Empire Company Limited

Adam Sheparski - Senior Vice President, Finance Michael Medline - President and CEO Mike Vels - Chief Financial Officer Clinton Keay - Executive Vice President, Technology Lyne Castonguay - Executive Vice President, Merchandising Jason Potter - Executive Vice President, Operations Pierre St-Laurent - Executive Vice President, Québec

Peter Sklar - BMO Capital Markets Michael Van Aelst - TD Securities Jim Durran - Barclays Vishal Shreedhar - National Bank Mark Petrie - CIBC Keith Howlett - Desjardins Securities Patricia Baker - Scotiabank

Thank you, Lisa. Hello and thank you for joining us.

Our comments today will focus primarily on the financial results of our fourth quarter ended May 6, 2017. Following our comments, we will then be open to your questions.

This call is being recorded in live audio on our website at www.empireco.ca. Joining me on the call this morning are Michael Medline, President and Chief Executive Officer; Mike Vels, Chief Financial Officer; Clinton Keay, Executive Vice President, Technology and Lead of the Transformation Management Office; Lyne Castonguay, Executive Vice President, Merchandising; Jason Potter, Executive Vice President, Operations; and Pierre St-Laurent, Executive Vice President, Québec.

Today’s discussions include forward‐looking statements. We want to caution you that such statements are based on management’s assumptions and beliefs.

These forward‐looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. I refer you to our news release and MD&A for more information on these assumptions and factors.

I will now turn the call over to Michael Medline, who will discuss operations. Mike Vels will then provide a review of Empire’s financial results.

Thanks, Adam. Good morning, everyone.

I’ve got to say, even though our results are not close to where they will be, I was pleased with the progress we have made in the quarter and what the team is beginning to accomplish. These are exciting times at Sobeys.

We are running the business, while transforming it and we will spend some time on this call talking about both. I’ll talk generally about our results, including working capital and CapEx, and then I will get to our four priorities, which will include some more color on our Sunrise transformation.

First, results. Our efforts in the quarter to stabilize margins have taken root.

We were disciplined with our costs and we saw some real progress on comp store sales. I hate negative comps, but for the first time in 17 quarters we grew tonnage.

Implied deflation was actually higher than our comps, while that’s progress. And given all this and some great financial leadership by Clinton Keay, we generated free cash flow.

By managing all aspects of our working capital this quarter, we reduced our Sobeys’ bank debt to zero at year end and we still have more work to do to improve our working capital metrics. Subsequent to the year end, Sobeys’ established a new $500 million non-revolving bank facility with terms consistent with the existing bank facility.

This facility reinforces our strong and longstanding relationship with our banking syndicate and proactively addresses the medium-term notes maturing in calendar 2018. As I said on our last call, we have good underlying assets, including our stores and people and we saw a glimpse -- a glimpse of that in our fourth quarter.

But we have a long way to go. We are not out of the woods yet.

We are buckling down for the tough work and we have to win back customers who we have gravely let down particularly in Western Canada. Our number one priority right now is cost reduction, but we cannot cut ourselves to [great witness] [ph].

We must exceed our customers’ expectations and we must be innovative to win. Last quarter, I said we will put capital spending under a microscope.

The result was that we will cut capital spending back to $350 million in fiscal 2018. Half of that number is maintenance capital.

The big price for us right now is to grow sales and improve profit from our existing stores. We have clearly destroyed shareholder value in our capital spend and that has to stop.

Where we do see high return projects to spend on, we will increase CapEx going forward, but not until then. I should mention that one of the reasons we can cut back on CapEx is the excellent investments we have made over the last few years on our supply chain, notably, our distribution centers.

As at the end of fiscal 2017, we wrapped up a significant CapEx spend to put in place the best-in-class DC infrastructure across our entire business. We anticipate the operational cutover of our third automated DC in Rocky View, Alberta to be completed by the fall of 2017.

Now as promised last quarter, we are going to organize my thoughts today around our four key priorities. First, we must address our complicated organizational structure, which has created complexity and duplication.

On May 4th we launched Project Sunrise and there were three phases to Sunrise, reset our foundation, unlock our scale and move from defense to offense. I can tell you that we are right on plan since May 4th.

I am excited about the velocity with which the team is working and it is already a much easier structure to run. We are giving our best talent more responsibility.

We will tomorrow be announcing internally the next level of the organization the Vice Presidents. As we move to a less complex functionally led business, there will be a significantly smaller number of VPs by taking out levels, increasing span of control and eliminating duplicate positions.

Second, we must take a significant cost out of the business. Again on May 4th we also announced the attainable goal talking $500 million in cost out of the business.

We need these savings to be competitive. We expect the majority of these cost savings to fall to the bottomline.

As we see opportunities to reinvest in the business to drive sales with the quicker payback in areas like marketing or customer facing technology, we will do so. Our early work on these cost initiatives are progressing well.

We expect to see the very beginnings of these savings to manifest themselves in Q3. Third, we need to really ameliorate our brands, our understanding of our customers and our marketing.

Interestingly, even before we get at this, Leger, in its highly respected survey of Canadian companies, recently named Sobeys as the most admired grocer or convenient store brand in Canada. So as I have been saying, we have a strong base to build on, but we are nowhere near where we need to be on brands, customers and marketing.

We have now completed our own nationwide study of over 6,000 Canadian consumers and have analyzed this alongside our own robust internal data. We will incorporate these findings into our strategy to thrill Canadian grocery customers and allow us to compete more effectively.

Lyne, our Chief Merchant has been leading this crucial work. As well, we will be able to announce relatively shortly the appointment of our new Senior Vice President of Marketing.

Fourth, we need to fix the West, where we have been sorely letting down our customers. I am pleased with the work Jason and his team have been doing in the West.

We saw real progress in store execution and promo mix. That allowed us to improve our comps in the West, still negative, but pretty close to our comps in the rest of the country.

Jason and Lyne are focused on formulating and implementing a strategy, particularly at our Safeway banner, which will be driven from our customer research and will allow us to exploit white space in the market. And before you ask, we have not made a call on whether to expand our discount banner to the West, but I continue to be impressed by the performance of our FreshCo banner.

Although, I see some fertile ground in the West for our discount business, we don’t want to be rushed to make a decision. We have a lot of other priorities and if we do expand we won’t announce this publicly right away as we don’t want to give a heads up to our competitors.

Now just a few concluding remarks before I turn it over to Mike. As you all know the Ontario Government announced changes to the minimum wages that will come into effect in 2018 and 2019.

These changes are coming at us and all retailers rather suddenly and will obviously impact our labor costs, and frankly, the Ontario labor force in general. We don’t have a number for you at this time, but it is obviously relatively significant unplanned expense for us and it will be our job to mitigate these costs.

After five months in the job, I am bullish on our future and the opportunities we have to thrill our customers and shareholders. We have a plan and need to execute with velocity.

However, you don’t just snap your fingers and improve a company. This type of transformational change doesn’t happen in a New York minute.

We need some time to work our plan. On the bright side, I know that the top operating team, my direct reports, are all excellent retailers and excellent leaders, and they are working hard to break down the regional silos which have plagued our business.

While I am excited about the long-term potential this company, we must realize the Project Sunrise is a significant undertaking for our organization. We are fortunate to have a standard SAP platform already deployed across Sobeys.

However, we will need to make numerous process and system changes to support our new structure and our people will need time to adapt to the new processes. Look, we cannot eliminate risks, but we will manage and mitigate the key risks and I can say that our Board is taking this initiative seriously.

We have established a Board committee to oversee our progress and provide the appropriate governance you would expect from us. I want to be clear, however, very clear that Project Sunrise will not affect our stores or our distribution centers.

Finally, I can’t tell you how pleased we are to have to Mike Vels on Board as our CFO. He is one of the most accomplished CFOs in the country.

He is a strong operational CFO and he’s extremely familiar with the food industry from his time at Maple Leaf Foods and Mike also has extensive transformation skills. With that over to Mike.

Thank you, Michael. Good morning, everyone.

Before I give some color on the financial results, I’d like to say, how pleased I am to be joining Michael and the Empire team. It’s an exciting opportunity to join such an iconic brand.

Same-store sales for the quarter, excluding the impact of fuel sales decreased by 1.6% from the same period last year, which included deflation of 1.9%. Our gross margin of 24.5% was relatively flat to the same quarter last year, but 80 basis points higher than the third quarter of fiscal 2017, as a result of the focus by our teams to stabilize margins, along with the positive impact of seasonality.

Our focus will remain on keeping margins within acceptable ranges. We need to be disciplined on pricing, and although, we will ensure we will remain responsive to market pricing, we will also be focused on sustaining and strengthening our margins.

Selling and administrative expenses as a percent of sales was 23.8% in the quarter, compared to 22.5% last year and 23.1% in the third quarter of fiscal 2017. The prior year was slightly impacted by an additional week of sales and therefore slightly impacted the SG&A percentage.

I would like to make some comments on our real estate earnings for the quarter and clearly, as Michael has outlined, the main focus for us is the food business, as it’s the principal contributor to our results and our future successes. During the quarter, Crombie REIT contributed normalized quarterly earnings to Empire of $7.7 million, compared to $18.1 million in the prior year.

The prior year included a large gain on the sale of the group of properties. The Genstar Partnerships contributed $4.9 million to Empire, compared to $2.8 million last year, slightly higher than historical run rates.

These Partnerships have been very successful for Empire that are now winding down. Results from real estate can be inconstant from quarter-to-quarter and we do anticipate that the contribution from the Genstar operations will continue to decline as those partnerships wind down and the gains expected, our experience related to Crombie are not necessarily going to be consistent on a quarter-to-quarter basis.

Free cash flow generated for the quarter was $170.8 million, an increase of $90.7 million from last year, as a result of increased proceeds from real estate transactions and decreased capital expenditures. At the end of the quarter, our fund to debt to total capital ratio improved to 33.9% versus 39.5% at May 7, 2016 and cash and cash equivalents equal $207.3 million.

As Michael mentioned, subsequent to the quarter end the company finalized a $500 million delayed draw non-revolving facility for the purposes of repaying our 2018 medium-term notes. This provides the company with the flexibility and certainty regarding liquidity required to refinance these notes well in advance of their maturities.

Both Empire and Sobeys remain committed to continuing to strengthen the balance sheet and reestablishing our investment grade credit rating from continued improvement in operations and sustainable management of working capital. We previously disclosed the Project Sunrise would in addition to delivering $500 million in savings, result in the incurrence of approximately $200 million in one-time costs.

At this point, this is our best estimate of these costs and includes severance, relocation, third-party consulting and minor technology costs, with the majority attributable to severance. Substantially all of these costs are cash costs and at this point we anticipate the majority of the cost to be charged to earnings in the first half of fiscal 2018 and the impact on cash to occur in the following two quarters to three quarters as the cash is paid out.

The timing and quantum of these costs, however, will be impacted by the rate of progress in the reorganization and we expect to continue to refine these estimates as the project execution progresses. In terms of the benefits of the project, we have a clear line of sight at this point on the quantum of benefits, the teams continue to find tune their plans and targets, and at this point we continue to expect to achieve the run rate savings of $500 million by fiscal 2020.

We do anticipate benefits to begin in the first quarter, as the first elements of the reorganization are executed, with the increase benefits following in consecutive quarters. We expect to achieve these reductions by eliminating the duplication that has arisen in the regional structure, increasing the scope and span of control of our leaders throughout the organization.

For example, where previously we might have had several people purchasing goods in the same category, we will reduce doing efficient configuration, where we previously needed finance support teams in every region, we will now support functional leaders across the organization. We will now be able to execute transactional work in the standardize manner in our shared services configuration.

And in addition, we will enforce Dennis’s specifications and compliance to negotiated contracts in our indirect purchasing activities, and expect to gain benefits for more effective negotiations with vendors, who can now work with our leaders, who will be able to negotiate with the full ability to execute commitments across the country on a national basis. All the directors today announced an increase in Empire’s quarterly dividend per share from $0.1025 per share to $0.1050 per share.

This marks the 22nd consecutive year of Empire dividend increases. On a personal note, my initial assumptions regarding the potential of this opportunity that led me to join Sobeys’ organization have been confirmed in the short time I have been here, as I’ve had the opportunity to work with the new management team, dive deeply into their details of the transformation plan and meet the people with whom I’ll have the privilege to work.

I’ve found the Sobeys’ people to be excited about the new direction and leadership, and committed to doing the right things to improve the business. There is a great deal talent in the business to help execute our plans.

Of course, we need to ensure that our plans are clear, if we manage them closely and if we mitigate the risk of this sweeping change that we are introducing to the organization. I’m very confident that we can accomplish this and very excited about the possibilities and the upside.

And with that, we’ll pass the floor now for questions.

Hi. Good morning.

Good morning.

As you pointed out your tonnage doing positive during the quarter after quite a number of quarters of negative tonnage trends, so I’m just trying to get a better understanding of that turn of events, was there any particular merchandising initiatives or promotions that facilitated that tonnage, was there any particular kind of disciple that you’ve imposed upon the merchants or any other factors that you could refer to that caused this change in trends?

Yeah. Hi.

It’s Michael. Thanks for the question, Peter.

Yeah. I mean, obviously, it doesn’t have to do with a ton of things I’ve done since I’ve joined, because I’ve only joined five and a half months ago.

I do think a few things that in the West we put three of our best talents out there and they have now had the time out in the -- out there to be able to really improve our stores and the execution we’re seeing in the stores. Even since I first went out there in last October to scout the company, I’m seeing a far better discipline, better looking stores, fewer holes, better morale in the stores.

We’re also seeing from what used to be called, I guess, our Western region a better feel for how to balance sales and margins, which you got to get right and more discipline in terms of margins and how to promote and when to promote and how to understand your customers. In the rest of the country, Ontario and Atlantic we’re seeing especially in our FreshCo discount banner better results and better disciplines I would say and we’re really emphasizing margin discipline while still exciting our customers.

In Québec which is of course historically our strongest part of the country with our great IGA banner and great franchisees they just keep on clicking along. It was a bit of a tougher quarter for them as they are starting -- as they started to cycle over last year’s very aggressive mosaic price downs and promotions, and that should continue to cycle until September, where we’ll get back to more even feel, but they did a great job in terms of being able to manage through that and also control their margins.

So, it’s the team, it’s execution, it’s basic blocking and tackling until we can get to the big prizes.

Okay. And Michael, it sounds like from your comments, you are undertaking a lot of market research -- consumer research, sounds like particularly in the West, perhaps with your other banners, your Eastern banners as well to try and understand the consumer and gain some insights.

I presume once you’ve gone through the -- gone through that process, there will be some repositioning of the banners and of your brands based on what you learn from that marketing research process. Can you just talk about a little bit of the timeline as to like when these insights are going to arrive and when you’d be able to act on them in terms of implementing them through the banners?

Yeah. Thanks.

Yeah. So it was across the country, you’re right.

We had a particular emphasis on the West as you can imagine. And all of us, especially Lyne and I’ve been very involved in terms of this work.

And we’ve started the analysis, it’s very telling. I think it’s very -- I’m very enthusiastic about the opportunities that are open to us.

It’s clear to me that in every area of a country including Québec, that we can do a better job responding to what customers are looking at from us especially in terms of a conventional more -- conventional banners. I would say in terms of timing that we should be able to get to understand our brand promises and how to appeal the customers over the next four months with I think the beginnings of that to show up in calendar 2018 at the beginning.

I don’t want to overpromise, it takes a while to get that kind of work, right. I think there are areas we can go out really quickly.

The team is highly aligned and highly motivated to do so. In the meantime we got to continue to execute well, I’m still not pleased with where our brand positioning is.

And would you be prepared to let the cat out of the bag at all with respect to Safeway and any learnings you’ve had there that are not obvious, I assume, I mean, we all know what’s happened to the brand and the loss of identity, but any particular surprises with respect to the banner?

Yeah. No.

I’m not going to let of the cat out of the bag because Lord knows who are on these calls. But I would say that the -- it’s my favorite word these days, the latent strength of the Safeway brand and what it means to our Western Canadian customers is still there.

And it’s funny when I get these letters from our customers and e-mails, and they’re starting to dry up a little bit actually, which is good when I first joined. They’re the worst kind of letters, because they’re not angry and I think they’re just disappointed, because we let them, the customers in areas where we just can’t do that and that, I think, I’ve reiterated enough I don’t want to talk about the past.

I think that there is a large group of Canadians who love shopping the Safeway banner. When I’ve recently been out in the stores, I have been really impressed.

I think there is some of our best stores across our network. Problem is how much we let down our customers and when you do that kind of brand damage, it has a halo effect on almost every other measurement you looked at across your customer base.

And so, I guess, one conclusion I’ve reached then, the team are actually, not me, it’s a team working together. Is that, you can’t go back, you can’t go back and try to reinstitute every single thing you did four years ago.

I think there is -- we have to move forward from here and that there is not only a great latent brand affinity from our customers, but there are opportunities to thrill them and find the white space that they’re looking at in their markets. So this will not be overnight.

But I think this is just heavy lifting and hard work, and strong directions, and being aligned, going in the same direction. We’ve done it before, we’ll do it again and but it just won’t happen overnight.

So see some steadying out there, but that the big improvement that we’d like to see is still to come.

Okay. Thank you.

Thank you. Can you start by breaking down or giving us a little bit more color of the same-store sales ex fuel in West versus the rest of the company?

Sure. Thanks, Michael.

Good morning. Yeah.

Look at, I’m going to, if I may I’ll back up a little bit, because we didn’t split out the West. And I have to say that when I came into this job, I was not crazy about how we had been segmenting out the West results.

And the reason being is not because I don’t like transparency, which I do, I just don’t like giving our competitors that level of information and I’m highly aware that they like that kind of information. Having said that, because we had a huge deviation between the West and the rest of the country, we needed to let you know for a while there, how we’re doing in the West and how it was driving our negative results.

Starting this quarter, there is no longer a real deviation between the geographic regions that’s significant, and therefore, we didn’t feel need to disclose a specific West results and I don’t really feel a need to disclose them going forward in terms of their numerically. However, in terms of being transparent, in terms of any region I don’t mind giving you color on how the geographies are performing.

So, I mean, so I’ll give you some color, which is Atlantic and Ontario performed surprisingly well in terms of comps and tonnage, better than they’ve been performing, Québec, Québec was a little weaker as I said just in terms of sales and tonnage, better in margin, and the reason just being as that we’re cycling mosaic last year and we will be until September. And the West a big improvement especially compared to the rest of the country and came into line with the rest of the country.

It’s comps we’re just slightly worse than the national average, which is a big improvement. Not where we want to be but improvement.

Okay. And just a clarification on the cost savings, I think, you said that, we’d expect to start seeing them in Q3 fiscal 2018 and then Michael Vels said in Q1.

Is that -- what’s the difference between the two, is one calendar one fiscal?

No. I think strictly speaking, Michael, we’d expect to see some small beginnings of savings earlier, but really the bulk of the savings, oh, sorry, more meaningful savings, I guess, should start on the timing that Michael mentioned.

Okay. And then on the CapEx, is that $350 million net of assets sales?

No.

No. It’s gross.

So that’s, I mean, it seems, well, I know you’ve spent a lot on your DCs in recent years and they are state-of-the-art. But when you look at say, I am not sure you are spending the same amount of money with much smaller network, do you have any concern that that maybe you’re not going to be keeping up the pace of renovations that you need to do?

Absolutely not. We took -- one of the first things that I do want to came on Board with the team is take a look at capital spending.

Maintenance is $175 million. So you got $175 million to go.

That leaves you another $175 million to do real estate and basically systems. That given where we are today and the type of improvements we are looking to make is sufficient capital in fiscal 2018.

Just to keep up with the Joneses, we’re not going to keep spending capital at a rate and destroying shareholder value. I can see a day, where our returns are better and we see far more compelling opportunities, but the real price as I said a few minutes ago is in our stores.

The ones that we already have, in terms of getting our processes right, getting our disciplines right, running a good retailer and that doesn’t take a lot of capital. At the same time we do across our network need to look at areas too, as we get into brand and brand promise, areas in the store which we’re going to emphasize and the stores we’ll have to renovate.

And we have plenty of capital to do that in fiscal ‘18. I think generally retailers and grocers spend a lot of money in capital, I think a lot of it is not high return and until we get those disciplines and get our own practices are in place, we’re not going to spend that capital.

And what kind of square footage growth is built into that?

We’ll get back to you on the exact square footage growth. I don’t have in front of me.

Okay. And then just final question, so just wondering, how do you square off the, I guess, recognition is the most admired grocer in Canada versus the type of emails that you are getting from disappointing customers in the sales trends.

What do you think, I don’t know if you see any details in the report, but what do you think that the differences are between the two?

That’s right, yes, Michael, you’re exactly, right. I mean, I had to [inaudible].

I think a few things, one, first of all every retailer gets disappointed or sometimes angry e-mails and complaints to customer service, and you got, firstly, you got a fewer and fewer and secondly you got to deal with them better and I think the ones we’re getting, we’re dealing with very well now, I hope we are. Actually, the thing that squares it up for me and is what I talked about last quarter on the conference call, which is even though we have a long way to go, there are strengths in this company.

So I have talked about strengths in terms of our store locations. I talked about strengths in our people and our stores themselves.

But I do think that we have and we are seeing in the customer research we’ve seen, there is a feeling that Sobeys, Safeway, IGA are connected to community. There is a feeling that they’re Canadian.

There is a feeling of I like shopping and there is a -- over these 110 years, it’s a 110th anniversary this year, that there is something there that has lasted. That’s the reason though that you can disappoint people, is that they expect, they cheer for us, they don’t cheer against us, but that means you can also disappoint them.

So that’s I think it makes sense, when you think about it, but it surprises you look first.

Thank you.

Good morning. With respect to the cost savings, so if I’m understanding this right from a cash flow standpoint, we’re hoping to see about $500 million of cost savings generated.

We’re going to have $200 million of largely cash-oriented charges, right, so from a cash flow standpoint over the course of the next three years, the cash flow net benefits about $300 million. That being said from the market standpoint, operationally you are still hoping that most of the $500 million in cost savings would flow through to an improved run rate of EBITDA, is that correct?

If -- good Morning Jim. So the $200 million is one-time, as I mentioned cash cost, it’s a combination of both upfront consulting fees and severance, and the $500 million is an annualized cash saving.

Some of which may well be reinvested into existing operations. So we do anticipate a large percentage of the $500 million to flow through our margins.

But over time we see significant -- we expect to see significant opportunities to reinvest some of that in growing our topline as well. So cost reduction is important for this company.

The more important outcome of Sunrise in addition to that really is shortening our decision lines, creating more simplicity in the company, operating a large scale grocer nationally using our scale and becoming much more nimble in the marketplace and the combination of reinvesting some of those savings in the operational flexibility that we’ll gain will also have positive impact scenario in store execution, merchandising in the topline. So it is -- the total benefits by the time it gets 2020, is not just one-time cost reduction.

Thanks, Michael. That’s helpful.

So would say that personally that what’s your tonnage improvement this quarter, would you say that you feel that by region your pricing relative to the market today is where you wanted to be or do you still feel that you need to invest on a real-time basis versus where is the market going and what you might have to do in the future?

Yeah. It’s Michael.

I think we’re pretty well where we want to be in terms of our price positioning. I think some good work has been over the last year and year-and-a-half in terms of getting us back to where we needed to be.

At the same time, we’re watching the market. So, we’re not going to be [inaudible] at the same time.

I think right now we’re in a good position.

Okay. So I get two other topics I want to ask about.

First of all, the centralization of procurement, can you help us understand from your view the sodalities of centralization of the physical buying versus the centralization of merchandising strategy and how you hope to maintain sufficient regional component given the differences across the country on that to the new platform as we move forward?

So we’ll probably answer that in two stages, Jim. Michael will probably take the merchandising element.

So the primary focus on the cost saving side in the early going is our goods are not for resale. So it’s not -- it’s basically our indirect purchases, which we believe is a significant area of opportunity, because of the regionalization of the business.

We’ve had poor negotiating frankly, fractured supplier base and inadequate compliance to contracts that are negotiated. So that initial centralization of procurement around indirect is really the focus there is bringing professional procurement processes, systems and discipline to a what is a large volume of indirect goods that we buy across the country.

And we do -- and the savings from that is part of the $500 million. Separate to that is reorganization of the merchandising group and then clearly as we could become more efficient, our systems are improved.

We’ll also be able to deal more efficiently and productively with our suppliers on more of a inefficient and partnership basis. And in terms of how that impacts our merchandising and coordination, I’ll have Michael or Lyne to provide a few comments on that.

Lyne, why don’t you say few words.

Good morning. And as we’re looking in our transformation for the merchandising organization, what we are looking to do clearly is to focus on local versus the national and where we’re going to have our teams located to ensure that we maintain that balance.

Therefore in our structure we will have a good focus on a national procurement for national categories that we’ve identified and then more of a local player for our fresh -- for our more local categories. So we really is looking at, perhaps if I could segment into two local and national categories, and then what we’ve looked at is fresh versus grocery in the majority of the cases and then we’re setting our teams up for success that way where we’re basically can -- in the localities where we feel it’s more critical.

And Michael, are you in a position where you’re willing to share with everybody what you think the chunks are of the $500 million like that’s not for resale is ex percent of the $500 million versus procurement versus head count reduction?

No. We’re not at this point.

A significant amount of the early savings is clearly related to the reorganization and head count savings, but we haven’t provided a breakdown of the $500 million at this point. We need to fine tune our targets and our plans little more before we are -- we can start talking about that.

Okay. And my last question is topic of the day that these days the whole world of digital and e-com, right.

So with the hiring of a new senior exec for marketing, what is that person skills set, is it -- are they going to have a strong digital background, will they be leading a digital charge? And I’m not ignoring the fact that there is a lot of branding and positioning work to be done, but obviously with the Amazon Whole Foods announcement, the whole element of e-com and digital has become much more topical in space?

Yeah. Three things we’re looking forward in the marketing person, really strong grass for brand and how to build the brand; second, really being able to target customers and understanding data; and three, obviously my predilection is someone who gets digital, gets the new ways of communicating and he is really phenomenal of digital marketing and advertising.

And there are some great people out there we’re talking too.

And given all the things you got going on, like how do you see e-com progressing for you, obviously the markets probably going to have to step it up, just to be in a very good position when and if the Amazon Whole Foods piece becomes a well-established Canadian market?

There is no doubt that we have to be a strong participant in e-commerce, that’s click-and-collect, but it’s also home delivery. We are working out right now in terms of what our strategy is and what our timing will be, because we have a few things going on as you point out.

But you know me, there is no way we’re going to miss out on e-commerce, which is going to be so essential not in the short-term, may be not in the medium-term, but long-term for our customers and it’s all about our customers and what they want. And so we have some work to do there, but we have a good base in e-commerce.

We’ve been doing home delivery for probably longer that anybody else out of Québec and we still continue to do that. We’re ahead of everyone else.

We were out of 50s in the West. But we didn’t put a foot on the paddle.

We didn’t continue to do that. We didn’t expand it.

We didn’t take it other areas and we didn’t use it, as well as we could even in Québec. I don’t think its rocket science.

I think there is some work to be done. And but, we’ve got to do things in order.

We’ve got to get our structure, right. We’ve got to take the cost out we can afford everything else and make sure our shareholders are being rewarded.

But it’s clear. I mean you’ve got to be good at e-commerce.

Great. Thank you, Michael.

Thank you.

Hi. Thanks for taking my questions.

I guess the first one is for Mike Medline. Just in terms of the minimum wage, you said it’s your job to find the way to offset it, but the minimum wage at least Ontario will kick in before the big part of the cost savings from your initiatives start to kick in.

So I was hoping to get some granularity on how management intense to address it? And just how do you think about the impact coming to Empire given that you have franchisees and maybe some union contracts, which are already above the minimum, maybe some context on that?

Yeah. Well, we’re working through that right now.

I mean these things happen and it sometimes happen suddenly to you, and as retailers, we’re pretty very used to do on that. Let me just backup a little bit, because the total impact before mitigation is material for everyone in the retail industry in QSR.

We haven’t had a lot of time to prepare for, because it’s -- first of all, it just was -- Bill 148 was just announced. It hasn’t been passed yet.

And these things always end up getting mitigated so we are putting together our plans right now being led by Jason Potter and Simon Gagne, Head of HR and they are working through, and we are all meeting, Mike Vels and I am meeting with them. So we are considering all of our mitigation strategies, which is a long list.

And as appropriately, we’ll report more on our potential impacts going forward. I think there’s a few things going on here.

One is we got mitigated in different ways our response to Bill 148 when it’s passed. In terms of still being extremely competitive and not affecting our earnings.

And at the same time, I think actually the timing of Sunrise is actually you’re going to see again quite well from the timing of Bill 148. Having said all that, because it’s happening faster, there will be a bit of dislocation and a bit of confusion, I think, throughout the market.

But we’re putting together our plans. It’s just catching us a couple of weeks in, so it’s a little too early to give you any granularity and as always I’m a little worried about telling our competitors exactly what we’re thinking.

Okay. So in general just to market responses based on your prior experiences, is it fair to say that the industry will adjust with labor optimization and price -- maybe price increases?

Yeah. Your words, not mine.

But I think it will be response in a little lot of different ways. And these things happen.

The government has brought down normal wage. We’ll follow the rules and we’ll take cost as appropriate and we’ll go through our customers.

So the world will go on, it’s makes it a little bit more difficult, but we’ll go through it.

Okay. Great.

Thanks for that color. And just on inflation, I know it’s difficult for everyone to kind of gauge the trends, but there has been some different views from some of your peers and where inflation ends up called it in 2017.

Do you have any thoughts on where that’s headed and do you expect the continued, I guess, some continued improvement in the inflation trends?

If I knew that, I’d be less smarter than I am and I think it’s very hard for people to call these trends, especially retailers who only look at their company and across their own industry. And you know what I’m hoping, I’m hoping that deflation seizes an inflation a little bit, but not too much better, but we’re just pulling the other strategy we’re executing whatever market we find.

But I’m not in the game of prognosticating where economics are going to go, it’s not my gig.

Okay. Fair enough.

And another question that’s maybe not too fair, but you’ve implemented substantial price reduction programs pretty much across Canada and then you’re starting to see some results not only from that, but also some merchandising improvement. Have you seen your competitors starting to react to your initiatives?

Not a major win, no.

Okay. Thanks a lot.

Thank you. Thanks for the questions.

Hey. Good morning.

Hi, Mark.

I just want to come back to the feedback from the customer survey that you guys have started to work through. And when you talk about changes being implemented in sort of early 2018, but obviously refinements going on today and will continue in the stores.

Are you talking about for next year sort of a more meaningful change in store experience or marketing or promotional tactics or how should we think about that?

Yeah. Mark, it’s a great question and one that obviously I’ve experienced a few times before in previous slides.

I think that certain areas -- it’s like once you get focused in terms of what you’re trying to do and the customers you’re really trying to target and what your brand promise is and it’s sharp and it’s got a strategy behind it. Every single decision you make from then on follows that.

Sometimes and often marketing will run ahead of other aspects of it as you probably already have a story to tell that fits that. At the same time, you have to look at what products you’re emphasizing, what you stand for, what you’re doing to the community, how -- the service you’re providing in your store.

So I would expect that like I’ve seen before that the -- your focus, you suddenly will see us doing things in a consistent manner and I have no problem sharing it at some point in terms of what we’re trying to do here, but I find that telling the story and being clear about that runs ahead of some of the other changes just because you can do that more easily.

Okay. And I guess, maybe a couple of other questions sort of related to that.

You talked about sort of being satisfied with your price positioning today, but also there is going to be some proceeds from your cost savings that are reinvested back into the business. So is it fair to say that what you plan to be reinvesting back into the company is more sort of about store experience and marketing as opposed to pricing?

Yeah. That is fair.

At the same time, if we feel that we can take advantage of something and there is return on it and it will -- for pricing will do that as well, but I’d say that that you’ll see more in terms of marketing, customer facing technology and maybe a little bit in the store, but we have not finalized those plans yet, but that’s my belief.

Okay. And then, I guess, again just related to that with the expectation that the majority of the savings are going to fall to the bottomline, do you expect that to be relatively smooth through the period or do you feel like, there’s probably more investment upfront and then you’re harvesting sort of further out closer to the fiscal 2020 timeline or what’s your perspective on that?

I think, at this stage, what we said last time in the press release for third quarter is consecutive quarter-on-quarter improvement. I don’t think we’re in a position to call the exact roll out and timing of the plans.

Clearly we have pretty good visibility to our initial rollouts and reorganizational restructuring, but at this point I think we just prefer to say consecutive quarterly improvements.

Okay. Thanks.

And then, actually just one other quick follow up. The $350 million of CapEx I know you talked about it, do you think that’s the right level of spending for this business over the long-term or is that sort of where you need to be today and then reevaluate what you need to invest in stores over the longer term and in the coming years...

Yeah. It’s Michael.

Great question. I don’t think it’s sustainable over a long period of time, because we’re going to be seeing some great places where we can reinvest in the business, but it’s absolutely the place we should be today and we’ll continue to look at that every single year.

I would expect next year would be a little higher than the $350 that would be our expectation at this point, maybe not a lot as we reinvest in areas where we think we can get returns. But it is -- I think, although, I do think people spend too much capital and they can get more out of their current assets that it is probably not sustainable over a long period of time.

Okay. Helpful.

Thank you very much.

Thank you.

Okay.

Good morning, Irene.

Okay. Operator, we’ll come back to Irene, if she calls back in.

Yeah. Thank you.

Hey, Irene. All right, operator, let’s move to next question.

Yes. Thank you.

Hi, Keith.

Hi, Michael. I was just wondering on the store network, I mean the footprint of the stores that -- are you satisfied with the number of stores and the amount of square footage?

For now, we are, I think, we have more than enough coverage across the country. We have great locations like I keep saying and what we got to do is buckle down and get those stores performing.

And as I would expect if that happens in the future that we’ll be looking for more and more opportunities.

Well, there is no rationalization required at this time?

No. There is not a big rationalization required, no.

I mean, like any retailer we will be looking at the store here and there or closing a store here and there, but it’s -- it will be probably one-offs.

And just on the brand image, particularly in Western Canada where the Safeway and Sobeys store share the same flier, the same pricing on identical items as I understand it. The same private label and both have air miles, like do you think that you’ve somewhat blurred both brands?

Yeah. I think we have -- I think that we brought that customer relationship, our brand promise is very, very close together, which for almost last year on some time most of it.

So once you have the same flier, once you have the same store operating team, the same pricing. They become relatively indistinguishable from each other to the customer and that’s what we’re seeing.

And then just finally on the real estate I was wondering if there has been any change in the approach to real estate or how you are conducting your relationship with Crombie or anything on the real estate side?

Yeah. We are really fortunate to have that great Crombie REIT that we’re 40% owners of and I spent a lot of time and I know Mike Vels is going to spend a lot of time with Donnie Clow and the team over at Crombie, a great team over there.

I think there are ways that we can even work better together, and perhaps, be able to take cost out of both organizations by cooperating more and sharing resources more and information more. I think it’s a big strategic advantage for us in many ways, but especially that Crombie is so expert at developing properties and we’re expert at running grocery stores.

And I think that sometimes we can blur those two things, but that’s the real strength we have by having such a strong Crombie REIT and the company have some -- a lot of innovation in it. I mean, we were the first to, first really to go for the REIT and retail in Canada, which was really innovative at that time, and we’re very mature in terms of understanding how to work with Crombie.

So I think this is fantastic and I look forward to even working -- work closely. So, that when we do up new stores and we do, that we’ll be able to have the best locations still because -- especially because of our partnership.

Great. Thank you very much.

Thank you very much. Michael, I’ve got a couple of questions relating to your opening remarks and then some further color that you gave answer to another question.

And that’s with the new VP of Marketing that you indicated you would be hiring. It sounds like you’re pretty active in that search.

Okay.

And definitely given your predilection for what -- where you think some of the weaknesses are and what you want to do at Empire and Sobeys. It’s a very important position for you.

How soon do you think you’ll be able to sort of put the pin in that?

Well, I’m hoping soon, but I don’t want to be rushed, I want to get the best person in place. So if you wait a month or two longer, so what in the long-term, but and a bit of patience, plus I’ve got to warn the person that I’m going to drive them crazy in that role, because I’m so interested in it.

We’re getting some real interest. I mean we’ve been able to attract some great people, one of whom is in the room with me.

And we’re getting a lot of interest from marketers, I think it would surprise you guys in terms of people wanting to come and be part of the journey at Sobeys and they’re well aware that we have issues and that we’re working to solve them. But it will be as soon as we can, as long as we can find the great candidate.

Okay. Appreciate that.

And these are the kind of surprises we don’t mind, Michael.

Thank you.

And then secondly, you indicated that very, very soon your key leadership team will be picking the VPs and I assume that will put sort of -- there must be a lot of concern throughout the organization, who’s going to make it, who’s not going to make it. So once that’s determined, I think, that would be a positive.

What can you tell us to reassure us that once those people are chosen that they are going to hit the ground running and there’s not going to be a transition period as they learn their new positions?

Yeah. Well, great question.

And yeah, these are tough times, I mean we’re having a lot of fun at Sobeys. But I got to tell you making these kinds of choices and going down in numbers in terms of all levels of the company is not the fun part of the job.

There is a lot of tough conversations have to be had and some for people they’re great conversations as we give chances and more responsibility to others. And tomorrow, we’ll announce to our organization internally what our next level, Level 3, we call it, which is basically the VPs, we’ll look that and that will send a signal to the rest of the organization how we’re going to be structured, because it’s easier to tell at that level than it is at the L2 level.

We, I mean, obviously one of the biggest concerns we have and our board has and I have is, being able to run the company while we’re going through so much transformation. And I’ve never seen the plan has detailed as there sort of thoughtful of this in terms of being able to do that.

At the same time, I expect whatsoever we’re going to have little hiccups here and there, because this is a lot of transformation, while you’re running a big company. I can tell you that my reports are interesting people work so hard, which is good, and they are trying to do a lot of things, they’re restructuring, they’re taking cost, so they’re working on exciting the customers, all well, trying to do as the best they can to get quarterly results and it’s a lot we’re asking people.

But I don’t know any other choice, we’re organized, we’re -- we’ve even a Board committee which is great and which can oversee all this. But same like we were was not the solution, so I’ll take a little bit of risk in terms of keeping the wheels on while we’re transforming then the status quo.

Okay. Appreciate that.

Thank you, Michael. Good luck.

Good question. Thanks, Patricia.

Thank you, Lisa. Ladies and gentlemen, we appreciate your continued interest in Empire and look forward to having you join us for our first quarter fiscal 2018 conference call on September 14th.

Goodbye.