M&A Announcement

Nov 5, 2020

Morning. I would like to welcome everyone to this conference call and webcast to discuss Alimentation Cousteau's acquisition of Circle K Hong Kong and entry into the Asian market. We would like to remind everyone that this webcast and presentation will be available on our website for a 90 day period. Also, please remember that some of the issues discussed during this call 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, future results could differ from the information discussed today. Details of the acquisition will be presented by Mr. Brian Anish, President and Chief Executive Officer and Mr. Claude Cisier, Chief Financial Officer. Following the formal presentation, we will open the line to analysts for Q and A and ask that you please limit yourself to one question and return to the queue to maximize the number of participants on this call. Please note that this webcast will end at 8:30. Brian, you may begin your conference. Thank you, Jean Marc, and good morning, everyone. I'm touring stores this morning, so hopefully, everyone can hear me well. Over the last 2 years, we've spoken at length about our strategy to double the company and our 5 year plan. And to do that in a balanced manner with more growth from organic and but also M and A being an important part of that journey. And probably for 3 years, we've announced our desire to enter the growth part of the world being Asia, Southeast Asia in particular. So today, we're very happy to be announcing we've entered into an agreement to acquire Circle K Hong Kong, our licensed partner in the region for approximately US360 $1,000,000 And while the transaction is not only material from an EBITDA standpoint, it's strategically meaningful as it provides us an entry point in the Asian market and positions us well to grow more significantly in the region. We believe the platform in Asia provides Coustar with a new growth runway as well as exposure to favorable economic and demographic trends for the decades to come. We'll still take Hong Kong, who we've known for many years. We now have the 2nd largest chain in the Hong Kong region and happy to bring into a family a network that's operated under the banner for, I guess, almost 35 years. And more importantly, it's a team that's been able to win in the markets, very highly respected. They were an inconvenience store chain of the year by Max in 2018. And again, just showing that they can win in their marketplace. And so using their expertise is really the biggest asset that we're acquiring here. Go to the next slide, key transaction highlights continued. Yoham provides us with exposure and expertise in high density small footprint retail, which is obviously very common in most of Asia. We think it's highly complementary to our existing operations in North America and Europe as we grow more nonfuel locations in the urban centers. We'd love to sit with our company culture. Again, we've known these people for a long time. We consider Circle K Hong Kong's credo of speed, tidiness and friendliness, which has led to the company achieving multiple awards, being very consistent with our own mission of making our customers' lives a little bit easier every day. We're excited to add this network to the team and our existing global presence. We've also been very impressed over the years with their merchandising expertise, which plans its stores down to the square inch to optimize productivity. The team has shown strong rigor around category management and a big focus on premiumization of the assortment by being active on the import front and bringing international brands particularly from Japan, South Korea and Europe into the markets to enhance their sales. And finally, Circle K Hong Kong counts on the leading digital loyalty platform, which we believe can be leveraged in the future as we expand across new markets in Asia. Next slide. I just want to go back in time and kind of reflect on the journey a bit. I think it's important to consider where we've come from as a company and how we've gotten there. Starting 40 years ago this year in Laval, Quebec, and subsequently consolidating the Canadian market in the 80s 90s. In 2001, so 20 years later, we entered the U. S. Market with the acquisition of Big Foot. And I'll remind you, Big Foot was only 160 stores and significantly less EBITDA than what we're talking about here today. But it served as a platform and a strong management team from which to grow the U. S. Market. So 11 years later, we turned our attention to Europe and actually had booked for 3 or 4 years, but established our 3rd growth platform with the acquisition, Stetto Retail. And again, a focus on strong on Amazon, which is largely still in place today. I'm getting feedback. If everyone would be on mute, I'd appreciate it. And finally, here we are 8 years later after entering Europe. We're proud to begin our journey in Asia with our acquisition in Hong Kong and on the road to building the world's preferred destination for convenience and fuel. Claude, I'll turn it over to you to talk a little bit more about Hong Kong specifically. Thank you. Billing in for Peter. My question is that it appears that the economics for Circle K Hong Kong stores are lower than sorry, am I hearing you say that? It appears that the economics of Circle K Hong Kong stores are lower than that of well operated stores in North America even after taking into account lower mix of field retailing given the real estate constraints in Hong Kong. Can you comment on how store economics compare between the two regions? Yes. I mean, I think you'll see that throughout in the Asia entry, per capita GDP, per capita income is lower, cost of entry of these sites are lower, these are typically much, much smaller. What is important here in Hong Kong is we're capturing almost 1,000 customers a day, which is on the high end per store for what we achieved globally. But it is smaller ring, smaller basket size. And so on a per store basis, EBITDA will be lower even when we do adjust for fuel. But again, very, very stable robust EBITDA that we think we can build from. Next question? Next question will be with Bobby Griffin at Raymond James. Yes. Good morning. Thank you for taking my questions. Just curious, seeing in here that they focus and as you mentioned on non fuel, initially as you look to expand your footprint. Yes. Good morning. It's Bobby. They obviously focus first on nonfuel, but as you look to initially expand your Asia footprint, will most of the growth organically or through M and A beyond kind of the convenience only store assets and then and not look to expand on the fuel offering? I think it really depends on the country and the output stream. I'm getting feedback. If everybody could be on mute, I would appreciate it. Mr. Tisi, could you please mute your line? Thank you. Some countries fuel is privatized and open. Other countries, it's controlled by the government, for example, Vietnam. We have a very strong presence for licensee there, but the fuel business is nationalized. So I think it will be country specific. We certainly would not shy away from the right entry into a combined fuel and convenience business. We think we've got great expertise with a global footprint there. But I think in Asia, the expectation would be we would do a lot more non fuel locations and fuel and convenience together. We will now return to the presentation. Mr. Hanash, please go ahead. Claude, I think you were if you want to go back to Hong Kong. Thank you, Brian. Let's now bring our attention to a high level view of Circle K's Hong Kong's business. Convenience only network that is already operating under the Circle K banner. It has roughly 30% market share and convenience in Hong Kong with 348 company operated stores as well as 33 franchised stores in Macau. We see significant organic growth potential and expect that with access to Cush Capital, Circle K Hong Kong will be able to accelerate the meaningful organic growth opportunity that lies ahead. Recent results have been impressive despite a number of headwinds. Same store sales in 2019 grew a strong 5.9% and this continued so far in the first half of twenty twenty with 5.7% rise in comparable sales across the network. In December 2020, Circle K Hong Kong expects to integrate its new distribution center, which will have embedded robotics to increase pick speed and accuracy, as well as improve shipments and logistics. This new distribution center will support up to 600 sites and help unlock efficiencies for the business moving forward. In terms of stores, the following slides help frame some of the formats that are deployed across the network. From stores in shopping malls and commercial places close to metro and train station to stores in mixed use residential complexes, Circle K Hong Kong is really well positioned in high density and high traffic areas and has perfected the small format urban store. With more than 90% of customers visiting stores on foot multiple times per week and even multiple times per day, Circle K Hong Kong has developed a high productivity store model with much room to keep growing. Moving on to the product offering. Circle K Hong Kong really manages to pack a lot of punch in its small footprint. Stores are already serving simply great coffee and we believe there is meaningful growth ahead in the coffee category in Asia. As I mentioned at the start of the presentation, Circle K Hong Kong has developed a very strong merchandising and promotional program with the frequent introduction of seasonal products and imports from Europe, Japan and South Korea. The company has done a great job in getting consumers to trade up on their purchases towards higher margin products, whether in bakery, beverages, ice cream or snacking. Enhanced category analysis leveraging proprietary analytics has allowed the company to improve the relevancy of its offer and to optimize velocity. These factors are very important considering that customers visit stores at a high frequency. Lastly, on the food front, Circle K, Hong Kong's Hot and Inn Food to Go brand has attracted a solid following with signature dishes such as stir fry noodles, which are our preferred, curry, fish balls at the steam station and even its freshly baked pizza made with Japanese yeast. So this gives you a high level view of the network. And on this, I would turn it back to Brian. All right. Thanks, Claude. Thanks, Claude. Thanks, Claude. Thanks, Claude. Thanks, everyone. Thanks, Claude. Thanks, everyone. Thanks, Claude. Claude, if you could meet again, please. Just to recap, we're excited about our 4th platform of growth. This fulfills a major objective of landing a qualified tenured management team that will give us not only the opportunity to grow in Hong Kong, but give us credibility to do M and A and do partnerships in that part of the region. And their success has been evidenced again if you compare per store throughput with a major competitor being 711 in the market, significantly outperforms and being named community store retailer of the year in Asia twice in the last 5 years. We do it brings us relative capabilities to scale in Europe. They've got a very successful food offer. They've got unique private label and import capabilities, and very strong omni channel loyalty platform that we think can be leveraged outside of Hong Kong. And finally, the advanced innovation capabilities, including gamification, which is something that we still have pride to bring into North America. And then in terms of just other best practices, we think Hong Kong is a logical place for us to land. It's a central hub for global trading and for sourcing across Asia. So we think the location itself just makes a lot of sense. And finally, and not a major reason for this transaction, but convenience Circle K Hong Kong did have the rights to a good part of China with Circle K brand. And now we repatriate that back in the company and we'll have more decisions, flexibility on how we deal with China in the future. Just real quickly on timing. I'll leave you with pretty clear timing and next steps. So we've got to have approval of the transaction by the CRA shareholders, which we anticipate in early December followed by the completion of the transaction in the second half of the month. So we do believe this will close yet in 2020. So with that, that concludes our full presentation. I'll go back to any remaining questions that you may have. Thank you, Mr. Hanash. Your next question will be from Martin Landry at Stifel GMP. Good morning. Wondering if you could just talk quickly on valuation metrics and accretion, if there are any? Claude, I'll let you take that Okay. And you're not disclosing the multiple that we're paying, but CRA is a publicly traded company that has most of the business that they operate are in the convenience store. We have a business, a small business at the bakery and also glasses. So you can look at their financials where inside that. In terms of accretion, it's very not material in terms of what it's going to create for us. But mostly it's synergies that are going to be driven into the business that's going to be outflow for us. So there's accretive in the growth platform in growing MTIs in Hong Kong and also growing in other area in Asia. And also there's going to be also some meaningful reverse synergies that could come out of that acquisition with potentially their OCO program, which is their loyalty program and online and offline program that they have that could be also applied elsewhere in the network. So we're excited about the potential synergies and that could be treated by that acquisition in most of the growth opportunity. We joke internally sometimes the companies have called things strategic. This is not only strategic for us, this is a solid return for our shareholders as well. Thank you, sir. Next question will be from Karen Short at Barclays. Please go ahead. Hi, thanks very much. I actually was just wondering if you could talk a little bit about what this means for M and A in the U. S, meaning does this kind of take you out of thinking of M and A in the U. S? And if so, is it a function of where multiples are? Or how are you thinking about further opportunities in the United States? Yes. I think I would I encourage you to think about we've got 4 platforms for growth. And we've said that the U. S. And Asia are our priorities, but we also will be opportunistic in the other 2. Our balance sheet is in a place where we have tremendous flexibility to pursue multiple opportunities across all four And we're actively looking across all four. So we've been disappointed with some of the activity levels in the U. S. Over the last 3 years just in terms of valuations, but cost is just optimistic that with the current economic situation that we'll have opportunities coming. So stay tuned, but no, I'd say just this is not precluding us from doing anything else anywhere in the world. Thank you. Next question will be from Derek Dley at Canaccord. Please go ahead. Yes, hi, thanks. Just wondering if you could just give us a bit of a context into the merchandising mix. Like do you have any color that you could provide just in terms of tobacco as a percent of revenue or food and fresh food, fresh food and food services as a percentage of revenue? Derek, I don't have that off the top of my head. Food is a significant penetration, larger than what we have in North America. But Claude or Jean Marc, do you have any stats handy? A significant cigarette profile also. So that's and you should probably think about the mix and the margins similarly to what we have in our stores in North America. So a lot of beverages that are there, so it's cigarette beverages, food and also a bit of bakery because of the relationship with Santano, which is the bakery that serves them. So and those are all the mixed margin and the margins comes up to a margin similar to us as opposed to 30% to 32%. Okay. So it's more similar to your prepared remarks. Okay. Thank you very much. Thank you. Next question will be from Chris Lee at Desjardins. Good morning, Brian and Claude. Having lived in Hong Kong for 10 years, I agree that these are great stores, especially the stir fried noodles. So congrats on the deal. Thanks, Chris. Yes. Brian, maybe a 2 part question. First, you have said before that Australia was a springboard to enter Asia. But now that you're there, has your view on Ample changed at all? And then another question would be, respect to Asia, as you expand to other Asian countries longer term, do you have a preference for countries where there are other Circle K licensed stores currently? Thank you. Yes. As we said before, Asia is a broad array of opportunities from probably the most sophisticated markets in the world being like a Hong Kong or Japan to emerging markets where modern retail is just starting to take hold like a Cambodia or a Laos. We in our mind have a half a dozen countries that are our priorities. What we are excited about is now we've got local expertise on the ground that's certainly closer and knows these markets and supply chain and all the other things are important to success much more than we do today. So one of our first steps will be much closer collaboration with this team and planning our priorities in the future. In terms of the attractiveness of our licensees, I'd say probably is attractive just from the standpoint we know the people. So to the extent that it would be partnerships or a purchase, we know the people, know the culture. So I think that's always an advantage when you talk about due diligence and de risking a transaction. So not specifically targeting that group, but if there were an opportunity, I think it is it does make sense from a risk standpoint. So we're excited about having this team on board and helping them helping us solidify and execute our expansion strategy. With regard to Ampol, our answer hasn't changed. COVID-nineteen has dramatically impaired the economy in Australia, the aviation business, the refining business. You saw this week that BP announced the closure of the largest refinery inside the country of Australia. So we just think there's a lot of uncertainty left that needs to be sorted out and we want to let the dust settle. That doesn't mean that our desires in Asia or in Australia have changed, but we think we want to see a little bit more of how this plays out in some of their businesses before we take any additional steps. Our last question will be from Michael Van Aelst at TD Securities. Yes. A couple of quick ones here. First of all, the acquisitions is a little bit smaller than what you would normally go into a new market with. So I'm wondering what kind of added management or infrastructure that may be required to operate as a standard business unit? Yes, Michael, I laugh because I think 8 or 9 years ago, we took some grief for buying something as big as we did in Europe for our 1st century. This it really isn't the size that is attractive to this. It's the team. It's a highly tenured, highly experienced team that we've known for a long time. So that's really why Hong Kong has been a priority for us the last 3 or 4 years. In terms of our infrastructure, this our model fits great. This will be largely a standalone that we think we can bolt on additional acquisitions in Asia to their model. So we will have, I think, synergy opportunities inside of Hong Kong's business itself, but we don't anticipate any material incremental cost in operating a business in Asia inside of the ACT mothership. All right. Thank you. And then a little bit sensitive, I guess, but did the political risk in Hong Kong that's been emerging in recent months give you any reservations in making this deal? I think it became a due diligence point, that we didn't expect necessarily when we started the conversations a year ago. But we spent a lot of time talking to experts in the area, whether that be our banking partners, our ambassadors, other politicians, people who have been on the ground there for years. And we believe in the long term, this will be a good place to do business and a good platform for us to grow from. And while we can never fully de risk that component, we think we understand it and we've got a very experienced management team on the ground there that certainly understands the lay of the land and those risks as well. Okay. And then on the M and A in the area, you mentioned partnerships. And I'm wondering if you're planning on taking a different approach to M and A and growth within Asia than you have in North America. I'd say we're open to it, Michael. It takes ages very different shapes and sizes, very different cultures depending on which country you're in. Supply chain capabilities are much more important than M and A would typically demand in Europe or in North America. So I think we're going to be thoughtful in how we enter those countries and understand what it takes to win. And if that includes having partnerships, then that'll be part of our recipe. But so it will be flexible is my point, maybe beyond what we've been in our traditional North American and Western Europe M and A. What do you mean by partnerships though? Can you try and clarify that? I can't really. It could be equity partnerships, it could be strategic partnerships, it could be minority interest, which has never been our preference and still would not be our preference. But I think the message is we're going to be flexible to make sure we can enter into countries with the right ingredients for success. Maybe more than just boxes, that may be logistics, supply chain, things like that, that are critical success in some of these emerging markets. Thank you. And that is all the time we have for questions today. Appreciate dialing in today. Yes. Paul, it's J. It's for the technical difficulties. Don't hesitate to reach out if you have any questions or following up. Thank you all for your time. We look forward to speaking again after we report Q2 results on November 24. Have a nice day everybody. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.