Good afternoon, ladies and gentlemen, and welcome to the Empire second quarter 2022 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during the call you require any further assistance, please press star zero for the operator. Also note that the call is being recorded on Thursday, December 9th, 2021. I would like to turn the call over to Katie Brine, Director, Investor Relations. Please go ahead.
Thank you, Sylvie. Good afternoon, and thank you for joining us for our second quarter conference call. Today we will provide summary comments on our results and then open the call for questions. This call is being recorded, and the audio recording will be available on the company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer, Matt Reindel, Chief Financial Officer, Michael Vels, Chief Development Officer, and Pierre St-Laurent, Chief Operating Officer, Full Service. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. Refer to our news release at MD&A for more information on these assumptions and factors.
I will now turn the call over to Michael Medline.
Thanks, Katie Brine, and good afternoon, everyone. Before I jump into the quarter, our thoughts continue to be with all those affected by the ongoing disaster in British Columbia. We will continue to work with our local supplier partners as they navigate the impacts to the food supply chain and infrastructure. We're extremely proud of our teammates who have navigated the crises in British Columbia and Newfoundland and Labrador over the last several weeks. I also wanna take a moment to welcome Matt Reindel, our new CFO, to this call. Matt Reindel has been with Empire for the past two years. He has been absolutely critical in setting up Project Horizon for success and has led our Longo's partnership. Matt Reindel joined Empire with extensive experience from Nestlé. I also wanna thank Mike Vels for his great run as CFO.
As you know, Mike is an exceptional leader, and we are thrilled he has stepped into the chief development officer role. Mike will now focus his many talents on continuous improvement in our execution, delivering our Project Horizon targets, and our growing ambitions beyond Horizon. Now let's talk about the business. It was a straight up good quarter, well executed by our teams across the country. We are consistently putting numbers on the board. We have strong underlying momentum, and in only four and a half months, we will be entering our crucial final year of Project Horizon, which we're feeling very good about. Today I wanna cover four topics, our continued strong performance, how we're managing inflation, how we're seeing the Full Service versus discount split, and e-commerce. First, our results. This was another strong quarter for Empire.
Our sales grew 4.9% this quarter, while same-store sales grew 90 basis points from Q1 to -1.3%. As we and many others have said, year-over-year comparables do not tell the entire story as we lap strong COVID sales. Our same-store sales have grown 6.8% over the last two years. Our e-commerce sales, excluding Grocery Gateway, were up 1.8%, but this number disguises the fact that Voilà continues to grow while being partly offset by our IGA.net and Thrifty Foods businesses, comping strong COVID-driven sales. If we included Grocery Gateway, our total e-commerce sales are up 33%. Sales are up as we continue to execute on key occasions. Our merchants and operators did an exceptional job delivering great value to our customers for Thanksgiving and Halloween.
We did this with a great customer experience in-store and online, exceptional assortment, and great promotions. I'll speak more to inflation in a moment, but continuing to offer our customers meaningful value through promotions is more important than ever right now. We have enjoyed significant momentum with these big seasonal events. On top of that, our investments in our renovations and own brands are paying off, especially in our Full Service stores. Our renovated stores look and perform in an excellent fashion, and you'll see this continue to accelerate our performance. This successful and significant investment in the interior and exterior of our stores sometimes flies under the radar, but I'm convinced this improvement in store experience will be a game changer for Empire. Continuing to improve on our own brands offering is giving our customers increasing opportunities to save money without compromising on quality.
We're very pleased with the progress we've made and expect this will pay off in the current inflationary environment. Empire's gross margin is strong and improving. Excluding the impact of fuel, we improved our gross margin rate by 72 basis points. This is on top of last year's strong margins and is largely due to our continued progress against Project Horizon, the addition of Longo's, and our business mix returning a little bit more to normal. Linked to our robust gross margin results, our SG&A rate went up 27 basis points. This is because our higher margin businesses, Full Service, Farm Boy, Longo's, are becoming more and more successful. These businesses have higher gross margins but also higher SG&A, which is why it is critical to look at our bottom line, which is showing solid improvement. Overall, our SG&A expenses were very well managed.
Our EBITDA margin grew year-over-year by an impressive 36 basis points to 7.7%. Our EPS performance was similarly strong at CAD 0.66, up CAD 0.06 from last year. Even more dramatic is our two-year EPS growth, which is up 29% when we remove the impact of Crombie's unusually large property disposal of CAD 0.06 in fiscal 2020. I'm also very pleased to report that our free cash flow grew 72% over last year, even after funding a very healthy capital reinvestment program. Our strategy is working. We're growing sales. We're improving margins. We're managing costs. We're generating strong cash flows. We're delivering for our shareholders. We're halfway through Horizon, and we have momentum and still the upside in the industry. There is so much more to come as we head into fiscal 2023.
Next, I'd like to dig into inflation and how we're managing it. Inflation is unusually high right now. The rising cost of goods business is a reality that all businesses across the globe are facing, not just in grocery, but we're managing it well. Our merchants and supplier partners are out there every day fighting to keep prices low for our customers. Our merchants are doing a fantastic job working with our data to utilize the effect of inflation on our customers, an example of how we're utilizing more and more data throughout our company. Many of you are familiar with our unique and successful approach to managing our relationships with our supplier partners. With our approach, we have risen to be ranked number two in the annual Advantage Supplier Survey of the top six grocers in Canada.
We were at the bottom of the ranking only a few short years ago. We are working diligently and respectfully together with our supplier partners to manage the cost increases coming through. It's actually because of these powerful relationships that we have been so successful in managing inflation and navigating any supply chain issues so far. Having relationships based on trust and transparency helps us keep conversations focused only on the real unavoidable cost increases, so we can maintain the best value for our customers. Where inflation does impact us, our Full Service network is in the best position to manage it. First, our higher margin model is more adept at mitigating cost increases. Second, our broader assortment gives value-conscious customers a myriad of substitutions. Where we've had unavoidable price increases, we see customers sometimes substituting products within a basket but not leaving our stores.
Now over to the Full Service versus discount split, a topic that has been popular recently. As we've been accurately prognosticated quarter after quarter, we expect this channel to return almost to pre-pandemic levels, but slowly. In other words, we are not seeing fast, significant changes. In fact, we continue to see a lot of stickiness in our Full Service banners. As we look ahead, we believe our Full Service stores will keep momentum coming out of COVID. Our customer occasions are starting to change, including more visits to restaurants. We are seeing a structural change in consumption of food at home. Over the past 22 months, customers have seen and experienced the affordability and convenience in eating at home with their families. We believe there is permanence in this shift. We're seeing this is how customers are shopping.
Prior to COVID, customers shopped an average of eight food stores a month. During COVID, that dropped to one or two , and today that number is steady at five- six stores. Despite this, our customers continue to favor larger shops at Full Service stores. While some of this is COVID, we've also made significant improvements in the last five years to thrill our customers. We improved our offerings, strengthened our price perception, renovated our stores to deliver an exceptional in-store experience. Our customers are giving us credit for it, and it's why we think Full Service will be sticky. There's an equilibrium in supply and demand between Full Service and Discount Stores, and our Full Service stores have never provided such value and service. Finally, I wanna touch briefly on e-commerce. E-commerce is a small fraction of the market today.
It is growing quickly, and it's top of mind right now. For our customers, we believe it will be critical to have the best omni-channel experience that includes e-commerce. For our shareholders, it will be critical that we do this profitably. We've run Click and Collect for years in Quebec and British Columbia. At best, it's an okay experience for customers, and we know it's not profitable at scale. Ocado developed best-in-world technology that thrills our customers and is a profitable solution at scale. Reaching scale is not the same as reaching capacity. We'll get to scale much sooner than that.
We were confident in our investment in Voilà in 2018, and now after running the GTA for over a year and seeing the results, we are more confident in it than ever, especially after seeing how little progress non-Ocado technology has made across the globe. I'll pass it over to Matt in a moment, but as you can see, there's a lot of momentum at Empire. In a couple of quarters from now, we will be done lapping COVID results, as will our peers. We performed extraordinarily well when the chips were down during COVID. Very soon, the playing field will be level again, and that's good for Empire. I've said many times that the second year of a three-year strategy is the hardest. We're making investments, great investments that are improving our business and not yet seeing all of the benefits.
Next year, we expect our investors will see those benefits even more clearly. With that, I'll pass the call over to Matt for his inaugural report as CFO of Empire. Over to you, Matt, and congratulations.
Thanks, Michael, and good afternoon, everyone. Before I jump into our performance, firstly, let me say how pleased I am to have joined Empire Executive Team. I also wanna take a moment to express my thanks to Michael, who has given me the best possible transition into Empire over the past two years. There's no question that I have some very large shoes to fill, but the great news for Empire is that Mike is still with us in his new role, and together we will ensure that the CFO transition goes extremely smooth. I'm also extremely happy that for my first quarterly earnings release, I get to talk about such strong performance. Let me provide some additional color on our results, and then we can jump right into your questions.
Gross margin was 25.3%, and if we exclude fuel, this represents a 72 basis points increase versus last year. Our promotional optimization tools continue to expand margin, along with the addition of the higher margin Longo's business. We continue to sustainably improve our gross margin performance, and we are expecting more upside in fiscal 2023 from our Horizon initiatives. Our SG&A was 21.2%, which was 27 basis points higher than last year. There's a number of puts and takes which drove this increase. First, Longo's has higher SG&A than our average, and we'll continue to see this mixed impact until we comp their results next year. Second, our depreciation is higher, mainly due to an increase in right-of-use asset depreciation under IFRS 16, reflecting an increase in occupancy costs. These increases were partially offset by lower incentive compensation accruals in the quarter.
Our EBITDA increased by 36 basis points to 7.7%, tuned by our strong gross margin performance, which was fueled by Project Horizon. We are now halfway through Horizon and on track, and we will continue to see Horizon benefits for the rest of this year and even more so in fiscal 2023. The effective income tax rate for the quarter was 26.2%, which is slightly lower than our statutory rate, primarily due to our consolidated structured entities that are taxed at lower rates. We are still expecting that the effective tax rate for fiscal 2022 will be between 26% and 28%, excluding the effect of any unusual transactions or differential tax rates on property sales. Earnings per share were CAD 0.66, which included Voilà dilution of CAD 0.07 for the quarter.
Our e-commerce platforms have combined sales growth of 33% over last year, but excluding the acquired Grocery Gateway business, our e-commerce sales grew 1.8%. This was primarily driven by the continued growth of Voilà, partially offset by the COVID-related declines in IGA.net and Thrifty. Equity earnings increased year-over-year, mostly due to a higher level of activity from our Genstar real estate development. Property lot sales in California accounted for the highest contribution this quarter, but as we've said in the past, timing plays an important element in these Genstar sales, and this quarter is not necessarily indicative of an increasing trend. Crombie also had higher earnings due to reductions in their mark-to-market levels compared to last year, which was impacted by COVID. Our cash flow generation and balance sheet remained strong.
Free cash flow generation increased 72% over last year despite the continued investment in our stores. This also allowed for our continued share buyback program, and as of this week, we have repurchased approximately 4.8 million shares in fiscal 2022 for a total consideration of approximately CAD 190 million. Also, even with the Longo's acquisition, we have maintained our net funded debt to debt total capital ratio at 3.3x . Strong cash flows allow us to continue investing in our store network. During Q2, we improved 45 stores through renovation, redevelopment or conversion. This included one new FreshCo store, with seven more to open over the next few months. We also opened one new Farm Boy in the quarter and two more locations subsequent to the quarter, including one new and one converted site.
Finally, I'd like to congratulate Farm Boy on their 40th anniversary last week. They've come a long way from a 300 sq ft produce store in Cornwall, Ontario, to now a network of 42 stores and counting. Tomorrow marks the 3rd Anniversary since into the Empire family, and we are extremely pleased with the progress we've been able to make together. With that, I wanna wish you all a happy and safe holiday season. Katie, I'll hand the call back to you for questions.
Thank you, Matt. Sylvie, you may open the line for questions at this time.
Thank you. Ladies and gentlemen, if you do have a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to remove yourself from the question queue, please press star followed by two. If you're using a speakerphone, we do ask that you please press the handset before pressing any key. Please go ahead and press star one now if you do have a question. Your first question will be from Patricia Baker at Scotiabank. Please go ahead.
Thank you very much, operator, and good afternoon, everyone. I have one question and then a follow-up. My first question is directed at you, Michael, to unpack a little bit your assertion that the full shift to more eating at home. Interestingly enough, we've heard very similar comments, in fact, that very phrase from Rodney McMullen and Gary Millerchip on their earnings call. I'd love to get you to share with us your thoughts on what is happening, what has led you to that conclusion. Obviously, if that is the case, that would be a nice tailwind over the next several years for the groceries in general.
Yeah. I won't bore you with the how many pieces of data we look up last to make that conclusion in our business and the way we look at it and how our understanding of Canadian customers in the market. We also look at our own results, and we're seeing
Mm-hmm.
We're seeing basket sizes remain at elevated levels to the extent that we believe it's all these data points plus what we're seeing in basket size are indicating not only sticky situation, but in some cases a probably permanent shift. Yeah, I agree with Rodney that that's happening Canada as well as the U. S.
Okay. Thank you for that. Then my follow-up, this is. I'm not sure if it's for Matt, Mike or yourself. But just in the press release this morning, you reiterated the fact that in fiscal 2022 you anticipate the dilution from Voilà will be in that range of CAD 0.25-CAD 0.30 per share, which is a number that you've given us several quarters ago. Potentially also confirmed that you believe that this will be the peak year for Voilà dilution.
Just picking up the fact that you didn't change anything there, am I right in assuming that that is indicating that you're seeing exactly what you want to see with respect to Voilà and the first facility and the progress that you're making cost-wise, et cetera, in Montreal? That things are going as you had anticipated and there's no serious change there that would cause you to have any different view from the outlook for how you see that going to perform over the longer term.
Yeah. Patricia, I'll take that. The very simple answer to your question is yes. Our dilution for the year is expected to be CAD 0.25-CAD 0.30, within that range, and F 2022 will be the peak of the dilution. Nothing's changed from that, from our expectations.
Can I just add on to Michael that I don't you know, now that we have Grocery Gateway, we have a year under our belts with Voilà. I mean, the GTA, no one has a better view of what actually goes on in e-commerce across the landscape than we do. I think people don't quite understand e-commerce sometimes with the seasonal shifts you see in e-commerce. We have a very good understanding of what's going on with this, and our confidence level remains very high.
Thank you very much for that, both of you.
Thank you, Patricia. Have a good holiday.
Thank you.
Thank you. Next question will be from Karen Short at Barclays. Please go ahead.
Hi, a couple questions. First of all, wondering if you could provide what the actual inflation number was in the quarter and what your thoughts are as we go into calendar 2022. Within that, you know, you talked about customer behavior and improve or strengthen private label, so maybe triangulate that with behavior from the customer perspective.
Well, I'll kick that off and then hand you over to Pierre for the own brands. We see consistent with what we've said in the past, Karen, we're not gonna give our internal inflation number. That's not something we normally provide. Pierre, do you want to?
No, I think it's obvious that our own brands it's a very strong option for customers to mitigate inflation. Our relaunch of this brand couldn't have come at a better time for us. We did the rebranding more than a year ago. We did the rebuild in many categories already. We're pleased with the progress we've made there. We are seeing, even if it's not the main metrics we're looking at because we need to make sure that, as I've said in the past, own brand are playing a key role and a meaningful role in every single category.
We're seeing our penetration growing year after year, which is a good sign for how it's accepted by our customer, how relevant our offer is, and it's really good for our financials because we strongly believe that it's a good margin generator for us.
Are you seeing spending down as a result of inflation and/or are you passing on all cost inflation? If you could provide any color on that.
There's a cost increase pressure on both own brands and national brands. However, we have more leverage to mitigate those costs on own brand than on own brand. We're facing the same issue. You know, the cost of ingredients don't change, the cost of packaging don't change. The pressure, the inflationary pressure doesn't change, but because it's our own brand, we have more leverage to mitigate those increases. That is why it would be a more and more popular option for customers, and it's good for our bottom line as well. It's a win-win situation for both customers and us.
Okay. You know, it's been over a year in terms of the GTA with Voilà. I'm just wondering if you could give a little color on what that, in specifically GTA, what e-commerce is as a % of sales, and then how you see that trending over time, generally speaking? I'm only specifically asking for GTA, obviously.
Sure. It's Michael Vels. The market has grown clearly through COVID. As we've come off COVID, there's been some return to stores. Canadians, particularly our Voilà customers, are much more comfortable about ordering online. We continue to be bullish about the penetration of online grocery, particularly in the urban centers. We're not currently providing a breakdown on the sales, but I will tell you that for us, it's it-
Actually growing and has been growing since we opened the facility. We've been growing our assortment consecutively, every month. That business has good momentum.
Okay. Thank you. Happy holidays.
Thank you.
Thank you. Next question will be from Kenric Tyghe at ATB Capital Markets. Please go ahead.
Thank you, and good afternoon. Michael, I wonder if you could speak to a two-part question on promotional intensity. The first one would be, do you see an increase in promotional intensity in the quarter, and perhaps where in stores is most pronounced? The second piece to that question would be, how much smarter has the market's promotional activity become, and how much smarter do you think you are? How much room is there on that front?
What was the question? I'm probably gonna answer we're smarter somehow, but what was the question?
How much smarter has the market become in terms of its promotional, you know, promotional activities, promotional programs? In that context, you know, do you think you're tracking ahead or behind in terms of that increase in how much smarter the market's become?
I'll let answer the first part, and then, if Pierre has anything to add. In terms of competitive intensity, promotional intensity, we're seeing no difference from pre-pandemic times. Pierre, did you have anything to add?
No, I mean, that's because we are dealing with a lot of volatility right now for various reasons, as we know, on supply chain, on inflation. Now we're using more and more data and tools, so that's really helpful to manage the situation. We're using data that a human cannot use, so we have a good outcome from the tools that we implemented over the last year. It's why we have been able to quickly adjust our mix, our promotion, and it remains extremely relevant for customers and it's why our margins continue to grow in that very volatile environment.
If I could just on supply chain and supply chain related sort of questions. Could you just speak to with respect to your build out with any potential risks? Or do you see that as being pretty well contained from a timing perspective?
You're talking about store build?
Yes.
Okay. Mike, you've got real estate.
The program is really moving ahead according to our expectations. Having said that, the most significant challenge that we're facing, and I'm sure anybody who's tried to build anything or do anything that involves logistics and materials these days, you know, will agree that it's becoming more complex and harder to stay on time. We're mostly you know making sure that on our store renovation program we order well in advance, and that program is still managing very well. On CFC 3, we finished our part of that build some time ago and handed it over to Ocado and they are well on track to be finished on time.
Thank you. I'll leave it there, Pierre, and happy holidays, folks.
You too, sir. Thank you.
The next question will be from Irene Nattel at RBC Capital Markets. Please go ahead.
Thanks, good afternoon, everyone. Just pondering what you're seeing in the marketplace around competitive intensity with, you know, certainly as consumers become a little bit more aware and sensitive to the rising inflation.
We're not seeing more intensity from our competitors. The thing we are seeing is whether they're trying to play around with high volatility. It's why it could be different year-over-year. I think we're all facing the same issue. We're not facing more competitive intensity right now. It varies by category, depending on inflation. In some period of time it's one category, in another period of time it's another category. That's why we're seeing, in terms of change, when we look at the competitors, than competitors. Overall, I think we're not. We remain extremely competitive like we have been over the last many years. We're competing all the time.
That's great. Thank you. Just on a slightly different topic. I wanted to come back to the whole gross margin SG&A. If we were to kind of put aside the mix changes resulting from, you know, Longo's and kind of the like, also the impact of e-commerce, what would be the cadence on the underlying business with respect to both gross margin SG&A?
Let's take gross margin first. The biggest driver of gross margin, our gross margin enhancement is promotional optimization through our variety tools. That's something that improved our margins last year, improved our margins this year, and we will continue to expect that will enhance our margin next year simply as our teams get more and more comfortable with using that tool. And then on SG&A, as we said in the script, there's quite a few moving pieces within SG&A. It's hard to predict that. I think you know, those higher SG&A businesses, which are also our higher margin businesses, like Full Service and Farm Boy, will continue to grow. That will increase that rate.
Our ongoing cost control, which is very strong in the company, should mitigate that. We may have reached a point of run rate of SG&A for the foreseeable future.
That's great. Thank you very much, and happy holiday.
Thanks, Irene Nattel. Have a good one.
Thank you. Next question will be from Mark Petrie at CIBC. Go ahead.
Hi, good afternoon. Just had a few follow-ups, actually, with regards to e-commerce. Just regarding the Voilà dilution, you know, just from what we saw in Q1. Is that a reflection of the preparation in Montreal, or was there a change in the dilution of the Toronto CFC as growth rates have evolved?
Hey, Mark. That's primarily we add costs into something to prepare for Montreal. As I just mentioned to Kenric, you know, we've pretty well completed our construction. The CFC was pretty well done with the inside of the facility. We'll be starting to inbound product fairly soon. As you can imagine, there's costs that come with that, both in CFC fees and also we're hiring to ensure that we're ready for our go live. That would be the primary reason for the increases in dilution this quarter and going forward.
Yeah. Okay. Just related to that, obviously the ramp-up in Montreal is gonna look a lot different than it was in Ontario simply because of, you know, you're bringing customers over from IGA. How should we think about the dilution progressing in sort of Q3 and Q4? Or should Q3 be higher than Q4?
Well, I think if you do the math, you know, our range is 25-30. So far we've done 12 year to date. I think, depending on how the volumes and the winter period goes with the IGA facility, you know, I think the math would tell you that we'd be at a slightly higher than the Q2 dilution rate.
Yeah, sorry. I was just trying to gauge Q3 versus Q4.
Oh, I see. Sorry. Again, to some extent, very responsive to volumes in the first CFC, but costs would be ramping up in Montreal. We did expect, all things being equal, it'd be a higher number in Q4 than Q3.
Okay. You highlighted the importance of sort of seasonal in the in-store business. I'm just wondering how Voilà performs around those types of occasions. Do you see a shift in sort of the relative popularity of e-commerce versus store shopping? You know, is there a shift in basket composition online? You know, is it different from what you would see in store?
I'm just trying to think. Voilà has only gone through one series of this, so I'm trying to think about it through. I'd say that it's, yes, you see seasonal shifts, obviously, in basket and baskets get larger. I'd have to check Mark in terms of whether it's all the way up to what you see in stores. Maybe a tiny bit less amplitude up and down seasonality from occasions, but there is quite a bit of seasonality in terms of volume times of the year in terms of the run.
Okay, thanks.
Thank you.
Yeah. Okay. Bye. One more, if I just could. Just with regards to Farm Boy, I just wanna sort of, you know, are you seeing the same trends in that banner in terms of, you know, elevated demand for full service store? I mean, I know it's not quite full service the same way as a Sobeys, but in the direction. Also, you know, have the different formats that you guys have kind of tested performed. These are the first conversions from Sobeys stores that are happening now. If that's not the case, how have those performed? You know, how are you feeling about the opportunities for that going forward?
First question, absolutely, we feel the same way about Farm Boy in terms of full service, as you mentioned. The second is I think Ottawa was our first. I can't remember when it opened, but I went and visited it. It was a little while ago. I'd say the biggest surprise to us is we knew we could convert Sobeys, especially urban stores to other Sobeys to Farm Boy. But I think that we found more locations which have been more successful than we imagined, is the way I would put it. When we did the model, we thought we knew there'd be some, but we wanted to test it before we got too excited. The ones that we have converted, very pleased with the results and what we're seeing from the Farm Boy.
Okay, excellent. Thank you very much and all the best.
Thanks, Mark.
Next question will be from Michael Van Aelst, TD Securities. Please go ahead.
Hi, good afternoon. I wanted to just finish up on the e-commerce, 'cause in response to Mark's question, you kind of implied that the dilution would increase in Q3, Q4. Let's just say that you're running closer to CAD 0.09 by Q4. How does that on an annualized basis, that's like CAD 0.36, but you're saying peak dilution will be in 2022 in fiscal 2022. As we go through fiscal 2023, what causes that to come down that dilution? Is it because Montreal ramps up much quicker because of the existing business and therefore CFC is, you know, more diluted initially because of the ramp-up? Or is it a combination of that and of course, Toronto coming in
Well, the primary driver of that is absolutely CFC 1. As that CFC continues to grow volumes and get more efficient, dilution decreases for CFC 1. That's the main driver.
Should Montreal's dilution follow a similar pattern as what we've seen in Toronto?
Got it.
Mm-hmm. Mm-hmm.
Sorry, Michael, we're waiting for the microphone here. It'll be less on an absolute basis for two reasons. First of all, as you correctly pointed out, we have an existing base of customers and we're also starting with an exceptional assortment, which is different from how we started in Toronto. We also have many of our back office and infrastructure costs in Toronto, which we don't have to replicate in Montreal. It's a lighter absolute number than the CFC 1 experience.
Okay, great. Thank you for that. Then on the inflation, a lot of indications are pointing to a hike starting in January. I don't know if you could comment on that based on what you're seeing, but, is there a level of inflation that you believe it becomes problematic for margins and that, you know, once you get beyond that level, it starts to put pressure on margins because you can't pass it all through?
Yes. At some point, as we said, if inflation is too high, customers can leave the product or the categories for substitution. It's why we believe in our Full Service business with our large assortment, there are many, many options for customers to mitigate that. When we have asks from supplier, we're working with them, we're working in collaboration. We even teach them or coach them to look at the potential impact of rising costs or prices too fast, because if you lose a customer in a category, it would take a lot of time to recover that. Yes, everybody is concerned about it, supplier and us. I think we'll always find it's an industry issue, it's a worldwide issue. We're working really well, in fact, in the food industry to mitigate cost increase.
If we compare how we manage inflation right now compared to other industry, I think we're doing a pretty good job. That's because the relationship we have, the strong relationship we have with supplier and we look in our business for long term. At this point of time, there's no sign that will have an impact on our margins.
Okay. Is there like, would 5%-6% be the kind of tipping point?
If I can predict that, I would be more rich for sure. No, I don't think it's I think it's very tough to predict. Once again, it's varied by category. That's the trigger. Over the last couple of months, inflation was very high for meat. We are seeing going down slightly. Now we're seeing more inflation in produce. So it's very volatile by category. Very tough to predict over time. It depends the weight of the category into the basket and into the format. I personally hate averages for that reason.
Okay. All right, thank you. Just finally, on the NCIB, you only had about 600,000 shares in Q2, but you know, 3.3 million in Q1. So should we look at the, you know, on average, you're on pace to get pretty close to your full buyback. Should we expect you to get close to that and like pick it up in the second half and be something similar to what you had for all of the first half?
On NCIB, we're always balancing the cash flow needs of the company in terms of how many shares we buy back in a specific quarter. That's the main reason for the difference between Q1 and Q2. We still see share buyback as a great use of cash, so we'll continue to do that. Again, we'll balance our cash flows for the balance of the year. We expect it to go up, and we expect it to be higher, certainly versus what we did in Q2, in Q3 and Q4.
All right. Thank you. Have a great holiday.
You too.
Thank you. Your next question will be from Peter Sklar at BMO Capital Markets. Please go ahead.
Hi, good afternoon. On a couple of questions like you've already touched on this, which is, you know, your analytical promotional optimization, you know, which is really facilitating your margin improvement. Can you just elaborate a little bit on what you're doing and what has changed? Is it you have more data, you have more software, more training for your merchants? When you use that expression, can you just elaborate a little bit on what you've accomplished there?
We're just leveraging more and more the data we had in hand in the past. I think that's the improvement. It's the quantity of data we had in hand in the past was just amazing. We are just able to leverage it more now than we did in the past. The team has better, I would say, recommendation insights than in the past. Better information means better decisions, and we remain. We continue to rely on people, but the quality of information they have to make decision, it's much better than it was in the past.
Sorry if I may interject. I think Pierre's being a little modest. I think he and his team and our merchants have completely and utterly embraced the fact that this is better for customers and better for our business. That we have a data analytics team that works hand in hand with our merchants and others in Sobeys group. Pierre's right. We always had the data. We told you that we had it, and we're gonna have better and better data. It's just a matter of the merchants and others having confidence in our plans. They do, and they see the ramifications and the results, and they're embracing it more and more. We're not nearly done here.
I think it's putting the data in good order, but it's really having that data analytics team and then merchants embracing it. We see that
Okay.
That's why we're getting the results we're getting.
Okay. That makes sense. Can you talk a little bit about the Olympics? Was there any spend in Q2, and will we see accelerated spend in the next few quarters or the next couple of quarters as we go into the Olympics? Will it be noticeable in terms of as your results unfold?
Well, we're really excited. We really liked what happened in the Summer Olympics and what we saw in terms of how we performed against competition in terms of perception of our customers. I think the marketing team did an extraordinary job for their first Olympics. They've even gained some better ideas for the upcoming games. We're really excited. Oddly, both games fall in the same fiscal quarter, which is odd and probably will never happen again. I think you'll see maybe a little bit of adjustment made, but we move our in terms of marketing, but it would be. I wouldn't worry too much about it.
We move our spend around and concentrate on different things and so we'll put more emphasis on the Olympics and maybe a little bit less emphasis on a few other things.
Okay.
Thanks. Good question.
Just one last question. You've talked, you've explained how the ramps work for GTA on the CFCs for GTA and Montreal. What's your sense of timing on Calgary? Like, have you broken ground there? When do we start to see the alluded benefits of Calgary?
We have started construction in Calgary. We're planning to be open in Calgary, F 2023, H1 . Similar to Montreal, probably a couple of quarters before that opening.
Okay, great. That's all I have. Thank you.
Thank you. Your next question will be from Vishal Shreedhar at National Bank. Please go ahead.
Hi, thanks for taking my questions. Most of my questions have been answered. Maybe I'll start with just some longer-term strategic questions. This management team has been, you know, pretty bold, and they made some big bets on the future. I'm wondering, as you look at your entire business, you know, two businesses I don't hear as much talk about quarter to quarter are the C-store business and your Lawtons pharmacy business. How does management look at if it considers those businesses to be core or if you're looking at the attractive multiples in the market and you can take that capital and reallocate elsewhere?
I think I've had the same answer for what is it? Next month, five years, which is we like these businesses. They make us money. We will always assess all of our assets on behalf of our owners, our investors, to ensure that we're putting our capital in the right way. I always say, as long as you're with us and you're part of the family, you're core. If we assess that there are new members of the family like we just brought on or that we can monetize assets going forward, it makes sense to us, and it's good for our business and good for our owners who you spoke to many of whom are on the line today, then we'll do it. We'll make all the right decisions.
right now, I think these are core businesses, and we're happy with their performance.
Okay. Switching gears here, obviously quarter to quarter, management showing progress with Project Horizon and indicating that increases from 8 - 8. At the time that Project Horizon was indicated, it was pre-COVID, and it was CAD 500 million of growth that you could get by fiscal 2023. But that obviously doesn't include Longo's, doesn't include the structural potential benefits that you see in the market. So as management evaluates that target, and I know last time with Sunrise, you took another look at it and you mentioned increased cap net expectation. So how does management need to see to get more confident that perhaps that you can up target or change it, or is it a question of margin profitability?
Yeah. It's a good question, but I'm gonna groundhog day you here, which is that to answer the same thing I said basically at the same time in the second year of Sunrise, which is we have a target. We're gonna hit that target.
If we can beat that target, we'll beat it. I'm so proud of the team to still be on Horizon. That they were still confident on Horizon at this point, which was pre-COVID, pre-disinflation, pre some of the labor, the wages issues and some of the other things that they're facing. To face all that, still be on target for CAD 500 million and then we'll see from there. Just like I said during Sunrise, I'm not. The team knows what its goals are. If they can overachieve, they shall do so.
Thanks for the comment.
Thanks, Vishal.
Thank you. Next question will be from Chris Li at Desjardins. Please go ahead.
Hi, good afternoon. Can we start with a question on own brands? Can you remind us, are you pretty much done with the reset?
More than halfway, I would say. As you know, developing a new product takes more time. To release the product, it's faster. Some element of the rebuild are already done. But we are really seeing positive trend on both penetration and rate, which is a good sign. It's just the beginning because the rebuild has been done. A part of category has been done last, not last year, last quarter. We are in another group of category. I think it will just continue to grow. We are just at the beginning. I would say, maybe 1/3 of the benefit have been captured and annualized to this and will continue to grow.
Perfect. If we just follow up on that, you know, are you able to provide us with some data on, you know, the penetration, our core private label. If not the absolute level, maybe just the growth versus now, say, two years ago before the project started. Just to give a sense of just how well the program is doing from a customer perspective.
Once again, I don't like that PPI for obvious reasons. Once again, it depends on category. In some category, the penetration is much higher because I think own brand is meaningful in that category. In other brands, there is no need to have own brands at all. Once again, because I hate averages, I won't go there. Once again, it depends on category, and it will continue to grow overall compared to where we are. We are using a lot of exclusivity as well. It depends on the definition of private label. I think adding an exclusive brand to us, if it's not Compliments or Panache, could be considered as an own brand. We have many, many strong partnerships like that with suppliers. We're exclusive with many suppliers for products that customers really enjoy.
Overall, I think we have a good assortment unique to us to build loyalty with our customers.
Perfect. Okay, great. Maybe just a question on Ocado. I believe that the U.S. International Trade Commission is in the process of reviewing the patent infringement lawsuit brought on by AutoStore against Ocado. I guess my question is, you know, in the event of an unfavorable ruling against Ocado, would that in any way kind of impact the service or the rollout plan for Sobeys in Canada? Thank you.
Yeah. We won't comment on the outcome of the first part of the question, but the answer is, no, it won't impact.
Okay. Thanks, Michael, and all best for holiday .
Thank you. You too. I know, I think you might be the last question, Chris. Before the operator comes off, I wanna thank the investment community who've been side by side for everything during the year. Wish you all great holidays and safe holidays and a fun one with your family and friends. Appreciate your keeping track, Empire, and your questions keeping us honest. Thanks so much. Appreciate it.
Thank you. At this time, I would like to turn the call back over to Katie Brine.
Great. Thank you, Sylvie. We appreciate your continued interest in Empire. For any unanswered questions, please contact me by phone or email. We look forward to having you join us for our third quarter fiscal 2022 conference call on March 9th. Happy holidays.
Thank you. Ladies and gentlemen, this does then conclude the conference call for today. Once again, thank you for attending.