Q2 2022 Empire Company Ltd Earnings Call

December 9, 2021

Ladies and gentlemen, thank you for your patience. Please do not disconnect. The Empire conference call should begin within the next two minutes. Once again. Please could you the standby do not disconnect. The Empire conference call should begin within the next two minutes. Thank you for your patience.

[music].

Good afternoon, ladies and gentlemen, and welcome to the Empire second quarter 2022 conference call. At this time all lines are in a listen to only mode. Following the presentation, we will conduct a question and answer session.

If any time during the call you require me to the assistance. Please press star zero for the operator. Also, note that the call is being recorded on Thursday December 9th 2021. I would like to turn the conference over to Katie O'brien Director of Investor Relations. Please go ahead.

I would like to turn the conference over to Katie O'brien Director of Investor Relations. Please go ahead.

Thank you, Sylvia, and good afternoon, and thank you for joining us for our second quarter Conference call. Today, we will provide summary comments on our results and then open the call for questions. This call is being recorded and the audio recording will be available on the company's website. There is a short summary document outlining the points of our quarter available on our website.

Today, we will provide summary comments on our results and then open the call for questions.

This call is being recorded and the audio recording will be available on the Companys website for comparison dossier.

There is a short summary document outlining the points of our quarter available on our website.

Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer, Matt Wrandell, Chief Financial Officer, Mike Labelle, Chief Development Officer, and Pierre [inaudible] Chief Operating Officer full service.

Michael Medline, President and Chief Executive Officer, Matt Wrandell, Chief Financial Officer, Mike Labelle, Chief Development Officer, and Pierre Sandra Chief Operating Officer full service.

Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. [Please refer to] MD&A for more information on these assumptions and factors. I will now turn the call over to Michael Medline. Thanks, Katie and good afternoon, everyone. Before I jump into the quarter, our thoughts continue to be with all those affected by the ongoing disaster in British Columbia.

Caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially.

For you to or unusually and MD&A for more information on these assumptions and factors.

I will now turn the call over to Michael Medline, Thanks, Katie and good afternoon, everyone before I jump into the quarter, our thoughts continue to be with all those affected by the ongoing disaster in British Columbia.

We will continue to work with our local supplier partners as they navigate the impact of the food supply chain and infrastructure. We are extremely proud of our teammates who have navigated the crises in British Columbia in Newfoundland and Labrador over the last several weeks.

We are extremely proud of our teammates who have navigated the crises in British Columbia in Newfoundland and Labrador over the last several weeks.

I also want to take a moment to welcome Matt [Randell], our new CFO to this call. Matt has been with Empire for the past few years. He has been absolutely critical in setting up project horizon for success and its the latter logos partnership. Matt joined Empire with extensive experience from Nestle.

Matt joined Empire with extensive experience from Nestle.

I also want to thank Mike Bell for his great run as CFO. As you know, Mike is an exceptional leader and we are thrilled to have stepped into the chief development officer role. Mike will now focus his many talents on continuous improvement in our execution delivering our project horizon targets and our growing ambitions beyond horizon. Now, let's talk about the business. It was a straight-up good quarter.

Now, let's talk about the business it was a straight up good quarter.

Well executed by our teams across the country. We are consistently putting numbers on the board we have strong underlying momentum and in only four and a half months, we will be entering our crucial final year project horizon, which we're feeling very good about. Today I want to cover four topics. Our continued strong performance, how we are managing inflation, how we're seeing the full service versus discount split and e-commerce.

Today I want to cover four topics. Our continued strong performance, how we are managing inflation, how we're seeing the full service versus discount split and ecommerce.

First, our results. This was another strong quarter for Empire. Our sales grew 4.9% this quarter, while same-store sales grew 90 basis points from Q1 to negative 1.3%. As we and many others have said, year over year comparables do not tell the entire story as we lap strong cobot sales. Our same-store sales are growing 6.8% over the last two years.

As we and many others have said year over year comparable is do not tell the entire story as we lap strong cobot sales or same store sales are growing six 8% over the last two years.

Our eCommerce sales excluding grocery gateway, we're up 1.8%, but this number disguises the fact that falloff has continued to grow while being partly offset by our Iga dot net and thrifty foods businesses comping strong COVID-19 driven sales. If we included grocery gateway, our total eCommerce sales are up 33%. Sales are up as we continue to execute on key occasions. Our merchants and operators did an exceptional job delivering great value to our customers for Thanksgiving and Halloween.

Sales are up as we continue to execute on key occasions, our merchants and operators did an exceptional job delivering great value to our customers for Thanksgiving in Halloween.

We did this with a great customer experience, in-store and online exceptional assortment of great promotions. I'll speak more to inflation in a moment, but continuing to offer our customers meaningful value through promotions is more important than ever right. Now we have enjoyed significant momentum with these big seasonal events.

I'll speak more to inflation in a moment, but continuing to offer our customers meaningful value through promotions is more important than ever right. Now we have enjoyed significant momentum with these big seasonal events.

On top of that, our investments in our renovations and own brands are paying off especially in our Full Service stores. Our renovated stores look and perform in an excellent fashion and you'll see this continue to accelerate our performance. This successful and significant investment in the interior and exterior of our stores, sometimes slides under the radar, but I am convinced this improvement in-store experience will be a game-changer for Empire and continuing to improve on our own brands' offering is giving our customers increasing opportunities to save money without compromising on quality. We're very pleased with the progress we've made and expect this will pay off in the current inflationary environment.

Doors, sometimes slides under the radar, but I am convinced this improvement in store experience will be a game changer for Empire and continuing to improve on our own brands offering is giving our customers increasing opportunities to save money without compromising on quality. We're very pleased with the progress we've made and expect this will pay off in the <unk>.

inflationary environment.

Empires gross margin is strong and improving. Excluding the impact of fuel, we improved our gross margin rate by 72 basis points. This is on top of last year's strong margins and is largely due to our continued progress against Project Horizon. The addition of Elong goes in our business mix, returning a little bit more to normal.

Linked to our robust gross margin results. Our SG&A rate went up 27 basis points. This was because of our higher-margin businesses Full Service Farmboy logos are becoming more and more successful. These businesses have higher gross margins, but also higher SG&A, which is why it is critical to look at our bottom line, which is showing solid improvement.

Overall, our SG&A expenses were very well managed. Our EBITDA margin grew year over year by an impressive 36 basis points to 7.7%. Our EPS performance was similarly strong at 66 cents up 6 cents from last year. Even more dramatic is our two year EPS growth, which is up 29% when we remove the impact of Crombie's unusually large property disposal of 6 cents in fiscal '20.

Our EBITDA margin.

Grew year over year by an impressive 36 basis points to seven 7% or.

Our EPS performance was similarly strong at 66 cents up <unk> from last year, even more dramatic is our two year EPS growth, which is up 29% when we remove the impact of crombie is unusually large property disposal of <unk> in fiscal 'twenty.

I'm also very pleased to report that our free cash flow grew 72% over last year, even after funding a very healthy capital reinvestment program. Our strategy is working we're growing sales, we're improving margins, we're managing costs. We're generating strong cash flows. We're delivering for our shareholders. We're halfway through a horizon and we have momentum and still the most upside in the industry. There is so much more to come as we get into fiscal '23.

Our strategy is working we're growing sales, we're improving margins, we're managing costs, we're generating strong cash flows we're delivering for our shareholders. We're halfway through a horizon and we have momentum and still the most upside in the industry. There is so much more to come as we get into fiscal 'twenty three.

Next, I'd like to dig into inflation and how we're managing that. Inflation is unusually high right now the rising cost of doing business is a reality that all businesses across the globe are facing not just in grocery, but we're managing it well. Our merchants and supplier partners are out there every day fighting to keep prices low for our customers. Our merchants are doing a fantastic job working with our data to utilize the effect of inflation on our customers. An example of how we're utilizing more and more data throughout our company.

a fantastic job working with our data to utilize the effect of inflation on our customers. An example of how we're utilizing more and more data throughout our company.

And many of you are familiar with our unique but successful approach to managing our relationships with our supplier partners. With our approach, we have risen to be ranked number two in the annual advantage supplier survey at the top six grocers in Canada, we were at the bottom of the ranking only a few short years ago.

With our approach we have risen to be ranked number two in the annual advantage supplier survey at the top six grocers in Canada, we were at the bottom of the ranking only a few short years ago.

We are working diligently and respectfully together with our supplier partners to manage the cost increases coming through. It's actually because of these powerful relationships that we have been so successful in managing inflation and navigating any supply chain issues so far. Having relationships based on trust and transparency helps us keep conversations focused only on the real unavoidable cost increases so we can maintain the best value for our customers.

focused only on the real unavoidable cost increases so we can maintain the best value for our customers.

And where inflation does impact u,s our Full Service network is in the best position to manage it. First, our higher-margin model is more adapted mitigating cost increases and second, our broader assortment gives value-conscious customers a myriad of substitutions. Where we've had unavoidable price increases, we see customers, sometimes substituting products within their basket, but not leaving our stores.

Our full service network is in the best position to manager first our higher margin model is more adapted mitigating cost increases and second our broader assortment gives value conscious customers.

Ed of substitution.

Where we've had unavoidable price increases, we see customers, sometimes substituting products within their basket, but not leaving our stores.

Now over to the full service versus discount split a topic that has been popular recently. As we've accurately prognosticated quarter after quarter, we expect discount to return almost to pre-pandemic levels, but slowly. In other words, we are not seeing fast significant changes and in fact, we continue to see a lot of stickiness in our full service centers.

As we've accurately prognosticated quarter after quarter, we expect discount what return almost to pre pandemic levels, but slowly in other words, we are not seeing fast significant changes and in fact, we continue to see a lot of stickiness in our full service centers as.

As we look ahead, we believe our full service stores will keep momentum coming out of COVID. While customer occasions are starting to change, including more visits to restaurants, we are seeing a structural change in consumption of food at home. Over the past 22 months, customers have seen and experienced the affordability and convenience in eating at home with their families. We believe there is permanent in this shift.

Customer occasions are starting to change, including more visits to restaurants, we are seeing a structural change in consumption of food at home over the past 22 months customers have.

Seen and experienced the affordability and convenience in eating at home with their families. We believe there is permanent and this shift.

We're seeing this is how customers are shopping. Prior to COVID-19 customers shop, an average of eight food stores a month during COVID-19 that dropped to one or two and today that number is steady at five to six stores. Despite this, our customers continue to favor larger shops and full service stores. While some of this is COVID-19. We've also made significant improvements in the last five years to thrill, our customers. We improved our offerings strengthened our price perception renovated our stores to deliver an exceptional in-store experience. Our customers are giving us credit for it and it's why we think full service will be sticky. There is an equilibrium and supply and demand between full service and discount stores and our Full service stores have never provided such value and service.

Improvements in the last five years to thrill, our customers, we improved our offerings strengthened our price perception renovated our stores to deliver an exceptional in store experience our customers are giving us credit for it and it's why we think full service will be sticky there is an equilibrium and supply and demand between full service and discount stores and.

Full service stores have never provided such value and service.

Finally, I want to touch briefly on eCommerce. ECommerce is a small fraction of the market today, but it is growing quickly and is top of mind right now for our customers. We believe it will be critical to have the best omnichannel experience that includes eCommerce. And for our shareholders, it will be critical that we do this profitably.

We've run click and collect for years in Quebec in British Columbia. At Best it's an okay experience for customers and we know it's not profitable at scale. Ocado develop best in world technology, the thrill as our customers and is a profitable solution at scale and reaching scale is not the same as reaching capacity. We will get to scale much sooner than that.

Ocado develop best in World technology, the thrill as our customers and is a profitable solution at scale and reaching scale is not the same as reaching capacity will get to scale much sooner than that.

We were confident in our investment in [Voila] in 2018, and now after running in the [GTA] for over a year and seeing the results we are more confident than ever, especially after seeing how little progress non ocado technology has made across the globe.

I'll pass it over to Matt in a moment, but as you can see there's a lot of momentum at Empire. In a couple of quarters from now, we will be done lapping COVID-19 results as will our peers. We performed extraordinarily well when the chips were down during COVID-19.

Very soon the playing field will be level again and that's good for Empire. I said many times the second year of a three year strategy is the hardest. We're making investments, great investments that are improving our business and not yet seen all of the benefits. Next year, we expect our investors will see those benefits even more clearly. With that, I'll pass the call over to Matt for his inaugural report as CFO of Empire. Over to you, Matt, and congratulations.

<unk> said many times the second year of a three year strategy is the hardest we're making investments great investments that are improving our business and not yet seen all of the benefits next year, we expect our investors will see those benefits even more clearly with that I'll pass the call over to Matt for his inaugural report as CFO of Empire over to your mountain.

<unk>.

Thanks, Michael and good afternoon, everyone. So before I jump into our performance. Firstly, let me say how pleased I am has joined Empire's executive team. And I just wanted to take a moment to express my thanks to Mike Bell, who is giving me the best possible transition into Empire over the past two years. There's no question that I have some very large shoes to fill. But the great news for Empire's that might just deal with us in his new role and together, we will ensure that the CFO transition is extremely smooth.

And I just wanted to take a moment to express my thanks to Mike Bell, who is giving me the best possible transition into Empire over the past two years.

There's no question that I have some very large shoes to fill.

Great user empires that might just deal with us in his new role and together, we will ensure that the CFO transition is extremely smooth.

I'm also extremely happy that is my first quarterly earnings release, I guess talk about such strong performance. Let me provide some additional color on our results and then we can jump right into your questions. Gross margin was 25.3% and if we exclude fuel, that represents a 72 basis points increase versus last year. Our promotional optimization tools continue to expand margin. Along with the addition of the higher margin long days business.

Let me provide some additional color on our results and then we can jump right into your questions.

Gross margin was 25, 3% and if we exclude fuel.

That represents a 72 basis points increase versus last year.

Our promotional optimization tools continue to expand margin.

Along with the addition of the higher margin long days business.

We continue to sustainably improve our gross margin performance and we're expecting more upside in fiscal '23 from our horizon initiatives. SG&A was 21.2%, which was 27 basis points higher than last year. There's a number of puts and takes which drove this increase. First, long as has higher SG&A than our average and we will continue to see this mix impact until we comp the results next year.

SG&A was 21, 2%, which was 27 basis points higher than last year.

There's a number of puts and takes which drove this increase.

<unk> long as has higher SG&A than our average and we will continue to see this mix impact until we comp that results next year.

Second, our depreciation is higher mainly due to an increase and right of use asset depreciation and [IFRS 16] reflecting an increase in occupancy costs. These increases were partially offset by lower incentive compensation accruals in the quarter. EBITDA increased by 56 basis points to 7.7% driven by a strong gross margin performance, which was fueled by project horizon.

Selecting an increase in occupancy costs.

These increases were partially offset by lower incentive compensation accruals in the quarter.

EBITDA increased by 56 basis points to seven 7% driven by a strong gross margin performance, which was fueled by project horizon.

We are now halfway through horizon and on track and we will continue to see horizon benefits for the rest of this year and even more set in fiscal '23. The effective income tax rate for the quarter was 26.2%, which is slightly lower than our statutory rate primarily due to a consolidated structure and states that are taxed at lower rates. We are still expecting that the effective tax rate for fiscal '22 will be between 26 and 28% excluding the effects of any unusual transactions or differential tax rates on property sales.

The effective income tax rate for the quarter was 26, 2%, which is slightly lower than our statutory rate primarily due to a consolidated structure and states that are taxed at lower rates. We are still expecting that the effective tax rate for fiscal 'twenty, two will be between 26 and 28% excluding.

The effects of any unusual transactions or differential tax rates on property sales.

Earnings per share was 66 cents, which included [inaudible] dilution of 7 cents for the quarter. Our eCommerce platforms have combined sales growth of 33% over last year, but excluding the acquired groceries gateway business, our eCommerce sales grew 1.8%. This was primarily driven by the continued rise of [Voila], partially offset by the Covid related declines in Iga.net and [inaudible]. Accuracy earnings increased year over year, mostly due to a higher level of activity from our Genstar real estate developments. Property lot sales and California accounted for the highest contribution this quarter, but as we said in the past timing plays an important element in these Gemstar sales and this quarter is not necessarily indicative of an increasing trend.

Our ecommerce platforms have combined sales growth of 33% over last year, but excluding the acquired groceries gateway business, our ecommerce sales grew one 8%.

This was primarily driven by the continued rise of Lala, partially offset by the Covid related declines in Iga Iga I don't that interesting.

Accuracy earnings increased year over year, mostly due to a higher level of activity from a gen star real estate developments promise.

<unk> sales and California accounted for the highest contribution this quarter, but as we said in the past timing plays an important element in these genstar sales and this quarter is not necessarily indicative of an increasing trend.

Crombie also had higher earnings due to reductions in that bad debt levels compared to last year, which was impacted by COVID-19. Our cash flow generation and balance sheet remains strong. Free cash flow generation increased 72% over last year. Despite the continued investment in our stores.

Our cash flow generation and balance Street remains strong.

Free cash flow generation increased 72% over last year. Despite the continued investment in our stores.

This also allows for a continued share buyback program and as of this week, we have repurchased approximately $4.8 million shares in fiscal '22 for a total consideration of approximately $190 million. Also even with the longest acquisition, we have maintained our net funded debt to net total capital ratio at 3.3 times.

Also even with the long guys acquisition, we have maintained our net funded debt to net total capital ratio at three three times.

Strong cash flows allow us to continue investing in our store network. During Q2, we improved 45 stores through renovation redevelopment or conversion. This included one new FreshCo store with seven more to open over the next few months.

During Q2, we improved 45 stores through renovation redevelopment all conversion.

This included one new fresh guys store with seven more to open over the next few months.

We also opened one new Farm Boy in the quarter and two mall locations subsequent to the quarter, including one new and one converted side. Finally, I'd like to congratulate Farm Boy on their 40th anniversary last week. They've come a long way from a 300 square foot pudgy stall in Cornwall, Ontario to now a network of 42 stores and counting.

Finally, I'd like to congratulate farm boy on their 40th anniversary last week.

They've come a long way from a 300 square foot pudgy stall in Cornwall, Ontario to now a network of 42 stores and counting tomorrow.

Tomorrow marks the 3RD anniversary since we welcomed Farm Boy into the Empire family. We are extremely pleased with the progress we've been able to make together. And with that, I want to wish you all a safe and happy holiday season, Jason I'll hand the call back to you for questions.

We are extremely pleased with the progress we've been able to make together.

And with that I want to wish you all a safe.

And happy holiday season, Jason I'll hand.

I hand, the call back to you for questions. Thank.

Sylvie, you may open the line for questions. Thank you, ladies and gentlemen, if you do have a question please press star followed by one on your touchtone phone. You will then hear a sweet home prompt acknowledging your request.

Thank you ladies and gentlemen, if you do have a question. Please press star followed by one on your Touchtone phone you will then hear a sweet home prompt acknowledging your request and if.

If you would like to remove yourself from the question queue. Please press star followed by two. And if you are using a speaker phone, we do ask that you please lift the handset before pressing any key. Please go ahead and press star one now if you do have a question. And your first question will be from Patricia Baker at Scotia Bank. Please go ahead.

Please go ahead and press Star one now if you do have a question.

And your first question will be from Patricia Baker at Scotia Bank. Please go ahead.

Well. Thank you very much operator, and good afternoon, everyone. Michael, I have one question and then a follow-up. My first question is that I'd like to unpack a little bit your assertion that there is a structural shift to more eating at home.

To unpack a little bit your assertion that that there is a structural shift to more eating.

At our at home.

And interestingly enough, we heard very similar comments. That very praise from Rod Mcmullin last week on their earnings call. I'd love If you could just share with us your thoughts. What is it that has led you to that conclusion? And then obviously if that is the case a nice tailwind over the next several years for the grocers in Denmark.

Interestingly enough, we heard very similar comments.

That very praise from Rod Mcmullin last week on their earnings call I'd Love, If you could just share with us your thoughts.

What is it that has led you to that.

Our conclusion and then obviously if that is the case.

A nice tail.

Tailwind over the next several years for the grocers in Denmark.

Yeah, I won't bore you with how many pieces of data we look out lab to make that conclusion in our business and the way we look at it and how we our understanding of Canadian customers in the market. And we also looked at our own results. We're seeing basket sizes remain at elevated levels to the extent that we believe all these data points plus what we are seeing a basket size are indicating not only are sticky situation, but in some cases and probably a permanent shift. And so yes. I agree with Rodney that that's happening in Canada, as well as the United States.

How many pieces of data, we lookout lab to make that conclusion in our business and.

And the way, we look at it and how we our understanding of it.

Canadian customers in the market.

And we also looked at our own results.

We're seeing.

Seeing basket sizes remain at elevated levels to the extent that we believe this all these data points plus.

Plus what we are seeing a basket size or indicating.

not only are sticky situation, but in some cases and probably a permanent shift.

And so yes. I agree with Rodney that that's happening in Canada, as well as the United States.

I agree with Rodney that that's happening in Canada, as well as the United States.

Okay. Thank you for that and then my follow up just I don't I'm not sure if it's for Mark, Matt or yourself. But just in the press release this morning you reiterated the fact that in fiscal 2022 you anticipate the slight dilution from the law will be in that range of 25 to 30 cents per share, which is number that you've given us several quarters ago. And secondly, also confirm that you believe that this will be the peak year for [inaudible].

Yes.

In the press release this morning.

We get it right with the fact that in fiscal 2022, you anticipate the slight dilution from the law will be in that range of 25 to 30 30 cents per share, which is number that you've given us several quarters ago and secondly, also confirm that you believe that this will be the peak year for a while I believe so.

So just looking at the fact that you didn't change anything there. Am I right in assuming that that is indicating that you are seeing exactly what you want to see with respect to [Voila] in the first facility and the progress that you're making cost-wise et cetera in Montreal? Boeing as we had anticipated and Theres no serious change that. Cause you to have any different viewpoint to outlook for how you think that's going to perform over the longer term.

Ability and the progress that you're making.

Cost wise et cetera.

In Montreal.

Boeing as we had anticipated and Theres no.

Serious change that.

Cause you to have any different viewpoint to outlook for how you think that's going to perform over the longer term.

Yeah. So I'll take that. tHE Very simple answer to your question is yes, so dilation for the year is expected to be 25 to 30 cents. Within that range. And at 22 will be the peak of the dilution so nothing has changed from that from our expectations.

Very simple answer to your question is yes, so dilation for the year is expected to be 25 to 30 cents.

Within that range.

22 will be the peak of the of the dilution side nothing has changed from that from pharma or expectations.

Just add on it's, Michael, that I don't know that we have grocery gateway every year under our belt would fall off probably in the GTA No. One has a better view of what actually goes on an eCommerce across the landscape than we do. And I think people don't quite understand eCommerce sometimes a new seasonal shift you see in eCommerce.

And so we have a very good understanding what's going on the business and our confidence level remains very high.

Okay. Thank you very much for that.

Thank you Patricia.

Have a good holiday.

You too.

Thank you next question will be from Carin Schwartz at Barclays. Please go ahead.

Hi, a couple of questions first of all wondering if you could provide.

So inflation number was in the core.

And what your thoughts are.

Go into calendar 'twenty two.

And then within that you talked about customer behavior and improve their strength in private label, So maybe triangulate that with behavior from the customer perspective.

Well I'll kick that off and then hand, you over to <unk> for the for the.

<unk> P C.

Consistent with what we've said in the past kind of we're not going to give our internal inflation number.

So it's not something that we normally provide.

Yes.

Oh, I think it's obvious that.

Or.

Owned brands.

So very strong option for our customers to mitigate inflation and.

Our readout of this brand.

Come into better time for us and as you we did the rebranding.

More than a year ago.

The rebuild and many categories already.

We are pleased with the progress we've made there we are seeing.

Even may.

The main metrics, we're looking at because we need to make sure that as I said in the past.

One Reno are playing a key role in the meaningful enrolling in every single category.

<unk> seen our penetration growing pretty good after for years, which is a good sign for.

Always accepted by our customer all relevant news our offer and it's really good to our financials. Because we are strongly believe that this is a good margin generator for us.

Are you seeing trading down as a function as a result of inflation and where are you passing on cost inflation could.

Could you provide any color on that.

There is a cost increase pressure.

Both owned brands and National brands. However, we have more leverage to mitigate those costs on one brand and then on the own brand. So we are facing the same issue. We discussed some ingredient changed packaging don't change the pressure on inflation.

And there will be pressure it doesn't don't change but.

Because it's our own when we have more levered to mitigate those increases so.

Yes.

That's why it will be in more and more popular option for customers and it's good for our bottom line as well so it's a win win situation for both customers and us.

And then it's been over a year in terms of GTA with.

I'm just wondering if you could give a little color on what that in specifically in GTA. What ecommerce is as a percent of sales and then how you see that trending over time generally speaking and I'm, specifically asking for GTA obviously.

Sure it's Mike.

Yes.

So the market the market has grown clearly through COVID-19.

We've come off Colby, there's been some some return to stores, but.

Particularly all of all of our customers are much more comfortable about.

Ordering online.

And we continue to be bullish about the penetration of auto.

Lyne grocery, particularly urban.

Robin centers.

We're not currently providing.

A breakdown of our sales, but I will tell you that for us.

Yes.

It's obviously growing and has been growing since we opened the facility.

We've been growing our assortment consecutively.

Consecutively every month.

And that business has good momentum.

Okay. Thank you.

Thanks.

Thank you you too.

Thank you next question will be from Ken Rick tie at ATB capital markets. Please go ahead.

Thank you and good afternoon.

Michael I Wonder if you could speak to Pauls question on promotion and thank you. So the first one would be can you speak to the increase in promotional intensity and Colton apps, where install it is most pronounced and the second piece of that question would be how much smarter.

The market has has that much activity and how much <unk> do you think you are and how much room is there on that journey.

Sorry, what was the second.

I'm, probably gonna answered, we're smarter somehow but what was the question.

A much smarter has the market become in terms of extra marshmallow.

Activity promotional program and in that context.

You think you're tracking ahead or behind in terms of that increase and how much stock in the market.

Nick I'll just answer the first part of that.

There isn't anything to that.

But in terms of competitive intensity promotional intensity, we're seeing no difference from pre pandemic times appear to do everything.

No because we are dealing with.

But you do right now for this reason that we know on supply chain on an inflation, but now we're using more and more data and tools. So that's really helpful too.

<unk>.

This situation. So we're using data that human cannot use so we have a good outcome from the tools that we implemented.

Last year.

Why we have been able to quickly.

Just our mix, our promotion and our promotion remain extremely rather than our customers.

And it's why our margin continues to grow and very volatile environment.

Thank you and then if I could just on supply chain and supply chain related follow up question can you just speak to with respect to your Youll bodes aquifer.

Any potential risks or do you see that as being fairly well contained.

Yes.

Youre talking about store builds.

Yes, Okay Mike.

<unk> got real estate.

The.

Yes.

The program is.

This is really moving ahead.

According to our expectations.

<unk> said that.

The most significant challenge that we're facing and I'm sure anybody who has tried to building secure.

Or doing anything that involves logistics and materials. These days.

We'll agree that.

It's becoming more complex and harder to say all the time.

So were mostly.

Making sure that on our store renovation program, we ordered well in advance.

And that program is still managing very very well and so you'll see three.

We finished all part of that build some time ago and handed it over to Ocado.

And they are well on track to be finished on time.

Great. Thank you I'll leave it there and get back next year, Linda happy holidays. Thanks, Sharon.

Thank you.

And your next question will be from Irene Mattel at RBC capital markets. Please go ahead.

Thanks, and good afternoon, everyone, just wondering what youre seeing in the marketplace.

Around competitive intensity.

Certainly as consumers become a little bit more aware and sensitive to the rising inflation.

Okay.

We're not seeing more intensity from our competitor the thing we are seeing great whether he's trying to play.

Playing around volatility so it's why it could be different year over year, but I think we all facing the same issue.

But we're not facing more competition intends to do right now.

And it's varied by category.

Inflation, and some very undefined and swim category and another for enough time for another category. That's why we're seeing so much change when we looked at the competitors on competitors, but overall I think.

We remain extremely competitive like we had been over the last.

Many many years.

We're competing all the time.

That's great. Thank you and then just on a slightly different topic.

Wanted to come back to the whole gross margin SG&A. So.

If we were to kind of put aside the mix changes.

<unk> from long goes in and the like.

And also the impact.

E Commerce.

What would be the cadence on the underlying business with respect to both gross margin SG&A.

Okay.

Let's take price.

Gross margin.

So.

The biggest driver of gross margin, our gross margin enhancement as promotional optimize it optimization through our horizon tools.

So that's something that improved our margins last year and improve our margins. This year and we will continue to expect that that will enhance our margin next year, particularly as the teams get more and more comfortable with using that tool.

Sure.

And then on SG&A as we said in the.

In the script, there's quite a few moving pieces within SG&A.

So it's hard to predict I think the.

There's higher SG&A businesses, which are also a higher margin businesses like foodservice and farm boy will continue to drive.

So that will increase not right, but then ongoing cost control, which is very strong and the company.

Well should mitigate that.

We may have reached a point of.

Our run rate of SG&A.

For the foreseeable future.

That's great. Thank you very much and happy holidays.

Thanks, Larry.

Morning.

Thank you next.

The next question will be from Mark Petrie at CIBC. Please go ahead.

Yeah. Good afternoon, I just had a few follow ups actually with regards to ecommerce.

Regarding the boiler dilution.

Step up from what we saw in Q1 is that a reflection of the preparation in Montreal or was there any change in the dilution of the Toronto CFC is as growth rates have evolved.

Mark.

That's primarily as we add cost.

Into our system to prepare for Montreal.

As I just mentioned are Kendrick.

<unk>.

We are pretty well completed our construction.

Okay that was pretty well done with inside of the facility.

We will be starting to inbound product fairly soon.

And as you can imagine there is some there's costs that come with that.

So our Caddo fees and also we're hiring.

To ensure that we are ready for all go lives. So that would be the primary reason for the increases in dilution.

This quarter and going forward.

Yes, Okay, and then just related to that.

Obviously, the ramp up in Montreal is going to look a lot different than it was in Ontario, simply because you are bringing customers over from Iga. So how should we think about the dilution progressing in sort of Q3, Q4 could or should Q3 be higher than Q4.

Well I think if you do the math on a range of 25 to 30.

So far we've got 12 year to date.

And so I think depending on how the volumes of the.

And the.

But winter period, it goes with the GTA facility.

I think the math would tell you that it would be.

At a slightly higher than Q2 dilution right.

Okay.

Yes, sorry, I was just I was just trying to gauge Q3 versus Q4.

Oh I see thank you sorry.

Again to some extent it's.

Very responsive to volumes in the first CFC, but the cost would be ramping up in Montreal. So you would expect.

All things being equal that would be a higher number in Q4 than Q3.

Okay.

And then.

You highlighted the importance of sort of seasonal.

In the in the in store business and I'm, just wondering how blah blah performs around those types of occasions do you see a shift in sort of the relative popularity of ecommerce versus versus store shopping.

And is there a shift in basket composition online is it different from what you would see in store.

Yes.

Trying to think.

And while I was only gone through one series of this I'm trying to.

Think about it through but I would say that it's.

Yes, do you see seasonal shifts obviously in basket and then.

And baskets get larger but.

I'd have to check Mark in terms of whether it's all the way up to what you see in stores, maybe a tiny bit less amplitude up and down seasonality from occasions, but theres quite a bit of seasonality in terms of.

Volume two times of the year.

In terms of.

Thank you, yes, okay. Okay.

And then one more if I could just with regards to Farmboy I just wanted to sort of are you seeing the same trends.

In that banner in terms of elevated demand for full service stormy and I know, it's not quite full service the same way as is.

The sobey, but but but in that direction and also have the different formats that you guys have kind of tested.

Formed in <unk>.

I think these are the first conversions from sobey stores that are happening now, but if that's not the case how have those performed and how are you feeling about the opportunities for that going forward.

And first question, absolutely we feel the same area, but farmboy in terms of full service as you mentioned the.

Second as we've.

Ottawa was our first.

I can't remember when it opened.

I went and visited it so.

It was a little while ago.

I would say that.

Biggest surprise to us as we knew we could convert so.

Especially urban fresh, but others. So these two farmboy.

But I think that our.

We found more locations, which have been more successful than we imagined is where I would put it. So when we did the model we bought it we knew there would be some but we wanted to test it before we got too excited.

And.

And the ones that we have converted very very pleased with the results and what we're seeing from the farmer.

Okay excellent. Thank you very much and all the best.

Thanks Mark.

Next question will be from Michael Van <unk>.

At TD Securities. Please go ahead.

Hi, good afternoon.

I wanted to.

Just finish up on the ecommerce.

In response to Mark's question.

<unk>.

That version would increase in Q3 Q4, so, let's just say that youre running closer to nine by year four.

On an annualized basis, 36%.

But youre, saying peaks dilution will be in 2020 in fiscal 'twenty two so as we go through fiscal 'twenty three.

What causes that.

To come down that dilution is it because montreal.

Ramps up much quicker.

The existing business and therefore only stage.

More dilutive initially because of the ramp up or is it a combination of that and of course, Toronto coming to breakeven.

Okay.

Primary driver of that is absolutely CFC want.

Is that a CFC continues to grow volumes and get more efficient dilution decreases CFT one.

That's the main driver.

Okay.

And should montrealers dilution.

Following a similar pattern as what we've been in Toronto.

Okay got it.

I'm talking about.

Suddenly for the microphone here.

Sure.

It will be less on a on an absolute basis for two reasons first of all as you correctly pointed out we.

We have an existing.

Base of customers.

And we're also starting with with an exceptional assortment.

Which is different from how we started in Toronto.

And we also have many of our back office and infrastructure costs.

In Toronto.

Which we don't have to replicate in Montreal So.

It's a lighter absolute number then.

Then the CFC one experience.

Okay, great. Thank you for that and then.

On the inflation.

Yes.

A lot of indications are pointing to us by starting in January.

If you could comment on that based on what Youre seeing but.

Is there a level of inflation that you believe it becomes problematic for margins in that once you get beyond that level. It starts to put pressure on margins because you can't pass it all through.

Yes.

At some point.

We said.

If inflation is too high.

Customers Ken.

<unk> the product category for substitution.

It's why we believe in our foodservice business with our large assumption.

There is many many options for customers to mitigate that.

When we asked from supplier.

Working with them working in collaboration.

Even we teach them or coach them to look at.

Potential impact of rising cost stock prices too fast.

Because if you lose a customer in that category a lot of time to recover that so yes, everybody is concerned about it supplier in the us and.

But I think we'll find other ways.

As an industry schuh, it's a worldwide issue.

We're working really well in fact in the food industry to mitigate cost increases will compare.

We manage inflation right now compared to other industry I think we're doing a pretty good job.

That's because the relationship we have the strong relationship we have a supplier.

We look at our business for long term.

But at this point of time, there is no sign that will have an impact on our margin.

Okay is there like what five 6% be the areas.

The inflection point.

If I can predict that that would be more rich for sure.

No I don't think its I think its very tough to predict and once again it varies by category. So that's that's.

That's the that's the trigger.

Over the last couple of mountain <unk>.

<unk> was very nice to meet.

We are seeing going down slightly now we've seen more inflation and for those so it's very well led by by categories.

Very tough to predict over a diamond and the weight of the category into the best guess in into the format.

I personally eight averages for that reason.

No.

Okay, Alright, thank you and just finally on the NPI be.

You only bought about 600000 shares in Q2.

$3 3 million in Q1, so should we look at the on average youre on pace to get pretty close to your full buyback should we expect you to get closer to that like pick it up in the second half.

And be something similar to what you had for all of the first half.

So on <unk> I mean, we're always balancing the cash flow needs of the company.

In terms of how many how many shares we buy back in a specific quarter.

So that's the main reason for the difference in Q1 and Q2, we still see share buybacks as a great use of.

Of cash so we will continue to do that but again, we will balance our cash flows for the balance of the year.

But we expect it to go up we would expect it to be higher certainly versus what we did in Q2 and Q3 and Q4.

Alright, thank you.

All of that.

Thank you and your next question will be from Peter Sklar BMO capital markets. Please go ahead.

Good afternoon.

On a couple of questions like you've already touched on this which is.

Your analytical promotional optimization.

Which is really facilitating your margin improvement. So can you just elaborate a little bit on what youre doing and what has changed is that you have more data.

Do you have more software more training for your merchants. So when do you use that expression, maybe just elaborate a little bit on.

What you've accomplished there.

We just.

Leveraging more and more to data we had in the past.

So.

I think that's.

That's the improvements.

We do have that though we had demand in the past was just amazing we just.

Are just able to.

But just more now than we did in the past.

And the team.

Better I would say recommendation insights.

Then in the past.

Better information means vendors decisions and we remain.

Reliable.

We continue to rely on people.

The quality of information to estimate the decision it's much better than the best.

Sorry, if I may interject, I think Peter it's being a little modest I think kian is.

And his team in our on our merchants have completely and utterly embraced.

Not that we are if this is better for customers and better for our business that we have a data analytics team that works hand in hand with our.

Our merchants and.

And other than peers group and it was really a appears right. We always have the data we told you that.

We had it we're going to have better and better data, it's just a matter of the merchants and others, having confidence in our plans.

They do and they see the ramifications in the results and embracing it more and more so we're not nearly done here, but.

But I think it's I think it's put into that and good order, but it's really having the data analytics team and then merchants embracing it and we've seen that.

Why were getting results were good.

Okay that makes sense.

Yeah.

Can you talk.

A little bit about the Olympics was there any spend in Q2 and will we see accelerated spend is in that in.

In the next few quarters or the next couple of quarters as we go into the Olympics and will it be noticeable in terms of as your results unfold.

Well, we're really excited we really liked what happened.

The Summer Olympics, and what we saw in terms of.

Yes.

How we performed against competition in terms of perception of our customers.

And I think the marketing team did an extraordinary job for their first Olympics.

<unk> gained some.

Some better ideas for the upcoming games. So we're really excited.

Believe it both games fall in the same fiscal quarter, which is which is odd and probably will never happen again.

I think you'll see maybe a little bit of extra SG&A, but we move our.

In terms of marketing, but it would be.

Worried too much better we move our spend around and concentrate on different things.

And so we will put more emphasis on the Olympics may be a little bit less emphasis on a few other things.

Okay.

Thanks, Tom.

And then just my last question.

You talked you've explained how the ramps work for.

GTA.

CFC for GTA in Montreal.

What what's your sense of timing on Calgary and like have you broken ground, there and when do we start to see the dilutive impacts of Calgary.

We have we have started construction on Calgary.

We are.

Planning to be opened in Calgary.

F 'twenty three.

First half.

So similar to Montreal are probably a couple of quarters before that.

Okay, Great. That's all I have thank you.

Thank you and our next question will be from Vishal Shah at National Bank. Please go ahead.

Hi, Thanks for taking my questions.

Most of my questions have been answered, but maybe I'll start with.

The longer term strategic question.

This management team has been.

Pretty pretty.

Bold and they made some big bets on the future.

And.

So I'm wondering as you look at your entire business two businesses that I don't hear much talk about quarter to quarter Your C store business.

Pharmacy business I'm wondering if management is looking at.

If we consider as those businesses to be core or if youre looking at the attractive multiples in the market.

Take that capital and reallocate elsewhere.

I think I've had the same answer for.

Next month five years.

Which is we like these businesses they make us money.

We will always assess all of our assets on behalf of our owners our investors to ensure that the.

That we were putting our capital in the right way and as long as I always say as long as you are.

Youre with us in your part of the family your core, but if we reassess that there are new members of the family.

Brought on or that we can.

Monetize assets going forward it makes sense to us and it's good for our business and good for our owners.

Many of whom are on the line today and we will do it.

Make all the right decision.

But.

Right now these are core businesses and we're happy with their performance.

Okay.

Switching gears here.

Obviously quarter to quarter management's showing progress with project <unk> indicated that youre pleased with the progress to date.

At the time that project twice and was indicated it was pre COVID-19.

$500 million gross and EBITDA by fiscal 2023.

But that base doesn't include logos. It doesn't include the structural potential benefit we may see in the market.

Evaluates that target and I know last time with Sunrise.

You took another look at it you mentioned <unk>.

Expectation, so what does management need to see to get more cost in that perhaps that there is upside to that target or is it a question of market volatility.

Yes, it's a good question, but I've got a groundhog day here, which is that and answered the same thing I said basically at the same time in the second year of Sunrise, which is we have a target we're going to hit that target and if we can beat that target we'll beat it.

I am so proud of the team to still be on horizon that we're so confident on horizon at this point, which was pre COVID-19 previous inflation.

Some of them.

Labor wages issues in some of the other things that they are facing and to face all that there'll be a target for for for that $500 million and then we'll see from there.

Just like I said during sunrise.

The team knows what its goals are for food can overachieve this shall do so.

Thanks for the color.

Thanks Vishal.

Thank you next question will be from Chris Li Please.

Please go ahead.

Hi, good afternoon.

One on brands.

Can you remind us are you pretty much done with the reset.

Yeah.

Yes.

More than the athlete.

And as you know.

Sure.

Developing a new product takes more time.

Product is faster.

So some of the rebuilds are already done.

So, but we are already seeing positive trend on both penetration and rate.

Which is a good sign and it's just the beginning because the rebuild thats been done apart the category has been done.

Last year last quarter.

We are in another group of category.

So I think as we've just continued to grow.

We are just at the beginning I would say.

One third of the benefit been capture on an annualized basis and will continue to grow.

Okay, and maybe just follow up on that.

Are you able to provide us with some data on the.

Penetration is for private label, you've not the absolute level, maybe just a growth versus now versus say two years ago before the project started just to give a sense of just how well the program is doing from a customer perspective.

Once again.

I don't like the PPI for obvious reason and once again it depends by category and subcategory redeploy nutrition is much higher because I think.

One is.

It is meaningful in that category and other vendors no need to add owned brands. So once again averages.

Averages alone.

Go there, but once again.

It depends on the category.

And as we continue to grow overall compared to where we are.

We are using a lot of excuse me as well so it depends on the definition of.

Private label.

Adding an exclusive rent to us if it's not complement OCA Nash could be.

Consider.

The owned brands. So we have many many strong partnership like that with supplier, we're exclusive with many supplier.

<unk>.

The customer.

Really enjoyed it.

Overall, I think we have a good assortment unique to us.

To build loyalty with our customers.

Perfect. Okay, and then maybe just a question on.

On Ocado.

I believe the U S International Trade Commission is in the process of reviewing the patent infringement lawsuit brought on by auto store against Ocado.

Yes. My question is in the event of an unfavorable ruling against the title.

That in any way kind of impact as soon as they sort of rollout plan for <unk> in Canada. Thank you.

We won't comment on the.

First part of the question, but the answer is no it won't impact.

Okay, Thanks, Michael and all the best for the holiday.

Thank you you too thanks, Sue I know I think you might be the last question, Chris So before the operator comes on I want to thank.

The investment community so side by side.

Everything during the year and wish you all great holidays, and safe holidays going to fund one of your friends family and friends I appreciate your.

Keeping track Empire.

And your question is keeping us honest. Thank so much I appreciate it.

Thank you and at this time I would like to turn the call back over to Katie Brian.

Great. Thank you so we appreciate.

The continued interest in Empire, if there any unanswered questions. Please contact me by phone or email. We look forward to have you join us for our third quarter fiscal 2002 conference call on March 9th Happy holidays.

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 do ask that you. Please disconnect your lines.

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Okay.

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