Empire Company Limited

Good morning, ladies and gentlemen, and welcome to the Empire First Quarter 2021 conference call. At this time, all lines are in 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, September 10, 2020. I would now like to turn the conference over to Katie Bryant, 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, 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 Bell, 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 Metzlein.

Thanks, Katie, and good afternoon, everyone. You know, so much has happened at our company since we last spoke in June. We announced our new three-year growth strategy, Project Horizon. We launched Voila!, our game-changing e-commerce solution. We continued to grow our number of Farm Boy and Fresco locations. We ratified our crucial Alberta labor agreement, and we were upgraded by S&P to an investment-grade rating. Today, I want to focus on a few key topics, the early progress we were making on Project Horizon, our performance this quarter, and an update on the trends we were seeing as a result of COVID. We announced Project Horizon, our new three-year growth strategy in July. And while our announcement was slightly delayed as a result of COVID, the team was already in flight on many of the initiatives. Through Project Horizon, we plan to deliver an incremental $500 million in annualized EBITDA by the end of fiscal 2023. You know, when we launched Project Sunrise over two years ago, we had a few doubters. Many thought we couldn't do it. They discounted our goals, said the savings wouldn't drop to the bottom line. But our team came through, and we proved them wrong. We delivered on time, above target, and above expectations, and we plan to do so again. Project Horizon is just as bold and equally as ambitious. We know we have a lot of work in front of us to get to the $500 million, but we are much more optimistic now than we were three years ago. We are a completely different company today than we were when we started Sunrise. We have reset our foundation, transforming Empire from a regional to a national company. We have sharpened our talent at every level and, in my opinion, now have one of the best executive teams in Canada. We have sustainable earnings growth. We have standardized our operational processes. and we've improved our cost structure. Although we only announced Horizon in July, it was not a standing start, not at all. Our initiatives are either underway or they are initiatives that I have seen successfully completed at other companies. Horizon is not rocket science. The only rocket science are the algorithms we're using in Voila and the artificial intelligence we're using throughout the company. Many of these initiatives we identified at the start of Sunrise, but we simply needed to do things in the right order At the right time, we needed a solid foundation to be able to achieve our earnings potential. Our earnings growth over the next three years will come from one, growing market share, and two, building on the cost and margin discipline we developed during Sunrise. I will speak to you about the initiatives we have ongoing to grow market share, and Mike Vells will take you through our cost and margin initiatives. A number of initiatives are underway to support market share growth, including investing in our store network, scaling up grocery e-commerce, growing our private label portfolio, continuing our Western frescoes, first investing in our store network. Toward the end of Project Sunrise, reinvesting in our stores became a key priority. We have seen extremely strong returns on these projects. Indeed, they are our best return projects. We have an ambitious store renovation program that ensures we deploy capital to revitalize most of our stores over the next seven years. Our renovations will range from a refresh to a full reset of the store, but at a minimum, you will see enhancements to decor and modifications to our key departments to better support our strategy. So far in the first quarter, we have touched 21 stores. Over the three years of Horizon, we plan to touch and improve approximately 30% of our store network. Next is expanding Farm Boy in Ontario. Farm Boy continues to be a weapon for winning share in urban markets in Ontario where we were under-penetrated. At the outset of the pandemic, Farm Boy saw a slight decline in their same-store sales as a large portion of their offering is focused on prepared foods. However, their same-store sales have been restored to even higher than historic levels as the exceptional leadership team at Farm Boy continues to successfully innovate to adapt their stores and offerings. 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 have announced plans to open another three Farm Boy stores in calendar 2020 and seven in calendar 2021. This brings Farm Boy's total announced store count to 42 stores, and this, of course, is just the beginning. The Freshco team is doing a great job, too, and I want to talk about Freshco's Western expansion. Freshco continues to outperform other discounters nationally while making progress expanding the discount banner to the West. Our brand equity scores are very high. Since the start of this fiscal year, we opened seven Freshco stores, bringing our total store count in the West 22 stores open. And we have eight in different stages of development, including two that we announced today in Regina and Grand Prairie. We are very pleased with our early results in the West. We also reached a mutually beneficial labor agreement that will allow us to expand Freshco into Alberta, the final Western province impacting our expansion. This is a huge milestone for the Fresco West team and for the company. Our first two Fresco stores in Alberta are expected to open in spring 2021. I want to talk about improving store space productivity. You know, driving better space productivity in the current store network is a crucial engine for long-term market share growth. The foundation of productivity is the customer offering and assortment in each department, as well as the mix in the store as a whole. During Sunrise, the company revamped its offering through the category resets program, but with a significant constraint, maintaining the current space allocation within stores. During Project Horizon, the company will drive a step function improvement in space productivity using advanced analytics to optimize every customer-facing element of the offering, store footprints, department space allocation, and strategies, layouts, and adjacencies, category assortment, and localization decisions. We're also going to win Canadian e-commerce. In response to the increased penetration we have seen in grocery e-commerce throughout the pandemic, we accelerated the customer launch of Voila, our game-changing online grocery home delivery service, to meet the increasing demand from customers for delivery. We began with a relatively small number of SKUs to test the system and have been ramping up big time. Voila launched in the GTA in June, and we are very pleased, very pleased with the yearly results. Customer feedback has been overwhelmingly positive and our customer net promoter score is the highest I have seen in my career. Customers are seeing the benefit of a central fulfillment model and one of my favorite customer quotes to date is, I received all that I ordered and this is no less than a miracle nowadays. I immediately saw the benefits of picking from a dedicated warehouse versus store and Produce was really fresh and well-packed. On-time delivery was exactly within the slot I requested. I felt the price of items was good, and so were the range of promotions, and we did not pay that person to write that. Positive customer experiences are translating into strong repeat behavior, much stronger than we forecast, and positive word-of-mouth referrals. This, coupled with a strong marketing campaign blanketing the GTA, has meant steady growth and strong week-over-week order volume growth. We are delivering best-in-class customer service with near perfect on-time and fulfillment rates. Our second Voila! Customer Fulfillment Center will launch in Montreal to service the Montreal and Ottawa area in early 2022. We have accelerated our plans for the remaining two Wallahi e-commerce customer fulfillment centers and have even more confidence than ever in that plan. That's going to give us a total of four customer fulfillment centers across Canada, covering about 75% of the population and 90% of the spend. In the few areas of the country where our customer fulfillment centers will not deliver or are not yet built, we will be introducing Ocado's proven store pick solution. In August, we started testing store pick in Nova Scotia with plans to expand to customers by the end of summer and then move west. It is clear now, more than ever, that we must be able to serve customers where, when, and how they want to shop. We are well positioned to win grocery e-commerce in Canada. We're growing our Empire private label portfolio. We've been working hard to improve our private label business through increased product innovation and the reset of key categories. Already, as a result of these improvements, our private label sales have grown faster than the industry. In August, we launched a campaign to highlight the rebranding of our entire compliments portfolio. Very happy with that. We will remain focused on improving our private label portfolio as we know it will become increasingly important in uncertain economic times. And we're going to provide best-in-class customer personalization. You know, we're moving forward aggressively with investments in analytics and technology. to deliver on our vision for unique customer experiences. Building a personalization capability enables Empire to better identify customer preferences and support direct individualized experience and personalized communication, evolving from mass communication to personalized connections with its customers. We're going to rely on both of those. The goal is to deploy world-class and practical personalized communications and offers to inspire customers to improve the experience and relevance of promotions. Personalization is a key enabler in delivering unique customer experiences, driving incremental behaviors, and engaging new customers. Now on to our first quarter results. Results were strong. You saw that. Grocery sales are still significantly higher than historical levels, and we continue to gain market share nationally. Same store sales excluding fuel were up 11% this quarter, slightly below the average of 13% for the first six weeks of the quarter that we gave you on our last call. Basket sizes way up and transaction count is down over prior year, but we see trips slowly increasing week over week as some customers are beginning to initially feel safe enough to shop a little more frequently, a little more. Pharmacy has stabilized and as Canadians have gradually been traveling more across Canada, we see fuel sales increasing. Q1 sales were impacted in the first six weeks by remnants of the lockdown. As restrictions started to ease up and over the last two periods of the quarter, we've seen sales rates slightly, slightly reduce, but still significantly elevated over prior year. We're now halfway through our second quarter, and when we look at the last two periods of Q1 plus the first five weeks of Q2, the average same-store sales has been averaging, that's a lot of averages, approximately 8 to 10%. And it's sticking around there. It's clear that many Canadians' food habits remain changed, and we predict will stay changed. They will stay changed due to the severity and length of COVID concerns. Full service continues to outperform discounts, but the gap between the two is slightly lessening. Of course, sales are stronger in regions which are currently most concerned about COVID. Looking ahead, we believe same-store sales may slow down a bit further but we see the stickiness in a good portion of the consumption that shifted from restaurants and hospitality businesses to grocery sales. Our gross margin dollars were positively impacted by our increased sales. Gross margin rate was 25.1%, up 50 basis points over the prior year. The margin rate improvement over last year is largely due to customers' continued preference for one-stop shops that are full-service banners, a slightly less promotional environment, and the annualizing of Sunrise savings. These positive improvements were partly offset by our service counters being closed for much of the quarter. We have now opened our service counters in almost every store across this country. EBITDA margin rate was 110 basis points higher than last year, and when we look again over the last 12 months, our EBITDA margin continues to grow faster than our major competitors. Our EPS of 71 cents a quarter is the highest. in our company's history. And lastly and briefly, I'd like to talk to you a little bit about the trends we continue to see as a result of COVID. This pandemic has fundamentally impacted how most Canadians shop for food and continues to do so. And many of the trends that we discussed last quarter have continued over the last few months. We still see many, many Canadians gravitating toward one-stop shop grocery stores that meet all of their household needs. Full service continued to grow faster than discount this quarter, albeit not to the same extent as during our fourth quarter in the heat of that pandemic. And we believe it will continue to do so for the short to medium term as most customers continue to seek out one-stop shops. Online grocery sales in Canada continue to remain at elevated levels, although pulling back from their highs per our internal data as consumers have embraced e-commerce in all forms throughout this pandemic. Empire's e-commerce businesses in Quebec through IGAA.net and B.C. through Thrifty Foods had sales growth of approximately 370% this quarter. We continue to believe that customers will shop stores that invest in safety and sanitation for as long as we are without a vaccine and probably even when we do find one. Though provincial restrictions have eased, at Empire we have not let our guard down. We continue to maintain the increased safety protocols in our stores with occupancy limits, one-way aisles, and masks. You know, when I arrived at Sobeys, we were non-investment grade rated by our credit rating agencies. The senior team and our board made it a priority to return Empire to the investment grade quality we knew it could be. We focused on operating a more efficient company, growing the cash flow through Sunrise, and bringing more discipline to the capital allocation process to strengthen the company's balance sheet. Last July, DBRS upgraded us to investment grade, and a few weeks ago, S&P upgraded us as well. We now have an investment grade credit rating by all our agencies, and being investment grade provides access to even more cost-effective capital. The momentum at Empire continues thanks to the hard work of our incredible team of 127,000 teammates and franchisee partners from coast to coast. I've always said retail is a simple business, sales, margin, cost, and capital allocation, but the trick is in executing consistently, and we are doing just that. Quarter over quarter, year over year, we are making strides toward extracting this company's full sales and earnings potential, and most importantly, thrilling our customers. And with that, over to Mike.