Metro Inc. (OTCPK:MTRAF) Q4 2023 Earnings Conference Call November 15, 2023 9:00 AM ET
Company Participants
Sharon Kadoche – Manager, Investor Relations & Treasury
François Thibault – Executive Vice President & Chief Financial Officer
Eric La Flèche – President & Chief Executive Officer
Conference Call Participants
Tamy Chen – BMO Capital Markets
Irene Nattel – RBC Capital Markets
Mark Petrie – CIBC
George Doumet – Scotiabank
Vishal Shreedhar – National Bank
Michael Van Aelst – TD Cowen
Chris Lee – Desjardins
Operator
Good morning, ladies and gentlemen, and welcome to the Metro Inc. 2023 Fourth Quarter Results Conference Call. Note that at this time, all lines are in a listen-only mode. But following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Also note that this call is being recorded on Wednesday, November 15, 2023.
And I would like to turn the conference over to Sharon Kadoche. Please go ahead.
Sharon Kadoche
Good morning, to everyone and thank you for joining us today. Our comments will focus on the financial results of our fourth quarter, which ended on September 30th.
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 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 2023-2024 action plans. 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 2022 annual report. 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.
François Thibault
Thank you, Sharon, and good morning, everyone. I have more to cover than usual this quarter. I’ll start by highlighting that the fourth quarter this fiscal year had 13 weeks versus 12 weeks for the same quarter last year. Also, our fourth quarter was unfavorably impacted by $36.7 million pre-tax of estimated loss profits and direct costs from a labor conflict at 27 metro stores in the Greater Toronto area that lasted five-and-a-half weeks.
This figure applies to 27 stores and does not include other unfavorable impacts, which affected our network such as those resulting from the illegal picketing of our distribution centers. For competitive reasons, we do not disclose the impact on the sales of these 27 stores.
Turning to our results. Sales reached $5,572 million, an increase of 14.4% versus the same period last year. And when we exclude the 13 week, sales grew by 5.4%. Food same-store sales were up 6.8% in the quarter, and pharma same-store sales up 5.5%. The comparable food sales figure excludes the impact of the strike.
Gross profit was unfavorably impacted by $36.3 million as a result of the strike and gross margin for the quarter came in at 19.5%, versus 20.4% in the same quarter last year. The decrease in gross margin reflects the impact of lost sales related to the labor conflict, as well as a decline in our food margins, partly offset by an increase in our pharma division.
Operating expenses amounted to $540.3 million, that’s up 13.5% or 4.7% when we exclude the 13-week. The net impact of the labor conflict on operating expenses in the fourth quarter 2023 was an increase of $400,000.
Operating expenses as a percent of sales was 10.7%, same as last year. But it’s not for lost sales due to the strike operating expenses as a percent of sales would have been lower than last year. EBITDA for the quarter totaled $448 million, up 1.5% year-over-year and represented 8.8% of sales versus 10% last year or 9.7% of sales when we remove the large gain on sale of assets that we did last year.
Total depreciation and amortization expense for the quarter was $125 million versus $119.8 million last year and the 4.2% increase reflects the additional investments in supply chain logistics, as well as the in-store technology. Adjusted net earnings were $228.8 million, compared to $219.4 million last year, a 4.3% increase and our adjusted net earnings per share amounted to $0.99, up 7.6% versus last year’s adjusted EPS of $0.92.
The strike had an unfavorable impact on adjusted EPS of $0.12 per share, whereas the extra week had a favorable impact of $0.12 per share as well. At the end of fiscal 2023, capital expenditures amounted to close to $680 million versus $621 million last year. We invested less than our original guidance, mostly due to some real estate purchases that were postponed.
For fiscal 2024, we expect CapEx to reach a record level north of about $800 million, as we continue our investments in modernization of our supply chain in both provinces. CapEx will reduce to a more normal level post-2024.
On the retail side, fiscal ‘23 was a busy year as we opened eight new stores; in Quebec, we opened one Metro Store and three Super C, while converting another Metro to a Super C and Super C in Gatineau. And in Ontario, we opened one Metro Store and two Food Basics. We also carried out major renovation in ten stores representing a net increase of 256,300 square feet or 1.2% of our food retail network.
In the pipeline for fiscal ’24, we are budgeting eight new discount stores, including two conversions and one new Metro Stores. We will also undertake more than 25 major renovation projects.
Under our normal course issuer bids, we have repurchased over 6.7 million shares for a total consideration of $484.4 million, representing an average share price of $72.09. The program ends on November 24th and we plan on renewing it as we remain committed returning excess free cash flow to our shareholders through share repurchases.
I will finish by providing an outlook for fiscal 2024. As we speak, we are ramping up our new state-of-the-art automated distribution center, north of Montreal and the expansion of our Montreal Produce facility as planned. We are also preparing for the launch of the final phase of our automated fresh facility in Toronto next spring. While these investments position us well for continued long-term profitable growth, we are facing significant headwinds in fiscal ‘24 as we incur some temporary duplication of costs and learning curve inefficiencies, as well as higher depreciation and lower capitalized interest.
In comparison, the investment we made so far in Ontario to modernize our supply chain were phased over a longer period. Therefore, we will not fully absorb these additional expenses and we are currently forecasting EBITDA to grow by less than 2% in fiscal ‘24 versus the level reported in fiscal ‘23 and adjusted net earnings per share in fiscal ‘24 to be flat to $0.10 cents down versus the level reported in fiscal ’23.
We expect to resume our profit growth post-fiscal ‘24 and we are maintaining our publicly disclosed annual growth target of between 8% and 10% for net earnings per share over the medium and long-term. That’s it for me. I’ll turn it over to Eric.
Eric La Flèche
Thank you, François, and good morning, everyone. We are pleased with our fourth quarter results, which were achieved in a challenging operating environment that included a five-and-a-half week strike at 27 Metro stores in Ontario. For the first time in our history, sales for the year exceeded $20 billion and net earnings reached $1 billion. Our sales momentum remains strong, fueled by our discount banners and pharmacy.
For the quarter, food same-store sales were up 6.8%, driven by the continuing shift to discount for a two years stack of plus 15%. Our internal food basket inflation decelerated to 5.5%, which is about 2% lower than the reported food CPI and down from 8% in our third quarter. Similar to previous quarters, transactions were up. The average basket increased slightly, tonnage was up, promotional penetration remained high and private-label sales continued to outpace national brands.
In pharmacy, we delivered a strong balanced performance, despite the expected decrease in demand for Over-The-Counter medication, as we were lapping exceptionally strong sales in Q4 last year. Total pharmacy, comparable sales were up 5.5% on top of 7.4% in the fourth quarter last year.
Prescription sales were up 6.7%, driven by the dispensing fee indexations growth in high cost molecules and professional services. Commercial sales were up 3.1%, primarily driven by cosmetics, HABA and seasonal. The two-year stack is 13.5% for prescription sales and 13.3% for commercial products.
As you know, the employees in 27 of our Metro stores located in the GTA were on strike for 5.5 weeks in August. We reached a satisfactory five-year collective agreement, which provides significant wage increases, as well as pension and benefits improvements for all employees. As an offset, we were able to improve scheduling flexibility, which will lead to increased productivity.
Turning to our loyalty program, we are pleased with the early results, following the launch of the Moi program in Quebec. We’ve doubled our member base, which now accounts more than 2.4 million members with the majority shopping at least two of our banners. The Moi program performance continues to improve week-over-week with healthy growth in swipe rates and loyalty sales penetration.
We see many opportunities to grow customer engagement with more personalized offers and communications to our customers based on their shopping habits across our banners. Our online food sales were up 116% versus last year, beating total market food e-com sales, which were essentially flat. Our growth is fueled by third-party partnerships and by expanding click-and-collect to our discount stores.
Turning to our supply chain, we started operations last month in the frozen section of our new Terrebonne DC, North of Montreal. This new automated distribution center represents the future of Metro’s fresh and frozen product distribution in Quebec. It will strengthen our market position, generate new opportunities for our company and our employees and enable us to remain competitive, while pursuing our growth.
The state-of-the-art facility is expected to ramp up in stages over the coming months and be fully operational by the end of fiscal ‘24. In Toronto, our fresh Phase one and frozen DC are tracking to the business plan and teams are getting ready for fresh Phase two set to begin operations next summer. As we begin our fourth quarter – our first quarter, the current trend of food inflation stabilizing month-over-month and declining year-over-year is continuing as we will cycle high inflation numbers over the next three quarters.
However, we are still receiving price increase requests from the big CPG companies, which our teams will negotiate as much as possible. So we expect food inflation to moderate going forward. On the pharmacy side, we will be going up against tough comps in the first half of fiscal ‘24, as we lapse extraordinary demand in OTC medication due to post-COVID-19 cough and cold symptoms last year.
Following our commitment in October ‘22 to rigorously evaluate the feasibility and cost of achieving the achieving the science-based targets initiative net zero standard, the company reviewed and adjusted the scope of its existing objectives by committing to set near-term emission reduction targets in line with the SBTI standards. We are setting science-based targets that are ambitious, but realistic.
In closing, I want to address the outlook François just gave you for fiscal ‘24. As you know, we normally do not give guidance and we don’t intend to give guidance in the future. However, we wanted to be transparent on the impact of our major investments we’ll have on our results for fiscal ‘24, which I would describe as a transition year.
I am confident that these key investments will improve our competitive position, allowing us to better serve our customers and will position us well to continue our long-term profitable growth.
That’s it. Thank you. And we’ll be happy to take your questions.
Question-And-Answer Session
Operator
Thank you. [Operator Instructions]
And your first question will be from Tamy Chen, at BMO Capital Markets. Please go ahead.
Tamy Chen
Hi, good morning. Thanks for the question. I wanted to start with the Fiscal ‘24 outlook and the DCs here. So, can you elaborate a bit more on what the challenges were? I think you’ve alluded to that in Ontario, it was all phased over a longer period. So, over here, are you just trying to do everything faster? And that’s what’s leading to some issues? And the press release that called out some learning curve inefficiencies. So are you able to elaborate on all of that a bit more?
François Thibault
Yes, thank you. Thank you for the question. It’s exactly that. In Ontario, we did fresh Phase one in 2021. We did the freezer in 2022. And we’re going back there next spring for fresh Phase two. Here in 2024, we have fresh and frozen for Quebec, which is just opening. So it’s a mega center. It’s a 550,000 square feet, brand new automated DC. We’re operating in that center right now.
But we have not seized the operations in the former DC. So the former fresh and frozen DCs in Quebec City and in Montreal are still operating to this day as we transition volume from those DCs to the new DC. It will be done over several months. We started with frozen. Things are going well. We’re gonna do fish next. Then we’re going to take a pause for the holidays and then go early in the New Year start with the fresh product.
So there’s duplication in warehousing and cost and transportation costs. So there are non-recurrent excess costs for sure. Then we will expand our produce DC in Montreal to enable our growth. We’re moving all dairy products from that DC to the new automated DC in Terrebonne. So that’s another transition. And then we ramp up the new expanded Phase at [Indiscernible] for produce.
And then if we go back to Toronto, all in the same fiscal year to do fresh Phase two. So there’s a lot of losing moving pieces. A lot of work. We’re confident that it’s going to go well. But it’s going to cost money. It’s going to cost money to do that, especially in the first year. And that’s why we’re transparent and we’re saying that’s a big headwind.
It will impede our reported profits next year, but it positions us well for the future. Depreciation is going to go up. No question about that. Capitalized interest, we will know no longer capitalize. So, that’s affecting our bottom-line next year. So, in a nutshell it’s a big transition here. We’re confident, it’s going to go well.
We have learned a lot in Toronto. We expect to ramp up periods to be to be faster here in Quebec. But there’s always some learnings and there is some issues as you start new DCs. And new systems, new ways of doing things. So it’s going to be – it’s going to have an impact next year. That’s why we’re doing this one-time guidance.
Tamy Chen
I see. Okay. I guess, I’m wondering as a follow up to that, there was more of a just pacing with the Ontario work. I am just curious as to why for the second round of work largely in Quebec? The timeline is much shorter and yet so much more going on.
François Thibault
Well, in Ontario, we built the projects on the existing land – on existing – it was our existing facilities that we built next to it. Demolished and did it in phases. So we were able to stage it here. The new DC in Terrebonne is one site, one big facility for both fresh and frozen. So it’s all at the same time. And then, when you open this large facility, you want to increase throughput. You want to bring merchandize in from all the other DCs. So, the dairy, which is in – with our produce today is going to go into the automated facility. So, that’s going to incur some cost. But it’s going to improve the profitability or the returns on the new big fixed cost facility. So it’s just that the sequencing in Quebec is faster, because of its one big center.
Tamy Chen
Okay. Got it. And my last question is, so are you expecting this to all be fully resolved by the end of next fiscal year or could there be some spillover into fiscal ’25? I was just reading your press release outlook part. It sounded as though, you expect this all to be that the drive to be fully resolved within fiscal ‘24. Thanks.
François Thibault
Yeah. Well, we’re saying that post-fiscal ‘24 will be back on our growth path and our growth track to and we maintain our long-term average, medium and long-term annual target growth objectives are maintained. 8% to 10%, – 8% EPS has been our long time number and we’re still committed to it.
Tamy Chen
Okay. Thank you.
Operator
Thank you. Next question will be from Irene Nattel of RBC Capital Markets. Please go ahead.
Irene Nattel
Thanks. And good morning, everyone. Just following on the discussion about the guidance. Can you please walk us through what your anticipated return on investment is? Does that exceed I guess, your mid-teens hurdle rate? And over what period of time should we expect to see those returns coming through?
François Thibault
Hi, Irene. Good morning guys. Well, same as what we said for Ontario. Our internal rate of return or return on investments that we’re looking at is the same whatever the project a new store renovation, a conversion, CapEx is CapEx funded from the same sources. So we are looking for the same double-digit after tax cash-on-cash return.
Obviously, this is a longer term project. So you don’t get this, because you don’t get the savings in the first couple of years like you do for a store for example. But over the medium term, you start to get you could you start to get there. But we will – we are confident that we will achieve our targeted rate of return as expected.
And based on what as Eric said, based on the experience we’ve had so far in Ontario, we’re confident that we are in good position to achieve that rate of return.
Irene Nattel
That’s great. Thank you. If we could turn back to operations, please, obviously, really nice number on the same-store sales from what you were saying. It sounds as though, all the key metrics are going in the right direction. Can you talk about what you’re seeing in terms of consumer behavior? Where you think the incremental traffic is coming from? And what you’re seeing in conventional versus discounts? Thank you.
Eric La Flèche
Thank you for the question. No material change to customer behavior. The trends we’ve been observing for the last – it’s over a year and a half now that the shift of discount continues. The growth in sales on the conventional side versus discount, there’s a gap and that gap is significant. We are well, positioned with Super C and Food Basics to capture that growth.
So, we’re very pleased with our traffic and our attendance in our discount stores. It’s – the momentum is strong. And we’re happy about that. So, trading down private-label growth, heavy duty promotional pressure and not pressure, but the penetration is consistent with what we’ve described over the previous calls. And that’s still happening.
So, it’s a very competitive environment as more discounts – more square footages is being added to the market it’s having an impact for sure. But we’re well positioned to continue to grow in that market.
Irene Nattel
That’s great. Thanks, Eric.
Operator
Thank you. Next question will be from Mark Petrie at CIBC. Please go ahead.
Mark Petrie
Hey, good morning. Actually, just a follow-up, maybe first on that food same-store sales result. I know you don’t like to get into the details, but clearly the continued shift to discount is a tailwind for you and you are gaining share. But I want to ask you what the relative performance in full-service? How that has trended from Q3 to Q4? And if the share gains look different by channel?
François Thibault
Well we’re pleased with our share performance by province and by format compared to the direct competition. So we want to close more than that. But the share of our conventional stores versus the conventional peer set is growing. A few exclude the strike in Ontario, of course. So we’re pleased with that and it’s been consistent over the last several quarters.
On the discount side, our share has been growing for over a year in Quebec as the discount market size due to a competitor converting many, many stores. As that pie grows on the discount side, we are very pleased with our growth, but on a relative market share basis discount – the performance is not the same as it was a quarter or two ago. But in total market terms, our discount banners in Quebec are growing share for sure. I hope that’s clear.
Mark Petrie
Yeah, yeah. Now that is clear. Thank you. I appreciate the color there. And François, just to clarify, with regards to same-store sales for this period, does your – do those – I think you said the strike stores were included in same-store sales. But does that mean that the full period of – in the same-store sales base includes those stores that were impacted by the strike? But then, in the current period they were not included. Is that right? Or they were excluded in both?
François Thibault
They were excluded in both. Yeah. So with the 27 stores for six weeks are out of the same-store sales numbers last year, and this year.
Mark Petrie
Yeah, understood. Okay. And then, one more question if I could please? I mean, obviously there’s a lot of volume pressure in the industry just given the shifts in consumer behavior. And I’m curious just to hear how you think about the impact in your business. Obviously, lots of different elements across private label penetration and promotional investments, cost leverage. Is that a factor in your outlook for fiscal ‘24? Or is it really, I mean it’s prominently the DC issues? But I was just curious about the sort of industry pressures for fiscal ‘24.
François Thibault
No, the guidance we’re giving on EPS for next year is all related to the headwinds due to our distribution. The program – modernization program. The market is the market. We expect to compete really well and to continue to do well from an operations point of view in sales growth, margins, and market share, those we’re very confident we will continue to perform well. The headwinds are related to the distribution program.
Mark Petrie
Okay. Appreciate all the comments and all the best.
François Thibault
Thank you.
Operator
Next question will be from George Doumet at Scotia Bank. Please go ahead.
George Doumet
Yeah. Good morning guys. Just a follow-up on the Terrebonne. Is there a way you can maybe give us a sense of the margin benefits that we should expect once that’s ramped up? And presumably, we should grow well above 8% to 10% in fiscal ‘25, as we get some of the benefit from Terrebonne, but maybe any color there would be appreciated.
François Thibault
Well, as we said the rate of return that we get in the investments are long-term. We’d like to buy the bulk of these extra costs on the edification and learning curve efficiency, so forth. It will be behind us. Expected to be behind us post ‘24. So, yes, as we did in Ontario, we were looking for improvements or at least more tools to be able to improve a margin. Better in-store servicing, better in-stock position, better quality, which all has a rippling effect on our on our growth. So that’s why we’re confident that we maintain our growth targets.
Eric La Flèche
Just a little more color on that. We’re not going to give you specific numbers on the benefits. But just an example, for those of you on the Investor Day, who saw the frozen DC, you were able to see the automation level, the number of employees, and the volume that is going through that facility and we were able to internalize a lot of formerly DSD product into our warehouse. So we’re going to do the same in Quebec. We’re confident that this will help improve service to stores. It will help improve in-stock position in stores. It will help our sales and that will help our margins. It will help our same-store sales. It will help our market share. So, there’s a lot of factors that play when you do big supply chain investments, that should benefit at retail. We’re seeing some of that in Ontario with our frozen DC, and we expect more the same in frozen down the road in Quebec. We’re not going to give you an exact number. But in our business case, and the return calculations, we do, we do put some money in there for those benefits. So that’s why we’re confident. We’re going to get the returns that we need on the investments that we needed to make. We needed capacity. We needed to grow and these investments were required. So it wasn’t as if we could continue to operate in our DCs for the next 30 years. We – there we’ve grown a lot in the last 20 years and we want to grow some more in the next 20 years. That’s why we make these investments for the long term.
George Doumet
Okay. Thanks. I just wanted to touch on the pharmacy. Some pretty good numbers there. So maybe on first on Rx. Can you maybe help break out that number? How much of that was higher indexation fees? Maybe a volumes and anything that you can maybe tell us on what’s happening over there?
François Thibault
So the RX number at 6.7 is healthy. There’s a, we said indexation of the script fees by the government on the public sector scripts. Same on the private sector fixed fees. So, there’s indexation of the script fee that’s contributing to that lift. Expensive molecules are contributing to that lift as – contributing to that lift and professional services, vaccinations, flu shots, that’s increasing.
So, there’s a lift in the 6.7 on top of the normal Rx counts. So, we’re pleased with that. And our share of Rx in the Quebec market is very consistent and continues to be number one. And we’re pleased with our performance.
George Doumet
Okay. Last one for me. Shifting over to front store, obviously some pretty strong numbers there. But I think inflation’s high for HABA products. So, can you talk a little bit about your volume trends? Now that you’re seeing when it comes to HABA in general and are you seeing a trade down? Are you seeing a slowdown? Can you talk a little bit about that?
François Thibault
Inflation in HABA is a little lower than food inflation that we’re reporting. So it’s not abnormally high inflation in HABA at all. The front store sales number is impacted by OTC. Those numbers are down year-over-year. Last year OTC numbers were sky high, because of post-Covid and sanitary relief, and whatnot? There were a lot of symptoms last year in Q4 and in Q1 of ‘23. So, we’re cycling that. So given that, we’re pleased with our HABA performance, cosmetics. Our strong seasonal performance was good. So 3.1 doesn’t sound like a home run, but compared to what we were cycling last year on a three year stack basis, it’s quite strong. And we’re pleased with that performance. But there is still going to be pressure for the first half of ’24, like I said in my opening statement on OTC sales, because of in Q1 and Q2 of fiscal ‘23, the cough and cold symptoms, and the flu season was very high. And that contributed to big numbers last year and we expected to that to be lower this year.
George Doumet
Okay. Great. Thanks for the call. I appreciate it.
François Thibault
Thank you.
Operator
Next question will be from Vishal Shreedhar at National Bank. Please go ahead.
Vishal Shreedhar
Hi. Thanks for taking my questions. I just want to go back to the DC in Quebec. Would you consider the Delta that that you issued in your outlook for fiscal ‘24, relative to Street expectations? Is that predominantly from planned costs that you saw coming? And the Street didn’t adequately reflected? Or was there some unplanned initiatives or unplanned events in there that caused that delta to magnify? It is a large delta on EBITDA that’s in the street. So, I just want to get that thought.
Eric La Flèche
Well, we are not responsible for what the Street expectations will be. But we’ve been pretty transparent that we’re making these – these are well-known investments. We’ve been talking about it since 2017, 2018. It’s a multi-year program with we started at $800 plus million. It’s going to be more like $1 billion because of inflation and construction and all that.
So we’ve been on this program and these facilities need to be ramped up and they need to be amortized going forward. So that’s the math here. So, that’s why we’re giving that guidance to be very transparent.
Vishal Shreedhar
Okay. I appreciate that. And on the actual D&A increase are you going to give us some specific help on those numbers?
Eric La Flèche
Yeah, I think we’re not going to, we’re not going to be showing, I’m going to break down the headwinds per category and so forth. But I think for depreciation, what we can say for next year is the total increase, not just for the DC that we’re talking about, but total depreciation expense you can use a $50 million plus delta for the year. Obviously, gradual, but the bulk of the increase happening in Q1 because of Terrebonne is starting live.
So, you can assume about $50 million more depreciation expense and you can assume of less than $15 million of lower capitalized interests. And I’ll leave it at that in terms of the impact to next year.
Vishal Shreedhar
Okay. And the duplicative costs, are you going to give us any help on those? And how long will those duplicative costs stay in the P&L?
Eric La Flèche
Well, we gave you some – we gave some impact as we tell you that, our EBITDA is expected to grow by less than 2%. So, we are absorbing part of these increases, but we are not absorbing all of it. And we will obviously, as the quarter – as we as we progress in the year, we’ll talk about our results. But as I said that, based on the experience we had in Toronto, the bulk of these inefficiencies, and edification should be behind us post ‘24. That’s the expectation.
Vishal Shreedhar
Got it. Okay. Just changing topics here. I just want to – I was hoping you could update us on your view on acquisitions, if there’s been any changes and what’s your interest in pharmacy assets?
François Thibault
Well, like we said before, Vishal, we are always on for acquisitions in food and pharmacy in Canada. And if an opportunity arises, we will take a close look.
Vishal Shreedhar
Okay. And is it fair to say on pharmacy assets, you would want to self-distribute it if assets were to become available?
François Thibault
That’s our model. Yes, we would prefer. We’ll see what the opportunities are.
Vishal Shreedhar
Thank you.
Operator
Thank you. Next question will be from Michael Van Aelst at TD Cowen. Please go ahead.
Michael Van Aelst
Hi there. I’m sorry to go back to this. But I wanted to talk – just get a better sense as the time of the DC impact. Do you expect these kind of overhead costs and the inefficiencies to be highest in the first half of the year or second half of the year? How would you expect that to go through the year?
Eric La Flèche
Well, those kind of fees is it’s gradual. You expect that learning curve by definition is a curve. So that the earlier part of the year will be tougher than the last part. We’re not going to give you a precise month-by-month, but that you could assume a gradual improvement as we move along the fiscal year. Just like we had in Toronto.
Michael Van Aelst
Okay. All right. And then, that before but I just want to clarify a little bit here, a lot of these costs that you’re calling out for fiscal ‘24 they’re one-time in nature. They’re temporary. So – and the industry continues to progress as you expected. So, should investors be expecting an outsized growth in fiscal ‘25 to make up for the shortfall that you’re seeing in growth in fiscal ’24?
Eric La Flèche
Well, some of the expenses are going to be permanent.
François Thibault
Depreciation.
Eric La Flèche
Depreciation, as François called out is going to be with us for a long time. There’s some one-time. There’s some cash. There is some non-cash. There is some one-time. There’s some permanent. So, it’s a mix of all that to say, we are going to expect outsized return in one year. I don’t think that would be fair or appropriate. But we expect we could generate our returns on our investment over time. We’re confident we’re going to get there. But some of these expenses are going to be with us. And not just for one year. Some of them is one-time, not all of them.
François Thibault
Although, obviously, the growth in depreciation in ‘25 and beyond will be held lot lower than what we’re showing in ‘24. And then, so with the extra volume that we are – we’ll be able to absorb going forward, that’s just that one year. That’s why we call it transition year. But after that, we will, we’re in a good position to absorb and drive the efficiencies and the margin improvements we discussed.
Michael Van Aelst
So, when you talk about 8% to 10%, getting back onto your 8% to 10% annual growth for EPS, if we look back, five years from now. Are you saying you are expecting to have 8% to 10% CAGR in EPS, over that five years?
Eric La Flèche
Yes. Yes, it’s exactly what we’re saying.
Michael Van Aelst
All right. So these are similar to historical. We’re just going to see a drop this year and then you’ll make up for it gradually in the following years as you get returns from these investments.
Eric La Flèche
Exactly. And as we said, we said in the past those targets, it doesn’t mean that we hit them every single year. There are reasons why you are like – for what we’re talking today where you make investments for the future. But if you take a period of time in medium to long-term, we are confident that we can still achieve those targets.
Michael Van Aelst
Yeah, you’ve done it historically on a pretty consistent basis. So, yeah. Okay. And then finally on labor, we’re clearly you alluded to the significant wage increases from this labor agreement. But it seems like both your OpEx and your competitor, that also reported today they had higher OpEx growth, as well. And I’m just wondering how much of that are we – is coming from labor at this point? Like, are we seeing, are you already seeing some meaningful increases in labor expense in your OpEx line this quarter?
Eric La Flèche
Yeah, I’ll pick some way – some salary wages increases are higher and we’ve planned for it. I’m pleased with our performance. Our OpEx as a percent of sales is the same as last year. And obviously, if you factor in the strike, it’s our percentage of OpEx on sales is lower than last year. So, we’re despite pressures from wages and other and other lines. So, we’re, yes, to your question, it’s wage increases over there. But we’ve been able to absorb them.
Michael Van Aelst
Okay. Your labor, your rates there are both in COGS and OpEx, correct?
Eric La Flèche
Yes.
François Thibault
Yes.
Michael Van Aelst
All right. Thanks very much.
François Thibault
Thank you.
Operator
Next question will be from Chris Lee at Desjardins. Please go ahead.
Chris Lee
Hi. Good morning, Eric and François. Maybe just a couple of questions, just on how to model for next year. Maybe for François, just want to clarify the adjusted EBITDA and adjusted EPS that you’re anchor in your financial outlook for fiscal ‘24, I just want to confirm is that excluding the extra week? And also excluding the strike impacts?
François Thibault
It’s versus the reported figures for ‘23, as you see them – as you see them on the P&L.
Chris Lee
Okay. So, okay. Got you. As they are reported. Okay. Okay that’s helpful. And then, secondly, just in terms of just the classification of these one-time costs, will we see them being reflected in a most mixable COGS and SG&A?
François Thibault
Well, some of it will come back when we do chapter 3:31, when we bring back from the cost increases to the margin, when we bring some of these cost increases to the margin you’ll see an impact on margin, as well. But mostly, OpEx.
Chris Lee
Okay. That’s helpful. And then, Eric, I think you already answered this question with Mark. But I just wanted to touch base again. So, as I’m trying to wonder like, if you’ve weren’t far of these one-time noise from the DC investments, make sure you, do you think you still be able to achieve 8% to 10% EPS growth in fiscal ‘24? And I guess, what I’m trying to understand is, I mean, does your low cost will incorporate some caution around the operating environment? Because as you said, there’s some tough comps and there’s increasing promo penetration?
Eric La Flèche
No. Like I said to Mark, we feel very confident about our KPIs and our operating performance in both of our markets. We’re well positioned. Stores are in good shape. We have a good CapEx program. So I’m confident that our performance in the market will be consistent with prior experience. So again, this guidance has nothing to do with the operating performance, all to do with our supply chain program.
Chris Lee
Okay. Thanks for that. And then my last question, just maybe on the gross margin, I know the results obviously included the impact of the strike, if we were to exclude that, is it fair to say your margin performance would have been somewhat similar to your performance in the recent quarters in terms of the year-over-year growth or comparison?
Eric La Flèche
Which margin – which margin?
François Thibault
Gross margin.
Chris Lee
Gross, gross margin. Gross margin, sorry.
Eric La Flèche
Well, gross margin is down for a few factors. The strike, obviously, and the margin in food by itself is also declining as it has been over the previous quarters, combination of we’re not passing on all the cost increases. And there’s also a shift to discount. So that also has an impact. And you’re also comparing to gross margin level of last year, which was at the highest of the year at 20.4. The whole year was at an average of 20. So, you are comping – you are comparing to a very high gross margin last year. So I think all these factors explain why the gross margin is where it is.
Chris Lee
Okay. Thanks guys. And all the best.
Eric La Flèche
Thank you.
Operator
Thank you. [Operator Instructions] And your next question will be from Mark Petrie at CIBC.
Mark Petrie
Yeah. Thanks. Just a quick follow-up. I just wanted to clarify, for the new facility at Terrebonne, does it have automated fresh, like what you’re going to be putting in, in phase two in the DTA? And I guess that’s first.
François Thibault
That’s the answer is yes. And it will be the pilot or for Toronto whether we do next June. So, when we say learning curve and ramping up on the fresh side, there’s going to be some of that going on in Terrebonne. So, yes. It’s not fully automated. But it’s more than 75% automated for fresh in that DC.
Mark Petrie
Yeah. Okay. And is it, would you characterize the automation in fresh as more difficult to execute or to ramp than then automated in frozen?
François Thibault
Yes. It presents a few more challenges, because it’s a mix of conventional and automated picking. So it has more complications. We live through that for produce in Toronto. It’ll be more automated in Terrebonne. And it’ll be more operated in Toronto once we’re done Phase two next summer. But as we ramp up, yeah there are more challenges with – on the fresh side than the freezer.
Mark Petrie
Yeah.
François Thibault
They all have challenges, but it’s a little more complicated with fresh, because it’s hybrid.
Mark Petrie
Yes. Understood. Okay. That’s helpful. Thank you.
Operator
Thank you. And at this time, we have no other questions registered. Please proceed.
Eric La Flèche
Thank you all for your interest in Metro and we’ll speak again soon to discuss our first quarter results on January 30th. Thank you.
Operator
Thank you, sir. Ladies and gentlemen, this doesn’t indeed conclude your conference call for today. Once again we thank you for participating and ask that you please disconnect your lines.
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