Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the Empire fourth quarter 2021 conference call. At this time, all lines are in the listen-only mode. But following the presentations, 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. Also note that the call is being recorded on Wednesday, June 23rd, 2021. And I would like to turn the conference over to Katie Brine, Director, Investor Relations. Please go ahead.

Thank you, Sylvie. Good afternoon and thank you all for joining us for our fourth quarter conference call. Today, we will provide summary comments on our results 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 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 CEO. Michael Veld, CFO. and Pierre Saint Laurent, Chief Operating Officer, Full Service. Today's discussion includes four 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 just materialize. I would agree to your 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. Last year's Q4 results were unprecedented. We were at the peak of COVID panic buying. We saw off-the-chart sales and margin growth. So we knew last year's results were going to be challenging to repeat, but we did match them. There are three things you should take away from our results today. One, we're making consistent progress on executing Project Horizon. It's how we matched last year's outstanding results. Two, we're driving real sales growth. Three, we're maintaining good cost control, even while investing more in our business. Our strong cash flows allow us to make these investments while returning more money to you, our owners. Like all of you, I hope things get back to normal soon. Most importantly, for the safety of our frontline teammates and customers in our country. But also, because when we return to normal, you will see clearly what a fundamentally stronger company we are. I want to cover four topics today. Our capital allocation strategy, our Q4 results, our future grocery market expectations, and our progress on Project Horizon. First, capital allocation. Mike and I have discussed this with you a lot over the last four plus years. We are strong believers in the power of a well-executed capital allocation strategy. The strength that we have built in our operations and merchandising, plus our strategic investments in renovating our stores, farm boy business, fresh gold expansion, voila and now longos, have put us in an enviable position. When Mike and I joined Empire, we lacked rigor here in our approach to capital projects. Today, our team has the capability to effectively manage capital in our organization. We have shown we can identify great projects with very good returns, and we deliver on them consistently. Over this time, we have also made two excellent acquisitions, reduced our net debt, and achieved an investment-grade rating from our credit agency. Returning capital to shareholders is an important part of our strategy. It's why we have continued to increase the dividend and have been buying back shares. To that end, today we announced a 15.3% increase in Empire's quarterly dividend per share, commensurate with our strong cash flows and continued and growing confidence in our business. We also believe that share buybacks are a useful tool to utilize excess cash. Today, we announced that we had renewed our NCIB to repurchase up to 8.5 million shares, or 5% of our outstanding shares. Combined with the prior NCIB, this enables us to buy back the shares issued for the Longo's acquisition and more beyond that. And we are doing this while still investing in future growth. For fiscal 22, we will increase our capital spend to $765 million, which includes Longo's capital projects. Capital will be deployed to renovate and refresh current stores, continue to build out our farm boy network in Ontario, and our discount network in Western Canada, advance our e-commerce expansion, and invest in advanced technology. All high return, dependable investments. And Mike will walk through all this in more detail with you in a second. Now on to our Q4 results. As a reminder, we are the first Canadian grocer to publicly anniversary the Extreme stock up phase of COVID last year. More than two thirds of our Q4 last year was impacted by the most extreme levels of stock up buying behavior we've ever seen. Same store sales last year were high and volatile ranging from a week that declined in sales to a week with growth of 52% resulting in unprecedented 18% year over year growth that quarter. With that in mind, we are very pleased with our performance this quarter and throughout fiscal 21. Our two-year sales stack for Q4 same-store sales was 10.4%. Because of the extreme COVID impact on results last year, we believe a comparison to two years ago is a more meaningful indicator of real growth. This quarter, our sales declined 1.3%, and our same-store sales was negative 6.1%. Well, you know I don't like negative numbers, but don't think anyone expected to see In e-commerce, Q4 last year saw our established ITA.net and Thrifty Foods businesses grow sevenfold. As expected, we saw these e-commerce businesses slow from the highs in Q4 this year, as all established e-commerce players will experience when comparing to the start of the pandemic last year. However, even with last year's extreme growth, in Q4, we still grew overall e-commerce sales by 15%. This remarkable net positive increase was driven by the exponential growth of our new voila business in the gta i'll speak more on our progress on voila in a moment covid also had a large impact on gross margin last year driven by sales mix and customer behaviors last year inventory shortages reduced our supplier partners ability to provide promotional items and customers shifted toward full service for a one-stop shop in q4 this year we held our gross margin rate flat to last year without the same extreme COVID tailwind. The recovery of our service departments and horizon initiatives, particularly our promotional optimization, offset the sales mix impact from the prior year to achieve this. And this year, combined with our sunrise and early horizon benefits, we delivered a record high rate of 25.5%, our highest gross margin as far back four years. EBITDA margin rate was 7.4% this quarter. The real story here is how we're closing the margin gap to our peers. In fiscal 2017, the average gap to our peers was 4.4%. In only four years, we have reduced that gap to about 1.9%. That translates to an increase in adjusted EBITDA margin dollars of approximately 170%, a colossal achievement for our team. We've shown we can drive meaningful, sustainable margin improvement, and we will continue to reduce this gap through Project Horizon. And we will not stop there, but we'll work to pass our competitors. Now to our expectations looking ahead. As more Canadians receive their COVID vaccinations, we expect to see three things. First, we expect many Canadians to gradually shift some spend back to restaurant and hospitality industries as lockdowns ease, Workplaces reopen and social gatherings resume. Second, many customers will start to shop more often and shift their basket mix. We expect basket size will decline somewhat and transaction counts will increase somewhat as some customers become more comfortable shopping multiple banners. Customers will also return to buying more prepared food and visiting our service counters as they reopen. We are already starting to see these trends in our stores. Third, we expect the split between full service and discount banners will stabilize but not return to pre-pandemic norms. We have revamped many of our full service stores and believe customers more than ever see the value in our full service offering. In Q4, we saw some impact to our market share as some customers returned to shopping multiple banners as they began to feel a little safer. But we expect to hold on to substantial market share gains as COVID subsides. We have also noticeably grown our discount presence, adding over 1 million square feet to the discount network in Western Canada to meet the evolving needs of the customers. In Ontario, we now have 95 stores, and in Western Canada, we have 40 locations confirmed, and we are on track to have about 48 stores open by the end of fiscal 23. As COVID subsides and CanNet is able to safely reopen, we believe we are very well positioned to meet these changing customer needs with our diverse network, and well-aligned offering. While we expect the grocery industry will shift towards some pre-pandemic ways, we do not believe it will fully return to the way it was. And we've been pretty accurate in our projections over the last while since the pandemic started. We've been pretty open with you. Finally, an update on Project Horizon. As of this quarter, we are one year into our three-year strategy. I am pleased that we are on track to deliver our goal of $500 million of incremental EBITDA and 100 basis points of EBITDA margin improvement over the three years. Despite some early delays due to COVID, our team has done an impressive job catching up on key initiatives. For example, our promotion optimization initiative continues to drive early results. Other initiatives like strategic sourcing are well established from Project Sunrise, but continue to build efficiencies and improve our bottom line. And I'll share a few updates right now on key strategic initiatives. First, we closed on our purchase of 51% of Longo's, including Grocery Gateway, on May 10th. We are thrilled to welcome the Longo's team to the Empire family. This acquisition is important to our strategy to grow our presence in the key Greater Toronto area, where we have historically been underpenetrated. As well, the addition of Grocery Gateway complements our goal to win grocery e-commerce in Canada. Second, FarmWorks. May 17th marked the halfway point in achieving our commitment to double Farm Boy store base within five years.