Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the Empire Third Quarter 2023 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Thursday, March 16, 2023. I would now like to turn the conference over to Katie Bryant, VP of Investor Relations. Please go ahead.

Thank you, Joanna. 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 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. Pierre St. Laurent, Chief Operating Officer, and Doug Nathanson, Chief Development Officer and General Counsel. Today's discussion will include 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 Medline.

Thanks, Katie. Good afternoon, everyone. I'm going to start by acknowledging that this was not a straightforward quarter due to both the high inflationary pressures we continue to face as well as our efforts to recover and move on from the cybersecurity event in November, which had significant impacts across our business this quarter, as expected. As high inflation persists, we are seeing how strong we've become as we're still putting up solid numbers and sustaining the fundamentals of our business effectively. But we are looking forward to high inflation abating. Inflation is bad for Canadians and for Empire Company. When it abates, we will see positive momentum and be well positioned to deliver stronger performance. Empire Company is best positioned to prosper in a non-high inflationary environment. Today I'm going to focus on three topics, key market trends and our Q3 results, a brief update on our cybersecurity event, and an update on some of our Horizon initiatives, specifically Voila and ScenePlus. As I've said over and over for a long time, the continued high level of inflation is challenging for Canadians and for our business. This quarter we saw food inflation remain stubbornly high and we saw customers continue to adapt their shopping behaviors due to this inflationary environment. with many people shopping multiple stores, trading down on products, buying more on promotion, and filling smaller baskets. Our team remains highly focused on providing value to customers during this time, and over the next few weeks and months, we will continue to accelerate on this front with the planning of several additional initiatives to emphasize and expand our value proposition to our customers. We received hundreds of new supplier cost increase requests this quarter at a comparable size and volume as we experienced in the fall of 2022. So we expect inflation to remain high for a few months. Now, we don't have a crystal ball. However, as we look forward, we believe that supplier partner requests for cost increases have peaked, and we will also soon be cycling high inflation numbers from last year. We're hopeful that food inflation will soon peak, then abate, then end, which will be very good news. Our own brands portfolio continues to provide significant value to customers and grew faster than the market for both the quarter and the fiscal year. We are focused on leveraging our own brands portfolio across all of our banners to provide value to customers. And this month we began the rollout of 230 non-food owned brands products at Longo stores. Our discount business showed excellent performance again this quarter with double digit same store sales growth and outpaced share growth versus peers. Last month, we achieved our Project Horizon goal to open 31 new Freshco stores by the end of fiscal 23. As of today, we have a total of 44 Freshco stores operating in Western Canada. We are very pleased with the momentum and growth trajectory of this banner Taking Freshco to Western Canada was a key decision we made in 2017 to turn around what was then a struggling region for us. I'm sure glad we made that call. We also continue to see benefits from implementing our Scene Plus Loyalty program at Freshco, which exceeded all of our targets in Q3. Overall, our sales this quarter increased by 1.5%, with same-store sales of 0.1%. In addition to the impacts of high inflation, our results were affected by lapping strong sales due to Omicron last year, as well as the impacts of the cybersecurity event across our business. Our gross margin excluding fuel was essentially flat with last year, but our margin was also adversely impacted by the cybersecurity event. We're very pleased with how we continue to improve the fundamentals of this business. This is a result of continuing to effectively execute our strategy with additional benefits from Horizon initiatives. We delivered an adjusted EPS of $0.64 this quarter. Management estimates that there is an additional impact of at least $0.06 related to the cybersecurity event, which caused a temporary decline in sales and short-term disruptions to operational effectiveness. Consistent with regulatory guidance, we cannot include the sales in our adjustments, and Matt will share some more details on this shortly. Moving to an update on the cybersecurity event, I will start by saying that these cyber attacks are a nasty piece of business. I wouldn't wish them on my worst enemy. Throughout this event, our priority was to do the right thing for our customers, our employees, and our business. However, this event had several one-time impacts on our Q3 performance and results. I am pleased to say that we're over it now and have fully returned to business as usual in Q4. Now for an update on our horizon initiatives, starting with Voila. Our comps declined 14.7% year over year, but this is not a particularly meaningful metric this quarter, as Voila experienced significant growth last year as a result of the Omicron outbreak, particularly in central Canada. If you look at Voila's performance against Q2, which we believe is the more accurate measure this quarter, we continue to see strong sales momentum growing by 9.4% over the second quarter. Both CFCs had positive double-digit growth, and Voila continued to outperform against the market. Looking ahead to Q4, we anticipate the Omicron impacts from last year to be much less significant and expect to see a return to positive year-over-year same-store sales. Now, today we're also pleased to announce that we will integrate Grocery Gateway into Voila starting in July. We said from the start that at the appropriate time, we could drive efficiencies by integrating Grocery Gateway into Voila. But in addition to these efficiencies, Grocery Gateway and Voila customers will both benefit by gaining access to each other's assortment. Both businesses are now at the right place to begin this integration. Similar to the EGA net transition, grocery gateway to customers will transition to Voila over a six-week period, offering Longos as a significant shop-and-shop on the Voila platform. We also remain on track for CFC3 to open in Calgary in the first quarter of fiscal 24 and are excited to be bringing our world-class e-commerce grocery business to the Alberta market to serve our customers. On to Scene Plus. We continue to be very pleased with the evolution of our new ScenePlus loyalty program, and this quarter we exceeded our targets on several key metrics, including new member sign-ups, active members, and overall program awareness. Next week, we will be launching ScenePlus in Quebec and in our Thrifty Foods banner in Bridge Columbia, which is the fourth and final regional launch. We have been working closely with our Quebec franchisees and thrifty store managers to prepare, leveraging the learnings from our past rollouts. Now, before I hand it over to Matt, I want to have a shout-out, a congratulation to Mark Holley, our former SVP Real Estate, on his new position as Crombie REIT's new president and CEO. While it's always difficult to see such a strong leader leave our fold, we could not be happier that he will be leading a company with such strong ties and strategic importance to our business. And with that, over to Matt.