Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the EMPIRE second quarter 2021 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 Thursday, December 10, 2020. 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, 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 and good afternoon everyone. I want to start today by recognizing the incredible efforts of our frontline teammates in our grocery stores, pharmacies and distribution centers. I am humbled every single day by their tireless efforts to maintain the heightened safety and sanitation protocols to keep our stores safe. Coming to work every day to serve Canadians. As this horrible pandemic continues and case counts continue to rise, we are all so thankful for their efforts. With that in mind, I'll focus on a few key topics today and update on COVID's impact in our stores, our performance this quarter, and some early updates on Project Horizon. First, COVID. Since we last spoke, the situation around COVID has continued to evolve with increased restrictions being imposed across the country. We're excited by news of potential vaccines, but recognize there's a long road ahead. All the trends we saw and foresaw in past quarters remain. I'll speak about this shortly, but first I want to address the actions we continue to take in our stores to protect our teammates and customers. Even through the summer when case counts declined, we did not let our guard down. Safety and sanitation in our stores continue to be our top priority. With the Canadian winter upon us, it's important that customers can visit our stores safely. With reduced capacity, we have prepared for potential lineups by repurposing our vestibules for indoor queues. In a small number of locations where we have seen significant queues, we're adding outdoor structural solutions and heaters to keep customers out of the elements. We are also rolling out innovative virtual queuing technology in certain locations, which allows customers to wait their turn to shop in the comfort of their vehicles. As we committed to earlier this year, When a region returns to a government mandated lockdown, closing non-essential businesses, we will compensate our frontline and distribution centre teammates for additional pressure they face. When the Manitoba and Ontario governments recently implemented new lockdown restrictions, it triggered our pre-set criteria in lockdown regions. We ensured our stores aligned with updated guidance, particularly capacity restraints and we implemented a temporary lockdown bonus for our frontline and distribution center teammates. I am so proud of our team who were prepared and responded quickly, seamlessly implementing the changes in our stores. Now an update on the trends we're seeing with COVID. Full service continues to outperform discount in our company and throughout the industry. We provide our customers with excellent value and our full service stores have the full breadth and depth of product offering. We believe many customers who switch channels during COVID have come to recognize that value and it will be a reason to continue shopping full service post-pandemic. And as we continue to invest in our value proposition, our industry is seeing material cost pressure on a select number of items. Lettuce and poultry are prime examples. Farmers and suppliers are incurring increased costs associated with poor weather, increased demand and supply chain challenges due to COVID. These are real, significant commodity increases which are being felt at the store. But outside of that, we are pushing back on price increases and continuing to provide excellent value to customers. Online grocery penetration remains elevated as customers become more comfortable with grocery delivery. Online grocery sales continue to grow in Canada, although, as we predicted in April, at a slower pace than when the pandemic began. Empire's e-commerce businesses grew 241% this quarter. As we see regions enter government-mandated lockdowns, combined with winter arriving, we are seeing e-commerce sales ramping up in the first part of Q3. We told you in July that we were accelerating the timing to build another two CFCs in Western Canada. and I am pleased to announce our third Voila! Customer Fulfillment Center in Calgary, Alberta, adjacent to our current Rocky View Distribution Center. This will be our first CFC in Western Canada and will service most of Alberta, including Edmonton. We expect this site to start delivering to customers in the first half of 2023, but we will serve the region earlier than that with OCADO's proven store pick solution. Crombie REIT will partner with us in the development of the CFC, similar to our Montreal CFC. And Mike will provide more details shortly. Now more about Empire's overall performance this quarter. Results continue to be strong. As in our last two quarters, we see customers shopping in a fundamentally different way due to COVID. We continue to see significantly elevated grocery sales and gains in Empire's national market share. Much of this is attributable to the safe shopping experience we have consistently delivered through COVID that our customers recognize and value. However, we have also made substantial improvements in our store operations, merchandising and marketing designed to thrill our customers through Project Sunrise and the beginnings of Project Horizon. We have a very strong team in place which is running our business better than ever before. We are confident, highly confident that we will sustain our success as the pandemic subsides. When we spoke in September, we said that same-store sales, excluding fuel at that time, were sticking with an average range of 8% to 10%. In the last month of Q2, we saw same-store sales accelerate, and we ended the quarter at 8.7%. We saw trips slowly increase through the quarter, and while basket sizes remained high, they were slightly less than last quarter. Pharmacy remained stable, and while fuel continues to be impacted by consumption, we see gradual improvement. We are now halfway through our third quarter. During the first five weeks of Q3, we have seen same-store sales excluding fuel continue to accelerate. For the quarter to date, ending last week, our same-store sales have averaged 11%. Our gross margin dollars were positively impacted by our increased sales. Our gross margin rate improved 30 basis points over the prior year and was consistent with our strong first quarter. The improvement in margin rate over last year continues to be largely due to our sales mix shifting toward our full service banners in addition to some early traction on horizon initiatives. EBITDA margin this quarter was flat to prior year at 7.4% and our EPS increased to 60 cents. A couple of non-obvious differences from last year affects the comparison. Last year had a few benefits that did not repeat this quarter. Most notably, Crombie REITs unusually large property disposal, approximately $0.06 per share after tax. Removing this item, EPS increased 17.6% over prior year and food retail net earnings actually increased 27.3% over prior year. Finally, I want to share some early progress on Project Horizon, our ambitious three-year strategy that we outlined during our last call. Despite the pandemic, our team recognizes we have a business to run and a strategy to execute. We are confident in the early progress we are making on our Horizon initiatives. This has taken some heavy lifting, but we are very happy with the performance. The team is meeting our very high expectations. I want to give an update on three of our important initiatives, winning Canadian grocery e-commerce, expanding Farm Boy and investing in our store network. Mike will give an update on our cost and margin initiatives. Today I will share some early operating metrics from Voila. We don't intend to share these every quarter, but want to provide a baseline today to give context on how strong the performance of Voila has been. When we partnered with Ocado, we knew we were getting the best grocery e-commerce technology. Accordingly, we set high targets for ourselves. I have been eager to share results since we launched, but we wanted to run the business for several months to confirm early trends. While initial sales and penetration have, in part, been bolstered by COVID, where we have truly been impressed is the customer satisfaction and our operational metrics. To date, our weekly on-time delivery score is 98.6%, beating our aggressive target of 95%. And our fulfillment, the percent of products ordered that are delivered is 99.6%, exceeding even our 98% target. These are best-in-world metrics. We are giving Canadians an e-commerce solution they can trust, will show up when expected, and will deliver the products they ordered. This type of service was not available in the greater Toronto area before Voila!, and as we predicted, customers are thrilled. Our net promoter score, I'm going to give it to you, is an extraordinary 87%. We continue to beat our industry best in class target score of 70%, 87%. We are seeing extremely high customer satisfaction and loyalty. This, along with positive word-of-mouth referrals and high, very high repeat rates, is translating to strong order volume growth. Early in Q3, we are seeing continued, compounded weekly growth as new customers discover Voila! and those who have tried us become repeat users. For those familiar with Ontario, Voila! now covers the Greater Toronto and Hamilton area and has recently extended to include Barrie and Guelph. There are over 100 Voila! delivery vehicles on the road, serving approximately 85% of the geography the CFC will ultimately deliver to. Customers can choose from a selection of approximately 17,000 products, and we continue to add products daily. Now, turning to Farm Boy. Since Q2, we have opened four stores and announced a fifth. Three locations opened in the GTA, including one at the old art shop building, at Yonge and Eglinton in Toronto, and we relocated the flagship store at Trainyards in Ottawa. This brings Farm Boy's total announced store count to 42 stores, with many more to come. The New Market, Art Shop, and Trainyard stores have extended footprints with larger center of store space to accommodate Farm Boy's exciting and innovative private label products. All new stores exceeded management's early forecast despite being opened during the pandemic. After the holidays, the Farm Boy team will open two more stores in January at Front and Bathurst in Toronto and in Waterloo. Front and Bathurst will have expanded grocery and hot food offerings in 38,000 square feet. Another conversion and new build are slotted to open early spring for a total of eight store openings in one fiscal year, a historic achievement for Farm Boy management. Also, over the course of Horizon, we plan to renovate approximately 30% of our Empire store network. This quarter, we renovated 18 locations across our network. We continue to develop our network of Fresco stores to achieve critical mass in Western Canada. There are now 22 Fresco stores open and operating in the West, and another eight in different stages of development. We track every renovation so we can adjust and learn constantly, and so far, we are very pleased Our renovation program is meeting its financial and strategic objectives. Last but not least, I want to take a moment to recognize two members of our team. Sandra Sanderson, Senior Vice President of Marketing, has been named CMA's Marketer of the Year in Canada. Congratulations, Sandra. And Pierre Saint Laurent, who's on the line with you today, our EVP and COO of full service, has been named one of Canada's 50 Best Executives in 2020 by the Globe and Mail's report on business. Very deserved. We are all very proud of Sandra's and Pierre's accomplishments. You know, the team at Empire continues to make important strides, moving toward our full sales and earnings potential. There is still significant room to grow, but our team is stronger than ever and dedicated to thrilling our customers and achieving our Project Horizon goals. Through these challenging times, we wish everyone a safe and happy holiday season. And with that, over to Mike.