Metro Inc
TSX:MRU
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Metro Inc
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Ladies and gentlemen, thank you for standing by, and welcome to the Metro Inc. 2021 First Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sharon Kadoche. Please go ahead.
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 19, 2020.Speaking today is Mr. Eric La Fleche, President and Chief Executive Officer; and Francois Thibault, Executive VP and Chief Financial Officer. During the call, we will present our first quarter results and comment on its highlights. We will then be happy to take your questions.Before we begin, I would like to remind you that we will use in today's discussion different statements that could be construed as forward-looking information. In general, any statement which does not constitute a historical fact may be deemed as a forward-looking statement. Expressions such as expect, intend, are 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 and pharmaceutical industries, the general economy and our annual budget as well as our 2020-2021 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 these risks, which could have an impact on these statements, could be found under the risk management section of our 2020 annual report. As with the preceding risk, the COVID-19 pandemic constitutes a risk that could have an impact on the business, operations, projects, synergies and performance of the company. We believe these statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking information, except as required by applicable law.I will now turn the call over to Francois Thibault.
Thank you, Sharon, and good afternoon to all. My best wishes for 2021, and I hope everybody in the line is in good health.Our first quarter sales totaled $4.3 billion versus $4 billion last year. That's an increase of 6.2%. Food same-store sales grew by 10% versus the first quarter of last year. And pharma same-store sales grew by 1.3%.As we indicated on our previous call, our pharmacy results were negatively impacted by the labor conflict at our Jean Coutu distribution center, which ended on November 12, with operations resuming on November 15. The conflict impacted our results through a combination of lower warehouse sales to pharmacies with the related margin impact and higher operating costs, mostly transportation. We have not adjusted the earnings for the labor conflict.Our gross margin stood at 19.7% of sales versus 19.6% for the same quarter last year. Our food business continued to post good margin performance, but the total margin was dampened by the impact of the labor conflict in our pharma business.Operating expenses, as a percentage of sales, came in at 10.4% versus last year's 10.6% or 10.4% when adjusting for the $7.5 million loss incurred from the disposal of our subsidiary, MissFresh. There was overall good cost containment considering the additional expenses incurred as part of the labor conflict at Jean Coutu as well as the COVID-19 related expenses.During the quarter, there were $28 million of pandemic expenses, including about $8 million related to the distribution of Thank You gift cards to our store and distribution center employees in December.Our adjusted EBITDA for the quarter stood at $399.2 million, that's up $28.6 million or 7.7%, and the adjusted EBITDA as a percentage of sales was 9.3% versus 9.2% last year. Adjusted net earnings were $197.7 million compared to $180.9 million last year, an increase of 9.3%. Our adjusted net earnings per share were $0.79, up 11.3% versus last year's adjusted EPS of $0.71. We estimate that the labor conflict at our Jean Coutu distribution center accounted for a negative impact of $0.05 per share.Our capital expenditures for the first quarter totaled close to $90 million, with the bulk of the investments going to our distribution center projects. At retail level, we relocated one store and carried out major renovations in 4 stores, representing a net increase of 18,000 square feet or 0.1% of our food retail network.Also, following the end of the quarter, we opened a new Adonis store in the city of Quebec, and that will happen on [ January 21 ]. This opening brings the total of Adonis stores now to 15, with 11 in Quebec and 4 in Ontario.We are also progressing well with our in-store technology rollout. We currently have 228 stores with self-checkout technology and 101 stores with electronic shelf tags. And we plan to have more than 330 stores with self-checkout and more than 200 with electronic shelf tags by the end of this fiscal year.Under our current normal course issuer bid program, we have repurchased, between November 25 and January 15 of this year, 1.7 million shares for a total consideration of $102.2 million, representing an average share price of $58.39.Finally, the Board of Directors yesterday approved a quarterly dividend of $0.25 a share, representing an increase of 11.1% versus last year's quarterly dividend. This represents a payout ratio of 30%, in line with our dividend policy of distributing between 30% to 40% of the previous year's adjusted net earnings.That's it for me. I will now turn it over to Eric.
Thank you, Francois, and good afternoon, everyone. We are pleased with our first quarter results, delivering continued double-digit food sales growth with good operating leverage while working through an 8-week labor conflict at our Jean Coutu distribution center. Overall, top line grew by 6.2%, adjusted EBITDA by 7.7% and adjusted EPS by 11.3%.Our teams have worked tirelessly and have shown great resilience since the beginning of the pandemic to serve our communities safely. And I want to again recognize their hard work.Food same-store sales were up 10% in the quarter despite some sales shifting to the second quarter given our December 19 quarter end date this year. Both conventional and discount performed well in Quebec and Ontario as we continue to gain market share. Our internal food basket inflation was 2.5%, slightly below than the previous quarter.Traffic trends improved but remained significantly below a year ago. The larger basket size again more than offset the decrease in transactions.Strong sales have continued in the second quarter. And for the first 4 weeks, our comp sales were up a strong 12%. We were also pleased with our sales during the holiday period.Pharmacy comparable sales were up 1.3% for the quarter, with prescription drugs up 4% and front-end sales down 3.8% due mainly to lower traffic, a much milder cold and flu season and the reduced promotional activity because of the labor conflict.Warehouse sales to our franchisees were also down, and operating costs increased versus last year because of the labor conflict. In the middle of the pandemic, our management team did a great job to operate the DC with about 1/4 of the normal staff and to implement our contingency plan to secure the supply of drugs to more than 400 pharmacies, which was the priority. We are now back to normal operating conditions after a few weeks to gradually ramp up inventories and promotional activity.However, new government restrictions on the sale of nonessential goods had been in place since December 25 in Quebec, and this is having a negative impact on our pharmacy front-end sales, which are down 11.7% for the first 4 weeks of the second quarter, while our prescription sales were up 5.7% for the same period.On the e-commerce front, online grocery sales grew by 170% in the first quarter. Our hub stores continued to perform well and have adapted to the increased volume. The accelerated deployment of our click-and-collect service has begun, with 19 additional Metro stores now offering the service. Our plan now calls for more than 170 Metro stores to offer click-and-collect by the end of the fiscal year, serving about 75% of the Quebec population and half of the population of Ontario.Construction of the Montreal dedicated e-comm store is underway, and we expect to begin operations early next summer. Phase 1 of our new automated Toronto fresh DC is completed, and operations are set to start next month. Construction of the new automated frozen DC is progressing well and should open in 1 year.In Quebec, construction of our new automated fresh and frozen DC in Terrebonne has started, and we expect to open in 2023.Looking ahead, we will be cycling very high comp sales in the last couple of weeks of our second quarter, when the pandemic was declared last year. We are focused on maintaining our strong momentum in food, with continued investments in our network and innovative merchandising. For example, we recently launched a new program called My Health My Choices to help consumers shop and find products based on customers' lifestyles, values and health needs. Nearly 9,000 SKUs found in-store will display up to 3 program attributes at shelf, and more than 50 different attributes can be found online or via the Metro app.With the new labor agreement in place, the integration of our pharmacy distribution operations has resumed, and the transfer of the Brunet pharmacies to the Jean Coutu DC will take place over the spring and summer, generating synergies of about $10 million next year. The rollout of the Jean Coutu lab and POS systems to the Brunet network is also back on track and will be completed this year.Finally, in December, we distributed over $8 million in Metro gift cards to our frontline store and warehouse employees as recognition for their hard work and dedication. 2 weeks ago, following the new lockdown restrictions announced in Quebec and Ontario, we decided to offer a second similar recognition program to our frontline workers, which will be paid in February.So our priority remains the safety of our employees and our customers as we continue to serve our communities during this challenging confinement period.Thank you, and we'll now be happy to take your questions.
[Operator Instructions] Your first question will come from the line of Karen Short of Barclays.
This is actually Renato Basanta on for Karen. So my first question is on the e-commerce growth rate. It looks like it's remained somewhat steady at 170% versus at 160% in 4Q. But just wondering if you can speak to the exit growth rate, what that was as you ended the quarter and then also, if e-commerce sales accelerated further from there given some of the additional restrictions we've seen so far in 2Q.
I would say the e-comm pace was pretty steady throughout the fall. We saw a bit of a surge, or not a peak, but it surged up again when the curfew was announced in Quebec. And when further restrictions were announced in January in Ontario, we saw a bit of a step-up in e-comm again. But throughout the Q1, I would say volume was pretty steady and growing.
Okay. That's helpful. And then just on the 12%, I guess, food comps in the first 4 weeks of 2Q, can you actually tell us what the comps were in the first 4 weeks of 2Q '20? I know you talked about comps ex COVID are close to 5% in 2Q last year, but just trying to get a better sense of the most recent full year trends as you start approaching those harder comparisons at the end of the quarter.
So I won't give you the exact 4 weeks last year. I can tell you, Q2 last year, we had good strong comp sales for sure. The 12%, as I said in my opening remarks, there was a bit of a shift here between Q1 and Q2 because of the December '19 quarter end date. So 12% is a strong number.Happy with that. Happy with the holiday sales. We continue to gain share in both markets in Quebec and Ontario.
Okay. And then just one more, just on SG&A. If you adjust for COVID costs in the quarter and then also the MissFresh charge last year, SG&A was actually down about 1% in the quarter. So can you just speak to what's driving the decline and then how we should expect SG&A to trend going forward when you sort of normalize out the change in COVID-related expenses year-over-year?
Yes. No, you're right. When you take out the loss on MissFresh, so you're comparing about $444 million to $420 million. So the COVID expenses that we indicated, $28 million, that's the total specific expenses related to COVID, but doesn't mean that we just absorb those costs and we don't adjust elsewhere. So we do, we do make sure that we apply good cost containment across all divisions, all departments, whether it's publicity, marketing, labor in different departments.And if you look at the split on those 2, we're actually helped a little bit on the rent and occupancy charge in terms of mostly utilities and energy. So these are all things that we -- these are all costs that we contain. And overall, you're right, we were pretty much flattish year-over-year when you take out the COVID expenses, similar -- by the way, similar to what we had last quarter, exactly the same situation we were in last quarter, plus/minus a few million.
Okay. And going forward, should we expect similar rates...
I think so. Yes, there will be -- I expect you will see a similar -- similar COVID expenses that we -- next quarter versus this quarter. It should be pretty much along the same ballpark. There will be another gift card that we've announced that we will book. And so -- and then the rest will be similar to what you see today. And it's -- as I said, it's our job. Obviously, we have high sales on the food side, and we are able to absorb these costs -- more than absorb these costs given the sale environment.
Your next question will come from the line of Irene Nattel of RBC Capital Markets.
Would you just be able to spend a couple of minutes talking about what we're seeing in terms of consumer behavior as you went through Q1 and into early Q2 in terms of conventional versus discount? But also just in terms of the composition of basket, did you see any pick-up because people weren't able to eat out, kind of what you saw and what you're continuing to see?
Thanks, Irene. So we saw continued similar behavior over the last few months. Clearly, with the food out-of-home opportunities very restricted, it's benefiting our channel. It has been since the beginning of the pandemic.It was strong throughout the fall. We experienced good tonnage and good sales in meat and seafood. So proteins were up strongly for us, contributing a bit to our higher inflation rate than what you saw reported in CPI.So I think the teams did a great job. I think our merchandising has been effective, both in-store and online. Our protocols, our in-store conditions, are pretty strong. Very pleased with the work that's been done in our stores. I think consumers are feeling safe in our stores. So we're seeing a slight improvement in consumer traffic, although it's still, as I said, down year-over-year.Basket more than offsets it. Conventional and discount, we're seeing strong growth in both, to be honest. It's still a bit higher in conventional, but we're very pleased with our discount performance in both of our markets. So for competitive reasons, I'll just leave it at that.
Understood. And just finishing up on that, promotional intensity, any changes there?
Always pretty intense, very competitive. Promotional activity is strong. Promotional penetration, in the overall larger basket, remains below a little bit last year, but certainly more in line with the usual patterns that we saw before. So it's -- the promo rate's increasing. It's still slightly down versus a year ago, but very slightly.
That's very helpful. And just one final question, if I might. Switching gears to what's going on in front of store in your pharmacy banners, can you just provide us a little bit more color in terms of what you're seeing, traffic-wise, but also what you're seeing in the essential versus nonessential categories?
So it's the law right now in Quebec that we can't sell nonessential goods. So it's a government regulation and law. We abide and we have to abide, and it is what it is. And it's in force until February 8, at which time we hope that it will be lifted or partially lifted or whatnot. So we just have to live with that.It affects categories, general merchandise that we sell and mostly cosmetics, which is a significant part of our front-end sales in Jean Coutu and in Brunet, as you know. So we're not allowed to sell them. So that's an issue.On the traffic side, that's also impeded by the very mild cold and flu season versus a year ago. As you know, when you have a cold or a flu, you tend to go to the drugstore to pick up either a prescription and/or some OTC. And while you're at it, why not some gum and whatever. So clearly, when there's less people coming through the door, it has an impact on sales.So we're mitigating that as much as we can with good promotional activity in the categories that we can sell. The categories that we cannot sell in-store we try to sell online and via click-and-collect as much as we can. But that's much smaller than in-store, as you can imagine, being a community-proximity, convenience-type shopping experience.So we're doing our best in a tough environment, and we hope again that on -- in early February, restrictions will be lifted. We'll just have to wait and see.
Eric, as both a consumer and an analyst, I hope you're right about February 8.
Your next question will come from the line of Vishal Shreedhar of National Bank.
I'm just wondering if you're able to provide additional color on the impact associated with the warehouse labor disruption. How much of that $0.05 was due to lost sales and how much were due to other costs?
So just to give you a range, a ballpark here, about 2/3 of the miss was lost sales and margins on those sales, and 1/3 was the extra cost. So I think those are the numbers we're willing to disclose, Francois?
No, that's good. That's about right. I think that's a ballpark figure. It's at -- that's about the split, Vishal.
So just to be -- Vishal, just to be clear on the lost sales and margin, as part of the contingency plan to service our pharmacies and prioritize prescriptions and medical products, we had to make some choices. With limited, it's only management staff that's locally, [ and by again ], that could work in the warehouse.So we had very limited staff. We were able to operate, and the guys did a fantastic job to service our pharmacies. But we had to outsource some volume to another distributor. We had to do more direct-to-store deliveries. So therefore, the warehouse shipments were lower, and therefore, the margins were lower. So it's dreadful and it's behind us, and that's it.
Okay. I appreciate that color. And just staying on the same topic of making choices and within pharmacy, with respect to the COVID-19 vaccine that's rolling out, has there been any discussion with the Quebec government on how Metro and PJC may be able to help deploy that? And if so, would PJC require any facility retrofits or investment to facilitate the distribution, like freezers or something like that?
Yes. So yes, there have been some discussions with the Ministry of Health. Clearly, with the limited supply of vaccines, the priority for them is to vaccinate people in the health system and in the long-term care homes in the priority list.As far as we know, community pharmacies will be asked to get involved and contribute to the vaccination effort for the general population when the quantities and the supply is better, so I guess sometime in the spring. The sooner, the better. We all want to get vaccinated.And our pharmacies at both Coutu and Brunet have good experience. This fall, we did the flu vaccine, over 300,000 doses. It went well. And the pharmacists will be ready and willing and able when the government gives us the green light. So we'll just have to wait for their direction. But it's -- there are discussions. And as I said, we will be ready when they are.
Okay. And should we assume, at this point, the economics would be similar for PJC as a flu shot and standard medication, or is that a different story there?
No, the economics are not confirmed yet. There should be a fee for the pharmacist. It becomes a sale for the pharmacy and on which we make a royalty. But again, those are not the priority of the financials. The financials is to get the vaccine out as fast as we can. We just have to wait for the health department.
Yes. Absolutely. Okay. Makes sense. And just switching gears here to some other topics. On the e-commerce offer, obviously much demand for it and Metro making investments and accommodating the customer. Can you comment on your -- the customer satisfaction scores in any way possible and if you're satisfied with what the customer is telling you about your offer?
So we track consumer satisfaction -- customer satisfaction throughout our business, but we certainly do it for our e-comm. Yes, we're pleased, and we're making progress. We're not perfect. It's a challenge, the delivery availabilities, the substitution rate. So there are lots of metrics we're monitoring. I can tell you that we're getting better.Volume is strong, and our consumer satisfaction metrics are improving. But we have work to do, and the teams are very focused on that. We expect the dedicated store that we will open in Montreal next summer will help us with some of those metrics, in addition to adding capacity.So it's really a part of our omnichannel strategy. So we have satisfaction in store. We have satisfaction online. It's the Metro brand. And I think, overall, we're doing pretty well.
Okay. And lastly, just with respect to all the customer changes, preference changes you're seeing happening so rapidly, and presumably, some of them will be for a short period of time, how does Metro management know, or is there any tools Metro management is using to figure out what customer behaviors are short term and no need to change your formats to adapt to such transient and short-term behavior? And what is more long-term and sticky? Is there some analytics that you can use from dunnhumby, or is it more of a little bit are in [ signs ]?
Well, for sure, we have a lot of insights, and we have a lot of analytics in-house and with our partner, dunnhumby. So the teams, I think, are combining data with experience and adapting quickly to consumer demand and consumer trends. So for obvious competitive reasons, we're not going to give you every little recipe and secret here.But it's very dynamic. The pandemic clearly has changed some habits. We all know that. We're all working from home. We're all eating at home a lot more. So we need to be there. We need to make it easier. We need to have the right variety. We need to be on trend for health programs. That's why we just launched this My Health My Choices. It's what consumers are asking for, local products. So it's a lot of moving parts. But our teams with [ Varennes ] are doing a great job to respond to that.
Your next question will come from the line of Michael Van Aelst of TD Securities.
I wanted to follow up on a few of the things you mentioned. First, if we look at the impact of the Varennes strike, you told us there's 2/3 from lost sales and margin. Are you willing to give us a dollar amount that you think you missed in sales and whether -- and on top of that, when you look out to the current quarter, are these sales that you'll get back as your franchisees have to restock and build up inventories again? Or were they fully replaced by the other distributors you use?
So on the sales -- I'll start with the sales. And obviously, we don't break down pharma and food. But if you just do a rule of 3, given that food is about 75% of our business and you assume it grows at the same 10% in same-store, it implies that pharma was down by mid-single-digit year-over-year. And that's the reality of the -- the reality of what happened during the conflict. So these lost warehouse sales to franchisees, the impact on margins, as we said, is about 2/3 of that amount impacting margins. So we would have had a higher margin -- gross margin percentage of sales than what we posted.And the rest of that impact is in OpEx, mostly higher transportation costs given that we shipped from a DC that was farther away. So that's the impact of that lost sale, higher OpEx on our results.
As far as the recoup of those lost sales, over time, gradually, I think it will all even out. But short term, pharmacies have restocked elsewhere for some of these products, and there's a lag.
Okay. So -- but if they have restocked from other sources, then they don't necessarily have to make up for the lost mid-single-digit sales that you had in the quarter. Is that correct?
No -- yes, maybe not all of that, right.
Okay. All right. And then on the Christmas shift for food, is 1% a good estimate as to what that might have been?
Yes. It's hard to put -- we didn't give you a precise number because of -- we know it's COVID, and there's -- and it's hard to give you a precise number like we used to do before when the shift was an important part of our story at this time of the year. So there was clearly a bit of a shift between 0.5% and 1% in that range.
Okay. And then inflation really slowed down, at least the CPI did in December, and was hardly up year-over-year. But I think early in January, we started to see produce prices going up and poultry prices going up. Are you expecting to see a reacceleration of inflation in the first half of calendar '21?
Hard to say, Michael. Hard to say. I think our mix is showing a bit of a higher rate than CPI, mostly driven by protein, like I said. Produce inflation is hard to predict. It can be fickle. It's weather. It's currency. It's a lot of stuff. It's -- I would say, our 2% -- 2% to 3% inflation number, that's what we're kind of seeing. But no crystal ball, my favorite, favorite expression.
All right. And then when you look at that drop in the first 4 weeks of the front store of pharmacy, down 11.7%, are you able to quantify or at least kind of give us a rough estimate of how much of that you think is nonessentials?
I don't have a breakdown for you. Clearly, there's -- actually, the nonessentials is restricted since December 25. So it's part of that story. The cold and flu is part of that story. So it's hard to give you a precise number. It is a substantial part of it, the nonessentials, but sorry, I don't have a more precise number for you.
All right. And are you seeing any progress in moderating that erosion with your online sales push?
Pretty modest. No, it's -- we're in week 6 right now. We gave you the first 4. So it's pretty similar.
I guess it seems to be tougher on front-store pharmacy to gain traction than it is on grocery. Is that fair?
Well, because of the restrictions, you mean, or the...
Just general...
The sale of nonessential goods? Yes. So there's that legal restriction and there's the traffic decline due to the mild cold and flu season. There -- and I guess on the grocery channel, we're getting a bit of those HABA sales in our stores as people do on some one-stop shops.So several moving parts, but the big reason is the legal restriction on nonessentials and the lower traffic because of the flu season.
Okay. And then just finally, so you've talked about really rolling out the click-and-collect throughout this year to a lot of more stores. You've had good cost controls on your SG&A during this last little bit. How do you see that changing though as you start to add labor and to satisfy the click-and-collect demand?
We don't think that the click-and-collect demand that will be serviced out of those click-and-collect stores will have an impact on that SG&A. It will be absorbed by those stores with our current labor. We're not talking huge volumes here by store. It's a service, it's an added service for consumers who want that online experience and click at the time they want in their local stores. So yes, there will be demand for that, but it shouldn't affect the labor line.
Yes, the depreciation -- the CapEx investment is also quite measured for these -- that rollout.
Your next question will come from the line of Mark Petrie of CIBC.
You touched on a lot of things I wanted to ask about. But I guess just one follow-up. I'm just curious if you’re seeing any changes as e-commerce kind of steadies out here to some extent, if you're seeing any changes in terms of consumer behavior, with regards to basket size or promotional weight within the online basket or product mix.
No, I think I answered that in a previous question. We're not -- the pandemic and the online surge or acceleration of -- is the big change in behavior. The basket of the online customer is pretty similar than it's been since the beginning of the pandemic. So the promotional rates, I've already answered that. So it's -- promotional, it's intense, but because of the large basket, the total promo rate may be slightly down versus last year, but nothing material. We're getting really close to normal promo levels.
Okay. And then with regards to the cost specific to the pandemic, obviously, the sort of gift card incentive is -- you play it by ear, depending on the conditions. But the balance of that, do you think that, that sticks with you through -- basically through the rest of this year? Or how are you thinking about those costs in your business?
Well, yes, I think it would be fair to say that we expect most of these costs for greeters at the door, cleaning extra -- sanitation and cleaning, masks. Yes, I think it's fair to say that we should expect those to be with us for the rest of this fiscal year, if you want to be conservative, yes.
Okay. And then just my last question. I wanted to ask about the relative price step spread between conventional and discount. I'm just curious how that has evolved as consumer preferences have shifted over the last year and how you think it could evolve as taste potentially revert, maybe back to the more historical balance, as the vaccine rollout continues, pandemic impact subsides and consumer behavior reverts to some extent.
I don't think there's been any change in the relative price positions of discount versus conventional. It's pretty consistent. There's nothing really to report there.
[Operator Instructions] Your next question will come from the line of Peter Sklar of BMO.
Eric, you've talked a couple of times on the call that in terms of promotional penetration and promotional intensity, it's pretty high, really hasn't eased off at all. And I just wanted to ask you, from a very high level, given this huge COVID tailwind that the Canadian grocery industries experienced, with these strong comps, like you had a 10% comp and everybody is comping so well with the channel shift of the consumer into grocery, are you surprised a little bit that competitive intensity hasn't eased a little bit because everybody is getting their sales, so just wondering how you see that.
Well, I'm not surprised. We have strong competitors, and everybody wants to keep and grow share. So it's competitive out there. Consumers have a lot of choice. So we're focused on our own program, our own banners, safety first for our employees and our customers, with the good innovative merchandising and good store conditions, draws the customers and keeps the customer.We had our online experience to have more of an omnichannel strategy and gain even more loyalty. So it's part and parcel of our strategy, which has served us well so far in the pandemic.You're right to say that everybody's sales are up. No bragging, but on a relative basis, we have gained share over the course of the pandemic in Quebec and Ontario. Not a huge amount, but we've gained share. So we're pleased with that.The promo intensity, we are competitive. We check prices and are very diligent on our -- on being competitive at shelf and with our promo. So, so far, we're pleased with our results.
Okay. And then just on another topic, I believe you said that the Ontario new fresh DC, it's opening soon. I can't remember, you said next week or next month.
It's very soon. So operations have begun to receive a bit, and they're in the building now. The construction's over. It will start in the next couple of weeks to shift to our stores gradually, so we'll do some waves. It's going to be about a 3-month rollout here to transfer all the stores to this new DC. It's partially automated, so new waves, change management, all of that stuff, but where a lot of good work has been done. We're ready, and we're looking for good results from the new fresh Phase I box, which is in Toronto, on Dundas, in the 427.
Right. So I assume that your cost structure will be much better in the DC. But from the perspective of the consumer, do you think the consumer will be able to perceive some change in the quality of the produce that they're seeing in the store? Like is this a little bit like the fresh program?
Yes. I think it will help. The current produce facility is old and dated. We have a lot of turnover in there. I think our product is fresh and it's all good generally. But in a new state-of-the-art facility, we will have better conditions, better operating conditions. And I think product calling will only improve.We saw that in Montreal when we built the new produce warehouse. We had better execution and better quality, which reflected at store level and was [ set for ] the customer.I think our quality is fine in Ontario. I expect it to be just a tad better with the new facility.
Our next question comes from the line of Chris Li of Desjardins.
Eric, you mentioned earlier you expanded click-and-collect to 19 stores during the quarter. Are you able to see if most of the sales are coming from new customers rather than the transfer from existing in-store sales to online?
So for competitive reasons, we're not going to give you those numbers. It's starting. So those 19 stores are recent. The volume is ramping up. Some of it comes from existing customers. Some of it is an extra trip from an existing customer, so new sales. And some of it comes from new customers. So we're tracking that carefully and monitoring the situation. But for competitive reasons, we'll just leave it at that for now.
Okay. That's fair. And the industry will be lapping a fairly weak Canadian dollar in a couple of months. How do you expect a strong Canadian dollar to impact your business? Do you expect it to result in more deflationary pressures when that happens?
I said earlier, there are a lot of factors at play to determine costs and pricing. Typically, when the Canadian dollar strengthens, we are able to absorb cost increases and it can result in lower prices at retail. But again, I won't adventure -- or venture to say and make a big prediction here. And we'll see how the currency behaves over the next several months. It's going to be one factor. It could help reduce prices, but there are other factors at play.
Okay. That's helpful. And maybe just on the gross margin, wondering if you can maybe review for us what are some of the key gross margin drivers this year. I mean on the one hand, obviously, the industry will start to lap the benefits of bigger baskets and maybe less promotional intensity. But on the other hand, you'll start to get some of the efficiency benefits from the fresh DC and the pharmacy DC consolidation. Do you expect gross margin this year to be sort of roughly stable? Or what are the things that you are looking at this year?
Well, this year, gross margin, I think has been healthy. Volumes have been good. So with high volumes, it's good for gross margins. The promo rates as the pandemic started and evolved were lower, so that I said is -- we've caught up there. But it did have an impact on gross margins. With very high volumes at store level, there's lower shrink. So that also helps for [ like a bench gross ].And the conventional to discount mix skewed a bit more to conventional this year, which also helps. So there's lots of moving parts on the gross margin. Looking ahead, we think we have good programs. Our fresh ratios are strong and healthy, which bodes well for gross margin. Some -- HMR is still hurting. Cut fruit is still hurting in our produce department. Those are higher-margin items. But it's offset by a lot of other factors, and we've been able to mix it back and we're satisfied with our margin. How it will evolve, again, I'm not going to give you a guidance on gross margin rate, but we feel we're in a good position to keep them healthy.
Okay. That's helpful. And maybe just one follow-up, just on the DC modernization in Ontario. I remember when the announcement was first made, I guess it was back in -- 4 years ago in 2017. I think the press release referenced that roughly about 180 full-time and 100 part-time positions will be reduced starting in 2021. I'm just wondering if that is still the case. And how much savings do you expect to achieve from this -- the new DC?
Francois can get back to you with more -- whatever we announced 4 years ago. I don't have it in front of me. Yes, there will be some efficiencies by going partially automated. There's a ramp-up period here where we're going to be operating basically in 2 centers. So it's going to take a bit of time. I think I'll let Francois get back to you, Chris, on that, okay?
Okay. No, that's fine. Maybe one quick one for Francois. Your leverage is around 2.5x debt to EBITDA. I think that's within your comfort zone. Do you expect to maintain a similar pace of share buyback this year as you have done in the last quarter?
Yes. I think on the leverage side, we're still comfortable with the 2.5x adjusted debt to EBITDA. That's a -- again, Chris, that's a pre-IFRS level. So it's about close to 3x on a post-IFRS, just so we're apples-to-apples because there's more accounting debt that we have to factor in. But no change, economically, no change in our leverage target, so we're still quite comfortable. And yes, everything else being equal, the pace of buybacks that you saw in Q1, that's a good pace. We have authority to do a level similar to last year's. So we're going to -- everything else being equal, we will continue at that pace, with the excess free cash that we generate.
And we have no further questions at this time. I'll now turn the call back over to the presenters for closing remarks.
Thank you all for your interest in Metro, and we will speak again soon to discuss our second quarter results on April 21. Thank you.
This concludes today's conference call. Thank you for joining. You may now disconnect.