Empire Company Limited

Good morning, ladies and gentlemen, and welcome to the EMPIRE third quarter 2025 conference call. At this time, all lines are in late-time only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, March 13, 2025, and I would now like to turn the conference over to Katie Brine. Thank you. Please go ahead.

Thank you, Ina. Good morning 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 umpireco.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this morning are Michael Medline, President and Chief Executive Officer, Matt Reindell, Chief Financial Officer, and Pierre Saint Laurent, Chief Operating Officer. Today's discussion includes four 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 DNA for more information on these assumptions and factors. I will now turn the call over to Michael Medline.

Thanks, Katie. Good morning, everyone. Before I jump into the quarter, I want to take a few moments to talk about the other announcement we made earlier this morning. I never like to see a valued colleague leave the fold, but when they have made the decision to retire, I can only feel a sense of happiness for that person. And after six years with the company, the last four is Chief Financial Officer Matt Rundell will be retiring. As you all know, Matt has been an incredible partner in helping drive Empire's turnaround. He played a critical role in helping our business navigate the challenges brought on by the pandemic, while also guiding us through a period of high inflation and interest rates with both rigor and a passion for the business. He has been instrumental in building the foundation for our ongoing success. He will be missed by all of us at Empire, but he will fortunately be around for a little while longer. We are fortunate to have found a great new CFO. In May, we will welcome Costa Pafanis as Executive Vice President and Chief Financial Officer. Costa is an experienced and immensely capable leader who spent 19 years with Leon's Furniture Limited and was most recently with Green Infrastructure Partners. He will play a critical role in helping drive Empire's results in the years to come. We are grateful that Matt has agreed to stay on for a number of months to work closely with Costa and ensure a seamless transition. On to the business. Q3 was the latest in a string of quarters where we continued to see improving momentum in our results. Same-store sales have strengthened for the last four quarters, and we continue to show increased discipline in managing our margins. But the numbers at face value do not tell the full story. While SG&A is slightly higher than Q3 last year, a large part of this increase is due to the accounting for long-term share-based incentives, which Matt will give you more details on shortly. So it's an even stronger quarter than it looks like at first glance. Today we will focus on three topics, our Q3 results and market trends, a quick update on our e-commerce business, and an update on the current volatile environment. First, our results in Q3 market trends. Our food sales grew 3.1% this quarter with same-store sales of 2.6%. This was supported by stronger top-line performance in our full-service banners and continued performance in our discount banner. Both of these channels continue to grow faster than their respective markets and in bricks and mortar. The gap between full-service and discount same-store sales continued to reduce this quarter. We're seeing positive same-store sales across all of our regions and all of our business units. Last quarter, you may recall, we saw smaller declines in the average basket size. This quarter, for the first time since Q1F24, we see growth in our year-over-year basket size, which is a big step in the right direction. And with regards to inflation, adjusting for the temporary tax break on select goods, our internal inflation is below the low CPI food inflation purchased from stores. In the previous two quarters, we said that we started to see green shoots and early indicators that customers are returning to more favorable and predictable shopping behaviors. We continue to see these trends come to life and improve in Q3, where we saw outsized growth in our fresh department, which indicates customers are starting to trade up from non-fresh to fresh products, and importantly, a decline in promotional penetration. Gross margin continued to improve this quarter, driven by operating efficiencies and a strong focus on executing with excellence in our stores. Margin improvement of 43 basis points was consistent with last quarter. As I've said in the past, this is not due to one silver bullet. It is many small but meaningful actions that continue to benefit us over time. We have now made significant advancements in our stores in areas like shrink and also through the ongoing deployment of space productivity and across our supply chain. Collectively, these initiatives have enabled us to become more efficient and more nimble, which is of even greater importance in this current environment. Overall, we delivered adjusted EPS of 62 cents, which was consistent with prior years. While this may look like a flat quarter at first glance, we actually delivered better results in our core operations, which Matt will touch on in greater detail shortly. And now for a quick update on our e-commerce business. We had total e-commerce sales growth of 72%, generated by strong double-digit growth in Voila and a strong start to our partnerships with Instacart and Uber Eats, which, as of two days ago, are now across the country. Voila has seen its results improve every quarter this year, shifting the team's attention to focus on our operational CFCs and improving profitability with the right move. Our new customer acquisition strategies, in tandem with the cost reduction initiatives across our delivery and CFC operations, are beginning to deliver real results on both our growth profile and on the bottom line. We are pleased to continue to see overall Canadian e-commerce penetration grow, and the interplay between Instacart and Uber Eats with Bala has proven to be highly complementary. We are excited by the growth potential of our e-commerce business and believe we have the right assets in place to effectively serve this growing market. All right, now to the current environment. Since we spoke to you in December, there has been a significant rise in unpredictability in our operating environment with the political shifts in the U.S. and tariffs. And it is unclear how this will play out over the next several years. While we have a strong plan to deal with the direct impacts of retaliatory tariffs, we don't want to downplay the risks that exist. The uncalled-for tariffs and the retaliatory tariffs represent a real threat to the Canadian economy. Uncertainty and volatility have been recurring themes over the last five years through events like COVID, high inflation, high interest rates, and natural disasters, and we've continued to get better at executing in these types of environments. Through all this, our main focus has always been protecting and continuously enhancing the value we offer to our customers, and this remains true today. Let's talk about tariffs in more detail. Unlike many Canadian companies, Empire is not directly impacted by U.S. tariffs, and our industry is fortunate to be in a much stronger position than many others. However, retaliatory tariffs impact us in three ways. They drive us to reduce reliance on U.S. sourcing, put pressure on our suppliers, and may result in a weaker Canadian dollar. First, on U.S. sourcing. In a normal environment, averaged across the year, approximately 12% of our products and dollars come from the U.S., and retaliatory tariffs would, in theory, lead to higher import costs on these items. However... This 12% number has been decreasing over the last year and will continue to as we shift our supply to meet our customers' growing demand for Canadian and non-American products. American products we are selling as a percentage of our total sales are rapidly dropping. We have heard loud and clear from our customers that they want Canadian products. Fortunately for us, supporting and promoting Canadian products is part of our DNA. We've moved quickly to further elevate our local strategy, making it easier for customers to make informed choices about Canadian products. As well, over the years, we at the company have developed a much larger and diversified source of supply to proactively manage threats, such as natural disasters or product shortages in geographic regions. Now, we have developed good alternatives in nearly every category – Our most challenging category to mitigate the threat of retaliatory tariffs is produce, where in Canada, in the winter, we do not always have viable alternatives. We could see an impact here either through increased costs or reduced assortment if the product is no longer competitive on our shelves over time. However, our suppliers have been good partners in helping us to mitigate the potential impact so far. Our supplier partners with U.S.-based production are directly impacted by retaliatory tariffs. This puts pressure on them, and as a result, they may be looking to pass these increased costs on. Some have begun to test our position on this. We're navigating a period of uncertainty, and we are focused on ensuring that reactionary or unnecessary costs are not passed on to customers. We're managing the short to mid-term through fair but often tough discussions with our suppliers, and we've been pleased to see many of our suppliers proactively coming to the table with solutions. A great example is Lindt. Last week, they announced publicly that while historically 50% of their chocolates in Canadian stores come from their U.S. factories and the rest from Europe, by the summer of 2025, 100% of Canada's supply will come from Europe. As well, in speaking to some of our other suppliers, many do not see the benefit of trying to pass on tariff costs right now for two reasons. First, they do not want their product to become less competitive on our shelves as a result of higher prices. And second, the backdrop is too volatile right now with the on-again, off-again approach to tariffs. Instead, they are focused on thoughtful solutions like looking at alternate sources of supply for input materials or alternate locations for manufacturing. Like us, our suppliers are working hard to minimize the impact to customers. Our national sourcing team is working closely with our suppliers while we are also continuing to further diversify our supply. At the end of the day, we all want to remain competitive and are working toward the same goal, protecting the value we deliver to customers. Another factor we're keeping close eye on is the US dollar. This is an inherent risk we face doing business with companies outside of Canada. Since many of our suppliers, both in the US and internationally, transact in US dollars, shifts in exchange rates and a weakening Canadian dollar do have some impact. However, this isn't an overly material risk for us at this point in time, and we have a hedging program in place to help mitigate any short-term fluctuations. Ultimately, the biggest risk for us is not actually in our own business, but the impact on the Canadian economy as a whole. I do not want to downplay this. A weakened consumer environment will hurt the retail sector as a whole. We do not know what will happen yet, but we feel as prepared as possible with the right team to manage through this current environment. Now, looking ahead, while we don't make it a habit to talk about the quarter we're currently in, we feel we owe it to you to give some insight in these especially volatile times. As I mentioned earlier, we have been well positioned in supporting Canadian products for some time. Even before tariff tensions began escalating, we have seen sales of Canadian products outpace our overall sales growth. And while it is still early days, we are now seeing this pick up further, especially since implementing new store signage and shelf labels to help customers find Canadian products. As well, when we look at Q4, quarter in right now, today, we're about halfway through our quarter. And from an overall top-line perspective, we see similar momentum to Q3. Quarter-to-date sales are off to a solid start. Now, before I hand it over to Matt, I want to close by saying that while we are operating in strange and unpleasant times, and you would think it would be easy to have a doom-and-gloom mentality today, It has been truly incredible to see Canadians come together. This is a strong and proud country. And as always, pulling together, we can weather any storm. And with that, over to Matt.