Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the Empire third quarter 2022 conference call. At this time, note that all lines are in the listen-only mode. Following the presentation, 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 March 10, 2022. 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 third 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 Chief Executive Officer, Matt Reindell, Chief Financial Officer, Michael Vell, Chief Development Officer, and Pierre St. Laurent, Chief Operating Officer. 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. Good afternoon, everyone. Our thoughts... today are with all those impacted by the awful crisis in the Ukraine. There's obviously a large and proud community of Canadian Ukrainians, many of whom are our teammates and our customers. We stand solidly with them. Now on to our third quarter results. Our team delivered another outstanding quarter. Earnings per share of 77 cents. This is our highest EPS in memory and we achieved it navigating some of the choppiest waters we've seen in a long time. Floods in BC and other global and local events that disrupted the communities and the supply chain. The Omicron surge presented new challenges in labor and the inflationary environment continued to impact our industry. Through it all, our team delivered historic performance. Free cash flow is up 75% this quarter. DBRS upgraded our credit rating trend from stable to positive, and we substantially completed our fiscal 22 share buyback target. Meanwhile, Verizon remains on track, including the $500 million of incremental EBITDA by the end of fiscal 23. Earlier this week, Voila launched its second CFC in Montreal to the public. We have never felt better about our business or our future, and the most encouraging thing is that there is no silver bullet here. Our performance is just based on strong execution across the board. So today I'll focus on just three topics. Our results, how we're successfully managing our business, and what the future holds for Empire. First, results. Sales grew 5.1% this quarter. Same-store sales were negative 1.7% as we caught severe lockdowns across much of the country last year, but we're up a strong 8.3% over the last two years. E-commerce sales increased 17% over last year with the addition of Grocery Gateway and continued growth in Voila, partially offset by declines in our other e-commerce platforms due to the significant stock-ups that happened during last year's lockdown. We continue to improve our gross margin, which was not a foregone conclusion this quarter. We faced a difficult comp as we drove exceptional gross margin improvement last year when we started to capture the benefits of our promotional optimization tool. In addition, this year we faced cost pressures with the timing of inflation pass-throughs, increased fuel prices, and supply chain disruptions that forced us to rely on alternative supply, typically at a lower margin. Not only did we sustain our strong margins, we improved them. Our gross margin rate excluding fuel grew by 41 basis points, and this is exactly the kind of performance that gives us confidence in our future. EBITDA margin also grew 50 basis points this quarter to 8.1%. This reflects the benefits of our Horizon initiatives, the addition of Longos, and an elevated contribution from Crombie. Delivering results like this is possible thanks to the underlying strength we have built in our business. With that in mind, I would like to spend a few minutes speaking to how we're successfully managing our business to deliver current performance and position ourselves for the future. Every day, our team continues to sharpen our execution, find new ways to bring Empire to the next level. Last year, we further evolved our national structure to centralize all sourcing responsibilities, and this team is already producing tremendous results. Without this structure, we would be hard pressed to navigate the inflationary pressure and supply chain disruptions our business is facing. We have received an unprecedented number of supplier cost increases over the last few months. Not only has our team managed to keep prices as low as possible for our customers, but we've also seamlessly executed the required price changes and minimized the impact on our performance. All the while, our merchants are innovating the customer experience and delivering value through more impactful promotions and private label. And our strong supplier partnerships, combined with the prodigious efforts of our teammates to ensure products get on shelves, are helping us mitigate some of the supply chain challenges our industry is facing. We receive an industry report that tracks on-shelf availability, effectively how stocked a retailer's shelves are. We have continued to keep our shell stock better than the market average over the last 13 tumultuous weeks, as we have through most of the pandemic. Customers can find and purchase more products in more instances in our stores, and this provides customers a more effective and just plain better shopping experience. In addition, we recently promoted Pierre Saint Laurent to the role of Chief Operating Officer, now overseeing all our full service, discount, and e-commerce grocery operations. These teams are working more closely together, finding efficiencies and focusing on solid execution day in and day out. They're streamlining all our grocery operations, supply chain and merchandising to win the customer with every tool in our arsenal while driving efficiencies throughout the company. And as we find new ways to simplify and focus our operations, it further improves our execution on horizon by giving our teams even more runway to focus on achieving those goals. Now, shifting to look ahead to our future, I feel like a broken record, but our business has great momentum and we've never felt better about what's ahead of us. As we said, we remain confident that we will deliver our horizon targets next year, but the benefits don't just stop when horizon ends in fiscal 23. Actually, material and additional horizon value will continue to be earned in fiscal 24 and beyond. We're building tools to dramatically improve the store and customer experience. We're renovating, converting, and building the best-looking grocery stores in Canada that continue to drive our best returns, and we're finding more personalized ways to connect with our customers. These initiatives start generating benefits during Horizon, but will really hit their stride in fiscal 24 and beyond. Thanks to these and the other investments we're making today, we will reap incremental rewards from Project Horizon for years to come. As we begin to think beyond horizon, we are no longer a transformation story, and we are proud of that. We are now consistent operators. We now execute with precision, and we have a well-earned reputation as tremendous business partners. We deliver value to our customers. We offer solid returns to our shareholders. After fiscal 23, we will not release another three-year plan. Our focus will be on execution, and we intend to grow our results at a greater rate than our competitors. Now, before I hand it over to Matt, I want to take a moment to congratulate our Canadian Olympians and Paralympians on a fantastic Winter Games and wish the best of luck to the Paralympians competing in the final few days. Sobeys is the official and exclusive grocer of King Canada, and I'm so proud of all that we're doing to support our athletes. Now, over to you, Matt.

Thanks, Michael. Good afternoon, everyone. I'm going to provide some colour on our third quarter results. an update on Voila, and then we'll move to your questions. Our gross margin was 25.7%, which was 41 basis points higher than last year when you exclude fuel. This is largely due to both the addition of the higher margin Longo's business and incremental benefits from our Horizon initiatives, including the expansion of Farm Boy in Ontario, Fresh Go in Western Canada, and our promotional optimization tools. We're very pleased with our margin performance despite a very choppy trading period where we navigated through increased inflation and supply chain challenges while still ensuring that we were price competitive. Our SG&A rate was 21.9%, which was 40 basis points higher than last year. As for our last quarter, there were a few puts and takes here. Firstly, Longos has a higher SG&A rate than our average, and we will continue to see this mixed impact until we comp their results in the first quarter of fiscal 23. Secondly, we had higher depreciation due to an increase in right of use to asset depreciation under IFRS 60. These increases were partly offset by lower COVID costs. Our EBITDA margin increased 50 basis points to 8.1%, reflecting our strong gross margin performance and our share of significant gains on the sale of properties by our Combi REIT. Our effective income tax rate was 26%. It was lower than our statutory rate, primarily due to consolidated structured entities and capital gains, both of which are taxed at lower rates. We do expect that the tax rate for Q4 will be consistent with Q3. Our free cash flow generation continues to be very strong. As of this week, we have repurchased $249 million worth of shares under our NTIB and have substantially reached our target for fiscal 22. Of course, we intend to continue buying back shares in fiscal 23. For capital investments, we've spent approximately $500 million year-to-date and remain on track to spend our estimate of $765 million. Our focus remains primarily on our stores, and we continue to be very satisfied with the returns generated from our real estate projects. This quarter, we renovated 34 stores, opened one new Farm Boy, relocated one Farm Boy, and opened seven new Fresh Go stores in the West. Now, during Sunrise, we were focused on fixing problem stores, addressing underinvestment, and defending our top stores. Now that our problem areas have been addressed, we are moving from defense to offense, investing in renovations that will enable us to sustainably capture market share and increase our sales and profits. Now, before we move to your questions, I want to dig a little bit deeper into Voila. We remain very confident that Voila is the optimal business model to sustainably deliver a profitable e-commerce grocery business at scale. So let me give you a few updates from the last quarter. First, we announced our fourth a customer fulfillment center, or CFC as we call it, which will be in the greater Vancouver area of British Columbia. With our four CFCs, we were able to serve approximately 75% of Canadian households, representing 90% of Canadian e-commerce spend. Second, the beauty of our exclusive deal with Ocado is that we have a partner who is investing in research and development and will continue to bring efficiency to our network, Our fourth CFC will have new generation robots, more efficiencies, and a lighter environmental and carbon footprint. If you want to see more, I would encourage you to go to our earnings presentation on our website. There is a link to an Ocado video showcasing their new innovations. Third, our second CFC in Montreal recently completed employee testing and began transitioning customers in some areas of Quebec to Voila from IGA.net. The feedback from the employee testing and our initial customers is fantastic. They're off to a really strong start. This will be a phased rollout, as we expect, that by summer, approximately 85% of the Quebec population will have access to Wallop. Fourth, in Q4 of this year, our CSC in Ontario will extend its geography to Ottawa and surrounding areas through an additional spoke. Fifth, Construction for CFC continues on track, and we have added another 22 locations for curbside pickup using Ocado's in-store fulfillment technology. So we're really pleased with our e-commerce program. Voila's impact on Empire's earnings is on track to be somewhere in the middle of the previously disclosed range of 25 to 30 cents for fiscal 22. We believe that fiscal 22 will be the most diluted year for Voila for a couple of main reasons. Firstly, we have a faster customer ramp-up in CFC2 than we have for CFC1. As a reminder, IGA Net in Quebec is an established business that we are transferring over to Voila, so we already have a significant amount of volume to flow through the CFC. And secondly, we'll have minimal additional backstage resources for the new CFCs, as this was all set up for CFC1. So we are getting a better leverage of that fixed cost. And it's worth noting that the addition of Ottawa will immediately add volume to CFC1. So in conclusion, Q3 was a very strong quarter, and we have strong momentum. Project Horizon is on track. It was designed to deliver $500 million of EBITDA, including the effect of the Voila strategy, and that is what it is doing. We are pleased to report that we expect our fiscal 2022 net earnings to be even higher than our COVID-inflated earnings, net earnings of fiscal 21. And that's really a testament to our consistent and sustainable execution. And with that, Katie, I'll hand you back for questions.

Thank you, Matt.

Sylvie, you may open the line for questions at this time. Thank you. Ladies and gentlemen, if you would like to ask a question, please slowly press star followed by one on your touchtone 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're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have a question. And your first question will be from Kendrick Tai at ATB Capital Markets.

Thank you and good afternoon. Michael, your opening remarks called out the choppiness in markets. Could you speak to... the biggest sort of challenges and provide some insight on the biggest challenges you managed to encounter with respect to inflation's impact on consumer behavior and the dislocation of the amplified supply chain pressures that you called out.

Yeah, I mean, I think the number one challenge in all of retail right now is the supply chain and that it just hasn't gotten back in shape for many reasons, including high demand and the disruptions that you know about, Kendrick. Um, and so, you know, our team is, is all the time, um, trying to find products, uh, where we're short, where, um, our great supplier partners just can't keep up and supply us. And that's causing us to go out and buy more from, uh, buy more in the market. Um, and, and at times, uh, really scramble to make sure that we fulfill our customers' needs. Um, I think we're doing, um, traveled country. I think we're doing, uh, as good or better job than anyone out there from what I can tell in store. And as I noted, we're above market in terms of the third-party reports and in terms of on-shelf availability. So happy about that. And that's really a testament to our merchants and our operators. In terms of inflation, you know, I'm not sure it's too much new to say. And it's a reality, again, that all businesses across the globe are facing. We are... Retail earns part of our daily jobs to deal with the rising costs of doing business, and we have the right people in the right seats now to do that. We have to manage it very, very closely, and we've never seen anything in our careers to match it. Periods of high inflation are extremely challenging, and I'm going to ask Pierre in a second to talk to you about how we're navigating it through it, but it's fair to say that our team has never faced so many at one time. that we're negotiating hard with our supplier partners, who in many cases have very justifiable cost increases, to be honest with you. And at the same time, there's always a lag, or often a lag, between cost increases and price increases as we provide value to our customers. So all of this is challenging to our team. I don't think anyone out there is doing a better job, and I'm very proud of that. Pierre, do you want to say a few words?

Just... has the fact that based on how we are structured, we feel I think we need to be very agile right now because all of those reasons, supply chain, inflation, the way we are structured now with the sourcing team who are working on cost increase and sourcing in general. And in the meantime, our merchandising team can continue to focus on building good promotion, relevant promotion for customers, and managing the margin. I think it's why we are in a good spot, but once again, need to work very closely with both sourcing and merchandising, and it's what we're doing right now. So we're really pleased having a sourcing team focusing on managing the volatility element of our supply chain and costing, and having a dedicated merchandising continue to be smart and efficient. and meet customer demand and concerns. So we're in a good spot.

Great. Thank you for that. And just one quick further question for me. Appreciate all the additional color, Matt, on Voila and its performance. And understand you're not going to be providing dollar sales or otherwise as the end for your four online platforms. But could you just provide some color, even directionally, on how Voila is tracking to your internal expectations? You know, I understand the planned growth and the additional CSCs coming on, but just trying to get a read on, you know, net-net where you are versus where you expect it to be with Voila. Understanding it's growing, but trying to get at some sort of additional color on where you are.

Sure. So for... I mean, it's a little bit of a different story by CFC, because obviously CFC2 has literally just started up in operations. I think in my comments, I've told you where we're up to on that. That's going to be a phased implementation launch. So over the next 12 weeks, we will ramp that up in the Quebec area. And by the summertime, we should have 85% of the population available to what are. So that's very much in the ramp-up phase. For CFC1, overall, we're happy with where the business is. I think, as we said, the net dilution is going to be in that range of 25 to 30, probably somewhere in the middle of that range. So overall, I think we're happy with how that CFC1 is progressing.

Thank you. I'll get back to you. Thanks, Heather.

Next question will be from Irene Natal at RBC Capital Markets. Please go ahead.

Thanks, and good afternoon, everyone. I guess I have two questions. My first is a follow-up on the Bula discussion. And it's really from a practical perspective. You mentioned that you're going to be building on the base of IGA.net. So will it be a case where you're going to sort of just – everyone who's an IGA.net customer will simply, like it'll look the same to them. Practically speaking, how does that actually work?

Yeah, so like Matt said, the reason it's 85%, there are a few markets where it's too far from the CFC to be able to service it. But in hopefully 12 weeks, we'll have 85% of the province served. It's very simple to move over from IGA.net to voila. If you talk to our Quebec business, they're very, very pleased with how this is being set up. The website's even nicer. The choice of products is greater. And everyone who's tested it is extremely pleased, especially Pierre and Luc, who are key constituents here. So very, very simple. I mean, the exciting part is that our Voila basket size in Ontario is, I don't know whether Katie will get mad at me or not, but over three and a half times larger than our bricks and mortar basket size, which is a lot bigger difference than at ij.net to what we expect to Voila. So we're going to expect, even from our own customers, They're going to have a better experience. Our basket size will be larger. They'll shop more at IGA and bring their basket more to IGA than to any competitors. And at the same time, we're going to be growing our market share. So not only is it more profitable for us because it's a way better system, way better for customers, way bigger basket size, we'll convert people over and we have the number one market share in the province. and we expect to take much more market share because now we have by far the best tool. So this one, you know, we are watching like hawks, but because of what happened in Toronto, GTA and our success there, and now because we're converting already great customers to even a better platform, we're not losing any sleep, honestly. but watching it very closely and making sure that the transition goes well.

Thank you. That's great. And then just shifting gears, if you don't mind, obviously we're seeing a surge in inflation and certainly our last couple of weeks surge in oil prices that's hitting consumer wallets. Can you talk about what you're seeing in terms of consumer purchasing behavior, promotional activity, trade down to private label, the usual stuff? Pierre, do you want to?

Yes, we know that customers are more sensitive for value in today's environment. So we feel good with all the innovation and redevelopment we've done in the own brand, in private label, new packaging, new assortment. Obviously, our own brand is on fire right now, and we're pleased with that. We're growing much faster than national brands. and it's good for customer and it's good for us. We also introduce good offer to customer and we're seeing very good traction on value pack and things like that. So the large assortment we have in our store provide many options to customer to mitigate inflation right now and we feel good about that. So yes, we are seeing Customer behavior changes. They're looking for more value in everything they're trying to buy. So national brand to own brand. We are seeing, like everybody, switch in choice of protein. And we're adjusting our merchandising plan according to it. Make sure that we're relevant for customer. We offer to them what they're looking for. So yes, we have to be very agile, like we said at the beginning. and the team is doing a very good job to stay relevant for customer without compromising our performance.

And are you also seeing, so you're seeing an increase in penetration of promotion within the basket?

Yes, for sure they're looking for deals, but once again, we are able to, with the large assortment we're having in our store, to stay relevant for them. So yes, they're looking for A good deal, but at the same time, we have much more than a deal to offer to them. As you know, there's inflation everywhere, fuel prices, restaurant prices. People are seeing inflation everywhere. We have a very strong prepared food offer, which is cheaper than going to a restaurant. And year over year, we're seeing good growth there, and it's a good margin product. So it's good for customers, and it's good for us. So it's what we have in mind all the time, stay relevant for customer and make sure that we're leveraging all of our assets to go through that period.

That's great.

Thank you. Next question will be from Michael Van Elst at TD Securities.

Hi, thank you. The gross margin was quite strong, but OPEC, as would be expected, I guess, was also up quite a bit. And if I back out the COVID costs and the depreciation. It looks like it was up about 7%. So I was hoping you could help me understand how much of this might be tied to long-dose being added in. And then when you look at the organic side of it, what are the largest puts and takes on the pressures and then how you're managing it?

Sure. I could take a pass at that. So when we look at our SG&A for the quarter, there's nothing, you know, particularly have a one-term nature in there. As I said, kind of last quarter, we're beginning to get to that kind of run rate of SG&A. But when you look at SG&A year over year, you're right. One of the major drivers is that mixed impact of Longos, and we'll continue to get that until we comp Longos next year. We also have the mixed impact of the and for higher margin businesses, higher SG&A businesses, sorry, such as Farm Boy and Voila. And then there's higher occupancy costs, so return on assets, sorry, right of use depreciation under IFRS 15. So it's a combination of those two things that, like I said, there's some puts and takes in there, but there's nothing that is particularly one-time of nature.

There's no Olympic costs, I guess, anymore?

Not in Q3. That was earlier in the year.

Okay. And then you mentioned on the NCIB that you're substantially completed, but I thought your plan was for 8.4 million shares and you've done 6.4 or so. Am I misunderstanding? No.

So the current NCIB we have runs from July to July. So it doesn't necessarily kind of match perfectly with our fiscal year and our budget and our target for the year. So we will continue to buy shares under that existing NCIB, and then we intend to renew that NCIB in July. So it's a little bit confusing when those two programs don't exactly match period to period, but for our fiscal year and what we had targeted to buy back this year, we are substantially complete.

Oh, for the fiscal year. Okay. Got it. All right. Thank you very much.

Sure. Thanks. Next question will be from Patricia Baker at Scotiabank.

Thank you very much. Good afternoon, everyone. I have two questions. My first question is on Voila, and Michael, you're mentioning the access to the R&D and that you'll be able to use the new generation bots with the Vancouver facility. So Kroger this week also was talking about using those new generation bots and that that's going to lead to a lower cost to build for them on some of their later CFCs. I'm wondering if that's the same case for you, And then if you just think back to when you first did the partnership with Ocado on the smart platform, have you taken advantage of any other R&D opportunities from Ocado since then to now?

I'm going to let Mike answer the question because he's worked closely with Ocado, and then if there's anything I can add, I will. Okay, thank you.

Thanks. The new bots are, I'd say for us, the most significant impact would be there is potentially some differences in how you build the grid. But a lot of other things go into that grid build, including seismic impacts and that sort of thing. But they're much more energy efficient. So that's probably the most significant impact for us reductions in energy usage as opposed to necessary construction costs. We're only up in one CFC and fully operating in terms of builds. And so there's been limited opportunity to materially change the grids and the actual infrastructure and construction build. Where we have benefited is that El Cato has a very strong pipeline. of incremental ads and improvements to their algorithms and their end-to-end software. And so I'd say from an R&D perspective, we've benefited the most from upgrades and improvements they've made on that end since we've started CFC1.

And the only thing I'd add is in terms of the, if you go on the OCADO link on our website, you'll see a lot on the picking innovations and on getting closer to, in terms of getting closer to customer and shortening delivery windows. I think the reason we loved the technology was also because of the entrepreneurial, innovative spirit of Ocado, and they haven't let us down. This is a company that is going to continue to innovate and stay ahead of everyone else. and we'll continue to put in some or many of the innovations that occur as we go along. The key, though, is to get the big sheds up in the four markets. Everything else can fall away from there. I think our opportunity, because we haven't broken ground yet, is in Vancouver to take some of this as well.

Okay, thank you for that, Mike and Michael. And so then my next question really is – kind of directed at the gross margin. It was nice to see that you were able to build on last year's margin of performance there. But we look at promotional optimization. How should we be thinking about that? Where are you in executing against that? And should we be thinking about something that, as the gift that keeps on giving, that you will be constantly having reiterations of improving promotional optimism, you know, optimizing your promotion?

So the promo optimization is related to two things. So last year we launched the tool that our merchants are working with and with the great adoption. So it's why we probably increased our margin a lot last year. This year it's a combination of both. We continue to work well with the tool. Plus the team is, in my opinion, the team is stronger and they take in good judgment. They're more agile. They're playing better with the tool. So it's a combination of strong execution and usage of the tool. So it's continuous improvement. It was a new tool last year. This year we have a better comprehension of the tool, and the team is, as I said at the beginning, the fact that merchandising teams are focusing on promotion without dealing on cost increase and supply chain issues It's very helpful, and it's why we get good control of our margin.

Okay, thank you, Pierre.

And maybe, Petrillo, just to add one thing onto what Pierre said. You know, when we launched the promotional optimization tool last year, and we had that significant uptick in margin, this year we've matched it. And that was really important for us because what we are making sure that we're delivering here is sustainable profit improvement. So the fact that we were able to match that level of margin rate from last year demonstrates the sustainability of the tools that we're putting in place. So that was a real litmus test for us, which we passed. We're very happy with that.

Okay, thank you. Thank you. Next question will be from Peter Sklar at BMO Capital Markets.

Okay, good afternoon. Just on these new technologies that Ocado's offering up, the grid and the robots, I'm just wondering why you're not incorporating that in Calgary? Is it just Calgary's too far down the road in terms of engineering and design at this point?

That'd be right. We've completed the design and the engineering. And there are some things for sure that I think we will end up either retrofitting or putting to all the CFCs. things like the automated frame loads, for example, which are relatively retrofit. But outside of that, it's really Vancouver that could probably be the first one to have major changes resulting from that already.

Okay. And when I was reading the Ocado stuff, they had a little bit of trouble, like a labor issue. They just couldn't get enough drivers. I may have asked the same question on the last conference call, but In Newmarket here, are you able to recruit enough drivers for all the vans that are running around the city?

You know, we're always transparent. During the height of Omicron, we couldn't fulfill every single order that we were getting online. And knowing you, you were going online to check on us. So we were, you know... We were out three days in terms of ordering, which we do not always like. We'd rather be able to fulfill our customer orders in a tighter period of time. The team at Voila, led by Sarah, went into overdrive and were able to make all sorts of adjustments so that we were able to lower that to two days, then one day. And so even during very, very big periods of demand during the height of Omicron, And although labor is tight everywhere and we're always looking for great people to join us, especially in Wallah, right now it's not an issue that's constraining us. But it was a bit of a bottleneck there for a while.

And when it is a bottleneck, Michael, like what is the constraint? Is it drivers or people in the shed, like pickers or what is it?

Well, it's not just people driving, right? These are really skilled people who are great with customer service, understand our standards. And so we just can't take anyone off and just put them in a truck and expect them to do the job. So it's not really the driving aspect of it. Most people can do that. It's understanding our processes and the standards we uphold every single day. So that was a constraint for a while. We put in all sorts of ways now that we're more flexible.

Okay. And then just like another, just switching topics here. I think you still have that strike, that work stoppage at the DC in Quebec. I think it's in Terrebonne. And can you just explain a little bit more in detail how you're working around that? I assume you're using other DCs and direct drop and but would that have had a noticeable impact on results as we go through Q4?

Yeah, so let me, that's a great question. And obviously we're not, you know, we're not pleased to have any sort of disruption, but yeah, because we don't talk about it, you can tell that it's not top of mind because we've really have a great team that's working around it. But maybe I'll just start at the beginning, which is, We settle around 60 collective agreements a year and haven't had a strike in 10 years, so this is rather unusual. And I want to be really clear that right now the impact on our shopping experience for our customers is absolutely minimal in Quebec, absolutely minimal. If you're in Quebec, many of you are, go in our stores, and you'll know that it's had almost no impact on how we're serving customers. When we get a deal that's reasonable for both sides, this thing will be settled. And, of course, there are incremental costs to our business, and there will be in this quarter. But they're not unreasonably costly. And you've got to understand that the cost impact, you know, is not going to be very material to our results. They're mostly incremental freight costs. Because we are using our, you know, we have a very resilient supply chain. Thankfully, we're national in scope now, not regional like we used to be. Thankfully, that the redundancies and systems we put in place at the beginning of the COVID pandemic to serve our customers are now putting us in a really good position going forward. So our contingencies have been great. We're a national company. We have 25 DCs. And also, most of our assortment is organized nationally with regional assortments that we can handle even in this case. So, you know, so far, so good. We're leveraging our facility in Vaughan, and we have other DCs that we can use in Quebec City, even the Maritimes, to take care of this. So, yes, incremental costs. So that's... It can be a tiny bit more costly, but we believe that it's worth it in this case to get to a fair agreement with our teammates. We have a great relationship with our supplier partners, so we will have the products in our stores, and we also have a great relationship with our teammates across the country, and I can't wait to welcome back our Terrebonne facility when we can settle this up because they are our teammates, and we don't like going through this, but we're handling it as best we can.

Okay. That's it for me. Thank you for your comments.

Thanks. Great questions. Thank you.

Next question will be from Chris Lee at Desjardins Capital Markets.

Hi. Good afternoon. Michael, your horizon financial target implies sort of low-teens EPS growth for fiscal 23. I mean, this is pretty impressive considering that it's net of still fairly heavy dilution from voila next year as you continue to expand. So this implies even stronger growth from the core business. I know a lot of your confidence is predicated on just accelerating benefits from Horizon, as you always have said, that year three will be the greatest. So I guess my questions are, I mean, is the strong growth assumption next year is also influenced by market factors like inflation and competition? And then secondly, what are the risks that would cause you not achieve that growth target for next year? Thanks.

Yeah, I think. I mean, obviously, we had to do horizon. We set our horizon targets before we knew there was going to be a global pandemic. We set them before we knew there was going to be this sort of supply chain and this sort of inflation. So actually, I think it's even a harder goal because our teams would be working so hard on some other things while they're still putting in the horizon initiatives. What's really gratifying is, as we said, we expect to hit those horizon initiatives through all that. But because of some of the things that have been going on, some of our work and benefits are actually postponed, and you'll see the majority of them occur post-F23 close. And what I'm really excited about is we set these three-year targets, which we're not doing again, I said, but we don't suddenly stop because it's the end of a fiscal year. And for some of our projects, many of our projects, the peak's hitting 24 and 25 now. while at the same time we were able to accomplish horizon. I'd say when I look at, you know, and we're optimistic people, but we also, you know, you know us, we look at risks all the time, and Matt and Mike are the leaders in leading us through what kind of risk there can be in our business, and we look at those and can mitigate and plan for them. Right now we're feeling good, but we're seeing such huge, what Matt called choppiness in our business, The supply chain has every retailer concerned about being able to get products on time and at a good cost. That's going to be a risk we look to, at least for the next year, as this probably continues. And it looks like this is going to be a highly inflationary market for times to come. We're not economists, but we speak to economists, and that's what they're predicting and what we're hearing. Those are the two big things. My confidence in our level of execution and us being empire are very high. They're really global or almost industry concerns and risks that worry me more, not about our own business or our own set of execution, because we have plans to improve our business. I think other than some of these great projects like Space Pro, Space Productivity, which are going to be giving us great benefits, especially in F24 and F25, what I'm most excited now that we have this great infrastructure in place are some of the other projects we have. And if you go across our country, you'll see really great renovations in our stores. You're going to see better execution. And I give... Real credit to Pierre and his team, but especially to Pierre, that while we were going through Sunrise and we were doing Horizon, we left some of the store execution and some of the supply chain issues alone so we wouldn't disrupt our business while we were turning around the company. We have a lot of opportunity now that Pierre is exploring and is going to be executing on in terms of serving our customers better but also being far more efficient. So some might say, hey, you're five and a bit years into turning this company around. But now I think a lot of the times I'm thinking that the good things are still to come now that we have this infrastructure in place that we can build on. So very excited about that. And I should also mention what we're doing on our investments in data analytics and personalization. We still haven't really, we're on, I don't even know if we're in the first inning of a baseball game on those. We're just starting that. So lots of upside. But we've got a lot of work to do, and these are tough markets.

That's very helpful, and all the best. Thanks, Chris.

Next question will be from Vishal Sridhar at National Bank.

Hi, thanks for taking my questions. I was wondering on the difference between delivery and in-store grocery and how they inflate differently given last mile is such a large component of delivery cost and fuel has gone significantly higher. And I know about the view to keep Voila pricing similar to in-store pricing. So I was hoping to get some context. Is there a big difference there on how they're inflating? And if so, how is that managed?

No, thanks for the question. I would say there's no big difference.

Okay, okay. Okay, and then on the same topic, I was hoping you could update me on the spoke model for, I think for Vaughan, how many spokes you have, and the cost for installing them, and how specifically do they improve efficiency?

Hey, what was the last part of the question, and how what?

How specifically do they improve efficiency?

Oh, thanks, okay. We're still in the process of building out the total network. At this stage, most of the deliveries will still come from the board of CFC. Over time, we're probably going to have maybe four or five in Toronto. They're relatively low cost to build out as they're not very sophisticated facilities. They basically receive straight trucks from the CFC, which are coming in large frames at pre-picked, and then they're being transferred through the facility in a sort of crossed-up nature to the delivery vehicle. And that's designed to, you know, does two things really. It eliminates congestion up in the CFC. It enables us to place the product closer to the final destination, cuts down the total number of miles driven our delivery trucks, and it's more efficient for our drivers because they don't have to go up to the CFC to start their routes. They start them closer to the customer. So all of that adds up to, first of all, a nice efficiency improvement in the cost of the delivery, and it also reduces congestion and complexity up at the CFC by moving large amounts of products out of the CFC overnight.

Okay, so eventually these spokes will go across wherever you've installed the CFC through time.

Sorry, Michel, we're having trouble hearing you. I don't want to guess at what you asked. Can you just repeat that one more time?

Yes, sorry about that. My question was, eventually these spokes will be installed in every market where you have a CFC. Is that a correct way to view it?

Yes. Yes, and then we'll have some markets like, as Matt said, Ottawa, where we'll actually service the entire city from Spoke and not from the CFC. But yes, we expect to have Spokes across the country in every location that we have a CFC.

Okay, got it. Hey, thanks for the answers.

Thanks, Michelle.

Thank you. And at this time, we have no further questions, so I would like to turn the call back over to Katie Bryant.

Thank you, Sylvie. We appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by phone or email. We look forward to having you join us for our fourth quarter fiscal 2022 conference call on June 22nd. 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.