Empire Company Limited

Thank you, Sylvy. Good afternoon, and thank you all for joining us for our fourth 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 at empireco.ca.

There's 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 CEO; Michael Vels, CFO; and Pierre St-Laurent, 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.

I refer you to our news release 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. Last year's Q4 results were unprecedented.

We were at the peak of COVID panic buying. We saw off-the-chart sales and margin growth.

So, we knew last year's results are going to be challenging to repeat, but we did match them. There are three things you should take away from our results today.

One, we're making consistent progress on executing Project Horizon. It's how we matched last year's outstanding results.

Two, we're driving real sales growth. Three, we're maintaining good cost control even while investing more in our business.

Our strong cash flows allow us to make these investments while returning more money to you, our owners. Like all of you, I hope things get back to normal soon, most importantly, for the safety of our frontline teammates and customers in our country.

But also, because when we return to normal, you will see clearly what a fundamentally stronger company we are. I want to cover four topics today.

Our capital allocation strategy, our Q4 results, our future grocery market expectations, and our progress on Project Horizon. First, capital allocation.

Mike and I have discussed this with you a lot over the last four-plus years. We are strong believers in the power of a well-executed capital allocation strategy.

The strength that we have built in our operations and merchandising, plus our strategic investments in renovating our stores, Farm Boy business, FreshCo expansion, Voila and Longo's have put us in an enviable position. When Mike and I joined Empire, we lacked rigor here in our approach to capital projects.

Today, our team has the capability to effectively manage capital in our organization. We have shown we can identify great projects with very good returns, and we deliver on them consistently.

Over this time, we have also made two excellent acquisitions, reduced our net debt, and achieved an investment-grade rating from our credit agencies. Returning capital to shareholders is an important part of our strategy.

It's why we have continued to increase the dividend and have been buying back shares. To that end, today, we announced a 15.3% increase in Empire's quarterly dividend per share, commensurate with our strong cash flows and continued and growing confidence in our business.

We also believe that share buybacks are a useful tool to utilize excess cash. Today, we announced that we have renewed our NCIB to repurchase up to 8.5 million shares, or 5% of our outstanding shares.

Combined with the prior NCIB, this enables us to buy back the shares issued for the Longo's acquisition and more beyond that. And we are doing this while still investing in future growth.

For fiscal 2022, we will increase our capital spend to $765 million, which includes Longo's capital projects. Capital will be deployed to renovate and refresh current stores, continue to build out our Farm Boy network in Ontario and our discount network in Western Canada, advance our e-commerce expansion and invest in advanced technology, all high-return dependable Investments.

And Mike will walk through all this in more detail with you in a second. Now onto our Q4 results.

As a reminder, we are the first Canadian grocer to publicly anniversary the extreme stock-up phase of COVID last year. More than two-thirds of our Q4 last year was impacted by the most extreme levels of stock-up buying behavior we've ever seen.

Same-store sales last year were high and volatile ranging from a weaker decline in sales to a weaker growth of 52%, resulting in unprecedented 18% year-over-year growth that quarter. With that in mind, we are very pleased with our performance this quarter and throughout fiscal 2021.

Our two-year sales stack for Q4 same-store sales was 10.4%. Because of the extreme COVID impact on results last year, we believe the comparison to two years ago is a more meaningful indicator of real growth.

This quarter, our sales declined 1.3% and our same-store sales was negative 6.1%. While you know, I don't like negative numbers, but don't think anyone expected to see a repeat of last year.

In e-commerce, Q4 last year saw our established IGA.net and Thrifty Foods businesses grow sevenfold. As expected, we saw these e-commerce businesses slow from these highs in Q4 this year as all established e-commerce players will experience when comparing to the start of the pandemic last year.

However, even with last year's extreme growth, in Q4, we still grew overall e-commerce sales by 15%. This remarkable net positive increase was driven by the exponential growth of our new Voila business in the GTA.

And I'll speak more on our progress on Voila in a moment. COVID also had a large impact on gross margin last year, driven by sales mix and customer behaviors.

Last year, inventory shortages reduced our supplier partners' ability to provide promotional items, and customers shifted toward full service for a one-stop shop. In Q4 this year, we held our gross margin rate flat to last year without the same extreme COVID tailwind.

The recovery of our service departments of Horizon initiatives, particularly, our promotional optimization, offset the sales mix impact from the prior year to achieve this. And this year, combined with our Sunrise and early Horizon benefits, we delivered a record high rate of 25.5%, our highest gross margin as far back as we can look.

Now, this is impressive performance and I'm so proud of the margin discipline we've built in this company over the last four years. EBITDA margin rate was 7.4% this quarter.

The real story here is how we're closing the margin gap to our peers. In fiscal 2017, the average GAAP to our peers was 4.4%.

In only four years, we have reduced that gap to about 1.9%. That translates to an increase in adjusted EBITDA margin dollars of approximately 170%, a colossal achievement for our team.

We've shown we can drive meaningful sustainable margin improvement and we will continue to reduce this gap through Project Horizon, and we will not stop there, but we'll work to pass our competitors. Now to our expectations looking ahead.

As more Canadians received their COVID vaccinations, we expect to achieve three things. First, we expect many Canadians to gradually shift some spend back to restaurant and hospitality industries as lockdowns ease, workplaces reopen, and social gatherings resume.

Second, many customers will start to shop more often and shift their baskets mix. We expect basket size will decline somewhat and transaction counts will increase somewhat as some customers become more comfortable shopping multiple banners.

Customers will also return to buying more prepared foods and visiting our service counters as they reopened. We are already starting to see these trends in our stores.

Third, we expect the split between full service and discount banners will stabilize, but not return to pre-pandemic norms. We have revamped many of our Full Service stores and believe customers more than ever see the value in our full service offering.

In Q4, we saw some impact to our market share as some customers returned to shopping multiple banners as they began to feel a little safer. But we expect to hold on to substantial market share gains as COVID subsides.

We have also noticeably grown our discount presence adding over 1 million square feet to the discount network in Western Canada to meet the evolving needs of the customers. In Ontario, we now have 95 stores, and in Western Canada, we have 40 locations confirmed and we are on track to have about 48 stores opened by the end of fiscal 2023.

As COVID subsides and Canada is able to safely reopen, we believe we are very well positioned to meet these changing customer needs with our diverse network and well-aligned offer. While we expect the grocery industry will shift towards some pre-pandemic ways, we do not believe it will fully return to the way it was, and we've been pretty accurate in our projections over the last while since the pandemic started.

We've been pretty open with you. Finally, an update on Project Horizon.

As of this quarter, we are one year into our three-year strategy. I'm pleased that we are on track to deliver our goal of CAD500 million of incremental EBITDA and 100 basis points of EBITDA margin improvement over the three years.

Despite some early delays due to COVID, our team has done an impressive job catching up on key initiatives. For example, our promotion optimization initiative continues to drive early results.

Other initiatives like strategic sourcing are well established from Project Sunrise but continue to build efficiencies and improve our bottom line. And I'll share a few updates right now on key strategic initiatives.

First, we closed on our purchase of 51% of Longo's, including Grocery Gateway on May 10. We are thrilled to welcome the Longo's team to the Empire family.

This acquisition is important to our strategy to grow our presence in the key Greater Toronto area where we have historically been under-penetrated, as well the addition of Grocery Gateway complements our goal to win grocery e-commerce in Canada. Second Farm Boy.

May 17 marked the halfway point in achieving our commitment to double Farm Boy's store base within five years. We opened seven new stores in fiscal 2021, one store opened one weekend into fiscal 2022.

In fiscal 2022, we expect to open seven net new stores. We continue to be extremely pleased with our acquisition of Farm Boy, which has grown its industry-leading same-store sales growth since we acquired them.

Finally, Voila. My view on Voila, it does not change quarter-to-quarter.

We have the best solution and are more confident than ever in it. Yesterday marks the one-year anniversary of the first delivery to a customer, and that customer was me.

And one year in, our average customer shopped twice a month and their basket size is 3.8 times greater than the average bricks and mortar basket. As I said, Voila is growing quickly.

Over the last year, we've worked hard to build our workforce of talented delivery teammates fast enough to keep up with growing demand. Even still, our core performance metrics have remained above target.

We remain on track to open our second customer fulfillment center in Montreal in early 2022. This is expected to be even smoother than our GTA, CFC.

We already have customers helping us to scale faster and we're very pleased with our store pick solution, very pleased with it. And we've launched in 30 stores in fiscal 2021 and as we continue to build our CFC network across Canada, the store pick solution allows us to quickly offer e-commerce in regions where CFCs will not deliver or are not yet done.

We need to be able to serve customers where, when, and how they want to shop. And by the end of fiscal 2022, we expect to have up to 120 stores, which means we'll have e-commerce options in every province.

We are well-positioned to win grocery e-commerce in Canada. Sometimes I hear concerns, we're doing too much.

And maybe for some companies that would be a problem but we've assembled the best team in Canadian retail. There is talent and structure in our organization that we never had before.

We have the bandwidth and see more opportunities to grow sales, improve margins, and reduce costs. With that said, although we continue to find new opportunities to improve our business, our focus right now remains on Horizon.

Besides, we need to leave some upside for our next three-year strategy. And as a final note, I want to take this moment to wish the best Canada's athletes heading to the Olympic Games in Tokyo this summer.

Sobeys is the official and exclusive grocer of Team Canada, and I'm so proud of the work we're doing to support our athletes. With that, I'll hand it over to Mike.

Thanks, Michael. Good afternoon, everyone.

I'll provide some additional color on our results, our expectations for capital expenditures in fiscal 2022, and some comments on expectations for next year. As Michael noted, we do believe the two-year stack is the best way to interpret our results as we start comparing to timeframes that are particularly distorted due to COVID shopping behaviors.

During COVID, we grew our sales and market share to a level we didn't expect to see for several years, reflected in the 10.4% increase in same-store sales from the fourth quarter two years ago. Our gross margin rate was very strong, and as Michael Mad, the fact that we were able to match last year's strong COVID stock up driven rate shows the positive impact of our Horizon initiatives and the focus on sustaining the margin focus in our teams.

We continue to sustainably improve our gross margin performance as demonstrated by the increase of 150 basis points in our annual gross margin rate since Sunrise began in fiscal 2018. We're now over two years into the expansion of Discount in the West.

We've opened 28 FreshCo discount stores in Western Canada, 26 of them conversions of old food service stores. All stores opened in our first year continue to improve their results and in aggregate, are performing better than the Full Service stores they replaced.

As we opened the first stores in the first year, we focused on operational improvements and margin management. As a result of that experience gained, stores that opened in our second year are performing better than those opened in the first.

While the absolute net earnings of the Discount business in Western Canada has been relatively immaterial to total earnings so far. We are seeing strong improvement in EBITDA and sales compared to the food service stores that they replaced.

This quarter, there were some significant items in SG&A, which resulted in our SG&A as a percentage of sales being 20 basis points higher than last year. Not all of these items, however, will occur in the future to the same degree.

We had - higher incentive payments to our teammates in stores, distribution centers, and backstage. We do not expect to see these expenses at the same levels in fiscal 2022.

The new Voila business now has its full back-office SG&A and supply chain costs reflected in the company's total SG&A at significantly higher rates from when we initially launched to customers a year ago yesterday. And these expenses will continue and will grow with the business.

We also didn't see the same amount of sales leverage that arose due to higher sales in the stock up period last year and through the last year, we also hired new store personnel all the way through fiscal 2021 to manage storer safety and sanitization which has increased our store labor SG&A. And finally, right-of-use asset depreciation on the IFRS 16 is higher than last year, reflecting an increase in occupancy costs.

Not as material, we also had Longo's closing cost this quarter, which will not be repeated. These SG&A increases were partially offset by lower COVID costs and benefits from our strategic sourcing initiatives.

The temporary Lockdown Bonus of CAD9 million paid to teammates in regions that had government-mandated lock-downs this quarter was less than the Hero Pay paid to all teammates last year. We expect SG&A expenses in the first quarter related to the increased costs of maintaining sanitization and safety measures and other COVID expenditures to be between [CAD15] million and CAD20 million, less than the first quarter amount last year of CAD67 million.

This quarter, the effective income tax rate was 19.7%. As outlined in our news release, our income tax rate for the quarter was impacted by some revaluation to tax balances not all of which will recur in the future.

Excluding these adjustments, we expect our tax rate for the quarter would have been between 24% and 25%. The effective income tax rate for the full year was 25.8%.

And excluding the effect of any unusual transactions or differential tax rates on property sales, we're estimating that the effective income tax rate for fiscal 2022 will be between 26% and 28%. Earnings per share includes CAD0.04 per share of Voila dilution for the quarter and CAD0.18 for the year, less than our initial estimate of CAD0.20.

In fiscal 2022, we expect to see improvement in the profitability of CFC 1 in Toronto, as volumes continue to increase and costs reduce due to improved operational efficiencies. However, Voila's total costs will increase as CFC 2 in Montreal begins operations and store pick e-commerce is implemented in up to 90 additional stores across the country.

In total, we believe that the impact of Voila's continued growth will dilute fiscal 2022 net earnings by approximately CAD0.25 to CAD0.30 per share compared to CAD0.18 this year. Based on our current forecast of sales growth, we expect that fiscal 2022 will reflect the highest net earnings dilution of the Voila program as CFC 1 is expected to begin to reflect positive EBITDA results towards the end of the third year of operations, partially offsetting the impacts of opening new CFCs.

Equity earnings increased year-over-year mostly due to higher earnings from Crombie REIT which continues to perform well despite ongoing disruption caused by COVID-19. Crombie has built a solid foundation and are well-positioned to continue to deliver with a high-quality portfolio over half of which is anchored by Empire grocery banners.

2020 was a big year for Crombie as they saw four major developments reach substantial completion including our own CFC 2 in Montreal. Cash flow generation continues to be strong with free cash flow of CAD745 million for the year.

Our focus on returning cash to our shareholders continues. Today we announced an increase in Empire's quarterly dividend per share from CAD0.13 per share to CAD0.15, a 15.3% increase.

Our dividend per share has grown by a compound annual growth rate of 10.9% over the past three years. We also renewed our share buyback program following the buybacks of CAD153 million in fiscal 2021.

We intend to more than offset the shares issued as part of the Longo's transaction and have, since the year-end, already purchased the equivalent of 1/3 of the shares issued in that acquisition. Capital expenditures, of course, are a key element of our capital allocation and strategy.

Our capital investment for fiscal 2021 - sorry, our capital investment estimate for fiscal 2021 was between CAD650 million to CAD675 million and we ended the year at CAD679 million. For fiscal 2022, we expect to invest approximately CAD765 million back into the business.

About a half of this investment will be allocated to renovations and new and converted stores of 10 to 15 FreshCo stores opening in Western Canada and seven net new Farm Boy stores in Ontario. We continue to invest in our advanced analytics technology and other technology systems which will be approximately 15% of the total investment.

We will invest approximately CAD80 million in Voila which includes our share of the Montreal and Calgary CFC build costs, up to 90 new store pick up locations, additional spokes, and associated investments in technology. This estimate also includes capital for Longo's projects.

As we begin fiscal 2022, we know the year will continue to be affected by the pandemic, but it's really difficult to predict the net impact of lower results due to COVID and the positive effect of Project Horizon initiatives. We expect that during fiscal 2022, same-store sales will reduce somewhat as industry volumes decrease compared to the unusually high industry sales in fiscal 2021.

Fuel volumes are also expected to increase as we see travel restrictions reduce and economic activity increase. We believe our margin rate will continue to benefit from Horizon initiatives, along with the addition of Longo's which has a higher margin rate than the Empire average.

Margin will be partially offset by the effects of sales mix changes between banners due to the expected easing of COVID restrictions. Both comparisons in fiscal 2022 for same-store sales and earnings per share in particular, will be affected as we lap a full year of COVID results embedded in fiscal 2021.

Finally, fiscal 2021 is a year we'll certainly never forget. We launched Voila, our home delivery service in the GTA, our store pickup service in four provinces, and our new three-year strategy, Project Horizon.

And we made great strides with our FreshCo and Farm Boy expansion plans and welcomed Longo's to the family. Going into fiscal 2022, we are up against the tough comp of COVID but we saw how Horizon initiatives improved the comparison in Q4.

Fiscal 2021 was a solid year and we are looking forward to what we will do in fiscal 2022. And with that, Katie, I'll hand the call back to you for questions.

Great. Thank you, Mike.

Sylvy, you may open the line for questions at this time.

I just wanted to talk a little bit about the overall environment. So, wanted to start with the promotional environment in 4Q and expectations for 1Q and beyond.

And then, I'm wondering if you could weave into what your thoughts are on inflation, both on the cost - at cost and at retail in fiscal 2022, what your perspective is? And then I had one other question.

Hey, Karen. I'll take the first question then I'm going to throw it over to Pierre and Mike for - if they want to say anything on inflation.

And thanks for your question. I appreciate it.

We predictably see customers purchasing more promotion right now this year for a few reasons that should be pretty obvious. One, because customers are not stocking up as they were last year.

Two, planned shopping is increasing. And three, suppliers are more in control of their production and inventory than last year, not completely back to normal, but more than last year, so there is more availability on the shelf.

In terms of the competitive environment, it's always been a competitive environment, and we don't expect this to change. We're not seeing anything strange out there and I don't think it will be any different from pre-pandemic times as things get back to normal.

So, it's competitive, it's normal, and that's what we're seeing.

Okay. And then on inflation, cost, and retail?

I'll take it. So, you have to remember, we're coming up through a complex quarter compared to last year, definitely not a good benchmark for us.

There are costs that have been added to various supply chain across the world, some of those were temporary, some were not for sure. So, suppliers always ask for cost increase, and we have since - we have seen our share of those.

We are not accepting all price increases as we go and we think the business in general is returning to more normal, which should result in a more normal inflation rate over time.

Okay. And then I wanted to just ask a question about FreshCo.

So, I'm wondering if you could just elaborate a little bit on what if anything changed from an execution perspective for the fiscal 2021 class of stores to improve the profitability? Or is that really just more a function of the pandemic helping with an improved profitability profile?

So, it's not the pandemic. Our discount stores probably were done better without the pandemic impact.

It was very hard to open them, hard to staff them, and starting a new business in the new geography was - it was very difficult to the management team and they did an amazing job opening the stores they did under the conditions that they had to deal with. So, certainly, they would have preferred to have done all in a more normalized environment.

The reason that our second year of stores are doing better is about operational excellence. When you start in a market, you've got a new management team, you've got a new franchisee, the competition response is not entirely predictable, and you're learning.

You’re just learning lessons and realigning your supply chain, receiving product out of new distribution centers. So, as you roll into - as we roll into the second year and improve the efficiencies, moved our labor rates to where our targets were, got a bit smaller with our promotions, all of that was experienced that our new franchisees and our new management team in Western Canada were able to apply to the second year of stores.

So, it really is just more miles in the saddle, a management team that’s on its rhythm and franchisees who were able now to learn from each other, from other franchisees in the same region. And they're all excited, they're doing an amazing job and we're actually very happy with the progressive improvement that we're seeing in all of those stores in Western Canada.

Okay. And then just last one for me.

In terms of the gross margin, obviously, you talked about promotions resuming but that was offset by Project Horizon benefit. Wondering if there is any way you could quantify the Project Horizon impact on the - in basis points?

And then on that note, obviously, you had dilution from Voila in this year, but when I look at the two-year gross margin change versus the prior - versus 2019, it was down pretty meaningfully and I don't think that that is explained by dilution.

So the - a lot of the Voila impact in SG&A and, in fact, the Voila gross margin is quite healthy. The impact of the amount of Horizon benefits are very hard to separate out and put a number to.

We're going to be in a position that we'll certainly give you a perspective on how we feel about the success of those initiatives. But we're going to need to be judged by our sales increases and our margin rate.

And we - the offset that we referred to was last year, a margin rate we felt were artificially high because of the everyday pricing, that a higher percentage of the basket was sold at. And we made up more so than this quarter and we made up that headwind with improvement in efficiencies in our promotions work that was mostly the analytics and the work we've done on our Horizon initiatives.

Okay, great. Thanks very much.

Thank you very much for taking my questions. Good afternoon, everyone.

Michael, I just want to follow-up a little bit on a comment you made in your opening remarks. One of the underlying tenants of Project Horizon is that the initiatives that are embedded in Project Horizon are designed to drive market share increases.

And you stated that you anticipate - you expect that you'll be able to sustain the majority of the market share increases that you saw in the last year. And I'm just curious about what would be the drivers of that?

And then more importantly, are you doing anything special to try and keep the new customers? And is there anything there that you can share with us?

Yes, I'll take that. Great question and I'm going to answer the first part and I'll see if Pierre wants to answer and give away anything to you on the second part.

I'm going to separate it into two pieces. I'm going to separate out COVID and I'm going to separate our Horizon, because I think they're two different moving pieces.

Customers turn to us during the pandemic more than others because we had the products and they felt we were a safe place to shop, and that our operations were incredibly efficient, productive more than any other time in our history. So, we gain market share through that.

We brought in new customers who saw the value in what we were doing in terms of pricing, in terms of offering. And we believe that we'll retain a good portion of those customers afterward.

And we've done everything we can, some of which Pierre will not tell you, to retain those customers. So, good.

So, even if nothing else has happening, good, we got more market share than we had two years ago. Now turn to where we are compared to pre-pandemic and even compared to last year in terms of our operations, our merchandising, but especially, our Horizon initiatives that are going to go, and most of what you're seeing right now from Horizon almost all of it is margin improvement because we said that margin improvement would be in the first year and a half than in the last half of Horizon - especially last year, you'd start to see even more market share.

So, right now, it's the operation, the merchandising plus, that we had more customers try us out like that has driven the market share. And then, we'll build on that and grow market share through our Horizon initiatives and improved.

I mean, it's always improving and so [indiscernible] is Mike Venton and everybody else in the company. And now we got Longo's, Farm Boy is always great, but that's - so that's what I wanted to separate out because these are two different moving pieces.

So, gain market share, we got to keep a good portion of it, and then we got to go after more. Pierre, what do you want to say to Patricia?

Anything you want to…

Very well said. We saw a change in customer behavior during pandemic, and we strongly believe that we keep some of those post-pandemic.

And we saw some interesting growth in some categories, and It's where we're seeing good stickiness. I think customer discovers better offering.

We have been able to build over the last two, three years. So, I think we'll benefit from that going forward.

And yes, Michael is right. Now we're focusing on Horizon, margin expansions through different initiatives, and pricing from owned brands.

And now we are working to continue improve our productivity per square foot. So, we are in much better shape than we were pre-pandemic, and we'll keep as much as we can from those increases.

Okay. Thank you very much both of you.

Can I have a follow-up question. This time Voila and your plans to, well, add another 90 of your store pickup in fiscal 2022.

I'm just curious whether that would have been in your original plans? Or were you guided by the experience that you had that the first 30 to roll that out faster?

If I understand you correctly, Patricia, I wanted to make sure I understood the question. Are you saying that the rate of improvement was in our original plans or are we going faster than what we had originally anticipated?

Are you going faster than you anticipated because you might have seen a good experience with the first one you opened?

Yes. It's closer to what our original plans were.

I'd say, if we had to say, are we going slightly faster or slightly slower. We're actually probably slightly slower just because it's just limited by the pace at which we can put the new process into each store.

But we like the outcome, we've seen good volumes, and our customers really like it. And so, that's what's driving us to put it into more stores.

Michael, you called out in your comments the IGA.com, your Quebec business online doing 7 to 10 times last year, would have done the year prior and obviously cooled off this year. Could you provide any insight on what - obviously, you saw a decrease in that business, how that settled out with respect to your relative share in that market, understanding, obviously you didn't put up the same sort of growth numbers a bit.

And then, a follow-up to that would be, how do you think about moving that business forward as you launch your Voila offering into that market later this year and sort of [indiscernible].

I mean, I think that we've outperformed the market in terms of the - in the markets that we compete in any cost. You got to remember in Quebec, we had a - we had the number one market share.

We still have the number one market share, and that - it's just moving depending on how safe people feel leaving their homes. And if you think back, and - when you're talking 7 - 7, 9, 10 times the volume that you would normally do, I mean that's first of all unsustainable then it is strange right.

And so, that was always something. We knew that was going to come off that kind of high.

But what we're seeing is that, that the volumes in all the markets, in e-commerce are remaining at a higher level than they were - much higher level than they were pre-pandemic, but often the heat of what that was. And we're also - and you know what, you asked about Quebec, CFC, and our confidence in that.

It's a different situation. In that market, we're going to be able to transfer over customers to an even better solution and take more customers from our competitors.

And what we also see is that - look at Katie and see if I'm allowed to say this. But we see that - customers that start shopping on us in e-commerce spend more than 1.5 times more weekly with us overall, and they've become our most loyal and our best customers.

Very few customers shop only one way, especially in Quebec with us. They shop bricks and mortar and the shop e-commerce.

So, Quebec is, I wouldn't say easy because it's not - never easy but it's - we have already the biggest market share that will transform the - transform over to - transfer over to Voila and that is efficient. It make more money, better service to our customers and then that translates to our brand into our bricks and mortars, so and so.

That's after a win-win-win. I'm really happy about that.

Great. Thank you, Michael.

And if I could just one more question. Just on the inflation discussion and any - and the expected normalization of, so the consumer behavior increased restaurant visitation et cetera.

How do we think about the evolution here? Or how you thinking about the potential evolution of food inflation given that one of the overhangs over the last period has been the sort of the supply chain and the redirection of a lot of fresh and related into grocery and out of our restaurants and clearly there will be increased tension or tightening of the market potentially as more restaurants get back to something approaching normal hopefully sooner than later from a social point of view, but that's not from any other reason?

Yes, Pierre and I looked at each other. We don't think it will be a major impact on us.

Especially, walking through sort of the improvements that you've made that are driving some of those market share gains. You mentioned private label, and wondering where you are right now with complement how you feel about that complements relaunch?

And whether it achieved your objectives?

Very good question. Thank you.

So we now refer to private label as owned brands at Empire. So own brand to remain strong in the basket, very if you with our progress rebranding is going extremely well.

The business is generating improved results and penny profits are improving in own brands. It's a huge opportunity and we know that since far as across the country and we still working on it.

So, and as I've mentioned in the past in attrition is not our main focus in own brands. It's about playing the right role in the category and the profitability by product.

That's our main purpose, and it's how we'd be and it's how we drive the business actually with that growth.

That's really helpful. Thank you.

And can I take it from that from your comments that you are in fact able to achieve the margin advantage with your own brands that you had been targeting?

Absolutely. It's one of - it's own brand program is one of the initiatives of Horizon.

So - our own brand will contribute to the margin expansion.

That's great. Thank you.

And then just switching over to FreshCo. You know that both in the release and in the remarks that although the stores in Western Canada are not delivering a material EBITDA contribution they are certainly outperforming the conventional stores they're replacing.

So, how should we think about, I guess, the maturation cycle of those stores, and the path to delivering a more meaningful EBITDA contribution?

I think the easiest way to put that, Irene is, as we gain more critical mass in the markets, we expect the efficiencies to improve in all of the stores. We do have, excuse me, a point of view as well that as restrictions continue to ease, particularly in the West, that we'll be in better shape to increase our sales and increase the number of customers in the stores.

So, it really is just consistent increase and consistent improvement. So, as I mentioned, the stores are on a good cadence and a good rate of improvement, and really just continuing that.

That's great. Thanks, Mike.

And then just one final one. I know it's been what, about I guess six weeks that Longo's has officially come into the family.

Just wondering about sort of anything you might be able to share with us in terms of thoughts around the integration around sharing the best practices around - just anything you can share on?

Yes, sure.

Sorry, not the integration because I know that it's very understandable, but you know what I mean.

Yes, I know what you mean. And you know it's early days, but we had a great plan.

Anthony and his team, and our team in terms of how to work together, we identified synergies. We're working on getting those synergies.

We're working together and discussing ways to run supply chains and comparing notes on e-commerce. And I'm got to tell you that both Farm Boy and Longo's, it's like a treat to our to partner with them.

And as always, our goal is just - we're a big company and we're hungry and just not to drive them too crazy. And once again, we're doing - we're simple folk.

Irene, we're simple folk. We just - if something works, we just keep doing it.

And the Farm Boy went so well and we - what did we do? We went to JL and Jeff and we gave a menu.

And what do you want to pick from the menu, and they chose it and along goes is look at our menu too and they got to figure how much they want to eat at one time, but this is so much when you bring these companies together and to have leaders like JL and Jeff and Anthony Longo. I mean these are pros.

They know what they're doing and attract the Pierre, JL and I had dinner last night together and they were talking private label and produce and just what - forget what we can bring to them. What they can bring us has been awesome, and when Pierre talked about owned brands, a lot of it is - are learnings from Jeff and JL along with our great team that just keeps getting better.

So, it's a fact, that's not something keeps me up at night.

Didn't think so. Thanks so much.

Thank you.

I wanted to talk - go back to that what you're seeing in the quarter and what you're seeing for fiscal 2022 so far but you, because you talked about in the gross margin discussion you talked about some pressure on the margin from mix between banners. So I'm assuming you're talking about a shift towards discount as already started.

Is that accurate?

In terms of the mix comment, that would be correct, but relatively minor in the quarter.

Okay. So is that picked up recently as we've seen cases come down and mobility increase?

And what do you - what are you doing to try to keep that customer because you did mention that you plan on keeping a lot of that market share. Is your - are you fighting to keep that market share within the conventional banner, or to capture it in discount as these customers change channels?

I think it's a lot of it, what Michael just said previously, is the customers are in our stores. The number one price is to use our improved executions.

I like the new banners that we have and Farm Boy and Longo and of course the new stores we have in FreshCo to maintain them within the Empire ecosystem, and there is clearly over time as consumers shop more banners we're going to have to be sharper, and we're going to have to execute well but we set ourselves a target of maintaining and sustaining as much of that sales benefit as we can, and it is really about execution and making sure that all of our Horizon works. Secondly, what we're doing on analytics, personalization, and other initiatives like that keep the customers within the Empire family.

I think that's a good answer like Dave. I just don't want to overstate it.

Sometimes these things are very small and incremental and they start and - but when you read them in, not a flag the media, but when you read them in the media, they seem like huge titanic shifts, which just don't happen like that. So, Michael, we can't comment on quarters before the one we're talking about.

But things change very, very slowly in this business and customers are very sticky. But - I also want to say, we were growing market share pre-pandemic, we grew market share through the pandemic, and we also intend to grow market share post-pandemic.

The issue is how much of that - and we don't have every answer, we try to have a crystal ball, but we've been pretty darn good, as I said, since the beginning of the pandemic. It's just trying to get how much returns to a little bit of normal and how much does it, and that - and you guys have your own guesses we have ours.

We're bullish, but we do - you know, we're realists too. We know what we can keep and what we're not going to keep, and then we go after some more.

So, just don't want to overstate it, it's just not as titanic as people make it out to be.

Okay. On the e-commerce side, so you've got your first spoke location up and running.

Can you discuss the economics of those spoke locations? What are the key benefits in delivery time or costs or whatever intend?

Are these also initially dilutive and then they improve profitability with volumes as well I'm assuming?

So, the primary reason for spoke Michael is to, first of all, improve your range which they do. The second, but really more important reason for having one is to reduce the congestion at the CFC as the volumes increase it just becomes just logistically impossible to have all of the small cube [indiscernible] waiting and lining up to take each of the orders away every day.

So, the economics of it for us, is as you get to a point where your congestion at the CFC mostly vans loading becomes significant, that's when the scope make - the spoke makes sense and reduces the congestion. The spokes are not massively expensive, they're relatively small pieces of real estate.

They're principally cross-dock facilities and they don't in terms of the total results of the Voila business. They're not that material in terms of changing the trajectory of the earnings.

So the Voila business doesn't see a dip in the earnings when the open spoke, that shows up on the radar. I mean I'm not downplaying the impact, because it is part of the business model, but they're just not at the same level of cost and complexity as obviously the big CFCs.

Effects across your delivery times?

At the margin we've still need to take the product from the CFC to be spokes and you still got that transit, which you don't save. It's not the spokes are not significant inventory locations that's still the CFC, and so at the margin it will improve your time.

It really improves the efficiency more than it improves the time to delivery.

Okay. And how many do you expect to have of these when you get to the scale that you expect over the next few years?

I think - we have the right to be wrong here, but I think the plan was roughly 400 - but plus a one on - plus or minus one of those.

Okay.

And then we would also, sorry - we would also have a spoke, into service - as well.

Okay. And actually last question.

When you start I guess going forward now will Longo revenues be included in your same-store sales over the next four quarters? Or you going to wait till they've been there for 13 months or for 12 months?

No we'll include them.

Thanks, and good afternoon. I just wanted to follow-up here.

Just with regards to the comments on private label. Is it fair to say that it's still relatively early days in terms of the overall contribution from that initiative to the Horizon targets, or is the progress material at this point?

It's early. We followed roughly the same press - the same process we did for category reset.

So we are doing things by ways, by categories. We completed wave one.

So that will install in the near future and then we're working already on the Wave 2 and Wave 3. So, Wave 2 will be in September.

So, during the year, we should see incremental margin expansion through these initiatives. So, early days so far in our lower margin.

And then with regards to the efforts on promo effectiveness and efficiency, I guess, supported by data analytics and new initiatives there. Would you say that the gains so far have been pretty low-hanging fruit and improvements from here get a little tougher or how are you looking at that?

No, I think very encouraged by the adoption of the tools by the team. And some surprised obviously because the engine is very powerful to crunch a lot of data.

No, I don't think there is lowering fruit and more difficult things. I think that will be a constant progress and it's all about every single promotion and we have different seasonality.

So, over time, we will continue to improve our ROI, and promotion, and investment on both sides, on our side and supplier sides. So, very pleased also with the support from our supplier partners.

They are highly interested by the result we have so far and we will improve both ROI - on both side, the ROI for them and for us. So, more meaningful promotion and more attrition.

Okay. Thanks.

And then I've got a couple of questions just on Voila. I'm just wondering, what have you seen with regards to customer retention?

And what are the patterns that you've seen in terms of people trialing Voila and then evolving and shopping as your execution has also evolved?

Terrific. We're seeing incredibly high rates of retention.

So, the key is, you got someone to try Voila. And once they try it, the level of retention is extremely high.

And then as they progress, they buy more and more product from us in a higher percentage of their total shop - in Medicaid, it's a very high percentage of the total shop. As you may have seen, because you follow these things very closely Mark, that our food product choice, especially on fresh is really good now and that we're seeing that really pop.

And so, no, all the metrics are good, just get someone to try and they --most of them get on.

And relative to your expectations or plans, how aggressive have you been in ramping up the marketing and promotion side of it?

I guess both around retention, but also around attracting new customers.

I say medium, I'd say that because scale for us is really important. We want to attract the customers, but we don't want to do it stupidly where we're just getting customers because we are offering some ridiculous deal.

We're offering value. We have delivery passes, we have all sorts of offers that are really innovative in terms of marketing to customers, and we just had our first anniversary offer to our long-time customers as well.

So I think medium, I think if we really want to turn up the number of customers, we could be more aggressive, but I think we're doing it in a really smart way.

Okay, thanks. And then just last one maybe.

With regards to the sort of flattish outlook for EPS growth this year and then the longer term or three-year target for 15% growth CAGR. Can you just help us understand sort of what the key levers would accelerate next year?

I guess you sort of, Michael talked about same-store sales growth or market share gains, accelerating. But I would guess that would be supported by gross margins continuing to expand and is better SG&A leverage a key part of the plan or is it mostly topline in gross margin?

Mark, I just have trouble getting to mute button there. I think we've said consistently from the outset that we're going to be very focused on the SG&A line and reducing costs.

But a majority of the improvement in Horizon over the next few years, well, at least over the Horizon period is going to be in our topline and our margin rate.

With respect to your promo effectiveness initiatives and your data analytics. Is Empire's reliance on a partner system for loyalty data is that a hindrance at all?

Are you able to get all the data you need in the manner you need it?

I mean I think we made great inroads with our partner, and look it can always be better and we're always looking for better ways to do it, but I think that the-- so I think that the relationship we have has been much, much better and that we get a lot of data that we need. And to be perfectly honest with you, Vishal we have all the data in the world we need.

It's a matter of what we do with that data and if that we do internally now and it's fueling all of our Horizon initiatives with that data. So definitely a little better, sure, but that's not the sticking point.

The sticking point is to take what we have and make a decision.

Okay. And Michael, maybe thoughts on just strategic orientations.

Empire's acquisitions mainly focus in the conventional arena, have focused on GTA, let's say. But the fastest-growing demoing immigrants, minorities, and they tend to shop at discount more.

And wondering if this is something that Empire reflects on and if they feel their mix of discounting conventional as appropriate in the GTA.

You know what, a lot of [indiscernible]. One is, we're just digesting our partnership with Longo's.

Second, we feel that our offering to all Canadians channel but also initiatives so we don't talk a lot about in terms of our Full Service, is having is really great way of great plans to be able to capture that. We're always looking for opportunities, I suppose.

But I think that we have the assets especially, in the GTA, to win the GTA. We set out in 2017, as I said in our strategic plan, knowing that we didn't have those assets and that we needed to grow e-commerce and we've done everything we have to do now, we just got to execute the hell out of it.

I just have a few quick questions on Voila. Michael Vels, you said that it lost CAD0.18 for the full year and I believe you gave the loss for the third - the fourth quarter, but I missed it.

CAD0.04, Peter.

Sorry. Say that again.

CAD0.04.

CAD0.04. Okay.

And then can you talk a little bit about the accounting for the launch of the Montreal CFC, like it's launching in the next calendar year. Can you - when is the launch date and how do you deal with costs up until that time?

Is everything capitalized or are there expenses that are falling to the bottom line?

So, we don't have an exact date. We're saying early in 2022 and we'll be more specific about that as the construction schedules progress more and we get our testing done with the installation of the Ocado Technology Systems.

Because, and I know this wasn't your question. We have a number of customers, many customers that were converting over, and those customers need to see as good or better experience with the launch of the CFC, and we're going to make sure that we're 100% ready.

So, we're staying a bit flexible on the exact date of the first order, because we want to make sure our customers have a great experience. In terms of the accounting, it's as you might imagine, you think that is, say for example, a design cost or a construction cost is capitalized any of the back-office SG&A that we're adding and we are going to be heading that as we go through F22 would be expensed.

And then any expenditures that Crombie does on behalf ultimately is realized in the form of at least when we take possession.

Okay. And then, Michael Medline, I believe I heard you say that you're going to try and convert people from IGA.net over to Voila, the Voila CFC in Montreal, is that correct?

Yes. In the territory where the Voila par IGA covers.

So how does that work? Because I believe IGA is a franchise system in Quebec.

So how do you deal with the franchisees on that issue?

I think we had discussion with franchisee on that topic since many years. So, we all aligned on the purpose of adding an automated CFC, so the franchisee are well engaged in our strategy.

We're not seeing any issue by doing it. By the way, we have a huge, in Quebec market not only in our business but in general, the unemployment rate is very low.

There's a lot of shortage in retail and general so a dealer will use their resources to serve customer whose coming in the store and will serve e-commerce customers in a more efficient way to CFC. So, it's a win-win through the CFC, we'll add more window that is open.

So, we'll have more chance to meet the demand. And like Michael said, the - when we look at the profile of these customers, they're more loyal to the entire ecosystem by 1.5 times.

So, there is a win-win for us, for them at lower cost and a most and better efficient result. So these things has been shared with dealers over the last two years.

So, we have very good discussion, we have very strong relationship with them, and they're really well engaged in that strategy.

Okay. And then just lastly, the CFCs require a lot of labor particularly, drivers given the labor environment.

Is that holding up, you know - the unfolding of these businesses at all?

The labor is tight all over the place, but we're doing a great job, being able to find drivers and great people to work in our CFC and for our organization. But there is no doubt that labor is tightening.

Thanks for squeezing me in. Just one quick question on Voila.

I know, food waste is a big expense and I know Ocado has done in past food waste ratio of 0.4%. I'm just curious where are you now in that journey for CFC 1?

And is improvement in shrink one of the key drivers to allowing you to achieve EBITDA positive towards the end of year three. Thank you.

We're happy with our experience to date. We started off, as you can imagine Chris, new business.

The only customer was Michael Medline. I could imagine the-- and he didn't buy everything that was available.

So, shrink numbers in the early days were high. As we've gained volumes and had, of course, become more comfortable with our customer, with our suppliers our shrink numbers have reduced.

And I think it'd be fair to say that we're not at our targets, but we're getting much closer. So, part of the improvement through F21 has certainly been shortened, but it's not the most significant driver of our numbers for F22 because the CFC is actually doing much better than when we started.

And while they certainly can be better. It's tight today, it's just going to get tighter.

Great, thank you, Tori. Ladies and gentlemen, we appreciate your continued interest in Empire.

If there are any unanswered questions, please contact me by phone or email. We look forward to having you join us for our first quarter fiscal 2022 conference call on September 9.