Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the EMPIRE second quarter 2024 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, December 14, 2023. I would now like to turn the conference over to Katie Brine. Please go ahead.

Thank you, Joanne. Good afternoon and thank you all for joining us for our second 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 quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer, Matt Rundell, 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. I will start today by saying that on the surface, our Q2 results don't appear as strong as Q1. And it's true, they're not at that level. But when we unpack everything, as Matt, Pierre, and I have done over the last number of weeks, we don't think they're much worse. Let me tell you why. First, in late August, we began to see some customers retrench. We believe as a result of higher interest rates biting and overall economic uncertainty. This retrenchment wasn't major, but it did appear to occur quite suddenly. Second, Q1 fiscal 24 had easier year-over-year comparisons than Q2, resulting in a lower same-store sales this quarter. Third, we did see margins contract a little more than forecasted due to higher promotional penetration of the flyer items. Although, I must emphasize, promotional intensity at our banners did not change. with customers also purchasing more own brand products and trading down to less expensive alternatives. Fourth, we saw slightly higher shrink numbers, primarily due to rising theft. And fifth, there were a lot of puts and takes this quarter that will break down. All this said, we don't think we did anything differently or executed less sharply this quarter. And while the macro environment continues to be challenging, there's a lot of momentum in our business, which you'll see as we unpack these results. Five weeks into Q3, we are seeing increased sales momentum, higher than Q2, but not as high as Q1. And we are optimistic this trend will continue as consumers start to regain confidence. And we're in a much better position than we were last year. We're also well positioned as food inflation continues to decelerate and interest rates move past their peak. I'm going to focus on three topics today. Our Q2 results and key market trends. a brief update on our plans to help further stabilize food prices in Canada, and an update on our strategic priorities, including the progress we are making to optimize costs and enhance store and customer experience. First, our results and market trends. We were pleased to see CPI's food inflation continuous downward trend this quarter, reaching its lowest level in 22 months at 5.4% in October. Our internal inflation remains slightly below CPI in Q2, as it has been since this period of high inflation began, and it's maintained its downward trajectory. In this environment, providing value to Canadians and helping further stabilize food prices is a top priority for Empire. Earlier this month, I appeared before the Agriculture Committee to discuss food inflation, and we have been cooperative with Minister Champagne's office over the last several months, including by submitting detailed plans for how Empire will play a role in helping to further stabilize food prices. I can assure you, we are already doing a lot for our day-to-day business, and we have now taken further actions to help Canadians with the ultimate objective of narrowing the gap between CPI and food inflation. However, and as I've said before, and as I've said to our supplier partners, I've got to emphasize that all key players in the food supply chain have a role to play in stabilizing food prices, not only grocery retailers. While we are seeing inflation decelerate, we're in a unique time where we have inflation, and on top of prior periods of high inflation, and this requires a different approach. Canadian consumers cannot afford more inflation. As an industry, we need to look at every single way we can minimize price increases, and this has to be done in close collaboration with our supplier partners. While the vast majority of cost increases requested by suppliers over the past couple of years have been justifiable and fair, we are now seeing more than a few of our large supplier partners send through cost increase requests for February, and some of them are distressing. They just can't be justified. Inflationary times are not an excuse to pass every single rising cost on to grocers, and more importantly, to Canadians. This was not the way business was conducted before these inflationary times. We have instructed our national sourcing team to be even tougher on this latest round of cost increase requests. We will not take unfair cost increases and pass them on to Canadians. It's not the right thing to do. And if that results in a few holes in our shells, we believe the Canadians will more than understand. Again, this is not an indictment of all our supplier partners. I am referring to several big multinational CPGs. And as I've said many times, our federal government has a huge role to play in taking out costs that have accelerated food inflation. As a company, we will be pursuing new solutions to help mitigate inflation. One way that we can keep costs down is through our own brands portfolio, where we have greater visibility and control over prices than with national brands. As we and others have said for several quarters, private label products are in high demand and will give even more space to our own brand products if it will help us maintain lower prices on shelves. Turning to our results, I believe that our business continued to perform well in Q2, as I said. It was a bit of a messy quarter to analyze given various quarterly puts and takes regarding crumbly REIT and real estate dispositions, the strike at our Vaughan distribution facility, and the sale of our Western Fuel business in Q1. Matt will make sense of all that for you in his remarks in a couple of minutes. All in all, when I look at Q2, I felt that our execution was just as sharp as Q1, but consumer confidence affected our results a little bit. We continue to attract more customers to our stores with higher transaction counts. Our promotions are constantly improving and are attractive to our customers while still protecting our margins. And we continue to see very strong on-shelf availability consistently above the market. Moving to our financials, our sales excluding fuel grew by 2.4% this quarter, with same-store sales of 2%. Both our full service and discount banners outperformed the market in their respective channels, and voila, grew sales over 15% in the quarter. We also maintained stable gross margins, despite increased promotional penetration and supply chain challenges due to the Vaughan RSC strike. We're pleased with how we continue to protect and grow the fundamentals of the business, regardless of the macro environment, and we are optimistic that we will pick up momentum as inflation eases. Overall, we delivered an adjusted EPS of 71 cents this quarter. On to an update of our strategic priorities. When we announced our long-term goal to grow adjusted earnings per share by 8% to 11%, one of the key pillars to achieve this ambition was focused on efficiency and cost control. While Empire is out of its transformation era, we still see many areas to be more efficient, and we've begun simplifying and taking a back-to-basics approach with all of our core SG&A activities. We are doing this across several initiatives that are tried and true at Empire. We're good at this. We've done it before. While I'm not going to share with you the full extent of these efforts, we felt it would be helpful to give you some insight into where we are focusing. As we announced last quarter, we have begun making organizational changes to optimize our structure and reduce costs. A refresh of what we did in Sunrise, but on a smaller scale. Almost 70 years have passed, and we are a very different company now. We have advanced data and analytics capabilities, new strategic assets in our portfolio, and a much stronger team. Before, the focus was on fixing what was broken. Now, the focus is on supporting our go-forward strategy to drive growth in the core. This isn't just about cutting. The team is being very strategic and is also looking at what we can bring in-house to do better and more efficiently. You will see severances in our financial adjustments this quarter and through to the end of fiscal 24. These costs will be substantially completed by the end of fiscal 24 as we progress this effort. Another area where we are pursuing cost efficiencies is within goods not for resale, or as I often call it, non-merch procurement. This is an area where we had great success during Project Sunrise and are again seeing opportunity to optimize by leveraging our national buying scale and working with suppliers to simplify our assortment and reduce rates. As one example, during COVID, we saw the prices of vinyl gloves, which many of our teammates in store have to wear, rise significantly. Through this initiative, we have been all able to negotiate with suppliers to lower our rates, generating over half a million dollars of savings from this one item. We have done this in many other places too, such as with paper bags, deli bags, and product containers. In our supply chain team, we have developed new capabilities to simplify our operations and streamline our engagement with carrier partners. We are laser-focused on this simple yet effective back-to-basics approach to ensure we are getting the best costs from our suppliers so we can offer more value to our customers. There are just a few initiatives of many that we are pursuing. but are areas where we are confident we will generate savings. We've done it well before and know we can do it again. Now for an update on some of our key customer and sales driving initiatives. Regarding our space productivity program, we've successfully completed all pilots for the first phase of this project, which allows us to deploy optimized category planograms by banner and region based on our algorithms. We are very pleased with the actual results from the pilots are there as good or in some categories even better than the algorithm's predictions. Seeing the success from the pilots, we have now rapidly begun rolling out new planograms category by category across our stores, and going forward, the majority of new planograms we roll out will be based on this new technology. There are over 100 distinct grocery planograms being executed in fiscal 24 across our banners, with over 80% completed as of today. Now that the first phase is near completion, we are turning our focus to the second phase, which allows us to optimize the total non-fresh space within each store. We have conducted several in-store phase two space pilots over the last few months and are on track to start the deployment to stores with the highest returns within this fiscal year. Benefits will begin to ramp up the second half of fiscal 24 with meaningful benefits expected into fiscal 25 and fiscal 26. ScenePlus also continues to progress this quarter, outperforming our Q2 targets with strong new member growth, increasing on-card sales penetration, and significantly higher active loyalty members than we had before. Program awareness and member satisfaction have all increased significantly with Empire customers since launch. Through our partnership with Scotiabank, we have been able to drive new customers into our stores, and we have seen a 400 basis point increase and Empire's share of grocery spend on Scotiabank credit cards since launch. We continue to pursue opportunities to leverage this outstanding loyalty program and work closely with our partners to provide even more value and benefits to our customers. Lastly, we saw strong momentum from Voila this quarter, in particular CFC3, which launched in Calgary in June, has been gaining momentum week over week. Customers who were previously using curbside pickup are moving to home delivery as we anticipated, and we see strong basket sizes and net promoter scores across each CFC. So while there was a lot of noise in this quarter, we continue to experience economic headwinds. The fundamentals of our business remain strong, and we delivered solid results. We have a clear strategy to deliver against, and our team continues to execute with focus and precision. And with that, let's turn it over to Matt.