Empire Company Limited

Good morning, ladies and gentlemen, and welcome to the Empire fourth quarter 2023 conference call. At this time, note that all participant lines are in listen-only mode. 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 zero for the operator. I'm sorry, star zero for the operator. Also note that the call is being recorded today, Thursday, June 22, 2023. and I would like to turn the conference over to Katie Brine, Vice President, Treasury Investor Relations. Please go ahead.

Thank you, Sylvie. Good afternoon, and thank you all for joining us for our fourth quarter conference call. Today we will provide summary comments on our results and then open the line 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 course 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 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 Medline.

Thanks, Katie. Good afternoon, everyone. The end of fiscal 2023 marked an important day for Empire Company, the end of our three-year Project Horizon transformation. After six and a half years, we are very pleased to announce that our turnaround is now complete. Through Project Sunrise and Horizon, we have delivered over $1 billion in EBITDA improvements since the end of fiscal 2017. We now have the tools, capabilities, team, and assets needed to compete and win. We will now transition to our next chapter and focus on consistent and sustained execution and results. I'm going to focus on four topics today, the completion of Horizon, our go-forward strategy, our Q4 results, and some key market trends. First, Horizon. We deliver it on Project Horizon. We've deepened our analytical capabilities and built a promotional optimization tool enhanced our own brand's portfolio, strengthened our stores through renovations and the expansion of Fresh Go in the West and Farm Boy and Long Goes in Ontario, and launched our new Scene Plus loyalty program nationally. On top of that, we launched our Voila e-commerce business, starting with our CFCs in Toronto and Montreal to give customers more choice on where, when, and how they shop. And we did this all while facing a global pandemic, strong inflationary headwinds, and the most challenging and market environment we've seen in decades. These efforts resulted in $500 million in annualized incremental EBITDA added to the company, translating to an EPS CAGR of approximately 13% and approximately 60 basis points of EBITDA margin growth. As you know, this was the second three-year transformation we've completed. Over the last six years, we've shared all of the details of our many strategic initiatives with you, and delivered each of them on time and on target, or in many cases, better than target. We told you what we were going to do, and we've done it. The turnaround is complete, and we now have everything in place to succeed, win, and grow market share. Since the start of Project Sunrise in fiscal 2018, we have improved almost 50% of our network through renovations and new stores, and we've generated a compound annual growth rate of 26% in adjusted EPS, leading the industry. I said it after sunrise and I'm pleased to say it again today. There are very few Canadian retailers that have executed a transformation of this magnitude with this level of success and I want to thank from the bottom of my heart every single Empire teammate who is part of this journey for their Herculean efforts. As for what's to come, we will not be publishing details of our next three-year strategy going forward as we are now through the transformation. Going forward, we aim to deliver on a financial framework that grows our adjusted EPS at an average annual rate of 8 to 11% over the long term through operating earnings growth and share repurchases. We may exceed or miss these goals in any given year, but that is our goal. To achieve this growth, we will focus on priorities such as an even greater emphasis on our store network, including our supply chain, an enhanced focus on digital capabilities and data, and a continued drive for efficiency and cost control. We will do this by continuing to advance our key initiatives, including scene plus, store renovations, own brands, space productivity, and others, while also beginning new strategic programs that support our stores and enhance customer experience. From a capital allocation perspective, the business now generates a healthy amount of cash and we will continue to invest your capital wisely. During our transformation period, we needed to increase our capital investments to develop new tools, capabilities, and assets. Now, starting in fiscal 24, capital discipline will be more crucial than ever, and we estimate we'll invest $775 million this fiscal year. It's intentionally lower than what we planned to spend last year, but at the right level now that we're out of the turnaround. And Matt will give you more details on this shortly. We're announcing a 10.6% increase in the Empire's quarterly dividend per share, which brings our five-year dividend CAGR to 10% and represents an increase in our dividends for the 28th year in a row. We also announced that we renewed our NCIB to repurchase up to 12.6 million shares, representing 9% of our public float. We plan to repurchase approximately $400 million of shares in fiscal 24, an increase from the $350 million we bought back last year. Now onto our results. We're pleased with our Q4 performance. Overall, we delivered an adjusted EPS of 72 cents this quarter. This translates to 18% EPS growth year over year when excluding the extra 53rd week last year. This was supported by solid sales growth with same store sales of 2.6% and total sales growth of 2.7% excluding fuel and the extra week in Q4 last year. Our full-service business in particular showed a noticeable upswing in same-store sales growth versus prior quarters, with higher unit counts and increased traffic in stores. Freshco continued to deliver very healthy sales growth with double-digit same-store sales. Our gross margin excluding fuel grew 60 basis points. This was primarily due to Horizon initiatives that have provided continuous margin-great growth, including consistent growth of our own brand's portfolio. We launched another 100 private label SKUs this quarter for a total of over 1,000 new SKUs introduced since the start of Horizon. We continue to drive product innovation and value-focused offerings through this assortment. We made significant progress against our strategic priorities this quarter. In late March, our banners in Quebec and Thrifty Foods in BC joined Scene Plus, marking the final phase of our national rollout. we were off to a very strong start with sales penetration above target in both Quebec and Thrifty Foods. Overall, this program continues to exceed expectations across regions, and ScenePlus now has over 13 million members. Over 3 million new members have joined the program since launching last August. We also continued to prepare for the integration of Grocery Gateway into Voila! and Q1, which will go live officially in July. We are looking forward to providing Grocery Gateway and Voila! customers access to each other's assortment by offering Longos as a significant shop-and-shop on the Voila! platform. We also had our first customer deliveries from CFC3 in Calgary earlier this week and are thrilled to be bringing our world-class e-commerce grocery business to the great Alberta market. Moving to market trends, while food inflation remains high, we are pleased to see that it is beginning to moderate. Although we continue to navigate through supply cost increases that are higher than pre-pandemic levels, it appears we reached the peak in our Q3 as supplier requests moderated this quarter in both magnitude and volume. We expect supplier cost increase requests will continue to moderate over the coming quarters. This is supported by most ingredient commodities coming off their highs, such as wheat, flour, and various cooking oils. For several quarters, we have said that as inflation abates, Empire will be well positioned, and in Q4, we began to see early indications of this reflected in our sales performance and in our tonnage. We are also continuing to see traffic in our stores improve, with higher transaction counts in Q4 across all regions. Although basket sizes are still lower than last year, we are seeing this trend improve. Our category managers continue to work in collaboration with our supplier partners and to leverage the promotional optimization tool we built to provide value to customers. And we're seeing higher promotional penetration than last year as customers stretch their dollars. Our team continues to focus on providing value to customers including by growing our value-sized products offering, deploying SIEM Plus member days across English Canada, and launching our new Serving Up Value program to offer budget-friendly recipes to customers using our compliments products. Although we face some of our greatest challenges in fiscal 23, I am extremely proud of this team for continuing to deliver results and scrupulously execute against our strategy in the face of significant external headwinds. Six years ago, I'm not sure our business could have withstood shocks of this magnitude, but our annual results, and Q4 in particular, highlight the underlying strength of our business today. And I truly believe the best is yet to come. And with that, over to Matt.