Alimentation Couche-Tard (TSX: ATD.b) is the 2nd largest participant in the highly fragmented convenience store industry behind Japan's Seven & I Holdings Co. (7-11 chain).
ATD.b will appeal to investors seeking growth versus dividend income.
- ATD is the #2 player in the convenience store sector on a global basis behind Japan’s Seven & I Holdings Co. (7-11 chain).
- Alimentation Couche-Tard released FY2019 results following the July 9, 2019 market close and held its call with analysts July 10th.
- It continues to generate strong Free Cash Flow which allowed for net debt repayment of $1.8B in FY2019 resulting in the leverage ratio being reduced from 2.46 in FY2018 to 1.61 in FY2019 and the adjusted leverage ratio being reduced from 3.13 to 2.29 over the same timeframe.
- Management has indicated the plan is to double the business again. Growth has historically been 70% M&A and 30% organic. Going forward the plan is 50% M&A and 50% organic growth.
- I fully intend to acquire additional shares but following the rapid YTD run-up in share price I will adhere to Monish Pabrai’s investment advice.
Alimentation Couche-Tard Inc. (TSX: ATD.a and ATD.b) reports its financial results in USD. Its stock, however, is traded on the TSX. Investors willing to purchase US shares over the counter should look at ANCUF. These shares, however, are very thinly traded.
ATD has Class A multiple-voting shares which are primarily held by insiders and which are very thinly traded. This article deals exclusively with the more commonly traded Class B subordinated voting shares.
ATD uses USD as its reporting currency since it provides more relevant information given the predominance of its operations in the United States. This article, therefore, reflects all figures in USD unless otherwise noted.
With ATD having just released its Q4 and FY2019 results on July 9th and having held its FYE conference call with analysts on July 10th I now take another look at what I deem to be an attractive long-term investment in the highly fragmented grocery/convenience store industry; ATD is ranked the 2nd largest chain in the convenience-store industry.
Following the release of FY2019 results a reader asked me for my opinion on ATD’s future growth opportunities.
Based on this company's history I fully expect further acquisitions. Looking at pages 23 - 29 of 51 in the recently released FY2019 financial statements I see ATD continued to acquire and also divest itself of 'non-core' operations.
CST was a big acquisition that is still being integrated; the deal closed mid-2017 and integrating over 1000 CST stores is a lengthy process. These CST stores are still in the process of rebranding so ATD resources are heavily focused on this integration.
I also see that ATD has been aggressively deleveraging. Look at page 36 of 51 of FY2019 financial statements for which I provided a link above. Subsequent to FYE, ATD further reduced its debt by repaying $150.0 million on Tranche 11 of its US-dollar-denominated senior unsecured note.
Looking at ATD’s May 2019 Investor Presentation (page 31 of 43), we see the company aims to keep its adjusted leverage ratio below 2.5x thus allowing flexibility for acquisitions. Go to page 6 of 13 in the July 9, 2019 Earnings Release and we see that as at FYE2019 the adjusted leverage ratio stood at 2.29X.
ATD had about $1.31B in ‘current portion of long-term debt' (CPLTD) with maturity dates of November 1, 2019 and December 13, 2019. I strongly suspect the plan is to repay this amount at maturity otherwise the maturity date of this large amount would have likely already been negotiated for further out on the calendar so as not to distort the company's current ratio; you will see that with this amount of CPTLD the company's current ratio was .77:1 as at FYE (see page 11 of 51 in the FY2019 financial statements).
I am not privy to what is discussed internally at the most senior levels but looking at:
- the company's acquisition track record (ATD became the 2nd largest industry participant through multiple acquisitions over time);
- the rapid deleveraging that is taking place;
- the considerable progress made in integrating CST and the fact the rebranding project will come to an end in the not too distant future
I would not be surprised if ATD were to announce another decent sized acquisition in FY2020. In fact, management has indicated the plan is to double the business again through its value creation equation and a focus on organic growth.
When we look at page 32 of the May 2019 Investor Presentation we see that growth has historically been 70% M&A and 30% organic. Going forward the plan is 50% M&A and 50% organic growth. Looking at page 39 we also see that return on capital employed has been driven primarily by organic growth initiatives.
On the July 10th conference call with analysts the following information was shared.
ATD’s Circle K rebranding efforts moving full steam ahead and contributed toward a record bottom line.
In Europe, ATD is nearing the completion of the conversion to Circle K fuel at all of its former Statoil, Topaz, and Shell locations.
By the end of FY2019, ATD had nearly 900 US sites offering the Circle K fuel brand. Roughly 98% of the sites in the Rocky Mountain business unit and 550 stores or 80% of the sites in the Texas business unit (mostly former CST sites) have been rebranded.
The rebranding is expected to be completed in FY2020 in the Texas business unit and the Grand Canyon business unit, formerly the Arizona business unit, is well over 50% complete.
The Circle K brand has now been expanded to more than 5,600 stores in North America and more than 2,000 stores in Europe; the rebranding project in Europe is now complete.
The company continues to generate strong cash flow thus allowing it to significantly reduce its leverage, to surpass its CST synergy target, and to make significant headway in the integration of Holiday into the ATD network.
Despite fuel shortages in some US regions, ATD experienced an increase in same-store merchandise revenue of 3.4% compared with Q4 2018. In Canada, same-store merchandise revenues increased by 4.2% and in Europe same-store merchandise revenues increased 4.7%.
In the U.S., same-store road transportation fuel volumes increased by 0.3% compared to Q4 2018 continuing the trend of 4 quarters in a row of positive same-store gallon growth in the U.S. While ATD experienced good same-store gallon results in Q4, overall volume was impacted by one major fuel shortage in Texas and Arizona triggered by a supplier issue. Management has indicated this underlying issue has been resolved and it is not expected that future quarters will be affected. (cont’d.)
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Disclosure: I am long ATD.b.
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