certainly seeing benefits early on from our Muscat partnership, Combines 1 of the largest gasoline shorts in the world, ours with 1 of the largest diesel shorts from the Love's And you combine those, it creates very unique opportunities around the procurements and around creating value for our refining partners. It accelerates our global training capabilities, enabling us to capture global arbitrage. An example would be HVO, which is 100% renewable fuel, is mandated and required in many of our European markets. In this past quarter, we've been able to procure meaningful amounts of that in North America, shipping it to our Scandinavian markets at a cost advantage basis. Transportation, we've deployed more of our own fleet now approaching, I think 900 or so trucks And that allows us to capture location arbitrages across our geographies. And all this fits particularly well with the conversion to our own brands, Which allows us to be a lot more flexible on the supply side. And again, as I step started out saying, we believe it creates some sustainable advantages versus the industry overall. Good. So next question is from Derek Blay at Canaccord Genuity. In regions that are ahead in terms of reopening, are you witnessing a normalization in terms of consumer purchasing behavior? Yes, Darryl, I wouldn't call it normal yet for sure, but we are seeing some trends. Traffic is improving where we've got society opening up and more higher vaccination rates. Sales mix is trending back More toward normal, food, which is shut down to a great degree in some of our markets, particularly in Europe, is up and operating and growing. We're seeing more single serve, which both of those help margin. The basket is declining a bit, but still at levels well above pre COVID. Then finally, I would touch on the morning day part, which I mentioned earlier. It's the one that is lagging. As we've got Work from home still in place in many, many parts of the world, but we anticipate that recovering as workplaces open up and people return either full time or part time Good. Thank you. Moving to Graham Crindler's Questions from 8 Capital. Potential for cannabis reforms in the U. S. Has many different pathways. Can you please discuss how the company views a scenario where interstate commerce is allowed versus a scenario where state markets are ring fenced With respect to its strategic relationship with Fire and Flower? Yes. I'd start by saying, we're proud of the role that We and our industry plays in selling age restricted products globally. We're exercising the same focus and responsible retailing as we look at cannabis. Our focus over the last 2 years has really been to understand the market and develop a consumer offer and associated technologies to win in that market with a goal to have a model to deploy In the U. S, when the time is right and if we think the returns are there. And so we've been pleased with our partnerships with Canopy Growth And with Fire and Flower in Canada and pleased with the progress. We're seeing continued sales growth and As we open sites, that business starts to become material to us. We're closely watching the regulatory front in North America, and I'm very pleased personally That MAX is engaged to lobby for a level and open playing field on behalf of our industry in the cannabis space. U. S. Industry today in those legalized states is extremely fragmented on the retail side. So we believe there will be meaningful opportunities For a scaled retailer with the right offer. And to your point on interstate versus ring fenced, if we do see ring fenced, this certainly will create the need for partnerships, Which we've got some foundations in place, Canopy Growth and Conversations with Others. We don't see ourselves focused on the growing or extraction pieces of the business. We're very much focused on retail. So again, partnerships could be a part of that solution if interstate is not allowed. The next question comes from Bobby Griffin at Raymond James. On the merchandise side of the business, Are you seeing any impacts from cost inflation? And if so, what are we as of the product assortment? And is the inflation having any notable impact on customer demand? Yes. It's just happening now, but we certainly are seeing Cost pressures in certain categories, you can talk about the cost of aluminum can as an example. I mean, it's really across the board, you're seeing it in proteins And others. We keep closer monitoring that and always evaluating our price and engaging our analytics teams to watch elasticity closely. Demand is hard to quantify right now as sales are very volatile with COVID openings and reopenings. But at the same time, your household income levels Are very healthy, really globally. So we believe we will be able to effectively pass along any material cost increases Without any significant impact on demand in our stores. The next question is from Chris Lee at Desjardins Securities. Do you have a sense of the breakeven fuel margin point for the single store and small chain operators? Has the breakeven point moderated compared to the height of the pandemic? Or has it remained largely the same because of rising Cost pressures from labor shortages and E and P compliance. Chris, we don't have industry data, at least not current right now. And I'd call it a moving target. Just the math would say overall breakevens should be down a bit as volumes are the key driver of that equation and they've We've covered a bit. Certainly, these breakevens are higher than pre COVID levels due to volume and the cost pressures that you point out, Would that be labor or the cost of EMV compliance? I'd emphasize the importance of the initiatives That we've got in place to create sustainable advantages versus the industry, whether that's the initiatives we discussed inside the store, our fuel procurements, our branding efforts The efforts Claude mentioned to make sure that we're continually taking costs out of the business and being a low cost operator in our space. Next question is from John Royall at JPMorgan. U. S. Fuel same store gallons came in below our expectations based on industry demand numbers relative to the same period of 2020, Well, CPG came in a bit ahead of our expectation relative to industry averages. Was there an effort to sacrifice some Volume by raising margin or is there another color around the volumes? 1st and foremost, we're focused on providing a consistent value to our customers with our fuel pricing. So in no way have we consciously decided To sacrifice volume for margin, we're very analytical and data driven around those decisions daily. I would say volumes have been very volatile and that's not only across countries and markets as they reopen at different paces, but we're also seeing differences Within states between rural, urban and suburban, with rural recovering at a faster pace than urban for obvious reasons. So It's a moving target, but one that we're committed to watching closely and again, just providing a consistent value to our customers as we go forward. The next two questions are from Karen Short at Barclays Capital. How are you thinking about the fuel margin outlook this year? Specifically, how rationally do you think operators will react to a higher wage And product cost inflation. How do you view the sustainability of high fuel high margins in the U. S. Relative to history? Any structural change to think about that are informing your views? Yes, Karen, I'd say fuel margins have always been difficult to predict in the short But if you look at the last decade, you'd see a consistent rise in unit margins for the industry. Underlying this is the need to generate a certain level of return In the face to cost pressures, declining cigarettes for some parts of the network or the industry And again, fuel volumes, some players have bled volume out over this period and they've got to make it up. COVID certainly has magnified these effects And the markets responded pretty rationally. To the extent these volumes are slow to recover and inflation is there in the short term, We believe the margins will have to remain healthy to offset. I'm not really concerned about short term volatility. It's been a part of Our industry forever. I just have our organization focused on widening the advantages that we have versus the overall industry. That includes investing in technology, loyalty, food, all the other things that we've talked about to you over the past quarters. And then compounding that with Circle K Fuel, which gives us again more optionality, better procurement capabilities, better consumer offer and obviously we don't incur those brand fees With the new localized pricing strategy in more than How should we think about the ability of these new systems to successfully manage the significant price volatility And high inflation we are seeing in some categories. How are gross margins trending at these stores versus the control group? We're very happy with the progress in seeing clear improvement versus control sites and hopefully we can share more During our Investor Day. Well, we do now have this widely deployed across our geographies with the next step to continue to increase the percent of the categories covered. For example, tobacco has been a category that we really haven't deployed this into and we think there's big opportunities. So While we've deployed broadly across geographies, the categories and SKUs covered, that's still a journey and that's it's happening quickly. And concurrently, we're piloting localized assortments and localized promotions. And we believe these are both very material opportunities and We'll be learning a lot over the coming quarters with the 3 markets that we've got under pilot on both of those. The next question is from Mark Petrie at CIBC World Markets. You have increasingly spoken about the attractiveness of Business to business fueling and the importance of a local presence of the Circle K brand. Could you elaborate on the key steps that could lead To this being a larger part of your offering, be it capital, infrastructure, marketing or otherwise? Yes, Mark. B2B has been a great strength of our offer in Europe and we continue to win and grow market share There and we've seen during COVID that that demand has been very resilient compared to the B2C business. And it's been a little bit frustrating because Over the 9 years, I've watched that since we bought Statoil, but there have been material structural things that blocked our ability to deploy that at Same pace or have that same level of success in North America. The first and foremost is the brands. If you look back 3, 4 years ago, if you went certain market, you might see Circle K with a BP fuel, a Shell fuel, a Chevron and it was literally impossible to get A consistent B2B offer out there to our customers. So the key first step is the brand conversions. We're well underway and as I said earlier, we'll have another 800 sites converted this year And that consistency will allow us to create a strong network in many key markets for us and be able to present a consistent and Compelling offer to our customers. 2nd, I'd add, we've brought in Louise Warner. She was a part of Caltex or Ampol In Australia, so as we did not end up with that network, we ended up with the next best thing, which is a great leader. She brings tremendous experience to us in the B2B space from her role leading this in Caltex and she's focused on plans to grow this materially as we finalize our conversions To our proprietary brands in North America. So more to come there, but it's certainly an area that we see big opportunity for us. Next question comes from Michael Van Aelst at TD Securities. Many companies, particularly also in the U. S. Have pointed to challenges in attracting and maintaining labor as well as Meaningful compensation tied to labor, transportation and various materials. KushChar does manage to keep normalized OpEx growth close to nil In fiscal 2021, and it declined 2.9% on a comparable basis in Q4. How much Did the government grants contribute to lowering costs? And do you see the likelihood of OpEx requirements rising at an accelerated pace over the next few years Because of these inflationary factors mentioned as well as the return to normal operation as the pandemic fades. So Michael, I think Brian alluded to the labor challenges That we're facing in the U. S. Particularly. And on your specific question about the grants that we receive the government, we accounted for $41,000,000 in government grants during the quarter. So if we are looking at it without the grants, Our OpEx would have increased by 0.5%, still a strong performance in our view, a testament to our cost discipline and To all our expenses growth under inflation rate, like it's always been our challenge that we've communicated in previous Meetings. So we're pleased with the efforts that we're doing to manage our cost base. As mentioned before, we have many programs Please to help this performance, and I've talked about them earlier on the call. But we're using our scale and our technology And also our support functions to make sure that we're maintaining those costs also in the future at a lower rate than inflation. Thank you Claude. The next question comes from Peter Sklar at BMO Capital Markets. Now that Circle K Hong Kong has been closed for a period of time, can you talk more about the potential M and A opportunities in Asia And which countries are attractive for CushGuard? Also, what is the M and A environment in Asia? And how do we evaluate and do valuations compare to North America? Yes. First, I'd say we've been very pleased to bring Hong Kong into the family. A lot of innovation, a lot of energy, a lot of culture there. So despite not being able to meet them in person since the acquisition, We've had some great conversations and they've added value back to us already. That said, we didn't buy that company to have 400 stores In Asia, it's part of a long term commitment to try to grow in that part of the region. And I think this is a platform for that. Yes, we've looked at several opportunities since the Hong Kong acquisition and having that team on the ground, I think one brings us credibility, And then 2 also brings us meaningful insights into some of the markets we're looking at. I'd say our focus right now would be in Southeast Asia, Countries like Vietnam would be an example where we've got an emerging class With disposable income, which leads to modern retail meets to convenience. So again, multiple conversations. But as I've always said, it's a long term play. So something may happen quickly or it may take a while. But I think just based on early Feedback, we're having more conversations as a result of actually being on the ground there today. Great. Our last question comes from Ghislav Sridhar at National Bank Financial. Can you explain the nature of the $26,000,000 inventory adjustment related to merchandise gross profit? Yes, Vishal. So the net reasonable value provision was taken, consequences of the market reopening and Mandatory mask wearing in many jurisdictions was lifted and we see improving conditions also with COVID restrictions everywhere. So this reserve is mostly for inventories of masks and hand sanitizers We had an inventory in our stores that we want to market In the current and under announcement. Great. Thank you, Brian. Thank you, Claude. That covers all of the questions for today's call. We thank you everyone for joining and want to wish you a great day, and we really look forward to Virtually seeing you at our July 14 Investor Day. Have a great day, everyone. Thanks, everyone. Take care. Thank you, everyone. Thank you, everyone. Thank you, everyone. Thank you, everyone. Yes. Thank you. Bye. This concludes today's conference. You are now invited to disconnect.