Empire Company Limited

Good afternoon, ladies and gentlemen. Welcome to the EMPIRE second quarter 2023 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during the conference you require immediate assistance, please press star zero for the operator. A reminder that today's call is being recorded Thursday, December the 15th, 2022. And I would now like to turn the conference over to Katie Brine. Please go ahead, Katie.

Thank you, Michelle. Good afternoon and thank you all for joining us for our second quarter conference call. Today we'll provide summary comments on our results and then open the call for questions. This call is being recorded and audio recording will be available on the company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer, Matt Reindell, Chief Financial Officer, and Pierre Saint 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 will now turn the call over to Michael Metline.

Thanks, Katie. Good afternoon, everyone. We're pleased with our Q2 performance. Despite the challenging economic environment, we delivered strong financial performance with much-improved same-store sales, including our full-service banners, continued improvement in our gross margins, and strong execution against our strategic priorities. Today, I'll focus on three topics. the IT systems issues we have been dealing with, our Q2 results, and the continued rollout of our ScenePlus loyalty program. Let me start with the IT systems issues. On Friday, November 4th, we experienced some IT systems issues related to a cybersecurity event. As soon as we became aware of the issue, we immediately implemented our incident response and business continuity plans, including the engagement of world-class experts. On the morning of Monday, November 7th, we sent out a press release concerning our systems issues. Following the advice of our advisors, that release was as specific as we could make it due to security reasons. We are now in a position where we can provide more details. However, we will not elucidate further on this subject beyond these prepared remarks and our published disclosure. After discovering the intrusion, we immediately began to isolate the source and shut down certain systems to prevent further spread and to protect our operations and our data. This ensured that we were able to run our stores with little disruption and with thankfully no interruption to our supply chain. But this event and our precautionary response did cause some temporary problems. For example, we shut down many of our pharmacy services, but fortunately only for four days. And some of our in-store services were impacted for a very limited time in areas such as self-checkout, gift cards, and the redemption of ScenePlus points. Despite this, And thanks to the incredible people who run our business day in and day out, our customers would have noticed very few changes to their usual shopping experience. We have been able to fully serve customers for several weeks now, and we are in a very good position to help customers celebrate the holidays. As you can appreciate, this has been a challenging time for our teams. There were a lot of work rounds and in-the-moment solutions that carried us through, many built and implemented by our incredible frontline teams. I'd like to thank all of our stakeholders, specifically our teammates, customers, franchisees, supplier partners, and shareholders for their patience and understanding as we put this behind us. Matt will provide more details shortly, but this matter had almost no negative impact on our Q2 results, coming as late as it did in the quarter. Now on to our second quarter results. It was a good quarter. Our sales grew 4.4%, including same store sales of 3.1%, which was 440 basis points higher than last year, and 270 basis points higher than Q1. As you would expect in this inflationary environment, our discount business is very strong with double-digit same-store sales. But what might surprise you is that our full-service business is more than holding its own with solid and positive same-store sales. Our full-service stores are satisfying the needs of the value-seeking customer through an excellent assortment of own brands' products, strong and relevant promotions, better personalized offers and great quality of service. We are seeing the positive impact that ScenePlus has had on our Atlantic and Western Canada businesses already this quarter, with well over 1 million new members joining the program since we launched. We continue to see higher transaction counts and a smaller basket size versus the prior year, but not back to pre-pandemic levels. And as customers look for value, it's not surprising that promotional penetration increased this quarter, and we saw double-digit sales growth in our own brand's portfolio. As well, our Longo's banner performed very well this quarter, realizing its highest same-store sales growth since our acquisition in spring 2021. I'm pleased to see that both our discount and own-brand businesses are outperforming the market and gaining share to deliver value to customers when they need it most. We have launched over 240 new private label SKUs in the past 12 months and have another 200 plus SKUs planned to launch in the next year to ensure we maintain this momentum. Overall, our e-commerce grew 4.6%. Our voila business continues to grow with comparable sales of 14.4% driven by particularly strong growth in Toronto. Voila is also performing very well in Quebec and is now materially larger than our prior IGA net business year over year. Grocery Gateway is down 14.1% from last year, reflecting the lower performance of most e-commerce businesses post-pandemic with the exception of Voila. Having said that, Grocery Gateway's three-year stack sales growth is still 12.3%. Our gross margin performance continues to improve. Our margin rate grew 29 basis points and excluding fuel, it grew by 58 basis points. This growth was largely due to our horizon initiatives, notably promotional optimization and own brands. Inflation actually hurt this margin number. If our full services store can deliver positive same store sales and margin expansion as it did this quarter during these periods of high inflation, you can see why we are confident that our performance will be even stronger as inflation eases. Our team is executing consistently, and we've continued momentum as we head into the final two quarters of Horizon. Now an update on our ScenePlus loyalty program. We launched in Atlantic Canada in August, then Western Canada in September, and most recently Ontario in November. We are extremely pleased with the rate the customers are signing up for the program and the week-over-week growth, that we are seeing in our on-card sales penetration. Our launch in the West marked the first time that our discount banner, Freshco, has had a loyalty program. Their on-card sales penetration out of the gate has exceeded all of our targets. As Freshco continues to build presence and brand equity in the market, particularly in the West, loyalty is a meaningful addition to provide our customers with even more value. Our most recent launch in Ontario was our biggest yet, including four banners and reaching over 5 million households. Although it is still early days, we have been very pleased with its performance and early customer traction. We will complete the SIEM Plus rollout across our remaining banners in early 2023 and look forward to offering our customers from coast to coast the exceptional value and benefits of this program. Before handing it over to Matt, I also wanted to mention that today we announced the sale of all of our retail fuel sites in Western Canada to Shell Canada for approximately $100 million. We expect this transaction to close in the first quarter of fiscal 24. In reviewing our portfolio, we determined that our fuel business in the West, which does not have a meaningful convenience store business, is not core to our offering. This sale allows us to realize the value of these assets while continuing to benefit from the foot traffic generated by these sites. Shell is a good partner, and through their investment in these sites, we expect to see increased benefits to both their business and our nearby grocery stores. We wish everyone a safe and happy holiday season. And with that, over to Matt.