Metro Inc.

Good morning, ladies and gentlemen, and welcome to the Metro Inc. 2025 second quarter results, Résilience du 12e trimestre 2025 conference call. At this time, all lines are in listen-only mode. Before we begin 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 has been recorded on Wednesday, April 16, 2025. I would now like to turn the conference over to Mr. Sharon Kadoshi. Please go ahead.

Good morning, everyone. Thank you for joining us today. Our comments will focus on the financial results of our second quarter, which ended on March 15th. With me today is Mr. Eric Lafleche, President and CEO, François Thibault, Executive VP and CFO, Marc Giraud, Chief Operating Officer, Jean-Michel Coutu, President of the Pharmacy Division, and Nicolas Amiot, incoming CFO. During the call, we'll present our second quarter results and comment on its highlights. We will then be happy to take your questions. Before we begin, I would like to remind you that we will use in today's discussion different statements that could be construed as forward-looking information. In general, any statement which does not constitute a historical fact may be deemed a forward-looking statement. Words or expressions such as expect, intend, are confident that, will, and other similar words or expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy, our annual budget, and our 2025 action plan. These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks known and unknown, as well as uncertainties that could cause the outcome to differ materially. Risk factors that could cause actual results or events to differ materially from our expectations, as expressed in or implied by our forward-looking statements, are described under the Risk Management section in our 2024 Annual Report. We believe these forward-looking statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking statements except as required by applicable law. I will now turn the call over to Francois.

Thank you, Estelle, and good morning, everyone. So total sales reached $4.9 billion in the second quarter, an increase of 5.5% versus the same period last year. Food same-store sales were up 5.3%, with sales positively impacted by the transfer of two significant pre-Christmas shopping days from the first quarter to the second quarter this year. When we adjust for this calendar shift, same-source sales were up 3.9%. In pharmacy, we recorded solid same-source sales of 7% on top of 5.9% in the previous year. Our gross margins stood at 20% of sales versus 19.9% in the same quarter last year. Operating expenses were $521.3 million, representing 10.6% of sales versus 10.7% of sales in the same quarter last year. We benefited from the fact that we cycled transition and duplication costs last year related to our Telbon Automated Distribution Center, but these benefits were partly upset by increases in other areas, notably energy costs in Ontario due to cold weather and an increase in fees related to our online partnership sales. EBITDA for the quarter totaled $461 million, up 5% year-over-year, and up 6.8% when we removed the gain and losses on disposal of assets. Total depreciation and amortization expense for the quarter was $136.1 million, up 6.6 million, or 5.1%. The increase in depreciation and amortization expense is mainly due to the commissioning of investments in our supply chain, including some automation technology and pharma, and the final phase of our fresh distribution center in Toronto last summer, as well as the timing of retail investments. Net financial costs for the second quarter were $33.4 million compared to $34.1 last year, and that decrease in financial costs is mainly due to overall lower interest expense on our debt, partly offset by lower capitalized interest. Our effective tax rate of 24.5% is lower than the effective tax rate of 26.5% in the second quarter last year as a result of the Tel Bund tax holiday of $6 million. Adjusted net earnings were $226.6 million compared to $206.4 million last year, a 9.8% increase, and adjusted net earnings per share amounted to $1.02 versus $0.91 last year, and that's up 12.1% year-over-year. On the food retail side, after 24 weeks, we converted two stores and carried out major expansions and renovation at eight stores for a net increase of 18,100 square feet, or 0.1% of our food retail network. Following the end of the quarter, we opened a new Food Basics in Ontario and converted another Metro store to supersede in Quebec. Under our normal course issuer bid program as of April 4th, we have repurchased 2.849 million shares for a total consideration of $264 million, representing an average share price of $92.65. I'll now turn it over to Eric.

Thank you, Francois, and good morning, everyone. We delivered solid results in the second quarter, driven by strong sales growth in both food and pharmacy as our teams continue to focus on bringing value to our customers across our different banners. Food same-store sales were up 5.3% or 3.9% when adjusting for the two-day Christmas shift to the second quarter. Discount continues to grow same-store sales faster than Metro, with the gap between both remaining stable. Our internal food basket inflation increased versus the preceding quarter, but was slightly lower than the reported food CPI after adjusting for the sales tax holiday. We are seeing inflationary pressures on certain commodity prices as well as a weaker Canadian dollar. The recently introduced tariffs and counter-tariffs did not impact food inflation in the second quarter. For the quarter, transaction count was essentially flat with the average basket up. Promotional penetration is up year over year, but stable compared to our first quarter. Online sales grew by 26% for the quarter. This growth is driven by the ramp-up of our click and collect services in our discount banners and by third-party marketplace. We are satisfied with our flexible model meeting customer demand and needs. In this uncertain economic environment, customers are favoring local and Canadian products, As a Canadian-owned and operated company, we have always sourced the products we sell from Canadian growers and manufacturers as much as possible. In the current context, we are putting even more emphasis on local and Canadian products and optimizing their visibility in all of our banners, whether in-store, online, or through our various promotional tools like the weekly flyer. Customers are responding well and sales of Canadian products are outpacing total sales, and the gap has accelerated over the past few weeks. On the pharmacy side, we delivered another solid quarter with comp sales of 7% for a two-year stack of 13.3%. Prescription sales were up 7.8%, driven by continued organic growth, specialty medications, and professional services. We continue to record significant growth in pharmacy services, and in the first 24 weeks of this fiscal year, we documented more than 2.4 million clinical acts and services performed through our network. We are well positioned to capitalize on this growing trend with our dedicated community pharmacists and our leading footprint across Quebec. Commercial sales were up 5.3% or 3.7% when adjusting for the Christmas shift. This strong performance was driven by growth in OTC, HABA, and cosmetics. As we begin our third quarter, we face an uncertain economic environment, and it is difficult to predict how the situation will evolve and how it will impact consumers and our business. As I said, to date, the recently introduced tariffs and counter tariffs have not had an impact on our business. However, the situation remains highly volatile. We remain steadfast in our focus to deliver value to our customers through robust merchandising programs, strong private label, and loyalty offers, and working with our vendor partners to find alternative sources of supply whenever appropriate. To conclude, we remain confident that our sustained investments in our retail networks and supply chain, combined with strong execution, will continue to fuel our growth, and we maintain our medium to long-term average annual EPS growth target of 8 to 10%. Finally, as most of you know, François Thibault is retiring at the end of the week. and this is his last analyst call. I want to take a moment to highlight his significant contribution to our success since 2012. I want to personally thank him for his leadership of our finance, legal, and IT teams, as well as for his partnership and friendship. Thank you, François. He will be replaced by Nicolas Amieux, who joined us about one month ago, and I'm sure that, like François, his aerospace background prepared him really well to be our CFO. So, Francois, do you want to say a few words?

Thank you, Eric. This is my 52nd and last earnings call. It was an honor to be Metro's CFO for the last 12 and a half years. I will definitely miss engaging with all of you and the investor community. Thank you very much. And we'll now take your questions.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Tammy Chen with BMO Capital Markets. Your line is now open.

Hi, good morning. Thanks for the question. Just wanted to start with your outlook statement. The comment on the current environment, I understand given all the tariff aspects, but Just given your business in grocery, the key staple for consumers, I'm just wondering what are you specifically flagging? Are you seeing in recent weeks as the tariff offsets have ramped up that consumer behavior in your banners have changed recently? Are they shifting back a lot more to discount? Just if you can talk a bit about that and How should we think about the rest of this fiscal year? Already in the first half, you've achieved that 8% to 10% target. Thanks.

Customer behavior has not changed. Essentially, the focus on value that's been out there for several quarters remains. We saw that in Q2 just like we did in Q1. I mentioned the high promotion penetration, high private label, some trading down. There's no change in customer behavior. I think our outlook statement referred more to the general macroeconomic environment with all this uncertainty and turbulence that we're all experiencing and how can that affect consumer sentiment, consumer confidence over the rest of the year. So we, as you say, we are a staples essential goods retailer and distributor. We're well positioned in any type of environment. We're confident that we'll continue to grow. But there's volatility and uncertainty, and that affects customers, and it ultimately can affect businesses. So that's all we wanted to point out.

I see. Okay. And my follow-up is, you know, good growth in the pharmacy business. That continues. I think it's outpacing food. I guess I just would have thought maybe see a bit more positive impact of MIPS on your gross margin from that. Are you able to talk a bit more about the puts and takes to your gross margin this quarter? Was food margin down year-over-year?

Thank you. We don't disclose margin between the divisions. I think we try to have effective merchandising and have the right pricing for our customers, so we did improve gross margin overall by 10 bits rounded, and that was helped by some supply growth, obviously.

Sorry, what was that, supply growth?

So, as Francois said, we don't disclose gross margin between food and pharmacy. Yes, there was good growth in pharma, consistent growth in pharma. So, I don't think, I can just say that it did not have a material impact on Metro total gross margin. The mix has been pretty consistent.

Okay, thank you. Your next question comes from Michael Van Elst with TD Cowan. Your line is now open.

Hi, good morning. Congrats on the good results. I wanted to continue on the outlook statement just because the last, I think, four or five quarters you've had the 8% to 10% long-term target in your outlook statement, but it was noticeably absent this quarter. Is there anything that you're trying to signal there, or is this just because you've kind of gotten past your fiscal 24 period when you were below that range and you no longer feel the need to reassure investors of that long-term target?

Yeah, hi, Michael. Exactly what you just said, the latter. This is an outlook that was written – Coming out of our transition year, where we said that after that transition year, we expected to gradually resume our profit. We look at where we are after six quarters. We felt that that was no longer relevant as a comment, but we certainly are maintaining our growth targets of 8% to 10% on a medium long-term outlook.

Okay, so there is nothing in your immediate future that led you to be concerned about your near-term outlook once again? Absolutely not. Absolutely not. Perfect. Thanks for the clarification. Okay. Just on the top line, on the grocery side, it did accelerate in the quarter, particularly the same store tonnage looked quite strong. And I'm hoping that you could help us understand where this is coming from, because I'm assuming that people aren't necessarily eating a lot more tonnage, though. You're gaining share, and where is that coming from, and why do you think you're gaining share?

Well, we're gaining share slightly. We're pleased with our market share performance overall in the markets where we compete. We will give you by market, by banner, whatever, but overall, we're pleased with our tonnage and our market share. There's not much else. Matt, do you want to comment more on that?

The result of a few factors, I would say, one, good and effective commercial strategy in market in both discount and conventional. Both formats are performing well in each market. Secondly, there's a bit of Christmas shift in that as well in terms of the tonnage. There are two days of large basket sales from Q1 to Q2, so that had a little bit of an impact. But overall, effective commercial strategy in both markets, so we're satisfied with those results.

Okay, and to what degree is the greater capacity, the increased freshness in your supply chain, like greater capacity in your DCs, your increased freshness, I guess your increase in stock positions, how much do you think that might be helping?

It's difficult to evaluate, Michael, but for sure our new Fresh Capacity in both provinces are helping our in-stock position and service to stores, but I couldn't evaluate exactly how much. Great. Thank you very much.

Your next question comes from Mark Carden with UBS. Your line is now open.

Good morning. Thanks so much for taking the questions, and best of luck, Francois. To start, you talked about customers gravitating towards Canadian-made products. Do you believe that you're seeing much of a lift from shoppers also moving any of their shopping away from American-owned retailers as well? Or is it mainly just a shift in what they buy?

What we're seeing is a shift in what they buy. We put a lot of signage through our stores on the shelf, on displays, to help customers make decisions on what products they want to buy. So yes, Quebec's local products, Ontario local products, Canadian products in general are selling well and better than the rest of the stores. We're not going to make a comment on are we attracting from other stores, U.S.-based stores. We're pleased, like I said earlier, with our market share, which is sustained over the long term and slight gains, and that's okay. But can we pinpoint to an increase in traffic because of U.S. stores? I don't think we can say that.

Got it. That's helpful. And then as a follow-up, are you guys seeing competitors largely marketing products as being tariffed to date? Are many passing these through? And then are you seeing any more flexibility from suppliers in trying to absorb any of the costs?

I'm not sure I got the first part of your question, but the counter-tariffs where the Canadian government is imposing tariffs on U.S. product coming in here, it's on the limited number of food products products and HABA products. So the effect is limited so far. And yes, some U.S. vendors have been working with us to mitigate that and help us to maintain their volume. So it's been a little over a month of these counter tariffs. It has not had really an impact on retail inflation so far. And vendors have been working with us. That said, we're working with alternative suppliers when we can to satisfy the needs of customers who want to buy non-U.S.

Great. Thanks so much. Good luck, guys.

Thank you.

Your next question comes from Mark Petrie with CIBC. Your line is now open.

Yeah, thanks. Good morning, and congratulations, Francois, and certainly wish you all the best in future endeavors. It's been a pleasure dealing with you and working with you. Thank you, Mark. I just wanted to ask about on the tariffs and sort of the impact on consumer behavior. and uncertainty. If you've seen that manifest in the Jean Coutu business at all, and thinking maybe a front store and some of the higher price point products, I know you don't go into prestige beauty, but curious how the beauty category specifically has performed.

Yeah, thank you. Our beauty category continues to perform very well. It continues to be one of the drivers of growth in our pharmacy division. Right now, we're very similar to food. A very limited number of SKUs have been affected by the tariffs. So we're not seeing much change due to the tariffs, but customers continue to look for value. Promotional mix continues to be strong. So it's very reflective of what we're also seeing in the food sector.

Okay, thanks for that. And Eric, I just wanted to follow up on one of your comments with regards to The relative performance of full service versus discount, I know discount continues to grow faster than full service. I think you said the gap has remained steady. I'm curious if that holds sort of in Q3 to date or if you've seen that waver at all as some of the tariff commentary has ramped up.

It's still pretty consistent. I said that the same store sales within our shop between conventional and discount is remaining stable. There's more growth in discount. That continues. Like I said, it's volatile. It's fluid. We'll see how customer sentiment and behavior evolves week by week. But so far in the third quarter, it's been pretty consistent.

Okay. And then I guess just the last one sort of related to that. Any change in how you've seen sales? consumers engage with the loyalty program or any shifts on your part with regards to how you want to present that to consumers in this kind of environment?

Well, loyalty is a way to deliver value to consumer and to allow them to save. So it's one of the lever of our commercial strategy. As you all know, we launched In Ontario, in Q1, the program, the sign-up to the program were positive with good momentum, and we're going to continue to focus on engaging customers and bring them value. So loyalty in both provinces is a lever of value and is part of our commercial strategy and will continue to be and is important in the current context where consumers are looking for value.

Yeah, understood. Okay, thanks. All the best, guys. Thank you.

Your next question comes from Irene Natel with RBC. Your line is now open.

Thanks, and good morning, everyone. I want to add my congratulations to Francois. I've been there for each of those 52 calls and enjoyed every single one, so thank you. That's right.

Thank you, Irene.

yeah so um just focusing for a second on the pjc side um first of all on front of store you talked about haba you talked about otc beauty um can you talk to sort of like rank rank order those because it was a really really nice print and wondering about the uh the q3 momentum to date so so rank order in terms of uh in in terms of uh

Velocity, so yeah, OTC continues to be the main driver of growth in our business, especially heading into a good cough and cold season. It was delayed, but once it started, it was a good one, and that really helped drive sales. Then after that, it's our beauty categories that continue to show really strong growth. The customers are responding well to our commercial programs. And then after that, it's what's unique about Jean Couture, our sundry and general merchandise category. overall continues to perform well. So that's how I would articulate it in rank order.

That's great. Thank you. And on the RX side, are you seeing a stabilization of the specialty or the growth in specialty? Has it started to kind of plateau? Are we still seeing that very sharp growth trajectory?

We're seeing sustained growth trajectories. So, as you could tell, our numbers are consistently growing. And when we kind of peel away some of the layers, it's really the same drivers, proportionally the same too. So, specialty, pharmacy services, and then some organic growth too. We're seeing our number of patients continue to increase period after period.

That's very helpful. And just one final little question. Somebody in the opening remarks mentioned something about pharmacy automation or automation at TJC. Just wondering what that is and, you know, where you kind of are with the state of play in terms of the DCs, perhaps any automation or centralized fill.

Thank you. Yep. Yep. So that automation was – it's continued investment in our automation program. As you know, Varenne is – very sophisticated semi-automated warehouse, and we're continuing to make investments to get the best out of our automation system. So we made some investments in our order storage and retrieval system over the past year, and we've commissioned a lot of that technology in Q2.

That's great. Thank you. Your next question comes from John Zamporo with Scotiabank. Your line is now open.

Thank you, good morning, and congrats again to you, Francois, and best wishes to you. Thank you. I wanted to ask about same-store sales through the quarter and acknowledging the holiday period shift. Did you see any meaningful change month to month?

Well, this was a meaningful shift, and we gave you on both food and pharma the reported number, 5.3, on food, 3.9. adjusted for that two days. It's a significant shift for only two days. The rest of the quarter is following that shift and it's back to normal and it's been pretty consistent since.

I know you don't want to get too far into the future on inflation expectations, but is it fair to say all else equal and normalizing for the tax holiday, you'd expect a near-term acceleration, whether it's meaningful or modest, you'd expect a near-term acceleration in food inflation given a higher U.S. dollar and the counter-tariff.

Well, that's what we experienced from Q1 to Q2. Inflation in our basket did increase. We said if we adjust for that tax holiday, our inflation number in Q2 is a bit below CPI. But it's higher than Q1. And so that was caused by the FX exchange rate. That was caused also by commodity prices. Some of them are quite high, nothing to do with tariffs. So that's happened and continues to happen. So we hope it will continue to stay around the current levels. And then we'll see going forward. Counter-tariffs are not good for inflation on the food side. We have to manage through it. We're managing as best we can to find sources of supply to protect our costs and protect our retails to minimize inflation, but it puts some inflationary pressures. So managing that really closely to deliver value to customers because it's key to satisfying customers today for sure. I hope that answers it.

It does. Thank you very much.

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Chris Lee with Desjardins. Your line is now open.

Good morning, and thanks, everyone. And let me also please add my congratulations to you, Francois. Best wishes. Congrats on a fabulous career. Thank you, Chris. I wanted to ask about first maybe a favorite topic on SG&E Expenses. I'm wondering, you know, if you were to exclude the higher energy costs in Ontario, which I take to be more transitory because it was a winter, cold winter, what would the SG&A rate have been? Would it have been notably improved more than what you reported?

Yeah, so the combination of these two, I mean, we have pressure from several lines, as I said, but these two stand out and We're not making excuses. We're just giving you facts of what we had to manage. But these two items combined, the energy cost and the partnership fees, this is more than a 20% year-over-year increase. So they're big increases. If you had removed them, then, yes, we would have shown a better, as you know, percentage of sales and a better year-over-year increase. But that's what we had to deal with, and that's how the numbers came out. Okay, that's helpful.

And I think you mentioned last quarter that the Q2 of last year was sort of the peak in terms of the duplication.

Yeah, Q2 and Q3 were sort of the peak quarters in terms of duplication costs and transition. So if nothing else had changed, yeah, the SG&A would have been better than what we reported today for sure. We no longer have these costs. But as I said, we've had pressures from other lines. And overall, I'm pleased that we were able to end with an SGA level that still is lower as a percentage of sales than last year. But you will have a similar situation in Q3 as well that we're comping. Okay.

Thanks for that. And maybe just a couple of questions for Jean-Michel. Do you have any sort of update on Bill 67 when the government passes approval?

Yep. So Bill 67 was – we were expecting it – Sometime this spring, there's been some delays as they work through the regulations and finalizing the scope. So we're expecting the regulations to pass sometime in June. Now that said, the AQPP is still negotiating pharmacist compensation. So right now, the way we look at it is we think sometime in probably Q1, late Q4 or early Q1, that we'll start getting the benefits, the full benefits of Bill 67. That's kind of our outlook on that portion of the business right now.

Okay, that's great. And my last question, just on specialty drugs, you know, just because Ozempic is such a big seller in Canada, just want to get your thoughts as it becomes generic next year. I think the gross profit dollars on generic drugs are generally higher than branded. I'm just wondering what type of impact do you think that would have on Is it going to be notable or not really? Just maybe high-level comments on that would be great. Thank you.

Yeah. First of all, the genericization of ZAMPIC remains still to be seen. Obviously, NOVA Nord isn't going to fight it, so it's tough to call when it's going to happen. We know it's going to happen eventually, but your guess is as good as mine. We're not going to disclose yet what the impact of it's going to be on our financials. But yes, obviously, there will be every time there's generalization, there is deflation in our top line sales. So we will calculate it based on when the timing comes.

But it will be good for your profit line, right? It should be accretive, even though it's deflation in the top line.

Yeah, generics usually. Usually it hurts the top line, but it's good for margin.

OK, great. Yeah, thanks and all the best everyone. Thank you, Chris.

Your next question comes from Michael Van Elst with TD Cowan. Your line is now open.

Thank you. Can you just clarify or provide more color on how those counter tariffs are being adjusted for or passed through? You did mention that you're getting some support from your vendors. But maybe break down to the degree you can roughly how much is being absorbed by vendors versus absorbed by Metro versus being passed through to higher prices.

Michael, it's Mark here. It's case by case and it's a very fluid environment. So it would be very difficult to break that down. Our teams, our sourcing team, are looking for alternatives. So in some instances, we're sourcing elsewhere from the U.S. Some of the vendors have fields in other countries than the U.S. So they are shipping from those other countries instead of the U.S. So product by product, case by case, it's a very fluid situation. But overall, we've been able to, the impact on price, and as Eric said, the impact on inflation, we haven't seen any impact in Q1. And Q2, sorry.

And is Metro being pushed to absorb some of it as a result?

And it changes every day, as we know, when we read the papers. So, you know, people are trying to wait and see before making big changes. So, yes, we've received some cost increases related to counter-tariffs. We asked for six weeks' notice from those suppliers. So in mid-April, starting now, some small cost increases related to tariffs can start to be reflected. But we've been working with our vendors to justify, to provide government codes. So whatever is subject to a counter tariff, we try to measure as best we can to minimize the cost increase for us and the retail price for the customer. But we're working with them, and some of them want to protect their volumes. Like Max said, they source the product from different countries, some of those large berry vendors. If you think of Driscoll, they have fields in Mexico, and some of the berries that we're selling these days are coming a lot more from Mexico than the U.S. So it's one way to protect costs here. So like I said, it's a fluid situation. It changes every day. We're monitoring closely, and we're trying to minimize as much as we can the impact. All right. Thank you.

Your next question comes from Tammy Chen with BMO Capital Markets. Your line is now open.

Hi. Thanks for squeezing me in here. Just a quick follow-up question on online grocery. Very good growth this quarter. I see you've mentioned the drivers. Can you just talk about right now, is grocery e-commerce as a channel for you? I mean, is it earnings diluted for you? I assume it is because of the fees. And just generally, how do you think about this segment as for several quarters now, I believe you've reported very good yield over your growth. Like, are you seeing this is starting to gain some more and more momentum? And Do you think at some point in the near future you may need to invest in some more infrastructure or supply chain of your own to continue to service this? Thank you.

So in answering your first question, the first part of your question, it is earning – so the overall business is profitable, so the bottom line, but it is dilutive as a percentage of margin. Right. We're looking at e-commerce also as a loyalty play. Our consumers, our customers that are shopping e-commerce are also shopping our stores. So for us, it's important as we continue to serve and meet the needs of our customers and our flexible delivery platform through third parties, express delivery, click and collect allows us to meet the customer demand. Growth over the last quarter has been stable. It's continuing to grow, and we want to meet the customer where they are and where their needs are. And currently, our current delivery platform through third-party and our own platform is allowing us to continue to grow. When time will come to reflect on investment, we will, but for now, we have the capacity to continue to serve those customers.

Thank you. There are no further questions at this time. I will now turn the call over to Estelle for closing remarks.

Thank you for your interest in Metro and please mark your calendars for third quarter results on August 13. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating in ASAE. Please disconnect your lines.