Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the EMPIRE second quarter 2022 conference call. At this time, all 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 the call you require immediate assistance, please press star zero for the operator. Also note that the call is being recorded on Thursday, December 9th, 2021. And I would like to turn the conference over to Katie Bryan, Director, Investor Relations. Please go ahead.

Thank you, Sylvie. Good afternoon, and thank you for joining us for our second 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, Matt Reindell, Chief Financial Officer, Michael Vell, Chief Development Officer, and Pierre Saint 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 MV&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. Before I jump into the quarter, our thoughts continue to be with all those affected by the ongoing disaster in British Columbia. We will continue to work with our local supplier partners as they navigate the impact to the food supply chain and infrastructure. We are extremely proud of our teammates who have navigated the crises in British Columbia, Newfoundland and Labrador over the last several weeks. I also want to take a moment to welcome Matt Rendell, our new CFO, to this call. Matt has been with Empire for the past two years. He has been absolutely critical in setting up Project Horizon for success and has led our Longo's partnership. Matt joined Empire with extensive experience from Nestle. I also want to thank Mike Vels for his great run as CFO. As you know, Mike is an exceptional leader and we are thrilled he has stepped into the Chief Development Officer role. Mike will now focus his many talents on continuous improvement in our execution, delivering our Project Horizon targets and our growing ambitions beyond horizon. Now let's talk about the business. It was a straight up good quarter. Well executed by our teams across the country, we are consistently putting numbers on the board. We have strong underlying momentum and in only four and a half months we will be entering our crucial final year of Project Horizon which we're feeling very good about. Today I want to cover four topics. Our continued strong performance, how we're managing inflation, how we're seeing the full service versus discount split, and e-commerce. First, our results. This was another strong forward empire. Our sales grew 4.9% this quarter, while same-store sales grew 90 basis points from Q1 to negative 1.3%. As we and many others have said, Year over year, comparables do not tell the entire story as we lap strong COVID sales. Our same-store sales have grown 6.8% over the last two years. Our e-commerce sales, excluding Grocery Gateway, were up 1.8%, but this number disguises the fact that voila has continued to grow while being partly offset by our IGA.net and Thrifty Foods businesses comping strong COVID-driven sales. If we included Grocery Gateway, our total e-commerce sales are up 33%. Sales are up as we continue to execute on key occasions. Our merchants and operators did an exceptional job delivering great value to our customers for Thanksgiving and Halloween. We did this with a great customer experience, Insta and online, exceptional assortment and great promotions. I'll speak more to inflation in a moment, but continuing to offer our customers meaningful value through promotions is more important than ever right now. We have enjoyed significant momentum with these big seasonal events. On top of that, our investments in our renovations and own brands are paying off especially in our full service stores. Our renovated stores look and perform in an excellent fashion and you'll see this continue to accelerate our performance. This successful and significant investment in the interior and exterior of our stores sometimes flies under the radar, but I'm convinced this improvement in store experience will be a game changer for Empire. And continuing to improve on our own brands offering is giving our customers increasing opportunities to save money without compromising on quality. We're very pleased with the progress we've made and expect this will pay off in the current inflationary environment. Empire's gross margin is strong and improving. Excluding the impact of fuel, we improved our gross margin rate by 72 basis points. This is on top of last year's strong margins and is largely due to our continued progress against Project Horizon, the addition of Longos, and our business mix returning a little bit more to normal. Linked to our robust gross margin results, our SG&A rate went up 27 basis points. This is because our higher margin businesses, Full Service, Farm Boy, Longos, are becoming more and more successful. These businesses have higher gross margins, but also higher SG&A, which is why it is critical to look at our bottom line, which is showing solid improvement. Overall, our SG&A expenses were very well managed. Our EBITDA margin grew year over year by an impressive 36 basis points to 7.7%. Our EPS performance was similarly strong at 66 cents, up 6 cents from last year. Even more dramatic is our two-year EPS growth, which is up 29% when we removed the impact of Crombie's unusually large property disposal of $0.06 in fiscal 20. I'm also very pleased to report that our free cash flow grew 72% over last year, even after funding a very healthy capital reinvestment program. Our strategy is working. We're growing sales. We're improving margins. We're managing costs. We're generating strong cash flows. We're delivering for our shareholders. We're halfway through a horizon and we have momentum and still the most upside in the industry. There is so much more to come as we get into fiscal 23. Next, I'd like to dig into inflation and how we're managing it. Inflation is unusually high right now. The rising cost of doing business is a reality that all businesses across the globe are facing, not just in grocery, but we're managing it well. Our merchants and supplier partners are out there every day fighting to keep prices low for our customers. Our merchants are doing a fantastic job working with our data to utilize the effect of inflation on our customers, an example of how we're utilizing more and more data throughout our company. And many of you are familiar with our unique but successful approach to managing our relationships with our supplier partners. With our approach, we have risen to be ranked number two in the annual advantage supplier survey of the top six grocers in Canada. We were at the bottom of the ranking only a few short years ago. We are working diligently and respectfully together with our supplier partners to manage the cost increases coming through. It's actually because of these powerful relationships that we have been so successful in managing inflation and navigating any supply chain issues so far. Having relationships based on trust and transparency helps us keep conversations focused only on the real unavoidable cost increases so we can maintain the best value for our customers. And where inflation does impact us, Our full service network is in the best position to manage it. First, our higher margin model is more adept at mitigating cost increases. And second, our broader assortment gives value conscious customers a myriad of substitutions. Where we've had unavoidable price increases, we see customers sometimes substituting products within their basket, but not leaving our stores. Now over to the full service versus discount split, a topic that has been popular recently. As we've accurately prognosticated quarter after quarter, we expect this camp will return almost to pre-pandemic levels, but slowly. In other words, we are not seeing fast, significant changes, and in fact, we continue to see a lot of stickiness in our full-service banners. As we look ahead, we believe our full-service stores will keep momentum coming out of COVID. While customer occasions are starting to change, including more visits to restaurants, We are seeing a structural change in consumption of food at home. Over the past 22 months, customers have seen and experienced the affordability and convenience in eating at home with their families. We believe there is permanence in this shift. We're seeing this is how customers are shopping. Prior to COVID, customers shopped an average of eight food stores a month. During COVID, that dropped to one or two, and today that number is steady at five to six stores. Despite this, our customers continue to favor larger shops and full service stores. While some of this is COVID, we've also made significant improvements in the last five years to thrill our customers. We improved our offering, strengthened our price perception, renovated our stores to deliver an exceptional in-store experience. Our customers are giving us credit for it, and it's why we think full service will be sticky. There's an equilibrium in supply and demand between full service and discount stores. and our full-service stores have never provided such value and service. Finally, I want to touch briefly on e-commerce. E-commerce is a small fraction of the market today, but it is growing quickly and is top of mind right now. For our customers, we believe it will be critical to have the best omnichannel experience that includes e-commerce. And for our shareholders, it will be critical that we do this profitably. We've run Click and Collect for years in Quebec and British Columbia, At best, it's an okay experience for customers, and we know it's not profitable at scale. Ocado developed best-in-world technology that thrills our customers and is a profitable solution at scale. And reaching scale is not the same as reaching capacity. We'll get to scale much sooner than that. We were confident in our investment in Voila in 2018, and now, after running in the GTA for over a year and seeing the results, we are more confident in it than ever. especially after seeing how little progress non-Okato technology has made across the globe. I'll pass it over to Matt in a moment, but as you can see, there's a lot of momentum at Empire. In a couple of quarters from now, we will be done lapping COVID results, as will our peers. We performed extraordinarily well when the chips were down during COVID. Very soon, the playing field will be level again, and that's good for Empire. I've said many times, that the second year of a three-year strategy is the hardest. We're making investments, great investments that are improving our business, and not yet seeing all of the benefits. Next year, we expect our investors will see those benefits even more clearly. With that, I'll pass the call over to Matt for his inaugural report as CFO of Empire. Over to you, Matt, and congratulations.