Earnings Call: Q1 2021

Sep 2, 2020

Good morning. I would like to welcome everyone to this web conference presenting Alimentation Couche Tard's financial results for its Q1 of its 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 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 Hanisch, President and Chief Executive Officer and Mr. Claude Tessier, Chief Financial Officers. Brian, you may begin your conference. Thank you, Jean Marc. Good morning, everyone. Thanks for joining us for the presentation of our Q1 2021 results. We had an exceptional quarter, I think both financially and operationally, as we've seen an increase in shopping occasions and solid execution by our teams to take advantage of changing consumer behaviors during this COVID period. This led to very strong same store merchandise sales across the network, driven primarily by a larger basket as consumers are certainly consolidating shopping trips. We believe we've grown market share versus a channel in the majority of our markets and fuel volumes continue to slowly improve while margins remain strong in most of the areas in which we operate. During the last 6 months, we've discussed on numerous occasions the benefits of operating a global network and the shared learnings that have often come from the varied experiences across many of our business units. From that perspective, we find the recent trends in our European markets to be encouraging and consider them a possible proxy for what to expect and how to react in North America when the virus is more fully contained. As we continue to cope with the COVID-nineteen pandemic, I'm pleased that we stayed the course on our strategic goals and advanced our journeys both on food and the customer experience at our locations. During these unprecedented times, I continue to be inspired by our team members' resilience, commitment to each other and to our communities. Before I turn to results, I did want to touch on Hurricane Laura, the strongest storm to ever hit Louisiana, which is an important market for us. While we had damage and flooding in our stores in Laura's path, we're fortunate that none of our employees were injured and we've already reopened the vast majority of our locations. On top of the strain of the pandemic, the teams in our Texas and Gulf Coast business units worked tirelessly to support our communities in those areas, who depend on us for emergency supplies and fuel. And I'm proud of them and want to thank them for their dedication and commitments. Now turning to the results of the Q1. Same store merchandise revenues increased 7.7% in the U. S, 3.4% in Europe and 19.9% in Canada compared to the same quarter last year. This growth was due to the gradual reopening of the economies in which we operate, the continued strength in the average basket size as customers relied more on the proximity and needs of our locations to fill their needs, as we adapted our offers to address these new demands. Speaking of our offer, we saw our strengths across many categories, especially alcohol, packaged beverage, lottery and various grocery items, in addition to tobacco specifically in Canada. We've also worked hard to drive more traffic to our locations through increased awareness of our loyalty programs and ensuring we remain focused on our core value proposition. A key priority in improving our customer experience and driving organic growth is expansion of our North America Fresh Food Fast program, which we formally described as Food at Scale. This may be the largest endeavor the company's under ever undertaken in my career. The temporary pause on food store training and openings due to COVID has ended and we have nearly 875 stores up and running and remain on target to have 1500 stores rolled out by October. Sales of stores with the new offerings continue to significantly outpace those in non converted benchmark stores and customer feedback has been excellent. Importantly, we also see a halo effect with positive sales in other categories versus control sites, with a caveat that certainly COVID has introduced a lot of noise into our results. No doubt developing food culture and executing this each and every day at every site is a big challenge that we don't take lightly. However, I'm pleased with the offer we're developing and believe it will deliver top line and margin improvements in the months and years to come. Capitalizing on our new coffee equipment in the U. S. That we rolled out last year, we strengthened the messaging and in store execution to enhance the customer experience, specifically with iced coffee. Separately, we're aggressively expanding the presence of our Froster program in Europe, which is now available at over 400 stores. And this offer continues to like customers and drive and promote TripStar sites, especially where we began testing in Ireland and the Baltics, where we've seen really strong consumer response and actually had one store in Lithuania sell over 5 50 cups in one day. Due to safety concerns related to COVID and consumer wanting to consolidate trips, we continue to see a switch from dispensed beverage to packaged beverage and larger package sizes future consumption. As a result, packaged beverage continues its double digit growth during the quarter, driven by energy and carbonated soft drinks, which have maintained a strong upward trend. In age restricted products, alcoholic beverages continue to grow at a rapid pace as consumers shift from on premise restaurant and bar consumption to purchasing from our local our locations. More specifically, sales of beer and hard seltzers saw very strong performance during the quarter. Cigarettes and OTP also saw strong demand in the quarter. In particular, cigarette sales grew in all geographies, although in the U. S. Not at the pace of the rest of the categories. In Canada, it showed the highest increase. We continue to see pressure on margins a bit as consumer patterns have shifted toward multi pack and cartons. OTP or other tobacco products continue to drive positive results as well with all parts of the network exceeding our internal sales and margin forecast for that category in the quarter. And finally, lottery was also a notable traffic driver to our stores over the summer as obviously people continue to want to gamble and Lottery fits that bill without a lot of other facilities being closed. During the quarter, we also pushed continue to push forward our localized pricing initiative using analytics. We now have it up and operating at more than 800 locations in Sweden, the Grand Canyon, and we've been very pleased with this initiative and we're forming plans to roll it out globally. Moving to our fuel results, same store volume in the quarter remained negative due to the impact of COVID-nineteen on miles driven. However, we're seeing some improvement in demand in portions of our network as portions of our network return to more normal operations, particularly in Europe. For the quarter, same store fuel volumes decreased 21.2 percent in the U. S, 12.4% in Europe and 25.6% in Canada compared to last year. Despite these declines, we continue to realize healthy fuel margins across the network. During the quarter, we converted more locations to our Circle K fuel brand, bringing the total to more than 2,350 sites in North America. We continue to be pleased with this fuel rebranding effort as a driver of traffic to our sites and a way to increase overall brand awareness and loyalty from our customers. At the pump, we continued the implementation of our dynamic pricing strategies in our developing data and analytics capabilities. We now have the ability to offer a more responsive price at over 2,400 locations and we believe will help us react more quickly to local market factors and customer demand changes as we continue to learn and expand this across our network. Promotional and loyalty programs have also benefited our fuel customers. The EasyPay program delivered increased frequency and growing transaction size versus non EasyPay customers. And as customers show strong attachment, EasyPay is now available across the entire U. S. Network, excluding our Northern Care or Holiday business unit. In Mobility, we're experiencing a strong summer in our Norwegian test markets with almost double the amount of charging transactions at our sites in July compared to the same month last year. This is particularly due to more holiday travel within the country during the pandemic as borders are closed. We also push forward with Circle K brand home charging solutions, now have over 1400 chargers installed at the end of the quarter, both in private homes and in partnership with residential complexes. These initiatives continue to push us top of mind for EV charging in the country and keep our customers engaged in our ecosystem for all their fueling, charging and convenience needs. Our work with innovation does go beyond mobility. To meet growing customer demand with fewer touch points and quicker transactions, particularly during COVID, we now have over 1,000 sites offering home delivery options and another 1,000 sites offering curbside or click and collect pickup. Our teams are learning and gaining insights into what the customers want in these offers and whether there's a viable business model there. We have also deployed frictionless payment options to more locations, including license plate recognition at the forecourt in Norway and leveraged mobile payments, our mobile app and prepay across the network as part of our core strategy to serve the customer anywhere, anytime and any way they want it. As part of that, we just announced a partnership to pilot autonomous checkout solutions in our Grand Canyon business unit. This is an exciting development as an emerging technology aims to make our checkout experience as easy as just walking in and out. And it's also uniquely designed to work with our existing store layouts, a factor we think will help us scale this if we prove successful. Gamification is also an increasingly successful way to reach our customers. In this quarter, we had millions of games played per week with high redemption rates. We're also using gamification as a training tool for our store members. In Europe, training is gamified training has over 90% completion rate with excellent employee feedback. And over the summer, we launched this initiative in 2 of our U. S. Divisions with great success and a clear positive impact. Specifically, we leveraged a tool to help our team members train our basket building strategies and early results have been encouraging and we certainly plan to roll this out to the rest of our network. Before turning to our financial results, I want to briefly mention the meaningful ways in which we continue to serve our communities in their time of need. By the end of the quarter, we'd served over 4,000,000 free drinks to first responders and healthcare workers, contributed over 40,000,000 meals to Feeding America and started an effort to donate 5,000,000 meals to local food banks in Canada. In July, we issued our 2nd sustainability report, where we highlighted the ways in which sustainability has become a lens in our business. And we've also set ambitious targets in 4 areas that we believe we can really make a difference in our communities: fuel, energy, food packaging and waste and workplace safety. While we have far to go, I'm proud of the promise and progress we're making for our customers, our employees and our stakeholders as we work to make this a better and safer world. I'm going to pause there and let Claude take you through more of our Q1 financial results. Claude? Thank you, Brian. So ladies and gentlemen, good morning. For the Q1 of 2021, we are happy to report net earnings attributable to shareholders of the corporation of $777,100,000 or $0.70 per share on a diluted basis. Excluding certain items for both comparable periods, adjusted net earnings were approximately $795,000,000 or $0.71 per share on a diluted basis compared with $0.48 per share on the equivalent period last year, representing an increase of 47.9% year over year. As Brian mentioned, the COVID-nineteen pandemic continued to impact traffic patterns and consequently our business and financial results during the Q1. From an operating expense perspective, we pressed ahead with the investments to ensure that health and safety of our employees and customer and are proud to have earned the consideration of our communities as a safe shopping destination. These additional costs were however fully offset by initiatives implemented across our network to reduce our controllable expenses. I will now go over some key figures for the quarter. For more details, please refer to our MD and A available on our website. During this most recent quarter, excluding CAPL's revenue and the net negative impact from foreign currency translation, merchandise and service revenues increased by approximately $304,000,000 or 8.5%. This increase was primarily attributable to growth in the average basket size with more than and which more than offset the continued softness in traffic. On the same basis, merchandise and service gross profit increased by approximately $109,000,000 or 8.8%. This was mainly attributable to strong organic growth despite lower traffic in our network due to the confinement measure aimed at slowing the spread of COVID-nineteen. Our gross margin increased by 0.7% in the U. S. To 34.7% due to the strong service revenues and the recognition of deferred credits. Our gross margin decreased by 0.9% in Europe to 40.6% and by 1.2% to 31.7% in Canada, both of which were negatively impacted by a shift in product mix towards lower margin categories. Moving on the fuel side of our business, while volumes decline overall, our road transportation fuel gross profit excluding CAPL's gross profit and a net impact negative impact from foreign currency translation, it increased by $168,000,000 or 17.2%. Our road transportation fuel gross margin was strong at $0.4299 per gallon in the U. S, an increase of approximately $0.16 per gallon mainly driven by a decline in fuel product costs. In Europe, the road transportation fuel gross margin was US0.1051 dollars per liter at an increase of approximately US0.02 dollars per liter while in Canada the road transportation fuel gross margin was CAD10.29 per liter, an increase of approximately CAD0.03 per liter driven by the changes in the competitive dynamic and improved supply conditions. Normalized operating expenses decreased 0.3% driven by costs and labor efficiencies as well as the various measures enacted to streamline and minimize our controllable expenses. These positive items were partly offset by COVID-nineteen related expenses, normal inflation, higher labor costs and incremental investments to support our strategy. COVID-nineteen related expenses include emergency appreciation pay of $2.50 per hour in North America for hourly stores and distribution center employees, thank you bonuses in North America following the end of the appreciation paid premium in June, additional cleaning and sanitizing supplies and routines as well as mask and gloves for our employees. A special focus was placed on cost containment initiative since the start of the pandemic, allowing us to reduce non critical expenses without impacting the service we offer to our customers. Excluding specific items described in more detail in our MD and A, the adjusted EBITDA for the Q1 of fiscal 2021 increased by $320,400,000 or 30.8 percent compared with the Q1 of fiscal 2020, mainly from higher road transportation fuel gross margins, partly offset by the negative impact of COVID-nineteen on our traffic and fuel volumes as well as the net negative impact from foreign currency translation representing approximately $12,000,000 Excluding specific items described in more detail in our MD and A, the income tax rate for the Q1 of fiscal 2021 was 20 0.7% compared with an income tax rate of 19.5% in the same quarter last year. From a profitability and capital efficiency standpoint, we continue to improve our key measurement ratios with a return on equity of 25.3 percent and a return on capital employed of 16.4%. Importantly, we maintained our significant free cash flow generation during the quarter and saw our leverage ratio decline further to a level of 1.26:one. As of July 19, 2020, we had ample balance sheet flexibility with access to $5,800,000,000 in liquidity through our cash balance and available revolving credit facility. Finally, on September 1, 2020, the Board of Directors declared a quarterly dividend of CAD0.07 per share and approved its payment for September 25, 2020. Before I conclude, I would like to express how proud I am to see our company deliver another solid quarter in the face of such a challenging and unprecedented macroeconomic environment. Our Q1 performance once again demonstrate both the financial and operational resilience of our agile business model. We generated record free cash flow, continue to strengthen our balance sheet and stand ready to invest in our growth initiative as the various economies in which we operate gradually ramp up. This crisis has reinforced our belief that only through this discipline, both in driving organic growth and in pursuing M and A opportunities will Couche Tard successfully preserve and continue to deliver sustainable value for our employees, customers and shareholders. With that, I thank you all for your attention and turn it back to Brian. All right. Thank you, Claude. Although we had a very strong quarter, we fully recognize the significant uncertainty ahead both in the course of the pandemic and the global economy. Therefore continue to be prudent and operate with a long term mindset as we keep a clear focus on our strategy. We'll always continue adapting to different consumer and customer demands, whether that's for larger basket, future consumption items, different assortment or changing or different shopping experiences. And we're cautiously optimistic that fuel volumes will continue their improvement across the network as economies reopen. The last several days, we've been hard at work serving our communities in the areas devastated by the fury of Hurricane Laura and our thoughts certainly go out to those suffering from the virus or taking care of loved ones. In conclusion, I want to thank our customers, our employees, our partners and shareholders for their continued support on our journey become the world's preferred destination for convenience and fuel. And with that, we'll now answer questions we received from analysts. Great. So the first question comes from Patricia Baker at Scotia Capital. The same store sales trends across the board in Q1 were very impressive. I would assume that you have certainly attracted new customers to your stores and that your locations and proximity to consumers really served you well. While one cannot expect this to be fully sustainable, are you engaging in any special tactics or thinking of strategies to try to convert the proportion of the new customers to become loyal Circle K shoppers? Yes, great question, and we certainly are. I think COVID has taught us that we can be relevant in certain categories and certain package sizes that we probably ignored a bit as we forgot about those customers over the years. Larger packaging product sizes in key categories like alcohol, salty, future consumption, CSD, it performed very well. And we believe we can demonstrate fair value and variety in an effort to keep those customers. We've added more health and safety products, which unfortunately are now just a part of everyday life during COVID and we've certainly expanded our offerings within the grocery category. We're going to continue to develop our frictionless capabilities, which help customers help to attract customers to want quick and easy purchases. We've been promoting our loyalty options to help retain new and existing customers. We've developed new ways of training our staff to better use our Lyft platform, which continues to deliver very strong results and delivering better value and offers for our customers. We focused on driving brand awareness through both our community involvement and also with gamified marketing and increased presence on social media, while we did cut back spending on traditional media. And finally, our focus on food, the rollout of our fresh food fast offer in North America. We believe it goes beyond just food and makes the brand even more relevant to our customers. So again, a lot of uncertainty, but cautiously optimistic as we believe we outperformed the channel during the quarter that we can see some of that momentum in the future. The next question comes from Vishal Shreedhar at National Bank Financial. Can you talk about the particular strength in U. S. Fuel margins and if this gap versus OPUS data is sustainable? Yes. 1st and foremost, I think we're always looking to optimize the balance between fuel volumes and margins to get the best results. We've actively in the quarter restored many markets with success. I think the markets have been more rational during COVID with the uncertainty of volumes. It's hard to say what the future holds in this environment, but we're pleased with the results for the quarter. We did see a benefit of our geographic mix, where some of the regions where we had stronger fuel margins saw smaller declines in volume in regions where clients were the largest may have had some softer fuel margins. So again, the global diversification we think has benefited us here. And finally, we believe we have a best in class fuel procurement team that is consistently widening our cost advantages versus the overall industry. 2nd question from Vishal Shreedhar. Can you talk about the strength in Canadian merchandising same store sales growth? In particular, what categories drove the performance? And if tobacco was a key driver of strength, was stockpiling a factor? Also, did performance sustain or moderate through the quarter? Yes, some unique things happened in Canada. I certainly I don't think stockpiling was a material issue. We saw new customers as First Nation reserves and vape shops in Canada were mostly closed outside customers for a portion of the quarter. Of course, this could be beneficial to us long term if we can be successful at retaining those customers. The reserves have been open for several months and we've seen some stickiness with some of these new customers staying with us. Although the pace of growth, while still strong, has slowed as we went through the quarter and entered the next quarter. We also saw bigger pack purchases, but again, we'd not quantify this as stockpiling, but rather in line with the trends we're seeing of making larger purchases and reducing frequency of trips for certain occasions. The next question comes from Derek Dley at Canaccord Genuity. Can you discuss if you've witnessed any changes in the competitive environment in North America and Europe in terms of promotions or product assortment? And have your peers in the convenience store space and in auxiliary channels like grocery channel or dollar store channel adjusted their product assortment or promotional strategy? It's difficult answering the question on competitive environment. There's just so many moving parts and things happening at the same time. But I think I can say it's been fairly rational environment with I think less price competition in most of the channels we compete in. On our side in terms of promotions, I think like many, we scale back our marketing and we've been more targeted in our initiatives. We've leaned heavily on social media to launch our In terms of assortment, I think we got out early in a lot of key categories and responded. So again, when we look at our supplier scorecards, we think we've taken share, but our competition will learn. So I think the channel overall will adapt at different paces to what the customers are looking for. As mentioned, we had clear moves into larger packages, product sizes, added more supplies, mass sanitizers, grocery, And we think again, there is some stickiness to that. And we're going to remain sharp on price to ensure we keep up with the value proposition and the needs as we probably are likely to see economic strain as in particularly North America where some of the government programs are cycling off. The second question from Derek Dley. Given the large scale consolidation announced by one of your competitors during the quarter, has this altered the acquisition environment? Are you seeing greater opportunities surface and is your focus still on North America and Pan Asia ahead of Europe? Our strategy is focused on driving significant and sustainable organic growth while doing M and A when we believe we can create shareholder value. Other than the transaction you referenced, which traded at value, quite honestly, I can't understand, deal flow has been relatively quiet in the quarter. We believe people just focused on dealing with COVID. Now that COVID has become a bit of the new normal, we are starting to see a little more deal flow. And again, we'll engage, as Claude said, the balance sheet is in great shape. So we'll engage and if the value is there, we'll certainly take advantage of those opportunities. In terms of the markets, the U. S. Still remains a very fragmented market. We see many chains that remind us of our Holiday acquisition that we did a number of years ago. These are material and size, simple to integrate on a regional basis. And if it's anything like Holiday, bring strong expertise and capabilities complementary. And when I look at North America in particular in the U. S, it's just our largest source of synergies, which has got a very scalable platform. Touching on Canada, we've got significant share in the East. So material acquisitions would be difficult, but we've got significant opportunities to strengthen our network in the western half of the country. Asia Pac, we've talked about that for a while now. It remains a strong area of focus. As you see the long term growth potential, we are exploring several opportunities actively there. In Europe, Europe is many different things. There are markets that's over the 9 years that we've been there, we've learned we want to expand in. There are markets we would likely never enter. We'll certainly keep an eye out for opportunities at attractive prices, but that region is not a priority for us today. Then I would want to touch on Australia, which I guess you can call part of Asia. We pursued Ampol, which it's now called because it was a strong strategic fit. We liked the story in Australia and we'd confirm that during our due diligence process early in the calendar year. And we paused because of the uncertainty created by COVID-nineteen, we want to put our focus on operating our business, ensuring the safety of our employees and our customers. Having said that, the recent results released by Ampol were weaker than we expected and the headlines seem to be more around financial engineering. It's really hard to understand the underlying performance of their business during the COVID environment. Their refinery, Litton, has experienced strong and persistent pressure on margins, which I guess likely raises some questions as to the near term viability of that plant. Retail volumes like in North America were all significant also impacted materially. And it's hard to say whether the backcourt strategy is gaining direction in this COVID environment. So you put all these factors, it's just giving us a pause. The next question comes from Irene Nattel at RBC Capital Markets. You delivered outstanding inside store sales across all regions, especially in Canada. Can you please talk about key drivers, cadence of basket size as you move through the quarter and exit rates relative to same store sales as reported? What levels do you think are sustainable? In terms of cadence in the growth of basket, it's declined slightly through the quarter as we in all geographies really, but still strong. The basket remains significantly higher than the same time last year. While we don't know the future and what's sustainable given the uncertainty around COVID and its impact on our markets, we're focused on delivering our strategy and balancing short term organic growth initiatives that are ongoing with longer term big bets like food and localized pricing and assortment. 2nd question from Irene Nattel. M and A in the space continues at a strong clip and at very rich valuations. What are your current thoughts around M and A? And do you think Couche Tard can successfully negotiate transactions at a reasonable valuation in the current environment? What would be the alternative use of excess cash flow? Yes. So thank you, Irene, for the question. And Brian has hit a lot of the answer that question in the previous question. So, but I'm going to tell you that as you probably know, overall, the activity in M and A is currently so slow. But we're confident that it will change and it eventually will create deal flow and there will be opportunities for us. We also do think that opportunities will arise to provide us with the return that we seek as long as we're patient and remain financially disciplined. In the meantime, our focus is to maintain a healthy balance sheet to allow us to seize those opportunities. And in terms of capital allocation, we will continue to make sure that we are maximizing shareholders' return. To do that, we will continue to support the maintenance of our business and growth initiatives in our strategy and be ready for any M and A opportunity that could arise. Any remaining excess capital will be appropriately used for debt repayment, dividends or stock repurchase as we've done in the past. The next question comes from Peter Sklar at BMO Nesbitt Burns. In the U. S, your merchandise same store sales growth was 7.7% and your motor fuel same store volume declined 21.2%. Can you please elaborate on how these growth metrics trended through the quarter? What were the exit rates for the quarter? And how are they trending in the 2nd quarter? Yes, Peter, I think we've hit the merchandise, but I'll touch on the fuel a little more. We're still seeing negative trends, but those trends did improve through the quarter. If you look in the future, it's really just dependent on what happens with COVID case and the degree which economies reopen or don't reopen or go backwards. Europe, where most of our geographies, the COVID is largely under control and the economies have been opening, we've seen recent trends encouraging. We've actually had days weeks where we've had positive same store leader growth in Europe. So we're optimistic that when the world normalizes, those customers will be back. But we'll continue to monitor that and balance margin and volume. We're not going to chase something that's not there. We are saying I would add that it's also been difficult to understand what good looks like. So we certainly are focused both on the merchandise side and on the fuel side of gathering public and private data points and we'll make sure to maintain a balanced approach as we always have. The next question comes from Karen Short at Barclays Capital. Can you provide any color in terms of how the Fresh Food Fast program helped drive higher baskets? And can you also provide color on how stores with the program are comping compared to the stores that are not yet up and running? Yes. So as we mentioned earlier, our Freshly Fast program, probably the biggest endeavor we've ever undertaken. I'm pleased with the early results, both in the pilots and as we scale it up through the 875 sites that we have live today. Specifically on the basket, we're seeing customers pick up more items during the transactions and we're also seeing a halo effect on other categories. Compared to our benchmark stores, we're seeing improvement both in sales and margin and the results have trended higher on average as stores rollouts mature. I'm really hesitant at this point to give any more color on them as the majority of our stores are still very much in the ramp up phase and we've got a lot of COVID effect that's created so much noise in the results. So hopefully in coming quarters, we can get more specific color there. Just in terms of the program itself, if you haven't seen it, our U. S. Leadership team, we couldn't gather the Europeans or Canadians. We all went to a store and actually executed the program ourselves. And so we're focused on making that program very easy to execute in the store, low touch for our customers with packaged products that lend themselves very well in a pandemic environment, while certainly enabling customization for local tastes so that we appeal to as many customers as possible. So again, early, very encouraged. The next question comes from Bobby Griffin at Raymond James. Should M and A opportunities be harder to come by due to the high valuations that we're seeing currently, is there further opportunity to accelerate your organic growth initiatives such as organic store openings, foodservice, dynamic pricing and others? Yes. We communicated last quarter, just with the uncertainty of the environment, we have reduced our capital plan for the year. But at the same time, we've tried to balance that with a long term view of the business and we stay committed to funding and driving our most important strategies to drive organic growth. I'll hit on a few of those. We certainly maintained our focus on building, buying and building new stores. So that goal of doubling the number of NTIs or new stores that we build is still very much on track. As we talked about with foodservice, we've rolled out we will have rolled out by next month the committed 1500 sites and prepared to continue to invest there, assuming we continue to see the results that we expect. Dynamic pricing, I touched on it earlier, very pleased with our pilots. So we're making a significant investment in rolling that out to the remainder of the network. Hopefully, most of that completed this fiscal year. If not, it will maybe go a little bit into next year. So those are examples. I'd say the other one is continuing to roll out the Circle K fuel brand. We've rebranded a significant number of locations and we have plans to roll out several 100 more this fiscal year. We've just been very pleased with the results there. So those are examples of areas that we've continued to fund that we think will continue to drive organic growth for us in the coming quarters. The next question comes from Mark Petrie at CIBC World Markets. How is having the consolidated Circle K banner helped you through the course of the pandemic so far? Can you give an example of how this has benefited you in the recent months? And as you look forward, what are the most material opportunities that you can leverage? Yes, I really hadn't reflected on it, but it'd be hard to go through what we've done for the last 8 months with the family of 5 different brands that we had. We've certainly been able to show that we're part of our communities. I touched on earlier, but 4,000,000 beverages to our frontline first responders, 40,000,000 meals in Feeding America, 5,000,000 meals in Canada, on and on and on. So when we look at our online brand metrics, Brand Tracker, we're being recognized for that. We're being recognized for being a part of the solution to our community. And I think that's just helped strengthen that global brand. Internally, there's just common calls to action around our brand promise to our customers. Our employees feel really good about us being a part of the solution. So I just think as you go through this, I think it's helped them cover a very strong culture and in some ways continue to strengthen that and strengthen our resolve to be 1 family, 1 team inside the company. And then I would say digitally, it's hard to draw boundaries in the digital world today. So being under the umbrella of 1 brand, while it does have some risks, I guess, it's helped us unify our messaging, take advantage of scale there. And just on the fuel space, where I've talked about rebranding the Circle K fuel brand just dramatically simplified the IT agenda, which allows us to be much more nimble, much more quick at bringing innovations to our fuel customers. The second question from Mark Petrie. Given the material shifts in sales mix in your merchandise business, could you please discuss the gross margin percentage within the major categories and how that trended in the quarter? So overall, we've seen similar trends in gross margins. So growth in the cigarette category, where margins are typically lower and softness in food category where margins are higher both negatively impacted the product mix. In the cigarette category, we saw declines in margins as customer purchased larger packs and cartons. So I think we referred to that earlier. And in Europe, the negative impact on margin was larger due to the higher penetration of the food category. While in the U. S, the growth in service revenues and specifically Lottery positively contributed to the mix impact. The U. S. Margins also were positively impacted by a one time deferred credit recognition. Gross margins, they trended higher as the quarter progressed and with the gradual reopening of the activities in the different markets, we've seen the mix of fresh food improving, thus having a positive impact on the gross margin. The next question comes from Chris Lee at Desjardins Securities. How has the pandemic impacted the company's 5 year ambition of doubling its earnings? Is the end period of the 5 year strategy still fiscal 2023 as previously communicated or has it been pushed back due to the pandemic? I'd say 5 years is still 5 years. We're 2 years in. Our 5 year plan remains on track and we actually take a deep dive quarterly as a leadership team to check our progress. And I'm pleased that we continue to make good progress on most of our initiatives. While the pandemic has had an impact short term on traffic patterns and behaviors, there's a lot of pushes and pulls. We've slowed some initiatives, for example, remodels. We had a big remodel agenda this year. Just being prudent with capital, that's one of the items that we pulled back on, but we can accelerate that at the right time. If you look at an item or an area that we would have accelerated, 2 that come to mind. 1 would be the localized pricing we talked about that just good results there. So making a heavier investment there we'll be ahead of plan in that space. The other would be non fuel locations. Unfortunately, one of the consequences of COVID is there is a lot of retail space available. So we see this as an opportunity to accelerate in a dramatic way our non fuel penetration to new stores. We are measuring the performance frequently. We have open discussions about how this COVID is impacting our environment. The last piece, I guess, I'd touch on would be innovation. Certainly, frictionless and touch points are more top of mind than even before. So we remain focused on being a part of the innovation and trying to change the consumer shopping experience in our industry. So overall, again, pleased with the focus that the team has had during COVID as everybody's both personal and professional lives have been impacted. 2nd question from Chris Lee. When Canada banned the sale of menthol cigarettes a few years ago, how did it impact tobacco sales overall? Did many menthol smokers switch to other brands or was there a material decline in tobacco sales as smokers either switched to contraband or quit? Finally, what are your thoughts on California banning menthol cigarettes and other flavored tobacco? Yes. Overall, we prefer that we not see localized legislation dictating what consumers have access to. Where we've had menthol bans, whether that be Minneapolis or in Canada, we certainly do see short term impacts. But as I look back over results, I think there's a shift to other products for a large portion of those smokers, menthol customers, whether that be in traditional cigarettes or other products like moist smokeless vape, the white nicotine products that are out there today. So really hard to say the net net result. With regard to California, the Governor signed the ban. What I did see this morning was several institutions filed for a voting referendum. So that could have an effect of delaying that ban for up to 2 years. So stay tuned there. I think there's a process of whereby people have to they have to go out and get a certain number of signatures to make that go to a referendum, but it seems to be a likely direction for California. I would add, California, not a large presence for us and just being the West Coast market, tobacco is a much smaller part of the mix than most of our other markets. The next question comes from Michael Van Aelth at TD Securities. Operating expenses were down 5.6 percent year over year and down on a more normalized basis. Can you give us an idea of what the total COVID related costs were and how much you benefited from reduced man hours, travel and promotional activity during the pandemic? So most of our COVID expenses of the quarter were related to more specifically to the appreciation pay in North America, which ended mid June, to the thank you bonus also in North America that were paid also in July. So in addition to those costs associated with labor, we incurred also significant costs to ensure the safety of our employees, mostly for masks to be used in our stores. Overall, we estimate that the cost of all COVID related expense to be around $80,000,000 You would understand to have the precise number is difficult because of the multitude of expense that we needed to take, but we estimated that to be around $80,000,000 In terms of normalized OpEx, they were down by 0.3%. And if not normalized for credit card fees, they would have been down 2.1%. So overall, we were able to scale back a lot of expenses. Our business model is giving up the flexibility to adjust in a short period of time. So accordingly, we were able to quickly adjust labor hours with the support of our business our labor models, sorry, to match the demand and traffic we were seeing without impacting our customer service. On the operational side, we carefully selected which expenses were required without impacting our performance. And we were also able to defer marketing expenses without hurting our value proposition and brand. And finally, on the corporate side, we eliminated all non essential travel related expenses and professional fees. So a lot of initiatives that took place. On another front, we also continue to work on cost optimization in all the areas of our business with particular opportunities in the goods that are not for resale. So we are focusing a lot on these to make sure that we're using our scale and reduce our cost base. And finally, in light of the current situation and until we see more stability, we will continue to scrutinize our expenses, use our usual financial discipline and make sure that we are taking the appropriate measures to adapt to the situation. So we're going to still be financially disciplined and we'll be careful about our expenses. Great. Thank you, Claude. Thank you, Brian. 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 Q2 2021 results in November. All right. Thanks, everyone. Have a good day. Thank you, everyone. This concludes today's conference call. You may now disconnect.