Metro’s (MTRAF) CEO Eric La Flèche on Q4 2020 Results – Earnings Call Transcript

Metro Inc. (OTCPK:MTRAF) Q4 2020 Earnings Conference Call November 18, 2020 9:00 AM ET

Company Participants

Sharon Kadoche – Manager-Investor Relations and Treasury

François Thibault – Executive Vice President and Chief Financial Officer

Eric La Flèche – President and Chief Executive Officer

Conference Call Participants

Renato Basanta – Barclays

Peter Sklar – BMO Capital Markets

Irene Nattel – RBC Capital Markets

Mark Petrie – CITC

Chris Li – Desjardins

Vishal Shreedhar – National Bank

Michael Van Aelst – TD Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Metro Inc. 2020 Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would like to now hand the conference over to your speaker today, Sharon Kadoche, Manager of Investor Relations and Treasury. Please go ahead, sir.

Sharon Kadoche

Thank you, Joanne. Good morning, everyone, and thanks for joining us today. The comments will focus on the financial results of our fourth quarter, which ended September 26, 2020. With me today is Mr. Eric La Flèche, President and Chief Executive Officer; and François Thibault, Executive VP and Chief Financial Officer. During the call, we will present our fourth 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 as a forward-looking statement. Expressions such as expect, intend, are confident that, will and other similar expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy and our annual budget as well as our 2019-2020 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.

A description of these risks which could have an impact on these statements can be found under the Risk Management section of our 2019 annual report. As with the preceding risks, the COVID-19 pandemic constitutes a risk that could have an impact on the business, operations, projects, synergies and performance of the company. We believe these statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking information, except as required by applicable law.

I will now turn the call over to François Thibault.

François Thibault

Thank you, Sharon, and good morning. I hope everyone on the line is in good health. Our fourth quarter sales totaled $4.1 billion versus $3.9 billion last year, an increase of 7.4% and excluding the impact of IFRS 16, the increase stood at 7.7%. Food same-store sales grew 10% versus the fourth quarter of last year. And pharma same-store sales grew by 5.5%.

Our gross margins stood at 20.2% of sales or 20.4% excluding IFRS 16, representing a 20 basis point improvement in margin versus the same quarter last year. Operating expenses as a percentage of sales came in at 10.4% or 11.8% without the impact of IFRS 16. And this compares to operating expenses of 11.9% of sales for the same period last year. There were $27 million of COVID-19 related expenses in the quarter. Our numbers include cost synergies relate to the Jean Coutu acquisition of $16 million in this quarter and $69 million for fiscal year 2020.

I am pleased to report that we have now secured an annual run rate of $75 million of cost synergies. And now that we’ve achieved our target of $75 million in cost synergies within three years of the acquisition, we will no longer disclose the level of synergies going forward. Our EBITDA for the quarter stood at $403.5 million, representing a margin of 9.7% of sales and excluding IFRS 16, EBITDA was up $37.9 million, an increase of 11.8% versus last year and represented a margin of 8.6% of sales versus 8.3% of sales in the same quarter last year.

Total depreciation and amortization expense for the fourth quarter was $118.5 million, of the $50 million increase versus last year. $35.1 million results from the adoption of IFRS 16 and $10.7 million or $0.03 a share represents an accelerated depreciation charge related to our new fresh products distribution center in Ontario. Making way for the opening of our Phase 2 fresh DC, some existing assets will no longer be used and this charge brings down the value of these assets in line with the remaining shorter useful life. We did not adjust our earnings for this charge.

Adjusted net earnings were $193.1 million, compared to $174 million last year, an increase of 11% and our adjusted net earnings per share were $0.77, up 13.2% versus last year adjusted EPS of $0.68. Our capital expenditures for the fourth quarter totaled $203 million, bringing total CapEx for the year to $511 million.

At the beginning of the year, we had planned a higher level of CapEx, but some projects namely or a new Ontario, automated DC got delayed due to the pandemic. We will carry forward some investments going into the new fiscal year and we expect CapEx for fiscal 2021 to stand at about $600 million.

On the retail side, we opened seven stores this fiscal year, including two conversions, relocated another two and carried out major renovations in 17 stores for a net increase of 168,800 square feet or 0.8% of our food retail network. Under a normal course issuer bid program, we have repurchased between November 25, 2019 and November 10, 2020, 4.26 million shares for a total consideration of $240.8 million, representing an average share price of $56.52.

We remain committed to return excess cash flows to our shareholders. And as such, we have renewed our normal course issuer bid programs, giving us authority to repurchase up to 7 million shares between November 25, 2020 and November 24, 2021. That’s it for me.

I will now turn it over to Eric.

Eric La Flèche

Thank you, François, and good morning, everyone. We are very pleased with our performance in fiscal 2020 and what a year it has been. We delivered our strong performance across the board as we grew our sales 7.7%. Our adjusted EBITDA by 11% and our adjusted EPS by 14.4% for the year, all this excluding the impact of IFRS 16. After a strong first half of the year, our performance in the second half of the year was fueled in part by the sales growth caused by the pandemic.

This performance was also the result of sustained investments in our store network, our supply chain, our merchandising programs, e-commerce and of course the dedication of our employees. I want to, again, thank our teams for all their hard work to ensure that retail and distribution center operations continued to run in an efficient manner. All the while providing a safe and secure environment to our employees and customers.

Let me now turn to the fourth quarter. We delivered solid results, driven by strong comparable sales and good operating leverage. Food same-store sales were up 10%. Our internal food basket inflation was 2.8%, slightly lower than the 3% recorded in the previous quarter. We saw traffic trends improving compared to our third quarter, but still significantly down year-over-year. A larger basket continued to more than offset the decrease in traffic. We are pleased with the performance of both Metro and our discount stores, Super C, Food Basics.

Our Metro stores continued to grow more than our discount stores again this quarter, although, the gap between them has narrowed significantly. This strong performance resulted in market share gains in both of our markets. On the pharmacy side, same-store sales grew by 5.5%. Prescription drug sales grew by 5.3% and front-end sales increased by 6%, led again by COVID-related items such as masks and hand sanitizers supported by strong merchandising and marketing plans.

These gains were partly offset by a softer performance in our cosmetics and beauty categories, which remain under pressure during the pandemic. We are pleased that the labor conflict at Jean Coutu warehouse in Varennes that started on September 23 was resolved last week. Employees returned to work on Sunday and we expect a gradual return to normal operations over the next few weeks.

As François mentioned, we achieved our target of $75 million in cost synergies related to the Coutu acquisition. There is still room for additional synergies with the transfer of operations from our McMahon distribution center to the Varennes center. These activities can resume now that the labor conflict is behind us and we expect them to be completed at the end of fiscal 2021.

During the fourth quarter, online grocery sales grew by 160%. As mentioned on our last call, we are now accelerating our investments in e-commerce to add capacity as demand grows. First, we just opened a third hub store in the GTA and Scarborough, and it’s off to a good start.

Second, we will be opening a dedicated store for online grocery next summer to serve the Island of Montreal. This dedicated store will leverage our key learnings and technology investments made over the last four years. This store will offer the same variety and freshness found in our regular Metro stores for next day home delivery with the option of same-day delivery.

Third, we’ll be deploying click-and-collect to most Metro stores increasing the number of stores offering click-and-collect from the 40 planned to more than 100 by the end of fiscal 2021. Finally, we will continue to work with Cornershop, a third-party delivery partner offering two-hour delivery, which adds flexibility to our online capacity. These investments will be part of our regular CapEx and will enable the company to increase its online grocery capacity, gain efficiencies and better meet our customers’ evolving needs.

Our Ontario supply chain modernization project is coming to fruition. The startup of the first facility is planned for next January. In Quebec, the automated distribution center project was submitted to city officials and it was well received. Key contractors have been selected and the preparation of the main construction activities is underway.

Looking ahead, while we can’t predict how long the pandemic will last or exactly how it will evolve, we expect that in the short-term food revenues will continue to grow at higher than normal rates versus last year as a portion of restaurant and food service sales continue to transfer to the grocery channel. In the first four weeks of fiscal 2021, food same-store sales increased by about 11% versus the same period last year.

On the pharmacy side, we are pleased that our contingency plan secured the supply of prescriptions in OTC products to our pharmacy network, although, commercial sales were negatively impacted. In the first four weeks of fiscal 2021, comparable prescription sales were up 3.6% versus the same period last year, while front-end same-store sales were down 3.4%. We expect front-end sales will remain under pressure during the first quarter as we gradually ramp up inventories and promotional activity, and this will negatively impact our pharmacy division results in the first quarter of fiscal 2021.

In closing, we’re pleased with our performance and how our teams stepped up to the challenge. Our priority remains the safety of our employees and our customers, as we continue to run our operations as efficiently as possible and invest in our long-term growth.

That’s it. We’ll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Karen Short from Barclays. Your line is now open.

Renato Basanta

Hi, good morning. This is actually Renato Basanta on the line for Karen. Thanks for taking my question. So first, I just – one of your competitors called out a pretty intense competitive environment on the discount side and actually some sort of price investments. So wondering if you’re sort of seeing the same thing and how you characterize the level of competitive intensity out there on the discount side, and if you feel the need to respond from a price perspective.

Eric La Flèche

Well, our market’s always very competitive. Yes, we did notice a little more competitive intensity in promotional activity towards the end of our quarter, leading into Thanksgiving this year. As usual, this is not unusual in our market that it heats up around that time of year. So nothing out of the extraordinary, but yes, it did heat up a little bit. That said, we’re priced well. I think we have strong merchandising programs and our discount banners are well positioned as our Metro stores in both provinces. So we’re in a good position to face this.

Renato Basanta

Okay. That’s helpful. And then just wondering if you could provide some context around the type of investment that may be necessary this year as you sort of ramp up these e-commerce capabilities. Maybe any color on how you’re thinking about the relative magnitude of these investments this year versus last year? And how they’ll potentially show up on the P&L at all versus maybe CapEx as the model continues to evolve?

Eric La Flèche

Yes. So, as we accelerate deployment of e-comm, there are some expenses associated with that. But like we’ve done from the beginning, we’re taking a gradual prudent approach. As demand grew faster than we expected this year, we needed to ramp up and that’s what we announced in the acceleration today. And I think the level of demand will allow us to support the expenses that come with it, but there will be some extra expenses. There will be some investment this year to set up click-and-collect and more stores facility. Clearly, that’s going to take some transition time and some expenses. So I won’t give you specific guidance. There will be extra expenses, but we think we can manage that, and the volume we expect to get will enable us to deliver decent returns.

Renato Basanta

Okay. That’s very helpful. And then just last one, if I may, presumably you’ve picked up quite a number of new customers during the pandemic, but just wondering what you’re sort of doing to cultivate those new customer relationships. Just whether there’s anything in particular being down to specifically target those new customers so that they’re sticky and to become loyal customers as you get through and beyond the pandemic. Thank you.

Eric La Flèche

Well, we try to operate great stores, offer great value and execute every day. That’s how you keep customers happy. We measure our customer promises every month and have been for many, many years. So no change there, that’s going to continue. The big change this year is the big basket, as you know. So traffic is down, basket is way up, and those trends are improving “a bit”, but it’s still similar to what we’re seeing.

So I think all sorts of good initiatives, merchandising, marketing, loyalty, we communicate with our loyal customers, we personalize offers. So stuff that we’ve been doing for a while, we are continuing to do. So when we say we try to execute day in day out to serve our customers and exceed their expectations, that’s what we mean. So, yes, we – I’m sure we got new customers over the next – lasted a little while, but I think our execution was behind the ability to generate a large basket, decent margins and good returns.

Renato Basanta

Okay, that’s great color. Thanks and best of luck.

Eric La Flèche

Thank you.

François Thibault

Thank you.

Operator

Your next question comes from the line of Peter Sklar from BMO Capital Markets. Your line is now open.

Peter Sklar

Okay, good morning. First on the dedicated store for online, I just had a few questions. I guess the first one, is this a conversion of an existing store? And there is a period of time of – looks like infrastructure development of the store where you – I think you said you’re not opening it up until next summer. And is there – what is the extent? Is there automation technology in the store? And you can discuss CapEx, just wondering if you could talk around all those points?

Eric La Flèche

Okay. So it’s not a conversion of an existing store. This is an existing facility in an industrial location. So it’s a building of about 100,000 square feet that needs – it’s an existing building that needs some modifications to adapt to an e-commerce store operation. So changes to receiving, shipping, everything inside needs to be done to build a food store, basically a food store that will be efficient for an e-comm model. So that’s why we need a few months to build it out, and start operations next spring wrapping up to next summer. So the CapEx is south of $15 million, say, around $15 million is what we’re talking about; one, five.

There is no automation per se to start. That’s planned. We have a lot of technology. We are leveraging the technology and the systems and the learnings that we’ve used in our hub stores that we continue to use in our hub stores. Those will be used in the new facility. So there’s a heavy technology component to it obviously, but there’s no pure automation to start. We continue to monitor the automation alternatives. It’s still early days for those technologies. The building where we will operate from will allow us to incorporate micro fulfillment, if and when we choose to do so, but that’s not the way we’re going to start. So I hope that answers your question.

Peter Sklar

Yes. And Eric, I take it that this store is only for home delivery. It will not be building click-and-collect baskets.

Eric La Flèche

Sure. That’s correct.

Peter Sklar

Yes. Okay. Just a couple of questions for François, if I may. François, the amortization charge that you took on the preexisting distribution assets in Ontario, I take it that’s just a one-time. We’re not going to see further charges as we go forward.

François Thibault

It’s a one-time, partly information, partly catch up. There’s going to be some remaining – as you shorten the useful life, we will continue to depreciate faster, but it’s nothing like this amount that we just booked.

Peter Sklar

Okay. And then on the COVID costs that were $27 million during the quarter. Can you talk a little bit about what the run rate looks like for Q1? Is that – are we kind of at that level? Or are the costs going down or up? Or where are you at on that?

François Thibault

No, we’re pretty much on it. Last quarter, if you remember, Peter, I said we were running about – we estimated would we be running about $10 million to $12 million. This was a little over $9 million per month this quarter. So it’s around that ballpark, but it’s – except a similar amount, everything else being equal.

Peter Sklar

Yes. Okay. And Eric, sorry, I forgot to ask you one thing on the dedicated store. Can you talk about, like I would think eventually you’re going to bring that to Toronto as well? Can you talk about, like as you look into the future, how many of these stores do you think you could have to service your customers?

Eric La Flèche

Yes. So the evolution of our omnichannel strategy is to have a dedicated facility in large dense urban centers. So clearly Toronto would qualify. So we will look to build something similar in the Toronto market. So we’re not ready to announce anything, we will keep you posted as they say, but we will start with this one in Montreal. Like I said, we now have a third hub store operating in Toronto. Our businesses – we’re pleased with our business in Toronto. We will need to add capacity there. But it’s going to be – in the year following ourselves.

Peter Sklar

Okay. Thanks very much.

Eric La Flèche

And in the meantime, by adding click and collect stores more quickly, we think we can capture our fair share and that’s our plan.

Peter Sklar

Okay. Thanks for your comments. Appreciate it.

Eric La Flèche

Thanks, Peter.

Operator

Your next question comes from the line of Irene Nattel from RBC Capital Markets. Your line is now open.

Irene Nattel

Thanks, and good morning. Just wanted to talk if we might oppose the step up, I guess in the pace of same-store sales from the end of Q4 through to Q1. And anything you can tell us around what you’re seeing as you know here in Quebec, we went into shut down. Is it kind of even Quebec and Ontario? And also just really how you’re thinking about in the store – same-store sales and the potential lift in e-commerce as we move into the brutally colder winter months as it’s starting to feel today.

Eric La Flèche

Yes. And so the lift, I wouldn’t call it a big lift from 10% to 11%. It’s a four-week number. So it’s not the full quarter. So I think we’re in the same ballpark. The first four weeks of fiscal 2021, there’s Thanksgiving in there. So Thanksgiving is a big week or 10 days, especially in Ontario, even more than Quebec. So I think we had strong week that week. But I wouldn’t call it a step up in same-store sales between the end of the quarter and Q1 to say that.

Traffic in our stores with the cold weather, the impact of e-comm, e-comm demand is still strong. Let’s put it that way. We’re pleased with that. Will it increase with the cold weather? I can make an argument. I don’t have the crystal ball like I like to say. And so we’re preparing our stores for the most of the business, as you know, is in the stores.

And we’ll be so over the course of this winter. So we have to take all the necessary measures. We have to keep that our store safe and clean. And if there are lineups outside, then we will have to find ways to put some shelters. So we’re all preparing for that. It looks perhaps be challenging, but we have to do what we have to do to provide a safe environment for our customers and our employees. And we will spare no expense and no measure.

Irene Nattel

That’s great. Thank you. And switching gears for a second to the pharmacy side of the business. Can you walk us through I guess, the cadence over the next 12 months as you do now consolidate the distribution facilities in Varennes. And although you will talk about synergies, maybe you can give us an idea of the magnitude of let’s call it duplicative costs that you’re incurring, because you’ve got McMahon in Varennes and the cadence with which we can expect those to kind of go away over the next 12 months to 18 months.

Eric La Flèche

So the priority now after the labor conflict is to really ramp up inventories in our Jean Coutu stores, and in our Jean Coutu warehouse. Clearly I said, we – it’s been challenging on the front end commercial sales. So we have the work to do there. So that’s the first priority and that’s going to be over the next couple of months. Then after the holidays, and beyond that, we will resume all the activities to schedule the transfer of stores, the Brunet stores from the McMahon warehouse in Eastern Montreal to Varennes.

So this will be done starting, I guess in the spring, number of stores per week or per month. And then we expected to have a full transfer done towards the end of fiscal 2021 or early fall. So – and at that time, yes, we expect further synergies, further SG&A reductions related to distribution. So something around $10 million is the number that we’ll be shooting for, but it’s going to take a bit of time and it’s going to be gradual.

Irene Nattel

That is great. Thank you. And then just finally following-up on the question, I think it was Karen Short associates who asked the question about at the top of the call. Just around what – I mean your Metro and Me, your Air Miles data, what are they showing you around existing customers versus new customers shift in basket, the effectiveness of the direct communications that you’re doing, particularly around Metro and Me.

Eric La Flèche

Well, there’s no big change in that. Like I said earlier, we’ve been added for awhile with our loyalty programs and personalization, especially with Metro & Moi. So we’re still using those tools and sharpening those insights and influencing our merchandising and our promotional activity.

So Metro & Moi remains a popular well like program in the province of Quebec. We’re seeing same kind and similar results that we’ve seen before. The online customer tends to be a Metro Moi customer. So we’re seeing more loyalty from them, which is a good thing for us. And that’s part of the – that is the omni-channel strategy to gain share of wallet throughout to our stores and online.

So Metro & Moi measures that pretty well, and we’re happy with that. So it’s all part of a larger digital plan, digital strategy, that we’re pleased with what to do, and we’re not done yet, but we’re pleased with that. I can’t give you a specific insights with obvious competitive reasons, but we’re doing what we – we’ve been doing and we’ll continue to do it.

Irene Nattel

That’s great. Thanks, Eric.

Operator

Your next question comes from the line of Mark Petrie from CITC. Your line is now open.

Mark Petrie

Hey, good morning. I wondered just to follow-up on a few of the topics that you guys have already given some great information on. With regards to the dedicated online store, are you willing to share an estimated sort of range on the revenue throughput that you would expect from that store once it’s ramped up?

Eric La Flèche

No, we’re not. We’re adding capacity.

Mark Petrie

Okay, fair.

Eric La Flèche

We’re adding capacity. And we think we will have enough capacity for a few years, several years, we’ll see how demand evolves, but we think we’ll be in good shape to serve this growing demand more efficiently than we are today with our hub store model in those – in the city of Montreal where there’s more demand. And we have five stores – hub stores around Montreal right now.

So we will then – three of those stores will be a “relocated” into the new one to be more efficient, add capacity. That’s our plan. And the stores we can click and collect, but the delivery – and the picking and delivery will be done from a central location, and at the level of volume that we expect to be efficient.

Mark Petrie

Okay, thank you. With regards to the gross margin performance in Q4, are you still seeing modestly lower promo penetration in larger baskets? And I’m just curious if there are any other impacts to call out for Q4 that were changed from Q3.

Eric La Flèche

So gross margin performance we’re pleased with, higher volumes, higher baskets, tend to generate a good margin. The promo rate has steadily increased back to more normal levels. So I can’t say that like early days in the pandemic where the promo rate was way down. This is not the case. Promo is backup to you more usual numbers. That said, I think our mix has been effective. Higher volumes is good for lower shrink. Private label penetration is a stronger. So it’s a bunch of factors that contributed to this good performance on gross margin. And we’re happy with that.

Mark Petrie

Okay. And with regards to the synergies, I know the distribution of Pro Doc generics through the Metro and Brunet network was not part of your original number. But could you just update us in terms of what type of progress you’ve made on that? And any comment on about how much of an increase this is driven for the Pro Doc business that would be helpful?

Eric La Flèche

And so Pro Doc the generic drugs are available to the Brunet pharmacies. Their decision to order it or not, we’ve seen a gradual ramp up in those sales to the Brunet pharmacies. There’s more potential there and those things that takes time and we’re monitoring it. But again, it’s the pharmacist decision on that.

Mark Petrie

Okay. Yes, understood. And just the last one, just sort of bigger picture, I mean obviously consumer eating habits have been changed dramatically through the pandemic. I’m just wondering how all this has affected? How you look at your prepared foods off – prepared food offerings be it HMR meal kits or even something like prepared food delivery. How have you adjusted your thinking about what that business could look like over the next couple of years, given all of the change that we’ve seen over the last number of months?

Eric La Flèche

Those are good questions. The HMR and the kitchens in our store clearly were almost shut down or early on in the pandemic. There are gradually coming back to life. And we’re offering more and more prepared foods from our stores. So we have to continue to evolve and adapt. So it’s clearly a big focused our Metro stores in both Quebec and Ontario to have the right offer at the right price, good fresh food and HMR.

So for competitive reasons, we’re not going to give you all our plans, but clearly it’s a requirement, customers are looking for it. The way it’s presented and merchandised can change, perhaps more prepack or refrigerated versus heated. So there are changes to the way we present, but we will – we have to present convenient fast good foods to our customers and that’s what we’re working hard to do. So I leave it to our good teams to come up with those answers, but that’s the direction.

Mark Petrie

All right. Appreciate all the comments, all the best. Thanks.

Operator

[Operator Instructions] Your next question comes from the line of Chris Li from Desjardins. Your line is now open.

Chris Li

Hi, good morning. Online pharmacy has become more topical again with the Amazon Pharmacy announcement in the U.S. yesterday. Eric, I know you don’t have a crystal ball, but would this love to get your thoughts on, how do you see online pharmacy is impacting, the pharmacy is in general over the longer term? Do you see them as a big threat? And then more importantly, how do you see your pharmacy network evolving over the longer term to continue to drive growth and take market share?

Eric La Flèche

So our pharmacies in Québec have – our offering, prescription renewals and prescription home delivery online. So we have that and it’s certainly there to stay and growing. The front end sale is – it’s not really a part of our model – it’s a small part of our model today. We’ll see how that evolves. The Amazon announcement yesterday in the U.S., I don’t think is a big threat short term anyway, in this market. Regulations are very different, price of drugs are regulated here. Prescription fees are regulated here by the government. So we don’t see that as a big threat. That said, for convenience and professional care are junk with students doing their pharmacies through their online platforms for health files and prescription renewals and ordering are delivering that service to their patients.

Chris Li

Great. That’s very helpful. And maybe just a quick follow-up on that, we know in Québec, the pharmacy regulations tend to a bit more – be more strict than other provinces, such as the requirement that pharmacists also need to be owners of the business. Do you see that as a potential hurdle for some of the new online entrance in Québec?

Eric La Flèche

Do we see this as a potential hurdle.

Chris Li

Hurdle to make it harder because of the more extreme stringent regulations.

Eric La Flèche

I would think so, yes.

Chris Li

Okay. That’s helpful. And then just shifting to online the grocery business, can you share with us, what is the mix between your click and collect and home delivery volumes so far?

Eric La Flèche

We don’t disclose those ratios, the model that we worked on for the last four years has been more skewed to home delivery. So a large percentage of our sales are home delivered, but click and collect, especially in light of the pandemic has picked up in the hub stores that we have today, click and collect has accelerated. So given where things are and the level of demand in smaller markets for online shopping through click and collect, we think we can, like I said earlier, keep our fair share of those sales in our Metro customers, in those markets, with the click and collect models. So long answer heavily a home delivery today that makes will change as we add click and collect stores over the next year.

Chris Li

Okay. That that’s helpful. Appreciating that as you expand your click and collect to more stores next year, there will be more expenses, but since most of them are more variable labor costs, is it fair to assume that as you do expand the click and collect, presumably you’d get more sales with that. So if most of the costs of more variable labor costs that impact on your profitability should be manageable. Would that be a fair assumption just on the click and collect business for next year?

Eric La Flèche

Well, yes, like I said earlier, there will be some costs associated with offering that service. I think in lower density markets stores can manage their hours too with their existing employees, with the help of the technology that we will provide that they can build that click and collect service within their hours that they manage every week. So they’re a reassignment of hours. We think that it can be absorbed and it will – it’ll be that much easier if it’s all additional sales, if it’s a transfer of existing in-store sales to online click and collect, then it’s a little more dicey and we have to manage our costs really well. We think we can, but we hope that it will be added volume or parts of it that will be new volume, which will make it a little easier.

Chris Li

Okay. That’s very helpful. My last one is just on capital expenditures, you guiding $600 million for this year. Can you share with us sort of what are the big buckets that you mentioned that the dark store will be like a $150 million investment, but in terms of other big buckets, like new DCs in store renovations, can you just give a rough sense of what are the big buckets of spending for next year?

François Thibault

Yes. Chris, François here. You can assume that it’s pretty well divided between DC and retail network. So obviously we have large investments in our automated DC in Ontario, we’re starting a Québec and about half of what I said will be around the retail rough order of magnitude.

Chris Li

Perfect. Okay. Thank you for your answers and have a strong and safe holiday season.

Eric La Flèche

Thanks you, Chris.

Operator

Your next question comes from the line of Vishal Shreedhar from National Bank. Your line is now open.

Vishal Shreedhar

Hi, thanks for taking my question. I just another follow-up here on the e-commerce acceleration initiative, particularly the Montreal facility for home delivery. Wondering why management decided to at least delay the installation of automated technology that the business case is the technology not reliable? What’s the issue with not trialing that at this point?

Eric La Flèche

I think, I guess the short answer is, we have a good model. We’re pretty efficient, the way we operate today. We think we can be even more efficient with this online facility. Can automation help us maybe, again, we are going to monitor that closely and incorporated if and when we think it’s going to be helpful. When you change the way of doing things, there’s a transition there’s costs, there’s training needs, people need assistance. So we have to be careful how we do it just to transition to a new building is a challenge.

We’re going to do it with the existing methods, and that’ll make it a little easier, smoother to start. And as we go down the road, we will incorporate automation, gradually, if we think – it will help us. So we will measure, we will analyze and where we think it can help us. We will incorporate it, but the priority for us was to open this rapidly and to do, we are choosing to go with our current model in a much more efficient efficiently, built building adapted for pure 100% e-com.

Vishal Shreedhar

Okay. Thanks for that. With respect to the investments in click and collect and delivery, I understand the future is uncertain. And of course, I understand that in the past delivery was a method that Metro thought would be more preferred by the customer. So given the pandemic, given the behaviors that you’re observing, is it fair to say that Metro now believes that click and collect and delivery are both going to have a place in the future for the customer?

Eric La Flèche

Well, our experience so far, it’s been – the delivery was the chosen or preferred model, click and collect is becoming available at other competitors, and it’s being trialed. So we think that there’s a customer for both. What the proportions will be, exactly, it’s hard to tell. But e-com, to me is, about convenience, first and foremost. And the way you deliver it depends on the density and the economics market by market.

So in the Montreal market or the GTA market, a dedicated center makes sense at the levels that we’re at today. And that’s why we’re going in that direction. And in other markets where delivery can’t be justified or supported, then should offer, click and collect efficiently. So that customer that prefers to shop online and pick up at store can be serviced. So, yes, it’s – you need both, I think, to, uh, to serve the customer as well.

Vishal Shreedhar

Okay, wonderful. And I’m just changing topics here a bit, with respect to the dumbest spanner, I know it’s a little bit more labor intensive and has a different offer, and you can call it most stores. Can you just comment how the pandemic impacted performance at Adonis, particularly given it’s prepared food offering as well. And has that changed your view on the court’s expectations of this banner?

Eric La Flèche

Well, I don’t think, it has changed tour views on the banner potential and concept is differentiated. I think it’s a great concept with a lot of potential. That said the pandemic has been a little harder on that banner than our regular food stores, couple of reasons. We have large, I would call them, destination Adonis stores and those stores early in the pandemic with – stores are with heavy volume and big crowds. Certainly they were affected people to lineup and wait for a long time, so that we lost some sales because of that. Sundays were closed early – for a few weeks early on in Quebec.

So it was tough on Adonis, the big stores, I would say early on, it’s better now. And we have also downtown urban 100 stores that are near the students, the universities and heavily focused on prep food. So no big secret that those stores even with our Metro banner and Quebec and Ontario, those stores are under pressure, downtowns are empty and students are not there.

So there is been pressure on Adonis for sure in the last year. That said, we’re very confident about the banner, its potential, we opened a store last year in Ottawa – this year fiscal 2020 in Ottawa that’s off to a good start. We’re opening at Quebec city early the next winter. So we see more growth, but clearly prepared food is the big part of the Adonis offer and that was affected. So I think that’s temporary. Vaccines are coming soon apparently. So we’ll see.

Vishal Shreedhar

Okay. And I was hoping to get your perspective on the trend for conventional versus discount. It’s been well discussed about conventional doing better because of restaurants closing one-stop shop, et cetera. But given that you’ve had presumably many new customers trial, your conventional offers that presumably haven’t shopped there as much as they usually have. Do you think that, that trial will result in some stickiness in the conventional banner once this COVID-19 pandemic dissipates your best perspective on that?

Eric La Flèche

Well, yes. We think we should get to keep some of those new customers or get those existing customers to keep spending more with us than they did before. Hopefully they found a good shopping experience and they saved money before – versus their previous habits and we get to keep more of their share of wallet. So we’re working hard to do that. And I think we have a shot at doing that. That said, discount is a significant part of our business. We like our mix of discount in conventional. The search for value is not going away. And I think, it’s important to have both strong formats in the portfolio and redo. So I think that’s a good thing.

Vishal Shreedhar

Thank you.

Operator

Your next question comes from the line of Michael Van Aelst from TD Securities. Your line is now open.

Michael Van Aelst

Thanks. Good morning. Just wanted to touch back on the Montreal, dark store or whatever you want to call it. Can you give us an idea of what the geographic area can cover? And like how many stores you’re delivering from in Quebec now? And will this replace some of those stores or is it just fully additive?

Eric La Flèche

So we have five stores, hub stores in the greater Montreal area, three on the Island, one in the South Shore, and one in Laval. So the plan is to migrate the three Island of Montreal stores to this new central location. The three Island Montreal stores will remain click & collect. The other, Laval store and the South Shore store will remain as hub stores for click & collect and delivery. And that’s the way we will start this new facility to service essentially the Island of Montreal. But it could service – we’ll see how it evolves, it could service a greater Montreal eventually. Again, we learn, we adapt, we test, we learn and things change. It goes fast in e-comm and I’m just giving you the original plan and we’ll see how it goes.

Michael Van Aelst

Okay. And which city is the actual facility located in?

Eric La Flèche

Saint-Lazare.

Michael Van Aelst

Okay, great. As far as the synergies are concerned, so you were at $16 million in the quarter, which is roughly $70 million if you annualize it, and now you’re talking about $75 million annualized going forward. So just wondering where the incremental improvement is coming from going out of Q4 and into Q1.

François Thibault

Yes. So Michael, François here. So many little things, but mostly additional procurement synergies that were secured, but it has not flown through the Q4 results, so that they will flow to the Q1 results now. But we have secured an additional five, it just hasn’t flown into the P&L yet.

Michael Van Aelst

Okay. And did I hear Eric say that the new – the converting or getting brand ramped up and taking over Brunet is going to add $10 million more?

François Thibault

Yes, that’s the – you can assume that that’s a goal. There were already some – there were some as SG&A that had been removed from the facility. But the remaining combination, you can assume an additional $10 million going forward.

Michael Van Aelst

Okay. And did the new labor agreement take away from that at all?

Eric La Flèche

Well, again, we’re pleased with the outcome of the labor negotiation. There are some added costs, there are some rate increases. I will spare you all the details of the changes in the collective bargaining agreement. But, I would say that it’s market and the increases that we will pay are normal course. Not taking away from the combination here.

Michael Van Aelst

Okay. And can you just explain the steps that have to be done to get your stores – your PJC stores back up to where they were prior? Like, why does it take a few months to get the stores restocked fully and promotion ramp back up?

Eric La Flèche

It’s a few weeks leading into Christmas, we think we’ll be in good shape around Christmas. But the contingency plan, we reduced assortment, we reduced promotions, we changed supply mechanisms to third-parties to direct delivery. So, again, systems and order books and sizes, million details here, but to provide a good contingency to service our stores, we have to make some changes. Now we have to unwind all those changes, go back to normal, it takes a bit of time. So stores need to be refilled, they have inventory, but they need more. And so we will gradually fill them up and reactivate our promotional activity, which since the beginning of the strike has been reduced, we skipped a week or two with flyers, conflicts are tough.

They’re tough on everyone, employees, managers, retail, it was tough. So I’m glad it’s behind us. and that’s why I say, it’s going to take a few weeks to get back to normal. So we want to get that done and that takes us into the holidays. And then after that, we can restart the process to prepare back in to receive the McMahon business. But before they do that, there’s a bit of work to do.

Michael Van Aelst

All right. Thank you. And last question, I think I’ll take a stab at this. But are you willing to give us an indication of what your e-commerce penetration is in food at this point?

Eric La Flèche

No. We – it’s still low single-digits, it’s the Metro banner only, it doesn’t cover all geographies. So we can – we know what our sales are, obviously, we know what the percentage of all Metro is. We measure it in the markets where we offer click & collect. So or not you can collect that. e-com. So it’s low single-digits, it’s growing from a very small base, and we’ll see where it ends up. But it’s an important – and more and more important part of the Metro business, it’s part of the offer. And we’ll see how it grows. When we have a more – like I said, a broader geographic coverage perhaps we’ll give you more color on the penetration.

Michael Van Aelst

Okay, great. Thanks.

Eric La Flèche

The markets that we serve like Montreal a few years and with our hub store model, it’s in the low single-digits and growing.

Michael Van Aelst

Right. Thank you, Eric.

Operator

Your next question comes from the line of Chris Li from Desjardins. Your line is now open.

Chris Li

Sorry, Eric. Just maybe a quick follow-up to the front end sales. The weaker cold coffin flu season, is that having a bit of an impact on your results so far in the current fiscal quarter?

Eric La Flèche

The answer is yes. It’s still early in that season, but from what we can tell early days, it’s a much weaker cold and flu season versus last year. Last year was “definitely strong, cold and flu season”. Now it’s an exceptionally weak one with all the sanitary measures everywhere. So yes, that’s having an impact on our sales or the pharmacy sales, right now. But there is also impact because of the, like I said, the fill rates and the promotional activity, that was not the same as last year. So that’s why we said at the outset of the call, pharmacy results there will be an impact because of this consulate for sure in Q1.

Chris Li

Okay. That’s helpful. And then lastly – okay, perfect. And then just lastly, just with respect to the reduction in branded drug prices for next year. Do you expect that to have a material impact on your results next year?

Eric La Flèche

We’re not planning for a material impact on our results next year. We’re following that closely and told, there could be some reductions, but it won’t be material in the next year or so. I don’t have all those details, Chris, we could get back to you. But, in our plan, we don’t have a big impact from that.

Chris Li

Okay. Great. Thanks again.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Sharon Kadoche

Thank you all for your interest in Metro, and we will speak again soon to discuss our first quarter results on January 26. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, you may now disconnect.

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