Alimentation Couche-Tard Q2 2024 Earnings Call Transcript

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Provided by Quartr
November 29, 2023

Key Takeaways

  • For Q2 fiscal 2024, adjusted net earnings were $792 million (or $0.82 per diluted share), essentially flat year-over-year, while merchandise and service revenues rose 0.9% ex-FX driven by both acquisitions and organic growth.
  • The company closed on 112 MAPCO sites in Georgia, Tennessee, Alabama, Mississippi and Kentucky and secured EU approval to complete the TotalEnergies acquisition in four new European countries, advancing its 5-year goal to build 500 stores (40 opened this year) and growing to over 2,100 licensed Circle K sites.
  • Inner Circle membership expanded into seven U.S. business units covering nearly 3,000 locations with over 8 million enrollments since launch, delivering higher visit frequency, fuel volumes and basket sizes versus non-members.
  • Normalized operating expenses increased just 1.5%—well below the ~3.8% inflation rate—reflecting early gains from the “Fit to Serve” cost-discipline program and efficiency initiatives such as 3,250+ smart checkouts globally.
  • Higher-margin convenience categories like packaged beverages and the Fresh Food Pass (now in 5,500+ sites) drove merchandise gross margins up, while U.S. same-store fuel volumes dipped 1.5% (Canada +3%) amid strong per-unit margins from supply-chain and pricing optimization.
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Earnings Conference Call
Alimentation Couche-Tard Q2 2024
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good morning. I would like to welcome everyone to this web conference presenting ADE Mota Son Couche Tard's financial results for the Q2 of fiscal year 2020 4. All lines will be kept on mute to prevent any background noise. After the presentation, we will answer questions from analysts passed live during the web conference. We would like to remind everyone that this webcast presentation will be available on our website for a 90 day period.

Operator

5. Also, please remember that some of the issues discussed during this webcast might be forward looking statements, 4, 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.

Operator

Brian Hanisch, President and Chief Executive Officer and Mr. Felipe da Silva, Chief Financial Officer. Brian, you may begin your conference.

Speaker 1

Thank you, John Phillip, and good morning, everyone. We're pleased to announce a solid second quarter with progress across most of our key metrics. Although we did see some softening in the quarter in same store sales in the U. S. Driven by weakness in the cigarette category and cycling against a very robust Q2 last year of 5.6%.

Speaker 1

In an environment with continued inflation and high interest rates, we remain committed to offering compelling value and ease and we believe we'll continue to grow our share in key categories as we continue to implement key pieces of our strategies. In the quarter, we substantially expanded the rollout of our Inner Circle membership program, which is providing meaningful convenience and fuel rewards to our most valuable customers. As America's 3rd stop, we're focused on the growth of our beverage category by offering great assortments, innovation and value in both packaged and dispense beverages at affordable price points. We also continue to be pleased with the performance of our fuel business in terms of both volume and margins as we continue to bring traffic to our sites through reoccurring promotional fuel days. I'll return to each of these areas with more detail later in my presentation.

Speaker 1

During the quarter, we held a very well attended Analyst Investor Conference, and I want to thank those of you who joined us either in person or online. At that time, we announced our new 10 for the Win 5 year strategic plan, with winning and growth being one of the lighthouses or pillars of that strategy. Here, we're excited by the recent developments in growing our network. In the beginning of November, we closed on the acquisition of 112 MAPCO sites, accelerating our development in key markets in Georgia, Tennessee, Alabama, Mississippi and Kentucky, and adding approximately 1300 team members to the Couche Dard family. We also received a very important decision by the European Commission allowing us to now in only a few weeks complete the acquisition of TotalEnergies in 4 new European countries.

Speaker 1

We're excited to welcome the TotalEnergies teams into the family and begin the journey of realizing significant value for all of our stakeholders. On the organic front, we're making progress on our stated goal to build 500 stores over the next 5 years, having already finished 40 new stores this fiscal year with more than 100 sites in the construction pipeline and 1,000 sites identified for future growth opportunities. We've also added 20 new Circle K branded sites during the quarter under licensing agreements, bringing that total to over 2,100 sites. Now let's turn our results for the quarter beginning with convenience. 4.

Speaker 1

Compared to the same quarter last year, same store merchandise revenue decreased by 0.1% in the United States and 0.2% in Europe and other regions. It's worth noting here that Europe really had healthy same store sales. However, the overall results were impacted by challenging tobacco market and cross border traffic in our Hong Kong market. Same store sales increased by 1.6% in Canada driven by our growth in beverage and food offers. As I mentioned at the start, I'm especially pleased this quarter with the expansion of our Inner Circle membership program in the U.

Speaker 1

S. Inner Circle is and will be an important tool in helping us provide consistent and high visibility value to our customers both inside our stores and at our forecourt. Starting only 5 months ago, we're now in 7 business units covering nearly 3,000 locations and we're well on a way to reaching 10 of our 13 U. S. Business units by the end of this fiscal year.

Speaker 1

We continue to see steady growth in enrollments in the program with now over 8,000,000 members enrolled since the program launched this summer. In Florida, our first business unit with the program, we're seeing enrolled customers visiting more often than non inter circle customers. We're learning how to best personalize our offers to increase traffic, grow fuel volumes and most importantly, reward those most valuable customers. In Europe, the updated Extra program continues to perform well and is one of the most recent and our most recent deployments into Lithuania are showing positive volume results matching the results we've seen in other European markets. Across the network, Fresh Food Pass is now in over 5,500 locations globally.

Speaker 1

Our operations teams continue to improve execution in stores as we simplify assortments and increased number of locally relevant items in trials in our markets. Our LTO sandwiches continue to perform well as does our cookie offers. As the program matures, we're giving a better understanding of demand in trolling waste. As America's 3rd stop, packaged beverage sales were up across the network with energy products and carbonated waters and enhanced waters leading the way. Great assortment and exclusive product offers, and activations are contributing to our overall success in that category.

Speaker 1

As with food, we're focused here on better operational tools and procedures. Nearly 3,000 stores globally, we've introduced new core solutions, which greatly expands customer facing assortment and holding capacity, while simplifying the restocking process for our team members. We're well on our way to doubling number of stores with this solution by the end of the fiscal year. As I mentioned in the opening, we continue to see headwinds on Cigarette 6 globally and we believe the belt tightening by this consumer group as increased price sensitivity impacted overall demand. We have made initiatives underway with our supply partners and are looking at the best ways to invest in this category to make sure we stay relevant with our tobacco customers.

Speaker 1

On a positive note, poly usage continues to grow, driving strong growth in other nicotine products in the quarter globally. Moving to our fuel business, after 2 positive quarters in the U. S, same store road transportation volumes decreased 1.5 percent in Europe excuse me, in the U. S. In Europe, same store road transportation fuel volumes decreased by 0.9% and increased 3% in Canada, favorably impacted by more people returning to the office, easing the retail prices and promotional activities.

Speaker 1

Our results compare favorably to our other public comps and we believe we're growing share in key markets. Over time, we're excited prospect of further growing this category with our inner circle loyalty. In addition, unit margins continue to remain strong, reflecting the increased margin requirements from a very fragmented overall industry. In our Circle K fuel rebranding work, we've now completed 4,300 Circle K fuel sites in North America. We also continued the promotional activities during the quarter, including our first ever Global Couche Star Circle K Fuel Day with over an additional 50% locally covering nearly 8,500 sites.

Speaker 1

These Fuel Days offer valuable Our EV fast charging network now consists of almost 1900 charging stalls, and that's up over 50% from the same quarter last year. We We also now have over 40 charges for heavy trucks in Sweden and over 11,000 home and workplace chargers deployed. Also in Europe, our B2B business had a solid quarter with truck volumes remaining very robust across both fleet and truck segments. Small fleet remains the main driver for growth and margin performance has remained very strong in the quarter. As of recent quarters.

Speaker 1

We continue to see improving labor situation globally, particularly in North America, and we're now focused on piloting comprehensive programs to improve retention and turnover at our sites as well as positively impacting sales. We're also continuing to implement solutions that reduce administrative hours, making it easier for our teams and allowing them to focus more on serving customers. With that in mind, we now have more than 3,250 smart checkouts globally, which contribute to savings on labor hours, while improving the customer checkout experience. With technology at the forefront Of every customer and team member experience, we're focused on market agility, quality and reliability. In the support of these objectives, early this quarter, we established a 10 year strategic partnership with CGI for our managed IT services.

Speaker 1

Through this collaboration, we're excited about the opportunities to better support our stores and customers while enabling our internal IT organization to focus on customer facing enhancements. With that, I'll pause and turn it over to Felipe.

Speaker 2

Thank you, Brian. Ladies and gentlemen, good morning. It gives me great pleasure to share that our focused efforts in managing costs are yielding tangible benefits. This quarter, we have successfully kept the growth of our normalized expense to a modest 1.5%, a figure that stands well below the average current rate of inflation affecting our operations. This is a clear indication of our team's dedication to efficiently operate and deliver value to our shareholders even amidst widespread economic challenges.

Speaker 2

Our ability to surpass expectations on this financial indicator demonstrates our commitment to financial discipline and operational excellence and certainly shows a great start to our fit to serve ambitions, one of our key focus areas as part of our 10 for the Win strategic plan. Additionally, with the recent successful issuance in Canada of 7 year Senior unsecured note for a principal amount of CAD800 1,000,000 which followed a rating upgrade by Sandals and Poor's Global to BBB plus from BBB, we've further strengthened our capital structure, ensuring it remains robust and effective. 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. For the Q2 of fiscal 2024, we are happy to report net earnings of $819,200,000 or 0.85 dollars per share on a diluted basis.

Speaker 2

Excluding certain items described in more details in our MD and A, Adjusted net earnings were approximately $792,000,000 compared with $838,000,000 for the Q2 of fiscal 2023. Adjusted diluted net earnings per share were $0.82 unchanged compared with the corresponding quarter of last year. 4. During the Q2, excluding the net impact from foreign currency translation, merchandise and service revenues increased by approximately dollars 37,000,000 or 0.9 percent. This increase is primarily attributable to the contribution from acquisitions.

Speaker 2

Excluding the net impact from foreign currency translation, merchandise and service gross profit increased by approximately $37,000,000 or 2.6%. 4. This is primarily due to organic growth as well as by the contribution from acquisition, which amounted to approximately $26,000,000 Our gross margin increased by 0.8% in the U. S. To 34.8%, impacted favorably by a Change in product mix and the improvement of our Fresh Food FaaS program.

Speaker 2

Gross margin increased by 0.3% in Europe and other regions to 38.6% and remained stable in Canada at 33.2%. Moving on the fuel side of our business. In the Q2 of fiscal 2024, our road transportation fuel gross margin was $0.4956 per gallon in the U. S, an increase of €0.04 per gallon. In Europe and other regions, our road transportation fuel margin was €0.102 per liter, an increase of €0.44 per liter.

Speaker 2

In Canada, it was CAD0.1363 cents per liter, an increase of CAD 0.01 0.08 per liter. Fuel gross margin remained healthy throughout our network due to favorable market conditions and the continued work on the optimization of our supply chain. Now looking at SG and A. For the Q2 of fiscal 2024, Normalized operating expenses increased by 1.5% year over year. This is mainly driven by the impact of costs from rising minimum wages, inflationary pressures and incremental investment to support our strategic initiatives, while being partly offset by the continued strategic effort to control expenses, including labor efficiencies in our stores, allowing us to use less hours in the quarter this year compared to the same period last year.

Speaker 2

Our control of expenses is evidenced by our normalized growth of expenses remaining lower than the average inflation observed throughout our network at around 3.8%. 4. Excluding specific items described in more detail in our MD and A, the adjusted EBITDA for the Q2 of fiscal 2024 increased by 26,900,000 shares or 1.8% compared with the corresponding quarter of fiscal 2023, 5, mainly due to the contribution from acquisitions, organic growth in our convenience operations as well as the translation of our foreign currency operations turns into U. S. Dollar, which had a net positive impact of approximately $2,000,000 partly offset by the impact of lower road transportation fuel volume sold, excluding the impact of acquisitions.

Speaker 2

From a tax perspective, the income tax rate for the Q2 of fiscal 2024 was 22.8% compared with 21.9 percent for the corresponding period of fiscal 2023. The increase mainly stems from the impact of a different mix in our earnings across the various directions in which we operate. Moving now to the balance sheet. As at October 15, 2023, Our return on equity remained strong at 23.7 percent and our return on capital employed stood at 17%. At the end of the quarter, our leverage ratio remained healthy at 1.52 times despite having repurchased 30,600,000 shares for $672,900,000 during the quarter under our NCIB.

Speaker 2

Subsequent to the end of the quarter and under For our NCIB, we repurchased 300,000 shares for $15,700,000 At the end of the quarter, we also had strong balance sheet liquidity with $1,400,000,000 in cash and an additional $3,200,000,000 available through our main revolving credit facility, net of USCP borrowings. Turning to the dividend. The Board of Directors declared yesterday a quarterly dividend of CAD0.175 per share, an increase of 25% and in line with the 10 year CAGR of 24% for the Q2 of fiscal 24 to shareholders on record as of December 7, 2023 and approved its payment effective December 21, 2023. With

Speaker 1

that, I thank you

Speaker 2

all for your attention and turn the call back over to Brian.

Speaker 1

All right. Thank you, Felipe. As we pursue our 10 for the win strategy, we're pleased with our progress and plans to develop, deploy and pull key levers to widen advantages versus our industry. We're significantly growing the network with our upcoming TotalEnergies acquisition, continuing to provide value needs to our customers through the expansion of our Inner Circle loyalty program and unit margins continue to be strong in our fuel business. We've also worked hard to outperform average inflation and operating costs.

Speaker 1

One last note, in mid December, 2 weeks from now, we are excited to celebrate the 20th anniversary of Couche Tard acquiring Circle K. For me, it's humbling to think of the growth that's It's occurred over these past 20 years. And as I think about 4 weeks from now, expanding that brand into 4 new countries for a total of 29 countries as we continue to pursue our vision of becoming the world's preferred brand for convenience and mobility. Now with that, I'll turn it back to the operator to answer Agla's questions.

Speaker 3

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Irene Nattel with RBC Capital Markets. Please go ahead.

Speaker 4

Thanks and good morning everyone. I was wondering if you could Please just provide some more detail around what you saw in terms of consumer behavior and demand both in the forecourt and the backcourt as we move through Q2 and Q3 to date?

Speaker 1

Thanks Irene. I'll start with the 4Q. During the quarter, we had sequentially higher retail prices and that showed up. Traffic on the 4 courts remained positive year over year, but we did see a contraction in average fills. As we look at more recent weeks, we've seen prices come down along with crude globally, And we've actually seen improvement in volume.

Speaker 1

So we're feeling that the volume picture has looked better in recent weeks than it did in the prior quarter. So we feel good about the fuel business. And also just building on that, we just completed what probably is the largest fuel RFP ever done in North America and very successful with our partnership with Musket. So I think we continue to widen the advantages that we're building versus the industry. On the backcourt side or the store, clearly, I think there's been some belt tightening, particularly we've referenced the tobacco category.

Speaker 1

We've got some headwinds with inflation and just student loans in the U. S, other things that again, things that we think are transitory, but The drag was really for us tobacco combustible. If you took that away, we would have positive same store merch for the quarter. So we're looking hard at that category. It's core to our traffic.

Speaker 1

It's important to our business. So we're looking at Very surgical investments to make sure that we continue to gain share in that category. But again, we view these things as transitory. We've never said we're recession proof, but recession resistant and feel good that with the tactics we have both in tobacco and then also with inner circle that will continue to grow share in our core categories.

Speaker 4

That's great. Thank you. And then on the top of the Yes.

Speaker 1

And I would add, I guess, I can't skip Europe. As Europe It grows for us. I did want to comment, Europe had a great quarter, both positive traffic, positive sales. If you take out Hong Kong, Europe was actually up 3.5% in same store March. So that's a good story.

Speaker 1

And as that grows as part of our portfolio, we'll constantly try to talk about that a little bit more.

Speaker 4

That's great. Thank you. And then just as a follow-up back to the U. S, any early insights from Inner Circle that you would care to Share with us just around sensitivity to pricing and value?

Speaker 1

So we truly think we've Deployed not just a me too, but a really unique program that helps us really focus in on the very valuable customers with a tiered approach. I'm pleased 5 months soon, we've got 8,000,000 people signed up. Florida was our 1st market, looking at results there and we're balancing the activities of rolling out sites Quickly to learning and doing hard at both at the same time is hard. But we are clearly seeing growing fuel volume versus non Inner Circle sites, Growing merch traffic and growing basket versus non inner circle sites. So and positive share in that state.

Speaker 1

So again, early, but we feel very good that we're off to a good start. Conversion has been solid. We're in the mid teens, both in merch and in fuel and that's growing every week. And so we again early, but we like where we're going. And when we started the year, our goal was to deploy about half of the number of sites we're actually going to deploy.

Speaker 1

So we're pleased that the technology and the platforms proved to be very 1st and we'll be in over 3,000 sites shortly.

Speaker 3

Your next question comes from Michael Van Aelst with TD Cowen. Please go ahead.

Speaker 5

Yes. Thank you. Felipe, can you talk a bit more about your OpEx and some of the bigger factors that allowed Couche Tard to keep that OpEx so much below inflation and if any of that is kind of temporary or timing or is that Something that you expect to see occur for the next for the foreseeable future?

Speaker 1

Hi, Michael. Yes, we

Speaker 2

as we mentioned earlier, we are very pleased by the performance that we had this quarter. So As we have announced during the Investor Day, we have launched a fit to serve program Around €800,000,000 cost that we are looking at finding during the over the next 5 years, and we see already good traction there. On the SG and A side, so looking out on procurement, standardization on also on productivity. So I was mentioning, we have seen also less hours being used at store level. So overall, I would say across the region at the corporate level also, we are seeing really Good discipline.

Speaker 2

As you know, our long term ambition is always to outperform at least by 1% the overall inflation. Of course, that can fluctuate from 1 quarter to over. But overall, we are feeling pleased that This one, we did very well and very confident actually to, yes, to on the long term to beat this fit to serve ambition. So That's good. All

Speaker 5

right. Thank you. And then just a follow-up on, I think it was Irene's question, but you had mentioned in the UK that Excluding Hong Kong, your same store sales were up. Can you give us an idea in the U. S.

Speaker 5

What your same store sales were up excluding tobacco?

Speaker 1

Yes, Michael, the low single digits, kind of 2% type of number ex tobacco, ex I would say ex cigarettes. When I talk about nicotine in general, non combustible nicotine continues to grow. We've actually got some business units now where In terms of gross profit, the power usage of other non combustible nicotine is larger than cigarettes. So The margin profile of the total nicotine category is strong, but again that doesn't belay the need to be sharp On making sure that that traffic and that basket is still coming into our stores.

Speaker 5

Okay. And you talked about fresh food and beverage And private label in some areas doing well. I'm assuming they're all growing faster than that 2%. Other than cigarettes, what is not what areas are weaker?

Speaker 1

The beer was relatively flat for the quarter, really globally packed bev. So the cooler continues to grow at a faster pace. Food continues to grow at a faster pace as you hypothesized. Europe had A great quarter in food, in particular U. S.

Speaker 1

Was maybe not at the pace we'd had. We've dramatically improved the margin profile of the food program. I I think for the quarter versus prior, we were up 500 basis points in margin on the food program, but growth is more in that single digits, Yes, high single digits versus we've been running double digit in past quarters. So our focus there is on trial and awareness and making sure that we're We're giving it out from the customers.

Speaker 5

Great. Thank you, Brian.

Speaker 3

Please limit yourself to one question, please. Your next question comes from Chris Lee with Desjardins. Please go ahead.

Speaker 6

Good morning, everyone. Maybe a question on fuel volume in the U. S. Brian, you mentioned that you outperformed your peers and gained some share. It looks like you're doing it also with limited impact on fuel margins.

Speaker 6

So I guess my question is, do you believe this is sustainable? And In terms of your market share gains, can you minus some of the initiatives that you do and you mentioned that in your opening remarks, but you can elaborate a little bit about that just to give us some sense of how sustainable this market share gain will be? Thank you.

Speaker 1

We're committed to fuel. We've spent the last 4 years converting from our Supply partner brands to ours, that's that journey is largely complete and now the journey is to build our brand both for the B2B and B2B, B2C customers. And we think Inner Circle will play a key part of that. If you start with Supply chain, we've invested heavily in creating advantaged supply chain, our partnership with Muscat, our trading divisions in both Geneva and in Houston. So we think we're procuring fuel at a significant advantage versus what is mostly a globally fragmented market.

Speaker 1

And we continue to think we widen that advantage. So start with that. And then I'd say second, we're investing pretty heavily in how do we price our products, using machine learning and other tools to help us make very good decisions, which equates over 10,000 decisions each and every day around fuel. And so you look at both sides of that and then combine that with the guerilla activities we have out there of just pop up events, things like that to provide value to our customers. Our goal is to continue to slowly and ratably take share in that marketplace.

Speaker 1

And so more to come there, but It's an area that we focus on being better than the industry in.

Speaker 6

Great. Thanks very much and all the best.

Speaker 1

Thank you.

Speaker 3

Your next question comes from Mark Petrie with CIBC. Please go ahead.

Speaker 7

Hey, good morning. Thanks. Maybe just a quick one first on the follow-up on tobacco. Are you over or under penetrated In any of the categories of tobacco, broadly, sticks, pouch, etcetera? Or do you sort of match the industry?

Speaker 7

And then my question on Fresh Food Fast, you mentioned 500 basis points of margin improvement, so thanks for that. Where does that put you in terms of where you I think that margin should sit. And I'm sure it's a combination of factors, but is bridging that gap more of an operational issue, I. E. At the store level?

Speaker 7

Or is it more broad about building the program across the network? Thanks and all the best.

Speaker 1

Yes. So fresh food fast, I'll take that one first. We're good progress on the journey, but we're still probably 10 points off of where we would like to be. And when we say where we'd like to be, that's where our Northern Tier Holiday business has shown that program can deliver. So again, a journey there.

Speaker 1

On tobacco, we've always been kind of with the industry on combustibles. We've got good momentum and I think we've been very much at the forefront of the poly usage and the other nicotine products. So I don't have exact numbers in front of me, but I think we would generally over index competition on the innovation side of the equation. We can follow-up with more precise figures through JP if you like.

Speaker 7

Okay, excellent. Thanks very much. All the best. Thank you.

Speaker 3

Your next question comes from Martin Landry with Stifel. Please go ahead.

Speaker 8

Hi, good morning. I'd like to touch on your U. S. Merchandise margin. I believe they were near or at Highest levels in recent years.

Speaker 8

So you did touch on the Fresh food program having an impact on your merchandise margins, but I'd love to have maybe a bridge to better understand All of the put and takes that created the expansion in the quarter.

Speaker 1

Yes, happy to. There's really three things happening. So with the softness in cigarettes, there's been a positive mix effect. And then when we convert those customers, nicotine customers to non combustible, that is a higher margin transaction. So that's one effect is the mix within the category and then overall.

Speaker 1

2, we've had growth in some high margin categories that would include, as I said, a 500 margin basis point margin improvement in our food program and then we've had great growth in Car Wash. So that's a it's a high margin category for us, great product, great service and then we've added Clean Freak to that equation. And then the third, I would say beverages continue to perform very well. And that's when you particularly when you think about the non sparkling, you get into energy, isotometics, things like that, the margin profile is better there too. So There's a mix effect there as we continue to perform well in the beverage category.

Speaker 8

Okay. And How sustainable are these levels? I mean, is there any seasonality that we should take into account? Or can they be replicated on a go 4 basis?

Speaker 1

I think Category by category, very sustainable. The mix can change seasonally for sure. And quite honestly, we'd like to do better in tobacco. 4. To the extent we're successful with our ambition to grow share there, that could bring it down a bit.

Speaker 1

The total gross profit dollars to the bank, We feel very good about the journey we're on there and we don't see any material backsliding on total gross profit.

Speaker 8

Okay. Thank you. Good luck.

Speaker 3

Your next question comes from Tamy Chen with BMO Capital Markets. Please go ahead.

Speaker 4

Hi, good morning. Thanks for the question. The press release had called out lower disposable income and a Tougher macro environment including inflation. And I'm just wondering was that all largely referring to the ongoing pressure in the cigarette category or did some did that also impact 4. Some of the other backcourt categories too.

Speaker 4

And Brian, could you just remind us what is going on in Hong Kong with respect to the cross border Headwinds there, it's quite significant given the underlying European business comp was quite good. Thanks.

Speaker 1

It is. So Europe continues to perform well in the backcourt. So when you talk about the consumer, our business, our traffic volume continues to be good there. Hong Kong specifically, really three things. There's been there's just an absence of tourism, whether that's from Mainland China or from the West.

Speaker 1

So that's way, way off. Last year, they were still really locked down and there were some significant government couponing to stimulate demand, which has been official to us a year ago. And then 3rd, there was a very material increase on tobacco taxes, which has impacted demand. There's been some pantry loading that certainly happened when that tax was put in place. So we're still seeing the we're still waiting to see where that levels out.

Speaker 1

But I think that was certainly been. And then there's a one off, which I hate to talk about weather, but they did have a typhoon that really 2 typhoons, I'm being corrected that certainly impacted our sales for the quarter there. But again, it was material in the overall context of Europe. But underlying Europe is solid and we're looking forward to having Total being brought in. In the U.

Speaker 1

S, I think we've got to admit there's been some belt 3. We see it our growth in private label has been strong. There's been trading down of from premium to lower tiers in tobacco and in alcoholic beverages. So that's something we're watching with caution, 4. Just making sure that we're communicating good value to our customers and focus on getting that loyalty program, getting people signed up so we can deliver them to deliver targeted value to those most valuable customers that we have.

Speaker 2

Got it.

Speaker 8

Thank you.

Speaker 3

Your next question comes from George Doumet with Scotiabank. Please go

Speaker 9

ahead. Good morning, Brian. Can you please talk a little bit about the performance of the Car Wash business? I'm just curious how much more room we have for that business to contribute to margins and top line in the longer term. And is that business something that you can potentially see as being significantly bigger And the 2,500 locations that we currently have?

Speaker 1

Yes. Thanks for the question, George. So we're adding almost 1,000 car washes with the acquisition Should total here in 28 days. So we are in the car wash business and we like that business. Cars get dirty, I don't care how they're propelled, They'll get dirty.

Speaker 1

It's a great ancillary transaction for us. And so I think we'll continue to focus on growing that business, both organically with our 4 courts. And then we like our TrueBlue business. We'll see where that takes us and whether we can conducting the M and A in that space. But we're going to grow that base organically as well.

Speaker 1

We're investing in some core markets where we're currently at, and then we'll look at A couple of new markets to penetrate with that tunnel offer, which we think is just a better mousetrap than the current rollover. So expect that to be a growth sector for us over time.

Speaker 3

Your next question comes from Bonnie Herzog with Goldman Sachs. Please go ahead.

Speaker 4

All right. Thank you. Good morning. Good morning. I had a question pricing inside your stores in the U.

Speaker 4

S. You touched on this, but Curious, could you give us a sense of how much pricing you pass through to the consumer in the quarter? And then Really what your expectations are for further pricing, I guess, next calendar year? And then also in the context of that, could you Touch on any noticeable down trading within your stores and ultimately how your private label business is performing. I guess I'm I'm really just trying to get a sense of any noticeable change in consumer behavior in the last few months.

Speaker 4

Thanks.

Speaker 1

Thanks, Bonnie. Yes, I touched on earlier private 4. It continues to grow double digits. Canada was up 30% for the quarter year over year. And so our 4.

Speaker 1

Our ambition is to do more of that. We want to introduce more products in the coming quarters that we think would resonate with our customers. So Certainly, we see that being, one, a good thing, right? It's a deflationary in terms of sales, but it's a positive in terms of gross profit for us. As I mentioned earlier too, we're seeing pressure on the premium cigarette category.

Speaker 1

I think we had 2 things. 1 is your normal demand decline that we've seen year over year for decades. But the supply partners that we've had have been pretty aggressive about putting price out in the market. And I think we've that combined and are colliding with a consumer that's maybe a little more cautious. We're seeing more trade down from premium into lower tier brands in the tobacco categories than we have certainly in the past.

Speaker 1

And then I think the same thing would be if you looked at the beer category with premium brands versus trading down in the Busch Lights and others. So certainly there's some signals of that that are out there. In terms of our activities, I think our goal is to be very surgical. We're not out here to Money at everything or everyone, trying to be very conscious of what we think our customers care about, where we can be price compared very readily versus other channels or other retailers in our channel and again being more surgical than not. So I wouldn't expect to see A massive change in our gross profit as I communicated earlier.

Speaker 1

The one category that will probably get a little more investment than others is tobacco. But that's going to be in a very structured thoughtful way. It's not every site and we're trying different trials to see what resonates most with our customers as we try to drive that volume.

Speaker 4

Okay. Thank you.

Speaker 3

Your next question comes from Anthony Bonadio with Wells Fargo. Please go ahead.

Speaker 9

Yes. Hey, good morning guys. Thanks for taking our I just wanted to ask about M and A dynamics. I know you've already got quite a lot under your belt for the year, but can Can you just talk about how the pipeline is evolving and how things have trended from a valuation perspective?

Speaker 1

Yes. Thanks, Anthony. One, we're excited about the co acquisition. We've taken on, I think, 73 of the 113 locations going very smoothly. Our teams are just really, really good at doing this.

Speaker 1

So couldn't be more pleased there and these are great sites for us. Total in 28 days, 2,200 locations, A huge challenge for our European teams, but we've got really good talent in Europe, and I think we're bringing on some really good people. Those 2 are big lifts for us in the coming quarter. But again, I'll remind, I think our decentralized model really is unique and enabling us to pursue multiple opportunities. So This by no way shuts down our appetite for growth.

Speaker 1

In terms of the dynamics, I think we're feeling Multiples coming off, and that's the math would say with higher interest rates that should happen. There's always this lag between the customer or sorry, the seller Looking at what they could have gotten versus what they could get today, and that's a period of adjustment. But we think that's going to happen. Prices are coming down. And then also I think the credit markets have taken away some of the people that we competed with over the last few years.

Speaker 1

So 4. And combine that with our balance sheet and our appetite, we feel good about the prospects for M and A in the coming years.

Speaker 7

Thanks guys.

Speaker 3

Your next question comes from John Royall with JPMorgan. Please go ahead.

Speaker 10

Hi, good morning. Thanks for taking my question. So my question is on U. S. Fuel margin and 1Q had been a big outperformance versus our expectations, But 2Q is flattish, a little bit down and the industry level data I'm looking at, which I know has its flaws, but the industry level data I'm looking at is up Pretty substantially.

Speaker 10

So I was just wondering if you had any color on the 2Q versus the 1Q fuel margin and anything in particular between those quarters we should be thinking about?

Speaker 1

I think it touched on earlier, we feel good about the fuel business. The volume we think is look stronger in recent weeks, really in all of our markets and the margins continue to be very solid. And as we said earlier, the supply chain continues to optimize and we think extend our advantages. So again, quarter to quarter, we'll have some volatility, we always will in the market, but we feel good that the gap versus the overall industry is widening, that the Marginal need for margin continues to be higher with the independent competitor out there. And As we widen the gap in how we buy and we're very thoughtful and deliberate in how we price, We continue to think that structurally the market will deliver very, very good margins for us.

Speaker 7

Thank you.

Speaker 3

Your next question comes from Bobby Griffin with Raymond James. Please go ahead.

Speaker 1

Go ahead, operator, to the next question.

Speaker 3

Your next question comes from Luke Cannon with Canaccord Genuity. Please go ahead.

Speaker 11

Thanks. Good morning, everyone. Just wanted to ask about packaged and dispensed beverage. Encouraging to see the growth that you guys have gotten there so far. My question is, who do you see as your main competitors here?

Speaker 11

Is it just other Larger C store operators, is it the independents? You include grocery in this as well, QSRs, etcetera. Just curious to know who you see as your main competitors? And then also against that competitive set, Where are you capturing the most share as of today?

Speaker 1

So really Maybe 3 pillars in there. So on dispensed beverage, QSRs are by far our largest competitors. So coffee shops and QSRs, both for hot dispensed and cold dispensed. So that's we've always had a very strong franchise in the U. S.

Speaker 1

With Polar Pop. Candidly, we may have taken our eye off the ball on price a little bit there. So we're looking at that to make sure that we're sharp and continuing to grow share in that category. And then packaged beverage, it's really a take home occurrence and an immediate consumption occurrence. We think we need to be better at take home, we've got pockets of where we do really, really well.

Speaker 1

And so we've kind of recommitted to being relevant in that category and being reliably priced for our consumer on those take homes. And that's not just a traditional sparkling, but also take home energy and things like that. And that's certainly grocery would be our primary competitor in that space. And then media consumption is where our industry just continues to be unique. Our coal holding power, the ability to provide really unparalleled assortments as brands continue to proliferate and use cases continue to proliferate.

Speaker 1

We feel good and we're seeing continued growth in energy, enhanced waters, isotonics. Other than fuel, that's our number one trip occasion. And so we think that's the biggest lever we have to grow and we'll continue to focus on being better in that space.

Speaker 7

Thank you.

Speaker 3

Your next question comes from Bobby Griffiths with Raymond James. Please go ahead.

Speaker 1

Hey, guys. Sorry about that on the error on the tobacco front. Brian, just a follow-up on the tobacco category. Has is the weakness in the category just the weak dynamics that we've come used to with less people smoking or is the competitive nature of tobacco within the C store channel changed over the last 6 to 12 months, where there needs to be more bigger changes inside 2 Star's strategy towards tobacco in general to maintain and go after market share? Yes, it's a great question, Bobby.

Speaker 1

If you look at BAT's results, so you look at Altria's results, you can see their stick performance. And I would say it's been an industry issue. We've actually held share. Our goal is to grow share. So that's the tactics I talked about earlier.

Speaker 1

But No, I think it's been a combination of kind of normal demand destruction, if you will, that 2% a year type that we've felt layering on some pretty aggressive price increases taken by the suppliers. And then 3rd, just a more cautious consumer. You multiply all those things together and I think that's what's manifesting a Steeper drop in demand than what we've seen in prior years. So is that transitory or not? I'd like to think it is, but We're going to deal with play with the hand that we've been dealt and continue to focus on good value to our customers and piling a lot of different activities on what's the most cost effective ways to provide value and grow share in that category.

Speaker 1

Thank you. Best of luck and have a great holiday season. You too.

Speaker 3

This concludes the Q and A portion of the conference. Mr. Lachance, back over to you.

Speaker 1

Hey, real quick for everybody. I want to thank you for the support, but also and for those of you that came to Phoenix for our Investor Day and then also have a great holiday season. JP, go ahead.

Operator

Thank you, Brian, and thank you, Felipe. 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 Q3 2024 results in March.

Speaker 3

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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