Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the Empire Company Limited First Quarter 2020 Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, September 12, 2019. I will now turn the conference over to Katie Bryan, Director, Investor Relations. Please go ahead.

Thank you, Joanna. Good afternoon and thank you all for joining us for our first quarter conference call. Today we will provide summary comments on our results and give you insight on the impact the new IFRS 16 leasing standard has on Empire. We will leave as much time as we can for questions. This call is being recorded and the audio recording will be available on the company's website at empirecode.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer. Michael Valls, Chief Financial Officer. And Pierre Saint Laurent, Chief Operating Officer, Full Service. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MP&A for more information on these assumptions and factors. I will now turn the call over to Michael Medline.

Thanks, Katie, and good afternoon, everyone. We are again pleased with our results this quarter. Our momentum continues. Sunrise costs are coming out of the business. The team is executing more sharply. Our strategic initiatives are all progressing well, and we continue to improve our EBITDA margin. Other than the IFRS accounting changes, it was a pretty clean and straightforward quarter. EPS was 49 cents this quarter, 12 cents higher than last year. And if you remove a few one-time impacts from last Q1 and this Q1, it would be more than a 75% improvement. Sales were up in all regions and across all banners. It is still early days, but we are pleased with the sales we are seeing from our seven fresh-go stores in the West. Farm Boy continues to post excellent sales. Same-store sales were 2.4%, with customer count and basket size both up. We have lacked the healthcare reform impacts last year, which rendered the impact of pharmacy same-store sales immaterial this quarter. Internal inflation was approximately 3%. We saw a dip in tonnage with a slow start to summer weather-wise, notably in May, and that appeared to impact the whole market, especially in eastern and western Canada. Temperatures were nowhere near seasonal norms and affected summer seasonal categories like cold beverages, ice cream condiments, and summer fruit. While tonnage is commonly used as an indicator of market share, internally we have several different data points that we use to look at market share at more granular levels. Based on these additional data points, we held our market share at least steady this quarter, even without counting our farm boy acquisition market share gains. All in all, I thought our team did a good job on comps, and as you can see from our margins, we didn't buy sales. In fact, we were purposefully a little less promotional this summer, As our promotions continue to become more effective, this gives our customers a great experience with a more relevant offer, provides a good lift for us, and reduces the amount of money we spend on promotions. Gross margin rate was up 120 basis points from Q1 last year. Category resets continue to expand our margin as anticipated. And on top of that, normal operational margin management by our merchant team was very good. This is our first quarter reporting IFRS 16. It's created some noise that Mike will explain. I will note that our pre-IFRS 16 EBITDA margin, pre-IFRS, increased 60 basis points over Q1 last year. That's apples to apples. We continue to close the gap on our competitors. As we greatly improve execution and continue to unlock Empire's cash generating potential, we believe that it is imperative to return cash to our shareholders. Last quarter, we increased our dividend and announced that we would be repurchasing shares. This quarter, we repurchased about 550,000 shares for approximately $19 million, and we remain committed to our $100 million target for fiscal 2020. We continue to make good progress against our major strategic initiatives. We are in the final year of our Sunrise transformation, and this initiative is progressing even better than we originally anticipated. We remain on track to achieve a savings target of at least $550 million, $50 million more than what we originally announced over two years ago. In-store execution of category resets, which will drive a large portion of our total Sunrise savings, is nearly complete. Our teammates in our stores have done a great job relining our stores, tranche by tranche, ensuring our shelves are stocked with the items customers want most. All of our reporting and customer feedback to date indicates that in-store execution of resets has been very well received. We continue to expand our Fresh Go banner in the West, and to date have opened five stores in British Columbia, including two ethnic-oriented, shallow Fresh Go stores and another two stores in Winnipeg. We are pleased with how the stores are performing and that our customers are excited. Our marketing team has done a great job driving awareness and will continue building the Freshco brand in the West. Our expansion of Freshco to the West allows us to participate in the growing discount segment by converting 25% of our poor-performing Safeway and Sobeys stores to Freshco stores in markets that are better suited to discounts. We remain on track to open 11 additional Freshco stores throughout the remainder of fiscal 2020. Our strategy to grow share in Ontario, where we have historically had a low market share, continues to progress well. We are seeing stronger results in our existing Sobeys, Freshco, and Foodland banners, and we continue to see improved sales and customer metrics as we convert all Freshco stores to the new Freshco 2.0 model. Our acquisition of Farm Boy gives us a winning format that will allow us to accelerate our growth in urban and suburban markets in Ontario. Farm Boy has been part of the Empire family for just over 10 months now and continues to build on its industry-leading operational and customer metrics. The team at Farm Boy is making progress against our plan to double the size of the business in the next five years. We currently have concrete plans to open another three Farm Boy stores in fiscal 2020. and two in the first quarter of fiscal 2021. Farm Boy's access to our empire real estate prowess has allowed us to accelerate development to Farm Boy in high-quality locations. Voila! Our game-changing e-commerce solution will also position us to accelerate our growth in the GTA. Voila! is on track to roll out testing and soft launch in the GTA in late spring. Our second CSC in Montreal, which will serve major cities in Quebec and the Ottawa area, is expected to open in 2021. You know, winning the next generation of retail will require both extraordinary execution and smart strategic innovation. In parallel with the strategic initiatives we have underway, we are positioning the company to innovate for the long term. Mohit Grover, our new SVP of Innovation and Strategy, will join our executive team at the end of the month Mohit will elevate the importance of data analytics and AI and drive innovation initiatives across the company. We are focused on putting in place the lean teams, tools, and culture that we need to drive innovation in our business and to win the next generation of grocery retailing. We are extremely pleased with the momentum we are seeing in our business. We are more customer-oriented, more innovative, and definitely more focused on execution. We are hard at work on finalizing a strategy, detailed roadmap, and financial goals for the three years post-sunrise to ensure this momentum continues. We see a lot of runway ahead of us. And with that, over to Mike.