Empire Company Limited

Good morning and afternoon, ladies and gentlemen, and welcome to the EMPIRE first quarter 2022 conference call. At this time, note that all participant lines are in a listen-only mode. But following the presentation, we will conduct a question and answer session. And 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 Thursday, September 9th, 2021. And I would like to turn the conference over to Katie Brine, Director of Finance, Investor Relations. Please go ahead.

Great. Thank you, Sylvie. Good afternoon, and thank you all for joining us for our first 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 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 McGowan.

Thanks, Katie. Good afternoon, everyone. We are pleased with our first quarter results, especially as we cycled extraordinarily strong COVID-heated sales and earnings last year. We continue to perform strongly and consistently. Our sales and market share was solid. Our margins matched last year's outstanding performance, which had limited promotional activity last year, and are actually up strongly when you exclude fuel. Our SG&A is solid, even as we invest in Horizon, and our bottom line is strong, especially when you back out last year's real estate gains. These are good results driven by great work from our team, and we expect more of this as we progress through Horizon. I don't have much to say, actually. We're happy with our results and focused on delivering Horizon. We continue to laugh last year's COVID-driven sales bump and are seeing the behaviour changes we expected as vaccine rates increase. With that in mind, I'll cover two topics today, our performance this quarter and the trends we're seeing in the market. First, our results. As I said last quarter, two-year sales stacks are the more meaningful indicator of sales as we lap COVID. With that in mind, our two-year sales stack for Q1 same-store sales was 8.1%. Our same-store sales versus last year were negative 2.2%. Total sales increased 3.7% as we added Longos and fuel pricing and consumption rebounded. E-commerce sales this quarter erupted substantially. We continue to believe that winning the e-commerce channel with the right business model combined with strong bricks and mortar offerings is critical. It's critical to success in grocery here and as you can see around the world. We are particularly pleased with our progress in Ontario. Canada's largest grocery market where we have gone from zero to hero in a very short time as we saw a significant increase in Voila sales as it grew rapidly in its first year and added grocery gateway through our Longo's acquisition. We continue to deliver the best e-commerce experience in Canada to our customers and believe we have the winning formula. In Ontario, we are now closing in on achieving a leading market share in a remarkably short period of time. We continue to be extremely pleased with our gross margin performance delivering a gross margin rate of 25.1%. Just like last quarter, we continue to match last year's outstanding margin performance even as promotional activity has picked up again. Our food margins are strong. This is a direct result of the progress we are making on Horizon as well as the addition of Longos and recovery of our service departments. Our sales mix, especially increased fuel sales, created some noise in our margins, even as our horizon benefits provided strong margin support. And Mike will speak about that more in a moment. With our strong sales and margin performance, we delivered EPS of $0.70 this quarter. Last year, our EPS had a $0.04 net benefit from unusual impacts, including a gain in real estate and payment tied to collective bargaining. Removing these, EPS actually increased a noteworthy 4.5% over the prior year, even without last year's large COVID bump. As I've said before, returning capital to our shareholders is an important part of our strategy. Results like these allow us to deliver on that. Over the last three years, we have grown our dividend per share at a compound annual growth rate of 10.9%. We increased our NCIB in April after we announced the Longos acquisition and renewed it in July. After only one quarter with Longos, we have already repurchased all the shares we issued as part of that transaction. Next, trends we are seeing in the market. Last quarter, we spoke about our future expectations as vaccinations accelerated. We are seeing those expectations play out in the market through the quarter. First, as others in the industry are experiencing, Customers are shopping a bit more as restrictions ease and vaccinations increase. We're seeing traffic up and basket sizes down, but these have not returned to the same levels as before COVID. Second, Canadians are starting to shift some spend back to the restaurant and hospitality industries. As we expected, this means customers are spending slightly less on groceries than at the peak of the pandemic. Third, as others have mentioned, promotional activity is pretty well back to the same it was pre-pandemic. And fourth, we continue to believe customers are seeing the value in our full service offering more than ever. We are seeing more pre-pandemic customer behaviors returning, such as customers returning to our higher margin prepared foods and service counter offerings. While we are seeing the split between full service and discount banners slightly stabilized, it's certainly not to the degree of pre-pandemic norms. Altogether, we expect same-store sales will continue to be elevated when compared to pre-pandemic levels, but obviously a bit lower than the unusually high industry sales of fiscal 2021. As we expected, the grocery industry is in a period of transition. While the industry undergoes these changes, we remain focused on delivering against our strategic objectives, as this team has done for the last four plus years. By keeping this focus, our team has achieved an impressive amount in that short period of time. A few examples. At the start of Sunrise, we were honest about two important issues that we needed to resolve. One, we needed to fix our big Western Canadian businesses after the Safeway integration and two, we needed to grow our share in Ontario, Canada's largest and fastest growing market and the region in which we had the lowest share. Today, I can say to you that we have fixed our Western business, turned it around. Operational performance, sales and profitability have significantly, significantly improved and we have more upside to go. And in Ontario, we have materially grown our market share by improving execution in our existing stores, expanding Farm Boy's presence, launching Voila and partnering with Longos. Our market share in Ontario has grown roughly 30% since fiscal 2017. Finally, two accomplishments our team is very proud of over the last month. First, if you live or work in Quebec especially, I'm sure you're aware of the newest member of the IGA family, Ricardo Media. After working together for many years, I'm pleased to officially welcome Ricardo Larive and Brigitte Coutu to the family. We're excited to see the innovation and growth fueled by this continued partnership in Quebec and throughout Canada. Second, we released our fiscal 21 Sustainable Business Report. Our Sustainable Business Report outlines our journey and shares much of our progress. It also, for the first time, includes disclosure against SASB, a world-leading disclosure framework to improve visibility and comparability of our performance. At Empire, sustainability and diversity, equity, and inclusion have been on our agenda for many years. And while there is more to be done, I'm very proud of the progress we've made and where we're going. And with that, I'll hand it over to Mike.

Thanks, Michael. Good afternoon, everyone. I have a couple of comments on the quarter performance, and then we'll move straight to questions. Our gross margin rate was strong this quarter, even against a tough comp last year. And if you remove the impact of fuel, it was 40 basis points stronger than last year. Overall, we continue to be very satisfied with our margin discipline throughout the business. and the positive impact that Horizon initiatives, such as our promotional optimization program, are having on margins. SG&A's percent of sales was 38 basis points higher for a few different reasons. We now include the Longo's business that has higher costs and margins than our average, and we'll continue to see this effect until we comp their results next year. Both our management teams, both Tempire and Longo's, are working to unlock synergies and are making good progress. We continued our expansion of Farm Boy and Wallah in Ontario, both of which result in higher SG&A. And finally, our depreciation is higher, largely due to an increase in right of use asset depreciation under IFRS 16, reflecting an increase in occupancy costs. These SG&A increases were partially offset by reduced COVID costs in the current year, and the non-recurrence of the prior year cost related to the Alberta labor agreement. The effective income tax rate for the quarter was 24.5%, and we estimate that the effective rate for fiscal 2022 will be between 26 and 28%, excluding the effect of any unusual transactions or differential tax rates on property sales that we may have. The effective income tax rate for the quarter was positively impacted by non-taxable capital items and differing tax rates of various senses. Earnings per share this quarter was net of 5 cents per share of Voila dilution, the same as last year. Total Voila costs will increase as CFC2 in Montreal begins operations. We build CFC3 and we continue to expand our store PIC e-commerce solution across the country. As CFC1 continues to earn the respect and loyalty of our customers, we welcome new customers and expand its geography. We expect it to reflect positive EBITDA results towards the end of its third year of operations, which will partially offset the impacts of opening new CFCs. Equity earnings increase year-over-year due to higher earnings from our GenSTAR real estate developments. and higher Combi REIT earnings due to improvements in their bad debt levels post the COVID impacts last year. Free cash flow continues to be strong this quarter, and we have great projects to invest in. We improved 25 stores this quarter through renovation, redevelopment, or conversion. And also, as of this week, in fiscal 2022 year-to-date, we have repurchased approximately 3.3 million shares for a consideration of $133 million. So fiscal 2022 is off to a good start. Q1 was a solid quarter, especially when compared to COVID-driven results last year. We know that we will be up against the tough comp of COVID for the next few quarters, but Horizon is on track. Our teams are engaged and working hard, and we are ready for what the remainder of the year has to bring. Before we get into questions, it's hard to imagine that we spent a little over a year talking to Longos, first in partnership talks, and then for the past five months as part of the Empire family. We've had great early interactions already, and there's been significant work between the two management teams reviewing synergies and growth opportunities, and we're so happy to have them part of the family. And with that, Katie, I'll hand the call back to you for questions.

Great. Thank you, Mike. Sylvie, you may open the line for questions at this time.

Thank you. Ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw your question, simply press star followed by two. And if you are using a speakerphone, we ask that you please lift the handset before pressing any keys. Thank you. And your first question will be from Karen Short at Barclays. Please go ahead.

Hi, thanks very much. I had two questions. The first question is just, when you think about the competitive environment today versus pre-pandemic, it sounds like you're saying that it has returned to normal. So the question I had is, how is the actual environment from an in-stock perspective? Because one of the things that's happening, at least in the US, is that in-stock levels are still not back to normal, which is making the promotional environment remain much more muted for a much more extended period of time. So I was wondering if you could kind of contextualize that. And then I had one other question.

That's a good question. You're absolutely right. We're not back to where we were before pre-pandemic in terms of supply and even from big suppliers. But we are able to manage it efficiently I don't think it's it's visible for customer or shelf or full but you're absolutely right some supplier are we're still in a location with major suppliers so the service level is not back at the same level but once again I don't think it will compromise the customer experience number store thanks for that but going forward you do expect the promotional environment to be more or less

relative to 2019 levels?

Like Michael said, we're almost back to the same level of promotion activity. I think we're more back to the normal. Like we said, last year it was less promotional for all the reasons we know, and this year we're almost back to the same level than we were pre-pandemic. Nothing major to call here.

Okay. And then with respect to the remainder of the year, maybe could you just give a little color on puts and takes to think through on both gross margin and operating expenses as we go through the year?

Sure. I see the effect of the increased fuel sales continuing to create some mixed impacts on our gross margin rate because although fuel sales did increase, I see there's more room for them to increase as reopening occurs. So you should expect that mix impact to reoccur in our gross margin line. We're comfortable and actually very happy with the progress so far on our horizon initiatives, which do come through and have come through mostly really in margin expansion insofar as we're working on promo optimization and that sort of thing. We expect that to improve and continue through the year. The sales lifts and the impacts of our renovations have been strong. We've been happy with those. The farm boy stores, and we've opened a lot of them over the last month to 18 months, are all performing strongly, and we expect those to be residual and continuing improvements through the rest of the year. And our discount business, is managing its margins very well, and we're continuing to see market share increases in discount in Western Canada as we open new stores in Western Canada. So, you know, those are all positive impacts, mostly internally generated. We do expect to see some mitigation in our ongoing COVID costs, but they're now down to a relatively low level. Other than that, I'm not sure I'd call out anything beyond that.

Okay, and then just last question for me. I think the comment was specifically you have leading e-comm share, I think, in Ontario is what you said. Maybe can you just clarify or if you could provide what you think that share is, and then when you make that comment, are you including click and collect in that calculation, or how are you defining the market?

Yeah, it's Michael. We include everything in that calculation, and we are accelerating on everyone in the market, and we will be a leading e-commerce player, if not now, very, very soon. We started from zero e-commerce in Ontario basically 12 months ago, and the combination of Voila and Grocery Gateway, it puts us in a great spot. And I think people sometimes don't look at e-commerce the right way. You look across the globe, you cannot succeed in the long term without being great at bricks and mortar and e-commerce. And it's a key part of our strategy, not just on the e-commerce side, but to drive our business going forward. So I can't wait to get the other two CFCs open as well, and then we can see the kind of success we're having in Ontario.

Great. Thanks very much.

Thank you. Next question will be from Ken Rekhtai at ATB Capital Markets. Please go ahead.

Thank you, and good afternoon. Jim, so I wonder if you could provide some insight just from your seat, the ebb and flow of sort of working through the pandemic here and just directionally even some of that consumer behavior and, again, how that could evolve. I mean, we're all sitting in different seats and have different perspectives, but it would be really useful even directionally just to understand how you – see the range of outcomes through the balance of this year with respect to the thanks for sales and thanks for sales comps. Just trying to get a better feel and able to try and get it a little more accurately than we can now.

Hey Kendrick, it's Michael. Great question and I'll start this like I started an answer six months ago that I'm no soothsayer, but we've been relatively, we've been pretty darn accurate in terms of what we thought ever since the beginning of the pandemic in terms of at least customer behavior. I think people talk too much about the difference between conventional and discount. That's not the main driver here. The main driver is customer behavior and trips to the grocery store and basket size. It's not so much conventional discount. That's on the margin compared to some of the other things. I think people talk about that way too much. It's not what we see in the market for sure. I don't know where it's going in terms of waves throughout the country, and hopefully this starts to dry up. But I'd say that each wave has a smaller impact on this industry than the previous wave. And that's what we've seen throughout. That's what we thought would happen, and we continue to see that. Compared to two years ago, this is a different industry. We're seeing elevated demand. elevated performance in our stores and online. But I don't think that, you know, unless there's some strange phenomena that I can't foresee right now, I don't think there's going to be, I hope there's not a sudden rush on the grocery and that everything starts to get better. But I wouldn't also, you know, I've talked about this before, although behaviors are getting back to normal, they may never get totally back to normal. And that's something that we've got to watch. Even in markets where there's relatively few cases and not too much worry about the pandemic, we're not seeing exactly the behavior we saw before. We're seeing more people going to the grocery store and spending more money. Is that helpful, Kendrick? Is that what you were looking for?

Thank you, Michael. That was great. Some really great insights. Just one quick further question for me. Just on the margin profile, can you sort of speak to You know, are there any learnings and which way are those learnings flowing in fresh sort of a first quarter in on Longo's here? Clearly a high gross margin profile in that business and a very fresh forward business. But any insights you can share whether there have been any learnings or whether you see any real opportunity there on the sort of margins and fresh and your fresh profile going forward?

Well, we're very familiar with Longo's. Of course, we've been watching them for a long time and respected them for you know, for, for all that time. Uh, and they, they do have to your point, a different mix and different format. Um, uh, and the customers are very loyal. So, um, in terms of learnings between the two businesses, um, for sure, similar to farm boy, uh, pooling all of our expertise, uh, relative to private label, uh, is something that, uh, that all of the management teams, uh, kind of immediately, you know, looked at as an obvious and, uh, And that's all about innovation and new products and positioning private labels. So that's been something that's been a great area of cooperation and collaboration. We are looking at how we all buy fresh. We all have different ways of buying off fresh, particularly for produce. And And there's a little bit that each business can teach each other on that one. And we have particular suppliers, sometimes local, sometimes not, that we can leverage. Beyond that, I think we're still getting to know each other and exploring other areas of opportunity.

That's great. Thanks so much, Ken. I'll get back in here. Thanks, Kenner.

Thank you. Next question will be from Patricia Baker at Scotiabank. Please go ahead.

Thank you, and hello, everyone. I've got a couple of questions. First of all, Michael, for you, I'd really like to talk a little bit more about the progress that you've made in Ontario with those market share gains that you shared with us. So obviously, you know, Farm Boy plays a role here. Voila plays a role. Fresh Coat 2.0. Those are big changes in the market in Ontario strategically that you've addressed. But can you also point to work that you've done on the brand and perhaps in the early days uh, with horizon on store renovation and expansion, but sees you with a higher share at the organic Soviet business in Ontario as well.

Yeah. Thank you. The last part's really important because obviously we've, we've, we set out as we were pretty clear on that. We had a, we had some weaknesses, uh, four and a half years ago in Ontario, in the GTA and in e-commerce and, and we set out to fix them and we've, We've more than fixed them, but we shouldn't, and my colleagues would be mad at me if I didn't also point out the incredible progress we've made at Sobeys and Fresco in Ontario. And a banner we don't talk a lot about, which has been on fire even before COVID and during COVID and now is Foodland, where the performance there, it's just been extraordinary. led by three of our great individuals are coming up through the company. And so I think a lot of it has to do, and it always comes down to execution in store by our merchants and especially our operators and our store operators. And it is night and day in our stores across the country, but especially in Ontario in our stores. But the brand investment that we began in 2017, which is, as you probably know, takes time and work over and over again, is paying off. The perception of our brands in terms of how they're situated, how they are in the community, what the pricing is, we haven't seen better price perception in our banners, well, certainly since I've joined, as we have in the last three to six months. All of this contributes and, you know, I never said this before, retail detail, it is true, and it's a bunch of different things coming through to put us in this position where we are so much stronger, and I'm sick of talking about COVID for many reasons, but one reason is because it is, I think it's, we performed really well in COVID, and now we're lapping that performance, and then others might not have performed as well, and now they're lapping that, And I think it's overshadowing the huge change at Umpire Company that we've seen. And that will shine through very, very soon.

Okay. And then let me follow up on that, Michael, two quick things. So would it be fair to say that when we look at, you know, the whole project horizon and that's all about, not all about, but a big part of that is driving further market share gains and driving the top line. So with respect to the important market of Ontario, you believe that the share gains that you've got are, are, for the most part, sustainable, and that you have to see a path. This is not the end game. There's a path to further market share gain.

Oh, yeah. Oh, yeah. We're on the move in Ontario. And it's nothing to do with COVID. That's just a small... I really think people are overemphasizing some of the things now from COVID, and they're overemphasizing this conventional discount thing instead of looking at execution out there. And I have great confidence across the country And you didn't point out the West, where I think we've made the biggest gains of anywhere in the country, and we had the farthest to go. But we have strength all through the country, but we were really not a player in Ontario, and we're a very important player on the move in Ontario now.

Okay, I just want to follow up on a point that you just made, that you said that brand investment is paying off, and maybe it's too early to tell, but I know that in the quarter, Sobeys was the sponsor of the Olympics. And I'm just curious what the impact of that campaign was on your brand. Do you have any indication that that was a successful spin for you?

Yeah, we're really happy. It's our first time. We're the first official gross for the Olympics. We had great exposure, as you saw, and can't wait for the Winter Olympics, which is even bigger in Canada, coming up, and we'll... We'll be big there, too. We 100% saw a positive impact. The Olympics is the most powerful and exclusive platform, and so we're lucky to be there. It's hard to quantify these things always financially, especially in the short term, but we have really, really good ways of tracking impact of our campaigns in market. This is our first campaign, our first time we put the brand on this, And Sandra Sanderson and the whole marketing team, plus our operators and merchants, hit it out of the park. We were right at the top of impact among the sponsors with the viewing public. And I think if you saw our spots during the games, you'd probably agree. I think they were probably one of our best spots, if not the best spot we've ever had. So now Sandra's got to beat that for Beijing.

Well, good luck to her. Mike, if I could just ask one more question for you. In the release, you indicated that a reference to the fact that voila, the metrics that voila are going better than planned. Can you speak a bit to this? And then just I'm curious about how that experience with the Toronto CFC is informing your plans and expectations for what you're looking for out of Montreal.

Sure. I think... The first part of your question was just some insight into the metrics for the CFCs, is that right? Yes, yes. Okay. In this respect, I'd say probably boring is good. The CFC started off with exceptional metrics and then has just either kept those metrics up or has got better. So, you know, on-time fulfillment, no substitutions, and all of the other customer metrics have resulted in net promoter scores, which have been remarkably high and remarkably stable throughout the entire process, which I think is impressive because as you start repeating customers, they start to get more picky, and it's important to keep a level of service up. So all of the customer-facing metrics are exceptional. Inside the CFC, I've said this to quite a few people. I'm personally quite surprised at how quickly and efficiently it started up. Very few teething issues. And that CFC is now operating from an efficiency perspective right at the top of all the OCADO facilities worldwide. So very smooth from that perspective. Yeah, they keep telling us that, and they're quite a little bit surprised about it. But, you know, I think it's absolutely right. And then other metrics that are helping us, and one of the reasons that we're improving those numbers is our shrink numbers are coming down as we get a better handle of our purchasing patterns. We're starting to get used to seasonality as we go through the summer, which is generally a lower time for e-commerce sales, and how to manage that capacity that frees up and how to generate more sales through quieter periods. So, yeah, it's really on track. We're just now, and how do we continue to through our customers? How do we increase the assortment? How do we improve price perception? How do we make sure that our promotions are on point, et cetera? On the CFC, just CFC2, it's really, it's not exactly rinse and repeat because it's a different place. It's different customers. We have an installed customer base, but certainly from a, from an operational perspective, tons and tons of learning, which I'm not gonna bore you with. The most significant difference, really, is that we have existing customers who are used to a certain level of service and assortment, and they love their IGA stores. And we're gonna have to make sure that what we give them is at least as good as that, and certainly our aim is to be better. They're very discriminating, they know what they like, and we need to satisfy their needs right off the bat without any learning curve.

Thank you very much. Thank you. Next question will be from Michael Van Elst at TD Security. Please go ahead.

Thanks. Good afternoon. I wanted to follow up on the e-commerce side and maybe you could help me just understand some of the commentary because in the press release you say that online grocery sales in Canada continue to grow. But then on the next sentence, it says sales remain consistent for the company's three e-commerce formats, excluding grocery gateway. So are we seeing, is the other one kind of like a comment? Is the first one on the industry a comment for like the last 12 months? And then this one in the quarter, the three divisions, what do you mean by the three e-commerce formats were consistent?

Thanks, Michael. And I, I do feel that you're right, that that could be somewhat confusing. So our first comment was more industry in general and referred to more of a long-term retrospective. So obviously, to a large extent driven by COVID, there's been a step up in penetration, and we expect that to continue, and we expect it over time to grow. Yes, there was a COVID blip in there, so we're not talking about e-commerce companies sales increasing over the COVID numbers. So I can see how that would have been confusing. What we're just saying is that e-commerce is a strong channel. It has increased materially, and we think it's going to keep growing. In terms of our own performance, you know, we've – and maybe we shouldn't talk about formats. You know, we have Wallar, which is new to us at least and growing as it ramps up and gains new customers. We have Grocery Gateway that we purchased through Longos, and we have our installed fulfillment format, which we started in Atlantic and we're rolling across the rest of the country. Our experience in e-commerce in total for the quarter would have been a significant increase, but a lot of that driven by Grocery Gateway. If we take Grocery Gateway out because it's an acquisition and doesn't have a comp for us, we would have experienced in total for the country, roughly flat e-commerce earnings. As I said, we're in a bit of a lull because we're in summer. And secondly, we're also coming off some very material COVID numbers in our Quebec business from last year.

Okay. And last year, you only had up for, I think it was half the quarter. So how would that have performed, like excluding quarterbacks? Volat then in Ontario and BC, I'd assume it was down a little bit given you're lapping really tough comps? No, Volat continued to grow. Right. So Volat grew, but Quebec?

Quebec was off because of the very significant comp with last year's COVID numbers.

Okay. Yeah, that makes sense. Okay, great. And then I don't want to go straight to numbers, but the outlook, you say you're expecting earnings growth to be less than fiscal 21, but earnings growth in fiscal 21 was 25%. So that's a pretty wide range. Am I reading that correctly in that you expect same-store sales to be lower than last year, but also sales growth earnings growth to be less than last year, or is it earnings to be lower than last year?

I'll try and clarify that. So we outlined when we started Horizon that we would, as management, we were targeting clearly the EBITDA increase, but also we thought that that should translate at the bottom line to roughly a 15% compound average growth rate in net earnings. And now here we are finding ourselves in F22, with an F21 number that was significantly inflated by COVID. And all we're saying is don't take the F21 number and add 15%. So we're not saying that our number is necessarily going to be lower in F22. We're just saying they're not going to be at a 15% growth rate if you take F21 as a base.

Yeah, that's clear. Thanks very much, Mike.

Thank you. Next question will be from Mark Petri at CIBC World Markets. Please go ahead.

Yeah, good afternoon. I just wanted to follow up on your comments, Michael, with regards to the Western Canada business and with regards to that now sort of being fixed. Are you basing that more on sort of qualitative evaluations or is it more quantitative evaluations? you know, be it in-stock, store-level profitability, customer feedback. What are you sort of basing those comments on?

Basing on top line, bottom line, brand scores, including customer feedback, and the work we've done to turn around our stores in terms of renovations.

Oh, that's it?

Okay. Okay. This is not just my opinion. Although my opinion is usually accurate on those ones. But it's top line and bottom line. Tremendous turnaround of our Western business and still have room to go.

Yeah. Okay. Understood. Appreciate it. And then actually just one small one following up on all of the Voila discussion. I know customer retention is something that Ocado talks about a lot and hangs their hat on. Is your customer loyalty still exceeding expectations?

Yeah, it's very, very strong. The Ocado model, which we have here, is best in class, and we've got great customer retention.

And related to that, How have you adjusted your promotional spend as Wallah has sort of, you know, built awareness, obviously still room to grow that, but how have you adjusted your promotional spend and your tactics? And is that sort of online or in line with your expectations or how has that played out?

Mark, I know you watch the industry pretty well, and you're probably looking online and getting offers from us, and you've seen that we've been trying different things to make sure that we keep our momentum, and especially as we come into – I mean, summer is usually slow in e-commerce. We're now back to school. We're back in the fall. Make sure that we continue the momentum we had before. It is, we started off because we just wanted to make sure that we were operating well, not very promotional. Went more promotional and tried different things, met to see what worked, kept what worked, got rid of what didn't, and now we're very happy with the promotional mix right now. But voila, with the literally hourly data that they get is very, very agile in terms of of attracting and retaining customers and doing what we have to do out there. You saw some of the monthly and annual passes that we put in place as well. So, you know, with the things that we know what to do in Canada, plus probably daily contact with Ocado and talking to the other partners. Remember, almost all the great retailers on earth have tried to get Ocado. And so we now are open to... best practices across Europe, the United States, and soon to be Asia. So we're not too proud. We'll take whatever works, and we're trying all that. Canada's a little different, and you've got to make sure it works for you. But I'm now happy with what they're doing in terms of promotion. It's right on.

Appreciate the comments. All the best. Thanks. Thanks, Mark.

Thank you. Next question will be from Irene Nattel at RBC Capital Markets. Please go ahead.

Thanks, and good afternoon, everyone. I just wanted to shift topics a little bit for a minute and just talk about what you're seeing in terms of cost push, both on the labor side around labor costs and availability, but also the kinds of discussions that you might be having with suppliers, you know, now that we're heading to this critical time. after Labor Day period, and those conversations typically dry up.

Pierre? It depends on regions. In some regions, it's more difficult than in others. Quebec is tough in BC, but in the rest of the country, it's manageable. I know suppliers have some issues in labor availability as well. It's why we are in a location with some of them. We believe that after summer, the situation will improve. And we have good tactics and plans to improve efficiency in store and making sure that our labor will be used for customer experience and production versus... not at none value added task. So it was like that before the pandemic in some provinces. It's been accelerated through the pandemic and and now we believe that we will come back to more pre pandemic situation. And we have a plan to. We had a plan before pre pandemic. We had to pause it, but now we're working on it too. improve efficiencies at solar level, and in our RCCs as well. So we have a lot of labor in our RCC. We're very lucky, and we're not lucky, but I think it's a good decision we've made in the past to have automated DCs in Calgary and Ontario and Quebec, and I think we're in good position because of it. But it's not enough. We need to continue to work towards that.

That's really helpful, Pierre. Which areas do you think have the most opportunity around improving in-store labor efficiency and eliminating non-value-added tasks?

To be honest, it's a cultural thing, and I think internally we can do a lot without compromising customer experience. As a backstage team, there's many opportunities we can improve our performance, so doing the right thing first time. as a backstage teammate, will change life in stores. And we strongly believe that we have the control on it.

That's helpful. Thank you. And then just on the inflation question, what kinds of discussions are you having? And is it your expectation that we'll see another step up in overall consumer pricing? And what has been the consumer response to date?

Like you know, we had inflation in Q1 almost the same level, slightly lower than in the previous quarter, Q4. It's very volatile, depend of categories. So into the Q1, we saw more inflation in there in Sifu. Now, I think the talk of the town is meat. But I think customers adjust their spending behaviors as prices increase, and often they will purchase other substitute products. And it's our job to showcase these different commodities at the right price they're looking for. So it's our job. It's a day-to-day job. You know, it's not new seeing volatility in prices, especially on a commodity side. And when it's getting too high, customer changing their behaviors and going after substitutes.

And what about center of store at this point? It sounds like that's not really been a big factor so far.

We have asked for cost increase from supplier. We didn't take Many costs increase. It's very important for us to be selective on taking cost increase, and we do our best for our customers all the time. But some of those increase are going to move to retail for sure, especially when we're challenging our supplier partner all the time. They know that. It's not new. But sometimes it's commodity pressure. Raw material is increasing so we have a robust processes to look at these tasks and most of the time we get we are able to reach an agreement with our supplier and making sure that it's well I would say there's good backup for these cost increase and most of those when we agree on are going to retail and but you're right actually there's a lot of pass from supplier for different reasons But we continue to challenge these to protect our customers as much as we can.

That's very helpful. Thank you. And then just finally, if I might, back to the whole subject of e-commerce. Just wondering how you're measuring those market share numbers and what your data is showing you around sort of new customers that you are gaining, you know, or that you're, if you will, poaching. from other e-commerce suppliers?

I'll start off by saying, Irene, that it's a remarkably difficult calculation. Figuring out exactly what the e-commerce numbers are for every participant in the market, not just the big players, is difficult. And so a lot of our work is internal triangulation and and trending in addition to some of the data that we get from market research companies. So that's all to say it's not necessarily a point estimate and clearly something that we look at on more of a trend basis. But if you look at the numbers and you look, you know, in terms of what we have visibility to, which is ours, You know, we do fundamentally believe that we're getting material share in the channel. And we're getting it from non-Sobies customers. You know, now that's partly because, you know, we started with a relatively small share in Ontario, as Michael said. But I don't think people are discriminating. You know, we're not getting customers because they used to or shop Sobies. We're getting it because of the brand. standing for customer service, great assortment, good pricing, and people are getting turned on to Voila as a real option in their shopping in addition to what they do in bricks and mortar stores.

That's really helpful. Thank you.

Thank you. Next question will be from Vishal Sridhar at National Bank. Please go ahead.

Hi. Thanks for taking my questions. Just with respect to the improvement that you've been noting for several quarters across the business, once upon a time for Empire, there was a perception that Quebec was the region maybe where Empire was the strongest, maybe the West not the strongest. I'm wondering how all these regions stack up to one another now. Is it more uniform or do you still think there's a disparity across the company?

There's still some disparity, but they're closer.

Okay. And in terms of the net promoter scores that you're seeing, is there consistent improvement along with these numerous initiatives that you're implementing? And along with your comments that the West is substantially repaired from the state that you inherited in, are those net promoter scores improving as well?

Yes. They're improving. It's been a long journey, but it's starting to accelerate. I said that before, it starts in the store, and the people in the store, and then all the other things we've been doing. We shouldn't underemphasize the changes we made to Project Sunrise are really starting to pay off, and now Horizon is just at the beginning.

Okay. And Empire has done a lot of work over the last few years at shoring up its market share in the GTA. And as you mentioned in your prepared comments, that was a focus for the company. Is the market share where you need it to be with your multibanner approach in the GTA? Or do you think there's still more work to be done there?

Well, we're way better than we even could have expected in 2017 because of some of the opportunities like the Ocado Voila opportunity and the ability to buy Farm Boy and Longos, which we didn't count on, to be honest with you. So we're way ahead, but we still have, I mean, as you know, we're not stopping Voila, nor Farm Boy, nor Longos expansion, that we still have plenty of opportunity in our more historic banners. to grow those. I believe that if I were a betting person, which I'm not, I would think that we're going to be gaining market share for the next number of years.

Okay. Thanks for those comments. Maybe just a quick numbers question here. The gross margin pre-fuel up 40 bps was a good result in light of the unusual quarter you had last year. And there are lots of moving parts in there. There's Longos, there's Project Horizon, there's the service counters coming back, maybe other factors. Is it possible or are you able to prioritize maybe what the major drivers were for that gross margin?

Certainly, the expansion of Farmway and Longos does have an impact on the net rate. but the largest positive was for sure was Horizon, and then everything else beyond that is relatively small.

Okay, thanks for the call. I much appreciate it.

Thanks, Michelle.

Thank you. Next question will be from Peter Sklar at BMO Capital Markets. Please go ahead.

Thanks. On the per-voir law, on the financial guidance you're providing, what you're saying is that you expect... this year, fiscal 22, to be the peak dilution year. So I think that means you expect this year to be the peak year for losses from voila and aggregate, and then the loss rate coming down in fiscal 23. So how does that work? Because you've got the GTA CFC that should have less losses next year as you ramp it up. But on the other side of the ledger, you'll be in the peak of the losses of the Montreal facility as it begins to ramp, and plus you'll be working on Calgary. So I just don't see how the arithmetic works for you to make that statement, unless you get a pretty dramatic ramp up in the financial performance of the GTA business. So if you could just give us some flavor around that.

Sure. Well, GTA is consistently improving, which – Clearly on a consecutive basis, it cuts into the dilution material as you move towards a breakeven. Montreal stocks with an existing base of customers. That's very helpful for the business and helps us with a number of things, including lower shrink, less dollar cost, that sort of thing. And yeah, so those would be the two most significant moving parts. And we also, sorry, I knew there was a third one. We've also invested material in back office, supply chains, replenishment, and all of the administrative and SG&A that we need to run what is really a separate self-standing business. We don't have to replicate that when we get into Montreal.

Okay. And when did the Calgary cost start, Mike?

Uh, much later in, uh, in F23.

Okay. Um, and then this is my last question on a different topic. Um, Michael, you've brought up a couple of times in your discussion today about promotional optimization and, you know, that's been one of the factors in your financial improvement. What are you talking about there? Are you saying that like, what is, are you hiring, you know, more skilled merchants or using new analytical tours, uh, tools, or, you know, you've, You've brought in consultants who are looking at demand elasticity. What actually is going on there?

Sorry, for which element?

Promo optimization.

It's just promo optimization. Sorry, I thought you were talking about the space product. When you say what's going on, it really is informing things. our merchandisers across the board. So not just somebody who's merchandising meat. It focuses in on a category like meat, obviously, but it is the calculations and the outputs and the sensitivities that it reflects rolling the effects through the entire store. So it forces, which is very new for our business, And I think it's a big part of becoming great at category management. It forces a category manager to really understand the impacts that they're making on the store outside of their category to start with. And that may sound really obvious, but it's pretty powerful. And then because of the fact that it's very rich in data and it enables – you know, us to do a lot of scenario analysis, you know, virtually almost real time, it completely changes the discussions with suppliers. And we can talk about a five cent or a seven cent difference on a promotion or a funding level, you know, with a supplier and show them almost in real time, you know, where they're incorrect as to what their impact, the impact of their promotion is going to be on that category and our story in total. And it, it enables our, our, our more tactical negotiations on promotions with suppliers to be materially better. And the reason that we think this is going to get better and better over the year and over time is we're only at the beginning of that. And, uh, and we're still in the, we call it the training period, uh, in many respects, when you, you look at those higher level discussions and those, those improved, um, uh, negotiations. So, you know, it's, uh, It is as simple as putting incredibly strong, insightful data into the hands of people that are already pretty good at category management, but it's bringing it all together in an ecosystem and a cross-store set of processes that where we're finding most of the power, where people are becoming much more businessmen as opposed to just wondering about next week's promotion.

Okay, thank you. That's all I have.

Thank you. Next question will be from Chris Lee at Desjardins. Please go ahead.

Thanks for squeezing me in. Good afternoon. Can you update us on where you are in your journey with Own Brands? I know it was a huge initiative last year. How much of the benefits have been realized in the margin so far, and is there still a lot more benefits to come? Thank you.

It's Own Brands. is part of Horizon. We're on track on benefits. We rebuilt category, so wave one is done. We are at the end of wave two. We'll then store in the next few months. So we are on track to deliver the benefits from old brands into the Horizon project. So really pleased with the progress. The rebranding, like I said in previous quarters, the rebranding is completed. We're now rebuilding the assortment to make sure that the assortment is relevant in every single category. We're very happy with the results so far. Penetration continues to be better. The margins continue to be better. We see an improvement year over year. we expect to finish that rebuild this fiscal year and get all the benefits in the next fiscal year.

Okay, great. That's very helpful. And then maybe another question I have is just your horizon plan implies, I think, EPS of roughly $3 a share in fiscal 23, which would imply a very nice ramp up from this year's level. I guess my question is, you know, how confident are you that this will be achieved, you know, since I think the backup of the horizon plan is largely predicated on sales growth and market share gains, which are obviously a bit more risky because it's not fully within your control. Are there other levers you can pull to achieve that target, even if, say, if sales do not pan out the way you expect? Thanks.

So, that's an interesting question, Chris. I mean, I could be a little flippant and say, you know, both myself and Michael and the team we have, I mean, we basically plan for success, right? So, you know, if you have to really ask us, we're not going to accept failure here. So in one way or the other, you know, our goal and our job and our expectation has been our expectation is to hit targets. So that is still our expectation, and we don't feel we need to deviate from that whatsoever. But having said that, you know, that's a generic answer. It doesn't help you much. You know, something Michael actually said to us, and we were having a conversation about this not that long ago, was, you know, if you personalize your strategy into three-year segments, right, like we have, inevitably the second year is the hardest one. because there's a lot of setup and a lot of maybe easier, I'm not sure it's easier, but the first year goes according to plan. Your targets become a lot higher in year two and you have to hit them. But you need to have momentum heading out of year two into year three. And so a lot of the heavy lifting and the foundations and the details of what you put in place in year two is the most important part of that three-year period. And it's not quite like you're just harvesting in year three, but but you really need to get year two right. And so far, we feel good about it. You know, we're on track. We have great plans. Our teams are engaged. And so far, so good. So, you know, this is a matter of execution, and we're executing on a number of items. That makes, to some extent, it's a little bit lower risk because we're not just relying on one thing to happen. At the same time, it's a lot of balls to keep in the air. But so far, we're doing well from an execution perspective. So we see no reason why we can't hit our goals, and we expect to.

That's helpful. Thanks, Mike, and best of luck. Thank you.

Thank you. Thank you. And at this time, I would like to turn the call back over to Ms. Bryan.

Great. Thank you, Sylvie. We appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by e-mail. We look forward to having you join us for our second quarter fiscal 2022 conference call on December 9th. Talk soon.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.