Q3 2022 Metro Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Metro Inc. 2022 third quarter results Conference call. At this time all participant lines are in a listen only mode, but following the presentation. We will conduct a question and answer session and if at any time. During this call you require immediate assistance. Please press star zero for the operator also note that the call is billing.
Quoted on August 10th 2022, and I would like to turn the conference over to Sheldon Kadosh. Please go ahead.
Thank you Sylvia and good morning, everyone and thank you for joining US today, our comments will focus on the financial results of our third quarter, which ended on July 2nd with me today is Mr. Eric La Fleche, President and Chief Executive Officer, and profitable Executive VP and Chief Financial Officer. During the call, we will present, our third quarter results and com.
Went on its highlights we'll then be happy to take your questions before we begin I would like to remind you that we will use in today's discussion different statements that could be construed as forward looking information in general any statement, which does not constitute a historical fact may be deemed as a forward looking statement expressions, such as expect intend or com.
And that will and other similar expressions are generally indicated are forward looking statements.
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 2021 2022 action plan is.
Forward looking statements do not provide any guarantees as to the future performance of the company and I 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 statements could be found under the risk management section of our 2021 annual report as with the preceding risks. The COVID-19 pandemic constitutes a risk that could have an impact on the business operations project synergies and performance of the company. We believe these statements 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 about political law I will now turn the call over to come to us.
Thank you Joe and good morning, everyone.
For the quarter, our total sales were $5 9 billion, an increase of 2.5% over last year.
Food same store sales increased by one 1% for the quarter, while pharmacy same store sales were up a strong seven 2%.
Included in the third quarter of two nonrecurring items, there are $7 7 million of direct costs related to the one we strike in our distribution center in Toronto and that was offset by a gain on sale of assets of $8 7 million.
The strike costs had been revised downward from the 10 million estimate we had disclosed in the previous quarter.
We're talking here strictly direct costs, such as security additional transport waste of perishables net of savings on salaries and we're not talking about lost sales and lost margins.
Our gross margin stood at 19, 8% of sales stable versus the same quarter last year.
Gross margin came down a bit but were compensated by stronger margins in our pharmacy division.
Gross margin included $5 3 million of the total of the.
Totaled 7.7 million of direct strike costs.
For the operating expenses, they were down 1% or $5 7 million year over year and represented 10, 1% of sales.
Versus standpoint, 5% of sales last year, the lower level of operating expenses is mainly due to a reduction in pandemic related expenses operating expenses were impacted by $2 4 million of the direct strike cost offset by the one about $8 7 million gain on sale of assets that I referred to earlier.
And the third quarter last year operating expenses included a $5 1 million gain on sale.
EBITDA for the quarter totaled $565 1 million or up five 9% year over year and as a percentage of sales EBITDA was nine 6% versus nine 3% last year.
The adjusted net earnings were $283 8 million compared to $61 2 million last year, that's an increase of eight 7% and our adjusted net earnings per share were $1 18 up 11.2% versus last year's adjusted EPS of $1.06.
40 weeks into our fiscal year capital expenditures amounted to 446 million, an increase of a little more than $62 million versus last year and the higher level of capital expenditures is mainly the result of our ongoing investments in the modernization of our supply chain in both provinces as well as in our retail store network, including in store technology.
The rollout of in store technology across our food network is almost complete during the third quarter. We added another 41 stores equipped with self checkout technology and another 21 stores equipped with electronic shelf tags, bringing adult the total to 421 stores and 239 stores respectively.
After three quarters, we have opened four new food stores and converted another from metro to supersede and already we are very pleased with the sales levels since the opening.
Also we relocated another metro store and carried out major renovations and the 11 stores, representing a net increase of 141000 square feet or <unk>, 7% of our food retail network.
Turning to our current normal course issuer bid program, we have repurchased between November 25 of last year and July 29 of this year 3.8 million shares for a total consideration of 256 million, representing an average share price of $67.38.
On June six given the high volatility in interest rates and uncertain future market conditions, and giving our high level of cash on hand, we proceeded with the early redemption of our series F notes maturing December 5th 2022 for the entire 300 million principal amount outstanding.
Early redemption allows us to choose the timing of our refinancing when market conditions are favorable.
Actual position remains solid and we have an untouched credit facility of 600 million.
So that's it for me I'll turn it over to Eric.
Thank you first of all hi, good morning, everyone. We.
We delivered a strong performance in both our food and pharmacy businesses in the third quarter growing sales by two 5% EBITDA by five 9% and adjusted earnings per share by 11, 3%.
This was achieved in a challenging operating environment marked by accelerating inflation as well as the ongoing labor shortages that are impacting the supply chain.
Food same store sales were up one 1% in the quarter compared to elevated sales last year.
Transactions were up again, while the average basket declined, albeit remaining significantly above pre COVID-19 levels.
Our internal food basket inflation increased to eight 5% up from about 5% in the prior quarter as the industry continues to experience higher than normal inflationary pressures and cost of goods sold.
Inflation effects, all departments and categories right now.
Consistent with the industry or food tonnage in the third quarter was down year over year, because people are eating out and traveling a lot more compared to last year when pandemic restrictions were in place.
Promotional penetration increased as customers are managing their budgets in the current high inflation environment.
We saw the shift from conventional to discount accelerate when compared to the previous quarter.
We are well positioned to meet the changes in consumer behavior and deliver the best value possible to consumers and these inflationary times with our multiple formats and effective promotional strategies and strong private label offering.
Pharmacy comparable sales were up seven 2% with a five 6% increase in prescription drugs helps by Covid related activities, such as the distribution of rapid tests.
Front store sales were up 10, 5% supported by strong growth in over the counter medications. Despite significant supply issues and also in cosmetics as people socialize and returned two offices.
Turning to online demand has softened as trips to stores increased however, our sales remained essentially flat versus last year as we continue to add capacity selectively.
We remain focused on improving our customer value proposition with our recently launched express delivery on Metro D. C E offering delivery in under two hours and.
In addition in May we signed a partnership with instant card and we now have about 180 metro stores offering a service that's on top of our corner shock partnerships.
Over the next few weeks, we will be launching click and collect in the supersede discount banner the deployment will be gradual and we plan to roll out the service to the majority of our discount stores. We are confident in our online model, which provides several shopping options and enables us to meet customer demand as it evolves.
We are on track with our supply chain modernization program as the transition to a fully automated frozen distribution centre in Toronto is now done and the productivity of the New center is meeting our expectations.
The construction of our fully automated fresh and frozen facility North of Montreal is progressing as planned and we are still aligned for a 2023 opening.
These long term investments in our supply chain will enable us to add capacity and increase productivity and improve service to stores, while benefiting from lower operating expenses.
Looking ahead, we continue to face higher than normal inflationary pressures in labor shortages and it is difficult to predict how long. This situation will last but as we will be cycling the start have higher levels of inflation last year over the next few months one could expect that the inflationary pressures will start to moderate but as I said.
Before we don't have a crystal ball.
In the short term, we are seeing our food tonnage improving and we expect food same store sales to grow at a higher rate than in previous quarters. Because we are now cycling periods, where at this time last year. There were no significant pandemic restrictions in place as we are experiencing now.
On the pharmacy side, we expect growth in prescriptions to moderate year over year.
<unk> levels.
To moderate versus year over year to date levels, given the high number of visits to physicians in the fourth quarter last year.
We also expect front of store revenues to remain strong driven by over the counter sales.
With that thank you and we'll now take your questions.
Thank you, ladies and gentlemen, if you would like to ask a question at this time please.
Star followed by one on you touched on something you will then hear a tomato them prompt acknowledging your request and if you would like to withdraw from the question queue simply press star followed by two and if you're using a speaker phone. Please lift the handset before pressing any keys. Please go ahead and slowly press star one if you have a question.
And your first question will be from Irene <unk> with RBC capital markets.
Thanks, and good morning, Eric.
Eric you talked about consumer behavior, and advising promotional penetration can you tell us what youre seeing in terms of other color around share.
Private how much are you seeing private label grow are you seeing that sort of fresh frozen.
And transition anything that you can help us with would be great.
Thank you Irene so as I said inflation increased accelerated so what we described in the last quarter.
The discount is a shift of discount also accelerated.
You know what you just said you know shift to private label trading down proteins are all of the above is happening in our stores consumers are feeling it a lot of consumers are on budget and fixed income and and we worked extremely hard in all of our banners to provide great value I think our promotional strategies are very.
<unk>, we have a strong private label offering so all of these elements are we're able to.
To to provide good value to the customers in and worked with the shift where we're well positioned with all of our banners.
Clearly our discount banners or are growing faster as as the whole market and we're capturing a some of that so happy with our performance happy with what our teams are doing to navigate in this tough environment to provide value to consumers.
Clearly a lot of consumers are feeling it then and where we're working really hard to meet to meet that challenge.
Understood. Thank you.
So is it safe to say that no promotional penetration is about pre pandemic levels.
It's it's there or slightly higher.
So it increased a bit quarter over quarter.
<unk> again.
To be expected when inflation rises like that when prices go up our costs have gone up significantly we are absorbing some of those costs and not passing on all of our cost increases so the consumers reacting and adjusting their behavior a lot of consumers around budgets overall I'd say the consumers are healthy unemployment levels are at.
Record low as people are working but these are these are our high inflation numbers at the pump and in the stores. So there's there's a shift for sure to devalue and it's our job to provide the best value we can.
Understood. Thank you and just finally, Eric.
Any shifts in the competitive intensity.
Ireland.
Not really always intense a very competitive market, but we haven't seen a.
Rational behavior or anything are very.
Very different it remains very competitive.
Understood. Thank you.
Thank you.
Next question will be from Mark Petrie at CIBC. Please go ahead.
Yeah. Good morning, I know you've called it out in your outlook, but hoping you can go into a bit more detail about the various pressures you're experiencing in your operating costs and how I guess relative to a more typical environment, you're you're managing that pressure and I guess, most specifically interested in comments on the labor market, but also more broadly.
Yeah. So.
Always manage their costs as best we can and our teams are very focused on that to provide value to their customers. We'd have to we'd have to have competitive costs, but there are pressures a transportation fuel labor our labor contracts, we are renewing our to I R. At higher rates increases and then were you.
Used to but that's the market. That's the market. We're in I think are doing a good job of managing that keeping costs under control in the circumstances.
Not much more I can say you know labor shortages are causing pressures too because that increases overtime to supply our stores, so where we have higher overtime percentages than we're used to.
That's something we have to manage through them.
And I think we're doing an effective job supplies are up.
And again, that's industry wide market based increases and it's part of it's just part of our costs that we'd have to manage so.
Hum.
A lot of focus on it and I think the numbers. We present today are expense rates are good and our teams are doing a good job.
And then on the the.
The labor market.
Would you say, it's it's improving from past quarters or recent a recent quarters or are still stable or worsening.
I wouldn't say, it's worsening, but it is not there's not improved so pretty stable.
The demographics are or what they are and the general economy is what it is theres a lot of open positions out there and there's not enough workers to fill them.
So yeah those pressures.
Crushers remain.
Understood and I guess, just last on that topic I mean, how should we be thinking about the level of SG&A increases in the coming sort of 12 months either on a rate or dollar basis, I think I heard in your commentary you expected the inc level of increases to moderate but just wondering if that's correct and what's the draw.
<unk> of that is it really just sort of transportation costs or other.
Alfonso answer the SG&A my comment on the moderation, we expected or I said, one could expect inflation year over year to start to moderate over high levels last year.
And our SG&A, but you know, we will manage well manage through that.
That's right.
Stop disclosing specific corporate expenses, they were 38 million last year, including gift card. So as I said on earlier calls we're no longer segregating COVID-19 expenses as the line is getting pretty blurred, but we do have more of these type of expenses and pre pandemic more cleaning disinfecting wipes or the other.
The entrance and there's increases in other expenses that we pointed out our suppliers energy travel expenses et cetera. So it's we we we manage it. According to we know we have sales growth. We have a we have a we have gross Martin and we and we manage our SG&A as we always do and trying to keep it in line.
With a sales increase so if you would as you should expect a similar performance going forward than what we've posted this year.
Okay understood sorry, just to clarify when you're talking with and about the inflation moderating because youre lapping bigger numbers you were talking about the like CPI like the top line inflation not as much the cost inflation.
Right that's right yeah.
Okay understood. Thanks for all the comments guys all the best Thanks Martin.
And your next question will be from Michael Van <unk> at TD. Please go ahead.
Good morning, just wanted to follow up on a few of those cost are questions on the labor side.
Do you have a number as to like the percentage of jobs that are unfilled right now.
In our company.
Yes.
At various fifth stores D CS offices, but it's more than it usually is for competitive reasons. We don't want to go with her and disclose of all of our statistics, but we have more open positions are.
And then we're used to and that we'd like to have.
That's that's all I'll say.
Okay.
So you're also saying you all looked at me.
Labor situations stays tops and the inflation stays tough for a prolonged period of time and that could put more pressure on margins. What do you figure like how much longer do you think its really has to be.
Going off going on before it's difficult for you to offset in the other parts of your business.
Tough to say I mean, we've been you know this year, we've called it every quarter for the last three quarters that are we are we haven't been able to pass on all the cost increases in food and so our food margins slightly down compensated by as we said by a better performance in pharmacy. So we're not talking you know its something that we can.
Manage but it is putting pressure on margin and our comment is just that if this there's this high inflationary high price.
Environment continues it will continue to put pressure on margin, but we find ways.
We find ways through our procurement, we find ways to our merchandising we find ways to our cost containment to to two to contain those all of those cost increases, but it is putting pressure on market for sure.
Okay. So the comment the outlook comment wasn't that suggests that it could have and that you would.
Expected to increase in the stake or along just that you would expect it to continue to put some pressure.
Yes Catherine.
Alright.
Fluid side.
Yeah, you're talking about same store sales.
Or at least tonnage starting to improve as you lap some easier comps on that front, but.
Now that you are lapping easier periods do you think.
Tonnage can actually start to be stable year over year.
Or is there still some pressures or headwinds from people traveling a lot more in.
Staying in the airports for 12 hours of their time.
[laughter] Yeah, that's we expect tonnage of as I said its it has started to improve we don't give guidance too far out. We're just giving you. The current landscape is as well.
Comparing apples to apples.
The Q3 over last year, there was a lot of noise last year Covid noise in <unk>, and Ontario different markets have different restrictions same thing in Quebec for extended periods. So.
Over the same store sales numbers are affected by that and I alluded to tonnage. So as we are now in a period of apples to apples without restrictions quote unquote.
We feel confident about our same store sales numbers and our tonnage. So I'll just leave it at that okay. So we could see Houston.
Stabilization that not just lower decreases, but maybe stable finally.
Yeah.
Okay.
Great and you mentioned the strike impact.
Are you able to quantify it.
And back on the Stryker, where youre able to stop yourselves.
Adequately.
So clearly there was a sales impact in our last lesson. We lost some sales over a few weeks and then lots of margins, but I'm not going to negotiate the short term incentive of our interior division with you on the phone here.
[laughter] isn't a isolated.
For our results, but clearly yeah. There was a there was an impact were not great.
Thank you very much.
Michael Thank.
Thank you.
And as a reminder, ladies and gentlemen, if you would like to ask a question. Please slowly press star followed by one on your Touchtone phone and your next question will be from Vishal <unk> of National Bank.
Hi, Thanks for taking my questions.
Metro like like like others has indicated that a discounted it continues to gain traction just wondering in.
In the conventional banner is that responsible for most of that pressure in gross margin the gross margin rate and if that's true.
Other than increasing promo what what are the tactics that management can employ to improve performance at combat shocked.
Well I.
I wouldn't say that the shifted discount.
Yeah overall that it has an impact on gross margin you could say that but on a conventional store margins are holding up pretty well.
For overall.
It's a mix you know that there are some categories in our conventional stores that are growing.
Much faster versus last year and versus even two years ago.
Hot food daily, though those departments are doing really well right now in our conventional stores. Those are as you know are high gross margin department. So the total margin in our conventional stores.
No we're.
We're not we're pleased with it overall there are declines in other categories in the store as the shift happens too to discount but overall.
I think we've done a good job, we're absorbing our cost increases or some cost increases passing on.
Some for sure, but absorbing some on our own the gross margin on the food side is down is down slightly and there's a lot of factors in play if the discount categories within the department within the.
The specific vendors so again it's.
It's not easy to give you broad strokes being this is it. This is gross margin is explained just by that there's there's a lot of factors at play.
Okay. So it's not a fair comment to say that our conventional is responsible for the bulk of gross margin rate pressure.
Got it.
Wow conventional the more you shift a discount at a lower gross margin that that will have an impact but.
As I said.
As part of its political its own pretty well so.
Got it.
Okay with respect to the comment that you made about <unk>.
Trends improving.
<unk> year over year restrictions.
Are you seeing that in conventional as well and there was a rush to restaurants kind of on a year over year basis.
And particularly in the warmer months well that will that help trends are.
Call it in the winter months as well as there's a little bit that pent up demand states away from restaurants or to some degree.
I'm not sure I understood your question really.
Okay. So so with respect to conventional the improving trends that you commented on the outlook are those are those are those.
Equally applied or is it is one sector getting more benefit.
And that was part that was part one of it and the second part was there was a rush to restaurants are in kind of the summer months for a variety of reasons at that time kind of pent up demand in restaurants states away does that help one sector more than or more or another.
Yeah first the first part D. I was equally applied there's no no big difference pick up because of those improving trends both will benefit.
What is the pent up demand to restaurants last year, you know that's what we're cycling and that's what I say that our our our cycling trends are better in food tonnage trends are improving and same store sales will be stronger.
Exactly that we're lapping a period last year, where it was pretty much opened up like it has this year. So again I'm repeating myself, but we expect to we expect a stronger same store sales are going forward for sure.
Okay. Thanks for the comments.
Yeah.
Okay.
Thank you. Your next question will be from Peter Sklar.
Capital markets. Please go ahead.
Hey, Thanks, So just back on this big negative tonnage trend that you experienced during the quarter, which.
You know we agree with that you know you've largely attributed to you know your youre up against very strong pantry stocking you know quarters. If you look over the last two years because of the COVID-19 restrictions, but what about like what's your sense of the consumer.
Like how is it going to play out going forward because clearly the.
The consumer is squeezed and you know there's that whole issue as you know is the consumer actually gone up by less tonnage put less items in the basket. So.
Just you know just maybe elaborate a little bit about.
Why are so positive about your tonnage trends given that the consumer is under a lot of pressure and maybe the consumer is not going to put as much in the basket as you're anticipating.
Maybe youre seeing trends that makes you more positive.
You know I cant again.
Mr Hall will consumers eat less.
And put lessened their baskets.
Personally I don't think so I think what you need to focus on is really the year over year comparison.
I think.
The what.
What we're lapping and last year.
And the current weeks and over the next a little while.
We're gonna, we're gonna be compare comparing apples to apples and I think what we'll.
We will do pretty well and I think the consumer yes, the shift to discount is there. Yes. There is some trading down in proteins, but number of items in tonnage I think it will be a will be there in our stores. That's that's that's what we think.
And what and Eric what about this you know this trend of turn of returned to restaurants. So you know recipes banners and Tim Hortons, Canada, you know reported booming second quarters as people return to restaurants do you think you're feeling that in the grocery space at all.
Well I can tell you the categories and our deli departments and hot foods or are up significantly.
We're up to three pandemic levels overall, and that's with our some of our newest urban stores like Toronto not back to pre pandemic levels because of traffic downtown as high or higher than it was in the pandemic, but its not back to where it was but.
But we're seeing that trend.
In our in our hot foods in ready meals departments, clearly, we are and that's helping our our our metro stores for sure Pizza is chicken sandwiches. Those sales are up significantly and our metro stores and I think it's great value for the customer versus a lot of the restaurants customers are seeing it and that's what's helping our sales.
So we expect that to continue.
Okay got it thank you so much.
Q.
Next question will be from Chris Lee at Deutsche Bank. Please go ahead.
Oh, Hi, good morning. So first question is.
Just based on the market share data that you have access to and you're able to comment whether you've managed to maintain or gain market share in your full service and discount formats.
Well, we don't disaggregate by formats or by Province, I can tell you that overall, we pretty much maintained market share and we're pleased with that because versus last year like I said I keep referring to the last year of a pandemic restrictions last year. There was there's a lot of noise year over year on market share comparisons I think the more useful exercise is to compare it to two years ago three years.
And we're very pleased with our market share overall in both of them are cars.
Okay. That's great and then just going back maybe on your food same store sales.
If I look at on a three year average basis. If my math is right I think you did sort of 4%.
In Q3, which is obviously a very good base and so trying to tie that with your comments about you're seeing an acceleration in food same store sales quarter to date, because you're lapping the call it Ben.
The bump last year, not giving asking to give any sort of guidance or anything, but it's sort of 3% to 4% I could expect.
Expectation going forward given you were lapping these type of benefits.
Benefits from last year.
Yeah, Yeah, I don't want to give a specific number Chris Oh, we're trying to give some color on the I love to say look as we are now comping cycling beers last year, where there were no restrictions or there's no significant restrictions. We should you know same store sales should be higher than what we've had in recent quarters. So you know we just started the quarters I don't want to give a precise number.
I'll leave it at that so I'll leave it at that.
No that's fair and then just.
Switching gears to your prescription same store sales growth obviously, it was very strong and you know that.
Covid related related activities were a key driver of your ability to kind of tease out for us like how much of that was COVID-19 related activities.
And then maybe related to that as I understand.
Sales have very good gross margin just by nature of that.
The business there.
So do you expect a bit of a maybe a headwind going forward as you start to lap that.
These COVID-19 related activities going forward.
So the 5% five 6% increase in prescription drugs is helped by about 1% or so with a test in vaccines and that's COVID-19 related activities. That's a that's a rough number.
Are we going to have more to as many are less tests going forward is there going to be a nice wave Oh, we don't know who knows.
It's hard to say.
Okay.
Okay and then maybe just last one just also on your OTC in cosmetics, and obviously higher margin categories, you're benefiting from the recovery of those sales.
What inning do you think you are at in terms of that because I'm just trying to figure out like how many more quarters of tailwind can we expect from a margin.
Recovery perspective, as these products continue to to recover thanks.
Again, we don't we don't give specific guidance forward I know you're trying to do all your models, but.
The the key messages, we had very strong front store sales are in our pharmacy business of junk with shouldn't do that in the quarter a.
Double digit and clearly over the counter cough and cold products or our flying COVID-19 symptoms or COVID-19 like symptoms.
Are out there and people are coming into our store those are traffic building categories and that's contributing to sales of other front store categories. So I'm very pleased with that how does that how does that continue to what level and it's hard to say, but as I said in the outlook we can we.
We expect our in the short term to have continued strong OTC sales.
Cosmetics, you know where we're.
I think I would think in Quebec are around around Christmas.
Things are pretty much back to normal on the social front so.
That's where you can maybe expect a things to do.
To compare less favorably.
Okay, that's fair and maybe Alaska.
The last one first homes once about sorry, just on the NCI is it fair to assume you're likely going to be on track to completing most of your NCI D.
Yes, yes, okay perfect yeah, Thanks, and best of luck.
Your next question will be from Mark Petrie of CIBC. Please go ahead.
Yes, thanks actually another one for Francois just to ask about Capex picked up a bit in Q3, but not overly substantially and so how should we think about the full year coming in and then also any view on next year.
Hum and levels and also how the balance may be evolving from infrastructure to two customer facing.
Yeah, so so I still see a forecast that should.
Should take us close to the guidance, we gave I wish it was around $700 million for the year, there's always some timing issues some title, but pretty much more or less around that number and next year you can expect a similar a similar level.
You know we have we have as Eric said, we were on track with the supply chain investments and the retail network. So I expect a similar level next year.
Okay, and netting out to similar type of square footage growth.
Yeah, it's going to be around you know, it's going to be around that.
That level should be it should be you know plus or minus a few basically that should be around that level.
Yeah, Okay. Thanks.
Thank you.
And at this time, we have no further questions I would like to turn the call back to Sean kept us.
Thank you all for your interest in Metro and we'll speak again soon to discuss our fourth quarter results on November 16. Thank you.
Thank you ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending and we ask that you. Please disconnect your lines.
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