Metro, Inc. (OTCPK:MTRAF) Q1 2023 Earnings Conference Call January 24, 2023 1:30 PM ET
Company Participants
Sharon Kadoche – Manager of IR & Treasury
François Thibault – EVP & CFO
Eric La Flèche – President & CEO
Conference Call Participants
Kenric Tyghe – ATB Capital Markets
Irene Nattel – RBC Capital Markets
Peter Sklar – BMO Capital Markets
Mark Petrie – CIBC
Michael Van Aelst – TD Securities
Chris Li – Desjardins
Operator
Good afternoon, ladies and gentlemen, and welcome to the Metro Inc. 2023 First Quarter Results Conference Call. At this time, all participant lines are in a listen-only mode. But following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Also note that the call is being recorded Tuesday, January 24, 2023.
And I would like to turn the call over to Sharon Kadoche. Please go ahead.
Sharon Kadoche
Thank you. Good afternoon, everyone. And thank you for joining us today. Our comments will focus on the financial results of our first quarter which ended on December 17. With me today, is Mr. Eric La Flèche, President and Chief Executive Officer; François Thibault Executive VP and Chief Financial Officer. During the call, we will present our first quarter results and comments 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 statements which does not constitute a historical fact may be deemed as a forward-looking statement. Expression such as expect, intent, or confident that, will and other similar expressions are generally indicated a 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 2022-2023 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. The description of these risks could have an impact on the statement could be found under the Risk Management section of our 2022 Annual Report.
As with the preceding risks, the COVID 19 pandemic constitutes a risk that could have an impact on the business operations, project, synergies and performance of the company. We believe these statements to be reasonable and pertinent at this time and represent our expectation. The company did not intend to update any forward-looking information as required by applicable law.
I will now turn the call over to François.
François Thibault
Thank you, Sharon and good afternoon, everyone. Total sales for the quarter were $4.7 billion, an increase of 8.2% over last year, with food same store sales up 7.5% in the quarter, and pharma same store sales up 7.7%. Our gross margins stood at 19.6% of sales versus 19.9% in Q1 last year. The decrease mainly the result of higher cost of goods sold in food, the portion of which we absorbed.
Operating expenses stood at $458.2 million or 9.8% of sales, versus 10.2% of sales in the same quarter last year. The decrease in SG&A ratio was mainly due to good cost control and good leverage on a high level of sales.
EBITDA for the quarter totaled $462 million, that’s up 8.9% year-over-year and as a percentage of sales EBITDA was 9.9% versus 9.8% last year.
Total depreciation and amortization expense for the first quarter was $120.1 million versus $112.5 million for the same quarter last year. The increase reflects the additional investment in supply chain and logistics as well as in store technology. Adjusted net earnings were $237.6 million compared to $14.2 million last year, a 10.9% increase. And our adjusted net earnings per share amounted to $1, that’s up 13.6% versus last year’s adjusted EPS of $0.88.
After one quarter, capital expenditures amounted to $129.3 million versus $141.5 million last year. As mentioned in our — on our previous call, we are planning a record level of CapEx this year of about $800 million, resulting mainly from our ongoing investment in the modernization of our supply chain in both provinces.
On the retail side, we opened two new Super Cs this quarter, one in Saint Jerome and another in Beauharnois and we also carried out major innovations in three Metro stores, representing a net increase of 100,000.4 square feet or 0.5% of our food retail network.
On November 18, we renewed our normal course issuer bid program, enabling us to repurchase 7 million shares between November 25, 2022 and November 24 of this year. As at January 13, we had repurchased 696,000 shares for consideration of 52.2 million representing an average share price of $74.94
In closing, the Board of Directors yesterday declared a quarterly dividend of $0.3025 a share, or $1.21 on an annual basis, and that’s an increase of 10% versus last year. This is the 29th consecutive year of dividend growth and represents a payout of about 31% of last year’s adjusted net earnings in line with our policy.
That’s it for me, I’ll turn it over to Eric.
Eric La Flèche
Thank you, François and good afternoon, everyone. We delivered solid results in the first quarter in a very competitive and challenging operating environment, growing market share driven mainly by our discount banners. As inflationary pressures persist, our teams did a good job to provide the best value possible to customers in our stores, pharmacies and online.
For the quarter, total sales grew by 8.2% adjusted EBITDA by 8.9% and adjusted EPS by 13.6%. Food same store sales were up 7.5% compared to a decrease of 1.4% in the same quarter last year. Our internal food basket inflation was 10%, same as that in the last quarter. Compared to last year, traffic was up while the average basket remained flat. Not surprisingly, customers are searching for value and promotional penetration continues to increase and private label sales growth is outpacing national brands.
Discount continued to outperform conventional and we are well positioned to capitalize on this trend with our Super C stores in Quebec, and Food Basics in Ontario. We are accelerating the growth of our discount footprint with the opening of two new Super Cs this quarter, and two more plans for fiscal ’23 in addition to two Food Basics.
Pharmacy comparable sales were up 7.7% and 16% over two years, with a 6.5% increase in prescription drugs helped again by COVID related activities, such as the distribution of rapid test. Food store sales were up 10.2% driven by strong growth in the over the counter medications due to cough and cold symptoms, as well as strong sales of cosmetics, and health and beauty products.
Our online food sales were up 40% for the quarter as we continue to grow by expanding our service coverage and adding more capacity to meet evolving customer needs. This is being accomplished by adding new markets, the rollout of click and collect to our Super C stores and expanding our presence on third party marketplaces such as Cornershop and Instacart offering two hour delivery. We are pleased that the Metro online service was ranked number one in grocery in the most recent Leger Digital WOW index.
As we begin our second quarter, market challenges and inflationary pressures persist, and our focus remains on delivering value to our customers while executing on our strategic priorities. We can’t predict future inflation as many vendor requests for price increases continue to come in, and the root causes outside of our control are still present. However, we will be cycling high inflation figures recorded last year in the second half of this fiscal year. And we would normally expect inflation to moderate later this year. Again, we don’t make predictions.
Metro is proud of its commitment to reduce food insecurity in our communities. Last week, we announced that the company donated $50 million worth of food in fiscal ’22 to food banks in Quebec and Ontario, equivalent to $9 million meals, in addition to giving $5.5 million to different charities and also raising $6.8 million in our networks thanks to the generosity of our customers. Moreover, in November and December, we held our first Healthy Eat together campaign and raised an additional $2.2 million from generous customers and Metro donated $550,000 to our longtime Food Bank partners.
To conclude we continue to execute on our business plans to deliver a strong value proposition to our customers, invest in our retail network and infrastructure and support our communities. As the company proudly celebrates its 75th anniversary, we look forward to continued growth and success for all stakeholders.
Thank you and we will now be happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And your first question will be from Kenric Tyghe at ATB Capital Markets. Please go ahead.
Kenric Tyghe
Thank you and good afternoon. Eric I want you to provide some insight into the relative performance of discount in Quebec versus Ontario or if that getting a little too specific, perhaps you could provide some insight into sort of the consumer behavior in each of those two markets and how you’ve seen that evolve in the face of the macro pressures?
Eric La Flèche
So as I said, in my opening remarks, discount continues to outpace conventional and it’s been the case for several quarters. It continued that into Q1. So both Quebec and Ontario, our discount banners are growing very nicely. Similar growth, I would say. So I won’t give you more color than that. But we’re pleased with our performance, overall performance and we’re pleased with our relative performance versus competitors, either in discount or unconventional. So yes, conventional is trailing behind discount, but holding its own versus peers. And discount is doing well, in both markets.
Consumer behavior is more of the same in this high inflationary period. Our features and specials are selling more and more every month. So people are looking for value and stretching their dollars, no big surprise. Our teams are working really, really hard to give — to provide the best value possible in this tough period for customers, tough period for everybody. We’re receiving — we received in the fall, a lot of cost increases, we continue to receive some. So the search for value continues by customers, and we’re well positioned to do our best to do that.
Kenric Tyghe
Thank you, Eric. That’s great. If I could just switch to pharmacy for one more quick question. Flu season had a very big start, and also appears to perhaps tapered quicker than somebody expected. Could you provide an insight of just how material flu season was in quarter, and how you were thinking about the impact of this performance on sort of OTC given the tough comps going forward? Thank you.
Eric La Flèche
Yeah, thank you for the question. So the flu season, you could call it a pandemic, it’s the flu, it’s respiratory viruses, it’s continued COVID, causing a lot of cough and cold flu like symptoms, which is generating traffic to our stores, and generating OTC sales at higher than normal pace. So it was strong in Q1, same as the previous couple of quarters, and it’s continuing so far into Q2. How long that will last? I can’t predict but it was material in Q1, no question about that. Yep. I hope that answers it.
Kenric Tyghe
It does. Thank you, Eric. Congrats on the quarter. I’ll get back in queue.
Operator
Next question will be from Irene Nattel at RBC. Please go ahead.
Irene Nattel
Thanks. Good afternoon, everyone. Just looking at the income statement with the pressure on both gross margins and on SG&A, or SGMA down one house setting the other? Can you talk about to what degree that’s the result of the mix shift towards discount, and what you’re seeing just on the cost side in general, and how we should be thinking about cost pressures as we move through F’23.
François Thibault
So the gross margin declined again like we said, in the last few quarters, on the food side, we’ve seen a decline of our gross margin. It was offset by pharmacy and cosmetics, and the like — in the previous quarters. And this quarter, the food decline was a little more and we overall was not completely offset by the pharmacy performance, which was quite strong.
So the gross margin is caused by a higher cost of goods sold, that we are not passing completely to consumers at retail for competitive reasons and for market reasons. Very competitive out there. There are price points that we can’t get to or we can’t pass on on a regular shelf price and also on promotion. So that’s causing an impact on gross margin.
The higher feature penetration and all of banners discount and conventional is also impacting the gross margin. Produce this past quarter was a challenge. You’ve all read about the weather conditions in certain areas where we get supply in California and others. Very challenging very volatile markets, high prices that we can’t pass on. So gross margin in produce suffered in all of our banners discount and conventional.
And last you say the mix to discount yes, as discount sales grow faster. It’s a lower gross margin business and it also has an investment. There’s not just one thing, it’s a combination of factors. So the good news is, I think our sales performance is strong, our market share performances is very healthy. So I think our value proposition resonates with customers. And our expense control was good in the face of high inflation on the cost side, too.
So there was a bit of leverage, there were sales expenses grew at a slower rate than sales grew so the SG&A rate went down, which offset the decline in gross margin. So pleased with that, but it’s a challenging operating environment. And it takes a lot of attention and experience to the middle, that’s for sure.
Irene Nattel
Absolutely. So if we’re thinking about the magnitude, Eric of cost increases for this year, minimum wage, et cetera, should we be thinking sort of low mid-single digits on the cost side, and that’s first part. And then second part is, what’s the magnitude of the vendor price increase request that you’re getting at this point.
Eric La Flèche
I’ll start with the vendors, and François Thibault can take the cost side. So we explained and it was covered in the media that we had an effect that — we have an effective blackout from November 15 to about February 1 where we don’t accept costs increases. But that doesn’t mean that the cost increases are not there and then coming.
So over the next weeks and months, there will be more cost increases. We’re getting a significant number of cost increase demand so that we have good conversations with our vendors to, to manage it to mitigate and to control the rate of increases, because we want to protect his customers and protect the pricing at retail.
But there are increases coming. The root causes of worldwide food inflation are still there. And we’re going to have to accept some of these increases. Hopefully, we will manage to mitigate as best we can. So there’s more of that ahead. While we will remain always competitive in a very competitive marketplace.
On the cost side, François?
François Thibault
Yeah. Irene I think your low single digit, up to mid is not an unreasonable assumption. This quarter year-over-year our OpEx grew by 4.2%. So when your top-line is 8.2, then obviously, this will be met by good leverage on the high level itself. Across the board, increases in labor, maintenance, energy supplies, publicity for these are — they were all increases, but they were lower, smaller increases than top-line.
So that’s what we mean by good cost containment, but that’s going to be our job going forward is to make sure that we have visibility and that we manage those costs. And we’ll have to show the same discipline that we’ve shown in previous years because that’s an inflationary environment. This not just does not just affect the gross margin, it affects the OpEx as well.
Irene Nattel
That’s great. Thank you. And also thank you for calling out all of the donations of food donations and to the community. We all know how important that is right now. Thank you.
Eric La Flèche
Thank you.
Operator
Next question will be from Peter Sklar at BMO Capital Markets. Please go ahead.
Peter Sklar
Yeah. Hi, François. Just following up on that comment about growth rate and OpEx costs. So the 4% growth was pretty good. Is there anything coming up in 2023? Could there be a large labor contract or an unusually high number of labor contracts that are coming up that could inflate that number? Is it kind of those labor contracts, kind of — is a kind of smooth curve as they mature.
François Thibault
So there’s a lot of components that OpEx, so there’s not one big number that can make or break the year. I think it’s — there’s always labor agreements coming due for negotiations. There’s several contracts the transport supply, et cetera, that you have to renew. So, there is going to be as I said, several components that we have to keep a very close eye on and make sure that we contain the increases in line with the top-line growth. That’s nothing unusual this year versus other years.
Eric La Flèche
Labor pressures. Labor pressures remain. Quebec announced a 7% increase in the minimum wage. So that gives you an indication on the labor side, there’s pressure. We expect that to continue. But to your question, is there a one single event that’s going to make a huge difference between ’22, ’23? As François said, there’s not one single thing, but there are pressures in the system on the expense side, labor, labor is our biggest expense. So we manage as best we can. There are rate increases. We have technology, we manage productivity. We manage as best we can, but there’s clearly pressure in the system.
Peter Sklar
Okay. And a different question. Eric, from your comments, it sounded like, discount is strong, and you picked up, you felt you’ve picked up market share and discount. And I’m just wondering, and it sounds like you’ve picked up market share in both Ontario and Quebec. And I’m just wondering what you attribute that to? Did you have any particular promotions that worked well, or was there anything you could attribute to? Or is it just daily blocking and tackling and merchandizing?
Eric La Flèche
Well, it’s daily blocking, merchandizing, good merchandizing, the right product, the right week at the right price in a challenging environment, with all the inflation that everybody talks about. Good execution at store level. It’s a total package. I’m pleased with the performance. So like I said, our discount banners are growing and a little better than the competitive set in discount. So pleased with that.
Our price indices versus the market are very competitive, we monitor that very closely. We have a strong private label program. It’s resonating well, by these days, for sure. Private label sales are growing significant significantly faster than the general sale. So discount, as you know, sells more private labels as a percentage of their sales. So that’s all in there to contribute to the good performance.
Stores are in good shape. The renovation program. Every year, we renovate stores expand others, so the physical plant, if you call it is in good shape, and Super C and Food Basics, I think that helps too over time. So a bunch of factors, but good execution.
Peter Sklar
Okay. And then just lastly, question on your online business. You touched a little bit about your comments, Eric. But you had very high growth rate and online sales at a time when consumers are generally returning to store. Like what’s the larger factor that caused that huge discount? Is it because you introduced your click and collect into discount?
Eric La Flèche
The largest contributor was partnerships, expansion of the partnerships, third-party marketplaces. So we’ve added markets and banners to, to Instacart and to Cornershop in the case of Ontario. So those are the largest contributors to our online growth.
Our hub stores are pretty consistent. Click and collect is growing, but not at crazy base. So I think our multi-service model where we have our own platforms click and collect home delivery either same day or next day and the short window immediate delivery with third party partners is serving us well enabling us to capture our fair share of online sites.
Peter Sklar
And these partnerships, do they positively or negatively impact margin?
Eric La Flèche
Well, let’s just say an online sale is a lower margin sales than in store sale, let’s be clear on that. But for those customers that are expecting online service, we are there to serve them and to provide the offer is it short term or next day, we’re click and collect. So it’s a piece of the market. Not a very big piece of the market. We want our fair share. So that’s why we have the offer we have.
Peter Sklar
Okay, thank you.
Operator
[Operator Instructions] And your next question will be from Mark Petrie of CIBC. Please go ahead.
Mark Petrie
Yeah, good afternoon. Just to follow up on a couple of things. First, on the gross margin, is it fair to say that the gross margin performance in the pharmacy business was consistent in Q4 versus –or sorry, in Q1 versus Q4?
Eric La Flèche
Yes.
Mark Petrie
Okay. And I also wanted to ask about sort of how supply chains are affecting your business today. I mean, one of the dynamics over the last couple of years is, we’ve heard of low service levels for manufacturers and, then we’re reducing their skews to sort of ease some of those challenges on their side. How has that evolved? And what’s the sort of state of that today for you?
Eric La Flèche
The supply chain is better than it was it’s improving, I would say every quarter, positively. But it’s not back to a pre-pandemic levels. So there are vendor service issues to our warehouses. We are still on allocation with certain vendors and certain categories. So an evolving situation, the assortment reductions or production reductions by certain vendors.
As far as I know it’s not that much better. They’re still concentrating on their best selling items to ensure supply. So that remains. So you can still see holes in some on of our shelves, most of them are vendor related. At some point, it’s self-inflicted, for sure that sometimes. But net net that supply chain service levels from our vendors has improved, but we’re not quite where we want to be.
Mark Petrie
And does that affect sort of, the promotional tactics that those customers or those suppliers may be adopting? Or how do you sort of look at that dynamic with regards to sort of product availability affecting promotional tactics?
Eric La Flèche
Clearly, it does. Our merchandizing teams sometimes they want to advertise a certain product at a certain price. And they can’t do it because they’re not going to get supply. So when I say we’re on allocation, sometimes it means that we can’t advertise X,Y, Z product the week we want to. So it’s again, collaboration and discussions with our vendors to be able to serve our customers, but it is a factor that’s affecting merchandizing for sure.
Mark Petrie
Okay, thanks. That’s helpful. And I guess just one last one, regarding the competitive environment, appreciating that it’s always very tough and extremely competitive. I’m curious if this sort of prolonged shift to discount has led to any sort of disruption or changes in behavior in in the competitive market?
Eric La Flèche
Well, it’s extremely competitive. All banners, the conventional or discount want their fair share, and are promotionally aggressive. The regular prices are — there’s a difference. The base shelf price, there’s a difference. Promotional activity, like I said, it’s strong in both formats, by all competitors. So does it create reaction? So yes, when discounts growing more some confessional competitors can become more aggressive, which affects the whole market. So it’s a reality, that’s always been a factor. And that’s why we say we’re well positioned with both of our banners. I think we’re very competitive in pricing with our competitors. And the projects, we consistently do prove it, where our price indices are where they need to be.
And when I look at our sales performance and our market share performance, I think it’s proving that it resonates with our customers.
Mark Petrie
Yes, indeed. Okay, appreciate all the comments. All the best.
Eric La Flèche
Thank you.
Operator
‘
Next question will be from Michael Van Aelst at TD Securities. Please go ahead.
Michael Van Aelst
Hi, good afternoon. I wanted to ask first on your unit volumes. Last quarter, you indicated that you’re still seeing unit volume growth, even though inflation was higher than your same store sales. So curious if that was still the case this quarter, and how you’re explaining that gap? Like where are the biggest, one of the biggest factors explaining that gap?
Eric La Flèche
Well, our data and information or tonnage is about flat this quarter, year-over-year. You wrote about that Michael, family size private label. So the gap between the total dollar sales and the inflation that we report does not equal tonnage. It’s a little bit more complicated than that. So we look at units go through the cash. We look at cases shipped from our warehouses in all of our markets. And this quarter the tonnage was about flat. That’s what I can give you.
Michael Van Aelst
Okay, thank you. And then on the gross margin, one thing I didn’t hear you talk about was shrink. And I don’t think you’ve mentioned that in a while, I’m wondering if shrink is becoming more of an issue with prices the way it is, you hear about increasing in social media and that. I’m wondering if that’s something you can actually see.
Eric La Flèche
Well, I called out produce as a contributor to gross margin decline in all of our format and food. So the high cost and the volatility in pricing for vegetables in particular, fruits, also led to some, we try to manage the prices, the sticker shock as much as we can. We certainly can’t recoup all the increases we’re getting. So that’s causing some decline.
And there’s also sticker shock that can lead to shrink in store. So in our produce departments, for sure, shrink was a little higher. But I wouldn’t call it out as the biggest main source of all the decline. It was a contributing factor. But even more than that, the whole base pricing and promotional pricing in produce environmental the last quarter was a bigger factor than shrink, that’s the good way to put it.
Michael Van Aelst
Okay, so you’re not going to be adding RFID to the tomatoes?
Eric La Flèche
No.
Michael Van Aelst
Okay. And then finally, can you talk about the benefits you’re expecting to see from your modernized supply chain? And one, what’s the timing roughly that we can expect to start seeing that?
Eric La Flèche
Okay, so we have done, projects are up and running phase one of fresh fruits and vegetables in Toronto, and the freezer, which is fully automated and strong. So we are seeing productivity gains cases per hour. So the throughput, we’re doing more volume with less people in those warehouses, especially in the automated frozen warehouse, very happy with our performance there. We’re ahead of plan on productivity so that bodes well. So the gain and efficiency is more volume with less hours, so better productivity. So better assortment, better freshness for consumers, and more efficiency at our end.
We’re bringing in-house some of the direct to store volume that’s done by third parties. So again, that enables some savings for us treating the merchandize. So we have expenses for it, but as part of the whole thing, it’s more efficient, and less deliveries to our stores, which generates some savings at store level too. So it’s a big project, a lot of change management. But we have a very good team managing it.
It’s a lot of work. But we’re pleased with our progress. And we’re looking forward to opening Terrebonne, which is fresh meat, fish, dairy in Quebec, 600,000 square feet plus, fully automated also. And that starts up in September. So it’s going to be gradual. We’re not going to be record productivity day one, but we’re confident that we can get the same kind of results at Terrebonne that we’re getting in Toronto. So we’re pleased with it. Thank you.
Michael Van Aelst
Okay. All right. And then just final question is, in Q4, you had an 8% increase in your OpEx, but excluding the gain that you had, it was more like a 10.7% increase. And then now this quarter, your year-over-year increase was 4% yet your top-line is growing around the same pace. So can you explain the difference in that growth rate? I do believe you said something about catching up a little bit in cost last quarter, but I didn’t seem like there one time in nature. So maybe you could explain the difference in those two growth rates? And how much in Q4?
François Thibault
No, you’re right. That Q4 we call it out, it was — there was a — we had some cost increases that were higher than sales growth. Energy was one, transportation was another. Transportation is still expensive this quarter by the way. So yeah, it was a — we had a — year over year, there were higher increases with some key components that drove that deleverage, if you will. And I did say that in some of these contracts, it was a bit of a catch up with respect to inflation that was not reflected last year or the beginning of fiscal ’22.
So again, this quarter was much better. And we intend to continue to do that discipline to make sure that we can contain those thoughts as sell growth [ph] decreases, eventually when we comp higher inflation at the latter part of the year. But you’re right, we had a couple of contracts, couple of components that were higher than the normal last quarter.
Michael Van Aelst
Okay. So this Q1 growth rate, and rate as a percentage of sales is more reflective of what we should expect going forward, except for once we get Q4 and you’re lapping that high number, you should see a little bit of relief, I guess by —
François Thibault
Listen, it’s really hard to predict. We got — our job is to make sure we have visibility on a contract that come do. When we go for a pretender, we negotiate. We try to contain that those costs increases as much as possible, given the top-line. And I think that’s what we’ve demonstrated in previous years, and will continue to do this year.
Michael Van Aelst
Great, thanks very much.
Operator
[Operator Instructions] And next question will be from Chris Li at Desjardins. Please go ahead.
Chris Li
Hi, good afternoon. Eric, just maybe a follow up to your answer to Mike’s last question about the benefits from the DC modernization? I’m just curious, did we see most of those benefits being reflected in this quarter’s result. Or a majority of them seem to come.
Eric La Flèche
As a DC is again more experienced, they get better and better. So we expect every quarter are suddenly every year that the DCs that we opened one in ’21 one in ’22 will continue to improve. So I think there’s more ahead of us. And the Project and Quebec gradually will ramp up and we’re confident we’ll deliver efficiencies as it matures. And then we go back to Toronto with phase two of Fresh, which will be more automated.
So we’re looking for gains, efficiency gains over there, too. So I wouldn’t say it all. We’ve all captured it, I think we will continue to improve gradually and reach our objectives. So these are long term projects. A lot of work. Not easy to — not easy to start a new DC with new technology, new warehouse systems, new everything. New ways of doing things with the team has done a good job. Always hard at first, but it will serve us well. I’m confident of that.
Chris Li
Okay, that’s helpful. Thanks for that. And I think you mentioned that the AGM this morning that like last year, you will see something like 27,000 price increases with an average ask of more than 10%. I know you you’re continuing to get price increases this year. Just curious, what is the average ask in terms of price increase this year? Is it more in line with the historical average?
Eric La Flèche
I don’t have a precise number for you. The discussions are ongoing. We’re trying to manage these cost increases as best we can to make them progressive and over time. So we have conversations with our vendors as we speak and some prices increase have been accepted and will start to materialize at retail in the coming weeks.
Rather not say a an average percentage, there’s still, like I said the root causes worldwide food inflation are still present, for the most part, and some of our vendors are living through that and their costs are going up and they’re looking for increases. So mid to high single digits and double digit, it really depends by category by commodity. So I don’t want to make a general statement here that there’s inflationary pressures are persisting.
Chris Li
Okay. And is it fair to assume just maybe quick on gross margin that, most of the gross margin pressure that you saw in Q1? Is it fair to assume that they will continue in the foreseeable future? And I know you don’t give guidance, but rationally speaking, is the 30 basis point decline in Q1, is that a reasonable boundary for Q2, or do we expect that to improve or accelerate in the foreseeable future?
Eric La Flèche
Chris, it’s hard to predict a precise number. We have to be competitive and we want to protect our market? But we’ve said all along, we’ve been saying these inflationary pressures, put pressure on margin, there’s no question about it. And every quarter in fiscal 2022, our gross margin food was slightly down year-over-year made up by pharmacy.
So nothing new this quarter, it was just a little more pronounced perhaps in previous quarters. So if inflation pressures persist, it does put pressure on margin. But I think the team is doing a good job both in terms of growing as a horse, the dollar the margin as opposed to certain percentage, and making sure that we contain costs. So overall, when you look at the EBITDA performance, I think we’re very pleased with that.
Chris Li
Okay, that’s helpful. And maybe the last one for me just on prescription drugs. As the industry approaches the end of the five year agreement between the government and the generic drug manufacturers in March, are you hearing any update from the government or what your expectations? Will you get a new agreement by then? Just any update on that front? Thank you.
Eric La Flèche
So as far as we know, discussions are ongoing. And there’s no decision made. So negotiations between the manufacturers and the governments, the association of provinces or the federal for the ethical drugs, discussions are ongoing. The price reductions that have been mentioned, are not, we’re not there yet. We’re trying to make everybody understand that the distribution model of drugs is based on the price.
So in these inflationary times where costs are going up for everybody, manufacturers, distributors, it’s very hard with the distribution economics to say that a price reduction can happen just like that would have an impact on inventories, it would have an impact on service level.
So discussions are ongoing, negotiations are ongoing. And hopefully, we’ll come to a solution where price reductions are negotiated, that they will be offset somehow for distribution would have to be.
Chris Li
Okay, great, thanks. It was very helpful and all the best.
Eric La Flèche
Thank you.
Operator
Thank you. And at this time, we have no other questions registered. Please proceed with closing remarks. Thank you,
Sharon Kadoche
Thank you. And we will speak again soon to discuss our second quarter results on April 19. Thank you.
Operator
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
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