Empire Company Limited

Good morning, ladies and gentlemen, and welcome to the Empire fourth quarter 2024 conference call. At this time, our lines are in 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, June 20, 2024. I would now like to turn the conference over to Katie Bryan, VP, Investor Relations. Please go ahead.

Thank you, Joanna. 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 call for questions. This call is being recorded and the audio recording will be available on the company's website at empirecode.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 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.

Thank you, Katie. Good afternoon, everyone. I am very pleased with the way our team is executing despite the currently inhospitable economic backdrop. We have become a disciplined, efficient grocer that is focused on delivering earnings growth. Our results this quarter demonstrate this with strong gross margin control, capital discipline and strong SG&A containment driven by our productivity initiatives and restructuring. We are committed to driving profits and doing the right things by our shareholders. We trust that you will see that in the approach that we are taking with Voila and in our continued commitment to return capital to our investors. The cost control and discipline we are delivering will pay off as we turn the corner on consumer sentiment, which will benefit our top line. Of course, everything we do comes down to our stores, and I am very pleased with how our operators and merchants are performing. I'm going to focus today on four topics. Key market trends, our Q4 and fiscal 24 results, an update on our strategic priorities and commentary on capital allocation for fiscal 25. First, market trends. In Q4, we saw a continuation of recent trends with consumer confidence remaining low due to the hangover of inflation and elevated interest rates. Food inflation continued its downward trend, remaining well below overall CPI and reaching a two and a half year low of 1.4% in April. While we are pleased to see low food inflation, consumers remain very careful in their spending. With the interest rate reduction announced by the Bank of Canada earlier this month, we believe this represents the start of a turning point for improved customer sentiment. As rates continue to gradually decline and Canadians feel less pressure on their wallets, we expect to see customers adding more items in their basket and trading up. That will translate to increased sales momentum for Empire. We are currently more optimistic about the market and our prospects than we have been in a long time. We expect that improvements will be gradual but inexorable. Turning to the quarter, we delivered solid results in the context of this environment. When you remove other income and share of equity earnings, which is largely real estate-related income, Q4 was consistent with both the prior quarter and last year. Gross margins continue to improve this quarter, driven by operating efficiencies and a strong focus on executing with excellence in our stores. This wasn't driven by any one thing in particular, but several smaller but meaningful things. For example, we reduced non-theft strength through a focus initiative, we improved space productivity, and we increased our supply chain efficiency to name a few. In Q4 of fiscal 24 and Q1 of fiscal 25, we are comping two strong quarters where we saw customers return to more pre-pandemic behaviors before they began to retrench again in late summer of last year. We are pleased to see that even in this environment, our customer base continues to grow. Customers are continuing to trade down to less expensive items, but this phenomenon seems to be abating. All of this is reflected in our same store sales increase of 0.2% this quarter. Now for an update on some of our key customer and sales driving initiatives. First, I wanted to provide a comprehensive update on Voila. We remain extremely pleased with Voila and continue to believe that this is the best grocery e-commerce solution in Canada and that it will be attractively profitable in the medium and long term. Customers love the service they're offering, the technology is best in class, and we are running the operations very efficiently. Overall, I am more optimistic about Voila today than I have been in some time. In Q4 of Voila, same-store sales grew by 17.3% and overall sales grew by 23.5% over last year, our highest ever. Voila is well-placed to win this growing channel and we remain committed and confident about its future success. However, as we have stated several times over the past two years, The current size of the grocery e-commerce market in Canada is smaller than we, or anyone for that matter, had anticipated. Our business model included a phased CFC opening timeline that was designed to protect Empire's profitability levels while expanding quickly. The plan was that the rapid growth in grocery e-commerce penetration would result in increased profitability at our active CFCs, and this would compensate for the initial operating losses from the newly opened CFCs. But due to the smaller overall market and the slower rate of growth, this has not been the case. So we're losing more money than we had initially estimated, and this is actually masking the strength of our bricks-and-mortar business. As a result, we are taking several immediate actions to address the higher-than-expected dilution from Wallach and quickly improve performance. First, we've decided to pause the opening of our fourth CFC in Vancouver. That's the right thing to do for our bottom line and for our investors. We want to focus on driving performance and volume on our three active CFCs before we open CFC 4. Construction of the external building for the fourth CFC in Vancouver has been substantially completed, with internal work related to grid build and robot commissioning not yet started. This pause will allow us to continue focusing our efforts on the strong momentum we are seeing with our active CFCs rather than the time-consuming activities associated with launching a new CFC. As soon as we see higher e-commerce penetration rates in Canada, we will be in a position to make a decision quickly on when we'll proceed with opening CFC4. Second, we are working with our partner, Ocado, to decrease our costs and provide us with increased flexibility to serve our customers more broadly, which includes ending our mutual exclusivity. Although it served all parties extremely well since the start of our relationship, by removing it we can pursue complementary growth opportunities in the market, including by serving more types of customer trips and having access to a larger segment of the market, which we're very excited about. Ocado has and continues to be an outstanding partner to us, and this is a decision we've made jointly to grow the business. We will have a one-time charge related to exclusivity as a result of it ending earlier than we had initially planned. This charge will be approximately $12 million. We anticipate this cost will be more than offset by the other operating improvements and savings we expect to achieve. All this to say, there is a lot we are doing to improve the bottom line results of WALA. These changes will have a significant impact on WALA's profitability in fiscal 25 and fiscal 26. We've had great conversations with our partners at Ocado. We're very happy with the partnership and our Q4 rollout results are the best we've had since we launched in June 2020. Now for an update on ScenePlus. Q4 marks the first full year of ScenePlus being active in almost all Empire banners across Canada. ScenePlus program benefits are resonating with customers who are swiping their cards more than ever. to earn points on their grocery shop, get additional savings with member pricing, and redeem points for free groceries. In fact, since launch, Canadians have redeemed over $270 million in points for free groceries across our stores. ThemePlus performance is meeting, and in most cases, actually exceeding our key performance metrics, such as on-card sales penetration, active customers, and supplier engagement where we have more than double the number of suppliers participating in Theme Plus. Program awareness and satisfaction also continue to grow nicely. Theme Plus now has over 15 million members, up 50% since the launch at Empire, which is fantastic, but having them active and engaged is critical. Our focus on digital has allowed us to double the number of loyalty members we are able to contact, which is key, as our digitally engaged members spend 2.8 times more than our non-members. The partnership with Scotiabank and Cineplex continues to thrive and we are extremely pleased with the Scotiabank acquisition campaigns that are bringing many new customers into our stores. We couldn't be more pleased, we couldn't be more pleased with the full year, the first full year in action for SIEM+. Now onto an update on Farm Board. This banner continues to thrive with their same store sales performance highest in our network over the last two quarters. But in addition to their standalone performance, the Farm Boy team brings so much valuable experience and learnings to the rest of our merchandising organization through several strategic initiatives. For example, this past quarter we ran produce pilots in some of Asobi's Ontario stores, leveraging the fresh sourcing, assortment, and operational excellence from Farm Boy to reinvent the customer experience in this department. There are several other exciting things in the pipeline between our merchants and operators at Farm Boy and our other banners to improve our stores, And I look forward to sharing more on how this great partnership is benefiting all of Empire. Our Farboy banner also generates consistently strong returns and has been a great use of capital. And in fiscal 25, we plan to continue investing in this banner by opening another three stores. Now, before I turn this over to Matt, I want to talk about our capital allocation plans in fiscal 25. Our business is generating a healthy amount of cash. $1.5 billion of free cash flow before CapEx, and we will continue to invest your capital wisely. During our seven-year transformation, we need to increase our capital investments to develop new businesses, tools, capabilities, and assets. In fiscal 24, we started to bring our capital investments back down with a target of $775 million. We actually finished the year at $720 million, excluding the Montreal purchase of land, which reflects the high cost of construction and our capital discipline. Where capital projects didn't meet our hurdle rates, teams were sent back to the drawing board to bring down costs. This brought our capital spend in lower than initial expectations for the year, and for fiscal 25, we estimate we'll invest $700 million, and Matt will give you more details on this shortly. Lastly, I'm very pleased to announce today a 9.6% increase in Empire's quarterly dividend per share, which brings our five-year dividend taker to approximately 11%, and represents an increase in our dividends for the 29th year in a row. We also announced that we renewed our NCIB to repurchase approximately $400 million of shares in fiscal 25, and you should know that this represents up to 12.8 million shares, which is about 10% of our public float. We remain committed to returning free cash flow to our shareholders and are at the maximum limit set by the TSX that we're able to purchase under our NCIB. Now with that, over to Matt.