Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the Empire Fourth 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 need assistance, please press star zero for the operator. This call is being recorded on June 18, 2020. I would now like to turn the conference over to Katie Brine, Investor Relations. Please go ahead.

Thank you, Joanna. Good afternoon, and thank you all for joining us for our Fourth Quarter conference call. Today, we will provide summary comments on our results, what we are seeing in the industry today, and then open the call 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. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer, Michael Vells, 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. Good afternoon, everyone. These are truly unprecedented times. Our thoughts are with all those affected by COVID-19. We at Empire are doing everything possible to ensure the health and safety of our teammates and customers, to keep our shelves stocked, and to support charitable organizations across Canada. I'm incredibly humbled by the efforts of our frontline grocery and pharmacy heroes, and of our teammates in our distribution centers. We've asked so much of them over the last few months, and they have shown up every day determined to serve Canadians. Today, I want to talk to you about a few things. The emerging trends as a result of this pandemic, our performance this quarter and our strategic initiatives, Fresh Go, Farm Boy and Voila. This pandemic has fundamentally impacted how Canadians shop for food and forced grocers to rethink how to serve our customers. In the three months since we last spoke, we have seen so much change. The most noticeable difference we have seen is the increased safety protocols in our stores, such as plexiglass, occupancy limits, and one-way aisles. For as long as we are without a vaccine, and probably even when we do find one, we believe customers will shop stores that continue to invest in safety and sanitation. Retailers that do the right thing and don't let up on their important protocols will be preferred by customers. We are committed at Empire not to let our guard down. We have seen consumption shift from restaurants and hospitality businesses to grocery stores as physical distancing requirements made it difficult for these industries to operate and people are encouraged to stay at home. Grocery sales won't be as high going forward as during the first portion of the pandemic, but we believe this trend will continue. Canadians are also shopping less frequently, but consolidating their trips to reduce exposure to COVID. These shifts in shopping behavior have basket sizes way up and transaction count down. We have seen the number of customers with a basket size over $100 triple since the pandemic began. We believe that the days of many individual customers visiting many grocery stores in the span of a week are over for the foreseeable future. All of the trends I speak about today are more pronounced in areas of the country that have been most hit by this terrible virus. Many Canadians are gravitating toward one-stop-shop grocery stores that meet all of their household needs. As we head into uncertain economic days ahead, we know that the discount format has historically performed well in such times. But in our view, this is not 2008. First, discount already makes up a much greater percentage of grocery stores than 2008. There's a good balance between discount and full-service stores. Second, full-service grocery stores are much more sharply priced now. And third, a pandemic-induced recession may be different as Canadians seek out safe and healthy places to complete their one-stop shop while also receiving value for their money. Now we don't profess to know everything, we're not soothsayers, but it's our belief that many Canadians will continue to favour one stop shops more than at any time in the recent past, making the future look quite different than the past. That's all to say that we believe safe, well stocked and customer friendly grocery stores will thrive whether they be full service or discount. But we believe that full service will grow faster than discount in at least the short to medium term. We have also seen a shift to online grocery, which was a relatively nascent industry in Canada before the pandemic hit. Online grocery penetration has seen an increase in three months to levels we anticipated in the next three years as the pandemic caused Canadians to trial grocery e-commerce. E-commerce has been supercharged because of COVID, but it is, of course, still a relatively small percentage of the total market and definitely will not be the death knell of stores. Overall, online grocery sales in Canada have more than tripled. But let's put this growth into perspective. It's off such a small base, probably at 1.5% penetration before the pandemic. We think it could triple over the next few years and could comprise about 5% or so of the market. So still small, well below UK and US penetration rates, but high growth. Canada is basically catching up to where the rest of the world was. Bricks and mortar will continue to rule in terms of market share for a very long time, but online will become more and more important and will grow the fastest. Online executed well will also put a halo over the bricks and mortar brand. Now we applaud all grocers who serve customers through store pick over the crisis. There will continue to be opportunities for store pick as opposed to a central fulfillment model in certain regions of the country. but it's just not as customer-friendly. It disrupts the store, isn't easily scalable, and is very difficult to be meaningfully profitable. E-commerce has to be really well done. Done badly, it can cause brand damage, and consumers will not put up with a poor e-commerce experience in the future the way they did in the middle of a pandemic. Changing topics. I can finally say what I've been waiting to say for the last three years. Our three-year transformation strategy, Project Sunrise, was successfully completed this quarter. The changes we made positioned us well to not only navigate this crisis, but to be able to optimize our business for the emerging trends. We have accomplished so much through Project Sunrise. We have reset our foundation, transitioning from a regional to a national structure. We have sharpened our leadership and developed a more accountable culture with a team that is results-oriented and strives to win. With the new structure, we have leveraged our purchasing scale, adopted best practices, and have standardized our operational processes across the country, contributing meaningfully to our bottom line. And the final piece of sunrise was our category reset program. We assessed every single category to put our underlying cost base on an even playing field with our competitors and to ensure our shelves are stocked with the items customers want most. This took us nearly two years and was one of the most difficult and successful projects in our company's history. For all of this, we removed over $550 million of costs from our business and executed our transformation even beyond our expectations. All initiatives on time, meeting or exceeding all financial targets. And we didn't stop there. We delivered these cost savings and positive same-store sales while setting ourselves up for long-term growth by expanding our discount banner, Fresh Go to the West, partnering with Ocado to bring a game-changing grocery e-commerce solution to Canada, and acquiring Farm Boy, the fastest-growing grocery retailer in Canada. There are very few Canadian retailers that have executed a transformation of this size with this level of success. So now let's get to our performance this quarter. Same-store sales excluding fuel this quarter were at an unprecedented 18%. The solid momentum we saw in the second half of the third quarter carried into the fourth quarter and was obviously really amplified by the impact of COVID. At the end of February, we began to see significantly higher same-source sales that peaked at 50% growth during the March 8 through March 21 period in all formats, excluding fuel, as customers stocked up in preparation for possible stay-at-home requirements. Sales. excluding fuel and the impact of the Easter period, then stabilized at a lower level of approximately 23% for the quarter. As stay-at-home restrictions were put in place, consumption shifted from restaurants and hospitality businesses to grocery stores. According to Nielsen, the Canadian grocery industry grew $3.7 billion in the 16 weeks ending April 25th and we were able to gain a significant portion of this market share. We believe, based on the data, that we gained the most market share over the past three months in both full service and discount. I'm not going to give you a number, but to put into perspective, we saw market share gains over the back half of the quarter that we would have been happy to achieve over the next five years. We plan to protect a good portion of these share gains as we move forward. Our market share gains can be attributed to four things. One, our full service format outperformed other bricks and mortar food retail formats throughout this pandemic. As many customers sought to minimize their grocery store visits, they gravitated toward one-stop shop grocery stores that met all their household needs. This clearly favored full service. Given that our store network is more heavily weighted toward full serve, we were positively impacted by this shift in behavior. Two, the resilience of our supply chain. Our highly automated distribution centers have enabled high velocity restocking of store shelves, ensuring a broad assortment is available to our customers. Three, our in-store execution. We moved with urgency to invest in increased safety and sanitation procedures to ensure our customers and teammates felt protected while shopping and working in our stores. and we did not let up on these protocols. We continue to closely monitor the impact of the pandemic on food retail around the world and to implement even better processes and best practices. Four, significant gains in discount. We finished refreshing all of our Ontario stores to the evolved Fresco 2.0 branding in the fall We also launched an ad campaign at the beginning of the quarter to reintroduce customers to Freshco, and it was a big success. Improved customer satisfaction and awareness resulted in very strong same-store sales gains at Freshco early in the quarter and, combined with the impact of stock-ups and increased baskets, positively impacted our discount business. Through the pandemic period in these times of high demand, we've been focused on ensuring cost to consumers are held in check and that prices continue to be competitive. Our flyers are still operating, running the promotions we can, and we are spreading them over an entire week to continue doing what we can to smooth traffic in our stores. We will continue to be vigilant in our attempts to avoid passing on cost increases to our customers. Our gross margin dollars were significantly impacted by increased sales. When we look at the underlying gross margin rate improvement of 50 basis points over last year, our margin strength can be attributed in large part to Project Sunrise, which we were able to complete amidst the pandemic. The customer shift toward full service, a slightly less promotional environment due to supplier stock availability, and higher private label penetration also positively improved margin. Over the last two years, we have been working hard to improve our private label business through the rebranding of our entire complements portfolio, increased product innovation and the reset of key categories. We are now beginning to reap the benefits of these improvements. Our penetration of private label has been growing faster than the industry for all of fiscal 2020, which has only been further amplified in the past 15 weeks during the pandemic. We will continue to improve our private label brand portfolio as it will become increasingly important in uncertain economic times. EBITDA margin rate, our most closely watched number improved by 70 basis points excluding IFRS 16. Sunrise savings and improvement in core gross margin positively impacted the rate. We continue to make strong progress closing the gap between us and our two major competitors. EPS of 67 cents is the highest in our company's history. It reflects the success of Project Sunrise, the impact of COVID, and the hard work of all 127,000 of our teammates across the country. Our teammates in our stores and distribution centers came through for Canadians. They are the reason we could put food on the nation's tables, why our stores were safe and clean. They became essential workers. They were and will continue to be heroes. We are now halfway through our first quarter. Our store operations have started to return to a more normal state, if you can even call it that. All of our service counters are up and running, our garden centers are open, and most stores have returned to their normal operating hours. During the first six weeks of Q1, as provinces gradually started to ease restrictions, we have seen same-store sales, excluding fuel, range from 9% to 17%, averaging 13%. slower now than at the beginning of the quarter. All of our grocery banners are performing well, but full-service stores continue to lead the way in same-store sales growth by a large margin. Pharmacy has rebounded very well, and we are seeing fuel beginning to recover. As provinces execute their reopening plans, other retailers open, and consumer behavior shifts, we felt this was a natural time to end our temporary hero pay program and did so on June 13th. We also provided our frontline and distribution center teammates with a one-time bonus equal to two weeks of hero pay based on average hours worked per week from March 8th to June 13th. We also pledged to our teammates that we will institute a meaningful teammate discount program in the fall. Now I want to take a few minutes to speak about three of our key strategic initiatives, Fresh Go, Farm Boy and Voila. Freshco's same-store sales growth this quarter ended up pretty well equal to our full-service banners. Discount and big-box formats did very well in the first few weeks of the pandemic, but as time progressed, full-services growth outpaced these other formats. Freshco's business outperformed other discounters and took market share from their discount competitors in the markets where they compete. Freshco has a great price position, but is also viewed by customers as a very clean and safe store to shop. Farm Boy continues to be a weapon for winning share in urban markets in Ontario, where we are under-penetrated. At the outside of the pandemic, Farm Boy faced some challenges, as a large portion of their offering is focused on prepared foods, which meant their same-store sales weren't as high as usual. However, the exceptional leadership team at Farm Boy was able to think creatively to adapt their stores and offerings to continue to serve their loyal customers. Farm Boy's private label products are now being offered on Voila soon, allowing customers another way to access this tremendous brand. As I noted earlier, online grocery penetration in Canada is growing dramatically. Our own e-commerce businesses in Quebec through IGA.net and in BC through Searcy Foods have experienced exponential growth and have toppled their sales since the crisis began. To put this in perspective, there was one five-week period where we hit the anticipated sales we had forecasted for the next year in Quebec and British Columbia. We continue to have the number one market share in Quebec for grocery e-commerce. The customer launch of Voila!, our game-changing online grocery home delivery service, has been accelerated to meet the increasing demand from customers for delivery. Voila! will launch in areas of the GTA starting this month and will continue its phased rollout to customers across the GTA over the next several months. While everyone is seeing spikes in their e-commerce grocery solutions, customers will ultimately stay with the online providers that deliver an exceptional experience. The world has turned in our direction. Automated, centrally picked grocery e-commerce is the future. I am so glad we made the decision nearly three years ago to partner with Ocado and obtain exclusivity in Canada over their world-leading grocery technology. It is safe with very little human contact, and it is profitable over the long term. Ocado's end-to-end technology, combined with our freshness guarantee, affordable prices, and white-glove delivery service bring the best online grocery solution in the world to Canadians. We are well positioned to win grocery e-commerce in Canada. Now, with the successful completion of Sunrise, we removed more than $550 million of costs and have a solid foundation to build on. but we know we still have substantial value that we can extract from our business. Our strategy for the next three years positions us well to take the offensive and win the next generation of grocery retail. We are almost ready to unveil our new strategy. The launch was delayed from early May in light of the current environment and the focus that all our teammates have in keeping stores filled and serving customers and to allow us the time to adapt our strategy slightly to address the social and behavioral changes resulting from the pandemic. In July, we'll unveil the bold ambition we have set for our next chapter. I think it's fair to say that we are better set up to succeed going forward than we were even three months ago. And with that, over to Mike.