Alimentation Couche Tard : Report Q1 2022

Q1

2022

QUARTERLY

REPORT

ALIMENTATION COUCHE‐TARD INC.

12‐WEEK PERIOD ENDED JULY 18, 2021

Management Discussion and Analysis

The purpose of this Management Discussion and Analysis ("MD&A") is, as required by regulators, to explain management's point of view on the financial position and results of the operations of Alimentation Couche-Tard Inc. ("Couche-Tard") as well as its performance during the first quarter of the fiscal year ending April 24, 2022. More specifically, it aims to let the reader better understand our development strategy, performance in relation to objectives, future expectations, and how we address risk and manage our financial resources. This MD&A also provides information to improve the reader's understanding of Couche-Tard's unaudited interim condensed consolidated financial statements and related notes. It should therefore be read in conjunction with those documents. By "we", "our", "us" and "the Corporation", we refer collectively to Couche-Tard and its subsidiaries.

Except where otherwise indicated, all financial information reflected herein is expressed in United States dollars ("US dollars") and determined on the basis of International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). We also use measures in this MD&A that do not comply with IFRS, these measures are described in the section "Non-IFRS Measures" of this MD&A and where such measures are presented, the reader is informed. This MD&A should be read in conjunction with the audited annual consolidated financial statements and notes thereto included in our 2021 Annual Report, which, along with additional information relating to Couche-Tard, including the most recent Annual Information Form, is available on SEDAR at https://www.sedar.com/ and on our website at https://corpo.couche-tard.com/.

Forward-Looking Statements

This MD&A includes certain statements that are "forward-looking statements" within the meaning of the securities laws of Canada. Any statement in this MD&A that is not a statement of historical fact may be deemed to be a forward-looking statement. When used in this MD&A, the words "believe", "could", "should", "intend", "expect", "estimate", "assume" and other similar expressions are generally intended to identify forward-looking statements. It is important to know that the forward‑looking statements in this MD&A describe our expectations as at August 31, 2021, which are not guarantees of the future performance of Couche-Tard or its industry, and involve known and unknown risks and uncertainties that may cause Couche‑Tard's or the industry's outlook, actual results or performance to be materially different from any future results or performance expressed or implied by such statements. Our actual results could be materially different from our expectations if known or unknown risks affect our business, or if our estimates or assumptions turn out to be inaccurate. A change affecting an assumption can also have an impact on other interrelated assumptions, which could increase or diminish the effect of the change. As a result, we cannot guarantee that any forward-looking statement will materialize and, accordingly, the reader is cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements do not take into account the effect that transactions or special items announced or occurring after the statements are made may have on our business. For example, they do not include the effect of sales of assets, monetization, mergers, acquisitions, other business combinations or transactions, asset write-downs or other charges announced or occurring after forward-looking statements are made. Additionally, we are uncertain of the duration and impacts of the current COVID-19 pandemic on our business. We are actively monitoring the effect of the COVID-19 pandemic on all aspects of our business and geographies, including how it impacts our people, our customers, our suppliers, our business partners and distribution channels.

Unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise forward‑looking statements, whether as a result of new information, future events or otherwise.

The foregoing risks and uncertainties include the risks set forth under "Business Risks" in our 2021 Annual Report as well as other risks detailed from time to time in reports filed by Couche-Tard with securities regulators in Canada.

Our Business

We are the leader in the Canadian convenience store industry. In the United States, we are one of the largest independent convenience store operators. In Europe, we are a leader in convenience store and road transportation fuel retail in the Scandinavian countries (Norway, Sweden and Denmark), in the Baltic countries (Estonia, Latvia and Lithuania), as well as in Ireland, and have an important presence in Poland. In Asia, we operate a network of company-operated convenience stores in Hong Kong Special Administrative Region of the People's Republic of China ("Hong Kong SAR") with an enviable local position.

As of July 18, 2021, our network comprised 9,189 convenience stores throughout North America, including 8,042 stores with road transportation fuel dispensing. Our North American network consists of 18 business units, including 14 in the United States covering 47 states and 4 in Canada covering all 10 provinces. Approximately 98,000 people are employed throughout our network and at our service offices in North America.

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In Europe, we operate a broad retail network across Scandinavia, Ireland, Poland, the Baltics and Russia through 10 business units. As of July 18, 2021, our network comprised 2,722 stores, the majority of which offer road transportation fuel and convenience products while the others are unmanned automated fuel stations which only offer road transportation fuel. We also offer other products, including aviation fuel and energy for stationary engines. Including employees at branded franchise stores, approximately 22,000 people work in our retail network, terminals and service offices across Europe. In Asia, our network comprised 344 company-operated convenience stores in Hong Kong SAR, offering a strong on-the-go food offer as well as a variety of other merchandise items and services. Approximately 4,000 people are employed in our retail network and service offices in Asia.

Furthermore, under licensing agreements, more than 1,900 stores are operated under the Circle K banner in 14 other countries and territories (Cambodia, Egypt, Guam, Guatemala, Honduras, Indonesia, Jamaica, Macau, Mexico, Mongolia, New Zealand, Saudi Arabia, the United Arab Emirates and Vietnam), which brings the worldwide total network close to 14,200 stores.

Our mission is to make our customers' lives a little easier every day. To this end, we strive to meet the demands and needs of people on-the-go. We offer fast and friendly service, providing fresh food, hot and cold beverages, car wash services, and other high-quality products and services including road transportation fuel, designed to meet or exceed our customers' demands in a clean, welcoming and efficient environment. Our business model is our key to success. We are a customer- centric, financially disciplined organization that routinely compares best practices, and uses our global experience to enhance our operational expertise and continually invests in our people and our stores.

Value Creation

In the United States, the convenience store sector is fragmented and in a consolidation phase. We are participating in this process through our acquisitions, market share gains when competitors close sites, and by improving our offering. In Europe and Canada, the convenience store sector is often dominated by a few major players, including integrated oil companies. Some of these integrated oil companies are in the process of selling, or are expected to sell, their retail assets. We intend to study investment opportunities that might come to us through this process. In Asia, our recent acquisition in Hong Kong SAR provides us with another platform to grow our business. Combining our best practices with local market expertise will help accelerate organic expansion and provide new opportunities for consolidation in the region.

No matter the context, to create value for our Corporation and its shareholders, acquisitions have to be concluded at optimal conditions. Therefore, we do not necessarily favor store count growth to the detriment of profitability. In addition to acquisitions, the contribution from organic growth has played an important role in the growth of our net earnings. Highlights have included the ongoing improvements we have made to our offer, including fresh products, to our supply terms and to our efficiency and our ability to adapt quickly to changes. All these elements, in addition to our strong balance sheet, have contributed to the growth in our net earnings and to value creation for our shareholders and other stakeholders. We intend to continue in this direction.

Exchange Rate Data

We use the US dollar as our reporting currency, which provides more relevant information given the predominance of our operations in the United States.

The following table sets forth information about exchange rates based upon closing rates expressed as US dollars per comparative currency unit:

	12‑week periods ended
	July 18, 2021	July 19, 2020
Average for period(1)
Canadian dollar	0.8167	0.7289
Norwegian krone	0.1188	0.1027
Swedish krone	0.1187	0.1057
Danish krone	0.1620	0.1492
Zloty	0.2662	0.2481
Euro	1.2044	1.1124
Ruble	0.0136	0.0141
Hong Kong dollar	0.1288	-

1. Calculated by taking the average of the closing exchange rates of each day in the applicable period.

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The following table sets forth information about exchange rates based upon closing rates expressed as US dollars per comparative currency unit:

	As at July 18, 2021	As at April 25, 2021
Period end
Canadian dollar	0.7944	0.8011
Norwegian krone	0.1136	0.1201
Swedish krone	0.1152	0.1190
Danish krone	0.1587	0.1623
Zloty	0.2573	0.2645
Euro	1.1802	1.2066
Ruble	0.0135	0.0134
Hong Kong dollar	0.1287	0.1288

As we use the US dollar as our reporting currency in our consolidated financial statements and in this document, unless indicated otherwise, results from our operations in other currencies are translated into US dollars using the average rate for the period. Unless indicated otherwise, variances and explanations regarding changes in the foreign exchange rate and the volatility of the Canadian dollar, European currencies and Hong Kong dollar which we discuss in the present document are therefore related to the conversion into US dollars of our Canadian, European, Asian and corporate operations' results.

Overview of the First Quarter of Fiscal 2022

Financial Results

Net earnings amounted to $764.4 million for the first quarter of fiscal 2022, compared with $777.1 million for the first quarter of fiscal 2021. Diluted net earnings per share stood at $0.71, compared with $0.70 for the corresponding quarter of the previous fiscal year.

The results for the first quarter of fiscal 2022 and the first quarter of fiscal 2021 were affected by specific items disclosed in the "Non-IFRS measures" section of this MD&A. Excluding these items, the adjusted net earnings1 were approximately $758.0 million ($0.71 per share on a diluted basis1) for the first quarter of fiscal 2022, compared with $795.0 million ($0.71 per share on a diluted basis1) for the first quarter of fiscal 2021, a decrease of $37.0 million, or 4.7%, driven by lower road transportation fuel margins in the United States and higher operating expenses, partly offset by higher fuel demand and the net positive impact from the translation of its Canadian and European operations into US dollars.

Changes in our Network during the First Quarter of Fiscal 2022

Divestiture of sites

We completed the sale of 48 sites located in Oklahoma, within the United States, to Casey's General Stores Inc. for cash consideration of $40.3 million. The transaction resulted in a gain of $13.6 million.

Store construction

We completed the construction of 16 stores and the relocation or reconstruction of 14 stores. As of July 18, 2021, another 57 stores were under construction and should open in the upcoming quarters.

• Please refer to the section "Non-IFRS Measures" for additional information on performance measures not defined by IFRS.
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Summary of changes in our store network

The following table presents certain information regarding changes in our store network over the 12-week period ended July 18, 2021(1):

		12-week period ended July 18, 2021
	Company-			Franchised and
Type of site	operated(2)	CODO(3)	DODO(4)	other affiliated(5)	Total
Number of sites, beginning of period	9,976	398	697	1,257	12,328
Openings / constructions / additions	16	-	4	14	34
Closures / disposals / withdrawals	(89)	-	(9)	(9)	(107)
Store conversion	3	(1)	(3)	1	-
Number of sites, end of period	9,906	397	689	1,263	12,255
Circle K branded sites under licensing agreements					1,913
Total network					14,168
Number of automated fuel stations included in the period-end
figures(6)	978	-	9	-	987

1. These figures include 50% of the stores operated through RDK, a joint venture.
2. Sites for which the real estate is controlled by Couche-Tard (through ownership or lease agreements) and for which the stores (and/or the service stations) are operated by Couche-Tard or one of its commission agents.
3. Sites for which the real estate is controlled by Couche-Tard (through ownership or lease agreements) and for which the stores (and/or the service stations) are operated by an independent operator in exchange for rent and to which Couche-Tard sometimes provides road transportation fuel through supply contracts. Some of these sites are subject to a franchise agreement, licensing or other similar agreement under one of our main or secondary banners.
4. Sites controlled and operated by independent operators to which Couche-Tard supplies road transportation fuel through supply contracts. Some of these sites are subject to a franchise agreement, licensing or other similar agreement under one of our main or secondary banners.
5. Stores operated by an independent operator through a franchising, licensing or another similar agreement under one of our main or secondary banners.
6. These sites sell road transportation fuel only.

Transactions subsequent to quarter end

On July 30, 2021, subsequent to the end of the quarter, we entered into a binding agreement in connection with the acquisition of Cape D'Or Holdings Limited, Barrington Terminals Limited and other related holding entities, which operate an independent convenience store and fuel network in Atlantic Canada under the Esso, Go! Store and Wilsons Gas Stops brands ("Wilsons"). The Wilsons network comprises 79 company-operated convenience retail and fuel locations, 147 dealer locations, and a fuel terminal in Halifax, Canada. The transaction is expected to close in the first half of calendar year 2022 and is subject to customary closing conditions and regulatory approvals, including those under the Competition Act (Canada).

On August 24, 2021, subsequent to the end of the quarter, we entered into a binding agreement to acquire, through a single transaction, 35 company-operated stores predominately located in Oregon and Western Washington, within the United States. This transaction is expected to close during the second quarter of fiscal 2022.

COVID-19 Pandemic

As we compare against a quarter fully impacted by the COVID-19 pandemic, results varied by region as the pandemic and social restrictive measures were at different levels year-over-year. Merchandise categories most impacted by COVID-19, such as food, continue to show a positive trend and, on a 2-year basis, convenience activities performed well in our global network. Fuel margins continue to be higher than pre-pandemic levels, while fuel volumes continue to be challenged by work from home trends and changes in local restrictions.

Looking at gross profit1 on a 2-year basis provides additional insight given the volatility in the various key measures of our business. Excluding the impact of CAPL and Circle K Hong Kong, merchandise and service, as well as road transportation fuel gross profit, are higher by 10.9% and 19.4%, respectively, compared with the pre-pandemic first quarter of fiscal 2020.

Fire & Flower

We exercised common share warrants in Fire & Flower Holdings Corp. ("Fire & Flower") for cash consideration of CA $9.8 million ($7.9 million), which increased our ownership interests to approximately 22.4%.

Share Repurchase Program

On April 21, 2021, the Toronto Stock Exchange approved the implementation of a share repurchase program, which took effect on April 26, 2021. The program allows us to repurchase up to 4.0% of the public float of our Class B subordinate voting shares. During the first quarter of fiscal 2022, we repurchased 8,471,000 Class B subordinate voting shares, for an amount of $299.2 million. All shares repurchased under the share repurchase program were cancelled upon their repurchase.

• Please refer to the section "Non-IFRS Measures" for additional information on performance measures not defined by IFRS.
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