Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the Empire Third Quarter 2024 conference call. At this time, our 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 14, 2024. I would now like to turn the conference over to Katie Bryan, 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'll 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 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 facts. I will now turn the call over to Michael Medline.

Thanks, Katie, and good afternoon, everyone. In Q3, we saw a continuation of the trends experienced in Q2 with some customers pulling back spending. as a result of continued economic uncertainty and pressure on Canadians' wallets. But when you peel the onion and work through some of the complexities, we delivered slightly better results than the prior quarter, with positive comps and strong margin control. This is a different empire company. We have built the capabilities, processes and disciplines to stay strong through tougher times. and we expect to deliver solid and sustainable results regardless of the macro environment as reflected in our Q3 performance. I'm going to focus on three topics today. Key market trends, including a brief update on our plans to help further stabilize food prices in Canada, our Q3 results, and an update on our strategic priorities. First, market trends. In Q3, we saw the challenging macroeconomic environment continue with interest rates remaining elevated, and low consumer confidence. While we were pleased to see food inflation decline by 130 basis points in January versus the prior month to reach its lowest level since August 2021, ultimately this offered little relief to struggling Canadians who are trepidatious about shelter costs amid overall cost of living challenges. Consumers are under pressure, and in this environment, providing value to customers and helping stabilize food prices is a top priority for Empire. We are seeing the number of supplier cost increase requests continue to trend down and suppliers are generally moving back to their more normal and expected approach of cost increase submissions. However, there are still sizable increases from select suppliers coming through that will inevitably impact the customer. This is largely driven by some commodities like sugar and cocoa continuing to be very volatile due to ongoing climate and geopolitical factors impacting global supply. But as I mentioned last quarter, we have strongly and successfully pushed back on unjustifiable increases and will continue to do so. When Empire finished its holiday price freeze in February, we doubled down on our promise to bring value to Canadians by launching a new 11-week program to lock or lower prices on approximately 1,000 essential items across our banners nationally. Almost one month in, we're pleased with how it's showing up in our stores and the traction it is gaining with customers. Turning to our results, I believe that our business performed a bit better in Q3 compared to the prior quarter, and let me explain why. Food retail is our primary focus. However, We often have a strong real estate element to our earnings, which acts as a complementary income stream. If you remove the other income and share of equity earnings, which is relatively stable on an annual basis but fluctuates quarter to quarter, our performance in Q3 was slightly stronger than Q2. There was also some noise in the quarter, such as the temporary strike at our bond distribution facility. Matt will make sense of all that for you in his remarks shortly. We continue to attract more customers to our stores with higher transaction counts, but we're seeing smaller baskets consistent with the industry. Our promotions are constantly improving and are attractive to our customers while still protecting our margins. Moving to financials, our sales excluding fuel grew by 1.3% this quarter, with same-store sales of 1.9%. We see the same store sales gap between full service and discount channels at Empire and in the industry at large gradually disappearing and expect this trend to continue. We've been expecting, as you know, the gap between full service and discount to shrink as inflation falls. But even we were surprised by the magnitude of the gap closing this much this quarter. Wallah also continues to grow with sales up over 15% this quarter compared to last year. SG&A also remains under control and in line with our expectations. While the SG&A rate is higher than we would like, this is a function of the current sales environment. We are actively making decisions to cut overhead in our business. Matt will go into more depth on this in a couple of minutes. Overall, we delivered an adjusted EPS of 62 cents this quarter, And now on to our strategic priorities. When we announced our long-term goal to grow adjusted earnings per share by eight to 11%, one of the key pillars to achieve this ambition was a focus on efficiency and cost control. As we announced in Q1, we have been making organizational changes to optimize our structure and reduce costs. This backstage initiative is largely complete with the full run rates cost savings to be realized in fiscal 2025. Beyond the cost benefits of this program, I am very pleased with the structure of our teams and the critical talent changes we have made to ensure we are better positioned to execute on our strategy and deliver strong results. This quarter, we also entered into an agreement to purchase a sizable plot of land in Montreal, which remains subject to due diligence. Securing this land was highly strategic, and for the time being, we will land bank it until we decide whether and when to proceed with site development. The opportunity for such a valuable and well-situated piece of land does not come around often. This may increase our capex spend from $775 million to approximately $885 million this year for this one-time purchase. And now for an update on some of our key customer and sales driving initiatives. Voila continues to gain momentum at each of the three CFCs, with fulfillment rates of 99.5%, a broad assortment offering, and excellence in fresh, with customers claiming the produce is delivered as well as if they picked it themselves. It's no surprise that we see the total number of orders increasing with strong customer retention rates. This continues to be the best grocery e-commerce solution in Canada. customers continue to give us strong NPS scores quarter after quarter. In fact, the highest I've seen in my time in retail. And as a reminder, our average basket size on Voila is over three times the size of a full-service store basket, so these are highly valuable customers. ScenePlus also continues its strong progress this quarter, and we surpassed 15 million members, a 50% increase since ScenePlus launched at Empire. ScenePlus is now in over 70% of Canadian households, with over 2,000 ScenePlus card swipes every minute, and a redemption every two seconds. The end of this month marks the first full year of ScenePlus being launched at Empire Banners across Canada, and while we've seen so much growth, this is, of course, just the beginning. We are now rapidly turning our efforts toward personalization to develop a more robust and customized loyalty program. In our topic, we haven't spoken about much publicly is our new central kitchen, often referred to as a commissary. First, we'll be opening in Calgary in the first half of F25. In partnership with Crombie Reef, we have built a state-of-the-art facility that will service Alberta and surrounding provinces, bringing an elevated curation of ready-to-cook, ready-to-heat, ready-to-eat meals into our stores. This concept has been developed within our merchandising team, leveraging expertise from Farm Boy, Thrifty Foods, and our internal team to create an offer that will be fresh, delicious, and market-leading. We will gradually introduce products from a central kitchen to our store network to provide greater consistency, expanded variety, fresher products, better forecasting, better flexibility, less food waste, and reduced costs for items produced in a highly food-safe facility. This opening in Calgary is just the beginning, and I look forward to sharing more soon. Before I hand it over to Matt, one last thing. Just over five years ago, we purchased Farm Boy, which has been a fantastic deal and partnership for us, both financially and strategically. A small group of key Farm Boy senior management held on to a piece of the company at the time of purchase, and in February, as had always been planned, we acquired the remaining 12%. Key management remains at Farm Boy, and we continue to share and benefit from the learnings from them. We are thrilled with what Farm Boy has accomplished in the last five years, growing from 26 locations to 48, with the newest store in Oshawa opening today. And with that, over to Matt.