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Metro Inc
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Good morning. 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 Second Quarter Results Conference Call. [Operator Instructions] Mr. Roberto Sbrugnera, Vice President, Treasury, Risk and Investor Relations, you may begin your conference.
Thanks, Jessa. Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our second quarter, which ended March 17, 2018. With 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 second 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 today discussions, different statements that could be construed as 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 the 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 information, except required by applicable law. I would now like to turn the conference to François
Thank you, Roberto, and good morning, everyone. As we discussed on our last call, second quarter was negatively impacted by the tiny shift of the week before Christmas, which fell in the first quarter this year, whereas it fell in the second quarter last year. So sales for our second quarter totaled $2.9 billion, that's pretty much flat versus the last year. And same-store sales came in at minus 1.2%, but they are up 1% when adjusted for the Christmas shift. Gross margin came in at 20.2% of sales in the quarter compared to 20.1% last year. Operating expenses, as a percentage of sales, came in at 13.1% versus 12.8% for the same period last year. But when adjusted for the $1.6 million expenses related to the Jean Coutu transaction, the ratio stands at 13%. The increase in operating expenses is in part due to the minimal wage increase in Ontario as well as some higher transportation costs. Adjusted EBITDA stood at $208.1 million, and that represents 7.2% of sales and that's down 1.8% versus last year's figure of $212 million or 7.2% of sales. Starting this quarter, as I mentioned last -- on the last call, we no longer book equity earnings from Alimentation Couche-Tard, whereas in the second quarter last year, we had recorded pretax earnings of $21.4 million in our results. The income tax expense for the quarter was $38.2 million and that represented an effective tax rate of 26.3% compared with last year's effective tax rate of 23.6%. So the current effective tax rate is much closer to the statutory tax rate as the Couche-Tard earnings were taxed on the capital gains rate. Net earnings for the quarter were $106.9 million versus $132.4 million last year, and earnings per share were $0.47 for the quarter versus $0.56 for the quarter last year. Most of the decrease is related to the fact that there were no Couche-Tard earnings booked this quarter as well as the negative impact of the Christmas shift. Adjusting for the Couche-Tard earnings, the Coutu transaction expenses as well as the interest income and short-term investments and interest expense on notes, all related to the Coutu transaction, adjusted net earnings and adjusted earnings per share were down 5.1% and 2.1%, respectively. However, we do not just earnings for the Christmas shift. But looking at the performance over the first semester of the year, effectively neutralizes the Christmas shift and provides a good comparison versus last year. There were several adjustments made to our earnings in Q1 that we described on our last call, so I won't go over them again, but they are well-detailed in our press release and in the interim report. On that basis, again for the first 24 weeks, total sales increased by 2.3%, adjusted EBITDA increased by 2.4%, and adjusted net earnings and adjusted net earnings per share were up 3.8% and 7.5%, respectively. That's it for me. I'll now turn it over to Eric.
Thank you, François, and good morning, everyone. First, we're very pleased that yesterday we received the approval of the Competition Bureau for the acquisition of the Jean Coutu Group, creating a new retail leader in Québec in food, pharmacy and health and wellness. The consent agreement calls for the divestiture of 10 pharmacies in 8 markets, which will all be on the Brunet side except for 1. The anticipated financial benefits disclosed at the time of the announcement in October remain unchanged, and we expect to close the transaction on May 11. Turning to our second quarter, same-store sales increased by 1%, excluding the Christmas shift in an intense competitive environment. Tonnage and traffic were essentially flat and the average basket was up. Our internal measured food inflation increased a little from the first quarter, but was slightly below the CPI average of 1%. Promotional intensity remains high, especially on the discount side. The strength of the economy in both Québec and Ontario, combined with low-food inflation, currently favor full-service supermarkets, and we are pleased with the performance of the Metro banner in both provinces. The minimum wage increase in Ontario on January 1, impacted our results as expected in our plan, and we continue to control all of our expenses as much as possible to mitigate this impact. Other employment law changes, such as part-time pay equity in Ontario will put additional pressure on our operating costs. On the CapEx front, year-to-date expenditures stand at $110 million, as we opened 4 new stores, expanded and remodeled 9 stores and closed 3, for a net square footage increase of 31,000 square feet or 0.1%. We recently opened the 12th Adonis store in Gatineau Québec side-by-side with a new Première Moisson bakery and both were well received by our customers. E-commerce is on track as sales continue to grow and our operational model improves. Still early days, but making progress and we are currently working on launching a similar offering Ontario early in fiscal '19. Fact is Jean Coutu, the teams on both sides have been actively preparing over the last few months and are ready to go. We expect a smooth transition and look forward to welcoming the Jean Coutu's employees and pharmacist owners to the Metro team. We believe this combination will create a stronger platform allowing us to better meet our customers' needs and create long-term shareholder value. So in closing, despite the headwinds facing our industry, we are confident that we are well positioned to grow in the long-term with our diversified platform, multiple store formats, strong real estate portfolio, solid balance sheet to enable our investments in retail and supply chain, and of course, our experienced team. Thank you, and now we'll be happy to take your questions.
[Operator Instructions] Your first question comes from the line of Michael Van Aelst from TD Securities.
Couple of questions. First of all, just if you look at the competitive environment and pricing in that, we saw the pace of CPI slip as the quarter progressed. Would you say that this is a sign of increased competitive pricing or is that just a sign of lower commodity and produce costs?
The competitive environment, I've said in my opening remarks, Michael, it's intense. It's the nature of the business. A lot of people chasing sales, very, very competitive. So the promotional prices are aggressive. And the promotional environment reflects -- the CPI reflects the promotional environment.
Okay. And then, you gave us the impact on the same-store sales from the Christmas shift. But when we look at the operating expenses, particularly wages and fringe benefits and then the employee benefit expense, how would those numbers be impacted by the Christmas shift?
Not much. No, isolate to the Christmas shift as a percentage of sales, not much. I think the increase in operating expenses in SG&A that we reported are largely attributable to the minimum wage and also transportation costs. But the employee costs, other than minimum wage, specific to Christmas, I'll say that there's an impact there.
No. So then you have like a 2% growth in wages and fringe benefits in Q2 compared to about a 4% growth in Q1, is that a sign of lower headcount as you try to make adjustments for the minimum wage?
We want to manage the business without impacting customer service, obviously, but clearly there's a lot of focus on productivity and store hours and scheduling right. So I wouldn't say that we went from 4% to 2% just because of that, but it's a contributing factor.
Your next question comes from the line of James Durran from Barclays.
Just following up on Mike's question. On the transportation cost side, like are you expecting now that you're going to see pretty steady inflation in that part of your business?
Yes, I think that's a fair expectation. That's what we see in the next 2 quarters ahead of us, transportation costs are up. The regulations in trucking with the eLog has increased our costs. So the vans are more expensive to start with, and then fuel costs are up. So there's a double whammy on transportation that affects our costs, and looking forward that's -- that -- we expect that to continue.
And just so I understand it properly as part of the contract you have with truckers, fuel price increases, do they get completely passed on or is that a negotiated outcome?
They get passed on.
Okay. And just back to minimum wage, can you give us any sense of any of the minimum wage pressure's been passed through in retail pricing, or are you working to offset it through internal cost control?
Well, as I said, the inflation that we measure on our basket is slightly below CPI. So it's very low levels. So there's clearly a lag effect between the minimum wage increase and our ability to pass on retail because of the competitive environment. But at some point, we expect that to have mix in and blend in. But right now, we can't see a big lift in prices in relation to minimum wage.
Okay. And last question just on Loblaw's introducing its gift card. Would you say that there had been any impact on your traffic as a result of Loblaws gift card program?
Hard to see and hard to be exact on this. But $25 gift card is material. So there were a few weeks out there that we think we felt, but it's hard to say exactly how much. So hopefully, it's all behind us, but it is what it is.
So when you talk about the competitive environment, you're not really emphatically including that as an issue. It's really more about price promotion?
Exactly. It's the price and promotional environment, in general. I think that was compounded, perhaps by the gift card that was out there. So ourselves, competitors, we will defend if there's competitive activity that's out there that we need to compete with, we will. But to say that it had no impact, we would be pushing it. To say how much exactly, very hard to say. It's just -- it was a competitive fact.
[Operator Instructions] [Audio Gap] question comes from the line of Keith Howlett from Desjardins Securities.
I was wondering, if you could help clear us on the Walmart Supercenter position in Québec?
Well, you would have to ask the supercenter conversions are mostly done, I guess. There may be a few more down the road, but they added quite a few over the last 18 months, I would say. In the last quarter, they added just 1. So it's a large competitor that we respect tremendously. And clearly, it's a presence in this market like it is in Ontario.
And do you see anything different in the character of their promotion. I noticed they introduced unbeatable low prices on a lot of the high-volume items. At least, they slide their shelf that way. Have you noticed any significant change in their competitive posture?
Again, not our habit to comment on our competitor's strategies. Clearly, we watch them closely, and we will have our own strategies to compete and grow our market share and grow our sales. So they do what they do, and we do what we do.
I just had a question on the competition grills review of the transaction, and I guess, there were 8 communities where they wanted dispositions. What -- broadly speaking, what standard are they using? How many pharmacies do they like to see in a market before they are happy they don't need to request divestiture?
So I'll just say this -- the towns or the small -- they tend to be smaller towns where Couche, Brunet, together had a large market share, and in some of these towns, we were the only 2 pharmacies in town. So depending on distance to other centers, or availability of other pharmacies, those were the guiding factors that led to the outcome that we announced last night. So we would have liked to hold on to all of the pharmacies. You know it's a regulated industry. We felt -- we know that we negotiated as best we could to keep the pharmacies, but that's the conclusion of the process, and we're satisfied that it's the right outcome. And we will treat our franchisees absolutely correctly. And there will be no interruption in service to the customers in those towns. And we will manage the divestiture process over the next few months. So that's it.
And in terms of online in pharmacy, I think more of health and beauty and those aspects are opened up online. It is -- did that factor at all in Competition Bureau's thinking or not really?
Again, I don't want to comment on the discussions we had with them. I think you should ask them directly how they looked at it, not for me to say.So we -- as we negotiate all this, clearly, we lay out all the competitive alternatives, including online. And the Competition Bureau makes its own judgment.
And I guess, maybe too early for Jean Coutu, but maybe you can speak to what your plans were for, say, Brunet online, and -- or what your plans going forward would be for the combined Coutu-Brunet online?
Again, too early to say anything too firm there, but clearly it's part of the agenda for the future, and we'll be working together with the Metro online team and digital team to develop the strategy that's well adapted for the pharmacy side. Brunet -- I know Jean Coutu has a small operation for HABA. So we'll look and see how we can together grow that with Brunet and Metro.
Your next question comes from the line of Chris Li from Macquarie.
Eric, first question is just on gross margin, despite of fairly promotional environment, you guys managed to keep gross margin stable. Can you maybe talk about the puts and takes that impacted your gross margin this quarter?
It's a good question. I think, the conventional banners had strong -- good results. They obviously, have the higher gross margin rate. And as a proportion of total sales in this quarter, that positively affected our gross margin rate. So heavy promotional environment compensated by the Metro performance. Gave the result that we have, we're able to manage and come up with a stable gross margin. So happy with that.
Okay. And just on you mentioned the performance of the conventional market. In addition to just relatively low inflation, are there other things you've seen in the consumer that are having them to gravitate towards more the conventional banner these days?
Well, the -- as I said, the economy is strong, employment is very low, food inflation is very low. So price very less than the conversation. Home meal replacement, meal kits, full-service supermarkets has a lot to offer customers. So that's resonating well. So I think we're happy to be well positioned with, as I said, multiple formats. We're strong with conventional, strong in discount. So we aim to serve our customers and all customer needs as best as we can. So that's an advantage of our portfolio.
And then just in terms of meal kits, can you talk about -- since you guys have the pickup, I guess, it was last year. How has the experience been? Are you seeing a notable improvement in your store traffic in stores where you had that offer?
For competitive reasons, we won't disclose that kind of information. Meal kits are one additional tool, one additional offer as part of many others in the Metro stores. So it's one more thing that we offer, and hopefully it draws customers. I will leave it at that.
And then my last question just [more]. Once the Jean Coutu in company in terms of disclosures going forward, what type of metrics will you be providing for PGC?
So Chris, it's Francois here. So it will be -- we'll have one operating segment, so it'll be no separate disclosure of profitability. Be 1 operating segment as we are today. And we will provide some operational metrics to be confirmed, but you have some few operational metrics that we will provide.
Your next question comes from the line of James Durran from Barclays.
On share buyback, I don't recall if you've talked about when you might get back to a share buyback program. Can you give us some idea of what kind of net-debt-to-EBITDAR metric you would want to see before you could commit to a more robust share buyback?
Yes, good question. So what we said to the market is our financial leverage target is about 2.5% adjusted debt to EBITDAR. We said that with the financing of the Jean Coutu transaction, we should close at a level of about 3, roughly 3x adjusted debt to EBITDAR. And the focus early will be to use excess cash to deleverage and bring us back to a level of 2.5x. So that our model that indicated that we should give that within 2 years. And if we get there earlier, fine, but that's the time line we have, and we would resume the share buybacks at that time.
That's great. And then given the timing of the closing, do you expect that Jean Coutu will report 1 more public quarter?
No, no. Not our expectation.
Your next question comes from the line of Keith Howlett from Desjardins Securities.
Just wondering, if you can comment generally on the relationship with CPG companies who are experiencing stress, I guess in their own businesses from new emerging competitors, from all directions. Are you finding that mix to easier to deal with, harder to deal with, or no change particularly?
Well, no particular change to report. It's -- we have good relationships, overall. There are always issues here and there, but overall, we have positive relationships with our CPG companies. And we think we're good partners with them, and not much else I can add, Keith.
And just in terms of your own assortment in the store, are you seeing that you would add SKUs or delete those that are slow selling and add smaller companies or no real change in terms of what you are center of store offering is?
Well, it's constantly changing. The category managers adapt their strategies as much as -- and tailor their needs as much as we can, by region, by customer profile, by banner certainly, by province certainly. And then at a more micro level, I wouldn't say we're -- we have personalized layouts in every store, but we're getting more and more -- going more and more in that direction. So in certain areas, local products, small companies, clearly we will list and we will offer, because that's what customers want. So there's a trend that way. It still as a percentage of total pretty small, but it's a growing trend and we have to provide it. So assortment, listing the listing is a constant process. But there's no general change in the strategy.
Your next question comes from the line of Chris Li from Macquarie.
Just one quick follow-up. What are your plans for your remaining stake in Couche-Tard. I know it was pretty small, but is that a long-term investment for you still? Or you look to divest it at some point in the future?
No. Yes, no, Chris, it's not a long-term investment. We will eventually monetize that in a very orderly fashion, let's just put it this way. But the plan is to monetize that in the future.
And that will go towards to your 2.5x leverage, I guess that...
Exactly. Exactly. Yes.
Your next question comes from the line of Michael Van Aelst from TD Securities.
Yes, that was pretty much my question. But I guess, just to clarify, have you sold any more other shares since the big block?
No.
No. And as I mentioned on our last call, the variation in the market value now is part of comprehensive income, and you can see there was a devaluation of the stub and that's part of the other comprehensive income.
There are no further questions at this time. I'll turn the call back over to the presenters.
Okay. Thank you, everyone, for joining us today. And we will be holding our third quarter conference call on August 15. Thank you.
This concludes today's conference call. You may now disconnect.