Good morning, ladies and gentlemen, and welcome to the Metro Inc. 2024 Third 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. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also, note that this call is being recorded on Wednesday, August 14, 2024. And I would like to turn the conference over to Sharon Kadosh, Director, Investor Relations and Treasury. Please go ahead.
Thank you, Sylvie. Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our third quarter, which ended on July sixth. With me today is Mr. Eric La Flèche, President and CEO, François Thibault, Executive VP and CFO, Marc Giroux, COO, Food, and Jean-Michel Coutu, President of the Pharmacy Division. During the call, we will present our third quarter results and comment on its highlights. We will then be happy to take your questions. Before we begin, I would like to remind you that we will use, in today's discussion, different statements that could be construed as forward-looking information. In general, any statement which does not constitute a historical fact may be deemed a forward-looking statement. Words or expressions such as expect, intend, are confident that, will, and other similar words or expressions are generally indicative of forward-looking statements.
The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy, our annual budget, and our 2024, 2025 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 or implied by our forward-looking statements, are described under the Risk Management section in our 2023 annual reports. We believe these forward-looking statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking statements except as required by applicable law. I will now turn the call over to François.
Thank you, Sharon, and good morning, everyone. For the quarter, total sales reached CAD 6.65 billion, an increase of 3.5% versus the same period last year. Same-store sales were up 2.4% in food and up 5.2% in pharmacy. Our gross margins stood at 19.6% of sales, essentially flat when compared to our third quarter last year. Operating expenses amounted to CAD 681.7 million, up 4.8% versus last year, and as a percentage of sales, they stood at 10.2% versus 10.1% in the same quarter last year. The higher ratio is mainly due to the startup of our new automated distribution center for fresh and frozen product in Terrebonne, and we also continue to have higher third-party e-com fees than last year.
Last year's operating expenses did include CAD 5.1 million of launch costs related to the Moi loyalty program. EBITDA for the quarter totals CAD 620.2 million, representing a 9.2% of sales, and is up 1.6% year-over-year when we remove the gain and loss of sales of assets. Total depreciation and amortization expense for the quarter was CAD 174 million, up CAD 14.5 million versus last year, and a significant portion of the increase is due to our new Terrebonne DC, Terrebonne DC, sorry. We also started depreciating the Fresh Phase Two investment in Toronto in the last month of the quarter.
Net financial costs for the third quarter were CAD 46.6 million, compared to CAD 37.1 million last year, and the increase is due to a higher level of debt and interest rates, as well as lower capitalized interest related to our distribution center automation projects. Adjusted net earnings were CAD 305 million, compared to CAD 314.8 million last year, a 3.1% decrease, and our adjusted net earnings per share amounted to CAD 1.35, flat year-over-year. On the retail side, in the first 40 weeks of fiscal 2024, we opened 6 Super C stores, including 2 conversions. We carried out major expansions and renovations of 7 stores and relocated another 1 for a net increase of 237,000 sq ft, or 1.1% of our food retail network.
Under our normal course issuer bid program, we may repurchase up to 7 million shares between November 25, 2023, and November 24, 2024. As of August 2nd of this year, we have repurchased 6 million and 45,000 shares for a total consideration of CAD 430 million, representing an average share price of CAD 71.14. In closing, our third quarter results are tracking well to the guidance we provided in November for fiscal 2024. That's it for me. I'll now turn it over to Eric.
Thank you, François, and good morning, everyone. We recorded solid comparable sales growth in the third quarter on top of a very strong quarter last year, reflecting effective merchandising and good execution in our food and pharmacy banners. Our teams did an excellent job to offer good value to our customers across all banners in a challenging environment. This resulted in overall market share gains in dollars and tonnage. For the quarter, food same-store sales were up 2.4% for a two-year stack of 12%. Our discount banners continued to fuel this growth on top of high comps and discount last year. As François mentioned, so far in fiscal 2024, we opened 6 Super C stores.
Three more stores will open in the fourth quarter, a Food Basics in Ottawa, the Petawawa that just opened, plus a Super C in Montreal and a Metro store in Ottawa. Our internal food basket inflation continued to decelerate and came in slightly lower than the reported food CPI of 1.1% for the period. Similar to previous quarters, transaction count was up in all banners, with higher foot traffic growth on the discount side, and the average basket came down slightly. Promotional penetration was up compared to last year, as cost of living pressures are still present and consumers search for value. Private label sales continue to outpace national brands. Online sales grew by 35% compared to our third quarter last year, fueled by third-party partnerships for same-day delivery and the ongoing expansion of our click and collect service to our discount banners.
The service is now deployed at Super C and in progress at Food Basics. On the pharmacy side, we delivered a strong performance this quarter with comp sales of 5.2% for a two-year stack of 11.4%. Commercial sales were up 3%, driven by a strong cough and cold season and growth in core categories such as OTC, HABA, and cosmetics. Prescription sales were up 6.3%, driven by organic growth, specialty medications, and professional services. We are well-positioned to deliver on the expanded role of pharmacists with our dedicated pharmacist owners and our leading footprint across Quebec. In May, we celebrated a successful first year for our Moi Rewards program.
In addition to more than doubling the number of active members from 1.2 to 2.5 million, over CAD 65 million in points were redeemed by members on their everyday essentials. Members spend on average 50% more than non-members, and we are very pleased with the level of cross-shopping and customer engagement in our different food and pharmacy banners. We look forward to the launch of Moi Rewards in Ontario later this fall. Our new automated fresh and frozen facility in Terrebonne is now fully operational, with productivity levels ramping up in line with our plans. During the quarter, we transferred most of the dairy volume from our Laval DC to Terrebonne.
As planned, on June tenth, we launched the final phase of our Toronto automated fresh facility, starting with the transfer of the produce volume from the conventional section of Phase One to the new automated section in Phase Two. Other fresh categories like meat, deli, and dairy will transfer gradually from our old facility every week until the end of September. With both phases now in operation, we expect to see a step change in overall productivity once activities reach the steady state. The benefits will be gradual and will come from efficiency gains and lower transportation costs.
To conclude, and as we approach the end of this transition year in our distribution centers, and while food inflation continues to decline, we know the environment remains difficult for many of our customers, and our teams are focused on delivering the best value possible to them, and we remain confident in our ability to create long-term value for our shareholders. Thank you, and we'll be happy to take your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, simply press star followed by two. If you're using a speakerphone, please lift the handset first before pressing any keys. Please go ahead and press star one now if you do have any questions. Your first question will be from Irene Nattel at RBC Capital Markets. Please go ahead.
Thanks, and good morning, everyone. Another great quarter from you guys. Thinking about consumer behavior, from your commentary, Eric, it sounds as though what you're seeing in store is really a continuation, or are you seeing any kinds of shifts at all as we continue to hear a narrative around, consumers really tightening, tightening, tightening?
Very similar consumer behavior across our networks. So as we've been reporting every quarter for over a year, almost two years, I would say, the search for value continues. As I said, people are searching for deals. Promotional penetration is really high. And private label sales are doing really well. So it's really the same environment as we've been describing for several quarters.
Understood. Thank you. And can you talk a little bit about, you know, while you mentioned the increased uptake in terms of cross-shopping, can you talk about what you're seeing, more broadly at both food and pharma, and how maybe you're using some targeted promotions to continue to drive traffic and basket?
I'll let Marc answer, or give a shot to that.
Thanks, Irene, for the question. So we've launched Moi a year ago, as Eric was mentioning. Our-- we're able now to use the data and analyze customer behavior across our food banners and across food and pharma. And the point that Eric was making is that we're happy to see consumer engaging more and more in the Moi program, but also engaging in our banners as they cross-shop between our banners. And as we continue to use the data, the teams have started and will continue and accelerate offers to consumers to to promote that cross-shopping, promote basket and transaction across our store network in Quebec.
So we're satisfied about the launch, we're satisfied about the increased performance of Moi, and the team will continue to be focused at offering value through Moi, through the program, across all of our banners.
Understood. Thank you.
Next question will be from Tammy Chen at BMO Capital Markets. Please go ahead.
Hi, good morning. Thanks for the question. I wanted to focus more on the DCs here. Just first, stepping back, can you talk about the phase one in Toronto? I'm just curious about that, since it's launched, how that's unfolded in terms of the benefits to your results, and specifically, I think for this quarter, just given the strong same-store sales versus the year ago, has any of that been driven by the gains from the Toronto phase one, perhaps also some initial gains out of the Terrebonne DC?
I would say, you know, Toronto phase one was January 2023. So it, it's been a while, so it's up and running. It's a combo DC, right? Phase one was manual and automated. The freezer in Toronto was fully automated, so those two centers have been in operation for a while, have been ramping up well and I think supporting our store network really well. Together with that, you know, we have automated replenishment in our stores. So the combination of our supply chain modernization efforts, clearly in Toronto that has been up for longer, has contributed to our performance, but it's not the main driver, but it's one of the contributing factors. Terrebonne is still very early days.
We're happy with the performance so far, but it's clearly in the ramp-up period, and it would be a stretch to say that Terrebonne has contributed to higher same-store sales. So I hope that answers your question.
Yeah, that does. Okay. And my follow-up is, these DCs, the automated ones in particular, can you remind us how to think about the benefits, just specific line items that they help you in your PNL? And if you could talk in any way about the magnitude, the cadence. I think there's just a lot of questions as to how we and investors should think about, especially now with these, Terrebonne and Toronto phase two gradually coming to their finish line, how we should think about the impact that they could have over time to your earnings going forward. Thank you.
That's right. Well, it, listen, these DCs are our cost centers. I think we made these big investments to make sure that we remain first of all address capacity issues in fresh and frozen. So the status quo was not an option. We had to invest, and I think we picked the best option. So the benefits, you know, will accrue over a long period of time, but they obviously as Eric said the phase one in Toronto has been performing as planned. So the benefits will be both on the OpEx and on the gross margin as you improve your in-stock position, your store servicing. We also made investments in automatic replenishment.
So you should expect the objective is to have benefits accruing across several lines of the PNL, but they will be over time. Now, the other benefits, now that these are fixed cost centers, is as sales increase, as volume increases over time, we also expect to have more benefit just because we are, we'll be leveraging a fixed cost operations for all practical purposes. So that's how we view the benefit. But these are now cost centers integrated into overall OpEx, and we will manage accordingly, and we will. That's why we said that we expect to be back to our usual profit growth targets, starting in fiscal 2025.
So just to complement on that, clearly with automation, we will save labor. We're not cutting jobs necessarily. We're adding capacity, we're doing more volume, more throughput through our DCs with basically the same labor force. So our cost per case from a labor point of view is coming down, will come down. That's offset by a higher amortization, higher investment. So these investments will meet, or we're confident will meet our return targets, and so far, we're pleased with that. So these are large investments. They are over the long term, they will take time to give us the full benefit, but we're confident we're on the-- we're well on our way to getting there, and so far, we're meeting our targets and our plans.
Great. Thank you.
Thank you. Next question will be from Chris Li at Desjardins. Please go ahead.
Well, good morning, everyone. Just a few questions from me. I guess starting with just the strength in your food comp this quarter. Are you able to share whether it's sort of well balanced between both Ontario and in Quebec?
Well, as we said in the opening remarks, it's driven mostly by discount. That said, we're pleased with our conventional store performance on a relative basis. Conventional is under pressure in both markets, no question about that. But overall, versus other conventionals, we're pleased with our performance. And overall, when we combine discount and conventional, as I said, we're seeing some market share and tonnage gains. So pleased with our performance, good execution by our teams and good merchandising.
Okay, that's helpful. Thanks, Eric. And maybe just a related one. I don't know if it's easy to answer at all, but just obviously there was a boycott by one of your competitors during the quarter. Did you notice any notable benefits from that event?
No. It's hard, it's hard to pinpoint to, to, to that single event.
Okay.
No.
Okay, that's fine. Okay, and then just follow up on the question about the cross shop. I remember last year at your Investor Day, you kind of disclosed, you know, before Moi was launched, your cross shop was around 60%. That was about a year ago. I was wondering if you can share what is that percentage now?
Chris, I don't remember sharing that information, but what I can tell you is that post-launch of Moi, we're very satisfied with the sales penetration on the card. We're above target in our food banners, and in pharma, we are also above Air Miles penetration pre-launch. And as we continue to track cross shop across our banner, our goal is to really maximize the overall wallet share of our customer. And that's where the focus of the team is. We shared with you that we invested in technology to allow us to personalize better at a greater scale, and that's what we're executing on right now.
Okay, thanks for that. And maybe just last one before I get back to the queue. First of all, I guess, you know, you sort of reiterated that the phase two of your DC monetization will be done by end of September, end of fiscal year, this year. I'm just wondering, sort of, as we look out into next year, are there any more lingering costs related to this initiative that we should be thinking about as you kind of gradually ramp up the automation? Any more costs that we should be aware of as we kinda think about the outlook for next year? Thank you.
Yeah, well, obviously, as we, as we just launched Fresh Phase Two, there will be similar duplication of cost. Not the same magnitude, but similar, similar costs in terms of extra labor as you're running two sites at the same time transferring volumes. So you got transport, you got shunting, you got utilities. So you'll see a similar pattern, not the same magnitude, but similar pattern to what we had at Terrebonne. And that should, you know, that should, that should start to ease as we enter fiscal 2025. Now, you know, it'll take some time to take care of some of the old sites that we have, so. But in terms of the impact versus this year, they'll be quite minimal.
So we don't expect any other lingering extra cost. It will be focused on ramping up and generating the efficiencies of these two sites in Quebec and Ontario.
Okay. Thanks, thanks very much, and all the best.
Thanks, Chris.
Next question will be from Michael Van Aelst at TD Cowen. Please go ahead.
Hi, good morning, and thank you. I just want to follow up on the DCs. When, when you look at the scale and complexity of Toronto Phase Two transition, is it, would you say it's, it's similar or, or maybe a little bit easier than, than Terrebonne was in Q2?
Fair - pretty similar. Again, every time we do the first one is always harder than the second one. So Fresh Phase Two, Toronto, will benefit from Terrebonne, and Terrebonne benefited from Toronto phase one and Toronto Freezer. So we live and learn, and we improve every time we do these projects. So as I said, we're gradually transferring deli, meat, and dairy in Toronto from the old cold chain to this new Fresh Two. And, you know, 50,000 or 60,000 or 70,000 cases a week are transferring. So by the end of September, it'll be done, and so far, it's going well, and service to our stores is maintaining at good levels.
So, you know, it's something we have to get through, but the teams have been really doing some heavy lifting all year, and everybody's looking forward to getting this behind us by the end of September.
Yes, I'm sure. So I'm assuming, based on that, that we shouldn't really expect the disruption to be any, any significantly different, let's call it, that. Maybe a little bit less than what we saw in Q2.
Yeah, that's fair. That's fair, yeah.
Okay. And then on the, on the gross profit side, so it, it was pretty stable year-over-year. I'm, I'm sure there's a decent amount of, of pluses and minuses that go into that, but can you talk a little bit about some of those main sources of gross margin pressure and, and some of the initiatives you're undertaking to offset them?
Well, you know, the market's competitive. Promotional environment is strong, so that has an impact. We get cost increases still from vendors on the CPG, on the CPG side. So it's a delicate balance, and it's an effort to come up with the right gross margin, and generate the sales that we're looking for. Like you said, it's puts and takes. Shrink is an issue, theft is an issue. We manage that, as best we can. I'm sure we can improve some more. But, you know, it's all of the above. So, people have...
We have targets to meet, and we're trying to do the best mix we can between our sales and our margins, and we're pleased with the results that we've been delivering this year. So,
Yeah, I mean, clearly, to hold it, just to hold it flat in an environment where your promo penetration is hitting highs and your, and your shift—there's a shift to discount, and shrink is still an issue. But is there anything you can kinda point to that you're doing really well, to, that's, that's a primary offset?
If I can add, I think it's about delivering value to our customers every week, and I think that's what we've been able to do. That's what our teams have been able to do on a weekly basis through a commercial program. We're well positioned with our store network and discount to capture the continued significant growth in discount. There's still a gap between conventional and discount, and we're well positioned to capture that. And in conventional, I think our teams have been able to manage the pressure by with good promotional program and meeting customer expectation on a week-to-week basis. So we're happy how those banners are performing within their segment, even though overall conventional is under pressure. Hopefully, that gives you a bit of color.
Yeah, that's great. Thanks very much.
Thank you. Next question will be from Mark Petrie at CIBC. Please go ahead.
Yeah, thanks. Good morning. I wanted to ask about the Quebec market specifically. Obviously, grocery is always highly competitive with weekly flyers, active loyalty offers, but have you noticed any shifts in the competitive balance in Quebec? And, I know discount has taken share, maybe a bit more in Quebec than other regions, just given the square footage growth over the last year or two, but any shift in the relative balance of, you know, between discount and conventional in Quebec?
Well, the discount market in Quebec is growing, as you point out, given the square footage additions on the discount side, massive conversions by one player. We have added square footage with new ones and a few conversions ourselves. So the discount total market is growing in Quebec faster than it is in Ontario, because of that, you know, square footage and number of doors. So like Mike said, it's a reality. The discount conversions are gonna end pretty soon, and then we'll see where the market settles. We like our position with a good mix of both conventional and discount. Clearly, there's been a little more pressure on conventional these last couple of years with this shift.
But we anticipate that at the end of the conversion wave, we, our Metro banner will be on a good footing to grow again. And we're confident that with our Super C banner, we will capture the growth on the discount side as we've been doing. And with our pharmacy, we deliver value at Jean Coutu and every day with strong programs. So we have a good diversified mix, and we're pleased with our solid, you know, position in the Quebec market, both food and pharma.
Yeah, okay. I appreciate that. I appreciate the answer. Thank you, Eric. Maybe, just to follow up on that, have you seen any different behavior in the full service or conventional channel in Quebec versus versus other regions of the country or I guess specifically for you, Ontario?
You mean within conventional, how are the customers are behaving compared to?
Yeah
... compared to Ontario?
Yeah.
I would say the behavior is very similar. Consumers are looking for value. They're participating to promotion more. They're trading down, especially in meat, I would say, that are a more expensive category. But I would say that the behavior within conventional is similar in both, in both Quebec and Ontario.
Yeah, okay. And probably one for you, François. Just when you look at the business case, coming back to the DC topic, when you look at the business case for the Toronto phases, and Terrebonne, is there any significant difference in terms of the expected return from each of those initiatives or the materiality of the impact to the P&L?
No. You know, obviously, since we started, looking at building these business cases back in, you know, 2017, 2018, obviously, the, the, the market has changed. We went through some, some, some events and costs have, have gone up. But on a relative basis, the return of these projects are, as good as when you compare them to the other alternatives we had studied. So we're still... Even though we, you know, the inputs may have changed in terms of cost and, and, and so forth, the returns are, are, are as they, as they, they were expected.
Sorry, let me, let me just clarify my question. What I meant was, those shifts, you know, as, as the market has shifted and the cost, cost dynamics have shifted over the last number of years, has that affected one of the DC projects more or less than the others, or have they all been affected, affected similarly?
The same. Very similar.
Yeah. Okay, fair enough. Thanks for all the comments, guys. All the best.
Thanks, Mark.
Next question will be from Vishal Shreedhar at National Bank. Please go ahead.
Hi, thanks for taking my questions. Your food same-store sales is noteworthy. And, just wondering if there's anything, you know, transient in this quarter and as we look to the next quarter, does the growth path that we're on still hold, or is there any considerations we should think about?
It's difficult to predict same-store sales going forward with the competitive environment, but as you said, we're satisfied with our same-store sales in Q3. I think our program are resonating well, and for us, an indication of performance is tonnage, and we're happy about the tonnage that we're generating. It means that customers are appreciating our programs and are coming through our doors, and that's what the teams are gonna try to continue to do. We talked about Moi in Quebec. The team are now using Moi more and more and more to understand customer behavior and to try to influence that behavior across our different banners. We're gonna be launching next fall in Ontario.
The first focus is gonna be the launch and customer membership, growing members, and then it'll move to engagement. But overall, we're satisfied with the quarter in the overall competitive environment, and we'll continue to... We'll try to continue to go in that direction, but difficult to predict, as I said.
Thank you for that. Management commented on shrink and the challenge with controlling that. Just wondering how that relates to management's initiatives to roll out self-checkout, and if that's gonna continue at the same pace, and do they deem self-checkout to be problematic for controlling shrink?
So shrink is the result of a balanced promotional program and a balanced program at store that can be executed in tonnage, but also theft, as Eric has mentioned. So as consumers shift behavior and promotional ratio increase, we need to adapt our store operations. So in the first quarter, we saw a little bit of elevated shrink in meat, and the team have been able to manage that afterwards. And so that was my first comment. Second comment is on theft. And as Eric said, during these challenging time for consumers, theft has increased in our stores, and we have multiple initiatives to manage theft from security, from camera.
At SCO, in particular, we're piloting technology right now to better track consumer behavior at SCO, and hopefully those pilots will be successful and then deployed and will allow us to better manage theft at SCO.
Okay, so self-checkout is proceeding with the rollout as planned?
Yeah, we're pretty much deployed already in most of our stores. The SCO deployment has happened in the last few years. The continued deployments, I would say, are adjustments in store. There's not a major deployment of SCO right now. It's more about how do we manage our self-checkout area more efficiently, first, to deliver customer satisfaction, and second, to manage theft.
Okay. And my last question-
If your question is, Vishal, are we removing self-checkouts from some certain stores? We haven't gone to that measure yet, but it's something we manage carefully, store by store, market by market, but we're not there. We're, we wanna provide good service, and the self-checkout is part of that service with the regular checkouts to, for customers to get out of our stores as fast as they want.
Thank you for that clarification. And, you know, Eric, just a conceptual question for you on conventional versus discount, and obviously the inflation that consumers have seen has placed pressure on conventional offer. But if you look at some of these newer discount stores being rolled out, some of the... They have, some of them have, you know, conventional-like offerings. And I'm wondering if, if that's causing you to reflect on the, on what conventional is offering to the consumer, if there needs to be an adjustment made to the conventional format, either offering more services, more exciting products. Is that something that you, you deem needs, needs change for, to get the ex-consumer excited again? Or is it merely an issue of, of anniversarying the high inflation?
Well, you know, it's the mission of all of our stores to continuously improve their offer and attract customers. So clearly, as discount stores offer more and are fully renovated and some brand new stores, they're attractive stores, so that puts pressure on the conventional stores. They have to provide something different. They have a more assortment, more services, the experience for the customer has to be elevated, and I think that's what the Metro banner is trying to do. So again, market by market, store by store, and we are investing in our conventional stores, we're investing in our programs, we're investing in our loyalty programs.
So there's more for the consumer in our conventional stores, and it's a differentiated offer versus discount, and that's the way it needs to be. So at a conceptual level, it's it has to be, it has to be executed that way. And overall, I think we're having some success.
Thank you.
Thank you. Next question will be from Michael Van Aelst at TD Cowen. Please go ahead.
Thank you. Just a clarification. When we were talking about the performance of discount versus Conventional in Quebec , I'd like to try and separate the conversions from the actual kind of same-store performance. So if you're able to look in Quebec markets where there are no conversions happening, how meaningful is the gap in performance between conventional and discount?
Similar, I would say similar to Ontario. So as we're cycling conversions in the market, competitive conversions or own conversions, we continue to be happy with the performance of our discount stores and conventional stores. So that's why Eric earlier said that we're gonna be cycling the turbulence or the square footage growth in the Quebec market, and we're confident that both our discount and conventional offer are competing well. But if you exclude the square footage growth and discount in Quebec, I'd say that the competitive dynamic and the growth of discount would be similar.
Just to complement on that, Mike. So in markets where there are no conversions, so it's status quo, the discount, speaking for ourselves, our discount stores are growing faster than our conventional stores. So, when you look at the total market, the number, the gap between conventional discount, the total market gap is quite significant because of all the square footage. In markets where there's no difference in square footage, there's a gap. It's a much smaller gap, but there's a gap, and, that's the reality of the market today.
And that's why we like to have both. That's why we like to have both banners, and we go to market with both banners, and then pretty much in every, speaking for Quebec and more and more in Ontario, we will go with food, conventional and discount in all markets.
Okay. So just so that, that's helpful. And just to clarify one a little bit more. So where you aren't seeing conversions, is conventional actually growing, or is it just, you know, discount we know is outperforming, but is conventional actually growing?
Yeah, in certain markets, yeah, in certain markets there's some growth. It's lower than discount, but there's some growth. In other markets, you know, it really depends market by market, so I'm not gonna call out a number for you. But yes, we do have Metro stores that are growing in several areas across Quebec and Ontario.
Yeah. All right, thanks very much. Congratulations.
Thank you.
Thank you. Once again, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone. And your next question will be from Chris Lee at Desjardins. Please go ahead.
Oh, thank you. Just maybe a few quick follow-ups. Sorry if I missed this already, but was the gross margin largely stable overall, both in food and pharmacy?
Yes. Overall, stable.
Stable, okay. And then, and François, just, you've always said that, you know, a key risk to earnings is sort of the lag between slowing food inflation and the rise in SG&A expenses from sort of labor cost. You guys seem to be managing this dynamic very well so far. And so my question is, like, do you expect this to continue? And are there any new meaningful cost reduction initiatives that sort of give you this confidence?
Oh, you're right. I've been calling this lag in reflecting inflation in OpEx for a while now, and it's still present. Obviously, as inflation declines over time, that pressure will diminish, but we still are seeing some pressures, and we have we always have several initiatives on the go to reduce or contain OpEx. I think the trend, if you look at the trend this year, it's trending in the right direction and as expected. You know, in Q1, our OpEx was up 10.5% year-over-year, in Q2, 6.1%, and in Q3, 4.8%.
Probably, you know, a little bit over 5% when you account for the Moi launch cost and the, e-com fees, but it's trending down year-over-year. And as a percentage of sales, we went from a 40 BPS higher, SG&A versus last year in Q1, 40 BPS in Q2, and now 10 BPS, you know, closer to 20 BPS when you account for the, Moi launch cost. So it's trending in the right direction. And as I said, as inflation continues to decline, we expect that pressure will diminish, but it's still, it's not a... It's still- you still need to be very focused on maintaining those costs, those cost pressures. That will continue, that will still continue in the, in the short term, as I expect it to be.
Oh, okay, that's helpful. And maybe just a couple of last ones. Just on CapEx, are you still on track to, I think, about CAD 650 million targeted for this year? Are you still on track to have that spend for this year?
Yeah, it'll be close to that, it'll be around that level.
Would it be similar for next year?
I'm not gonna call out next year yet. We're going into budgets. We're finalizing our budget. I'll be able to give more color on, on the Q4. I've said what I've said before is a normal run rate without any other special projects would be, you know, 550, 600. I think that's a normal run rate CapEx for us, but it's never, it's never a run rate a year for us, so I, why don't I, I'll give you, I'll give you more color in Q4 once we've completed our budgets.
Okay, and last one for me. I mean, your balance sheet is obviously in good shape with leverage around the low twos. Is there an opportunity for you to perhaps upsize your share buyback next year, especially as your supply chain modernization is now complete and your free cash flow conversion as Jean Coutu remains very strong?
Well, it's a good question. There's no change in our capital allocation. There's no change in our leverage target. So yes, leverage has been coming down. As you say, we've been generating good cash from operations. Despite the high level of CapEx, we've been maintaining a solid balance sheet. So there's... You know, we said that we wanna be at no more than three times adjusted debt to EBITDA. So that remains the limit, and there's room, you know, there's still room to grow that leverage from where it is today, especially now that those big projects are getting behind us, less risk. So it's just something that we'll be looking at as we enter fiscal 2025.
Very helpful. Thank you.
Thanks, Chris.
Thank you. At this time, I would like to turn the call back over to you, Sharon Kadosh. Please go ahead.
Hey, thank you all for your interest in Metro, and please mark your calendars for our fourth quarter results on November 20th. Thank you.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask, we ask that you please disconnect your lines. Have a good day.