Q4 2019 Earnings Call
94 quarter results conference call at this time, all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
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In Canada, Senior advisor Investor Relations and risk at much right. Please go ahead.
Good morning, everyone. Thanks for joining us today, our comments will focus on the financial results fourth quarter, which ended September 20 to 29.
With me today Mr. every clip.
<unk> Chief Executive Officer.
Executive VP and Chief Financial Officer.
The call represent our fourth quarter results and comment on entirely.
Good question.
Before we begin I'd like I'd like to remind you that we will use a pretty discussion difference.
That could be construed as forward looking information in general.
What does not constitute a historical fact, maybe deemed forward looking statement expressions, such as expected and are confident that well and other similar expressions are generally we indicated a forward looking statements.
Forward looking statements are based upon certain assumptions regarding the comedians pharmaceutical industry, the general economy, and our annual budget as well as over 28.
Actions.
These forward looking statements do not provide any guarantees after the future performance of the company and are subject to potential risks known and unknown I loved insurgent that could cause the outcome to differ materially.
A description of these rules, which could have an impact on these goodman couldn't under the risk management function or that were 20 <unk> annual report.
Friedman to be reasonable and Britain and at this time and represent our execution. The company's is not intended to be any forward looking information, except as required by applicable.
Welcome to <unk>.
Thank you Shawn and good morning, everyone.
Before we begin I would like to remind you that the acquisition, which closed in may of 2018, and the fourth quarter last year included the full contribution of an officer.
The fourth quarter. There result that we're reporting today are there for comparable year over year.
Turning to our results total sales reached 3.9 billion versus 3.7 billion last year, an increase of 3.2% in.
In the quarter, we book 18 million in cost synergies related to the jokester acquisition.
Our lives run rate synergies now stands at 65 million.
Gross margins.
Stood at 20.2% of sales in the fourth quarter compared to 19.7% for the same period last year.
Operating expenses as a percentage of sales came in at 11.9%.
Versus 12.6% last year or 11.7% after excluding 31 point Fourmillion expenses recorded for the pharmacy that weren't closure and restructuring.
Increase in operating expenses is primarily due to transportation costs and expenses related to e-commerce .
Adjusted EBITDA stood at 321.6 million up 23.7 million or 8% and represented 8.2% of cells versus 8% to the same quarter last year.
Income tax expense for the quarter was 62.3 million, representing an effective tax rate of 27.1% versus 24.9% in the prior year.
Reduced tax rate in the fourth quarter of 2018 as relays itself or the remaining shares about north or so of course, though.
Adjusted net earnings were understating 4 million compared to 161 million last year up 8.1%.
Adjusted net earnings per share were 68 cents versus six to three last year and that's an increase of 7.9%.
Our capital expenditures for the fourth quarter total 152 million bring it to bring a total capex for the year to about 400 million.
We have outlined a higher capex, but as we stayed in a previous call delays in getting city approvals and permits for the Ontario warehouse modernization project push some investments to fiscal 2020.
We expect total capex for fiscal 2020 to stand at about 550 million.
In September the board of directors approved the dividend of 20 cents a share that's the same amount as in the previous three quarters, which represents a year over year increase of 11.1%.
Under the normal course issuer bid program, we have repurchased a little under a 2.2 million shares for total consideration of 159.7 million and representing an average share price a $50 in 31 cents.
We remain committed in returning excess cash flows to our shareholders and as such we have renewed or normal course issuer bid program, giving us authority to repurchase up to 7 million shares between November 20 to 25 2019 and November 24 2020.
Finally, we will be applying the new accounting standard for a 16 in fiscal 2020, which effectively abolishes. The current distinction between finance leases and operating leases.
Such most leases will be recognized on the balance sheet meeting that as alessi Metro will recognize assets and liabilities with respect to operating leases for property vehicles and equipment.
Depreciation expense on these new assets and interest expense on these new liabilities will replace rental expense.
As stated in our press release of this morning, we expect an increase in liabilities in a range of 2.1 to 2.3 billion an increase in assets in the range of 1.9 to 2.1 billion. The net difference recorded in retained earnings.
We will be hosting a conference call within a couple of weeks to go through the provisions of opt for a 16 in more detail.
That's for me I will now turn it over to Eric.
Thank you Haswell and good morning, everyone.
We're very pleased with our fourth quarter results to close and outstanding fiscal 2019.
We achieved strong comparable sales in food and pharmacy into four while delivering solid margins and improved customer metrics.
Food same store sales were up 4.1% on top of 2.1% in the same quarter last year for a two year stack of 6.2%.
Performance was strong across our banners as we saw increased customer count basket size and tonnage.
Our internal food basket was a 2.8% slight increase versus the 2.5% reported in the previous two quarters.
However, we're experiencing lower food inflation success since October as produce prices have stabilized.
Pharmacy same store sales prescription sales and front store sales all grew by 3.4%.
By strong growth and Otcs Abba and seasonal products.
The integration with junkets through is progressing well.
That's where I mentioned, we realized 18 million and cost synergies in the quarter and 65 million on an annualized basis.
Working hand in the back end warehouse to increase automated capacity is ongoing and there's awkward suit retail systems are being deployed in the between that pharmacies.
The next step is the renewal of the backend collective bargaining agreement, which expires in December .
As previously mentioned, we expect to capture the remaining synergies starting in the latter part of this fiscal year.
So I think we can say that our first full year with the short answer group was successful and that we're on track to meet our 75 million synergy targets after three years.
Our warehouse modernization project in Toronto is underway.
We received the permits to build the first phase of our semi automated fresh this distribution center in August .
Happy to report that the steel structure is up we expect to start operations at the end of next summer.
On the E Commerce side sales in Quebec are growing at a good pace and our model is delivering a good customer experience.
And the GT demand is ramping up faster out of the gate than it did in Quebec.
That said, we have the required capacity and the team is working hard to learn the processes and become more efficient.
Online sales still represents a very small proportion of our food sales and our model allows us to remain agile and add capacity as needed with more stores.
We continue to invest in our food retail network during fiscal 19 with eight new food stores, including two relocations as well as two conversions and 20 Remodels nine stores were closed such that our total net square footage remained flat.
In the pipeline for fiscal 2020, we're budgeting 10, new stores, including three relocations.
Plus two conversions and 27 renovation projects.
Investments in technology at retailers on plan more than 100 stores now have self checkout and we're planning on adding another 100 stores this fiscal year.
Also we now have 37 stores equipped with electronic shelf labels and we're targeting a total of close to 100 by year end.
To conclude I want to thank all members of the Metro team for their contribution to our solid performance.
Despite a highly competitive environment. We are confident that we can can you continue to grow by staying focused on our customers investing in our store network infrastructure and executing well on our business plan.
That concludes my comments and we'll be happy to take your questions.
Q as a reminder, cast a question you will need to press star one on your telephone to withdraw your question.
Keith. Thank you. Please hold all become politics, you any real Sir.
Your first question comes on line of Irene net nutshell with RBC capital markets. Please go ahead.
Thanks, and good morning, everyone. Eric I was wondering if you could just comment on the competitive environment and I know that you'd generally don't talk about performance of discount versus conventional but as you know last week loblaw talked about a step up and I had it in competitive intensity in the discount segment and I was wondering if you could add your thoughts.
Please.
Well, we don't we don't comment on performance by by better, but I repeat my opening comments that are performance was strong across markets and across manners, very very happy with that.
The environment, we always say every quarter that it's very competitive because it's true it remains a very promotional highly promotional and the competition is always strong so.
Has there been a pickup in intensity recently.
UBS inflows to me, it's always competitive and we always try to be competitive I can't say that discount in particular.
We saw something more than usual, it's always competitive.
That's great. Thank you and just on the E Commerce site in your commentary you said that it was it served out of the gate stronger strength is stronger in Ontario than what you saw in Quebec are there any other differences in terms of say basket size or frequency of shop or are you noticing any meaningful differences.
There are some differences, but it's still too early to commented for competitive reasons I can't really comment.
Comment on the speed of the ramping up its we expected it to be a bit stronger.
And it is ontarios a more mature market on the e-commerce side Theres been a grocery ecommerce offer out there for quite awhile.
People are familiar with the service and our joining or service so again.
Good good start on terms of volume.
Challenging for for the teams at first but we'll get around to it and then.
I think we have a model that will.
Sort of the customer well.
That's great and just one more if I may yes, you did have that nice pickup in gross margin in the quarter. If you could just talk a little bit about sure what went into that gross margin gain and how we should be thinking about the evolution.
Yeah, we're happy with with that number to some of it comes from the synergies.
Through the procurement synergies clearly we.
Targets and synergies so we'd like to see it flow to the bottom line.
That's that's a contributing factor I think also the.
The effective merchandising then done by our teams, we're very focused and all of our fruit vendors on fresh.
And that has a higher gross margin as you know.
It's also a contributing factor. We're also pleased with the performance of our private labels increase penetration from them, which also contribute so it's a combination of factors, but those are the three main ones.
That's great. Thank you Eric.
Thank you.
Your next question comes from the line of Michael can help with TD Securities. Please go ahead.
Thank you had just a I guess the follow up on that a little bit them, because you did mention that.
Harman as intends yet your same store sales are very strong in your gross margins are up 56 basis points. So.
Is there apart from those three items that you mentioned in terms of helping the gross margin is there anything else that you think you could point to that would be.
So that.
And where you're outperforming the rest of the market.
Without without feeling that the effect on the margins so.
Factors to helping the gross pick up gross margin pickup I mentioned, the three main ones.
I think it all comes up to effective merchandising so.
We tried to be.
Right product at the right time.
Our loyalty.
Strategy and some personalization helps also so again effective merchandising.
Shrink at store level is under control so good store conditions.
Overall, good strong performances delivery number it's not one thing.
Okay.
With respect to the Opex growth up 5% most of it's in that others line.
You talked about transportation and ecommerce are both of those in that others line.
Yes.
And what else would be in there I think advertising I'm not mistaken.
The thing advertising.
Listen the.
A whole range of of the typical cause that go into the and then other than the the four main line three main lines you on top.
So the big drivers of outline where that where the transportation and the ecommerce delivery.
That's right that's right. That's right are you willing to kind of.
The two.
No.
Okay.
Theres no one time kind of or temporary costs tied to like the DC switch over in at Moran or anything like that.
Transport is transport is the main culprit, we said that we would we would start.
Coughing that by the end of Q1.
So it's still going to still be with us for for awhile.
And the rest as a as a bunch of things with.
The these any of the wages that benefits the rent that that was under that was under control.
So just to add to that Michael their transportation contract.
Renewed a bunch of.
Contracts with our.
Carriers.
Starting at the end of Q1 into Q2 Q3, Big the Wilson contract in Ontario was in Q2 with with large unusual increases. So we have we are living with those right now and we'll continue to to be affected by those increases the until the end of Q1. So that's the main ones.
And finally on synergies.
You are able to split it up at all between Cogs and Opex.
Well, we sort of again, but we don't get pulled us.
Yes, I meant to us obviously team.
You're right, it's a combination desperate theres procurement, which goes into gross margin and then there's some SGN a reduction like.
Salaries at cost.
Corporate costs, there were no longer there as a whole bunch of a admin reductions that are part of the operating expenses.
It's in both lines.
Again, so when I take that when I do the simple math and I'd take the 18 million divided by 12 weeks and multiply it times 52 to get an annualized number it would come out to about 78, I think and you're talking about $65 million run rate. So is the difference retroactive benefits that are kind of temporary and.
That's right Michael that's exactly it so when you when you book.
You negotiate your agreements.
You know there's all this sometimes amounts that go back to two previous months or to the closing, which you weren't you didn't have you didnt have in place in previous quarters. So theres a theres that portion. So that's why we give you the annualized run rate. So that you don't you don't think that were 78. So the true number if everything stops today and we didn't we know.
We don't get one more dollar of synergies you will expect to see 65 billion flow through or on annual basis.
And most of that retroactive.
What I'd be right to assume that thats in the Cogs.
Yes.
Thank you very much.
Hi, Dan if you like to ask a question on each press star one on your telephone. Your next question comes from the line of Karen Sharp with Barclays. Please go ahead.
Hi, this is actually remodeled the compound the line for Karen.
Good morning.
So I just wanted to just follow up on your ecommerce business.
Can you can you talk about what you're seeing with respect to average ticket in ecommerce versus in store purchases and I suppose related to that.
What you're really seeing with respect to incrementality.
In other words.
At a new customer that's shopping your stores.
From a from or your banners from an ecommerce perspective, our existing customer shopping more.
Any color there would be helpful.
So as we said on previous calls ecommerce average ticket is quite a bit higher than the average basket in our stores.
It's a bigger Sean.
Convenience.
Just a bigger Shaw we.
We said before and we remain pleased with the mix in the basket. The gross margins that gives us. So it's a good healthy basket and I'll just leave it at that.
On the increment incrementality so our.
Data and with with our between what program in Quebec, We can track a the behavior of our of our loyal metro customers. So.
I think the data shows that we're getting more dollars from existing loyal customers and we're attracting some new customers to the metro better that were shopping with us before.
As well as kind of middle exiting some of our existing metro sales, but net net we see a intevac incremental sales.
Material Oh my comments, it's too early to give you any color.
Okay. That's helpful. And then just on your I guess fixed inflation expectations.
You talked a little bit about a slowdown.
And then you know it also looks like your internal inflation came in below.
The Ontario, and Quebec, PPI by looks like about 100 basis points can you talk a little bit about your expectations going forward for inflation.
And why your inflation could come in below the industry figures.
Well the reported the number we report is what we sell in our stores. So it reflects with the customers pace at the two for weather for what they buy versus last year. So.
Effectively with we sell typically.
That's what we see.
In our markets that are observed inflation is typically not always but typically lower than reported.
That's a that's not really big news as far as expectations. We don't have a crystal ball that I I mentioned that October we're seeing lower inflation.
That.
Can rain that can change it fluctuate.
Last year at this time inflation was increasing so as we are cycling a higher levels of inflation it'll be interesting to see what happens. This year commodities are in place and FX is in place.
It's very hard to give you guidance.
We typically budget for 2% type.
We should lift.
We'll see if we if is there not a as the year goes along.
The meat situation right now, we're seeing some inflation in meat.
The China situation with protein now that they've reopened.
The market could have inflationary impact will have to see it's really a.
It's really week by week.
Keep you posted.
Okay. That's helpful. And then just last one for me.
You talked about the self checkout and electronic shelf labeling programs seem like they're progressing nicely can you can you talk about what you're seeing there from a labor savings perspective, and also any feedback you're getting from customers on the in store experience.
And then how do you how do you expect to continue to ramp those programs two additional stores going forward. Thank you.
Okay.
So yes were.
Installing the self checkout to improve the customer experience.
Proving speed at checkout.
That especially in stores with smaller average basket higher customer accounts those.
Self checkout has been there are being added are very welcome by the by the customers. So I think it's it's a plus your customer experience and on the productivity side.
If we manage our hours well.
If it's monitored well, which we try to do we're seeing some labor savings as as expected to provide the return on investment. So so far so good and Thats why we are actively rolling them out.
And we measure store by store, what's with the penetration we get the as we get the labor savings. It varies it's not the same everywhere.
So it won't it won't be a installed in every store, but we see a good opportunity to continue so as I said, we have over 100 done.
And we'll do a 100 more this fiscal year, it's a significant investment, but when that will provide returns for us and we expect to give give a plus the customer experience.
Electronic shelf labels.
I think customers getting very few comments they hardly see it.
Yes.
The shelf labels or.
Electronic but they look almost like pay for some people or at least.
The difference we see the difference in terms of labor savings.
And.
Price accuracy and better layouts in terms of.
If you're out of stock if theres a whole the tickets the remains there so.
So.
In a positive experience.
So far so.
Again, we'll keep you posted but we're on a run a plan to roll them up.
Okay, great. Thanks best of luck.
Yes.
Your next question comes on line of Mark pitcher with see Ibcs. Please go ahead.
Hi, This is Krishna written them on the line from Mark I was wondering if you could give us some color on the performance of each Amar category in the quarter.
Well its a.
Mostly on the Metro vendor in both in both conducted Ontario, It's a growing category and that's also contributed to the gross margin.
Slightly but yes, it's a growing categories. So I think we're doing a better job improving the quality.
And providing a good customer experience the renovated stores the new stores have expanded HMRC HUD foods.
Cold cold offerings also.
Self serve with some sit down most of our stores don't have enough space for sit down areas, but yes.
So.
Customer need and a growing customer needs that we're trying to meet as best we can and it's a growth category for us and the big focus for Metro teams in both cutback in Ontario to grow that category.
Okay. Thanks, and just a follow up on that can you talk about your performance to date with food aggregators and whether or not its met your expectations.
Just looking ahead do you see Ms fresh fitting into your aggregator partnerships as well.
I'm, sorry, I'm not sure.
Aggregators.
By food Aggregators like skip the dishes.
Partners that you're working with on the age of my dad, Okay, sorry, I didn't get that term.
We have done we're doing some some tests are event.
Small partnerships with with Ah you birds get the dishes.
Too early to comment or something.
In trials and growing a little bit zero base.
So.
We'll just have to wait and see Thats, one more convenience offer that we try to offer for the customer that once that type of service.
But its a.
It's not a material factors.
Yes.
Okay. Thank you.
Your next question comes alive, Keith helps with dish I'll be securities. Please go ahead.
Yes, you said some questions on store formats.
Specific I'm just wondering on Donnie so thats doing you put a.
Out of your senior executives in charges that I was wondering what specifically means in weather Donnie says meeting expectation or or what's going on there any comments you had on your smaller.
Newer format superseding Metro stores.
Yes, what Dennis is.
As a growth engine for us we want to grow we want to grow that banner.
Several but that was longtime metro executive.
Wanted to two or.
Not slow down because it's not a slowdown tied to job would move on to something else and pass the baton. If you will do makes you to head up get back as planned as part of our succession plan.
And the cost.
We will be the perfect candidate to structure adonis to be able to growth.
This is a great format is a differentiated offer.
Needs a needs some should see.
Structure and processes to be viewed in one or more solid foundation to grow rapidly. So.
It's going to be taking care of that with you're going to finish the teams.
Same team new leader I think for bigger and better things, we opened a third store in Toronto This summer.
Mississauga.
Ramping up nicely and that we're opening a new store Norwalk tomorrow.
Dennis expecting good things over there.
We have.
Opened one that last year and gets into one the other side of the reversal, we will have to in that region.
Yeah, we see that we see a few more opportunities and get back and.
Hopefully more in Ontario down the road to grow that format.
The suit the smaller Super C.
We have a few small supersedes, we're opening a new one.
A couple of weeks and.
Don't come Montreal.
Under 200 room, 20000 square foot it'll be a.
Full supersede offer.
Limited I should say limited.
Linear footage for grocery, but we will have a supersede program in that store.
Different formats in the sense that it doesn't have the typical large box and large parking.
We think there was a good market to serve in discount in that part of the center of Montreal, and we'll see we'll see where that goes.
Smaller metro stores.
We have a few we opened one and in Metro advisors in the interior with Metro in by Oh, sorry, Bathurst in steel.
After a good start.
20000 foot very fresh focus variation more focused.
And I think we'll be will do well in that can be so really.
Same for us strategy market by market, what's the best format, what's the size and we tried to make an investment that will.
We will pay off and that will generate enough sales.
And profits.
Just before the investments we have a few in the pipeline.
We will keep growing that way.
And then a question on loyalty in Quebec.
Are you able to marry the metro and more.
Data with the air miles data like customer orders is sort of too.
Sheppard pillars snow, we do not.
There are two separate program.
And then just a question on the discount versus.
Conventional banner when it comes to things like shelf tags and automated checkout.
Are you putting them in both discount unconventional or is it skewed to conventional.
We're putting in principle.
The self checkout.
There was more in conventional we're adding some and discounts to as we go alone self checkout to started and.
Electronic self labels that started in discount.
More in discount I would say and we're adding some to metro. So it depends really store by store market by market with with the opportunity and where does it make sense. So we don't have a one size fits all though.
We will make the right decision for the right store with the right technology to improve customer experience, when we can and get better productivity to address labor shortages, which remains a challenge in our business.
Yes.
When it comes to online you've got to.
Major competitors in discount that are doing either pickup in store or.
Delivered a home, perhaps I guess in certain regions.
What's your view on online in the discount channel.
I'll Reserve my comments were really focused on.
Our model with them into a banner in both of our markets.
The fleets is full we see we see online.
Convenience additional service for for the Metro customer.
For now never say never but we have no plans to bring into this.
For now.
And then just finally on the junket too.
Cost synergies.
Would you use your intention be that once you go over 75 million.
It would cease talking about it or is there any possible you may revise the.
Number upwards before you stop talking about it.
No I think at once we have once we've achieved a 75 million we will we will stop reporting it.
Thank you.
Your next question comes from the line of Peter Sklar with BMO capital markets. Please go ahead.
Just one question for you.
With a tight labor markets that we're seeing particularly in Qubec I think it's almost record levels of unemployment.
I'm, just wondering is that impacting store operations or in any way that would impact results or are you managing your way through that.
So the answer is it's a challenge I suspect it's a challenge for everybody in retail it's a challenge for us.
To to stock stores.
We are managing through it but it's.
It does have an effect because.
Yes, and please don't show up or if you have vacant positions.
Certain points conditions reflect that so.
We're not perfect, but I think we manage wells.
But it's a big tournaments, and Thats why technology like self checkout or shelf labels helps and making and making a job of simpler for for a store people because.
There are challenges.
Fine labor so.
We managed to it it's manageable, but it's a challenge that we face for sure. Eric do you think you like metro or any of your franchisees have had to cut back store hours from what they would otherwise like them to be because of the labor issue.
No we have not.
Going to that to that level.
See that.
Anytime short term mid term.
I want to get there we have to find ways to find staff retained staff motivate them to keep them onboard and.
It's a joint challenge for for operations people with or HR people too.
To attract the write a talent and be able to be in a position to keep them.
And with the companies.
Yes. The short answer is no we don't want to cut hours, we want to maintain or.
Okay. Thank you.
Yes.
Your next question comes from line of Michael Vaughan Hill with TD Securities. Please go ahead.
Thanks, just a quick follow up on Miss fresh I know, it's a small part of your business, but can you give us some color as to your experience so far with administration growth and profitability.
So it Mr pressures.
Small part of the business.
Okay.
It's a small market.
It's growing somewhat.
Marketing expenses or are significant in the you'll get a industry.
So.
Somewhat challenging economics, but it's a good service with good quality that loyal customers appreciate.
The experience in store for us selling meal kits is.
We did some tests and the were.
Turning to do something different because it's not been great so far but.
We're looking for for for for more performance from them, but again a minor.
And I.
Should I say, it's a small part of our business and.
And it's a startup so.
We'll leave it at that.
Indeed, it's clear that its.
That's a it's a start up high expenses upfront things like that but long term do you actually see a business model.
That can actually be profitable or is this something that you're just doing to test out and as a defensive measure.
Well it for us it's a test it's a it's a lab, it's a small business its online it's run separately.
As I said, the economics are challenging at first and we'll see where it goes so.
For me a bit too early to comment on the future.
The long term business model, if you to answer your question.
Honestly my comments to that.
Thank you.
There are no further questions at this time I will turn to call back over to presenters for closing remarks.
Thank you all for your interest in Metro and we'll speak again soon to discuss our first quarter results on January 28. Thank you.
This concludes todays call you may now disconnect.