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Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Metro Inc. 2018 Third Quarter Results Conference Call. [Operator Instructions] Mr. Sbrugnera, you may begin your conference.
Thank you, Simon. Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our third quarter, which ended July 7, 2018.Joining 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'll present our third quarter results and comment on its highlights. We'll then be happy to take your questions.Before we begin, I would like to remind you that we will use, in today's discussions, different statements that could be construed as forward-looking information. In general, any statement which does not constitute historical fact may be deemed as a forward-looking statement. Expressions such as expect, intend or confident that, will, and other similar expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industry, the general economy and our annual budget, as well as our 2017-2018 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. A description of the risks which could have an impact on these statements could be found under the risk management section of our 2017 annual report.We believe these statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking information except required by applicable law.I would now like to turn the conference to François.
Thanks, Roberto, and good morning, everyone.The acquisition of the Jean Coutu Group was completed on May 11, 2018. And therefore, the Jean Coutu results have been consolidated with Metro's results for a little over 8 weeks. For this quarter and the following 3 quarters, we will be providing Jean Coutu sales and EBITDA figures in order to explain variances in our results. We made several adjustments to our earnings for the third quarter, all related to the Jean Coutu acquisition, the biggest one being transaction expenses. Please refer to the tables provided in the press release and the interim report for all the details.So total sales for the third quarter totaled $4.6 billion versus $4.1 billion last year, an increase of 13.8%. Excluding $467 million of sales from Jean Coutu, sales would have been up 2.4%. Food same-store sales were up 2%, and our food basket experienced inflation of approximately 0.5%.Pharmacy same-store sales were up 1.8%. That's 0.4% for prescription drugs and 3.8% for front-store sales. The number of prescriptions grew by 2.4% year-over-year. These pharmacy same-store sale figures represent the weighted average of Jean Coutu and Brunet results.Gross margins stood at 19.4% of sales in the third quarter compared to 19.5% last year. The slight decrease is attributable mainly to the inclusion of Jean Coutu. Operating expenses as a percentage of sales came in at 12.5% versus 12.1% last year but when adjusted for the $25.1 million in expenses related to the Jean Coutu transaction, the ratio stands at 11.9% of sales. The lower SG&A ratio is due in part to the inclusion of Jean Coutu, which is partially offset by increases in operating expenses, mainly minimum wage and transportation costs.Adjusted EBITDA stood at $345.4 million. That's up $43.9 million or 14.6% and represented 7.4% of sales. Excluding Jean Coutu's contribution of $48.5 million, adjusted EBITDA would have been $296.9 million, down $4.6 million year-over-year or negative 1.5%.When we take into account the negative impact of declining generic drug prices in our McMahon division and a small real estate gain last year, the performance of our food business was essentially flat, which is quite satisfactory considering the absorption of about $50 million of higher expenses due to the increase in minimum wage in addition to rising transportation costs.The income tax expense for the quarter was $48.6 million, representing an effective tax rate of 22.5% compared with last year's effective tax rate of 24.9%. The reduced tax rate is a result of a $9.2 million tax gain realized in connection with the disposal of the majority of our shares of Couche-Tard. We removed this gain in the calculation of adjusted net earnings. And net earnings for the quarter were $167.5 million versus $183 million last year, and earnings per share were $0.69 for the quarter versus $0.78 last year.Adjusted net earnings were $183.4 million versus $165.1 million last year, and adjusted net earnings per share was $0.75 versus $0.70 last year. That's up 11.1% and 7.1% respectively. Our deleveraging plan is progressing very well. In the roughly 3 months since the acquisition of Jean Coutu, we have reimbursed $750 million of debt, $550 million in the third quarter and $200 million after. Our adjusted debt to EBITDA ratio now stands at 2.65, and we are ahead of our publicly disclosed schedule of 2 years to achieve our target leverage ratio of 2.5. We therefore, expect to resume our share buyback program sometime in fiscal 2019.That's it from me. I will now turn it over to Eric.
Thank you, François, and good morning, everyone.On May 11, we closed the acquisition of the Jean Coutu Group, which marked an important milestone for Metro, creating a new retail leader in food, pharmacy, health and wellness. We are excited about the future growth opportunities resulting from a stronger, more diversified retail platform that will enable us to better serve the everyday needs of our customers. Together, Metro and Jean Coutu are present in almost every community in Quebec, bringing us ever closer to our customers.Turning to our third quarter results. We had a good quarter overall, as we achieved some strong same-store sales growth despite low inflation and a very competitive environment. We experienced an increase in traffic, average basket and tonnage. Our internal food basket inflation was 0.5%, a bit lower than our previous quarter but slightly higher than the CPI average. Our teams did a great job to mitigate the impact of increasing operating expenses, mainly minimum-wage and higher transportation costs.After 3 quarters, CapEx totaled $200 million, as we opened 5 new stores, expanded, renovated or remodeled 20 stores and closed 4 stores for a net increase of 0.3% or 51,000 square feet. Investments in our retail network are skewed more towards renovations, and customer response is very positive. Moving on to pharmacy. Our strategy following the acquisition is to maintain our 2 banners, Jean Coutu and Brunet, both supported by a strong pharmacy division with state-of-the-art facilities, systems and a first-rate management team.We are confident in our ability to achieve our synergy target of $75 million in 3 years, focusing on 3 main categories: procurement, SG&A and distribution. We will begin to report on our progress starting next quarter.On the e-commerce front, we recently launched same-day delivery as our e-commerce offer continues to evolve and adapt to our customers' demands. We are still planning to offer an e-commerce service in Ontario in fiscal '19 starting in the GTA. To conclude, we had a good quarter overall with a bit more noise than usual. Going forward, we expect the competitive environment to remain highly promotional with continued pressure on our labor and transportation costs. Recently announced tariffs are an additional headwind facing our industry, and we will do everything to mitigate their impact in our ongoing negotiations with our suppliers. That said, we expect to see some retail price inflation as a result of all those cost pressures.Finally in the coming quarters, we will continue to execute our business plan and focus on the Jean Coutu Group integration, and we are confident to grow our business and create value for our shareholders.That's it for us, and we'll be happy to take your questions.
[Operator Instructions] And your first question comes from the line of Irene Nattel with RBC Capital Markets.
I was wondering if you could start by just providing us sort of an update. You've owned PJC now for -- June, July -- for 3 months, 3 months and 4 days. Just wondering, if you could really just provide some update on your thinking, how the early stages of the integration are going? Certainly, I know that it was very well planned. So how quickly you got out of the gate in terms of execution and really any color you can provide?
So generally, things are going very well. We're very happy with the combination and the potential it offers us, as I said in my opening remarks. We had some time, as you know, to plan the postacquisition. So we had lot of work streams planned that kicked in after May 11. So there's a lot of work going on in all the aspects of the business: people, systems, cost of goods, marketing, et cetera, et cetera. So there's a lot going on, and it's working well. It's going to take some time. It's still early days. But as I said, the key point, I think, for the investor community is that we are confident in out $75 million target on synergies. And we're working on a bunch of things to make it happen. So just to give you an example, private label will start to be introduced across banners sometime late summer, early fall. So we'll be selling [ F&L ], the good HABA brand that Coutu owns in our Brunet stores, in our -- some of our Metro stores. Brands with some of our food products on private label will be -- start to introduced at Jean Coutu. So I would say things are going very well. People are getting along. There's a good fit. And so we're very confident.
That's great, thanks. And just one other question if I may, focusing on the food, really nice uptick in same-store sales. I think this is the best print you've had since early calendar 2017. Wondering what you're seeing out there. Everyone's talking about competitive intensity. Have you managed to step it up that way and whether you think it's sustainable at this point?
Well, we hope it's sustainable. We had a strong quarter in a very competitive environment. I think our merchandisers did a very good job in all of our businesses and banners to get to this number. Though we don't want to give you banners but conditional, as I said on the previous call, is seeing a bit stronger growth than discount in this strong economy. We're well positioned with our Metro banner in both provinces. I think the CapEx that we've invested steadily over the last few years is resonating well with customers, and we're seeing nice lift in some of those stores. So it's a mix of several factors that's driving the top line. It is very competitive. It is very promotional. So I think our guys did a great job to maintain gross margin given the pressure on cost of goods, pressure on transportation, which goes into cost of goods for some of the products. So all in all, I think a very good performance.
Your next question comes from the line of Kenric Tyghe with Raymond James.
Eric, could you help us better understand how we should think about the potential tariff impact? And essentially, are tariff-driven price increases just as hard to take as price increases in the rest of the basket? Or are they a little easier to pass through? Any color you could share on that will be great.
So we're starting to get demands from some suppliers who -- whose products will be -- are affected by the new tariffs. So as with any demands to increase our cost, we negotiate and we assess what's the origin. So if it's legitimate and if it's industry-wide, sometimes we won't have any choice, and we will have to accept. The few -- a few cost increases have been accepted already but very minor. But negotiations are ongoing. So we will make sure our cost of goods are competitive, that -- and our prices at retail are competitive. So I would say that it's something that's out of the control of our suppliers and that they're coming to us, and we expect that there will be some cost increases that we will have to take and that the market will have to take. And as I said earlier, we expect that, that should be reflected at retail. But again, we'll just have to wait to see. We will always remain competitive at retail, and we will take, as we say, the margin that the market will give us. So we're following it closely, and we will be competitive.
Great. And if I could just quickly switch gears to the e-commerce and specifically e-commerce in Ontario. Is there a material step-up in spend needed to support that launch? Or is this more about getting the right pieces in place ahead of that launch? How should we think about your e-commerce capability in Ontario in 2019 and getting there?
Well, for sure, there is going to be some investment to start e-commerce in Ontario. There's CapEx. There's operating expenses. There's going to be a marketing expense. So for sure, it's going to be an investment next year in fiscal '19 for us. We're going to go through the budgets with our Ontario division very soon, and I will get the numbers. But yes, for sure, there's some investment. I won't give you a precise number. In the general scheme of things of Metro Inc., it's not that material, but it's not insignificant, if I can leave it at that. But just to say, the platform we have -- so we're leveraging the investment we've made already in Quebec. Same platform. Same system. Same technology. So we have tested and learned over the past couple of years. So we're starting from a better place in Ontario, but there will be some investment.
Your next question comes from the line of Mark Petrie with CIBC.
So I guess I just wanted to come back to this whole sort of balance of prices and cost in the grocery business specifically today. And you highlighted, Eric, the competitive environment but also the significant inflation that you've seen on labor costs and transportation and tariff. So I guess with the expectation of inflation accelerating at -- on some basis in the next couple quarters, is that driven predominantly by the tariff impact in your view? Or is it kind of a settling out of the market after the pressures of minimum wage earlier in the year?
Well, we've said for the past few quarters that the headwinds facing our industry at some point would likely be reflected at retail, all the while being competitive. So minimum wage started January 1. It was, I think, likely to happen at some point, so we have yet to see big cost increases. Inflation was very low in the third quarter, but we expect that the cumulative effect of all these cost pressures could -- should start to be reflected at retail. We're starting -- just starting to see some minor price increases. Nothing major. But we'll just monitor it. And as I said earlier, we will be sure to be competitive in all of our formats.
And just with regards to that, appreciating that the business models are somewhat different. Across formats, do you any difference in how this would affect conventional versus discount?
Not really. No, can't give you more details than that.
Okay, and then I guess just with regards to the sort of relationship with suppliers at this point. Obviously, as you noted, some are specifically hit by the tariffs, but they're all under pressure as a result of inflation in their business. And what's the sort of puts and takes there? And can you just, sort of summarize the relationship there versus maybe a year ago? And I guess what I'm sort of wondering is does it affect your expectations around the purchasing synergies component of your $75 million target at all?
Well, just on tariffs specifically, it's one more factor that's part of the cost increase demands that happen in normal course of business. So negotiations with our suppliers happen every day in the business. Always have. Always will. So it's part of life. The fact that tariffs have been added to it makes the discussion more pressing for some of them. Again, as I said earlier to the previous question, we will deal with it supplier by supplier, category by category to make sure that we have competitive and fair costs and that our retail prices remain competitive. How does that -- does that affect the synergy work that we're doing with suppliers? I think those are 2 different buckets. We're not talking about tariffs in the same discussion as we're talking about cost comparisons between Coutu and Metro with our different suppliers, so those are 2 discussions.
Your next question comes from the line of Jim Durran with Barclays.
Yes, just want to go back to e-commerce. Can you give us some idea as to how that business is performing at this juncture and how your business might skew between click-and-collect versus home delivery? And are you getting to a point where the earnings compression -- the margin compression is becoming less onerous?
I'm not sure. I get your margin compression point there. I'll just say that the e-commerce business in Quebec is growing nicely. It started from a 0 base, and I think we're seeing nice growth. There is customer demand. As I said before, it is skewed largely to home delivery versus click-and-collect. We offer both. We have 7 stores doing the e-commerce service. So we pick in store and offer home delivery to about 60% of the population in Quebec. So there is a nice uptick in sales. It remains small in the general scheme of things, but it's growing nicely. It remains a strong, healthy basket. That hasn't changed. So we're pleased with the performance. We're improving our store operations model when we pick in store. We're improving our delivery cost situation. So we had 3 stores doing it last year. We have 7 now, happy with the progress and looking forward to coming into Ontario with this offer, similar strategy, pick in store, hub and spoke, and home delivery will be our main focus.
So is your e-commerce profitability less than your 4-wall profitability would be on a similar transaction?
Well, if you account for all the costs involved, yes, it's less profitable for sure. The backup, the...
Technology.
The technology investment, the office set up to support e-commerce. At store level, per se, on a variable basis, it's a comparable business. It's the investment behind it that needs to be absorbed, and with the beginning or the early days of this business, we're investing, so...
And you mentioned that, at this point, it's still a small business. So I assume that with respect to your 2% comp store sales number that it wasn't really a material contributor to that lift?
No. But it did contribute to the Metro Quebec performance marginally, but it did -- it didn't -- it did contribute to that banner's positive same store. But for the total business, it's not that material, right.
On the Coutu business, the script growth number, a little bit weaker than sort of the 12-month trend. Is there anything specific going on in pharmacy within Quebec that would suggest that script growth is going to be more in the 3% range over the next while?
I think their current rate, the leveling offer, the moderation in the growth rate is similar to what's happening in the market. The Quebec market had high script count growth the last couple of years due to these compliance packages, the pillboxes that increased the count of prescriptions to higher numbers last couple years. So that has taken effect. So we're cycling that, so we're expecting more normal 2% to 3% volume growth going forward.
And on the Pro Doc side of the equation, like, is it your intention to continue to operate Pro Doc as a stand-alone business? Or have you got any changes that you would expect to implement over the next 12 months?
So the answer is yes. It's business as usual for Pro Doc. And Pro Doc will begin to offer the generic drugs to the Brunet franchisees, and hopefully, that will work. Franchisees will make their own decisions when they're live with generic drugs, but Pro Doc is a very nice business, very high service level, full assortment. So serving the Coutu franchisees really well, and we hope that they will service Brunet franchisees going forward, but we'll have to wait and see.
Your next question comes from the line of Peter Sklar with BMO Capital Markets.
As a result of the e-commerce effort that you have up and running now in Quebec, you would be collecting quite a bit of data on the customers who are involved in e-commerce with you in Quebec. And I'm just wondering what you're doing with all that data? Are you able to integrate it with metro&moi data so that you know which -- like able to match up the customer and able to utilize that in terms of targeted marketing, promotions, category strategies, et cetera.
Absolutely, the e-commerce customers, not perhaps 100% but a substantial majority of them are metro&moi cardholders, so we had data of their purchases prior. We have data of their purchases today. We see the evolution. We're getting a bigger basket from our -- form those customers, so that's a positive. And of course with all those data similar to what we do with metro&moi for all metro&moi members, we do offer targeted offers and merchandising. So yes, that's clearly part of the strategy with e-com is to be more effective in the merchandising and to serve our customers better. That means getting the products that they want so we're seeing more of their purchases -- as I said, getting bigger basket from a lot of these metro&moi customers, which is good.
And then some retailers sell their data to their vendors or suppliers. I'm just wondering, does Metro participate in these programs. And does this give you a greater opportunity to market your data?
Well, we have a relationship, as you know, with dunnhumby, and dunnhumby interacts with our supplier community with all the data that we have from the metro&moi and AIR MILES programs. So yes, we do offer services for a fee to certain suppliers, so that includes e-commerce data. So yes, that's part of it.
Your next question comes from the line of Vishal Shreedhar with National Bank.
Just on -- I just wanted some simple segmentation questions here. So Brunet was taken out, and that's now reported in the Rx business. Is that right?
Well, Brunet is a part of -- it's a franchise business, so the stores are franchised. The wholesaling business McMahon is now part of Jean Coutu, which is our pharma division. So the pharmacy numbers that we reported today in terms of sales are just Jean Coutu. We're trying to explain the difference between Metro this year versus Metro last year. So the sales number and the EBITDA number we provided, that François provided early on are just Coutu. The same-store sales -- pharmacy sales that we provided, those are weighted average brunet and Coutu.
Retail.
The retail part, not the wholesale, the franchising part.
Okay. So the Metro comp previously, did that -- last year, did that include Brunet? And this year, is it like-for-like?
No. No. The food -- the comps that Metro has always provided have only been food. We have never provided pharmacy comps. We just started with the Coutu acquisition because it's a larger part of our business, and Coutu obviously provided that information before. So we will maintain that disclosure. At retail, we will provide same-store sales front end and commercial -- front end and the Rx drugs.
And just on your comments about conventional gaining a little bit of strength here versus discount. I guess you might have hinted at this last quarter as well, and it marks a reversal of trend that we -- seemingly over the last few years. Are you seeing this in Quebec and Ontario, and any...
I don't provide -- we don't provide provincial or market data, banner data. I -- my comment will be limited to saying that the conventional business for us is growing a little stronger than our discount business. But I won't talk about the general market, and I'll let you do your homework.
Okay. And on the inflation, I'm not sure if you're able to provide color on that, but you implied that you are seeing a little bit of inflation in the market. Did you see through the quarter inflation improve as well? And any color there because one of your peers had made similar comments to you about inflation getting better as we go through the year.
Well, maybe coming out of the quarter and starting Q4 was, I said, we're seeing slight increases on certain items, not anything material. So we'll just have to wait and see. But -- so yes, we expect but we don't know that inflation would accelerate at retail a little bit. And I think it will remain very competitive, so -- and we will be there..
And I might have missed this, Eric, but did you help us with synergies recorded in the quarter just for our modeling purposes?
No, we have not reported any synergies in Q3. We said that we would start to report on synergies in Q4.
Your next question comes from the line of Patricia Baker with Scotiabank.
Yes. Just a quick follow-up on e-commerce because most of my questions have been answered. You referenced the fact that you're going to be able to leverage the Quebec experience when you launch in Ontario, and you noted that you've -- or have been -- with the Quebec experience, you've tested and learned through the process. Is there anything you could share with us, Eric, in terms of what the key learning might have been over the course of the -- your e-commerce in Quebec.
Well, for competitive reasons, I think I will be quiet on that, but it's -- I am talking about store processes, scheduling. It's really minute details of the operations of an e-commerce business. It's complex, and we did learn, of course, in our first year in Quebec. So we start from a better place in Ontario. The model will be essentially the same, but processes and systems are just going to be a little better, and we expect them to continue to improve. Delivery costs are challenging in home delivery. Again, we've made progress, and we're looking for more progress, so just have to wait and see.
Fair enough. So would I be correct if I paraphrased what you said there, processes and -- et cetera, that basically what you've done is you've gotten better?
We have. And -- anyways, I thought I said that. Yes, we have improved. We improved our operations. We're improving our -- the cost of delivering that e-commerce offer, but again, we expect more. And as we scale up, we expect that it will do better.
Your next question comes from the line of Keith Howlett with Desjardins Securities.
Yes, I had a couple of questions just on the number presentation. The in-store pharmacies in Ontario get included in the food comp or in the drugstore comp?
They're not included in our food comps, and they're not included in the drug retail comps that we just published. So they're not reported. That's the honest answer. Part of our Ontario sales -- it's part of our Ontario sales, but they're not in our food comp number that we disclose.
And then just in terms of the accounting, the customer relationships I think were valued at 1 -- just a bit over $1 billion. Is that going to be adjusted for each quarter in the adjusted EPS?
The amortization of that intangible, yes, it's going to be adjusted every quarter.
And is that a straight line, I presume?
Yes. It's a straight line over 27 years. But just a key, this should be precise. This purchase price allocation is a preliminary figure. We have a year that we can make adjustments, but so far, this is where we've landed at.
Great. And then just a question on the metro&moi. Jean Coutu uses AIR MILES, and you use metro&moi in Quebec. Do you have any view as to what you'll do going forward?
That's obviously something we're going to be looking at, at some point. It's not priority #1. We have a lot on our plates systems-wise and business-wise before we get to that. Right now, AIR MILES is a partner with Coutu, and I expect that to remain for some time, and we'll evaluate it going forward. We have no announcement to make on that.
And then just on the online of Brunet and Jean Coutu -- I know Jean Coutu has some refill your prescription and things online. Can you just speak to the -- where those 2 businesses are at online and where you might be going with online in the pharmacy sector?
So yes, both Brunet and Coutu offer prescription renewal on their -- I'd say the lab systems that they -- that the both banners have, so that continues. Jean Coutu has a small online business that goes direct to consumer, very small business. Again, our focus is more on the food e-com for now, and we'll keep you posted on the developments in pharmacy, but we don't have anything really to report there.
Your next question comes from the line of Michael Van Aelst with TD Securities.
Yes, I just wanted to go back on to the e-commerce for a bit. So you're doing -- you're targeting or you have access to 60% of Quebec population out of those 7 stores with your home delivery. Would it -- as far as click-and-collect is concerned, what percentage of the population would you be able to go with?
Theoretically the same, but click-and-collect draws from a smaller radius than home delivery. So what we've seen is more home delivery than click-and-collect. There are some customers, very close to the stores, who would drive by these stores that will pick up. But more of our business is on home delivery, so -- because we can deliver to a wider area, 1 hour or 1.5 hour out or something like that, whereas, click and like pickup tends to draw from closer than normal.
And as -- are you only allowing for pickup at those 7 stores? Or do you deliver to other stores?
For now, yes. Stay tuned. We're always working, and it could evolve to more pickup click-and-collect locations. Work in progress, so stay tuned. For now, yes, it's only those 7.
And as you've added on the same-day delivery option, can you talk a little bit about how the customer's reacting to that? Are you seeing a lot of interest in the same-day delivery versus 1- or 2- or 3-day deliveries?
I don't have a precise number for competitive reasons to give you, but it's a nice complement. It's something that some customers want. Same-day delivery tends to be a smaller basket, but it's -- for us, it fills some of these windows we have for picking and for delivering, so makes sense economically for us, and it's -- makes customers happy. So it's a win-win. So again, just started, early days, but it's something -- that's promising. We'll just have to measure this and monitor as we...
Is same-day delivery more expensive given that -- I'd assume it must alter your delivery efficiencies to a degree since you have to -- you don't have as much option to put together a bunch of multiple deliveries along the same route?
We are currently offering the same economics for the same-day delivery. I'm not 100% sure of that, Michael. I'm sorry if the tariff -- or the fee that we charge for picking and delivering, I think it's the same, but I could get back to you on that.
Your next question comes from the line of Chris Li with Macquarie.
Eric, did I hear you correctly that food gross margin was largely stable in the quarter?
Yes, on an adjusted basis, Metro food was basically flat on the gross margin. And that's with pressure on cost. Some of the minimum wage impact is dealt in cost of goods, transportation costs from trailers from the U.S., obviously, is felt in cost of goods, but with all of that and a very competitive retail environment, highly promotional, we maintain gross margin. So we consider that to be pretty good.
That's helpful. I guess that would imply -- with your EBITDA margin down about 30 basis point, that would imply most of that -- it came -- come from your SG&A expenses, and if the view that when you do get some inflation back into the system, I guess that SG&A deleverage will start to improve or hopefully improve in the back half of the year. Is that how you look at the business?
That's it, Chris. That's right.
Okay. And then just on Pro Doc, when Jean Coutu was still public, we saw their EBITDA was under pressure from drug reforms. And now that we -- a lot of the drug reform impact is already in the business, can you share with us, are you seeing a bit of a stabilization in that Pro Doc business? Or is that actually improving now that there's lapping some of drug reforms? Or maybe just give us a sense of how that business is going overall from a profitability standpoint?
So it's not what it used to be, and we won't segregate the Pro Doc as Coutu did before, but it's stabilizing, and it's performing to our expectations.
Okay. And Eric, can you just remind us again what the company's intention with respect to the cannabis over the marijuana market? Is there something that you would like to pursue if the opportunity presents itself?
Well, if the governments let us know what the rules of the game will be for medicinal cannabis, which we don't know. As far as we know, pharmacies are -- have not been permitted to sell medicinal cannabis for now. If that is authorized, we expect that we will participate in that. On the recreational side, as you know in Quebec, it's a subsidiary of the SAQ, the liquor commission in Quebec. So for Ontario now, the government has announced changes to go private sector for recreational. So that's not been on our radar. I guess we'll have to look at that, but it's not our priority for now.
Okay. And then I guess my last question on the share buyback. Is it the right way to think about is that once the company reaches the 2.5x leverage target, then you'll start to do the buyback? And we can assume that most of your free cash flow from then on will be used mainly for capital return purposes that you'll keep your leverage at 2.5x eventually.
That's right, Chris. It's not a perfect science, but this is the long-run target that we've announced, and so, just like we did before the acquisition, we will maintain that leverage around that level, and we will return cash to shareholder through a combination of dividends and buybacks.But given how much CapEx we have to put in the business, that's how we start with the capital allocation, and then whatever excess cash is left, typically, has been returned through buybacks.
[Operator Instructions] Your next question comes from the line of Mark Petrie with CIBC. And there are no further questions at this time. I would turn the call back over to our presenters. Actually wait, we do have one more question, and it's from the line of Keith Howlett with Desjardins Securities.
Yes, I had a question on the e-commerce business. Are you looking at -- or maybe you're already offering subscription services, sort of automatic refill of household paper or cleaning products, that sort of thing?
We do not offer that service. It's something that's -- that our e-commerce team is looking at, and we will decide, I guess, soon what we're going to be doing, but we don't have that right now.
And in terms of the Ontario market, I wonder if you could comment on what the impact of selling beer in your stores has been to-date?
Well, we -- it has contributed to our same-store sales growth and to our sales. We have -- I don't have the exact number of licenses in front of me, but yes, it's been positive in certain locations. We're very happy with those results, so it brings traffic. It increase the basket. So we're happy to sell bear. We'd like to sell more. So hopefully the government will let us sell more beer in more stores and more wine in more stores because we're in a great position to do that.
And then just one last question on the capital budget. Can you speak specifically to the plans for Jean Coutu network in terms of store openings or renovations?
There won't be many store openings in the next year as we look at our combined network of Brunet and Cotou and looking to optimize that. So at least for the first year, we don't expect store -- new-store openings. The renovation program, franchisees renovate their stores on an ongoing basis so that will be normal course. And the CapEx for the company or for the Cotou business, I guess, will be similar to previous years.
Excluding warehouse [indiscernible]
They've invested in a new warehouse, so that's done and behind them. So the CapEx is -- it's a low CapEx model, and we -- we will -- we expect that to continue.
And there are no further questions at this time. I turn the call back over to the presenters.
Yes, so thanks to everyone who joined us today. Our next conference call will be held on November 21 for the fourth quarter results. Okay. Thank you.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.