Empire Company Limited

Good morning, ladies and gentlemen, and welcome to the Empire Fourth Quarter 2022 conference call. At this time, all phone 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 Wednesday, June 22, 2022. And I would like to turn the conference over to Katie Brine, Vice President, Treasury, Investor Relations, ESG Finance. Please go ahead.

Thank you, Sylvie. Good afternoon, and thank you all for joining us for our fourth quarter and fiscal year-end 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 Rangdell, 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, and good afternoon, everyone. A lot has happened since we last spoke in March, and I'm really proud of our ability to consistently perform. Despite another volatile quarter, including a multitude of external pressures, including inflation and supply chain challenges, our teams have been busy executing with excellence to ensure we posted another quarter of strong results. At the same time, we've been busy preparing for fiscal 23 and beyond, including unveiling our exciting new loyalty strategy. With that in mind, today we'll focus on three topics. One, our Q4 results and key market trends. Two, progress on Project Horizon, including our recently unveiled loyalty strategy. And three, commentary on capital allocation. First, our results and market trends we're watching. This quarter had many unusual events with both puts and takes on our results. These included global supply chain disruptions, labor shortages, early redemption of outstanding notes, a 13-week strike in our Quebec distribution center, and as you know, extremely elevated inflation. Despite these trends and the multitude of other challenges faced, the quarter was well executed by our team, delivering EPS of 68 cents. Sales grew 5.2% this quarter, excluding the 53rd week that falls in Q4. Now, two years into the pandemic, two-year stacks are no longer meaningful, so we will focus on comparisons to the prior year. While same-store sales were down 2.5%, it's important to remember that we are comparing to a period of significant COVID lockdowns, which we especially benefited from last year. Inflation, along with the resulting customer impact, is something that we are watching extremely closely. We neither like nor profit from when inflation is at these high levels. There is sentiment in the market that it may be moderating and it's at its peak. That is difficult to predict, but we certainly hope so. We've gone through another intense period with copious cost increases being brought forward in a short time and have managed through it well with our supplier partners. But with May's food CPI at 9.7%, it's natural and logical that customers are very focused on what they are buying. We are seeing double digit rates of inflation on basic commodities like eggs, flour and meat. We're cognizant that customers simply won't and often cannot accept cost increases at some of the extreme levels we're seeing while also paying more at the pump and for other essentials. With these dynamics at play, we are seeing customers shopping more stores, increased transaction counts with fewer impulse purchases. We're seeing product trade down, such as from beef to pork, trading down on size and stocking up more on major promotions. And we're seeing our own brand's growth outpacing the rest of our store and the market in general, both for the quarter and the fiscal year. Now these changes in customer behavior appear now to be stabilizing. As a grocer, there are levers we can pull to keep delivering great value to our customers and maintaining high foot traffic in our stores, including leveraging our own brand portfolio and promotional strategy. And we're doing that in both our full service and discount stores. While the inflationary environment requires a careful balancing act across pricing, promotions, and product mix, our team has done an excellent job managing through this period. However, the reality is that a lot of Canadians are struggling under the weight of inflation, and we hope this period of high inflation is short-lived. We are proud of how we managed through these ongoing headwinds to deliver the bottom line. This took some time. Our quarter ended better than it started, and our teams quickly pivoted to respond to the rapidly changing market conditions. Our margins were solid, and they are a direct result of good execution of the right strategy. not because of inflation. We are very pleased with our investment in Freshco, which has expanded our discount presence. The improved products and strong focus on value in our own branch portfolio are meeting the needs of customers, and we are finding ways to continue to offer value to customers across our entire network. Our consistently solid results through these challenging times demonstrate the positive impact of the improvements we've made. the consistent execution from our team, and the strengthening earnings power of our business. Project Horizon has been critical in driving these improvements, which I would like to turn to next. Year two of Horizon is in the books, and we are laser focused on execution going into our third year. We are now five years into our transformation strategy at Empire. When we started this journey, we had four priorities. addressing our then Byzantine organizational structure, taking significant costs out of the business, strengthening our brands, and fixing the West. To accomplish these goals required more than doing things differently. It required infrastructure investments that we were frankly behind on. The five major infrastructure investments we focused in on were, one, expand discount to the West, two, develop a scalable, profitable e-commerce solution, Three, enhance our own brand's offering. Four, winning key urban markets like the GTA, where our market share was too low. And five, evolve our loyalty program. In only five years, we've made major strides against all of these priorities, and the recent announcement of our co-ownership of ScenePlus and plans to transition to the ScenePlus program marked the final infrastructure step we need to make to transform our company and to continue to drive results. We've been eager to talk about our loyalty strategy for quite some time, but when we started our transformation, there were so many foundational investments we needed to make in personalization, data, technology, and marketing to even consider an evolution in loyalty. We have been steadily making these investments, and today we are well positioned to introduce such an exciting and meaningful new program to our customers. In partnership with our fellow co-owners, Scotiabank and Cineplex, we are transforming ScenePlus to become a preeminent loyalty program in Canada. ScenePlus is already one of Canada's leading loyalty programs with more than 10 million members, touching approximately 50% of Canadian households. As the CEO of ScenePlus said recently, ScenePlus members and extensive customer research told us that grocery is a very important piece of any loyalty offer. TeamPlus offers customers a superb assortment of opportunities to earn and redeem points across a broad spectrum of partners, like banking with Scotiabank, escaping to Cineplex theaters and entertainment venues, recipe restaurants across Canada like Swiss Chalet, Harvey's, and Montana's, and travel through Expedia. Redemption partners also include great retail brands like Best Buy, Apple, and Sephora. Grocery will be a key pillar of this program. ScenePlus members will be able to earn and redeem their points for food, and we simply cannot wait for our customers to access these benefits through our stores. For Empire, ScenePlus will allow us to thrill our customers and unlock the true power of personalization. It will deepen our relationships with our customers and reward them for their loyalty across many of our businesses. There is a mountain of opportunity here to thrill our customers, build our strength in data and personalization, and take our marketing and merchandising to the next level. We have robust transition plans in place that start with introducing the Theme Plus program to customers in Atlantic Canada in August 2022, and then rolling out to the rest of the country, culminating in early 2023. Through these plans, we will mitigate any disruption to our customers throughout this change. I also want to touch on two of those other major investments we needed to make in our transformation journey, fixing the West and developing the e-commerce solution. An important part of our Fix the West strategy was to introduce Fresco, our discount banner to Western Canadians, and we are very pleased that we decided to do this four years ago. Today, in partnership with our dedicated franchisee operators, we are running 40 Fresco stores in Western Canada. In the back half of fiscal 22, we increased our discount store footprint in the west by 40% and now have a presence in all western provinces. Our discount network is thriving and soon Freshco will have a completely new weapon to add to their arsenal, a competitive loyalty program. They previously had no loyalty programs. Turning to e-commerce, as you know, we have been investing in the only profitable and scalable solution for grocery e-commerce in Canada. Voila now has two CFCs operational in Canada with two more in development and 98 locations with curbside pickup. Grocery e-commerce, coupled with a strong bricks and mortar offering and a strong loyalty engine like ScenePlus, give us a competitive advantage over the other models currently in market. Our e-commerce business has come a long way since we opened our first CFC in Toronto two years ago. With the opening of the Ottawa Spoke, we can now reach approximately 90% of online spend in Ontario through Voila. We completed the launch of Voila par EJR in Montreal, which now covers approximately 95% of Quebec's online spend, and the transition has been operationally seamless. Net promoter scores for Voila! Par EGIA are higher than the EGIA net, and the service is attracting net new customers to Empire. Quebec dealers are happy to have all of their teammates focused on the in-store experience, and we are now setting our sights on the West at our future launches in Alberta and BC. We are proud to see these large infrastructure investments that have been key to our transformation journey come together. And while we are still clicking some of the final pieces in place, we're also delivering strong bottom line quarterly results. Today, Empire is focused on consistent day-to-day operations, while also strategically investing in the future. Finally, before I hand this over to Matt, I want to talk about capital allocation. We announced a 10% increase in Empire's quarterly dividend per share, which brings our five-year dividend tenure to 9.5%. As well, we announced that we renewed our NCIB to repurchase up to 10.5 million shares, representing 7% of our public flow. In fiscal 23, we plan to repurchase $350 million of shares. For fiscal 23, our capital spend will be approximately $800 million. About 50% will be used to continue renovating and refreshing our store network, expanding our Farm Boy and Longo's footprints in Ontario, and our discount network in Western Canada. By the end of fiscal 23, we will have touched almost 50% of our network over the six-year timeframe. Additionally, we will continue to advance our e-commerce expansion and invest in advanced technology. Now, Matt will walk you through this in more detail. I'll hand it over to Matt.

Thanks, Michael. Good afternoon, everyone. I'll provide some additional color on our results, as well as setting some expectations for Voila, SIEM+, and our capital allocation strategy for fiscal 23. We're really pleased with our Q4 results. We're making sure that we manage the various puts and takes that happen each quarter, while still ensuring that we deliver consistently strong results. And at the same time, be well prepared to take advantage of opportunities as and when they arise. The early redemption of one of our notes in June was a good example of this. So let me comment on our results. Same-store sales were minus 2.5%, which was in line with our expectations and was driven by two main factors. Firstly, our comparables in Q4 of last year were highly elevated due to COVID lockdowns in Ontario and Quebec, particularly in February and March of 2021. We only started to see the impact of easing restrictions midway through our first quarter. Secondly, when we look at the current highly inflationary environment, as expected, we've seen some changing consumer behavior in our stores with an increased focus on value. As Michael noted, we're satisfying the needs of these value-seeking customers through a combination of promotions, assortment that enables product trade downs, value side SKUs, and our own brand's portfolio. We also saw a slight shift to discount. Our customer numbers are still strong in both full service and discount, but the net impact of the value-seeking customer is a lower basket size. Overall, Canadians' food budgets are not increasing at the same pace as inflation, and so customers are logically making value decisions in our stores. We improved our gross margin rate by 17 basis points, excluding the impact of fuel. This growth is largely due to the addition of Longos and our continued progress against Project Horizon, partially offset by higher supply chain costs, including the cost from the strike at our distribution center in Quebec. Our SG&A rate was 21.8%, which was 16 basis points lower than last year. This is largely due to the additional week of operations, the so-called 53rd week, plus lower COVID-19 costs. It's partially offset by Longo's higher SG&A rate, which we will start comping in Q1, and higher depreciation due to right-of-use depreciation. Other income increased over the prior year, primarily from the gain of the surrender of a lease in Western Canada. The net impact of all of these puts and takes was an increase in our EBITDA rate of 10 basis points. Our effective income tax rate was 23.1% in Q4. The income tax rate for the quarter was lower than the statutory rate, primarily due to benefits related to tax investment credits and capital items taxed at lower rates. The effective income tax rate for the year was 25.0. For fiscal 23, excluding the effects of any unusual transactions or differential tax rates on property sales, we're estimating that the effective income tax rate will be between 25 and 27%. Earnings per share was 68 cents, which included 7 cents of Voila! dilution for the quarter and 28 cents for the year, which was within our estimated range of 25 to 30. We believe that the fiscal 23 earnings dilution for Voila! will be marginally lower than fiscal 22. The dilution will be higher in the first half of next year as we ramp up operations in the Montreal facility and then improve in the second. Ultimately, future earnings from Voila will be primarily impacted by the rate of sales growth, but we believe that fiscal 22 was the peak year of dilution on Empire's earnings per share. Based on where we finished fiscal 22 and our plans for fiscal 23, we expect to deliver at least a 15% earnings per share CAGR versus fiscal 20, which as a reminder, we defined as the Q3 fiscal 20 trailing 12 months. i.e. the year before COVID. With strong results and a strong balance sheet, we will maintain a very positive capital allocation strategy in fiscal 23. We have announced a 10% increase in our quarterly dividend per share. This is the 27th consecutive year of dividend increases. We also renewed our share buyback program and intend to repurchase 350 million of shares in fiscal 23. We continue to increase our NCIB program aligned with our expectations when we announced Horizon. We anticipate investing approximately $800 million back into the business via CapEx, slightly more than the $767 million we spent in fiscal 22. About 50% of this investment will be allocated again to improving our store network through renovations and new and converted stores with four Freshco stores in Western Canada, four Farm Boy stores in Ontario, and two Longo stores in Ontario. We will continue to invest in our advanced analytics technology and other technology systems, which will be approximately 25% of our total capex. We've been preparing for the revamping of our loyalty strategy for some time. The investments you've seen in advanced analytics and other technology systems in fiscal 21 and 22 included work that positioned us for becoming a co-owner of ScenePlus. As a result, you will not see a large spike in capex in fiscal 23 related to ScenePlus as we are already well prepared. As Michael noted, we're excited about the opportunity that the ScenePlus program provides. With the addition of Empire, ScenePlus will transform from an entertainment loyalty program into a preeminent loyalty program. Since Scene's inception, this program has evolved to be much more than just movies. In addition to the various other redemption opportunities provided, ScenePlus members will be able to earn and redeem points for groceries. And with a meaningful number of points already in the market, we are expecting to welcome a significant number of new customers to Empire. We simply can't wait for our customers to begin to use it in Atlanta, Canada in August. And with that, Katie, I will hand it back to you for questions.

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

Thank you. Ladies and gentlemen, if you do have any questions at this time, please slowly 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 from the question queue, 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 1 now if you have a question. And your first question will be from Avishal Sridhar at National Bank. Please go ahead.

Hi. Thanks for taking my questions. I just want to get your perspective on what you saw intra-quarter as the trends improved and how they improved and for what reasons. I know you mentioned that in your script, so if you can provide some additional context.

Yeah. It's my all-star, and then I'll see if... if anyone wants to add anything on. I mean, I think what we saw throughout the quarter and so different in terms of periods are in rank order, our comparison to last year, right? Whatever was going on last year and what we did pretty well had a big effect on whatever period we were talking about. And then we saw customer behavior change early in the quarter and in the middle of the quarter, but then start to stabilize. And these are all in rank order. So comparison last year, customer behavior, and then the third was we saw a slight move to discount. But again, we saw in the quarter some stabilization throughout that. But I think all of it, if you look at the pandemic and you look at the inflation, it's pretty logical and predictable and not out of the ordinary. So that's what we saw.

Is there anything you want to add, Matt? Okay.

Hello?

Any further questions?

Oh, yeah. I just want to follow up on management's comments about expectations for positive same-store sales growth in fiscal 23 and what underpins that assumption and to what degree will SIEM Plus play a role in that expectation?

Sure. So, yes, expectation of positive same-store sales. As Michael said, the biggest driver of that is when we start to a lower COVID base in our prior year. Having said that, the work that we're doing internally on all of our key drivers, we expect to significantly improve our top line. I think the work that Pierre is doing will certainly contribute to that. And as we roll out Scene Plus, as we said, one of the advantages and one of the benefits of this new program is that it's an existing program. So there's 10 million customers out there, 40% of whom do not currently shop at Empire. There are also a multitude of points out there in the market that existing Scene customers will be able to redeem at Empire stores. So we are expecting that the launch of Scene Plus will bring new net customers to Empire. Of course, that will be over time. We have a phased implementation launch, as we explained in our press release. But certainly, we expect the incremental impact of CM Plus to be positive and accretive in year one. So, yes, that will be one of the drivers of next year.

Okay. And lastly, I was hoping to get... Your perspective on gross margin up 17 basis points, excluding fuel. If you remove the strike impact up even more year over year, quite a solid result given all the inflationary pressure. But, you know, top line a little bit lower than at least I had expected on same store. Wondering if management is satisfied with the balance between gross margin and sales or if there's any fine tune adjustment to be made there.

Yeah, so thanks. It's a great question. What I would highlight is, first of all, we're very happy with the balance and the mix. So growth margin, as you said, was 17 basis points higher. You exclude the impact of the strike, probably 35 basis points higher. And that's really coming from two main sources. One is the inclusion of long goes. But more importantly is our ongoing horizon initiatives. This is not because of inflation. But our ongoing improvement in our operational excellence in our stores continues to have a benefit on gross margin. So the fact that we were able to increase our gross margin in this extremely volatile environment is a great testament to Pierre's team in particular, who obviously manages our negotiations and ultimately our pricing. And it demonstrates that we can consistently deliver results through challenging times. The balance of margin and sales is something we are acutely focused on. We could go out and buy market share, but that's not in the best interest of our company or our shareholders. So the fact that we are gradually increasing our gross margin demonstrates that we're capturing the right sales in the right banners and at the right time. Yeah, we're very happy with the mix and the blend of sales and margin.

Thank you.

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

Yeah, good morning. I'd like to resume discussion, Michael, on the theme plus. You guys certainly negotiated a very good deal, to say the least. Can you share with us some of the discussions that you had with the, with the partners and what they were, what other than what you already told us, but anything else you can share about what we saw. So because such a coveted partner, and then also on scene plus, do you think that it's a little bit of an advantage right now that you're going to be rolling that out in August to the maritime, which is probably one of the more struggling parts of the country and doing it in the context of inflation. And that would make those team points, uh, look very value-oriented for those customers to really want to redeem the points for food when food prices are so high?

I'll take both those questions in turn. The first is that we were, and I'm not going to go through the details, highly coveted by many suitors to be a loyalty partner. One is that Grocery is absolutely key to loyalty. Second is that we're national and one of the only national players in the country. The other one already has a loyalty program, I think. And the third reason is because of being able to cut the deal is because we've been far more successful and our brand is so much better than we were five short years ago. So we were able to find the best fit for us and take the pick. At the same time, we were able to join ScenePlus and have a third ownership for no cost to us because that's how important it was and what a good partnership it is. In terms of is there an upside, I'm well aware as a ScenePlus cardholder that there are some glut of points that customers, especially those with a credit card, will be looking forward to being able to redeem in their grocery stores. And so I think that we'll go through different stages of this, that people are going to want to wear down their AML points with us, which we welcome. And they'll have plenty of opportunity to do that. And then secondly, we're going to have to go through some change and have all our customers change over to ScenePlus. We have very many plans for that. We just took the board a couple hours ago through our plans for that, and they're excellent. And then the third will be that we have these millions and millions of ScenePlus members who do not currently shop our banners who will be available to us and have a lot of points. And I think they're going to love this program. And I've got to give credit where credit is due to Sandra Sanderson, our head of marketing, Mike Vells, who also with Sandra led the negotiation, and Matt Rendell and others who put together what is, over time, what is a great program. What people don't see, I guess, and that's what you're looking for, is that over the last couple of years, we've been investing a lot in our business to get our data monetization and our store processes better. And so there's no real spending here. Now we'll just convert over. We'll make it as seamless as possible.

So Michael, you'll be able to personalize message to those 40% of the theme plus members who don't already shop at Furby?

Yes. And this will not be, we've just started some personalization already. with the data we currently have before Steam Plus, and our team is knocking the cover off the vault, actually. Whenever I use this sports analogy, you should know I'm extremely serious. And we're really happy, and so we're building that capability alongside of eventually being able to personalize to all these Steam Plus holders. So we're gonna have our own customers, they should be excited, and we're gonna have some new customers. We just have to execute.

Thank you. And then do you have anything to say about my last comment about, well, it's fortuitous to be doing it at a time when there's high inflation that makes this point even that much more attractive?

Yeah, I mean, absolutely. I think that, you know, that having this loyalty program is going to, you know, we want to bring value to our customers, and this is going to bring value to our customers. and that they're going to be able to use points at a time when it's difficult out there. And so, yeah, it is fortuitous. Hopefully, by the time we get to some of the other regions, it won't be so fortuitous, and inflation will calm down, and we'll be able to be firing on all cylinders. But, yeah, for sure in August, when we unveil it in Atlanta, Canada, it's going to be a great help to us. Thank you. Thanks for your questions.

Thank you very much.

And your next question will be from Mark Petrie at CIBC. Please go ahead.

Hi there. I know there's a lot of moving parts in the top line and even in the same share sales figure. And I know you're not going to quantify an inflation number, but I'm hoping you can just give some context around the actual impact of trade down on the top line. And then I guess related to that, comments about how you think you performed in terms of market share today. both by channel, but also overall?

Okay. It's coming from, obviously, customer behavior changes. The biggest one is people are coming back to pre-pandemic behavior by shopping more stores. They're buying more own brands, private label product at the lower retails. but a good value for them and a good value for us because we did an amazing job in rebuilding the own brand. So we're pleased with the result we're having, especially right now. We're trending up, like I said, in Q3. Very pleased with the performance in our own brand, but it's at lower retail, but that's a really good margin. So it's explaining the top line and the bottom line, the penetration in our own brand. Obviously, customers are trading down some category, and in protein, it's obvious. Beef to chicken, it's an easy one. They're buying less on impulse. They're sticking on their shopping list more. So, you know, they're just more disciplined, and they're looking more for deals, obviously. So those things are impacting the top line. for sure, but we have everything in our portfolio to manage their demand. We are measuring a lot of things in terms of promotion. Our promotional penetration is trended in line with the industry. We're measuring everything, and we make sure that we remain relevant and competitive, and that's exactly what we're doing. And we are there to meet customer expectation and demand. So that's the main changes we're seeing impacting Topline.

Okay, thanks for that, Pierre. And I guess just following up on the private label comment specifically, are you able to quantify any piece of that, either in terms of penetration? or the relative growth of your private label business versus the rest of your business over the last year or even the last several years, would just sort of help us get a sense of the relative opportunity from here that you still have on private label?

We are seeing much higher sales in private label than in national breadth, which is good. And our overall margin rate is higher with own brand than it is with our average margin rate. So I'll stop here. But we're benefiting right now of the good work we did over the last two years to rebuild own brand category by category. Like I said in the past, with the progress that we made in every category, we have a relevant play for own brand. In some categories, less. In other categories, less. it's much bigger. So frozen fruit is a great example. Most of the products are on-brand. In other categories, it's less relevant having on-brand products. But overall, on-brand sales are higher than national brand sales by a lot because that's a good job done and at a higher margin rate.

Michael, Mark, and obviously we've got to make sure we don't give out publicly disclosed information, but I know that you asked so nicely that I'm going to at least guide you a bit. But, I mean, the work we've done was at the right time to really improve what we're doing in our own brands. And then, obviously, consumer behavior is changing. And so everything we're seeing is we're growing faster than the market, but this is by far the fastest I remember since I've joined the company that our penetration is up. And as you know, penetration isn't... the raison d'etre for everything we do on our own brands, but we haven't seen penetration like this before. So it's really great timing for us on that. By that standpoint, it's not great for the sales, as Pierre pointed out, but that's really good for right now and for the long term.

Yeah, understood. And if I could just one more, SG&A was well controlled, you know, adjusting out the COVID costs. Can you just help us understand the impact of the extra week on SG&A? Was it just a straight line impact or how did that play out? And then also, how should we think about SG&A for next year, just given all the inflationary effects on your business?

Yeah, sure. I can tell you that, Mark. So, yeah, I mean, there's nothing highly unusual in SG&A for the quarter. You're right, you have the 53rd week. which you can basically straight line it. I mean, that's the absorption benefit we get from an extra week of sales. Having said that, of course, it's not a complete fixed cost because there's a big piece of SG&A that's variable with the stores. So it's hard to specifically call out what the impact is, but of course we got a kiss in Q4 from that. As we look forward to F23, I think I said on a call maybe two calls ago, that we're beginning to reach our kind of a stable run rate of SG&A. So what you saw in Q4 is, you know, it's not going to be materially different from what we expect for F23. I know we're not going to give a specific number, but it'll be in that ballpark.

Appreciate that, all the best.

Thank you. And your next question will be from Irene Natel. at RBC Capital Markets. Please go ahead.

Thanks and good morning, everyone. Just want to clarify one thing, Matt. When you say the run rate similar to F23, are you talking about dollars or percentages? Run rate similar to F22.

Yeah, I'm talking rates.

Okay, perfect. Thank you. Yeah, thank you. So just continuing on the whole discussion around consumer spending behavior, What are you seeing now in terms of penetration rates on promotions within the basket?

So as I said, our promotional penetration trended in line with the external reports. So maybe a few things to highlight. So we're still facing inventory availability challenges in some category, and therefore we cannot promote like we would like to do. Cereal is a great example, and it was during the quarter. And we are seeing less impulse buy, which are typically done on promotion in store. As customers now are more selective in their promotion. But overall, when we look at our promo penetration versus the industry, we continue to trend in line with the industry. So there's a lot of volatility because supply chain and customer behavior, but we continue to stay relevant and competitive based on those metrics from the industry.

That's really helpful. Thank you. So presumably a lot of the work you've done on data and analytics and on your gross margin is really helping with your ability to sort of deliver the gross margin and even with rising promotional rates?

It's a combination of many things. But if you refer to the promo optimization tool, so the usage of the tool is obviously well embedded in our merchandising practices, regardless of the environment, which is good. And that said, when the environment experiences rapid changes like we're seeing right now, We make sure that the tool is refreshed more frequently. And we need to engage more professional judgment, a thing that we do well when we make decisions. And we continue to leverage Insight from the tool and with our partnership with supplier to leverage tools Insight. So honestly, the team did a really good job working with the tool, working with Insight, and having good professional judgment and managing really well the promo mix right now. And the decision we've made, as I said earlier, in recent quarters, by having a sourcing team negotiating price increases with supplier, keeping our merchandising team focused on merchandising and business plan with supplier is very, very helpful right now. So we're benefiting of it. So it's a combination of many things that could explain our good performance on margin right now.

That's really helpful. And actually, it leads into my next question, which is, What we're hearing from the supplier side is that they need to keep coming back for more price increases because, of course, they're facing the same magnitude of inflation. So can you talk about the types of discussions you're having now and how you think that that plays into the outlook for food pricing as we go through the back half of calendar 22?

We're taking those asks one by one. And we're measuring those ads versus peers versus and what could influence higher cost. Is it transportation? Is it commodity? Is it raw material? Is it packaging? So we have very good insight to manage every single ask individually. So I would say so far so good. It's really well managed by the sourcing teams. But yes, we continue to face cost increase right now. It's not slowing down. Maybe the level of increase is slightly lower. We heard, again, an increase from dairy farmer in September, which is lower than the one we've got before in February. But this, once again, it's category by category, one ask at the time and it's very volatile right now and it continues to be volatile for, it will continue to volatile going forward based on what we're seeing right now. But really well managed, good discussion with supplier. We have been able to manage it well with them. No major disruption, obviously tough conversation because We're sensitive to their situation, but at the same time, our job is to keep really good value for our customers, and it's exactly what we're doing.

That's great. Thank you very much.

Next question will be from Michael Van Elst at PD Securities. Please go ahead.

Hi, thank you. You covered a lot, but I have a few left over. So part of the Project Horizon target in getting there involve market share gains from what i recall and you did you did get some from longos acquisitions and the new store openings but i'm wondering if you need some same sort of tonnage market market to also hit this uh these goals over the over the period so yeah it's an interesting question what i would say is um when we look

At our final year of Horizon and our plans that we have in place for the year, we have enough growth that's coming from our store renovations, our space productivity, all of the operational excellence that we're delivering in stores to be able to capture enough growth to deliver Horizon. I think the work that Pierre is doing is going to capture tonnage growth. That's what our expectation is for F23, that we'll have positive same-store sales. So is there anything else specific out there that we need to do in order to capture that? I don't believe so. We've got confidence in our plans that we'll deliver 23 with positive same-store sales to deliver those horizon numbers.

All right, thank you. And then on On the discount, as you're, what, two-thirds of the way through almost your expansion in Western Canada, I'm wondering if the success that you're having as well as the market conditions that we're seeing with all this inflation is leading you to consider going beyond the 65 or so that you have planned for Western Canada and also if you have any plans to launch any discount in Quebec.

So I'll take both those. No, we don't have plans to go beyond what we said we're going to do. Because when we looked at the market, around 65 stores was perfect. And it also helped us fix the West. I think we've seen really good performance even before inflation, which was a bit muted during the pandemic because discounts suffered a bit during the pandemic. And there's no way I want to overreact to inflationary period that will end hopefully soon, but maybe within however many months or whatever it is, and make mistakes strategically and get off of where we want to be. So when we looked at the markets and we looked at what it could hold and where the right places were, we came up with those 65 stores. In the meantime, Our Safeway and Sophie stores and our community banners are doing much better in Western Canada as well. And so, you know, there's always a tension, too, that we believe there's room for great growth in our established banners, too. And so both financially and strategically, at this point, we're not going to get off of that. In Quebec, there are no plans to put this kind of banner into Quebec.

All right, thanks. And then just final question is just to clarify on the e-commerce. You said that there was growth in VOLA, but I'm wondering if there was growth in VOLA if you excluded Montreal, the Montreal conversion or so. So like, in other words, was there growth in VOLA in Ontario?

Yeah, so we... We're not going to provide the split of all of the individual businesses that we have under e-commerce, and particularly in a period where we're transitioning the idea.net business over to Voila! So that's obviously a moving picture. But what we can say, as we've said previously, we are continuing to experience growth in our Voila! platforms. and we can expect to continue to do that as we move forward. And in the older platforms, against a very high COVID baseline, they are lower than the previous year. So the overall net increases of 12% obviously has some positives and negatives in there, but that's the key takeaway. Voila is growing, and the older businesses are not comparing to a COVID-elevated baseline.

You know, even for us, it's a great question, Michael. Even for us, sometimes you get blurred by this pandemic memory, trying to remember what the heck happened when there were lockdowns. And, you know, and obviously we have to look at that all the time to be able to make sense of our results. But big portions of Q3 and, sorry, Q4 and Q1 a year ago, there were major lockdowns in central Canada, which would go through it. And so some small pullback. So the business is growing, but that kind of pandemic fever is not there. But we're happy with the underlying growth. But it was really, everything was COVID influenced last year. Full serve, voila. This was, it was scary. It's still scary times now for a lot of people, but it was very scary last year, this time in central Canada.

Thank you.

I'll leave it there.

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

Okay. Thank you. Michael, a question on the new loyalty program, which I can see management is very excited about. So you're going to lose air mile customers who are not scene members, and you're going to pick up scene customers who are not currently air miles, you know, currently don't hold air miles. And so, you know, net-net, like why is your management and you're so optimistic that you're going to be so far ahead at the end of the day? Like it seems to me that you're substituting one loyalty program for another, but you're just so optimistic that the net impact is going to be so positive.

Well, I try not to wear rose-colored glasses, but I am a bit rosy on this one, but I guess the way to look at it, Peter, thank you for the question, because I'd like to clarify all that, which is, one, almost all our customers will convert over to ScenePlus. They might still have an AirMiles account, and I hope they do, and they'll also be ScenePlus members. So we'll bring over... almost all our customers, and then we'll gain new customers. Now, that's not the only reason I'm really excited. The other reason is that we're going to be able to use the data and the personalization and be able to communicate with more customers than we ever had before. Remember, ScenePlus is at 10 million members. That's without a grocer. So this is going to be a really large and powerful program. And also, I've had the benefit, which you have, of seeing our marketing and the plans for ScenePlus. And so I'm at an advantage. But, yeah, we're pumped about this. We've worked hard. We followed the customer on this one. We did a lot of research. And we're pretty darn good at executing now. We make plans and we do everything to make sure that we're ready. And a lot of thought was going into this. I think we're just glad that we don't have to keep it secret anymore and we can talk about it and share it with our stores because they're going to be the key to the front line of our company. They are very excited about the change because they know it's going to be positive.

Michael, how do you know that you can convert almost all of your existing air mile customers to take up the scene loyalty program? and be active on it. I would think there'd be some meaningful proportions that I'm loyal to air miles, so I'm going to stick with my air miles.

I'm not going to take you through all the work we did because we don't have time, although we could do it at a different time, just you and I. But I think the key to that is that people are very loyal to their grocer and that they're going to be very excited about the loyalty program. And so that will increase their loyalty, love, stickiness with us. And they're going to go to where the loyalty program is. And because this is such a good one, I'm not worried about it. But this was not an overnight decision. This was plenty of thought put into it.

OK. And I just have one final question on a different topic. I don't know if you saw, I'm sure you saw that Cotto, you know, in their recent revised guidance, they said that, you know, consumers are putting one or two fewer items in the basket. And so there's some kind of online phenomena going on in the UK, I guess, as the consumer is squeezed by high cost of living inflation. When you look at Voila, are you seeing anything like that? Or even in your in-store market, Like, even in your in-store, are you seeing fewer items in the basket?

Yeah, I think probably most every retailer is seeing that because of the heavy cost of inflation. I don't think that has anything to do with online or not. I don't think it's huge, but it's enough to make a small difference. And, you know, it's clear, you know, I'm sure, Peter, you filled up your car the last week or two. People only have so much money. When they show up to the car or they have extra expenses or they have to buy hockey skates, they're more expensive. or they have to go to the grocery store. They have to make harder choices. And so, to me, periods of high unemployment or high inflation are terrible for Canadians and for anyone. And so they have to make tough choices, and I don't think that's a surprise, and this is a global phenomenon. So I wasn't surprised at all. This, too, shall pass, and our job is to create even more value and get people to come in our stores more and and loading up. So I don't think our job becomes a tiny bit harder, but as Peter said, we have to tackle that. But these are tough times.

Okay, that's all I have. Thank you for your comments.

Well, thank you for your questions. Appreciate it.

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

Hi, good afternoon. Maybe just a few follow-up questions. Michael, in your opening remarks, you mentioned that the quarter ended better than expected at then it started. So I'm wondering if you can elaborate on that. Were you talking specifically to Siems or Salesforce?

I talked about everything, including Siems or Salesforce.

And so it's so hard to see. You know, I like numbers so much. I'm loathe to see trends that are in too short a period. But I can only tell you what I see, and that is, you know, and we'll see how it goes from here. But we saw stabilization, but we also saw that it takes a little while for any retailer, including ourselves, no matter how good we are, no matter how smart Pierre and his team are, to figure out changes that occur with such velocity. And these changes came on us, just getting out of the pandemic, and you see inflation, which in a period of quarter, took off. And so we had to, you know, the customer had to get used to it, and we have to get used to it. And so I like what we're doing. We've got further plans. And, you know, if I knew the answer to all economic questions, I'd be a lot smarter than I am. But that's just what we saw.

Okay. That's helpful. And you also mentioned that, you know, you saw a bit of a shift to discount picking up towards the end of the quarter. I was wondering, has that sort of accelerated post the quarter in May and June, or has that also started to stabilize?

So hard to see, right? Because there's a lot of moving pieces, but I think our view at this moment would be that it's stabilized pretty much. But, you know, it's all logical, right? I think everything, the customers are incredibly logical in a certain period of time. We all are. We make different decisions. And so, as I said, and I ranked the order, the third thing that influenced sales was a small movement to discount.

Okay. Okay, that's great.

And then... We were also comparing to COVID-heated sale a year earlier where full service benefited more than discounts. It all moves around that lever as well.

Okay, great. That's helpful. Another one I have is just, you know, in order for you to achieve your financial targets for Verizon, do you need market conditions to improve a lot or do you have enough levers under your control to really achieve those targets? And essentially, I'm trying to get a sense of how confident you are in achieving the earnings growth target for F23.

We said that we remain on track and confident. we take into account, we basically think that whatever's happening now, we'll anticipate that, and if it gets better, good for us, and we'll make other changes as necessary to be able to hit our targets as we have over the last five and a half years. But, I mean, I'd rather it was smooth sailing, honestly. I'd rather it was a better market, but our job is to perform on the bottom line in any type of market. And so that's how we're feeling.

Great, and best of luck.

Thanks so much.

Thanks for your question.

Next question will be from Mark Petrie at CIBC. Please go ahead.

Yeah, I just had a couple follow-ups. On scene, does it have any sort of regional strengths? Like, is there a region of the country where it's over or under-penetrated versus the national average?

Mike, do you want to take that? You've been... You've been too quiet. I've got to hear from Mike, though.

Sure. Thanks, Michael. There are variations across the country, Mark. Strong but less penetrated in Quebec, I'd say would be the only region that I would call out. Having said that, our dealers... and our employees in that region, as we've introduced the program to them, are just super excited to have it, actually, and actually can't wait to get started. So nothing material that causes us significant concern or issue. I think it's going to be strong all the way across the country.

Okay, thanks. And then also, just following up on ScenePlus, is there any change in the cost of offering that program versus air miles, or is it pretty consistent? Mike?

We have more flexibility in terms of how we're going to set our earn and burn rates, Mark, so I'd say the best answer to it is it's going to be significantly more effective for us because we have more control about about how we take it to market.

Yeah, okay, fair. And then I guess also just one other follow-up with regards to Voila. You reiterated the achievement of positive EBITDA for the Vaughan facility. I know this is on track with your original plans, but could you just talk about how the actual P&L there or other operating metrics are coming in relative to the original plans? And then related, what should we expect for time to break even or positive EBITDA for the Montreal facility, just given the different ramp curve? Thank you.

So, first of all, we're very happy with the operational metrics. The one thing, as we've said and as we've called out, the one thing that we can't control is the speed, the curve, the shape of the curve of e-commerce adoption. So that's the one risk we've called out, but we are happy with how that's tracking versus the business case. We have not committed to when we're going to break even for the second CFC. But again, it's a very, very different model because we're actually taking over the IGA.net business into that facility. So that's not something that we have... that we've given any guidance on.

Okay. Thanks very much. Appreciate it.

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

Hi. Thanks for squeezing me in. Just a quick follow-up. CapEx seems to be trending above the $300 million or $700 million target indicated. I was hoping you can give us some some color on that extra spend and if your capital investments are generating the desired rates of return.

Yes, they are because we wouldn't be investing more if we were. We're very happy with our, especially our store renovation program. And so, yes, and so that helps us spend capital knowing full well that it's going to get the return. We also have long list numbers in there, which in some ways up the number Um, and so, yeah, I think that, I think that with our store, um, investments with our wall investments and with the, uh, everything we're doing on the technology and data side, which is really helping us and is going to help us, um, that this is, we're going to be a higher than 700 million and we're going to be closer to this trend that we just talked about at the 800.

Okay. So past fiscal 23. Is the 800 number a more sticky number I should consider for Empire's CapEx on an ongoing basis?

Well, we haven't announced what our future ones are, but if you want to put that in, that's a good number to use. Use whatever we just announced in F23, and it'll either be slightly higher or slightly lower than that, but I'd probably ran that number.

Yeah, I agree. Is that okay, Matt?

Yeah, I agree. Okay, thank you.

Thank you. And at this time, we have no other questions. Please proceed with closing remarks.

Great. Thank you, Sylvie. We appreciate your continued interest in EMPIRE. If there are any unanswered questions, please contact me by calling me or by email. We look forward to having you join us for our first quarter 2023 conference call on September 15th. 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.