Metro Inc
TSX:MRU
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Metro Inc
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Good afternoon. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Metro Inc. 2018 First Quarter Results Conference Call. [Operator Instructions] Roberto Sbrugnera, Vice President, Treasury, Risk and Investor Relations, you may begin your conference.
Thank you, Jessa. Good afternoon, everyone, and thank you for joining us today. Our comments will focus on the financial results of our first quarter, which ended December 23, 2017. Joining me today is Mr. Eric La Flèche, President and Chief Executive Officer; and François Thibault, Executive VP and Chief Financial Officer. During the call, we will present our first quarter results and comment on its highlights. We'll then be happy to take your questions. Before we begin, I would like to remind you that we will use today discussions, different statements that could be construed as being forward-looking information. In general, any statement, which does not constitute historical fact, may be deemed as a forward-looking statement. Expressions such as expect, intend or confident that, will and other similar expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food industry, the general economy and our annual budget as well as our 2017-2018 action plan. These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks, known and unknown, as well as uncertainties that could cause the outcome to differ materially. A description of the risks, which could have an impact on these statements, can be found under the Risk Management section of our 2017 Annual Report. We believe these statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking statements, except as required by applicable law. I will now turn the conference to François.
Thank you, Roberto, and good afternoon, everyone. I'd like to start by highlighting the adjustments that we have made to our reported earnings in the first quarter in order to provide comparable profitability measures versus the same quarter last year. So we've removed from earnings the $1.1 billion pretax gain on the sale of the majority of the Couche-Tard share that we own as well as the $225.6 million fair value revaluation gain on the share that we were -- that we kept, that were not sold. We've also removed $5.3 million of interest income earned on our short-term investments and security deposits that will be used to finance, in part, the Jean Coutu transaction. We added back to earnings the $11.4 million provision we recorded for the modernization of our Ontario distribution network, and we added back the $2 million in professional expenses related to the Jean Coutu transaction as well as $4 million in financial expenses related to the notes that we issued that are held in escrow as well as to the balance payable for the buyout of Adonis minority interest.So for the quarter, sales totaled $3.1 billion. That's an increase of 4.7% versus the same quarter last year. And same-store sales increased 3.4% versus last year. This quarter's results were positively impacted by the shift in the week preceding Christmas, which fell in the first quarter this year, whereas last year, it was included in the second quarter. Adjusting for this Christmas shift, we estimate same-store sales would have increased by 1.2%. Gross margins came in at 19.5%, which represents a 20 basis point decrease versus Q1 of last year and reflecting an increased promotional investment. Operating expenses as a percentage of sales came in at 12.5%, however, excluding the $11.4 million expense for the distribution network modernization and the $2 million in professional fees for the Jean Coutu Group acquisition, operating expenses stood at 12.1% of sales versus 12.4% last year, reflecting our continuing efforts to contain costs. EBITDA came in at $217.8 million. That's $1 million up versus last year or 0.5 percentage. And as a percentage of sales, it represented 7% versus 7.3% last year. Again though, when we exclude the 2 items that I mentioned previously, adjusted EBITDA stood at $231.2 million, up 6.6% versus last year and represented 7.4% of sales. Net financial costs for the quarter were $12.3 million compared to $14.6 million for the same period last year. Note that some items were specific to the first quarter only and are part of the adjustments I referred to at the beginning of my presentation. Our shares of earnings from our investment in Alimentation Couche-Tard were $30.8 million in the first quarter, an increase of $6.9 million versus last year. We will no longer record our share of earnings in Couche-Tard going forward following the sale of the majority of our shares that we owned, the remaining portion of the investment that was reclassified as a financial asset available for sale. As a result, the investment was revalued at fair value on October 13, 2017, resulting in a pretax gain of $225.6 million. And subsequent variations in market value will be recognized in the cumulative other comprehensive income. Income tax expense for the quarter was $223.3 million and represented an effective tax rate of 14.7% compared with last year's amount of $44.8 million and an effective tax rate of 24.5%. The noticeable decline in the effective tax rate results from the large gains on the sale and revaluation of Couche-Tard shares as well as our share of Couche-Tard earnings, which carry a capital gain tax rate of about 13%. The regular earnings were taxed at the statutory rate of 26.7%. Adjusted net earnings for the quarter were $153.4 million versus $138.1 million last year. That's up 11.1%. And adjusted fully diluted net earnings per share were $0.67 versus $0.58 for the same period last year. That's an increase of 15.5%. Lastly, the Board of Directors yesterday approved a quarterly dividend of $0.18 a share, representing a 10.8% increase from last year. The announced dividend represents a payout ratio of about 27% of last year's net earnings. That's it for me. I will now turn it over to Eric.
Thank you, François, and good afternoon, everyone. In a very competitive market, we delivered solid first quarter results with good top line same-store sales and earnings growth. For the quarter, tonnage and average basket were up, offset by a slight decrease in traffic. Our food basket inflation of 0.5% was up very slightly from the previous quarter, an encouraging trend. Promotional activity was intense but stable overall. We remain committed to improving our retail store network. During the quarter, capital expenditures totaled $60 million as we opened 2 new stores, closed one and expanded and remodeled 8 stores. The company is on track with the previously announced $400 million investment in our Ontario distribution centers over the next 6 years, allowing us to increase our capacity and productivity. Also during Q1, the company acquired the minority interest in Adonis and Phoenicia. We will continue to grow this banner in Quebec and Ontario to capture our share of the growing ethnic segment. Our e-commerce sales are growing nicely, and we believe that our operating model with in-store pick, click-and-collect and home delivery is well suited to current and foreseeable demand. Customer satisfaction survey results are encouraging, and we learn, adjust and improve our operations every week. Still on the e-commerce front, MissFresh, our meal-kit partner, now offers in-store pickup in about 100 stores in Quebec and more than 30 stores in the GTA. We have also started to sell meal kits in some 30 stores in Quebec for those who don't subscribe to the service. As you are aware, on January 1, the Ontario minimum wage increased significantly. We are working hard to mitigate the impact through store hours optimization as well as several IT initiatives such as installing more self-checkouts and electronic shelf labels. Looking forward, second quarter sales will be adversely affected compared to last year because of the Christmas week shift, and we expect moderate food inflation levels and continued strong promotional activity. Last but not least, we very much look forward to receiving the approval of the Competition Bureau in order to close the Jean Coutu acquisition in the first half of this year. Our teams are working actively to prepare a successful combination to form a new retail leader and create significant shareholder value. Those are my comments. And now we'll be happy to take your questions. Thank you.
[Operator Instructions] Your first question comes from the line of Irene Nattel from RBC Capital Markets.
With regard to the Ontario minimum wage issue, on a prior call, Eric, you commented about the potential for input cost increases. And I wonder what kind of conversations you're having with suppliers at this point.
While we don't disclose our conversations with our suppliers, as you know, this time of year, Irene, is a blackout as far as cost increases are concerned. There will be regular cost increases, I suspect, after the month of January. So as we've said before, minimum wage in Ontario is an industry-wide issue. It affects retailers, suppliers, everyone, and the cost structure of everyone is going up. So I suspect that we will have conversations with our suppliers, and we've had a bit where they're signaling that some of their costs might be going up, but I don't have that specific information for you. But I think it's not unreasonable to expect some cost increases this year.
Yes, I totally agree, Eric. And then just sort of thinking that through, what are you seeing right now in terms of consumer behavior. You mentioned promotional activity is intense. What are you seeing around penetration rates and sales on promotion, depth of promotion, consumer sensitivity to promotion, all of that?
Well, intense promotional activity is a fact. Q1 and into Q2, it's still very intense on the promotional front. Consumer behavior, people shop around, and it's a very competitive market. We're starting to see some price level -- price increases at chef level and a few staples. We'll see where that goes, but promotional activity is intense, and that keeps inflation in check. So very competitive out there, and we will be competitive.
Your next question comes from the line of Jim Durran from Barclays.
I just wanted to ask you a question about drug reform. Now that the CP CHST announced its intended reductions in the reimbursement rates, can you give us some idea as to what you would estimate the impact is for your Rx counters outside of Quebec?
Well, I don't have a specific number to give you. The pharmacy business in our Ontario stores is not a very large business. So yes, we will be impacted as everyone will be by the generic price reduction that will kick in April 1. We put that as part of our budget process, so we're managing for it. So I would say that in the grand scheme of things, the impact on our total Metro business is not that material, although it will affect the drug segment in Ontario. So Jim, I don't have a specific number for you.
That's okay. Would you classify the announcement as sort of in line with what you would have expected?
I haven't had a chance to look at all the details, but from what I understand, it's in line with the Quebec announcements that were made late last summer between the Quebec government and the generic producers association, so I think that's largely reflecting in this pan-Canadian alliance agreement. So as it came out yesterday, we've been a little busy with our board meetings and all yesterday, so I'll look at all the details, but it looks in line with that.
Okay. No, I appreciate that. Just on e-commerce. One of the things I've heard from consumer experiences, and it's not specific to your home delivery, but it's the substitution issue, sourcing inventory out of store. Can you tell us what kind of, in substitution level, you might be experiencing in your e-commerce and what you can do to try and minimize that?
Well, it's frivolous information. For obvious reasons, we can't share those numbers, but substitution is a fact in e-commerce, especially with the store pick model. It's a metric we watch closely and try to improve on all the time. There are ups and downs, and it's a question of being in-stock at your -- in your stores, so -- and in the back room. So again, we're improving. It's something that can get further improvement, and it's an issue with customers. I think our policy of substitution is a good one and appreciated by customers. We replace with a likewise item, so it's an issue that we manage. That's all I can say.
You mentioned in your earlier comments that you're happy with the approach you've taken. Do you have a sense of how far out you'd have to think about setting up your own dedicated fulfillment center for e-comm?
That's a good question. We'll see how demand grows. It's growing, but we think we have the right model for a while. I won't give you a specific time frame. That would not be appropriate at this time, but we think the model we have with store pick, limited number of stores where we pick, is an efficient way to meet existing customer demand.
Your next question comes from the line of Mark Petrie from CIBC.
Actually, I just wanted to follow up on the MissFresh business. And I know it's relatively early days, but, Eric, what sort of traffic or what sort of consumer behavior do you see on that in-store pickup business, I guess specifically in Quebec because that's where you had it the longest? But do customers sort of blend that purchase with additional in-store purchases? Or what do you see?
Well, that's why we're doing it. Number one, the in-store pickup reduces delivery costs for MissFresh, so that's an advantage there, but it also increases traffic into the Metro stores. And we have promotions ongoing where those who use that pickup service get a $5 discount when they shop at Metro. So yes, it feeds the Metro banner, and we use cross-promotions at an effective cost to do that. So yes, there's good traction with that.
Okay. And then more broadly, just with regards to your prepared foods and food service strategy overall, how many of your locations are sort of up to the standard that you guys started rolling out a number of years ago? And where -- how do you sort of feel about that as a competitive offer for -- from a prepared food standpoint?
Well, I think we're pleased with the progress we're making. We offer ready-to-eat, ready-to-heat meals in all of our Metro stores in both provinces, certain stores with a more expanded offer. So it's a growing business, and we're improving every year. So I won't give you a number of stores that are at expectations versus the rest. We think it's a good opportunity. It's an opportunity we're starting to capture. We launched in Quebec, "tout prêt tout frais", which means "all ready all fresh". We are -- our meals-to-go in Ontario, it's a growing business for us that we're putting more focus on. And the quality is improving at very interesting price points, so we think we can get more share of stomach than we are currently. We have sushi counters in our stores. So we're not a restaurant, we don't pretend to be a restaurant, but we are selling more and more meals. That's for sure.
Your next question comes from the line of Michael Van Aelst from TD Securities.
I just wanted to -- a quick follow-up on the e-commerce questions. Are you willing to give us a sense as to what percentage of penetration e-commerce or home delivery would have to be before it justifies you guys starting up a standalone warehouse?
Sorry, Michael, we're not going to go there. We monitor our sales closely. At some point, if the market demand is there and the volumes are there, we could contemplate opening a dedicated facility. We're not there yet. It's still in the aggregate, small numbers, growing nicely, but small numbers.
Okay. And then the Christmas shift into Q1, are you able to quantify the impact on EBITDA that we should take out of Q1 and also kind of add back to Q2?
We'll let François answer that one.
Yes. So we're careful not to throw adjusted earnings out there. It's -- the Christmas shift is not a precise number. I mean, it's -- we gave the best estimate that we could derive, so the 1.2% adjusted for that is the -- is now the impact of the shift, so it gives you an idea of the kind of a sales impact there is. I mean, EBITDA has increased because of that, has increased because of the additional same-store sales, has increased because of good operational leverage with cost containment. So these are all the reasons that explain part of the EBITDA increase. So again, I'll let you do the math, but definitely, there's -- part of it is due to the Christmas shift.
Your next question comes from the line of Patricia Baker from Scotiabank.
Eric, you talked a little bit about -- or referenced the fact that you've bought in the minority interest on Adonis and Phoenicia. Can you share with us maybe what we're going to see in the next 2 years there because obviously, you're going to accelerate the plans to roll out Adonis, particularly in Ontario?
Yes. So we see some growth -- some good growth opportunities going forward with Adonis in Ontario and in Quebec, perhaps over time, more in Ontario. There's another store opening in Gatineau, Quebec in March. We have a store that should open before the end of calendar '18 in Ontario. So yes, a couple of stores a year -- per year is what we see for a little while. We won't, for obvious competitive reasons, give you more visibility on that, but we're happy with the transition. The management team was trained by the founders, have been there for a long time. They work well with the Metro team, so it's managed separately, very customer-focused. And we're looking forward to some more growth from them than we'd seen in the last year because we didn't open a store in the last 18 months or so.
That's helpful. And just with respect to the incremental capacity that you're adding on the supply chain or distribution side. Are you able to share with us just how much incremental capacity you'll have at the end of 6 years?
We don't like to talk about it in that sense. We're adding capacity. We're adding automation, so productivity will increase, service levels to our stores will increase. So improving our supply chain in the back end is the way we see going forward to reduce our costs and stay competitive. So it's a big investment, but it reflects our belief to the potential that we have in Ontario. And we want to grab our share of that growth in Ontario, and we need these DCs to be modernized to capture it. So that's what we're doing.
And I guess that addresses one of your business priorities, which is to improve efficiencies, so it's about growth and about improving efficiencies?
Absolutely.
[Operator Instructions] Your next question comes from the line of Keith Howlett from Desjardins Securities.
I had a couple of questions. One on the impact of drug reform announced yesterday on Quebec. Am I right to assume that Quebec will adopt all of the prices that were agreed to by the other 9 provinces yesterday?
I think you are right. Quebec has the law of the lowest price that's available in Canada. Again, as I said to Jim's earlier question, my understanding is that the deal that was announced yesterday is in line with what was announced in Quebec at the end of the summer. So the generic price reductions are untold in line with what was announced in Quebec so that it will be uniform across Canada. I don't have -- I don't know that for a fact for every molecule, so don't hold me to it, but I think that's the guiding principle.
And then I just wanted to -- on the cash flow statement that there was a gain on the disposal of a fixed asset and I was just wondering what that related to.
So we sold one real estate property in Ontario. So yes, there was an unusual gain there. We do sell properties from time to time. The gain on this one was a little larger than usual, but I would tell you that that's largely, largely offset by the impairments we took on some assets. And also, last year, we had impairment reversals. So the net-net of that property gain and the impairment, the minus and the pluses, is quite minor. So overall, for the results, it's not a factor.
And the nature of these expenses, Keith, I mean, these are normal. We always have some gain or losses on real estate, and we have some eye for arrest of impairment or reversal of impairment, so it's not a special nature of the expense.
And then I'm just wondering whether, I know it's pretty small potatoes, but in Ontario, whether you feel any change in the way Whole Foods has been operated over the last 6 months. I realize there's only, I think, 6 stores, but do you -- is it -- are they big enough to be on your radar? Or do you notice any change in the way they're approaching the marketplace?
Well, yes, they are on our radar, that's for sure, but we don't comment on what we see our competitors doing. We monitor it closely, but there's nothing to report.
Right. And then just finally, on the 2 store openings, can you identify the banners that opened there in the quarter?
So we opened a Food Basics in Kingston, Ontario, in the east end. And we opened a Super C in Laval, Quebec, resulting from a conversion from a Metro store.
Your next question comes from the line of Peter Sklar from BMO Capital Markets.
François, I have an accounting question for you. You sold -- you would have closed the sale of your Couche-Tard shares during the quarter. But when I look at the equity pickup, it seems that you had almost a full quarter of equity pickup for Couche-Tard. So am I seeing that right? And can you just explain what the accounting policy is?
Yes. The earnings for Couche-Tard. The quarter of Couche-Tard ended October 15. And so it's basically the same day that we effectively sold the share. So that's why we have to pick up the earnings, that was the proper thing to do. And from now on, as I said, we will no longer report any pick up of equity earnings from Couche-Tard. The remaining shares were revalued at market, and variations in market price will now be part of the other comprehensive income. So it's because the -- that the end of the quarter of the relevant Couche-Tard earnings matched the day that we sold the shares.
Okay. And then the effective date for the new accounting policy is the first day of the second quarter?
Well, actually, if -- to be precise, it starts at October 13th. So from October 13 to the end of our quarter, there was actually a revaluation gain of $33 million. So the stock price of our -- on Couche-Tard for the remaining shares increased. And that $33 million between October 13 and the end of the quarter was reflected in other comprehensive income. If you look at the comprehensive income statement, you will see that $33 million in there. That's what it is.
Right. Okay. And then so now that the accounting treatment of Couche-Tard has changed and you've taken out the minority of Adonis, is there any equity income? Or is that line going to be 0?
No, there is because we Première Moisson. We have a partnership with Première Moisson, so there's a small noncontrolling interest with Première Moisson. But as you can see, it's pretty small.
There are no further questions at this time. I turn the call back over to the presenters.
Okay. Thanks, Jessa. We thank you for joining us today and take note that we will be holding our second quarter conference call results on April 25, 2018. Thank you.
This concludes today's conference call. You may now disconnect.