september 2019 katie brine, director finance, investor ... · investor presentation september 2019...
TRANSCRIPT
Investor Presentation
September 2019
Katie Brine, Director Finance, Investor Relations
Phone: 905-238-7124 x2092
Email: [email protected]
2
Disclaimers
Forward-Looking Information
This document contains forward-looking statements which are presented for the purpose of assisting the reader to contextualize Empire Company Limited’s
(“Empire” or the “Company”) financial position and understand management’s expectations regarding the Company’s strategic priorities, objectives and plans.
These forward-looking statements may not be appropriate for other purposes. Forward-looking statements are identified by words or phrases such as “estimates”,
“plans”, “predicts”, “anticipates” and other similar expressions or the negative of these terms.
These forward-looking statements include, but are not limited to, the following items:
The Company’s expectations regarding the impact of Project Sunrise, including expected cost savings and efficiencies, the expected timing of the
realization of overall and fiscal 2020 in-year incremental benefits, and the expected $50 million overachievement of the initial $500 million target which could
be impacted by several factors, including the execution and completion of category resets, time required by the Company to complete the project as well as
the factors identified under the heading “Risk Management” in the fiscal 2019 annual Management’s Discussion & Analysis (“MD&A”);
The FreshCo expansion in Western Canada and Farm Boy expansion in Ontario, including the Company’s expectations regarding future operating results
and profitability, the amount and timing of expenses, and the number, location, feasibility and timing of construction and conversions, all of which may be
impacted by construction schedules and permits, the economic environment and labour relations;
The Company’s plans to purchase for cancellation Non-Voting Class A shares under the normal course issuer bid (“NCIB”) which may be impacted by
market and economic conditions, and the results of operations; and
The Company’s expectations regarding the implementation of its online grocery home delivery service which may be impacted by the timing of launching
the business, the customer response to the service and the performance of its business partner, Ocado.
By its nature, forward-looking information requires the Company to make assumptions and is subject to inherent risks, uncertainties and other factors which may
cause actual results to differ materially from forward-looking statements made. For more information on risks, uncertainties and assumptions that may impact the
Company’s forward-looking statements, please refer to the Company’s materials filed with the Canadian securities regulatory authorities, including the “Risk
Management” section of Empire’s fiscal 2019 annual MD&A.
Non-GAAP Financial Measures & Financial Metrics
There are measures and metrics included in this earnings call presentation, such as adjusted EBITDA, adjusted earnings per share, same-store sales, free cash
flow, funded debt and total capital that do not have a standardized meaning under generally accepted accounting principles (“GAAP”) and therefore may not be
comparable to similarly titled measures and metrics presented by other publicly traded companies. The Company includes these measures and metrics because
it believes certain investors use these measures and metrics as a means of assessing financial performance.
For a more complete description of Empire’s non-GAAP measures and metrics, please see Empire’s MD&A for the first quarter ended August 3, 2019.
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CEO’s Direct Reports
Michael Medline President &
Chief Executive Officer
Vivek Sood
Executive Vice
President, Related
Businesses
Mike Venton
General Manager, Discount Format
Pierre St-Laurent
Executive Vice President, Chief Operating
Officer, Full Service
Sarah Joyce
Senior Vice President,
E-commerce
Vittoria Varalli
Vice President, Sustainability, Chief of Staff, Office of the
CEO
Mike Vels
Chief Financial Officer
Simon Gagné
Executive Vice
President, Human
Resources
Doug Nathanson
Senior Vice President,
General Counsel & Corporate
Secretary
Sandra Sanderson
Senior Vice President, Marketing
Mohit Grover
Senior Vice President,
Innovation & Strategy
Empire Company Limited – Who are we?
• Canadian company headquartered in Stellarton,
Nova Scotia.
• Key businesses include food retailing and related
real estate through wholly owned subsidiary Sobeys
Inc. and a 41.5% equity accounted interest in
Crombie REIT.
• Sobeys is a national Canadian grocery retailer,
serving the food shopping needs of Canadians under
retail banners that include Sobeys, Safeway, IGA,
Foodland, FreshCo, Thrifty Foods, Farm Boy and
Lawtons Drugs.
• In addition to food retail we are:
• Pharmacy retailers with in-store pharmacy
banners and free-standing locations through
Lawton’s Drug Stores;
• Wholesalers, distributing to our corporate and
franchised stores and over 8,000 retail stores
and independent wholesale accounts; and
• Owner and operator of fuel and convenience
stores, and liquor operations.
Quick Facts – Empire*
Share price (CAN$)** $36.01
52-Week High ** $37.36
52-Week Low ** $22.69
30-day Average daily trading volume** 664,379
Shares outstanding (diluted) 272.9M
Quarterly dividend $0.12
Number of Stores*** > 1,500
Number of Retail fuel locations > 350
Employees ~123,000
Total Square footage ~40.0 M
Communities served > 900
*As at Q1, Fiscal 2020 (August 3, 2019) unless noted otherwise
**As of September 13, 2019
*** See http://corporate.sobeys.com/at-a-glance/ for details of
stores per banner and location
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Key Achievements – Last twelve months
December • Completed the acquisition of Farm Boy, Ontario’s fastest growing food retailer
January • Announced progress implementing a labour decision provided by a Special Officer appointed by the Government in B.C.
• Decision sets terms that provide a framework to improve store profitability and enable conventional Safeway stores to compete on a
level playing field in B.C.
• Enabled Empire to move forward with Discount expansion strategy in B.C.
April • Opened first Western Canada FreshCo store in in Mission B.C.
May • Unveiled Voilà by Sobeys and Voilà par IGA – the name and brand for the Company’s online grocery home delivery service for the
Greater Toronto Area, Ottawa and major cities in the province of Quebec
• Announced changes to Executive Committee, as the Company sets its sights on stronger execution, innovation and growth
June • Announced full year results reflecting fourth consecutive quarter of tonnage growth
• Project Sunrise exceeded targets for fiscal 2019 – achieved $200 million of incremental savings in fiscal 2019, and increased total
savings target to $550 million
• Annual dividend per share increased 9% to $0.48
• Capital investment program for fiscal 2020 expected to be $600 million
• Announced intent to repurchase approximately $100 million of Non-Voting Class A shares
July • With announcement of additional FreshCo store investments in Western Canada, one-third (22) of Western FreshCo locations confirmed
• DBRS Upgrades Ratings on Sobeys Inc. to BBB (low) and changes trend to Stable; S&P revises outlook to Positive
September • Announced first quarter results reflecting increased earnings
• Same-store sales excluding fuel increased by 2.4%
• Store closure and conversion costs of $21.0 million ($0.06 per share, after tax) included in results
• Repurchased 547,300 shares for a total consideration of $18.9 million
2019
2018
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Strategic Focus
Successful completion of
Sunrise by end
of fiscal 2020.
Reset our Foundation
Strengthen the emotional
connection to our banner
brands.
Bolster our Brand
Expand discount to Western
Canada and refine our
FreshCo model.
Enhance Discount
Launch home delivery and
rapidly grow the number of Farm
Boy stores.
Fill the Urban Gap
Win in our Stores
Improve service and offering in
our conventional stores.
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Leverage digital and data to accelerate
growth.
Invest in Innovation
Project Sunrise Update
In the fourth quarter of fiscal 2017, the Company launched Project Sunrise, a comprehensive, three year
transformation initiative intended to simplify organizational structures and reduce costs. The initiative is now
expected to generate at least $550 million in annualized benefits by the end of fiscal 2020 and will be achieved
through three phases:
1) Organizational realignment – from a regional to a national structure, is complete.
2) Operational efficiencies – store operations, labour standards and other operational process initiatives
continue to progress as planned, with increased benefits achieved in fiscal 2019 and planned for 2020.
3) Cost of goods sold – harmonization of costs with suppliers; more competitive net acquisition costs achieved;
category resets are providing an improved, simplified and in some cases more innovative assortment for
customers.
Financial benefits from Phases one and two largely impacted selling and administrative expenses. Phase
three financial benefits will be reflected mostly in gross margin expansion. As at Q1 F20, Project Sunrise is
on track.
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Year Approximate In-Year
Savings break-down ($M) Achieved Through
1 F2018 (completed) ~100 Organizational design, indirect sourcing cost reductions and improvements in store
operations.
2 F2019 (completed) ~200 Initial rollout of category resets, continued cost reductions and operational improvements.
3 F2020 (expected) ~250 Completion of category resets rollout, continued cost reductions and operational
improvements.
Total ~550
Initial Target (set May 2017) 500
Expected to exceed by ~50
Significant improvement in Empire’s key metrics since the launch of Project Sunrise.
Project Sunrise Update
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Fiscal
2019 2017 Change
52 weeks
4-May-19¹ 52 weeks
6-May-17 +/-
Sales $25,142.0 $23,806.2 + 5.6%
Same-store sales, excluding fuel 4.3% 3.3% + 100 bps
Gross margin 24.2% 24.0% + 20 bps
Adjusted EBITDA $1,076.2 $769.9 + 39.8%
Adjusted EBITDA margin 4.3% 3.3% + 100 bps
Selling and Administrative margin (adjusted)² 22.1% 22.9% - 80 bps
Adjusted EPS $1.50 $0.70 + 114.3%
$23
$24
$24
$25
$25
$26
2017 2018 2019
+1.8% CAGR³
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
2017 2018 2019
+11.8% CAGR
$0.00
$0.50
$1.00
$1.50
$2.00
2017 2018 2019
+28.9% CAGR
Sales ($B) Adjusted EBITDA ($M) Adjusted EPS ($/share)
¹ Empire’s results for the fiscal year ended May 4, 2019 include Farm Boy operations as of December 10, 2018.
² Selling and Administrative costs, excluding the impact from adjustments made to operating income during the fiscal year. See Empire’s fiscal 2019 MD&A.
³ Compound annual growth rate.
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Farm Boy Acquisition Advances Ontario Strategy, Accelerating Ontario Presence and GTA Growth
Farm Boy Stores acquired
Farm Boy Stores opened
Existing Farm Boy Distribution Centre
Announced Farm Boy Distribution Centre Opening
• Farm Boy acquired on December
10th, 2018.
• Farm Boy contributed to Company
results for 21 weeks of fiscal 2019;
sales of $212.7 million and net
earnings of $7.9 million.
• For fiscal 2020, the Company
expects to spend approximately $70
million in capital for the expansion of
the Farm Boy store network in
Ontario.
• Since the acquisition, the Company
has opened two new Farm Boy
stores in Ontario. Three further
stores will open in fiscal 2020 and
two more in the first quarter of fiscal
2021.
• Farm Boy Private Label will be part of
the Voilà by Sobeys offering when it
launches in Spring 2020.
Farm Boy Stores announced to open
Note – For further company and transaction information, please see Appendix A
10
Ocado Solutions
With more than 15 years at the forefront of innovation and success in grocery ecommerce,
Ocado will partner exclusively in Canada with Sobeys on our end-to-end e-commerce solution.
Key facts:
• Canadian online grocery market is
growing 30%+ per year
• Greater Toronto Area Customer
Fulfilment Centre (“CFC”) complete
in 2 years
• Soft launch in Spring 2020
Ocado by the numbers*:
• 99% order accuracy
• 95% delivery punctuality
• 0.7% product waste
• 318,000 orders a week (average)
• 741,000 active customers *Per Ocado Group’s 2019 Half Year Report
This is a link to a video showing the Ocado’s Andover facility.
https://youtu.be/EeMTZd68fOU
Financial Results – Annual
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¹ Empire’s results for the fiscal year ended May 4, 2019 include Farm Boy operations as of December 10, 2018. All metrics, including same-store sales, include the
consolidation of Farm Boy operations
² The Company revised the definition of free cash flow in Q4 F19 as cash flows from operating activities, plus proceeds on disposal of property, equipment and
investment property, less acquisitions of property, equipment, investment property and intangibles. All amounts in the chart have been restated to reflect the new
definition.
Fiscal
F2019 F2018 F2017 F2016
52 weeks 52 weeks 52 weeks 53 weeks
4-May-19¹ 5-May-18 6-May-17 7-May-16
Sales $25,142.0 $24,214.6 $23,806.2 $24,618.8
Same store sales growth (decline), excluding fuel 2.7% 0.5% (2.2)% 0.3%
Inflation (deflation) at quarter end – internal 2.2% 0.8% (1.9)% 2.2%
Gross profit $6,083.6 $5,900.5 $5,707.2 $5,957.6
Gross margin 24.2% 24.4% 24.0% 24.2%
Adjusted EBITDA $1,076.2 $1,014.7 $796.9 $1,161.4
Adjusted EBITDA margin 4.3% 4.2% 3.3% 4.7%
Adjusted earnings per share $1.50 $1.27 $0.70 $1.50
Free cash flow ² $540.7 $808.9 $619.7 $367.3
Capital expenditures $434.6 $288.0 $514.5 $672.0
Dividends per share $0.44 $0.42 $0.41 $0.40
Share price $29.94 $25.01 $21.50 $21.09
Fiscal
2020(2)(3)
Fiscal
2019
Fiscal
2018
Fiscal
2017
Q1 F20 Q4 F19 Q3 F19(4)
Q2 F19 Q1 F19 Q4 F18 Q3 F18 Q2 F18 Q1 F18 Q4 F17 Q3 F17 Q2 F17
Aug. 3 May 4 Feb. 2 Nov. 3 Aug. 4 May 5, Feb. 3, Nov. 4, Aug. 5, May 6, Feb. 4, Nov. 5,
2019 2019 2019 2018 2018 2018 2018 2017 2017 2017 2017 2016
Sales $6,744.1 $6,220.4 $6,247.3 $6,214.0 $6,460.3 $5,886.1 $6,029.2 $6,026.1 $6,273.2 $5,798.9 $5,889.8 $5,930.9
Same store sales, excluding fuel 2.4% 3.8% 3.3% 2.5% 1.3% 0.0% 1.1% 0.4% 0.5% (1.6)% (3.7)% (2.6)%
Inflation (deflation) – internal 3.0% 2.2% 1.8% 1.3% 0.0% 0.8% 1.6% 0.7% 0.5% (1.9)% (2.2)% (0.1)%
Gross profit $1,660.4 $1,577.5 $1,511.7 $1,482.1 $1,512.3 $1,451.3 $1,444.7 $1,473.5 $1,531.0 $1,420.9 $1,394.8 $1,400.7
Gross margin 24.6% 25.4% 24.2% 23.9% 23.4% 24.7% 24.0% 24.5% 24.4% 24.5% 23.7% 23.6%
Adjusted EBITDA $460.0 $300.1 $218.3 $279.1 $278.7 $240.4 $253.3 $242.2 $278.8 $193.9 $178.7 $181.2
Adjusted EBITDA margin 6.8% 4.8% 3.5% 4.5% 4.3% 4.1% 4.2% 4.0% 4.4% 3.3% 3.0% 3.1%
Adjusted EBITDA margin (Pre-IFRS 16) 4.9% 4.8% 3.5% 4.5% 4.3% 4.1% 4.2% 4.0% 4.4% 3.3% 3.0% 3.1%
Adjusted EPS $0.49 $0.46 $0.27 $0.40 $0.37 $0.35 $0.33 $0.27 $0.32 $0.18 $0.13 $0.12
Free cash flow (1)
$224.2 $175.6 $179.2 $58.4 $127.5 $342.7 $248.4 $111.2 $106.6 $150.7 $15.5 $6.6
Capital expenditures $91.4 $227.1 $86.5 $73.4 $47.6 $84.0 $70.9 $58.5 $74.6 $111.9 $96.3 $171.3
Dividends per share $0.120 $0.110 $0.110 $0.110 $0.110 $0.105 $0.105 $0.105 $0.105 $0.1025 $0.1025 $0.1025
Share price $35.52 $29.94 $29.75 $23.43 $26.12 $25.01 $23.31 $23.73 $20.39 $21.50 $16.24 $18.51
Financial Results – 12 Quarter Review
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1 Amounts have been restated to be consistent with the pre-IFRS 16 definitions. See “Non-GAAP Financial Measures & Financial metrics" section of Empire’s News Release for the first
quarter ended August 3, 2019. 2 In the first quarter of fiscal 2020, the Company expensed $21 million in closure and conversion costs. These costs relate to the announced conversion of ten Safeway locations to
FreshCo stores and the conversion of two Company locations to Farm Boy stores that were announced in the first quarter. 3 Certain financial metrics were impacted by the implementation of IFRS 16 in the first quarter of fiscal 2020. See Appendix B for additional details. 4 Q3 F19 results include $45 million in costs related to the B.C. labour buyouts and FreshCo conversion store closures which impacted selling and administrative costs
Appendices A – D
Farm Boy – Company Overview
Founded in 1981, Farm Boy Inc., (“Farm Boy”) is an Ontario-
based retail grocer that has a focus on high quality and locally-
sourced meat and produce and offers a wide range of
exceptional private label and prepared foods and renowned
customer service
Farm Boy is led by Jean-Louis Bellemare (founder and co-CEO)
and Jeff York (co-CEO), both are continuing their leadership
roles with Farm Boy
Farm Boy operates a unique and compelling brand that
resonates with Canadians and has a passionate and loyal
customer base
Scalable platform with infrastructure in place to support future
long-term growth
Over the last 5 years, Farm Boy has approximately doubled
store count and delivered strong revenue, EBITDA and free
cash flow growth
Today, Farm Boy has 28 stores with defined plans for continued
expansion into the GTA
Appendix A
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Farm Boy – Key Investment Highlights
Aligned with Empire’s Strategic Priorities
Leading Specialty Food Retailer with Strong Brand
Loyalty
Attractive, Scalable Platform Primed for Growth
Enhances Presence in Urban Markets with
Established, Well-Known Brand in Ontario
Exceptional Private Label Offering
Retention of Strong and Driven Management Team
1
2
3
4
5
6
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Farm Boy – Transaction Overview
Purchase
Price & Timing
Empire, through a subsidiary, signed an agreement on September 24, 2018, to acquire the business of Farm Boy for
a total purchase price of $800 million; transaction closed on December 10, 2018
Farm Boy is set up as a separate company within Empire’s structure
Farm Boy’s Co-CEOs, together with members of their senior management team, have reinvested for a 12% interest
of the continuing Farm Boy business
Financial
Profile
Accretive to adjusted earnings per share and operating cash flow per share in the first full fiscal year after closing
Empire’s fourth quarter of fiscal 2019 was the first full quarter including contributions from Farm Boy
Empire’s fiscal year 2020 will be the first year including a full year of contributions from Farm Boy
Historical EBITDA CAGR of 21% with compelling EBITDA margin profile(1)
Plan to double store count, sales and EBITDA in the next 5 years
Free cash flow generation sufficient to self-fund growth
Three year average same-store sales growth of 5.3%(2)
Financial
Flexibility
The acquisition was financed through a combination of cash on hand and a new $400 million senior, unsecured, non-
revolving two-year credit facility
Rapid deleveraging profile
(1) For the period from FY2014 through the 52 weeks ended July 14, 2018
(2) FY2015 through FY2017.
16
• IFRS 16 intends to align the presentation of leased assets more closely to owned assets.
• Impact of the standard has been reflected in the financial statements for first quarter of 2020 (from May 5, 2019).
• This standard will not impact Empire's strategy, business operations, or cash flow generation.
• The adoption of IFRS 16 had a material impact on balance sheet classifications.
• The Company expects the adoption of IFRS 16 will not have a material impact on fiscal 2020 EPS.
13 Weeks Ended
($ in millions, except
per share amounts)
Aug. 3,
2019
Aug. 4,
2018 Change
Impact of
IFRS 16(1)
Change
(excl. IFRS 16)
EBITDA $460.0 $278.7 $181.3 $129.0 $52.3
Adjusted EBITDA $460.0 $278.7 $181.3 $129.0 $52.3
EBITDA margin 6.8% 4.3% 2.5% 1.9% 0.6%
Finance costs, net $71.7 $23.1 $48.6 $46.3 $2.3
Net earnings $130.6 $95.6 $35.0 $(0.9) $35.9
Adjusted net earnings $133.9 $100.2 $33.7 $(2.0) $35.7
Adjusted EPS (fully diluted) $0.49 $0.37 $0.12 $(0.01) $0.13
INCOME STATEMENT IMPACT BALANCE SHEET IMPACT
(1) Reflects the impact of changing accounting standards from IAS 17 to IFRS
16 in the first quarter of fiscal 2020, including the add back of $3.5 million
($2.5 million after tax) in historical straight-line expense under IAS 17.
As at May 5, 2019 ($ in millions)
Asset increase (decrease):
Prepaid expenses $(43.4)
Current loans and other receivables 53.6
Non-current loans and other receivables 519.0
Other assets (7.3)
Property and equipment (22.3)
Right-of-use assets 3,800.7
Intangibles (126.7)
Deferred tax assets 127.3
Total assets $4,300.9
Liabilities and equity (increase) decrease:
Current provisions $7.4
Long-term debt due within one year 6.5
Lease liabilities due within one year (424.4)
Long-term provisions 23.7
Long-term debt 22.6
Long-term lease liabilities (4,569.6)
Other long-term liabilities 164.4
Deferred tax liabilities 36.5
Retained earnings 432.0
Total liabilities and equity $(4,300.9)
Adjustments to opening balances resulting from the initial adoption of IFRS 16:
IFRS 16 Update
Appendix B
17
18
Appendix C
FreshCo 2.0
19
FreshCo 2.0
Appendix D
Voilà – Canada’s best online grocery home delivery service
Voilà by Sobeys promises to help Canadians stay one step ahead of their busy lives.
Key Facts:
• Powered by Ocado’s world-leading online grocery engine, Voilà by
Sobeys will offer an expansive product selection of up to 39,000
products, including high quality fresh produce, at prices comparable to
Sobeys and IGA.
• Construction of CFC in Vaughan, Ontario is on track to roll out
testing and soft launch in the GTA in late Spring 2020.
• Ocado is building the grid in the ambient & chilled portions of the
warehouse
• On-boarding suppliers has begun
• Robots are arriving soon for testing
• Delivery trucks are ordered
• Team on-boarding ongoing
• Second CFC announced to open in Montreal in 2021, serving major
cities in Quebec and the Ottawa Area.
• Empire has partnered with Crombie REIT to develop the second CFC in
Montreal.
20
21
Voilà by Sobeys – Vaughan CFC
Voilà by Sobeys – Vaughan CFC
Ocado’s live CFC in
Erith, UK
Vaughan
CFC
22