Metro Inc. Q2 2023 Earnings Call

And access to restaurants limited if you'll remember.

Speaker 1: many restrictions on capacity and access to restaurants limited if you'll remember.

Speaker 1: Our internal food basket inflation was 9% slightly lower than in the previous quarter.

Speaker 1: Compared to last year, traffic was up while the average basket came down slightly.

Speaker 1: Promotional penetration remains very high as consumers search for value.

Speaker 1: Turning to online, sales were up 41% versus last year, driven mostly by successful third-party marketplace partnerships and added capacity.

Speaker 1: Pharmacy comparable sales were up 7.3% on top of 9.4% in the second quarter last year.

Speaker 1: Prescription drugs were up 5% and commercial sales were up 12.2%, primarily driven by over-the-counter products, cosmetics and health and beauty.

Speaker 1: We are looking forward to the launch of the MOI Loyalty Program later this spring across our Quebec banners.

Speaker 1: Moi will leverage the strength of our food and pharmacy networks, where over 95% of Quebec households already shop during the year, offer more points collection and redemption opportunities, and enable more personalized promotions and greater customer engagement.

Speaker 1: Turning to the modernization of our supply chain, we are pleased with the operations of both Fresh Phase 1 and the new freezer in Toronto.

Speaker 1: Our frozen DC is exceeding expectations in terms of productivity and capacity. About 95% of frozen products are now shipped through the DC versus 70% previously.

Speaker 1: This results in improved on-shelf availability for our customers and more efficient operations.

Speaker 1: In the Provincial Quebec, construction activities are now completed for the new fresh and frozen DC and TABUN, and the installation of the automated systems is on track to start operations at the end of this summer.

Speaker 1: As we begin our third quarter, we remain focused on delivering value to our customers with quality products at competitive prices as higher than normal inflation and market challenges persist.

Speaker 1: Compared to last year, the number of price increase requests received from suppliers in the month of February and March came down, as well as the size of those increases.

Speaker 1: While we are not able to predict how the current macro environment will evolve, we expect some moderation in food inflation.

Speaker 1: To conclude, the draft Grocery Code of Conduct is expected to be released in the coming weeks and I want to reiterate that Metro has and will continue to support industry-led initiatives that enhance transparency, predictability and fair dealing throughout the supply chain.

Speaker 1: Mithoa has played an active leadership role in the drafting of the industry-led grocery code of conduct, and it's supportive of its widespread adoption.

Speaker 1: Thank you and we'll now be happy to take your questions.

Speaker 2: Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please leave the handset before pressing any keys. One moment please for your first question.

Speaker 2: Your first question comes from Mark

Speaker 3: Yeah, thanks and good morning. I wanted to just start on the food gross margin performance. And Francois, you called out productivity gains, and I'm just hoping you could expand on that a little bit. Is that stemmed specifically from the new DCs or is that more broad? And I'm just curious if sales mix in one form or another.

Speaker 3: category or channel had any notable effect.

Speaker 4: So the morning mark, so basically the productivity gains come from two factors. One, top line growth is still healthy, so you get efficiencies because of the increase in sales, but also, as you point out, our investment in DCs are showing improvement. So there's less.

Speaker 4: so that overall the margin remains flat.

Speaker 3: Okay, and so is it fair to say then that those productivity gains accelerated in Q2 from Q1? Yes, they did.

Speaker 4: Yes, yes, I am cautious when I say that, but yes, these are long term projects, but we're looking at the improvement, the learning curve and the productivity improvement as expected is increasing and as Eric pointed out,

Speaker 4: the performance of the freezer especially is above expectations. So that is showing up. And yes, we expect, you know, it's not over. And as we move to the next phases, that's what we expect to have in coming months, coming years.

Speaker 4: But there has been an improvement in Q2, yes.

Speaker 3: Okay, I appreciate that. On SNA, obviously, another great quarter of control and cost. Hoping you could just expand on the various pieces there. And then specifically, what kind of wage inflation are you experiencing in your business today or are you seeing in terms of...

Speaker 4: your union negotiations. Well, the SGA, as I said in my remarks, 4.9% increase. It was 4.2 in Q1. So I think we're, as you say, we're pleased in the environment that we're in. We pleased that you were your increases. We did have 8 million of your cards last year. But...

Speaker 4: As I said, there's also new items this year, which we're not there, like the launch of wine and the fees that we pay for these express delivery sales with our partners in E-commerce. So, all then, I'm looking at an increase at 4.9 we're okay with. And as I said, this is a focus for us as we move forward.

Speaker 4: There's more of a lag in SGA and then cost of goods also obviously with respect to inflation. So we've got to be mindful and we've got to make sure that we're on top of these expenses. As top line growth, as top line growth is expected to come down as inflation pressures is off.

Speaker 4: that's the first thing. On the labor contract, yes, obviously as labor agreements come due, people are looking for some catch-up. So the first year of a new labor agreement is a higher than normal increase, but we negotiate multi-year agreements so that on a CAGR, if you will, for the next four or five years.

Speaker 3: Yeah, okay, appreciate all the comments. I'll pass the line. Thanks.

Speaker 3: I'll pass the line. Thank you Mark.

Speaker 2: Your next question comes from Peter from BMO Capital Markets. Please go ahead. Kyle throughout his company tried making the sword for $ fanfare

Speaker 3: Good morning. Your food store sales was positive 5.8%.

Speaker 5: But your inflation, I think you said in the write-up was 9%, suggesting you lost some tonnage.

Speaker 5: I'm just wondering how you reconcile that.

Speaker 1: with your statement that you gained market share during the quarter. So maybe we could talk a little bit about the ins and outs of all that arithmetic. So on the market share we rely on on Nielsen market track data that we track weekly, monthly, quarterly.

Speaker 1: And we can say based on those figures that we are gaining share overall. So very pleased with our market share performance and it has been the case for.

Speaker 1: for the last few quarters. On tonnage, the quick math that you're doing is a bit misleading in this high inflation period. The discount mix package, private label sales, there are different factors at play here that indicate that our tonnage is...

Speaker 1: It's more like flat to slightly positive versus the decline that you get on the back of the envelope calculation that you're using. We're pleased overall with our performance. In discount, obviously, discount continues to perform very well, market-wide, and for us very pleased with our performance. We're pleased with our performance.

Speaker 5: With the launch of MOI, you briefly touched on it in your commentary, Eric, but can you elaborate a little bit on?

Speaker 5: What are the advantages for the consumer and what are the advantages for Metro?

Speaker 5: consumer and what are the advantages for Metro?

Speaker 1: So the consumer will get more opportunities to collect points and redeem points throughout our channel of food and pharmacy. So instead of just Metro stores in Quebec, it's Metro, Super C will participate, the Jean Couture banner will be the big newcomer and Brunet also. So more...

Speaker 1: stores or opportunities to collect points online and in store for our customers in Quebec.

Speaker 1: Like I said in my opening statement almost everybody in Quebec shops, one of our banners during the year, hopefully they'll shop even more with this internal, that's called an internal coalition program in the province of Quebec. So I think for customers it's an option to get points, save money.

Speaker 1: get targeted promotions on what they buy, what they like, even more so. So we think it's a more personalized, more generous program for customers and for us we get better visibility of customer behavior throughout our stores.

Speaker 1: So I think that gives us and our vendor partners more opportunities to target and be more personalized and engage more with our customers.

Speaker 1: So we think it's a win-win. And the last new thing, I said it before, I didn't say it in the opening statement today, is the credit card partnership with RBC. It's a co-branded card. So customers who select that card will collect points, not only in our networks and our stores, but they will collect metro points.

Speaker 1: on whatever purchase they make on that credit card. So we think that's going to be a benefit for customers too. So we're looking forward to launching it in a few weeks. We're going to have a marketing campaign to support it and hopefully people will sign up. Okay, thank you for your comments. That's all I have.

Speaker 1: Thank you.

Speaker 2: Next question, some Chris Lee from Desjardins, please go ahead.

Speaker 4: Oh, hi, good morning, Eric. And from slide, I guess my first question is maybe a tough one to answer, but I just wanted to get your thoughts, you know, even though inflation is starting to moderate, you know, prices are still going to be meaningfully higher than a year ago. So I guess my question is, you know, how sticky do you think the shoppers are, who has shifted to discount, you know, how sticky are they? Will they remain there for longer, even though inflation is starting to moderate a little bit?

Speaker 1: Yeah, I purchased our high and that's why discount is growing fast. There's no one that's surprised there, but we do provide good value in our Metro stores. There are strong promotional programs in the Metro store and there's good value for our customers there. And then...

Speaker 1: I think conventional stores are going to continue to do well. You know the transfer between one and the other, there's ebb and flow. Hard to predict. I think overall that the general long-term trend favoring discount continues and will continue. But that doesn't mean that conventional stores are going to continue.

Speaker 1: are not going to continue to do well in many markets. It's the right store, it's the right format for the market. So we like to have both in our portfolio and we'll continue to do well with both. And maybe follow up to that is, was the transaction count at the conventional banner up compared to last year?

Speaker 1: Yes. So customers are in the stores more often buying smaller baskets but there's higher traffic in all of our vendors.

Speaker 4: Okay, so that's helpful. And it maybe shouldn't give you just a little bit, just very significant comment, just maybe on what you're seeing in terms of the competitive intensity. And I wanted to maybe drill down a little bit in the Quebec market as you know, no one of your competitors have been converting some of their conventional banners to discount banners.

Speaker 4: In Quebec, are you seeing any notable impact on your business? Maybe just some comments on that would be helpful.

Speaker 1: Yes, we are tracking all competitive activity in all of our markets and we monitor a lot

Speaker 1: You know the impact so I can't say it's really stored by store market by market and some places it's

Speaker 1: It's hardly noticeable in other places. It's very noticeable. It really varies. And competitive reasons I'm not gonna say more.

Speaker 4: Okay, but last one for me, just on the drug reform side and you seeing any updates I know the agreement has come and gone. Just any update on that on generic drug pricing.

Speaker 1: So, no, we're still waiting for resolution and news of those negotiations. So, the agreement expired April 1st, so it's been extended for...

Speaker 1: for an undefined period but we are still awaiting the news and hopefully the reductions, whatever reductions or pricing that comes out of that will respect the realities of distribution. Our distribution fees are based on the price of these drugs.

Speaker 1: and our costs are going up. There's inflation in the supply chain, as we all know. So I'm sure the government is aware of that, and we'll see where the negotiations end up.

Speaker 1: our costs are going up. There's inflation in the supply chain as we all know. So I'm sure the government is aware of that and we'll see where the negotiations end up. Okay thanks and now the best.

Speaker 2: Thank you. Your next question comes from Vishal Sridhar from National Bank. Please go ahead.

Speaker 4: Hi, thanks for taking my questions. Can you give us a sense of what will change at Metro for investors when we look at the company as a result of this grocery code of conduct?

Speaker 1: What will change at Metro for investors?

Speaker 1: Okay, so there won't be a... You know, just to give you a...

Speaker 1: It's an industry-led code of conduct that will make rules of engagement a little clearer and it will encourage more written agreements between the parties so that there are no surprises and no unilateral decisions to increase, decrease in post fees or whatever.

Speaker 1: So it's not going to change how we go to market. It's not going to change the way we deal with our suppliers. We think our relations with the supplier community are good, are fair. We've always believed in fair dealing and we do our best to deliver on the commitments that we make. So we negotiate fairly.

Speaker 1: We of course we negotiate hard. We want we want to have competitive costs, but it's not going to change

Speaker 4: It's not going to change the way we do business. Okay, thank you for that. In your opening commentary, you mentioned that promotional intensity is strong. When you compare that to 2019, will you say it's at levels comparable?

Speaker 1: more intense than 2019 levels pre-COVID. So slightly above pre-pandemic in terms of penetration, percentage of sales on promo versus regular. It's slightly higher now than it was pre-pandemic. So again, very much.

Speaker 1: function of high inflation. Features, specials are selling more. People managing their budgets, very normal behavior.

Speaker 1: We try to serve our customers the best we can. We have promotional strategies in all of our banners and we try to be as effective as possible and I think our results show that they have been effective. So we're pleased with that. Okay, and maybe on another topic here, pharmacy services, just given the long-term outlook of that business.

Speaker 4: I would anticipate the pharmacy services in your drugstores to increase. Wondering on, given that your business is franchisee, do the economics predominantly flow to the franchisee? How should we think about how Metro thinks about pharmacy services?

Speaker 1: your inclination to expand that? Yeah so it would pharmacy services are going to grow yes we expect long term that that that number will continue to grow you know to to relieve pressure on the public system and demographic reasons that you know very well so the economics of it will influence or impact our franchisees and will...

Speaker 1: the franchisee and we make a royalty off of that. So it has an impact on us. So we are working with our franchisees through our professional services group to be the best in the market to deliver those services in the most efficient way for our patients, for their patients and for the pharmacists.

Speaker 1: Yeah, it's a focus of our team for sure and we're looking for more down the road.

Speaker 4: And maybe just one last one here. Obviously encouraging to see some of the initiatives that Metro has been working on for several years starting to to bear fruit.

Speaker 4: in terms of on the P&L, but can you give us some insight on the capital expenditure and when you expect that to normalize? Are there any other big projects in the pipe after this supply chain initiative? And what is a normal level of capex that we should expect for Metro after this supply chain initiative? Yeah, so I'll take that one, Vishal.

Speaker 6: So as we said, we did 620 million last year, which was a record. We called about 800 million this year, and probably a similar level next year. So the biggest years in terms of CAPEX is this year and next year.

Speaker 6: this year and next year as we as we finalize the tabung and then we come back and finish fresh phase due in Ontario and then you'll start to see CapEx coming down in the number that in the 800 million number that for this year there is some real estate which can be a little choppy so we know it's not as precise as P&L but so we'll see for that and if there's any change we will give you an update but to your question

Speaker 6: this year and next year will be the two biggest and then you come back down to a more normal level which is going to be around 500 million I would call it, roughly. That includes both food and pharma on a regular run rate investment. So this is all factored in our plan. We are looking to earn the rate of return as we do all projects in which we invest.

Speaker 7: Good morning everyone. I think we're all kind of trying to square the circle on consumer spending behavior today versus pre-pandemic. So you said the promotional intensity was higher. Where do we stand on discount versus conventional?

Speaker 7: and also private label and things like pack size. If you could provide a little color there, that would be great. Thank you.

Speaker 1: Promotional penetration, as you said, is higher. It's high, it's elevated, it has creeped up with the high inflation. It went down early in the pandemic, if you'll remember, because of people doing one-stop shop and availability of product was an issue.

Speaker 1: So last year when inflation started to pick up quickly, promotional penetration picked up also very quickly. And that's where we are. So I think we're back to a little above pre-pandemic levels and we expect that to stay elevated.

Speaker 1: discount versus conventional continued

Speaker 1: It just continues what we've said for the last three quarters. Discount is growing, it's essentially faster than conventional, and that continues for us and the market in general. Again, we're well positioned in discount in both of our markets in Quebec and Ontario, and we're pleased with our performance in discount on a relative basis and on an excellent basis.

Speaker 1: very pleased with our share.

Speaker 1: Private label throughout all of our banners is growing at double the rate basically of sales because our private label portfolio provides a lot of value to customers, lower prices, great quality So we are very pleased with that performance.

Speaker 1: I think our portfolio of 4000 or so private label products is the best quality it's ever been. And I think it's resonating well and being bought by a lot of customers more and more in our stores. Not just, yes the price, but the quality is there too and that builds loyalty and it builds repeat purchases.

Speaker 1: There is not much change on customer behaviour over the last few quarters. This is the fourth quarter basically of very high inflation so it is very similar to what we described in the last few calls.

Speaker 7: that's really helpful, Eric. That 4000 number on the private label, has that been relatively stable or have you been increasing the private label? It looks like there are more of them or they are just redone and they look good. I'm not sure if you have any questions. I'm not sure if you have any questions on that. I'm not sure if you have any questions on that. I'm not sure if you have any questions on that.

Speaker 1: Yeah, well, the packaging is redone once in a while and they're labeling requirements that forces us to redo packaging, so while at it we improve it. So yeah, no, I think the team's done a great job. The 4,000 number is plus or minus in the same neighborhood as it's been for a long time. I think the quality and the innovation has improved a lot over the last five years. So I think that's...

Speaker 1: That's reflected in the sales performance we're getting for those products.

Speaker 7: that's great. Thank you. And then just coming back to the launch of MOI, is there anything you can share with us at this point about the ease of conversion for existing next-gen MOI customers and whether we should be expecting another step up in spend around that in the current quarter?

Speaker 1: So for Mito and Moa members, card holders, it will be seamless, so they will have to do nothing, and their card will be...

Speaker 1: accepted on their purchases at our other stores, other banners, in addition to Métis. So at Jean Coutu there will be a campaign to sign up members. A lot of Métis members are sharp on Jean Coutu already, so for them it's going to be seamless.

Speaker 1: that do not, we will have to sign them up as new members. So we will have in-store campaigns, digital and in-store, to sign up the membership. We have 1.2 million members of Métis-Ouille-Moi, so we're looking to increase that substantially over the next year and we'll put some...

Speaker 6: gunpowder behind it on the marketing side. To your question Irene, to your question there will be some expenses in Q3 as they were in this quarter and it's part of the plan and it's part of the pool of the expenses that we manage so we'll give more colour on the next call.

Speaker 7: That's very helpful. Thank you. And then just finally, if I'm on PJC, kind of store very strong. Can you talk about what you're seeing in the current quarter, where we are in terms of sales levels by category, the Gory Relship to Pre-Pandemic, and how you expect that to evolve?

Speaker 1: So, thanks for the questions. Very strong front store sales at Chankwacu in the last few quarters. The coffin cold season has been long and strong, which drives traffic as you know in our stores, so it's very good for OTC sales.

Speaker 1: traffic and we sell a lot of other stuff. Beauty and cosmetics has done really well also. Since the end of March, coughing cold season has abated quite a bit. So we're seeing lower OTC sales currently and expect that to be so for the next little while until the next person.

Speaker 1: lower front end sales performance going forward but still healthy.

Speaker 1: On Rx, you saw from 7% or so increases we saw in previous quarters down to 5 in this quarter, still very strong Rx performance. You have to remember that last year we were distributing tests for COVID and that counted in Rx.

Speaker 1: performance. We were providing vaccines so there's much much less of that going on today and there's no more distribution of tests. So that cost a few points of growth on the RX but we're still very pleased with the 5% growth and we look for continued strong performance on RX going forward.

Speaker 2: I hope that answers your question. That's great. Absolutely. Thank you. Your next question comes from George Dumas from Scotiabank. Please go ahead.

Speaker 6: Yeah, good morning, Eric and Francois. Just a couple of follow-ups for me. On the pharmacy, do you know what the RX kind of volume, prescriptions, volume, do you know where they are versus pre-pandemic? And maybe on that front end, the front end 12% comp number, can you maybe break out how much of that was pricing?

Speaker 1: So we'd have to get back to you on volume of RX versus 2019. I don't have that top of mind. And on the pricing, there was inflation. There's inflation on the pharmacy commercial sales, not as elevated as what we're reporting for food and the 910%. It's more mid...

Speaker 1: forward. We're expecting some moderation on the on the pharmacite too.

Speaker 6: Got it. Thanks for that. On the gross margins for food, I think the last quarter you called out higher-feature penetration and weaker produce margins. Just wondering if that pressure was consistent this quarter and maybe there are any other headwinds that you might want to call out.

Speaker 6: But on the gross margins for food, I think the last quarter you called out higher feature penetration and weaker produce margins. Just wondering if that pressure was consistent this quarter and maybe there are any other headwinds that you might want to call out.

Speaker 1: Not really. I think the margin performance in the current environment, very competitive high inflation, you have to be sharp, you have to be...

Speaker 1: I think our teams are doing a really good job to deliver that value and deliver a decent margin. So like Francois said, we invested in gross margin, we're not passing on all the inflation that we received, but productivity on the labour front which counts on the cost of goods sold was better, so we're reporting a flat margin.

Speaker 6: Other than that, we're happy with our performance. Okay, one last one if I may. What would be your outlook maybe for tonnage growth for the second half of the year? I know we've been tonnaging it up flat to up a little bit, but your outlook there and I know this is a bit of a crystal ball question, but what needs to happen for...

Speaker 1: for discount to stop outpacing conventional going forward, I guess.

Speaker 1: account to stop outpacing conventional going forward, I guess.

Speaker 1: We don't provide guidance or outlooks for tonnage growth. Like we say, we provide many formats, many stores and we're looking for increased sales in all of our stores, be they conventional or discount or pharmacy.

Speaker 1: would have to change for discount to slow down. Like I said earlier, inflation remains elevated.

Speaker 1: It's hopefully going to moderate, but it's still going to be elevated versus normal inflation that we used to have. So you can expect this count to continue to perform well short term.

Speaker 2: That's all I would say. Okay, thanks for your answers. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Michael Van Helft from TD Cowen. Please go ahead. Good morning. I wanted to.

Speaker 5: get back onto the gross margin a little bit. You talked about the productivity gains from your pros in DC. Can you just give us a bit more color on to how that's ramped up over the past couple of quarters since you opened it and, and how much more upside there is to come from that?

Speaker 6: Well, it has ramped up obviously when you first go live, it's not near where it has to be, it's not near as what the old warehouse was doing, but it's...

Speaker 6: as we said, it's performing ahead of business plan and so there's been a steady increase in performance and eventually that will get to the business case, sort of the run rate level. We're not there yet. And then the fresh phase one...

Speaker 6: up and moving forward we expect to see sequential improvements as well. So doing it in phases sort of minimizes the overall impact.

Speaker 6: You know, we're trading, we're reducing labor and getting efficiencies in labor at the expense of depreciation, but I'm pleased with the year-over-year depreciation expense, 3.7, given the investment that we're making. That's in line with our expectation and I'm pleased with that number.

Speaker 1: It's a fixed cost operation pretty much. So as we load up the volume, as all the DSD, the direct to store deliveries are transferred into the DC, we're increasing volume and thereby getting productivity gains, efficiency gains, and that's what's helping a lot.

Speaker 1: efficiency in our operations, but in terms of the substantially higher fixed cost operation and most of the volume is in there now. So going forward it's going to be tweaks and improving it. We still see room for improvement but we've received most of the gain.

Speaker 5: Okay, earlier in the conference call, I think you said...

Speaker 1: Did you say there was 95% of the product was now going through the DC as a frozen DC? Yes. For our Ontario stores, so from 70% or so, 30% DSD, and we're now 95% DC, 5% DSD. So that's better for...

Speaker 1: for the customers because there's more product on their shelf and it's better for our efficiency both in the DC and in the store. So that's why we did it and so we're on our way. And do you expect to get to 100 or is it 95.5 is the word it's gonna plateau?

Speaker 5: It might tweak up a little bit, but we're pretty much there. All right, and then thank you for that. And then on the cost tied to the launch of your new loyalty program, the cost that you called out this quarter, and then we'll continue next quarter. I'm assuming those are mostly launch costs. But...

Speaker 5: Do we see those go away or are they replaced by higher program costs in the future quarters? Are those higher program costs that you're talking about in terms of the increased points, are those funded by vendors?

Speaker 1: those funded by expectations for higher sales? The launch costs are going to be one-time costs. The going forward costs, points costs, we're going to pay with increased sales and we're going to pay with greater revenues.

Speaker 1: that we negotiate, but that's all going to be part of the margin of the businesses. You shouldn't put a line, an additional cost on Metro because of this program. This program is to drive sales and drive customer engagement. Yes, it costs money, but it will provide a return.

Speaker 2: Great, thank you very much. Thanks, Michael. Thank you. Mr. Kadesh, there are no further questions at this time. Please proceed with your closing remarks.

Speaker 4: Before we end the call, I would like to remind everyone that Metro will be hosting an investor day on May 10th. A webcast will be available for presentations made by senior management.

Speaker 8: Please contact me directly or send me an email for more information. And again, thank you all for your interest in Metro, and we will speak again soon to discuss our third quarter results on August 9th. Thank you.

Speaker 2: We thank you for joining and you may now disconnect your lines. Thank you.