Q1 2020 Earnings Call
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Now I'd like to tend to conference over to your speaker today sure incidents.
<unk> Investor Relations and Riskmetrics. Please go ahead.
Thank you Julie good afternoon, everyone and thank you for doing the city.
Comments will focus on the financial results of our first quarter, which ended December 21, 2019 with him today Mr., Eric with less President and Chief Executive Officer, uncomfortable Executive VP and Chief Financial Officer. During the call, we would present or first quarter results and comment on the pilot well then Peter.
Hey, good question.
Before we begin I would like to remind you that we will use in today's discussion different statement that could it be construed as forward looking information and general any statement, which does not constitute a historical fact, maybe <unk> of the forward looking statement expressions, such as expects intends are confident that will and other similar expression or.
And it really indicative of forward looking statement.
The forward looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy, and our annual budget as well as our 2019 20 twin action plan. These forward looking statement not too late and guaranteed after 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.
A description of these risks, which could have an impact on these these men could be found under the risk management section of our 2019 annual report we believe these steedman to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward looking information, except as required by applicable.
Nothing to call over the council.
Thank you Sharyland and good afternoon, everyone. A few things before I go over our Q1 results.
First as Youre, your where a affected this quarter, we reported results on due to new standard RF arrest 16.
Effectively removed the distinction between operating leases and finance leases.
Released an interim report provide information on new standard, but in a nutshell.
1.962 billion of assets or added on the balance sheet with a corresponding net amount in lease liabilities and retained earnings.
On the piano the impact on net earnings is positive of $770000, which is not material and less than one cents. A beep. Yes. This represents roughly the quarterly impact going forward in December when we presented these better doing conference call or forecast out indicated an impact that was closer to one cent.
<unk> fiscal 2019 numbers I've not been restated for I for a 16.
Secondly, we dispose of our Mr. <unk> business for a net after tax loss of 4.2 million, we have adjusted or numbers for this loss and finally, we acquired the minority interest single point of muscle for a cash consideration of 51.6 million.
Turning to our results total sales reached 4.3 billion versus 3.9 billion last year, an increase of 1.3%.
Excluding the impact of the new standard offer a 16, which reclassifies rental sub lease income sales reached 4.4 billion for a 1% increase 1.6% increase or.
Same store sales were up 1.4% for the quarter and our internal basket inflation was about 2% or food same store sales stands at 2% when adjusting for the Christmas shift or pharmacy same store sales were 3.6%.
During the quarter, we captured 50 million in cost synergies related to the puts requisition compared to 11 million for the same quarter last year. This represents synergies 65 million on an annualized basis. The same amount same level that we disclosed in the previous quarter.
Gross margins stood at 19.6% of cells or 19.9% when adjusting for the impact bar for a 16 compared to 19.4% for the same period last year.
Operating expenses as a percentage of sales came in at 10.6% versus 11.3% last year.
Excluding the loss on the disposal Miss Rush for 7.5 million this quarter and the gain of 7.4 million on a divestiture of pharmacies in Q1 last year.
The operating expense ratio was 10.4% of cells versus 11.5 last year.
When we exclude the impact of by for a 16 the ratio stands at 11.7%.
Adjusted EBITDA. So the 370.6 million, that's up 57.4 million and represented 9.2% of cells versus 7.9% for the corresponding quarter last year.
Normalized with the I first 16 impact adjusted EBITDA was up 4.7% and represented 8.1% of cells.
The income tax expense for the quarter was 60.3 million versus 66.7 million last year, representing an effective tax rate of 26.2% and 24.7% respectively.
The company you recognize a three point threemillion tax benefit during the first quarter 2020, following the sale of Miss fresh.
Adjusted net earnings were 180.9 million compared to 172.2 million last year, that's up 5.1%.
Adjusted net earnings per share were 71 cents versus 67 cents last year, an increase of 6%.
Option of I first 16, as I mentioned at the beginning had no material impact on this quarters if yes.
Under the normal course issuer bid program, we may repurchase up to 7 million shares between November 25, 2019, and November 24 2020.
As of January 17th 2020, the company repurchased 850000 shares at an average share price of $55 for total consideration of 46.7 million.
Dollars.
Given our strong financial position and the fact that there is an awkward to operations are well integrated the board of directors as approved the change to our dividend policy, whereby we are increasing our payout ratio range from 20% to 30% to 30 and 40% of the previous years adjusted net earnings.
The board also declared a quarterly dividend of 22.5 cents.
12.5% increase over our previous quarter or over a previous quarterly dividend.
The annual dividend payment will represent about 31% of fiscal 219, I just in that earnings.
That's it for me I'll now turn it over to Eric.
Thank you peninsula and good afternoon, everyone.
The 2020 fiscal year is off to a good start with solid revenue and earnings growth in a very competitive environment in the first quarter.
Food same store sales were up 1.4% and up 2% when adjusting for the Christmas calendar shift that's on top of 3.2% in the same quarter last year.
Our average basket was up well traffic and tonnage were slightly down due to the Christmas shift adjusting for the transfer of the holiday sales overall tonnage and traffic were up slightly.
So where Q1 results are inline with our expectations.
Our internal food basket inflation was 2% down from 2.8% in the previous quarter.
We experienced produce deflation in the quarter as we cycled hi produce inflation last year.
Also fresh meat costs have been quite volatile over the past few months and our teams at a very good job to deliver effective merchandising programs.
The competitive environment was intense but not worse than recent quarters.
Well, we are pleased with our holiday sales and most of that performance will be in our Q2 results.
Pharmacy same store sales grew by 3.6% with the 4.1 increase in prescription drugs and a 2.7, an increase in front store sales fueled in part by a strong performance in new T.C. and how about.
Prescription count grew by 2.5%.
We're also pleased with our pharmacy sales during the holiday season.
The integration was real concern is proceeding as planned including the work in the could you warehouse to increase automated capacity as well as the deployment of the could see retail management systems across the moving their network.
The other priorities in the short term is the renewal of does I hand, the collective bargaining agreement.
As mentioned on the last call, we expect to start capturing the distribution synergies in the latter part of the year.
Ecommerce sales continued to grow and our keep you guys are improving every month.
Oh very modest as a percentage of total sales become sales are largely incremental to the metro banner as we gained share of wallet from existing customers and attract new customers.
We will soon be adding a second hub store in Qubec city, bringing the total up to eight stores for the province.
In the quarter Capex totaled 76.7 million, an increase of 18 million compared to the same quarter last year.
This reflects our increased investments in our Ontario supply chain project, which is progressing well.
On the retail side, we opened four new stores, including to relocate relocations converted to metro stores to food basics and expanded or remodeled eight stores for a net net square footage addition of 86000 square feet 4.4%.
In conclusion, we are well positioned to reach our objectives. This year and are confident in our ability to grow by focusing on our customers' needs continuing to invest in our retail network and supply chain and most of all executing well every day. This combined with a higher dividend and share buybacks will come.
Can you to create value for shareholders, we will now be happy to take your questions.
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Please standby the composite Kenny roster.
Your first question comes from the line of Karen short from Barclays. Please go ahead.
Hi, Thanks for taking my question.
Little color I know you indicated that the competitive landscape was kind of consistent but.
Obviously tonnage did slow meaningfully sequentially. So wondering if you could just give a little bit more color on not specifically.
Well again I said in the opening statement it was intense a highly promotional like like it always is.
But it wasn't really worse.
Then in recent quarters and.
In the fall, we always see aggressive promotional prices. It was again this fall around Thanksgiving It was and leading into Christmas. It was also but the what we saw was not extraordinary or out of the or.
What we're used to so I would say that company competitive environment was.
Intense, but not worse than it was in the recent quarters and that's that's my answer.
Okay and then just.
Pharmacy side.
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I see comps were strong I know one into your basis and while the front end was strong I mean, it did decelerate sequentially.
Fairly meaningfully any thoughts as to why.
That would have happened.
Well, we're very happy with our front store sales in pharmacy, the 2.7 number.
Is for the quarter ending again on December 21, there is a trend through sales in that business also we didnt pointed out.
Exactly the amount, but yeah I would tell you that the sales trend in the front store is is maintained and we're doing fine in the front store on on trend as as we were.
Okay and then last question for me on the payout ratio just curious if you could just go run through the philosophy on increasing the ratio from the board perspective.
So our previous policy was 20% to 30% target, 25% we were at the <unk>, we were at the 30% of.
Number.
As of this year.
Following the acquisition of Q2, which is going well and the cash flow profile generation the Q2 assets.
The company I think has evolved to a position where we can put out a higher percentage over previous years earnings as a dividend. So that's why the policy was changed from a range of 20 to 32, a range of 30 to 40.
And the increase that we are giving for this year, a 12.5% will will bring the payout ratio to almost 30, 131%. So that's the rationale.
Great. Thanks, I'll get back in to Q.
Thank you.
Your next question comes from the line of Irene Nets out with RBC capital markets. Please go ahead.
Thanks, and good afternoon, Eric I was just wondering if can continuing the discussion around consumer behavior competitive environment.
What you're seeing if you're seeing anything around consumer trade down increasing penetration on promotions or you know just that the shift in traffic from conventional to discount.
So there hasn't been where we haven't seen a noticeable shift the a and.
Number of a discount stores continues to grow.
We have converted to as I said in my opening remarks to metals were converted in Ontario, So that long term trend to discount a especially in Ontario continues but not at an accelerated pace, we haven't seen consumers treating down in that respect.
That said Metro we think we're really well positioned with both formats. Three if you added bonus on the food side with conventional full service discount well represented in both provinces to capture whatever market environment is before us, but as we speak today the can miss.
A little business is doing well.
That's great. Thank you and certainly when when you talk about the adjustment for for the Christmas for the shift in Chris Smith, when you kind of do the math, if it makes sense, but should we assume.
That you got all of that back in Q2, I think this morning at the AG I'm you mentioned that really best way to will be to look at Q1 in Q2, and you're pleased with the overall holiday sales can you provide a little bit more color there.
Well, it's exactly what you just said, yes, we are pleased with our holiday sales in both food and pharmacy that will help our Q2 for for sure. We're comping good numbers in Q2 by the way to last year, but we're happy with our Christmas sales.
There is a transfer clearly from Q1 to Q2 and you'll you'll have to add up Q1 in Q2 in due time to see the overall performance and we're confident that there will be okay.
That's very helpful. Thank you and just switching gears for Lam and if I might on Nancy IB are there any plans to accelerate the pace of repurchase as we move through the year.
I think a higher in itself as well I think a you know the phase that we've done so far it under 50000, a shared I think is a is a good pace.
We have a three to 7 million, we'll see we'll see obviously a with market conditions are but we have no change in our capital allocation, you know capex dividend and excess cash will be used to do share buybacks, keeping a financial leverage of adjusted debt to EBITDA of 2.5 swaps and no change going forward on that.
Allocation of capital.
So yes, I think the pace that we've seen so far is a good pace for the for the year.
Okay. So as we think about sort of in aggregate cost spot, we should assume that you're going to try and keep leverage is close to that level as possible.
Yes, that's a that's our the 2.5 main is maintained as a target financial leverage.
That's great. Thank you.
Welcome.
Your next question comes from the line of Mcfetridge with <unk>. Please go ahead.
Hi, Good afternoon, Eric I'm, just on the tonnage topic.
As of delivered tonnage growth for effectively for years and.
Even with the calendar shift it's it's it's flat.
So by no means that overly concerning result, but definitely a departure from the run rate. So how do you sort of interpret that result, and when you break down the drivers and leavers what stands out to in terms of the performance of the business.
Well you know it's it's it's one quarter you know the tonnage is essentially flat on a comparable basis.
And we were Comping strong numbers.
The market's competitive as I said, so nobody's, they're giving us a free ride and we have to fight for for every dollar that said you know the tonnage or is fine like produce we were we experience a bit of deflation or tonnage is really strong and produce.
So would you know I think we will continue to develop effective merchandising programs in and I'm confident that our tonnage will be fine.
This is this is the result, a for one quarter.
Yep, Okay and in terms of the balance between sales and gross margin I mean, another solid very solid gross margin performance in the quarter. I know you don't split out you know food or pharmacy, but can you give us some of US a sense of the biggest drivers of that margin expansion. I mean was it was at the same carryover from from Q4 in terms of center.
Yes, well in excess.
Yeah, so synergies or there's a bit of an uptick in synergies Q1 over Q1 last year.
But I would say most of the driver there is a good effect of merchandising.
More weight on the fresh sides and good shrink management. So it's a lot of small stuff my each banner.
Store operations to deliver a decent gross margin number so don't get the impression that we walked away from sales and Oh, we I think were effective in our merchandising and we're happy with the result.
Okay. Thanks, and then just last question I just wanted to ask.
Sort of longer term about you know the results that you've seen from all the remodels that you've completed over the last number of years, obviously, that's an ongoing project and it's an evolution, but could you just talked about the impact that you see sales lift paybacks and how that has evolved over time and as the stores mature.
Does the performance.
Sort of progress as as as you would expect.
In general, Yes, we were happy with the results of our investments most investments meet the targets that we set for returns. We typically you get a good lift in the first year and we continue to see a lift in the next couple of years, that's above the average so that hasn't changed or the cost.
So the projects has gone up a that's for sure. So the return comes as it comes off a little bit, but overall it meets our hurdle rates or more and quite happy with the performance in both conventional discount on the food. So I don't know and also pharmacy. So you know, we're disciplined with or without it.
Vestments, we look at every project project by project in which owns the pro forma isn't a we challenge the investment and we're trying to.
Make the returns that we have been used too so.
It's more challenging with higher higher cost of projects, but we will manage.
Okay, and just to sort of clarify separate or excluding the higher cost of upfront in upfront cost of the investment.
The sales performance or uplift is is consistently on track with your expectations.
No we're sitting versus what it would have been five years ago, no nobody's bedding for a thousand but in general Yeah, We're happy with our returns yeah. Okay. Thanks a lot.
Your next question comes on line of Michaels Finer Hill with TD Securities. Please go ahead.
Thank you I'm. So first off just on the inflation Cpis and your provinces was around 3.6 in the quarter and your inflation was too that's a bigger gap in what we've seen in recent quarters. There are you seeing more trade down or is that a mix difference or what do you. What do you think accounts for that and and if you had a crystal ball.
Where do you think your basket inflation was going it would be for the year.
Well, we don't have a crystal ball, so so I'm not going to go there, but the number we report on inflation is the number that we have <unk> based on what we sell at store level. So it's.
Dollars Freud them Department by Department and Oh. This is a number that we saw in in the quarter. So yeah, maybe a slightly bigger gap to CPGA, we typically see a gap to CPR.
I'm not sure it's not significant man.
Again, there's no change in the methodology and this is the same way of reporting and so.
Crystal ball, a 2% is a number we <unk>, we can live with and.
You know hopefully it'll stay in that neighborhood, we'll have to see.
Okay and then.
I want to look at some other cost because there is some big movements in some of your Opex line items, you had wages and benefits down 2% for example.
But then your other was up 9% in your rent excluding.
If you adjust strive for us look like it was up something I think six or seven if I remember correctly. So can you talk about what's going on there like wages and benefits being down 2% is that a head count reduction or is that a bonus accruals being lower.
Oh, that's plus what to take this Oh I think as good a it's good.
Productivity.
Numbers the employee benefits expense has gone up as you see by 3 million, that's mostly reflection of lower interest rates was thing, which increased the pension expense in our results.
On the rent, yes, you're right adjusting for the offer a 16 its higher it's mostly.
Utilities cost in Ontario, So we've had significant increases in utility.
Energy expense or in Ontario.
And on the other on the other line is the usual suspects higher transportation costs that the investment that we're making a in E com for the GE. So my team with the unit with the with the projects were having so as we said we'd be start we're going to start cycling the higher transportation cost. The in Q2, so everything else being equal we should we should see.
Well that but these are the these are the main items that explains the differences.
And with duplicate overhead cost from where they stand now.
And where do we see those.
When you're talking about like that convert the merging of the Dcs and trying to ramp up version.
In preparing.
They would all be they would be there that would be nears Ginnie a motion is unique so there aren't you there's no huge duplicative overhead costs relating to the D.C. the projects and trona, yes, we have some consultants and well that in and Uh Huh you talk about pharmacy. So again, however, oh, sorry about that yeah.
There is so it's all there in the between that's all there in the transportation expense and the a in the in the wages. So that's a that's as we said that's the last bucket of synergies that we the we will realize once we once we merge the DC in the transportation later this year.
But it's all it's all in those numbers yeah.
And just finally then.
On your balance sheet or some big increases in accounts receivable and inventories on a year over year basis can you explain what's happening there.
But.
We're talking here not not accounting for if our 16.
Oh.
I don't I don't know how big of a impact there is on accounts receivable or inventories well, there's a big long term account siebel increase due to the I first 16 of a 629 long term and.
87 million on a short term.
No I'm talking more about the.
I think it's just your normal inventory.
It's but it's in line is the growth of business ahead of a head of the Christmas season.
And you look at a trend between the account see boule inventory and payables are in line.
Okay.
Thank you.
Your next question comes from the line of Patricia Baker with Scotia Bank. Please go ahead.
Afternoon actually all of my questions have been answered so I'll, just let someone else get on the line.
Your next question comes on line of Vishal Shreedhar with National Bank Financial. Please go ahead.
Hi, This is Ryan for dish all I'm. Most my questions have been asked just one last another one.
With the Miss fresh divestiture or what was the reasoning behind that was there a.
When you picked it up versus now as you are different in view of where the market was going on changes in where metro viewed this business model, whether it was vital are not able to comment on that.
Well, yes, a quick come and this fresh was a small startup we thought there was more potential in the muted business for us than we saw especially at store level and the a subscription you can model that's not a model that we were really the twoq.
To continue and we thought we were not the best owner going forward from for that business. So.
It didn't meet our objectives, we thought that with the metro a customer ecosystem, we could leverage that <unk> to to gain some sales on on the meal kits. It was it was challenging or there was no real advantage with that so a better or someone else than us.
Okay. Thank you that's it.
Your next question comes on line of credit sleeve with <unk>. Please go ahead.
Hi, Good afternoon, just a few quick ones for me hopefully I'm just first.
Comment about the labor productivity improvements I'm, just wondering is that capturing some of the early benefits that you're seeing from the self checkout and electronic shell tables.
Yes, I think it's a contributing factor it's still early days for self checkout himself labels, but.
It's certainly meeting or objectives at this stage in terms of usage by customers and hours saved more work to do work in progress, but it's delivering a and will deliver the savings that we were hoping for and it's slightly contributing to the wage and benefit improvement.
Okay, and I should probably noticed a as well at the shell check out is that predominantly just within the metro conventional stores or are they also in the younger to store as well.
For now it's all on the on the food side not on the pharmacy side and we have it in metro stores and we have it also in discount stores, mostly metro.
And this pharmacy, a potential full rollout a in the future.
Some some potential.
I've seen it the competitors so it really defends location by location.
When the customer count the is very high it could be helpful.
So it's something we will be look at the we will look good but.
Nothing to announce yet.
Okay and you mentioned also you are you building, an extra and other hub store in Qubec from seven to eight what what's what would that coverage fee going forward. Once you have that store up and running for ecommerce.
So our strategy is to target a urban centers and not the whole province for now for obvious reasons and cubic cities. The larger urban area. So we were a operating on it with one store and its its reaching or will soon to enrich capacity. So we decided to open the second store and that.
As an advantage of this this the hub store model you a you expand the when you when demand is there and you can add at a reasonable cost the some more capacity.
So that's why we're opening that second store in the next few weeks.
And any material you have two stores I believe right now what's the plan for them next 12 months in Ontario.
Well for competitive reasons, we're going to keep our plans to ourselves. The two stores are ramping up a silver sales are growing operational metrics are improving every month. So a more work to do it's it's a it's more competitive out there in Ontario is.
It's another domains and so I'm pleased with what progress but work in progress.
Okay and it maybe switching quickly got to just to juggle reforms any up pretty clear events that youre team is keeping a close eye on for this year I'm thinking pretty clear on things like potential reduction in branded drug prices or any potential changes to dispensing fees any of that of that nature.
So yes, we of course keep a close eye on all of that we are not expecting a major reforms to hit us in the near future, we're keeping a close high but.
It's not on our radar in the short term.
Okay and it maybe one quick one for fun slot just.
Your leverage target of 2.5 times I, just wanted to make sure I understand.
Is that so you view based on now Q1 was I F 16 fully baked in.
As you calculate that leverage is that 2.5 times as of Q1 or is that.
Your targets.
So it's measured on the pre IRS a impact okay. So taking the you existing debt and using the the methodology by S&P. So capitalizing the leases as per the S&P method. So no one no change on that we'll see as as the year progressive whether we convert that ratio to a post IPO Ras al.
And we'll use the equivalent but I want to make sure that we get to further ahead in the year before we we adjust for any leverage for so for now it's the same methodology to we've been using in the past I.
Okay. Thank you both we answers.
<unk>.
There are no fair question at this time I will turn the call back over to their presenters for closing remarks.
Thank you all for your interest in Metro and we will speak again soon to discuss our second quarter results on April 22nd Thank you.
This concludes this conference call you may now discuss.
So.