Empire Company Reports Fiscal 2015 Third Quarter Results

STELLARTON, NS, March 12, 2015 /CNW/ – Empire Company Limited (“Empire” or the “Company”) (TSX: EMP.A) today announced financial results for its third quarter ended January 31, 2015.  In the third quarter, the Company recorded adjusted net earnings from continuing operations, net of non-controlling interest, of $120.3 million ($1.30 per diluted share) compared to $86.2 million ($0.94 per diluted share) in the third quarter last year, a 39.6 percent increase over the prior year.

Third Quarter Highlights

• Sales of $5,940.5 million, down $63.4 million or 1.1 percent.  The decline was primarily the result of retail store divestitures, store closures associated with the network rationalization and the decline in oil prices impacting fuel sales in the food retailing segment.
• Sobeys’ same-store sales ⁽¹⁾ excluding fuel sales increased 3.0 percent.  Including fuel sales, same-store sales increased 1.9 percent.
• EBITDA ⁽¹⁾ of $322.5 million compared to $188.9 million last year, up $133.6 million or 70.7 percent. 
• Adjusted EBITDA ⁽¹⁾ of $310.1 million compared to $279.9 million last year, up $30.2 million or 10.8 percent. 
• Net earnings from continuing operations, net of non-controlling interest, of $123.6 million compared to $6.4 million last year, an increase of $117.2 million.
• Adjusted net earnings from continuing operations ⁽¹⁾, net of non-controlling interest, of $120.3 million compared to $86.2 million last year, a 39.6 percent increase.
• Adjusted EPS ⁽²⁾ from continuing operations (fully diluted) of $1.30 compared to $0.94 last year, a 38.3 percent increase.
• Net earnings from investments and other operations of $28.1 million compared to $5.5 million last year, an increase of $22.6 million.
• Free cash flow ⁽¹⁾ generation of $327.7 million compared to $21.5 million last year.
• Funded debt to total capital ⁽¹⁾ ratio of 32.1 percent versus 38.0 percent at May 3, 2014.

 

Marc Poulin, President and CEO of Empire Company Limited stated, “Adjusted net earnings of $120.3 million ($1.30 per diluted share) was up 39.6 percent over last year reflecting in part our continued progress at capturing synergies connected to the Canada Safeway acquisition. We are also pleased with Sobeys’ strong free cash flow generation and net debt reduction of over $1.3 billion since the acquisition.  

Subsequent to the end of the quarter we achieved a critical milestone in the Safeway integration by moving Safeway onto our SAP platform. This achievement will not only support the management and optimization of our second phase cost synergy strategy, but will also be a valuable tool towards further enhancing Safeway’s operating performance. Going forward, we remain confident in our ability to achieve $200 million in annual run rate cost synergies and will be focused on securing operational efficiencies and cost reductions across the organization, while at the same time continuing to promote our Better Food for All culture.” 

Dividend Declaration

The Board of Directors declared a quarterly dividend of $0.27 per share on both the Non-Voting Class A shares and the Class B common shares that will be payable on April 30, 2015 to shareholders of record on April 15, 2015. These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation and, therefore, qualify for the favourable tax treatment applicable to such dividends.

 

 

Sales

Consolidated sales for the 13 weeks ended January 31, 2015 were $5,940.5 million compared to $6,003.9 million in the third quarter last year, a decrease of $63.4 million or 1.1 percent. The decline in sales, as expected, was primarily a result of retail store divestitures, store closures associated with the network rationalization and the decline in oil prices impacting fuel sales in the food retailing segment. These negative pressures have been partially offset by food inflation. During the third quarter, Sobeys’ same-store sales increased 1.9 percent from the same period last year. Excluding the negative impact of oil prices on fuel sales, same-store sales would have increased 3.0 percent.

EBITDA

Consolidated EBITDA in the third quarter was $322.5 million compared to $188.9 million in the third quarter last year, a $133.6 million or 70.7 percent increase.  EBITDA margin increased to 5.43 percent in the third quarter from 3.15 percent in the same period last year. The increase in EBITDA was primarily the result of reduced transaction costs associated with the Canada Safeway acquisition of $0.8 million (2014 – $67.7 million), the one-time inventory adjustment of $17.1 million in the prior year and synergies realized of $39.2 million (2014 – $6.3 million) related to the Canada Safeway acquisition. An offset to these cost reductions were additional expenses for variable components of compensation, including stock-based awards, recorded during the current quarter compared to the third quarter last year.

After adjusting EBITDA for items which are considered not indicative of underlying business operating performance, as presented in the following table, third quarter consolidated adjusted EBITDA was $310.1 million compared to $279.9 million in the third quarter last year, an increase of $30.2 million or 10.8 percent. Adjusted EBITDA margin was 5.22 percent in the third quarter compared to 4.66 percent last year.

The table below provides a reconciliation of EBITDA to adjusted EBITDA for the 13 and 39 weeks ended January 31, 2015 compared to the 13 and 39 weeks ended February 1, 2014.

 

 

Operating Income

Consolidated operating income in the third quarter was $203.6 million, an increase of $138.3 million or 211.8 percent from the $65.3 million recorded in the third quarter last year. Operating income was impacted primarily by the factors affecting sales and EBITDA when compared to the same period last year.  

Finance Costs

Finance costs, net of finance income, for the 13 weeks ended January 31, 2015 were $36.9 million, a decrease of $12.8 million from the $49.7 million recorded in the same period last year. This decrease is primarily the result of lower interest expense due to decreased debt levels from the repayment of debt associated with the Canada Safeway acquisition.

Income Taxes

The Company’s effective income tax rate for the 13 weeks ended January 31, 2015 was 25.1 percent compared to 72.4 percent in the same quarter last year. The decrease in the effective income tax rate is due to the partial non-deductibility of certain Canada Safeway acquisition costs, combined with lower earnings before income taxes on which to calculate the effective tax rate in the same period last year.

Net Earnings and Adjusted Net Earnings from Continuing Operations

Consolidated net earnings from continuing operations, net of non-controlling interest, in the third quarter equaled $123.6 million ($1.34 per diluted share) compared to $6.4 million ($0.07 per diluted share) in the third quarter last year. 

After factoring in the impact of the adjustments for items which are considered not indicative of underlying business operating performance, Empire recorded adjusted net earnings from continuing operations, net of non-controlling interest, of $120.3 million ($1.30 per diluted share) for the 13 weeks ended January 31, 2015 compared to $86.2 million ($0.94 per diluted share) recorded in the third quarter last year, a 39.6 percent increase. 

The following table reconciles reported net earnings from continuing operations, net of non-controlling interest, to adjusted net earnings from continuing operations. 

 

 

Discontinued Operations

On November 1, 2013, the Company announced that Empire Theatres completed the sale of 46 theatres with 397 screens in separate transactions with Cineplex Inc. and Landmark Cinemas as previously announced on June 27, 2013. As a result of the sale, financial results related to Empire Theatres, as previously reported in the investments and other operations segment, have been included in discontinued operations in the condensed consolidated statements of earnings for the 13 and 39 weeks ended February 1, 2014.

Net Earnings

The following table reconciles Empire’s segmented net earnings from continuing operations, net of non-controlling interest, to net earnings, net of non-controlling interest, for the 13 and 39 weeks ended January 31, 2015 compared to the 13 and 39 weeks ended February 1, 2014.

 

 

Net earnings (loss) from discontinued operations in the third quarter of fiscal 2015 equaled $ nil ($ nil per diluted share) compared to $(6.0) million ($(0.07) per diluted share) in the same quarter last year.

FINANCIAL PERFORMANCE BY SEGMENT

The Company operates and reports on two business segments:

1. Food Retailing, which consists of wholly-owned subsidiary Sobeys Inc. (“Sobeys”), and
2. Investments and Other Operations, which as of January 31, 2015 included investments in Crombie REIT (41.5 percent equity accounted interest; 39.3 percent fully diluted) and interests in Genstar.
   

FOOD RETAILING

The following table presents Sobeys’ contribution to Empire’s consolidated sales, gross profit, EBITDA, adjusted EBITDA, operating income, net earnings, net of non-controlling interest, and adjusted net earnings, net of non-controlling interest.

 

 

Sales

Sobeys reported sales of $5,940.5 million for the 13 weeks ended January 31, 2015, a decrease of $63.9 million or 1.1 percent over the same quarter last year.  The decline in sales, as expected, was primarily a result of retail store divestitures, store closures associated with the network rationalization and the decline in oil prices impacting fuel sales. These negative pressures on sales have been partially offset by food inflation. During the third quarter, Sobeys’ same-store sales increased 1.9 percent from the same period last year. Excluding the negative impact of oil prices on fuel sales, same-store sales would have increased 3.0 percent.

Gross Profit     

For the third quarter of fiscal 2015, Sobeys’ gross profit was $1,479.8 million, an increase of $8.0 million or 0.5 percent compared to the same period last year. The slight increase in gross profit for the 13 weeks ended January 31, 2015 was the result of synergies realized during the third quarter of fiscal 2015 related to the Canada Safeway acquisition, coupled with new retail selling square footage, the majority of which was offset, as expected, related to the store divestitures and network rationalization, when compared to the same period in the prior year. Gross margin in the third quarter increased 40 basis points to 24.91 percent compared to 24.51 percent in the same period last year.  

For the 13 weeks ended January 31, 2015, the decline in the price of oil, which had an impact on fuel sales, did not have a material impact on gross profit.

EBITDA

EBITDA contribution from Sobeys to Empire in the third quarter was $284.3 million (4.79 percent of sales) in the third quarter compared to a $182.3 million (3.04 percent of sales) contribution in the same quarter last year, an increase of $102.0 million or 56.0 percent. The increase in EBITDA was primarily the result of reduced transaction costs associated with the Canada Safeway acquisition of $0.8 million (2014 – $67.7 million), the one-time inventory adjustment of $17.1 million in the prior year and synergies realized of $39.2 million (2014 – $6.3 million) related to the Canada Safeway acquisition. An offset to these cost reductions were additional expenses for variable components of compensation, including stock-based awards, recorded during the current year compared to the third quarter of fiscal 2014. These, combined with the factors affecting gross profit, as previously mentioned, had a net positive effect on EBITDA. 

After adjusting for items which are considered not indicative of underlying business operating performance, adjusted EBITDA contribution from Sobeys to Empire in the third quarter was $271.9 million (4.58 percent of sales), an increase of $1.8 million or 0.7 percent from the $270.1 million (4.50 percent of sales) recorded in the same period last year. 

 

 

Operating Income

Sobeys’ operating income contribution to Empire in the third quarter was $165.8 million (2.79 percent of sales) compared to $58.8 million (0.98 percent of sales) in the third quarter last year, an increase of $107.0 million or 182.0 percent. Operating income was impacted primarily by the factors noted in the sales and EBITDA sections which included a reduction of $66.9 million in transaction costs associated with the Canada Safeway acquisition and a $17.1 million one-time inventory adjustment from the same period of the prior year. 

Net Earnings

Sobeys contributed net earnings, net of non-controlling interest, to Empire in the third quarter of $95.5 million compared to $3.9 million in the same period last year, an increase of $91.6 million. This increase is mainly due to synergies realized, reduced transaction costs associated with the Canada Safeway acquisition and the one-time inventory adjustment. After adjusting for items which are considered not indicative of underlying business operating performance, Sobeys contributed adjusted net earnings, net of non-controlling interest, of $92.2 million compared to $80.7 million in same period last year, an increase of $11.5 million or 14.3 percent. 

The table below reconciles net earnings, net of non-controlling interest, to adjusted net earnings, net of non-controlling interest, for the 13 and 39 weeks ended January 31, 2015 compared to the 13 and 39 weeks ended February 1, 2014.

 

 

INVESTMENTS AND OTHER OPERATIONS

The table below presents investments and other operations’ contribution to Empire’s consolidated sales, EBITDA, operating income (loss), net earnings from continuing operations, net earnings (loss) from discontinued operations and net earnings (loss).

 

Operating Income

Investments and other operations contributed operating income of $37.8 million in the 13 weeks ended January 31, 2015 versus $6.5 million in the same period last year, an increase of $31.3 million. 

The contributors to operating income in the third quarter of fiscal 2015 were as follows:

• Equity accounted earnings from the Company’s investment in Crombie REIT were $7.3 million in the 13 weeks ended January 31, 2015, an increase of $7.1 million from the $0.2 million recorded in the third quarter of fiscal 2014. The increase was driven primarily by gains on property sales.
• Equity accounted earnings from the Company’s investments in real estate partnerships (Genstar) were $24.2 million in the 13 weeks ended January 31, 2015, an increase of $15.8 million compared to $8.4 million recorded in the same period last year, primarily as a result of stronger lot and housing sales.
• Other operations, net of corporate expenses, contributed operating income (loss) of $6.3 million in the third quarter of fiscal 2015, an improvement of $8.4 million from the $(2.1) million recorded in the same quarter last year. Gains on property sales are the primary reason for the improvement in operating income.

Net Earnings

Investments and other operations contributed $28.1 million to Empire’s consolidated net earnings (loss) in the third quarter of fiscal 2015 compared to $(3.5) million in the same period last year. The $31.6 million increase is primarily attributed to an increase in net earnings from continuing operations of $25.6 million.

CONSOLIDATED FINANCIAL CONDITION

The financial condition measures are presented in the table below.

 

At the end of the third quarter, Empire’s consolidated ratio of funded debt to total capital was 32.1 percent (May 3, 2014 – 38.0 percent) with cash and cash equivalents of $322.8 million (May 3, 2014 – $429.3 million). 

Shareholders’ equity, net of non-controlling interest, increased $216.4 million or 3.8 percent over the third quarter last year to $5,920.8 million.  Book value per common share increased to $64.13 at the end of the third quarter versus $61.82 at February 1, 2014.

Free Cash Flow

Free cash flow is used to measure the change in the Company’s cash available for debt repayment, dividend payments, and other investing and financing activities. The following table reconciles free cash flow to GAAP cash flows from operating activities for the 13 and 39 weeks ended January 31, 2015 and the 13 and 39 weeks ended February 1, 2014.  

 

 

Free cash flow generation in the third quarter of fiscal 2015 was $327.7 million compared to $21.5 million generated in the same quarter last year. This increase in free cash flow was the result of an increase cash flows from operating activities, combined with an increase in proceeds on the disposal of property, equipment and investment property associated with the divestiture of manufacturing facilities, and the sale of nine properties to Crombie REIT.

NORMAL COURSE ISSUER BID (“NCIB”)

The Board of Directors and senior management of Empire are of the opinion that from time to time the purchase of Non-Voting Class A shares at the prevailing market prices is a worthwhile use of funds and in the best interests of Empire and its shareholders. 

Accordingly, the Company announced today that it has filed a notice with the Toronto Stock Exchange (“TSX”) to purchase for cancellation up to 1,788,584 Non-Voting Class A shares representing approximately three percent of those outstanding, subject to obtaining regulatory approval. The purchases will be made through the facilities of the TSX. Currently 59,619,458 Non-Voting Class A shares are issued and outstanding. The price the Company will pay for any such shares will be the market price at the time of acquisition. Purchases may commence on March 17, 2015, and shall terminate not later than March 16, 2016.  Empire has not repurchased any Non-Voting Class A shares within the last 12 months.

The average daily trading volume (the “ADTV”) of the Non-Voting Class A shares was 106,314 on the TSX over the last six completed calendar months.  Accordingly, under the policies of the TSX, the Company is entitled to purchase, during any one trading day up to 26,578 Non-Voting Class A shares (being 25 percent of the ADTV of the Non-Voting Class A shares). The Company is entitled to purchase a larger amount of Non-Voting Class A shares per calendar week, subject to the maximum number that may be acquired under the NCIB, if the transaction meets the block purchase exception under the TSX rules.

SUBSEQUENT EVENTS

Subsequent to the close of the third quarter ended January 31, 2015, Sobeys sold two manufacturing facilities to Agropur Cooperative. Total proceeds attributed to these transactions were $221.4 million. Assets of $201.8 million have been included in assets held for sale as at January 31, 2015 for these manufacturing facilities.

Subsequent to January 31, 2015, Sobeys sold and leased back 22 properties from Econo-Malls Holdings #19 Inc. Total proceeds from the transaction were $61.6 million, all of which was used to repay bank borrowings. Assets of $34.6 million have been included in assets held for sale as at January 31, 2015 for these properties.

Subsequent to the close of the quarter, 1,548,070 Class B common shares were converted to Non-Voting Class A shares.

Subsequent to January 31, 2015, the Company has filed a notice with the TSX to purchase for cancellation up to 1,788,584 Non-Voting Class A shares representing approximately three percent of those outstanding, subject to obtaining regulatory approval.

FORWARD-LOOKING INFORMATION

This news release contains forward-looking information that reflects management’s current expectations related to matters such as future financial performance and operating results of the Company. Expressions such as “anticipates”, “expects”, “believes”, “estimates”, “could”, “intends”, “may”, “plans”, “will”, “would” and other similar expressions or the negative of these terms are generally indicative of forward-looking statements. Forward-looking statements contained in this news release include anticipated benefits from the Canada Safeway acquisition including: (i) the effect of implementation of the Sobeys SAP systems within the Safeway business which may be impacted by the effectiveness of the integration and training efforts; and (ii) the ultimate achievement of synergies, which may be impacted by a number of factors, including the effectiveness of integration efforts.

By its very nature, forward-looking information requires the Company to make assumptions and is subject to inherent risks and uncertainties which give rise to the possibility that the Company’s expectations or objectives will not prove to be accurate. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and risks are discussed in the Company’s materials filed with the Canadian securities regulatory authorities from time to time, including the “Risk Management” section of the annual Management’s Discussion and Analysis (“MD&A”).

Readers are urged to consider these and other risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information. The forward-looking information in this news release reflects the Company’s expectations as at March 12, 2015 and is subject to change after this date. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company other than as required by applicable securities laws. 

NON-GAAP FINANCIAL MEASURES

There are measures included in this news release that do not have a standardized meaning under GAAP and therefore may not be comparable to similarly titled measures presented by other publicly traded companies. The Company includes these measures because it believes certain investors use these measures as a means of assessing financial performance.

Empire’s definition of the non-GAAP terms are as follows:

• Same-store sales are sales from stores in the same location in both reporting periods.
• Gross profit is calculated as sales less cost of sales.
• Gross margin is gross profit divided by sales.
• Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is calculated as net earnings from continuing operations before finance costs (net of finance income), income taxes, and depreciation and amortization of intangibles.
• EBITDA margin is EBITDA divided by sales.
• Adjusted EBITDA is EBITDA excluding items which are considered not indicative of underlying business operating performance.
• Operating income, or earnings before interest and taxes (“EBIT”), is calculated as net earnings from continuing operations before finance costs (net of finance income) and income taxes.
• Operating income margin is operating income divided by sales.
• Interest expense is calculated as interest expense on financial liabilities measured at amortized cost plus losses on cash flow hedges reclassified from other comprehensive income.
• Adjusted net earnings from continuing operations are net earnings from continuing operations, net of non-controlling interest, excluding items which are considered not indicative of underlying business operating performance. These adjustments include items which are non-recurring or one-time in nature and items that result in a truer economic representation of the underlying business on a comparative basis.
• Funded debt is all interest bearing debt, which includes bank loans, bankers’ acceptances and long-term debt.
• Net funded debt is calculated as funded debt less cash and cash equivalents.
• Total capital is calculated as funded debt plus shareholders’ equity, net of non-controlling interest.
• Net total capital is total capital less cash and cash equivalents.
• Funded debt to total capital ratio is funded debt divided by total capital.
• Net funded debt to net total capital ratio is net funded debt divided by net total capital.
• Funded debt to EBITDA ratio is funded debt divided by trailing four-quarter EBITDA.
• EBITDA to interest expense ratio is trailing four-quarter EBITDA divided by trailing four-quarter interest expense.
• Book value per common share is shareholders’ equity, net of non-controlling interest, divided by total common shares outstanding.
• Free cash flow is calculated as cash flows from operating activities, plus proceeds on disposal of property, equipment and investment property, less property, equipment and investment property purchases.

For a more complete description of Empire’s non-GAAP terms, please see Empire’s MD&A for the third quarter ended January 31, 2015. 

CONFERENCE CALL INFORMATION

The Company will hold an analyst call on Thursday, March 12, 2015 beginning at 1:30 p.m. (Eastern Daylight Time) during which senior management will discuss the Company’s financial results for the third quarter ended January 31, 2015. To join this conference call, dial (888) 231-8191 outside the Toronto area or (647) 427-7450 from within the Toronto area. To secure a line, please call 15 minutes prior to the conference call; you will be placed on hold until the conference call begins. The media and investing public may access this conference call via a listen mode only. You may also listen to a live audiocast of the conference call by visiting the Company’s website located at www.empireco.ca. 

Replay will be available by dialing (855) 859-2056 and entering passcode 95304017 until midnight March 19, 2015, or on the Company’s website for 90 days following the conference call.

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

To view and download the Company’s unaudited interim condensed consolidated financial statements for the third quarter of fiscal 2015 ended January 31, 2015, please access the following link:

Q3 Fiscal 2015 Unaudited Interim Condensed Consolidated Financial Statements

This information is also available for download at www.sedar.com or by accessing the Investor Centre section of the Company’s website at www.empireco.ca.

ABOUT EMPIRE

Empire Company Limited (TSX: EMP.A) is a Canadian company headquartered in Stellarton, Nova Scotia. Empire’s key businesses are food retailing and related real estate. With over $24 billion in annualized sales and $11.9 billion in assets, Empire and its subsidiaries, franchisees and affiliates employ more than 125,000 people.

Additional financial information relating to Empire, including the Company’s Annual Information Form, can be found on the Company’s website at www.empireco.ca or at www.sedar.com.

 

SOURCE Empire Company Limited

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