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Metro Inc
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Good morning, ladies and gentlemen, and welcome to the Metro, Inc., 2023 Second Quarter Results Conference Call. At this time, all participant lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, April 19, 2023.
I would like to turn the conference over to Mr. Sharon Kadoche, Manager Investor Relations and Treasury. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our second quarter which ended on March 11.
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 comments 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 statements which does not constitute a historical fact may be deemed a forward-looking statement. Words or expressions such as expect, intent, or confident that, will and other similar words or expressions are generally indicated as 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, and our 2022-2023 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. Risk factors that could cause actual results or events to differ materially from our expectations, as expressed in our forward-looking statement are described under the risk management section in our 2022 annual report.
We believe these forward-looking statements to be reasonable and pertinent at this time and represent our expectation. The company does not intend to update any forward-looking information as required by applicable law.
I will now turn the call over to François.
Thank you, Sharon, and good morning everyone.
So total sales for the quarter were $4.6 billion, an increase of 6.6% over last year, with Food same-store sales up 5.8% in the quarter and Pharma same-store sales up 7.3%. Our gross margins stood at 20.1% of sales, same as in last quarter -- second quarter last year, with both Food and Pharma gross margin stable year-over-year.
With high food inflation persisting, the company has continued to invest in Food margins during the quarter, but this was offset by productivity gains and direct labor, and as such margins remained flat year-over-year. Year-to-date Food gross margin is down partly offset by higher margin Pharmacy.
Operating expenses increased 4.9% to stand at $407.7 million, or 10.2% of sales versus 10.4% of sales in the same quarter last year. $8 million in gift cards were paid last year, whereas this quarter, we also had new expenses that were incurred for the launch of the Loyalty Program 1, as well as fees paid to partners for the express delivery e-com sale. So EBITDA for the quarter totalled $447.3 million. That's up 8% year-over-year, and as a percentage of sales EBITDA was 9.8% versus 9.7% last year.
Total depreciation and amortization expense for the quarter was $120.6 million versus $116.3 million for same quarter last year, and the 3.7% increase reflects the additional investment in supply chain and logistics as well as in-store technology. Adjusted net earnings were $225.4 million compared to $204.7 million last year, a 10.1% increase, and our adjusted net earnings per share amounted to $0.96. That's up 14.3% versus last year adjusted EPS of $0.84.
Halfway through the fiscal year capital expenditures amounted to $288.5 million versus $285.7 million last year. And turning to our current Normal Course Issuer Bid program, we have repurchased between November 25, 2022 and March 31 of this year, a little over 2.9 million shares for a total consideration of $210 million, representing an average share price of $0.81 a share.
That's it for me. I'll turn to Eric.
Thank you, François. Good morning, everyone. Building on our strong start in fiscal '23 we are pleased with our results in the second quarter, as our team has continued to deliver value to our customers in the current high food inflation environment with competitive everyday prices, our full range of private label products, the sector promotional strategies and our loyalty programs. Our commercial programs continued to resonate well with our customers resulting in market share gains.
Total sales grew by 6.6%, EBITDA by 8% and adjusted EPS by 14.3%. Food same-store sales were up 5.8% compared to elevated sales last year because of the Omicron variant with many restrictions on capacity and access to restaurants limited, if you'll remember. Our internal food basket inflation was 9%, slightly lower than in the previous quarter. Compared to last year, traffic was up, while the average basket came down slightly. Promotional penetration remains very high, as consumers search for value.
Turning to online, sales were up 41% versus last year, driven mostly by successful third party marketplace partnerships, and added capacity. Pharmacy comparable sales were up 7.3% on top of 9.4% in the second quarter last year. Prescription drugs were up 5% and commercial sales were up 12.2% primarily driven by over-the-counter products, cosmetics and health and beauty.
We are looking forward to the launch of the loyalty program later this spring across our Quebec banners. Meanwhile we will leverage the strength of our Food and Pharmacy networks, where over 95% of Quebec households already shopped during the year, offer more points collection and redemption opportunities and enable more personalized promotions and greater customer engagement.
Turning to the modernization of our supply chain, we are pleased with the operations of both Fresh Phase 1 and the new freezer in Toronto. Our frozen DC is exceeding expectations in terms of productivity and capacity. About 95% of frozen products are now shipped through the DC, versus 70% previously. This results in improved on-shelf availability for our customers and more efficient operations.
In the province of Quebec construction activities are now completed for the new fresh and frozen DC in Terrebonne, and the installation of the automated systems is on track to start operations at the end of this summer. As we begin our third quarter, we remain focused on delivering value to our customers, with quality products at competitive prices, as higher than normal inflation and market challenges persist. Compared to last year, the number of price increase requests received from suppliers in the month of February and March came down as well as the size of those increases.
While we are not able to predict how the current macro environment will evolve, we expect some moderation in food inflation. To conclude the Draft Grocery Code of Conduct is expected to be released in the coming weeks. And I want to reiterate that Metro, Inc., has and will continue to support industry-led initiatives that enhance transparency, predictability, and fair dealings throughout the supply chain. Metro has played an active leadership role in the drafting of the industry-led Grocery Code of Conduct, and it's supportive of its widespread adoption.
Thank you, and we will now be happy to take your questions.
Thank you. [Operator Instructions] Your first question comes from Mark Petrie from CIBC. Please go ahead.
Yeah, thanks, and good morning. I wanted to just start on the Food gross margin performance. And François you call out productivity gains. And I'm just hoping you could expand on that a little bit. Does that stem specifically from the new DCs, or is that more broad? And I'm just curious if sales mix in one form or another, either category or channel had any notable effect.
Yes, good morning, Mark. So basically the productivity gains come from two factors. One, top line growth is still healthy. So you get efficiencies because of the increase in sales. But also, as you pointed out, our investment in DCs are showing improvement. So there's less labor touching the product to bring it to the store. So we're gaining efficiencies on that respect. So it's mostly these two factors that explains the improvement. Even though we made some investment in margin at the merchandising level, those were offset by these direct labor gains so that overall the margin remained flat.
Okay, and so is it fair to say then that those productivity gains accelerated in Q2 from Q1?
Yes, it's yes, I'm cautious when I say that. But yes. These are long term projects, but we're looking at the improvement. The learning curve and the productivity improvements, as expected is increasing. And as Eric pointed out, the performance of the freezer especially is above expectations. So that is showing up. And yes, we expect it's not over. And as we move out -- as we move to the next phases, that's what we expect to have in coming months, coming years. But there has been an improvement in Q2, yes.
Yeah. Okay. Appreciate that. On SG&A, obviously, another great quarter, controlling costs. Hoping you could just expand on the various pieces there. And then specifically, what kind of wage inflation are you experiencing in your business today? Or are you seeing in terms of your union negotiations?
While SG&A, as I said, in my remarks, 4.9% increase, it was 4.2% in Q1. So I think we're -- as you say, we're pleased in the environment that we're in. We're pleased with that year-over-year increases. We did have $8 million of costs of good sold [ph] last year. But as I said, there's also new items this year, which were not there, like the launch of wine and the fees that we pay for these express delivery sales with our partners and e-comm. So all-in, I'm looking at an increase at 4.9%, we're okay with. And as I said, this is a focus for us as we move forward.
There's more of a lag in his DNA than cost of goods sold, obviously, with respect to inflation. So we're going to be mindful, and we're going to make sure that we're on top of these expenses, as top line growth, we will -- is expected to come down as inflation pressures ease off. So that's the first thing.
On the labor contract, yes, obviously, as labor agreements come due, people are looking to some catch-up. So the first year of a new labor agreement is a higher than normal increase. But as we negotiate a multi-year agreement so that on a CAGR, if you will for the next four or five years, or more than the labor agreement is in place, it's a reasonable CAGR. And it's something we manage, as you've seen in our SG&A, something that we can manage, but yeah, there's some cost increases, minimum wage that we manage. So I think overall, so far so good.
Yeah. Okay. Appreciate all the comments. I'll pass the line. Thanks.
Thanks, Mark.
Your next question comes from Peter Sklar from BMO Capital Markets. Please go ahead.
Good morning. Your Food same-store sales was positive 5.8%. But your inflation, I think you said in the write up was 9%, suggesting you lost some tonnage. I'm just wondering how you reconcile that with your statement that you gained market share during the quarter. So maybe you could talk a little bit about the ins and outs of all that arithmetic.
So on the market share, we rely on Nielsen MarketTrack data that we track weekly, monthly, quarterly. And we can say based on those figures that we are gaining share overall. So very pleased with our market share performance. And it has been the case for the last few quarters.
On tonnage, the quick math that you're doing is a bit misleading in this high inflation period. The discount mix, package, private label sales, there are different factors at play here that indicate that our tonnage is more like flat to slightly positive versus the decline that you get on the back of the envelope calculation that you're using. But we're pleased overall with our performance.
In discount, obviously discount continues to perform very well market wide and for us, very pleased with our performance in discounts. Our conventional stores are not growing as fast. It's a market reality. But within the discount -- within the conventional segment, we're pleased with our relative performance. So those would be my comments.
Okay, understood. And then just my last question is, with the launch of MOİ you briefly touched on it in your commentary, Eric. Can you elaborate a little bit on with MOİ, what are the advantages for the consumer and what are the advantage for Metro?
So the consumer will get more opportunities to collect points and redeem points throughout our channel of Food and Pharmacies. So instead of just Metro stores in Quebec, it's Metro Super C will participate. The Jean Coutu banner will be the big newcomer also. So more stores or opportunities to collect points online and in-store for our customers in Quebec. Like I said, in my opening statement, almost everybody in Quebec shops one of our banners during the year. Hopefully they'll shop even more with this internal, let's call an internal coalition program in the province of Quebec.
So I think for customers it's an opportunity to get points, save money, get targeted promotions, on what they buy, what they like, even more. So we think it's a more personalized, more generous program for customers. And for us, we get better visibility of customer behavior throughout our stores. So I think that gives us and our vendor partners more opportunities to target and be more personalized and engage more with our customers. So we think it's win-win.
And the last new thing, I said it before, I didn't say it in the opening statement today, is the credit card partnership with RBC. It's a co--branded card. So customers who select that card will collect points, not only in our networks, in our stores, but they will collect Metro points on whatever purchase they make on that credit card. So we think that's going to be a benefit for customers too. So we're looking forward to launching it in a few weeks. We're going to have a marketing campaign to support it, and hopefully people will sign up.
Okay, thank you for your comments. That's all I have.
Thank you.
Your next question comes from Chris Li from Desjardins Bank. Please go ahead.
Oh, hi, good morning, Eric and François. My first question is maybe a bit of a tough one to answer. But just wanted to get your thoughts, even though inflation is starting to moderate, prices are still going to be meaningfully higher than a year ago. So I guess my question is, how sticky do you think the shoppers are who have shifted to discount? How sticky are they? Will they remain there for longer, even though inflation is starting to moderate a little bit?
Prices are high, and that's why discount is growing faster. There's no big surprise there. But we do provide good value in our Metro stores. There are strong promotional programs in the Metro store, and there's good value for our customers there. And I think conventional stores are going to continue to do well. The transfer between one and the other, there's ebb and flow, hard to predict. I think overall that general long term trend favoring discount continues and will continue. But that doesn't mean that conventional stores are not going to continue to do well. In many, many markets it's the right store. It's the right format for the market. So we like to have both in our portfolio and will continue to do well with both.
Okay, that's helpful. And maybe a follow-up to that is, was the transaction count at the conventional banner up compared to last year?
Yes. So customers are in the stores more often, buying smaller baskets, but there's higher traffic in all of our banners.
Okay, so that's helpful. And maybe shifting gears a little bit just Eric, if you can come just maybe on what you've seen in terms of the competitive intensity, and I wanted to maybe drill down a little bit in the Quebec market, as you know one of your competitors have been converting some of their conventional banners to discount banners in Quebec? Are you seeing any notable impact on your business? Maybe just some comments on that would be helpful.
So yes, we're tracking all competitive activity in all of our markets. And we monitor the impact. So I can't say it's really store by store, market by market. In some places, it's hardly noticeable, in other places, it's very noticeable. It really varies and for competitive reasons I'm not going to say more.
Okay, then last one for me just on the drug reform side. Have you seen any update? I know the agreement has come and gone, just any update on that on generic drug pricing?
So no, we're still waiting for resolution and news of those negotiations. So the agreement expired April 1. So it's been extended for an undefined period. But we are still awaiting the news and hopefully the reductions -- whatever reductions or pricing that comes out of that will respect the realities of distribution. Our distribution fees are based on the price of these drugs. And our costs are going up. There's inflation in the supply chain, as we all know. So I'm sure the government is aware of that. And we'll see where the negotiations end up.
Okay, thanks. All the best.
Thanks Chris.
Your next question comes from Vishal Shreedhar from National Bank. Please go ahead.
Hi, thanks for taking my questions. Can you give us a sense of what will change at Metro for investors when you look at the company as a result of this Grocery Code of Conduct?
What will change at Metro for investors?
Yeah, as we look at it. Okay, so there won't be any…
Just to give you -- it's an industry-led code of conduct that will make rules of engagement a little clearer. And it will encourage more written agreements between the parties so that there are no surprises and no unilateral decisions to increase, decrease, impose fees or whatever. So it's not going to change how we go to market. It's not going to change the way we deal with our suppliers. We think our relations with the supplier community are good are fair. We've always believed in fair dealing. And we do our best to deliver on the commitments that we make.
So we negotiate fairly. We, of course, we negotiate hard. We want we want to have competitive costs. But it's not going to change the way we do business.
Okay, thank you for that. In your opening commentary, you mentioned that promotional intensity is strong. Wondering if you -- when you compare that to 2019, will you say it's at levels, comparable or more intense than 2019 levels pre-COVID?
So slightly above pre-pandemic, in terms of penetration. Percentage of sales on promo versus regular, it's slightly higher now than it was pre-pandemic. So again, very much a function of high inflation. Features and specials are selling more and people are managing their budgets, very normal behavior. And we try to serve our customers the best we can, and we have promotional strategies in all of our banners, and we try to be as effective as possible. And I think our results show that they have been effective. So we're pleased with that.
Okay, and maybe on another topic here. Pharmacy Services, just given the long term outlook of that business, I would anticipate the pharmacy services in your drugstores to increase, and wondering on the -- given that your business is franchisee, do the economics predominantly flow to the franchisee? How should we think about how Metro thinks about pharmacy services, and your inclination to expand that?
Yeah, so pharmacy services are going to grow? Yes, we expect long term that number will continue to grow, to relieve pressure on the public system and demographic reasons that you know, very well. So the economics of it will influence or impact our franchisees and will impact us. The franchisees makes a fee or charges a fee that's negotiated with the government on the value of the services for the most part. And we and those services become part of the retail sales, quote-unquote, of the franchisee and we make a royalty off of that.
So it has an impact on us. So we are working with our franchisees through our Professional Services Group to be the best in the market, to deliver those services in the most efficient way for our patients, for their patients and for the pharmacists. So it's a focus of our team for sure. And we're looking for more down the road.
Okay, and maybe just one last one here. Obviously encouraging to see some of the initiatives that Metro has been working on for several years starting to bear fruit in terms on the P&L, but can you give us some insight on the capital expenditure and when you expect that to normalize? Are there any other big projects in the pipe after this supply chain initiatives? And what is the normal level of CapEx that we should expect for Metro after this supply chain initiative?
So I'll take that one Vishal. So as we said, we did $620 million last year, which was a record. We call about $800 million this year, and probably a similar level next year. So the biggest years in terms of CapEx is this year and next year -- this year and next year as we finalize the Terrebonne, and then we come back and finish Fresh Phase 2 in Ontario. And then you'll start to see CapEx coming down.
In the number that -- in the $800 million number for this year, there is some real estate, which can be a little choppy. So we know it's not as precise as P&L. But so we'll see for that. And if there's any change we'll give you an update. But to your question this year and next year will be the two biggest. And then you come back down to a more normal level, which is going to be around $500 million I would it roughly. That includes both Food and Pharma on a regular run rate investment.
So this is all factored in our plan. We are looking to earn the rate of return as we do all projects in which we invest. And so far we're, as we said earlier, we're tracking well on these big projects.
Thank you for that color.
Your next question comes from Irene Nattel from RBC. Please go ahead.
Thanks, and good morning, everyone. I think we're all kind of trying to square the circle on consumer spending behavior today versus pre-pandemic. So you said the promotional intensity was higher. Where do we stand on discount versus conventional, and also private label and things like pack size? If you could provide a little color there, that would be great. Thank you.
So promotional penetration, as you said, is higher. It's high. It's elevated. It has creeped up with the high inflation. It went down early in the pandemic, if you'll remember because of people doing one-stop-shop and availability of product was an issue. So last year, when inflation started to pick up quickly, promotional penetration picked up also very quickly. And that's where we are.
So I think we're back to a little above pre-pandemic levels. And we expect that to stay to stay elevated. Discount versus conventional continued. It just continues what we've said for the last three quarters. Discount is growing at substantially faster than conventional. And that continues for us and the market in general. Again, we're well positioned in discount in both of our markets in Quebec and Ontario. And we're pleased with our performance in discount on a relative basis, and on an absolute basis. Very pleased with our share.
So private label throughout all of our banners is growing at double the rate basically of sales, because they provide -- our private label portfolio provides a lot of value to customers, lower prices, great quality. So very pleased with that performance. And I think our portfolio of 4,000 or so private label products is of the best quality it's ever been. And I think it's resonating well and being bought by a lot of customers more and more in our store.
It's not just -- yes, the price, but the quality is there too. And that that builds loyalty and it builds repeat purchases. So there's not much change net-net on customer behavior over the last few quarters. This was the fourth quarter basically of very high inflation. So it's very similar to what we've described in the last few calls.
Thanks. That's really helpful. Eric. That 4,000 SKU number on the private label, has that been relatively stable? Or have you been increasing the private label? Because it looks like there's more of them? Or they are just redone [ph] and they look good?
Yeah, well, the packaging is redone once in a while. And there are labeling requirements that force us to redo packaging. So while at it we improve it. So yeah, no, I think the team's done a great job. The 4,000 number is plus or minus in the same neighborhood as it's been for a long time. I think the quality and the innovation has improved a lot over the last five years. So I think that's reflected in the sales performance we're getting for those products.
That's great. Thank you. And then just coming back to the launch of MOİ, is there anything you can share with us at this point about the ease of conversion for existing Metro and MOİ customers, and whether we should be expecting another step up in spend around that in the current quarter?
So for Metro and MOİ members card holders it will be seamless. So they will have to do nothing and their card will be accepted in their purchases at our other stores, other banners, in addition to Metro. So at Jean Coutu there will be a campaign to sign up members. A lot of Metro and MOİ members shop at Jean Coutu already. So for them, it's going to be seamless, but those that do not, we will have to sign them up as new members.
So we will have in-store campaigns, digital and in-store to sign up to sign up the membership. We have 1.2 million members of Metro and MOİ. So we're looking to increase that substantially over the next year. And we'll put some gunpowder behind it on the marketing side.
To your question Irene, there will be some expenses in Q3 as they were in this quarter. And it's part of the plan, and it's part of the pool of the expenses that we manage. So we'll give more color on an extra call.
That's very helpful. Thank you. And then just finally, if I might on PJC [ph] kind of store, very strong. Can you talk about what you're seeing in the current quarter? Where we are in terms of sales levels by category relative to pre-pandemic? And how you think -- how you expect that to evolve?
So to make sure, the question is very strong front store sales at Jean Coutu in the last few quarters. The cough and cold season has been long and strong, which drives traffic as you know, in our stores. So it's very good for OTC sales and traffic and we sell a lot of other stuff. Beauty and cosmetics has done has done really well also. Since the end of March, cough and cold season has abated quite a bit.
So we're seeing lower OTC sales currently and expect that to be so for the next little while until the next burst in cough and colds and viruses comes about. So we were expecting that. The peak of cough and cold was like I said long and strong. So at some point it has to come off. And I think we're going to be through that in the next few months. So we're expecting lower front end, sales performance going forward, but still healthy.
On Rx, you saw -- you know from 7% or so increase, as we saw in previous quarters down to 5% in this quarter, still very strong Rx performance. You have to remember that last year we were distributing tests for COVID. And that counted in Rx performance. We were providing vaccines. So there's much less of that going on today. And there's no more distribution of tests. So that cost a few points of growth on the Rx. But we're still very pleased with the 5% growth. And we look for continued strong performance on Rx going forward. I hope that answers your questions.
Absolutely. Thank you.
Your next question comes from George Doumet from Scotiabank. Please go ahead.
Yeah, good morning, Eric and François. Just a couple of follow-ups for me. On the pharmacy, do you know the Rx kind of volumes for prescriptions volumes, do you know where they are versus pre-pandemic? And maybe on the front end 4% comp number. Can you maybe break off how much of that was pricing?
So we'd have to get back to you on volume of Rx versus 2019. I don't have that top of mind. And on the pricing, there was inflation. There's inflation on the pharmacy commercial sales. Not as elevated as what we're reporting for food in the 9%, 10%. It's more mid-single digit on [indiscernible] products. So that is also a factor in the elevated commercial sales.
Thanks for that.
We expect that to moderate also as we quote-unquote expect Food inflation to moderate going forward. We're expecting some moderation on the pharma side too.
Got it. Thanks for that. On the gross margins for Food, I think last quarter, you called out higher feature penetration and weaker produce margins. Just wondering if that pressure was consistent this quarter, and maybe there's any other headwinds that you might want to call out.
Not really. I think the margin performance in the current environment, very competitive, high inflation. You have to be sharp, you have to be -- I think our teams are doing a really good job to deliver that value and deliver a decent margin. So like François said, we invested in gross margin. We're not passing on all the insulation that we receive, but productivity on the labor front, which counts on the cost of goods sold was better. So we're reporting a flat margin. But other than that, we're happy with our performance.
Okay, just one last point, if I may, Eric, what would be your outlook, maybe for tonnage growth, for the second half of the year? I know we've been -- tonnage is up flat to up a little bit, but your outlook there and it's a bit of a crystal ball question but what needs to happen for discount to stop outpacing conventional going forward, I guess?
We don't provide guidance or outlooks for tonnage growth. Like we say we provide many formats, many stores, and we're looking for increased sales in all of our stores, be they conventional or discount or pharmacy. What has to change for discount to slowdown, like I said earlier, it's -- inflation remains elevated. It's hopefully going to moderate but it's still be elevated versus pre -- normal inflation that we used to have. So you can expect discount to continue to perform well, short term. That's all I would say.
Okay, thanks for answers.
[Operator Instructions] Your next question comes from Michael Van Aelst from TD Cowen. Please go ahead.
Hi, good morning. I wanted to get back onto the gross margin a little bit, you talked about the productivity gains from your frozen DC. Can you just give us a bit more color on how that's ramped up over the past couple of quarters since you opened it, and how much more upside there is to come from that?
Well, so it has ramped up obviously. When you when you first go live, it's not near where it has to be. And it's not near as what the old warehouse was doing. But it's -- as we said, it's performing ahead of business plan. And so there's been a steady increase in performance. And we -- eventually that will get to the business case, that's the sort of the run rate level. We're not there yet.
And then the fresh Phase 1 same thing. That continues to ramp up. That one will go live. So we'll have a similar pattern where it'll be learning curve and some doubling of admin, which is as per plan. And then as you start ramping it up, and moving forward, we expect to see sequential improvements as well. So doing it in phases sort of minimizes the overall impact. We're trading, we're reducing labor, and getting efficiencies and labor at the expense of depreciation.
But I'm pleased with the year-over-year depreciation expense, 3.7, given the investment that we're making. That's in line with our expectation, and I'm pleased with that number. So steady improvements. But we're not done yet. There's still some phases to go. But we expect for that to continue.
Just to pick up on that, the frozen DC in Toronto, as you know, is a fully automated facility basically. And so fixed costs. It's a fixed cost operation pretty much. So as we as we load up the volume, as all the DSD, the Director Store Deliveries that are transferred into the DC, we're increasing volume, and thereby getting productivity gains, efficiency gains. And that's what's helping a lot. So it's not quite full yet, but we're getting there. We have transferred pretty much all that's supposed to be done out of there.
So now it becomes a question of adding, how should I say, just gaining more efficiency in our operations, but in terms of substantially higher fixed cost operation and most of the volume is in there now. So going forward, it's going to be tweaks and proving it. We still see room for improvement, but we've received most of the gains.
Again, earlier in your -- in the conference call I think you said -- did you say there was 95% of the product was now going through the DC at the first DC?
Yes, for our Ontario stores. So from 70% or so 30% DSD, and we're now in 95%, DC, 5% DSD. So that's better for the customers, because there's more product on the shelf. And it's better for our efficiency, both in the DC and in the store. So that's why we did it. So we're on our way.
And do you expect to get to 100, or is it 95 is where it's going to plateau?
It might tweak up a little bit, but we're pretty much there.
Okay. All right. Thank you for that. And then on the launch, the cost tied to the launch of your new loyalty program. The cost that you called out this quarter, and that you said next will continue next quarter, I'm assuming those are mostly launch costs. But do we see those go away? Are they replaced by higher programming costs in the future quarters? Are those -- are the prior program costs that you're talking about in terms of the increased points, are those funded by vendors? Or are those funded by expectations for higher sales?
The launch costs are going to be onetime costs. The going forward costs, points costs, we're going to pay with increased sales. And we're going to pay with vendor rep revenues that we negotiate. But that's all going to be part of the margin of the businesses. You shouldn't put a line, an additional cost on Metro because of this program. This program is to drive sales and drive customer engagement. And yes, it costs money, but it will provide a return.
Right. Thank you very much. Good quarter.
Thanks, Michael.
Thank you.
Mr. Kadoche, there are no further questions at this time. Please proceed with your closing remarks.
Before we end the call, I would like to remind everyone that Metro will be hosting an Investor Day on May 10. A webcast will be available for presentations made by senior management. Please contact me directly or send me an email for more information. And again, thank you all for your interest in Metro and we will speak again soon to discuss our third quarter results on August 9. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.