Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the EMPIRE Second 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 assistance, please press star zero for the operator. This call is being recorded on Thursday, December 12, 2019, and I would now like to turn the conference over to Katie Brine, Director, Investor Relations. Please go ahead.

Thank you, Joanna. Good afternoon and thank you all for joining us for our second quarter conference call. Today we will provide summary comments on our results and 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 empireco.ca. There is a short summary document outlining the points of our quarter available on our website as well. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer, Michael Vels, Chief Financial Officer, and Pierre St. 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 MD&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. I'm extremely proud of our team. They have transformed our company from one which had quarterly adjusted EPS of 12 cents three years ago to one that earned 58 cents or 52 cents after you back out the impact of the Crombie transaction. That's a 333% increase in EPS in just three years. And most importantly, we've built our brands and improved our customer service over that period. You know, I'm going to do this a bit differently today, and I hope to give you a bit more color on the business. Today, I want to talk about seven topics. Our performance this quarter, what we're seeing in the market, our EBITDA margin, FOLA, Farm Boy, our store renovation program, and our ownership position in Crombie. I'll leave it to Mike to take you through some of the details of our quarter, the results of Project Sunrise, the Crombie Oak Street transaction, and an update on our capital spending and share repurchases. Let's start with our performance this quarter. Sales were up in all regions, across all banners, despite a more competitive and promotional marketplace than we have seen in some time. Same store sales were 2%, with both customer count and basket size up. Internal food inflation was approximately 2.4%, and our same store sales were 2%, implying relatively flat tonnage. We also have several different data points that we use to look at market share at more granular levels. Based on these additional data points, we believe our market share held relatively steady during the quarter. We are working hard to thrill our customers with stronger execution and through our strategic initiatives. As you can see from our margins, we are not chasing empty calorie sales. Gross margin rate was up 90 basis points from our second quarter last year. Category resets continue to expand our margin as anticipated. We have not at this point done what some of our competitors have done when they say they tried to improve the trending of their food sales with margin investments. We are working hard to earn our sales growth through better execution. However, we do intend to protect and grow our market share going forward. Perhaps I'll just make a few comments about the state of the market and what we're seeing and watching out for. We are monitoring consumer spending and promotional activity closely. Although we had positive tonnage in the last month of Q2, we have seen a slight softening in sales at the end of the quarter and into the beginning of Q3. We think that part of this could be due to the relative health of the Canadian economy, and we are closely watching key indicators like employment and the recent communications of our Canadian banks. We also saw early inclement weather that can be good for some retail, but not so much for grocery. We continue to be very proud of our margin performance, but we think that we could have been a little quicker responding to a more promotional marketplace. And so, as I said, we'll be making sure we protect our sales going forward, while at the same time being smart about it. Just to be clear, we're only talking about a little fine-tuning here. Second, our EBITDA margin. This is our most closely watched number. Quarter after quarter, we continue to chew into the EBITDA margin gap between us and our two major competitors. We are extremely focused on an overarching goal to close the food EBITDA margin gap with them. We're gonna finish the job. We don't believe there's any reason for us not to be able to do it so long as we continue to execute and set a strong strategy. I do say food retail gap as there are certain structural differences between the three companies. The most important difference is that we have a smaller pharmacy business which historically has had a higher EBITDA margin than grocery. On an apples-to-apples basis, our fee IFRS 16 EBITDA margin is up 50 basis points over Q2 last year when you removed the impact of the Crombie REIT transaction. That's a big move. Our approach to closing our food EBITDA margin gap is two-pronged. We're focused on improving our cost base, and SG&A is pretty well there. With COGS, we had to start with category reset to get us on an even playing field, and now we need to be more efficient with our categories. Sunrise was the first step, and we have made great strides, but we still have way more upside. We're also focused on our sales productivity. We have great people and great assets in great locations across the country, and we will now optimize them. Third, I wanted to talk about Voila!, our game-changing e-commerce solution. While most players in the industry are focused on inefficient store pick models to fulfill their online orders, we are building automated warehouses powered by OCADO's world-leading grocery technology. We'll be able to provide customers with convenient, short delivery windows beginning early in the morning and running until late in the evening. The system is more flexible than you might think. Customers can place orders at night for the next morning or morning for later that same day. This is the only e-commerce model that at scale will eventually allow us to profitably deliver an expanded assortment of groceries to over 75% of the Canadian population with only four CFCs. While our focus is on home delivery, we can also do click and collect sourced out of the CFCs if that's what customers want in certain areas. Although I must add our data and experience tell us that when given the choice, customers overwhelmingly prefer delivery to home. The flexibility of the hub and spoke network model, where each CFC is the hub and smaller cross-stop facilities are the spokes, allows us to get closer to the customer. And we have plans to build on this best-in-class OCOTO infrastructure. We will build even more flexibility over time to meet customers' needs. There is a reason that many of the best grocers in the world, including Kroger in the US, Casino in France, Ikea in Sweden, Kohl's in Australia, Marks and Spencer, and Morrison's in the UK, and Aeon in Japan are partners with Okado. The reason being is that Okado is the most advanced and continually innovative small cube e-commerce solution in the world. Frankly, any plan B is just not nearly as good. When we study what Canadians are looking for in an online grocery offer, it's quite simple. Excellent, fresh product at competitive prices, no substitutions, delivered to their door exactly when they want it. Bola will deliver on exactly that. At scale, Voila will offer an expansive selection of up to 39,000 products, which is way more than any other grocery e-commerce business in Canada, and 15,000 more than your average grocery store, including high-quality fresh produce at prices comparable to our bricks-and-mortar, Sobeys, or IGA stores. An online grocery home delivery experience like Voila does not exist in Canada. We're going to grow the market. Voila is on track to test on soft launch in the GTA in late spring. We are so confident in the Voila solution that we have already started building our second CFC in Montreal with our partner, Crombie Reap. This CFC will serve major cities in Quebec and the Ottawa area and is expected to open in 2021. Fourth, Farm Boy, which along with Voila is a weapon for winning share in urban markets in Ontario where we are under-penetrated. Farm Boy has been part of the Empire family for just about a year now and continues to deliver on its industry-leading operational and customer metrics. It is outperforming all of our expectations. The phenomenal team at Farm Boy is making progress against its plan to double the size of the business in the next five years. The Farm Boy store camp will grow in a mix of urban and suburban communities with diverse store sizes and formats to fit the needs of local customers. We opened a new Farm Boy last week in Burlington and have announced plans to open another six stores in 2020 and two in 2021. Most of these new stores will be in the GTA, five in downtown Toronto, one in Newmarket and one in St. Catharines and one in Ottawa. The stores will range in size from a 12,000 square foot urban footprint to a 38,000 square foot signature store. This will bring Farm Boy's total announced store count to 37 stores. And this is just the beginning. Farm Boy is in different stages of development on more than 25 new stores in Ontario, a mixture of greenfield conversion and mixed developments. We intend to blanket the GTA and take market share from incumbents. In a market where we have always had low market share, Farm Boy's aggressive plan for growth is being well supported by Empire's infrastructure and capabilities in real estate, sourcing and logistics. Fifth, our store renovation program. We have an ambitious store renovation program that ensures we deploy capital to most of our bricks and mortar stores over the next seven years. We are investing capital at solid returns to revitalize our stores, both discount and conventional. Our renovations will range from a refresh to a full reset of the store, but at a minimum, you will see enhancements to decor, facades, and modifications to our key departments to better support our strategy. So far in this fiscal year, we have touched 28 of our conventional stores and we just finished refreshing all of our Freshco stores in Ontario to the Freshco 2.0 model. We will ramp full service renovations up as a result of our renovations are very strong. And finally, something we don't talk about often, our ownership position in Crombie. Crombie is our largest landlord. We currently own 41.5% of Crombie and we are pleased with this level of ownership. We are working even closer with Crombie REIT's management than we have in the past to optimize the value of our partnership. Crombie REIT leads mixed use development opportunities provides capital to facilitate our strong renovation program, and has had a history of sale and leaseback of properties, allowing Empire to effectively reallocate our capital to higher growth opportunities in other parts of our business. A great example of our partnership, mutually benefiting Crombie Reed and Empire, is our Davies Street store in the heart of Vancouver. Crombie REIT took ownership of our Davie Street store, closed it and developed a mixed use property for Crombie REIT. At the end of fiscal 2020, we will be opening a brand new 44,000 square foot store on the property, which features up to 330 residential rental units that will increase traffic to our stores. We are pleased with the momentum in our business. It is a testament to the growing strength of our team. I want to wish you all a great Christmas and holiday season, and if you want to eat really well over the holidays, shop for food at one of our great banners. And with that, over to Mike.