Metro Inc.

Good morning, ladies and gentlemen, and welcome to the Metro Inc. 2025 Third Quarter Results Conference call. At this time, note that all participant lines are in the listen-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. Also note that this call is being recorded on Wednesday, August 13, 2025. And I would like to turn the conference over to Sharon Kadosh, Director, Investor Relations and Corporate Finance. Please go ahead.

Merci, Sylvie. Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our third quarter, which ended on July 5th. With me today is Mr. Eric Lafleche, President and CEO, Nicolas Amillot, Executive VP and CFO, Marc Giroud, Chief Operating Officer, and Jean-Michel Coutu, President of the Pharmacy Division. During the call, we will present our third quarter results and comment on its highlights. We'll 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 incentives 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 Nicolas.

Okay, thank you Sharon, and good morning everyone. I will now go over our Q3 results. Total sales reached $6.9 billion, an increase of 3.3% versus the third quarter last year. Food same-store sales grew by 1.9% in the quarter, while pharmacy same-store sales grew by 5.5%, supported by a 6.2% growth in prescription sales and a 4% growth in front-end sales. Our gross margin stood at 19.8% of sales versus 19.6% in the same quarter last year. The year-over-year increase is partly attributable to productivity gains in our food distribution centers as well as shrink improvement in food retail activities. Operating expenses were $702 million, representing 10.2% of sales, a similar level to our third quarter last year. We benefited from the fact that we cycled transition duplicate costs last year related to our Terrebonne Automated Distribution Center, but these benefits were offset by inflationary pressures, operational expenses related to our fresh phase to DC and Toronto, as well as an increase in fees related to the growth of our online partnership sales. eBuildUp for the quarter totaled $656 million, up 5.7% year-over-year, while EBITDA, as a percentage of sales, stood at 9.5% this quarter, an increase of 20 basis points over Q3 2024. Total depreciation and amortization expense for the quarter was $185 million, up $11 million. The increase in depreciation and amortization expense is mainly driven by retail investments as well as by the commissioning of investments in our supply chain, including the final phase of our fresh distribution center in Toronto last summer and some automation technology in the pharmacy division. Net financial costs for the third quarter were $45 million compared to $47 million last year. The decrease is mainly attributable to a lower interest expense on net debt, partly offset by lower capitalized interest. Our effective tax rate of 24.1%, is lower than the effective tax rate of 25.9% in the third quarter last year, largely driven by the Terrebonne tax holiday consistent with what we have reported in our first two quarters this year. Adjusted net earnings were $332 million compared to $305 million last year, an increase of 8.8%, while adjusted net earnings per share amounted to $1.52, versus $1.35 last year, and that's up 12.6% year-over-year. Our capital expenditures for the third quarter totaled $146 million, down $41 million versus last year. As expected, the lower capex level is mainly the result of the completion of our automated distribution centers. On the food retail side, after 40 weeks, we opened eight new stores including three conversions, and carried out major expansions and renovations at 12 stores for a net increase of 194,000 square feet, or 0.9% of our food retail network square footage. Under our normal course issuer bid program, as of August 1st, we have repurchased 5.7 million shares for a total consideration of 562 million, representing an average share price of $98.55. To conclude, we have delivered solid Q3 results, and I will now turn it over to Eric for more color on our performance. Thank you.

Thank you, Nicolas, and good morning, everyone. We are pleased with our results in the third quarter as our teams continue to deliver on our customer promises, in particular good value with competitive everyday prices, effective promotional strategies, our full range of private label products, and our loyalty program. For the quarter, total sales grew by 3.3%, EBITDA by 5.7%, and adjusted EPS by 12.6%. Starting with food, same-store sales were up 1.9% and 4.4% over two years. Discount continues to drive same-store sales growth faster than Metro, with the gap between both remaining stable. Our internal food basket inflation was in line with the reported food CPI of 3.1%. We continue to see inflationary pressures on certain commodity prices, namely in the meat category. The introduced tariffs and counter tariffs are also a contributing factor to food inflation as we continue to receive price increase requests from our vendor partners. Teams continue to negotiate to minimize the impact on consumers and for now, the effect remains manageable. During the quarter, transaction count was slightly down but offset by an increase in the average basket. Promotional penetration remains at elevated levels and private label sales continue to outperform national brands. The competitive environment intensified somewhat in the quarter and we held our own in terms of market share and tonnage. The Buy Canada movement is also persisting with sales of Canadian products outpacing total sales. albeit at a slower pace. Online sales grew by 14% for the quarter. Growth is being driven by the ramp up of click and collect services, and also the launch of home delivery at Super C and Food Basics, as well as third-party marketplaces. Also, we announced in mid-July the expansion of third-party delivery services to include DoorDash in Quebec and Ontario. This is in addition to Instacart and Uber, with whom we've been operating for a few years now. Turning to pharmacy, the business sustained its positive momentum and delivered another strong quarter with comp sales of 5.5% for a two-year stack of 11%. Prescription sales were up 6.2%, driven by continued organic growth, specialty medications, GLP-1s, and clinical services. Commercial sales were up 4%. The strong performance was driven by growth in OTC, HABA, and cosmetics. As Nicola mentioned, we are on track with our plan to accelerate the development of our growing discount banners as we successfully open five new stores in the quarter. In our fourth quarter, we plan on opening another six stores, including two conversions, bringing the total to 14 in fiscal 2025. A new Adonis store will open in London tomorrow, our fifth Adonis in Ontario. As we begin our fourth quarter, we continue to see similar market trends and our teams continue to focus on delivering the best value possible to our customers in this uncertain economic environment. Finally, we are confident that our sustained investments in our retail networks and supply chain combined with strong execution will continue to fuel our growth and create long-term shareholder value. Thank you, and we'll now be happy to take your questions.

Thank you. Ladies and gentlemen, if you do have any questions at this time, please press star followed by 1 on your touch-tone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by 2. And if you're using a speakerphone, please lift the handset first before pressing any keys. Please go ahead and press star 1 now if you do have any questions. And your first question will be from Mark Carden at UBS. Please go ahead, Mark.

Good morning, and thanks for taking our questions. So strong performance, but a notable step down from last quarter. I was wondering if you could detail your comp performance within the quarter, how that trended, and then any early read on how 4Q is looking. Thanks.

Well, I think we had a strong quarter and I don't agree that we've had a notable step down, certainly not in our sales top line and bottom line and EPS growth. And we're pleased with our performance. If you're referring to the slightly lower same store sales growth on the food side, I think you have to look at it over two years. I think comp sales are a function of what you're comping. We've had steady and strong comps for many, many quarters. We had good comps this quarter. Yes, it was a bit softer than the previous quarter, but if you look at it on a three-year basis, we're pleased with our performance.

Great. And just as a follow-up, I'm curious what your view is on the consumer. Has anything changed in their shopping habits over the last quarter? Any more trade down happening within categories?

I wouldn't say there's more trading down. The search for value has been ongoing for over a couple of years now or more. So it's the same trends. I referred to it in my opening comments. People are searching for value. Promotional levels are high. Private label sales are high. So we're seeing pretty much the same picture on the consumer side. Some meat prices have, you know, there's a strong inflation in the meat category. So we're seeing some adjustments. We called it maybe some trading down or higher promotional penetration in the meat category because our costs have gone up substantially on the meat side and some retail prices are reflecting that. That's what I would say.

Great. Thanks so much.

Next question will be from Tammy Chen at BMO Capital Markets. Please go ahead, Tammy.

Hi. Good morning. Thanks for the question. Eric, could you elaborate a bit more on your comment that you saw the competitive environment intensify somewhat in the quarter? Is this both your region provinces in the country? Is it coming from a certain few competitors or pretty broad? And I assume you're talking about like not just promo penetration, but specifically like promotional intensity. And is this a fairly meaningful step up in that?

I don't want to spook anybody. We are operating in a competitive environment. It's always competitive. We noticed a bit of an uptick in promotional activity, openings of new stores, conversions. So there's been quite a bit of activity in the market out there in Q3. So that intensifies competition. So I think it's normal or it's expected, I should say. We operate in a competitive environment. I think prices are rational, but it did intensify a bit in Q3. That's what I'd like to say. Is that clear, Tammy? I don't know if that answers your question. We're not identifying anybody. It's just that, at large, we noticed an uptick in the competitive intensity, promotional pricing, due to market conditions. So it was... it intensified somewhat a little bit in Q3.

Yeah, I see what you mean. And are you able to talk a bit about your conventional banner? So I noticed you said your discount is still driving the comp. How's your conventional banners doing in your two regions? I think in Quebec you picked up some shares. I'm curious how it's doing in Ontario because I think there are some competitors that have been fairly aggressive rolling out this new discount square footage, particularly in Ontario. Thank you.

So we're pleased with our conventional stores, our metro stores in both provinces. They're holding their own really well versus their conventional peers, as measured by Nielsen GDM Conventional. We're pleased with our performance in both markets. So we're holding our own. Clearly, there's been more growth in discounts than in conventional over the past few years. That is continuing. albeit at a slower pace, but it's still continuing. So overall, I'm not saying our conventional stores are gaining market share, but relative to the competitive set of conventional stores, we're holding our own and pleased with our performance.

Okay, thank you. That's it for me.

Thank you. Next question will be from Irene Mattel at RBC Capital Markets. Please go ahead, Irene.

Thanks, and good morning, everyone. Just switching gears a little bit, you noted, Eric, in your commentary that you're getting more price increase requests from vendors that are tariff-related. Can you just talk a little bit about that, what the magnitude of the price increases are, efforts to offset and the like? Thank you.

Yeah. So the number of price requests is similar. It's We're still in the normal environment, but those related to tariffs, they represent about 20% of the increases demands that we're receiving from vendors. There's about 3,000 SKUs right now that are affected by tariffs that we've received increases and accepted increases related to tariffs. So we negotiate hard and it has to be with the code number and it has to be proven and all of that. So we're talking about, you know, High single digits or percentage are the asks. We don't necessarily finish there, but we negotiate as best we can to minimize the impact on our consumers in this environment where everybody's searching for value and everybody's more price sensitive. So we're working hard with our vendors to minimize that impact. The counter-tariff started in March. Some suppliers waited to impose cost increases on us, but some of those have now started to flow in. On the HABA side, one large U.S. CPG company, we started to see some price increases that we've had to take in this month in August. So we're seeing some of that. But like I said in my opening statement, it's manageable. We're still in line with CPI. CPI is around 3%. We'd like it to be 2%, but we're at 3% these days.

Thanks, Eric. And in those categories where you are seeing the price increases, are you seeing an acceleration in, let's say, you know, trade down to private label to the extent that it exists in those categories and increased penetration? Are you seeing consumers just kind of say, yeah, we're just going to switch out of these products if possible?

I don't have a specific example for you, but I think those increases contribute to the rise or the growth in sales for private label. It's a contributing factor, not the only one, but it certainly helps. The tariffs or the price increases related to tariffs that I just referred to have just, on the HABA side, are very recent, so I can't really point to a change in consumer behavior there. On the food side, what we've seen since March, those products that have been affected, like we said before, we search for other suppliers in other countries just to minimize prices and maintain quality. So the consumer, you know, we've been able to navigate and to provide value to our customers despite these tariffs. That's why I say it's been manageable. So hopefully it will stay that way.

That's great. Thanks, Eric.

Thanks.

Next question will be from Michael Van Elst at TD Cowan. Please go ahead, Michael.

Yes, thank you. Just to start off, can I clarify on the same-store sales growth? When you're talking about two-year stock, are you looking at it that way because you benefited in May of last year when there was a boycott on a competitor and therefore had a bigger boost last year and you're cycling that now? And if so, did you see your same-shore sales growth re-accelerate in June after you cycled the May boycott?

Well, this quote-unquote boycott may have helped us a little bit last year, so we had to count that. That's one of the reasons I referred to the two-year number to give you a better picture. We're not going to give you details on our sales. We don't give guidance on our sales in June, July, or whatever. The quarter ended July, early July. So, you know, it's all pretty much behind us now. Yeah.

Okay. All right. And then on the distribution centers that have opened, Can you provide some colors to how they perform during Q3 in terms of pick efficiencies and service to the stores and how that is different heading into Q4?

Well, our food DCs in Tavbon and Toronto Fresh Phase 2, we're very pleased with our performance. If I look at cost per case, productivity numbers, we're very pleased with the performance. It did contribute to our gross margin improvement of 20 basis points, those productivity gains. So we're pleased with the performance. We're on track, pretty much on track with our – or ahead of our plan related to our DC performance. So that performance of Q3 is continuing into Q4. So I'm not really concerned by that. It's hard work, but ramping up well. I don't know if that answers your question.

Because your outlook statement changed a bit. So you talked about productivity, initiatives, or efficiencies, and then you talked about service to the stores. And it seems like you took out the part of this quarter where you're saying you're looking to improve service to the stores. So I was wondering.

We took it out because the transition is over and our service to our stores is very good. So we're not concerned by that. it's done. So we're focused on productivity, efficiency gains. The service to the stores is satisfactory, and we're pleased with that performance. So we're always focused on service to our stores, but it's not a specific focus going forward.

And I know there's no kind of finish line, but how much longer do you expect it to be before you get a run rate of efficiencies in the DC that is in line with business plan or at least in line with what you now expect?

Well, I think we're there now. We're in line with our business plans. Both freezers in Quebec and Ontario were ahead of plan and very pleased with the performance of productivity. The automated fresh in Toronto is a bit more of a challenge. The supply chain has to adjust. The packaging from our vendors has to adjust to be automatable. So we'd like a higher percentage of cases to go through the automation system. We're close to where we want to be, but we're not there yet. So there's room to improve on the fresh side. It may take a little more time. As I said, the supply chain adjusts. The rest, fresh meat, frozen meat. In both provinces, Delhi, Derry, we're very pleased with our performance.

Great. Thank you very much.

Thank you. Next question will be from Ian Liu at Scotiabank. Please go ahead, Ian.

Thank you, and good morning. I wanted to ask about GLP-1s, in particular, Asantec and Rigobi. Can you talk about the state of produce product business and how you expect the expiry of those weight loss drugs patent is expected to impact your generic business, and how these transitions have played out historically.

I'll let Jean-Michel take this one.

Yeah, so can you hear me?

Yeah. Can you hear him well, yeah?

Yeah, so it's, so right now it's, Maybe just to clarify one thing, the only patent that's being challenged is for Ozempic. WigoV, which is the one that actually has the indication for weight loss, is not going to be challenged in terms of its patent since it's fairly new in Canada. It's too early to tell how it's going to happen with Health Canada in terms of approval. We know that there are some companies that have submitted to have those patents broken. Obviously, if that's the case, we're going to work with our vendor community and our partners to try to get a product equivalent as we always do with every generic molecule that has sufficient volume. Usually the way it works is when a molecule becomes generic, the networks convert as quickly as, the pharmacists convert as quickly as they can because it is margin accretive for them within their stores. And when we talk about margin here, it's really professional allowances, which they have to reinvest in their stores according to the law in Quebec. So it is margin, but it's margin that needs to be guided towards certain expenses within their stores. So I hope that answers a little bit of your question.

Yeah, that's helpful. Thank you.

Just a compliment on that. For the company here as a distributor, we – If those drugs become generic, we will make a generic fee, a distribution fee on the generic lower price. So there could be a dilutive impact here for that. But volume usually picks up the slack.

Yeah. Thank you. And then I guess just another follow-up. I wanted to double-click on the performance between your two provinces. I'm wondering in particular about the exposure to certain Ontario markets that are perhaps more impacted by the tariff environment. Have you noticed any consumer behavior changes there?

Not that we can point out more specifically what we're describing as the consumer environment, competitive environment concerns both of our markets.

Thank you.

Thank you. Next question will be from Mark Patri at CIBC. Please go ahead, Mark.

Yeah, thanks. Good morning. I wanted to just ask about the SG&A rate. Maybe if you can give some more specifics about sort of the puts and takes there. And then, Eric, you've commented about fresh phase two, but hoping you could give some sense of when you would expect that that facility to turn to a tailwind when it comes to SG&A? Thank you.

Okay, so good morning, Mark. Maybe I start with SG&A. As I've mentioned, SG&A was at 10.2% of sales this quarter, similar to last quarter. I mentioned we cycled out transition costs, so obviously that was a tailwind for us. However, there's overall inflation in pretty much all the categories of expenses that flow into SG&A. And we're happy with the cost control performance we've had, but we have seen SG&A inflation pressures there for sure. Also, the commissioning of our distribution center, Fresh Phase 2 in Toronto last summer, is now driving recurring expenses that are now in SG&A and that are going to be incorporated going forward. And finally, I would say, as I mentioned, that the ongoing growth of the e-commerce business is driving fees to our partners in SG&A. And I guess nothing abnormal, but consistent with the growth in e-commerce sales. So overall, I would say happy with the performance on SG&A.

And more specific to the Fresh Phase 2, you know, like I said, we're on plan. We're on track with the ramp-up that we expected. I said automation, if we could automate even, if we can put through more products through the automation machine, it would be even better. Again, that takes time because it's a supply chain, it's a vendor adjustment. So it's generally a tailwind. We're pleased with the performance. We're reaching our objectives, and there's going to be room for more as the industry adjusts. So I don't know how I give you a clearer answer.

Okay, fair enough. With specific to the online growth, is it fair to say that a lot of that is the growth is being driven by sort of short time frame delivery, third party orders? And I guess, you know, what's your latest thinking about your infrastructure and processes? I know that's been sort of a source of sort of, you know, constant review, but Any view to any alterations in that over the next 12 to 18 months?

Good morning, Mark. It's Mark here. As you know, we've gone to market with a multi-service model, meaning that we leverage third-party, we leverage click and collect in our own infrastructure, and we do our own delivery. And to your first question, the growth on our own delivery has been at the same level as third parties. So consumers, there's a mix of need in the market. Consumers are looking for quick delivery, but also planned delivery and click and collect. And all of these services have been growing at a steady rate. And as we look at the future of our platform, we will continue to go to market with multiple types of investment or platform through third party marketplaces, Click and Collect and our own delivery. And as you noticed in our comments, we just signed a new partnership with DoorDash, giving us a new channel to market through the DoorDash marketplace. So we're continuing in the same line as our strategy of the last few years.

Okay, thanks for that. And one last one. As you look within Q3 and then in Q4 to date, and you think about the bi-Canadian trend, would you say that that trend is stable, accelerating, or decelerating?

It's decelerating somewhat. Consumers are still buying more Canadian, so we're seeing more growth on Canadian product than non-Canadian product, but it has decelerated slightly.

Okay. Thanks for that, all of us. Thanks.

Once again, ladies and gentlemen, if you do have any questions, please press star followed by one on your telephone keypad. And your next question will be from Vishal Sridhar at National Bank. Please go ahead, Vishal.

Hi, this is Anshul in for Vishal Sridhar. I wanted to follow up on your duplicate cost related to the new DC. On your last conference call, I would say that you lapped the duplicate cost in Q2 and Q3 last year. And is it fair to expect SG&L leverage going forward, notwithstanding heightened third-party partnerships?

So I would say that, so as you've mentioned, we lapped duplicate costs in the third quarter, this quarter, Q2 last year. Going forward, we would not have that lapse. So I think SG&E, we're always looking to create leverage and, you know, grew SG&E at a lower pace than revenue growth. So I think I would, yeah, expect modest leverage in the coming quarters for SG&E.

Thank you.

Thank you. And at this time, it appears we have no other questions registered. So I will turn the call back over to Sharon Kadosh.

Thank you all for your interest in Metro and please mark your calendars for our Q4 results on November 19th. Thank you.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your line. Have a good day.