Empire Company Limited

Thank you, Sylvie. Good afternoon and thank you all for joining us for our third 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 is a short summary document outlining the points of our quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer; Matt Reindel, Chief Financial Officer; Michael Vels, Chief Development Officer; and Pierre St-Laurent, Chief Operating Officer.

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. Good afternoon, everyone.

Our thoughts today are with all those impacted by the awful crisis in the Ukraine. There's obviously a large and proud community of Canadian Ukrainians, many of whom are our teammates and our customers.

We stand solidly with them. Now on to our third quarter results.

Our team delivered another outstanding quarter. Earnings per share of $0.77.

This is our highest EPS in memory, and we achieved it navigating some of the choppiest quarters we've seen in a long time, floods in BC and other global and local events that disrupted the communities and the supply chain. The Omicron surge presented new challenges in labor and the inflationary environment continued to impact our industry.

Through it all, our team delivered historic performance. Free cash flow is up 75% this quarter.

DBRS upgraded our credit rating trend from stable to positive, and we substantially completed our fiscal '22 share buyback target. Meanwhile, Horizon remains on track, including the $500 million of incremental EBITDA by the end of fiscal '23.

Earlier this week, Voilà launched its second CFC in Montreal to the public. We have never felt better about our business or our future.

And the most encouraging thing is that there is no silver bullet here, our performance is just based on strong execution across the board. So today, I'll focus on just three topics.

Our results, how we're successfully managing our business and what the future holds for Empire. First, results.

Sales grew 5.1% this quarter. Same-store sales were negative 1.7% as we comped severe lockdowns across much of the country last year, but we're up a strong 8.3% over the last two years.

E-commerce sales increased 17% over last year with the addition of Grocery Gateway and continued growth in Voilà, partially offset by declines in our other e-commerce platforms due to the significant stock up that happened during last year's lockdown. We continue to improve our gross margin, which was not a foregone conclusion this quarter.

We faced a difficult comp as we drove exceptional gross margin improvement last year when we started to capture the benefits of our promotional optimization tool. In addition, this year, we faced cost pressures with the timing of inflation pass-throughs, increased fuel prices and supply chain disruptions that forced us to rely on alternative supply typically at a lower margin.

Not only did we sustain our strong margins, we improved them. Our gross margin rate, excluding fuel, grew by 41 basis points and this is exactly the performance that gives us confidence in our future.

EBITDA margin also grew 50 basis points this quarter to 8.1%. This reflects the benefits of our Horizon initiatives, the addition of Longo’s and an elevated contribution from Crombie.

Delivering results like this is possible, thanks to the underlying strength we have built in our business. With that in mind, I would like to spend a few minutes speaking to how we're successfully managing our business to deliver current performance and position ourselves for the future.

Every day, our team continues to sharpen our execution, find new ways to bring Empire to the next level. Last year, we further evolved our national structure to centralize all sourcing responsibilities.

And this team is already producing tremendous results. Without this structure will be hard pressed to navigate the inflationary pressure and supply chain disruptions our business is facing.

We have received an unprecedented number of supplier cost increases over the last few months. Not only has our team managed to keep prices as low as possible for our customers but we've also seamlessly executed the required price changes and minimize the impact on our performance.

All the while, our merchants are innovating the customer experience and delivering value through more impactful promotions and private label. And our strong supplier partnerships, combined with the prodigious efforts of our teammates to ensure products get on shelves are helping us mitigate some of the supply chain challenges our industry is facing.

We received an industry report that tracks on-shelf availability, effectively how stock a retailer shelves are. We have continued to keep ourselves stock better than the market average over the last 13 to as we have through most of the pandemic.

Customers can find and purchase more products in more instances in our stores, and this provides customers a more effective and just playing better shopping experience. In addition, we recently promoted Pierre St-Laurent to the role of Chief Operating Officer, now overseeing all our full-service discount and e-commerce grocery operations.

These teams are working more closely together, finding efficiencies and focusing on solid execution day in and day out. They're streamlining all our grocery operations, supply chain and merchandising to win the customer with every tool in our arsenal while driving efficiencies throughout the Company.

And as we find new ways to simplify and focus our operations, it further improves our execution on Horizon by giving our teams even more runway to focus on achieving those goals. Now shifting to look ahead to our future, I feel like a broken record, but our business has great momentum, and we've never felt better about what's ahead of us.

As we said, we remain confident that we will deliver our Horizon targets next year. but the benefits don't just stop when Horizon ends in fiscal '23.

Actually, material and additional Horizon value will continue to be earned in fiscal '24 and beyond. We're building tools to dramatically improve the store customer experience.

We're renovating, converting and building the best-looking grocery stores in Canada that continue to drive our best returns, and we're finding more personalized ways to connect with our customers. These initiatives start generating benefits during Horizon but will really hit their stride in fiscal '24 and beyond.

Thanks to these and the other investments we're making today, we will reap incremental rewards from Project Horizon for years to come. As we begin to think beyond Horizon, we are no longer a transformation story, and we are proud of that.

We are now consistent operators. We now execute with precision and we have a well-earned reputation that's tremendous business partners.

We deliver value to our customers. We offer solid returns to our shareholders.

After fiscal '23, we will not release another three-year plan. Our focus will be on execution, and we intend to grow our results at a greater rate than our competitors.

Now before I hand it over to Matt, I want to take a moment to congratulate our Canadian Olympians and Paralympians on a fantastic winter games and wish the best of luck to the Paralympians competing in the final few days. Sobeys is the official and exclusive grocer of Team Canada, and I'm so proud of all that we're doing to support our athletes.

Now over to you, Matt.

Thanks, Michael. Good afternoon, everyone.

I'm going to provide some color on our third quarter results and update on Voilà and then we'll move to your questions. Our gross margin was 25.7%, which was 41 basis points higher than last year when you exclude fuel.

This is largely due to both the addition of the higher-margin Longo’s business and incremental benefits from our Horizon initiatives, including the expansion of Farm Boy in Ontario, FreshCo in Western Canada and our promotional optimization tools. We are very pleased with our margin performance despite a very choppy trading period where we navigated through increased inflation and supply chain challenges while still ensuring that we were price competitive.

Our SG&A rate was 21.9%, which was 40 basis points higher than last year. As per our last quarter, there were a few puts and takes here.

Firstly, Longo’s has a higher SG&A rate than our average and we will continue to see this mix impact until we comp their results in the first quarter of fiscal '23. Secondly, we had higher depreciation due to an increase in right of use of asset depreciation under IFRS 16.

These increases were partly offset by lower COVID costs. Our EBITDA margin increased 50 basis points to 8.1%, reflecting our strong gross margin performance and our share of significant gains on the sale of properties by our Crombie REIT.

Our effective income tax rate was 26%, which was lower than our statutory rate, primarily due to consolidated structured entities and capital gains both of which are taxed at lower rates. We do expect that the tax rate for Q4 will be consistent with Q3.

Our free cash flow generation continues to be very strong. As of this week, we have repurchased $249 million worth of shares under our NCIB and have substantially reached our target for fiscal '22.

Of course, we intend to continue buying back shares in fiscal '23. For capital investments, we've spent approximately $500 million year-to-date and remain on track to spend our estimate of $765 million.

Our focus remains primarily on our stores and we continue to be very satisfied with the returns generated from our real estate projects. This quarter, we renovated 34 stores, opened one new Farm Boy, relocated one Farm Boy and opened seven new FreshCo stores in the West.

Now during Sunrise, we were focused on fixing problem stores, addressing underinvestment and defending our top stores. Now that our problem areas have been addressed, we are moving from defense to offense, investing in renovations that will enable us to sustainably capture market share and increase our sales and profits.

Now before we move to your questions, I want to dig a little bit deeper into Voilà. We remain very confident of Voilà is the optimal business model to sustainably deliver a profitable e-commerce grocery business at scale.

So let me give you a few updates from the last quarter. First, we announced our fourth customer fulfillment center, or CFC, as we call it, which will be in the Greater Vancouver area of British Columbia.

With our four CFCs, we were able to serve approximately 75% of Canadian households, representing 90% of Canadian e-commerce spend. Second, the beauty of our exclusive deal with Ocado is that we have a partner who is investing in research and development, and we'll continue to bring efficiency to our network.

Our fourth CFC will have new generation robots more efficiencies and a lighter environmental and carbon footprint. If you want to see more, I would encourage you to go to our earnings presentation on our website.

There is a link to an Ocado video showcasing their new innovations. Third, our second CFC in Montreal recently completed employee testing and began transitioning customers in some areas of Quebec to Voilà from iga.net.

The feedback from the employee testing and our initial customers is fantastic. They're off to a really strong start.

This will be a phased rollout as we expect that by summer, approximately 85% of the Quebec population will have access to Voilà. Fourth, in Q4 of this year, our CFC in Ontario will extend its geography to Ottawa and surrounding areas through an additional spoke.

Fifth, construction for CFC continues on track, and we have added another 22 locations for curbside pickup using Ocado's in-store fulfillment technology. So we're really pleased with our e-commerce programs.

Voilà's impact on Empire's earnings is on track to be somewhere in the middle of the previously disclosed range of $0.25 to $0.30 for fiscal '22. We believe that fiscal '22 will be the most dilutive year for Voilà for a couple of main reasons.

Firstly, we have a faster customer ramp-up in CFC2 than we had for CFC1. As a reminder, IGA Net in Quebec is an established business that we are transferring over to Voilà.

So we already have a significant amount of volume to flow through the CFC. And secondly, we'll have minimal additional backstage resources for the new CFCs as this was all set up for CFC1, so we are getting a better leverage of that fixed cost.

And it's worth noting that the addition of Voilà will immediately add volume to CFC1 CFT1. So in conclusion, Q3 was a very strong quarter, and we have strong momentum.

Project Horizon is on track. It was designed to deliver $500 million of EBITDA, including the effect of the Voilà strategy, and that is what it is doing.

We are pleased to report that we expect our fiscal '22 net earnings to be even higher than our COVID inflated their earnings in fiscal '21. That's really a testament to our consistent and sustainable execution.

And with that, Katie, I'll hand you back for questions.

Thank you, Matt. Sylvie, you may open the line for questions at this time.

Michael, your opening remarks called out the choppiness in markets speak to the biggest challenges and provision of the biggest challenges you managed through in quarter with respect to inflation's impact on consumer behavior and the dislocation of the amplified supply chain pressures that you called out?

Yes. I mean I think the number one challenge in all of retail right now is the supply chain and that it just hasn't gotten back in shape for many reasons, including high demand and the disruptions that you know about, Kenric.

And so our team is all the time trying to find products where we're short, where our great supplier partners just can't keep up and supply us. And that's causing us to go out and buy by more in the market and at times really scrambled to make sure that we fulfill our customers' needs.

I think we're doing traveled country. I think we're doing as good or better job than anyone out there from what I can tell in store.

And as I noted, we're above market in terms of the third-party reports in terms of on-shelf availability. So happy about that.

And that's really a testament to our merchants and our operators. In terms of inflation, there's -- it's -- I'm not sure it's too much new to say and it's a reality, again, that all businesses are across the globe are facing.

We are retailers part of our daily jobs to deal with the rising cost of doing business, and we have the right people in the right seats now to do that. We have to manage it very, very closely, and we've never seen anything in our careers to match it.

Periods of high inflation are extremely challenging. And I'm going to ask Pierre in a second to ask to talk to you about how we're navigating it through it.

But it's fair to say that our team has never faced so many at one time that we're negotiating hard with our supplier partners. So in many cases, have very justifiable cost increases, to be honest with you.

And at the same time, we have to -- there's always a lag or often a lag between cost increases and price increases as we provide value to our customers. So all of this is challenging to our team, I don't think anyone out there is doing a better job, and I'm very proud of that.

Pierre, do you want to say a few words?

Just -- add the fact that based on how we are structured, we feel -- I think we need to be very agile right now because all of those reasons, supply chain inflation. The way we are structured now with the sourcing team or working on cost increase and sourcing in general, and in the meantime, our merchandising team can continue to focus on building good promotion, relevant promotion for customers and managing the margin.

I think it's why we are in a good spot. But once again, need to work very closely with both sourcing and merchandising and it's why we're doing right now.

So we're really pleased having a sourcing thing, focusing on managing the volatility element of our supply chain and costing, and having a dedicated merchandising continue to be smart and meet customer demand and concern. So, we're -- we're in a good spot.

Great. And just one quick further question for me.

I appreciate all the additional color, Matt, on Voilà and its performance and I understand you're not going to be providing your dollar sales or otherwise as your platforms. But could you just provide some color even directionally on how Voilà as tracking to your internal expectations?

I understand the growth the planned growth and the additional CFCs coming on. But just trying to get a read on net-net, where you are versus where you expected to be with Voilà, understanding it's growing, but trying to get after some sort of additional color on where you are.

Sure. So for I mean it's a little bit of a different story by CFC because, obviously, CFC2 has literally just started up in operations.

I think in my comments I've told you where we're up to on that. That's going to be a phased implementation launch.

So over the next 12 weeks, we will ramp that up in the Quebec area. And by the summertime, we should have 85% of the population available to Voilà.

So that's very much in the ramp-up phase. For CFC1, overall, we're happy with where where the business is.

The -- I think as we said, the net dilution is going to be in that range of 25% to 30%, probably somewhere in the middle of that range. So overall, I think we're happy with how that CFC1 is progressing.

I guess I have two questions. My first is a follow-up on the Voilà discussion.

And it's really, from a practical perspective, you mentioned that you're going to be building on the base of IGA net. So will it be a case where you're going to sort of just everyone who's an IGA net customer will simply -- like it will look the same time like practically speaking, how does that actually work?

Yes. So like Matt said, the reason it's 85%, there are a few markets where it's too far from the CFC to be able to service it.

But in hopefully, 12 weeks, we'll have 85% of our -- of the province served. It's very simple to move over from iga.net to Voilà.

The -- if you talk to our Quebec business, they're very, very pleased with how this is being set up. The website is even nicer.

The choice of products is greater. And everyone who's tested it is extremely pleased, especially Pierre and Luke, who are key constituents here.

So very, very simple. I mean, the exciting part is that our Voilà basket size in Ontario is is I don't know whether Katie or Matt or not, but over 3.5x larger than our bricks-and-mortar basket size, which is a lot bigger difference than at iga.net to what we expect to Voilà.

So we're going to expect even from our own customers, that they're going to have a better experience. Our basket size will be larger.

They'll shop more at IGA and bring their basket more to IGA than to any competitors. And at the same time, we're going to be growing our market share.

So not only is it more profitable for us because it's a way better system, way better for customers, way bigger basket size, we'll convert people over, and we have the number one market share in the province, and we expect to take much more market share because now we have, by far, the best tool. So -- just one, we are watching it like hawks.

But because of what happened in Toronto GTA and our success there and now because we're converting already great customers to even a better platform, we're not losing any sleep honestly. We're watching it very closely and making sure that the transition goes well.

That's great. And then just shifting gears, if you don't mind.

Obviously, we're seeing a surge in inflation and certainly our last couple of weeks surge in oil prices that hitting consumer wallet. Can you talk about what you're seeing in terms of consumer purchasing behavior, promotional activity, trade-down, private label, the usual stuff?

Pierre, do you want to?

Yes. We know that customers are more sensitive for value in today's environment.

So with all the -- we feel good with all the innovation and redevelopment we've done in the own brand in private label, new packaging, new assortment. Obviously, our home brand is on fire right now, and we're pleased with that.

We're growing much faster than national brand, and it's good for customers and it's good for us. We also introduced good offer to customer, and we're seeing very good traction on value pack and things like that.

So, the large assortment, we have in our store provide many options to customer to mitigate inflation right now, and we feel good about that. So yes, we are seeing customer behavior changes.

They're looking for more value in everything they're trying to buy. So national brands to own brand, we are seeing like everybody switched in choice of protein, and we're adjusting our merchandising plan according to it, make sure that we're relevant for customer.

We offer to them what they're looking for. So yes, we have to be very agile like we said at the beginning, and the team is doing a good -- a very good job to stay relevant for customers without compromising our performance.

And are you also seeing -- so you're seeing an increase in penetration of promotion within the basket?

Yes, personally, you're looking for deals. But once again, we are able to -- with the large assortment we're having in our store to stay relevant for them.

So yes, they're looking for a good deal. But at the same time, we have much more than deal to offer to them.

As you know, there is inflation everywhere, fuel prices, restaurant prices, people are seeing inflation everywhere. We have very strong prepared food offer, which is cheaper than going to restaurants.

And year-over-year, we're seeing good growth there, and it's a good margin product. So it's good for customers and it's good for us.

So it's what we have in mind all the time, stay relevant for customers and make sure that we're leveraging all of our assets to go through that period.

The gross margin was quite strong, but OpEx, as would be expected, I guess, was also up quite a bit. And then if I back out the COVID cost and the depreciation, it looks like it was up about 7%.

So, I was hoping you could help me understand how much of this might be tied to Longo’s being added in. And then when you look at the organic side of it, what are the largest puts and takes on the pressures and then how you're managing it?

Sure. I could take a pass at that.

So when we look at our SG&A for the quarter, there's nothing particularly of a long-term nature in there. As I said, kind of last quarter, we're beginning to get to that kind of run rate of SG&A.

But when you look at SG&A year-over-year, you're right, the -- one of the major drivers is that mix impact of Longo’s, and we'll continue to get that until we comp Longo’s next year. We also have the mix impact of the higher margin businesses, higher SG&A businesses, sorry, such as Farm Boy and Voilà and then there's higher occupancy costs.

So, our return on assets -- sorry, right-of-use depreciation on our -- under IFRS 15. So it's -- it's a combination of those few things.

But like I said, there's some puts and takes in there, but there's nothing that is particularly like onetime of nature.

There is no Olympic cost, I guess, anymore?

Not in Q3. That was earlier in the year.

Okay. And then you mentioned on the NCIB that you're substantially completed, but I thought your plan was for 8.4 million shares, and you've done 6.4 million or so.

Is that -- am I misunderstanding?

So the current NCIB we have runs from July to July. So it doesn't necessarily kind of match perfectly with our fiscal year and our budget and our target for the year.

So we will continue to buy shares under that existing NCIB, and then we intend to renew the NCIB in July. So it's a little bit confusing when those two programs don't exactly match period to period.

But for our fiscal year and what we had targeted to buy back this year, we are substantially complete.

I have two questions. My first question is on Voilà and you -- Michael, you're mentioning the access to the R&D and that you'll be able to use the new generation box with the Vancouver facility.

So on Kroger this week also was talking about using those new-generation bots and that's going to lead to a lower cost to build for them on some of their later CFCs. I'm wondering if that for you?

And then if you just think back to when you first did the partnership with Ocado on the Smart platform, have you taken advantage of any other R&D opportunities from Ocado since then to now?

I'm going to let Mike answer the question because he's worked closely with Ocado and then if there's anything I can add, I will.

Thanks. The new bots are -- I'd say, for us, the most significant impact would be there is potentially some differences in how you build the grid but a lot of other things into that quick build, including seismic impacts and that sort of thing, but they're much more energy efficient.

So that's probably more of a significant impact for us to be reductions in energy usage as opposed to necessary construction cost. We're really up in one CFC and fully operating in terms of builds.

And so there's been limited opportunity to materially change the grids and the actual infrastructure and construction build, where we have benefited is that Ocado has a very strong pipeline of incremental adds and improve to their algorithms and their end-to-end software. And so I'd say from an R&D perspective, we benefited the most from upgrades and improvements that may on that as we started CFC1.

Yes, the only thing I'd add is in terms of the -- if you go on the Ocado link on our website, and you'll see a lot on the picking innovation and I'm getting closer to -- in terms of getting closer to the customer and shortening delivery windows. Look, we -- I think the -- the reason we love the technology and this was also because of the entrepreneurial innovative spirit of Ocado and they haven't let us down.

This is a company that is going to continue to innovate and stay ahead of everyone else. And we'll continue to put in some or many of the innovations that occur as we go along.

The key is to get the big sheds up in the four markets. Everything else can fall away from there.

I think our opportunity because we haven't broken ground yet is in Vancouver to take some of this as well.

Okay. And so then my next question really is kind of directed at that -- the gross margin.

It was nice to see that you were to build on last year's margin performance there. But when we look at promotional optimization, how should we be thinking about that?

Where are you in executing against that? And should we be thinking about something that as the gift that keeps on giving that it will be constantly having reiterations of improving promotional optimizing your promotions.

So the promo optimization is related to two things. So last year, we launched it the tool that our merchants are working with and with the great adoption.

So it's why we probably increased our margin a lot last year. This year, it's a combination of both.

We continue to work well with the tool. Plus the team is, in my opinion, the team is stronger and they take in good judgment.

They are more agile. They're playing better with the tool.

So it's a combination of strong execution and users of the tool. So it's continuous improvement.

It was a new tool last year. This year, we have a better comprehension of the tool.

And the team is, as I said at the beginning, the fact that merchandising team are focusing on promotion without dealing on cost increase and supply chain issue, it's very helpful, and that's why we kept good control of our margin.

And maybe, Patricia, just to add one thing on to what Pierre said. When we launched the promotional optimization tool last year, and we had that significant uptick in margin, this year, we've matched it and that was really important for us because what we are making sure that we're delivering here a sustainable profit improvement.

So the fact that we were able to match that level of margin rate from last year demonstrates the sustainability of the tools that we're putting in place. So that was a real litmus test for us, which we passed.

So we're very happy with that.

Okay. Just on these new technologies that Ocado is offering up the grid and the robots.

I'm just wondering why you're not incorporating that in Calgary? Is it just Calgary is too far down the road in terms of engineering and design at this point?

Right, we've completed the design and the engineering. And there are some things for sure that I think we will end up either retrofitting or put into all the CFCs, things like the automated frame loads, for example, which are relatively retrofit.

But outside of that, it's truly Vancouver that could probably be the first one to have major changes resulting from that R&D.

Okay. And when I was reading the Ocado stuff like -- they had a little bit of trouble like a labor issue.

They just couldn't get enough drivers. I may have asked the same question on the last conference call.

But in new market here, are you able to recruit enough drivers to -- for all the vans that are running around the city?

We're always transparent during the height of Omicron. We couldn't fulfill every single order that we were getting online.

And knowing you, you were going online to check on us. So, we were -- we were out three days in terms of ordering, which we do not always like.

We'd rather be able to fulfill our customer orders in a tighter period of time. The team AT VO led by Sarah went into overdrive and we're able to make all sorts of adjustments so that we were able to lower that two days than one day.

And so even during a very, very big periods of demand during the height of Omicron. And although labor is tight everywhere, and we're always looking for great people to join us, especially in Voilà.

Right now, it's not an issue that's constraining us, but it was a bit of a bottleneck there for a while.

And when it is a bottleneck, Michael, like what is the constraint? Is it drivers or in the shed like tickers?

or what is the...

Well, it's not just people driving, right? These are really skilled people who we're not going to -- who are great with customer service, understand our standards.

And so we just can't take anyone off and just put them in a truck and expecting to do the job. So it's not really the driving aspect of it.

Most people can do that. It's the -- it's understanding our processes and the standards we uphold every single day.

So that was a constraint for a little while. We put in all sorts of ways now that we're more flexible.

Okay. And then just like another just switching topics here.

I think you still have that strike that work stoppage at D.C. in Quebec.

I think it's in Teribone. And can you just explain a little bit more in detail how you're working around that?

I assume you're using other DCs and direct drop and -- but would that have a notice would that have had a noticeable impact on results as we go through Q4?

Yes. So let me -- that's a great question.

And obviously, we're not pleased to have any sort of disruption. But yes, because we don't talk about it, you can tell that it's not top of mind because we really have a great team that's working around it.

But maybe I'll just start at the beginning, which is we settle around 60 collective agreements a year and haven't had a strike in 10 years. So this is rather unusual.

And I want to be really clear that the -- right now, the impact on our shopping experience for our customers is absolutely minimal, in Quebec, absolutely minimal. If you're in Quebec, many of you are go in our stores, and you'll know that it's had almost no impact on how we're serving customers.

When we get a deal that's reasonable for both sides, this thing will be settled. And of course, there are incremental costs to our business.

And there will be in this quarter, but they're not unreasonably costly. And you got to understand that the cost impact is not going to be very material to our results.

They're mostly incremental freight costs because we are using our -- we have a very resilient supply chain. Thankfully, we are national in scope now, not regional like we used to be, thankfully, that the redundancies and systems we put in place at the beginning of the COVID pandemic to serve our customers are now putting us in a really good position going forward.

So our contingencies have been great. We're a national company.

We have 25 DCs. And also, most of our assortment is organized nationally with regional assortments that we can handle even in this case.

So, so far, so good. We're leveraging our facility in Vaughan, and we have other DCs that we can use in Quebec City, even the Maritimes to take care of this, so yes, incremental costs.

So that's going to be a tiny bit more costly, but we believe that it's worth it in this case to get to a fair agreement with our teammates. We have a great relationship with our supplier partners.

So we will have the products in our stores and we also have a great relationship with our teammates across the country, and I can't wait to welcome back our facility when we can settle this up because they are our teammates, and we don't like going through this, but we're handling as best we can.

Michael, your Horizon financial target implies sort of low teens EPS growth for fiscal '23. I mean this is pretty impressive considering that it's net of still fairly heavy dilution from Voilà next year as you continue to expand.

So this implies even stronger growth from the core business. I know a lot of your confidence is predicated on just accelerating benefits from Horizon, as you always have said that year three greatest.

So I guess my questions are, I mean, is the strong growth assumption next year is also influenced by market factors like inflation and competition? And then secondly, what are the risks that would cause you not achieve that growth target for next year?

I think -- I mean, obviously, we had to do Horizon. We set our Horizon targets before we knew there was going to be a global pandemic.

We set them before. We knew there was going to be the sort of supply chain and sort of inflation.

So actually, I think it's even a harder tool because our teams have been working so hard on some other things, while they're still putting in the Horizon initiatives. What's really gratifying is, as we said, we expect to hit those Horizon initiatives through all that.

But because of some of the things that have been going on, some of our work and benefits are actually postponed, and you'll see the majority of them occur post F '23 close. And what I'm really excited about is we set these three-year targets, which we're not saying again, I said.

But we don't suddenly stop because at the end of the fiscal year. And for some of our projects, many of our projects, the peaks hit in '24 and '25 now.

while at the same time, we were able to accomplish Horizon. I'd say when I look at -- and we're optimistic people, but we also -- you know us, we look at risks all the time.

And Matt and Mike are the leaders in leading us through what kind of risk there could be in our business. And when we look at those and can mitigate and plan for them.

But right now, we're feeling good, but we've seen such huge what my call choppiness in our business. The supply chain has every retailer concerned about being able to get products on time and at a good cost.

That's -- that's going to be a risk we look to -- at least for the next year as this probably continues. And it looks like this is going to be a highly inflationary market for times to come.

We're not economists, but we speak to economists. And that's what they're predicting and what we're hearing.

So those are the two big things with my confidence in our level of execution and us being Empire are very high. They're really global or almost industry concerns and risks that worry any more, not about our own business, our own set of execution because we have plans to improve our business.

I think other than some of these great -- a great project like Space Pro, space productivity, which are going to be giving us great benefits, especially in F '24 and F '25. What I'm most excited now that we have this great infrastructure in place or some of the other projects we have.

And if you go across our country, you'll see really great renovations in our stores. You're going to see better execution.

And I give real credit to Pierre and his team, but especially to Pierre that while we were going through Sunrise and we were doing Horizon, we left some of the store execution and some of the supply chain issues alone, so we wouldn't disrupt our business while we were turning around the Company. We have a lot of opportunity now that Pierre is exploring and is going to be executing on in terms of serving our customers better, but also being far more efficient.

So some might say, hey, you're in bit years into turning this company around. But now I think a lot of the times, I'm thinking that the good things are still to come now that we have this infrastructure in place that we can build on.

So very excited about that and I should also mention what we're doing on our investments in in data analytics and personalization, we still haven't really -- we're on -- I don't even know if we're in the first inning of the baseball game on those. We're just starting that.

So lots of upside, but we've got a lot of work to do, and these are tough markets.

I was wondering on the difference between -- the difference between delivery and in-store grocery and how they inflate differently given last mile is such a large component of delivery cost and fuel has gone significantly higher. And I know about the view to keep Voilà pricing similar to in-store pricing.

So I was hoping to get some context. Is there a big difference there on how they're inflating?

And if so, how is that managed?

Thanks for the question. I would obviously no big difference.

Okay. Okay.

Okay. And then on the same topic, I was hoping you could update me on the Spoke model for -- I think, for, how many spokes you have and the cost for installing them?

And how specifically do they improve efficiency?

What was the last part of the question at what?

How specifically do they improve efficiency?

Okay. We're still in the process of building out the total network.

At this stage, most of the deliveries will still come from the for CFC. Over time, we're probably going to have maybe four or five in Toronto.

They're relatively low cost to build out as they're not very sophisticated facilities. They basically receive straight trucks from the CFC, which are coming in large frames.

-- pre-pack and then they're being transferred through the facility the cross-dock nature to the delivery vehicle. And that's designed to -- does two things really.

It eliminates congestion up in the CFC. It enables us to place the product closer to the final destination cuts down the total number of miles driven delivery trucks and it's more efficient for our drivers because they don't have to go up to the CFC to start their routes, they stop the plus the customer.

So all of that adds up to a first of all, nice efficiency improvement and the cost of delivery and it also reduces congestion and complexity up at the CFC by moving large amounts of products out of the CFC overnight.

Okay. So eventually, these spokes will go across wherever you've installed the CFC over two time.

Sorry, Vishal, we're having trouble hearing you. I don't want to guess at what you asked.

Can you just repeat that one more time?

Yes. Sorry about that.

My question was, eventually, these spokes will be installed in every market where you have CFCs, that a correct way to view it?

Yes. Yes, and then we'll have some markets like as Matt said other one, where we'll actually service the entire city from spoke and not from the CMC.

But yes, we expect as spoke across the country in every location that we have CFC.

Thank you, Sylvie. We appreciate your continued interest in Empire.

If there are any unanswered questions, please contact me by phone or e-mail. We look forward to having you join us for our fourth quarter fiscal 2022 conference call on June 22.

Talk soon.