Empire Company Limited

Katie Brine - Director, IR Michael Medline - President and CEO Michael Vels - CFO Lyne Castonguay - EVP, Merchandising Jason Potter - EVP, Operations Pierre St-Laurent - EVP, Québec

Mark Petrie - CIBC Capital Markets Kenric Tyghe - Raymond James Jim Durran - Barclays Capital Irene Nattel - RBC Capital Markets Michael Van Aelst - TD Securities Chris Li - Macquarie Vishal Shreedhar - National Bank Peter Sklar - BMO Capital Markets Patricia Baker - Scotiabank

Thank you, Sherin. Good morning and thank you all for joining us on our third quarter conference call.

We will provide some short summary comments on our results and leave as much time as we can for questions. This call is being recorded, and the audio recording will be available on the company's Web site at www.empireco.ca.

As well, there is a short summary document outlined at the point of our quarter available on our Web site. Joining me on the call this morning are Michael Medline, President and Chief Executive Officer; Michael Vels, Chief Financial Officer; Lyne Castonguay, Executive Vice President, Merchandising; Jason Potter, Executive Vice President, Operations; and Pierre St-Laurent, Executive Vice President, Québec.

Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs, and are subject to uncertainties and other factors that could cause actual results to differ materially.

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 on our financial results.

Thanks, Katie. Good morning everyone.

We continue to see improved results this quarter. In Q3, our adjusted EPS was $0.33, up 150% from last year.

Against the backdrop of restructuring the company we have generated 77% more adjusted EPS in the first three quarters this year than the same period last year. We are committed to doing everything it takes to make our company successful.

We will make the tough decisions. We announced the closure of 10 underperforming stores in B.C., cut CapEx this year to $350 million, and had to let go a lot of good people in our offices in order to be efficient.

We announced the decision to expand discount to the West. We invested in a partnership with Ocado to build the best ecommerce solution in Canada.

In the quarter, same store sales grew 1.1%. The last time we saw comps greater than 1% was 10 quarters ago.

Inflation helped, so did execution. I want to explain something.

We are far more interested in stabilizing our margins right now than chasing empty calorie comps. We witnessed a fairly aggressive industry promotional environment in Q3, and that has continued into Q4, especially in Ontario discount.

We're expecting to see increased pressure on sales in Q4 as those curios gift cards from our competitor began and continue to hit the market. But we're more interested right now in margin and basket size than simplistically pursuing tonnage and inflating same store sales.

We need to earn comps through execution and our strategic initiatives, having said that, we had good comps this quarter as we benefited from inflation and better execution through better blocking and tackling. We had a solid holiday period, better service levels from our warehouses to our stores, improved store execution, creative merchandizing, and our ad campaign are worth calling out here.

This quarter, we continued to stabilize our margins. We've previously mentioned that Q3 and Q4 would be the riskiest time period of our transformation, and we may see volatility.

However, in Q3 margin was actually up 30 basis points over the prior year even with Sunrise distractions. Of course, we're not out of the woods yet.

We're still in the riskiest phase of the transformation, but the long-term gain we're looking for is well worth any short-term bumpiness. And with that I will organize a few additional comments around the four key priorities that I set out a year ago.

First, reorganizing our organizational structure and our people; at this point, I am happy to report that we have completed the organizational restructuring. We have some merchants still transitioning, but for all intents and purposes we are complete.

Second, we remain on track with our Sunrise program, with a strong foundation laid in the first year we are pleased to see benefits reflected this quarter that align with our expectations. However, it is still early days, and the quarterly results only reflect slightly less than 5% of our full target of $500 million, with benefits expected to ramp up over the next two years.

Third, we are seeing improvements on executing on our brand promise. But as I always say, this is the piece that is going to take the longest.

We've made great strides in understanding our customers and are in the process of finalizing our customer brand strategy. I am actually a little surprised; we have already had three positive comp quarters after the freefall we were in.

Brand strategy of course is not just determining the look and feel of ad campaigns. Brand is the sum of everything we do that touches the customer, the net impression of who we are and what we offer.

A game-changing ecommerce offer is part of bolstering our brand. And that is exactly what we announced this quarter, our exclusive Canadian partnership with global ecommerce leader, Ocado, will give us the best strategic and sustainably profitable ecommerce infrastructure in Canada, positioning us to thrill our customers and take customers from our competition.

Leveraging Ocado's state-of-the-art robotics and end-to-end proprietary systems we plan on rolling out home delivery to customers in the GTA in the spring of calendar 2020. We've secured a location for the first customer fulfillment center, and it's in Vaughan, a few hundred meters from our existing automated distribution center.

Now, on to our fourth priority, fixing the west, the progress we've made has been encouraging in this early-going. We are seeing positive same-store sales and improvements in our margins.

We are making the difficult decisions necessary to turn around our business in the west. We've closed stores, we're renegotiating many provincial labor union agreements, we're converting stores to discount, we're improving BC's service levels, and store standards.

Recently we've reached a settlement in Saskatchewan with our labor union that keeps us competitive while allowing us the flexibility to run our business. Now, we are in the hottest point of negotiations with our Manitoba union.

We hope to reach a mutually beneficial agreement, but we need to be competitive in the market. So to summarize, only nine months into a three-year transformation, I am very pleased with the progress we've made on our journey to turn around our company.

Again, we will make every tough decision we need to in order to win. We are changing the culture at Sobeys.

Our leaders are expected to deliver Sunrise results and strengthen our company to win in the future, no excuses. With that, over to Mike.

Thank you, Michael. Good morning everyone.

As Michael said, same-store sales for the quarter excluding the impact of fuel sales increased by 1.1% from the same period last year, and an internal inflation number of 1.6%. A gross margin of 24% improved 30 basis points compared to the prior year, reflecting a continued focus on margins and improved promotional strategies as stable margins continues to be our priority.

Selling and administrative expenses as a percent of sales was 23% for the quarter, but excluding one-time expenses is 22.3%, a 70 basis point improvement in part reflecting early benefits of Sunrise, although partly offset by increased incentive compensation costs. In January, we announced the closure of 10 underperforming stores in British Columbia, and recorded $20.9 million in expenses related to the closures, including asset and inventory write-offs and severance.

The last quarter, we finalized our estimate of one-time Sunrise related costs comprising severance, relocation, consulting, and miner system developments noting and will not exceed $240 million. We have expense of $16.3 million this quarter mostly comprised of severance and consulting costs.

The real estate operation contributions for the quarter increased significantly due to a higher level activity this quarter in the Genstar partnerships which contributed $20 million compared with $10.9 million last year. Lot sales in Western Canada and a bulk sale in the United States accounted for the elevated contribution this quarter.

As I've mentioned before, timing plays an important element in these sales, and this quarterly result is not necessarily indicative of an increasing continuing trend. The effective income tax rate for the quarter of 28.1% is at the top end of our indicated range of 26% to 28%.

Pre cash flow for the quarter was $269.4 million, a strong increase of $241 million from last year due to stronger earnings and lower capital investments. We continue to expect that capital expenditures for this year will be at or slightly less than $350 million.

Since the beginning of the transformation the company's balance sheet has strengthened considerably driven by consistent operating cash flow improvements and cash and investment controls. Liquidity continues to improve, and all of the company's significant credit metrics are moving in the right direction.

For example, debt to adjusted EBITDA improved to 1.8 times, compared to 2.2 times a year ago. And adjusted interest coverage has grown from 2.9 times to 6.5 times over the past year.

This supports our continued expectation of reestablishing the company's investment grade credit rating over time. As Michael said, Project Sunrise is on track, and we continue to anticipate that the transformation will yield at least $500 million in cost reductions on an annualized basis by the end of fiscal 2020.

The transition of our merchandizing staff will occur over the next six months, and the speed of this transition will determine the rate of benefits realization for the next, and the following year. As Michael said, we did realize benefits in the quarter, mostly reflected in SG&A.

But as he said, it's still early days, and only slightly less than 5% of our total targets is included in results in this period. At the end of our fourth quarter, we expect to be in a better position to provide expectations of the rate of realization of benefits over the next two years and the impact on our EBITDA margins.

The three-year plan, as I said before, can be divided into three phases. The first organizational redesign from a regional to a national structure is complete.

The second, operational benefits is gaining traction. Activity related to improving store operations, labor standards, and other operational processes is progressing well, and is an important element of our efforts to offset minimum wage increases.

The third and largest, cost of goods sold, will take the longest to be recognized and will mostly be realized by year three. Our current structure of systems and processes are fragmented and cause confusion between us and our supplier partners.

Discussions are ongoing with our partners and we're making necessary improvements in our systems to harmonize information across our company and with our supplier partners. Healthcare reform and minimum wage continue to be hot topics in the industry today.

On January 29th, additional healthcare reform was introduced that will come into effect on April 1, 2018. We estimate the impact of these changes prior to any mitigation may be to reduce our income before taxes by up to $40 million.

This quarter we had our first month that was impacted by the new minimum wage increases, most of which I'm pleased to say we were able to mitigate through Sunrise and other initiatives. At this time, we continue to be cautiously confident that we can offset the full-year fiscal 2018 impact of $25 million.

We continue to develop plans to mitigate the full-year impact of minimum wage and Bill 148 increases that will arise in fiscal 2019, but there is risk that the company may not be able to fully offset the result, the effect on earnings considering the short transition period. In summary, we're pleased with our results to date and the early traction on Sunrise benefits, although we have a significant amount of work in front of us as we return the company to its full earnings potential.

With that, Katie, over to you for questions.

Hi, good morning. Just wanted to ask, I guess first, with regards to the competitive environment.

And Michael, you mentioned that Ontario discount seem to be particularly intense in terms of the promotions. But maybe you could just comment broadly by geography what you've seen from a competitive perspective?

I mean, I don't want to overplay it. It's not intense.

But we have seen more promotional activity from our largest competitors in Ontario, and in the west than we've seen in the previous 12 months. So we're dealing with that.

You can see that we were able to deal with it in Q3. And, what I've said before is, we'll stabilize margins and -- but we will remain competitive.

Okay. And then just in terms of your own same-store sales performance, I think last quarter you kind of said that Quebec was sort of the weakest region and the rest of the regions were performing quite well.

Has that trend continued or how would you describe Q3?

Q3 was strong across the board. Quebec was mad at me for saying that last quarter, and they responded very well.

Okay. And then just last I guess, you talked about the minimum wage increases and offsetting it through Sunrise and other initiatives.

But how would you characterize the reaction in the competitive environment so far in 2018? Have you seen people sort of begin to react to the increases in the markets most affected?

Mark, it's Mike. Our observation, although imperfect across the market which seemed to indicate that the initial actions by most of our competitors would be to reduce costs and do their best to mitigate prior to increasing any prices.

So I think that's been the primary activity at this point in time. From our perspective, we had a lot of costs to take out.

That's clearly a benefit for us, and we did benefit from that in the first month. We are working hard on our labor standards and have made some adjustments in store hours and other actions within our stores.

So that I think given that it's really just the first month or so that it's been impacted, it probably makes sense that people would look to cost first.

Good stuff. I'll get back in the queue.

Thank you very much.

Thanks, Mark.

I'll just touch on the gross margin discussion and specifically the expansion. You highlighted improved execution from promotional strategy, is there any positive mix impact you could speak of on sort of share recovery in select categories.

I'm just trying to understand if there's sort of a second leg to the story here that we should be thinking about.

No, I don't think so. As Michael said, we're focused very much on making sure that our strategies are rational from a promotional perspective.

We're putting a high premium on keeping our margins in a range while remaining competitive in the marketplace. And at this time that's the priority for us as opposed to chasing after sales that are potentially transitory.

We have a lot of work to do, as Michael said, on improving our stores, in execution, delighting our customers, improving our marketing, and over time that will have impacts on sustainable top line growth. At this time that's not as much of our focus.

Cheers, Michael. If I could just switch gears quickly then to the store closures in quarter, were there any surprises in either the number or were these stores sort of the perennial underperformers that were flagged for closure early on in your review process?

I'm not sure what you mean by surprises. We felt, as Michael said, as we fixed the west in addition linked to our expansion of discount there's a number of stores we felt would be better closed, and would have a positive impact on our western results.

But having said that, certainly the number that was closed is to some extent related to the fact that we do believe that those stores may at some point be able to reopen assuming we have appropriate labor agreements as discount formats. But it is a part of the scan and the review of our operations, and specifically related to fixing the results in our western unit.

Great, thanks so much. Congrats.

I'll get back in the queue.

Yes, I just wanted to go back to tonnage. So with respect to tonnage, and while I know it's not a focus it's obviously an important metric over the long-term.

Right now you're just saying that there have been previous promotion practices I guess that were not less than ideal in terms of their payback and so you're not chasing that business any longer. Are there any other factors that are impeding your ability to get back to even modest traffic growth -- or traffic in tonnage growth?

Well, we're seeing better traffic. We're seeing better basket size.

At this point I look for how's our margin doing and are we good on our comp. And I think we are helped by inflation, we're helped by some better execution.

I think it's not right to expect us to be vastly growing market share until we put into place more of our strategic initiatives. So although we've improved our store standards, although we've improved service levels and our branding and advertising is better than it was, I do not want the team chasing market share at the expense of being strong, getting Sunrise savings, and being strong in the long-term.

Obviously, as we execute our conventional strategy, get discount up and running, open our ecommerce, improve our stores and our service, we are going to grab back our market share. And that's inevitable.

I just do not, and I've been clear since I started, I do not want to get this out of order because it will not help us to do so.

That's helpful. And within the context of your inflation number, like what are the primary drivers to that recovery in inflation, I think by category or how much of it's really just you not being as aggressive on price promotion?

Hard for me to give an exact answer for that or any great useful color, I'll just tell you a combination of both; we are clearly different this year from last year in terms of how we're pricing and our strategies in the market. At the same time we have seen some element of increases across some of our categories.

So hard for me to give you a split, it'd be a combination of the two.

All right. I think a lot of it is just doing things smarter.

I've seen our fliers are more exciting for the customer at the same time as we're seeing slightly better margin growth. I think we're pricing competitively.

Our promotions are hot and focused, and I think we're just doing some things, we're just executing on that better and that's what we should do. But the big gain in margin will come as we get, as Lyne and the team gets at that cost of goods sold.

Okay. And for cost savings in the quarter, just want to be clear so the 5% of the $500 million or 25 million was that a run rate established towards the end of the quarter or was that a fully realized number in the quarter and what was the potential dollar value of the compensation increase offsetting some of the benefit of the saving?

So to your first question, the amount would've been fully realized in the quarter, we're going to try and avoid talking run rates, because it's confusing.

Yes.

And the competition increase would've been a relatively small percentage of that, but not a number that I have right at the tip of my fingers.

Okay. Thanks, Mike, I appreciate it.

Thanks, Jim.

Thanks and good morning guys, noticing that here in Quebec you've stepped up the communications with consumers around ecommerce, could you just talk a little bit about that and also could you walk us through, I guess, once you get up and running in 2020 with ecommerce, how you expect to get back some of the ground that ou may have lost between now and then as your competitors kind of ramp-up their initiatives in the GTA?

So Pierre, will say a couple of sentences on Quebec ecommerce and how we're ratcheting that up and then I'll speak on the second question.

Oh, ecommerce, the news with Ocado is really interesting for dealers, because we have a quite good result with ecommerce in Quebec. So by implementing Ocado in Quebec we'll improve our costs in store, because we'll move from store pick to central fulfillment, so our dealer expecting that as soon as possible in the province to be more efficient and to get savings from that.

And generally on ecommerce, I see this as a marathon and we're in the first 100 meters, and I say that often internally. We made a strategic decision to have the best arsenal at our disposal and the best assets and systems and store pick although really the best that's available in Canada right now, and we did I think the best job in Quebec and DC with our Thrifties [Ph] is not in the end in the next five to seven years sustainable, profitable, or the best way to serve your customers.

And so we made the decision to go for the win rather than a short term answer. Look, I'd rather be up and running with our system today, but I don't want to put mediocre systems across the country when there's much more modern ways to win over the customer.

And just to be clear when do you expect to have the Ocado system available here in Quebec?

Well, right now we said that we are concentrating on the GTA and getting that up and running, because that's the market we need to and will win. And there are three or four other markets in the country that we need to look at.

If you look at it, a handful of market covers over three quarters of the customers in the country. I think it's quite clear which markets I'm referring to and that the question then is just timing over a period of times, because we got to watch our capital expenses overall in the company and we're, I think, getting very good in terms of capital allocation, and we need to time when the CFCs open, but our main priority for the next while will be the GTA.

And then we'll look at -- as Pierre said, we're talking to our dealers about what the correct timing could be in Montréal or in other regions across the country.

That's certainly understandable and helpful. Just sort of conceptually would it be sort of one year, would it be sooner than that, less than that, longer than that?

I'm not going to commit to one a year or one every two years or whatever, I'm not going to commit to that, because right now we're working through the GTA. Having said that, because of the lead time of two years to open up, you've got to factor that in.

As we're working through even further with Ocado and we've been meeting with them constantly since we announced the deal and as we looked at the market we're more and more confident that this is a good strategy, but we will put it in and we'll allocate capital in the correct manner and we'll phase this and we will not be announcing a bunch of CFCs at the same time. This will be in a measured, focused way and right now the big prize we're going to capture is the GTA.

That's great. And just one other question if I might, please; you did call out from a competitive perspective the discount side of things, but what are you seeing in, I guess, the sort of conventional segment and also what are you seeing from the smaller ethnic banners?

I call it out the discount, because I think we've seen much more promotional behavior from our discount competitors especially in Ontario over the last couple of months, a few months, and it's always competitive. So I hate to whine about competition, and I was just hearing stores in the United States who want to see competition.

So I don't like to whine about it. I would say that in the face of some competitors, especially on the ethnic side that we continue to grow our comps.

So we will respond. We have so much upside to be able to grow our comps, we can do that in the face of competition and I expect more competition.

That's great, thank you.

Hi there, I just wanted to touch on a few things, just wanted to start off by clarifying again on the cost savings for Project Sunrise. So that $25 million, give or take, was actually saved in the quarter, it's not an annualized rate?

That's right, Michael.

Okay. Thank you, and then if we look at the same sort of tonnage trends I know it's not your immediate focus, but you started to show some improvement and then it slipped a little bit the last couple of quarters.

At the same time, the gross margin is up year-over-year, but it's about 50 basis points lower than it was in the last three quarters. So we've seen some slippage there.

I'd assume it's still within a band that you're comfortable with, but can you describe kind of what happened in the quarter with respect to gross margin, was that a reflection of investing a little bit to try and protect the market share or was there some other factors?

I wouldn't point to any particular factor, Michael, it's within a raise that we're comfortable with. It's not going to be dead flat obviously.

There are also some seasonal impacts. As Michael said we had a good Christmas holiday outcome and we certainly drove higher sales through that.

On average, those tend to come at slightly lower margins, but still accretive, so there's a mixed impact, so I wouldn't look at any particular factor or any systemic change or anything that we are doing differently. It's within a range that we're comfortable with.

Okay. And with respect to the headwinds from minimum wage and health care reform in the past I think you've said that the -- you'll try to mitigate the fiscal '18 $25 million amount for minimum wage without dipping into the Project Sunrise savings, when you look at the numbers in the fiscal '19, are you expecting to have to dip into that $500 million of savings to offset it or do you think you can do it over and above?

I think realistically, particularly when you layer on the wage parity and other impacts, Michael, I think what we've said is we're lucky that we have -- not lucky but fortunate, I guess, that we have an ability to reduce costs at a higher rate than our competitors. So yes, to fully offset it in the absence of any increased prices in the market, Sunrise is going to be a partial offset for those minimum wage increases.

Okay, thank you. And you did talk about some new labor deal at Saskatchewan, and in negotiations with Manitoba, the Labor Union in BC, back to those 10 store closures has been in press lately, what's your progress in negotiations with Western Canada Union as far BC Unions, I guess, for the FreshCo banner?

It's Michael, great question. We are in talks with BC right now, and we are moving along.

And it's about on the pace -- Head of Labor Relations and HR, Simon Gagne would have said, would love to move it faster. But as we said, we will be opening our first stores in about nine months.

We are on pace to do that. We haven't said they're going to be in BC.

We haven't said where they're going to be in the West. And I don't foresee an issue.

We are also working on the real estate portions of it as well, getting the permitting done as we talk us through with the Unions.

All right, thank you.

Maybe I'll ask two questions on Ocado partnership, maybe Michael, first on, in order for the company to earn a good return on the investment, can you maybe share with us on a high level basis, what are your long-term assumptions on things like online market penetration as well as market share for Empire when this is up and running in the GTA?

We haven't said anything publicly about it. So I have to be careful here, but I would say that if you -- our assumptions are that we assumed that we would follow where the U.S.

market is growing, and actually we even pair that back to be even a bit more conservative. Our assumptions are -- I'm not going to give a number because I haven't said anything publicly, but we will have a very high market share in the GTA, but when we ran it, we do very well financially even if we don't hit the number that we have in mind of hitting.

So this is -- we expect -- I mean, I think if you don't believe in growth of e-commerce, this is not the deal for you, but we believe that e-commerce will grow, it will grow in the percentage terms fast, also small base, and the next five years it's going to grow quite a bit. The issue for e-commerce in this country, in Canada, is that no one has given the customers a fantastic option, and you can see in the U.K.

where they were given a great option that the growth in e-commerce took off faster than it otherwise would have. So, even with the growth as it is on current trajectory, it makes sense for us by offering customers something that they just never have seen before.

We will have highest market share in the grocer, and we will be competing with you know who. So that's where we are looking at.

Okay. That's great.

And maybe on the flipside of that, I know you guys have done a lot of due diligence on this before signing the deal, I mean, what are some of the key risk do you think that would cause this partnership to not be a good one for Empire? Are there anything that particularly disconcerning [Ph] as you would do in the due diligence?

No, not at all. I mean, honestly the thing we look for is in any of these deals, and I know you guys think it's soft, but it's most important thing, can you work culturally together.

And I think this is going to be a super-cultural fit.

Okay. And maybe just a couple ones for Michael, just with respect to the $70 million of investment that the company is making for the next two years for the e-commerce customer fulfillment center, will most of that be treated like CapEx kind of flow through the cash flow statement with some depreciation expense flowing through the income statement, or will there be an SG&A expense component associated with it?

Essentially I want to make sure that I'm kind of capturing the numbers correctly in the earnings forecast open in the next couple of years?

Yes, the $70 million that we referred to on the capital is the expenditure that we're making both to purchase the software effectively and build the distribution center, which as Michael said, we have now located, and it's actually under construction as we speak. Those amounts will be capitalized as per usual on our balance sheet as fixed assets and depreciated over the years of life.

Okay. And then I think in the past you mentioned this will be marginally dilutive to earnings in the beginning, is that still the case?

Well, it just makes sense that it would be, because when you start up a complete new warehouse with very little volume, by definition you are not going to make profits on in year one. And then it will improve.

And as we said, at scale, these warehouses or CFCs are profitable because of their efficient costs, and the very high quality Web site and promotional purchases that we have towards on the customer. And so, yes, as you wrap it up, just by its very nature, it's just not going to make money on day one.

Okay. And my last question is, just on the 10 store closures, can you give us a sense of what the sales and earnings impact would be from those 10 store closures?

No, we are not going to disclose those numbers.

Okay. Okay, thank you.

Hi, thanks for taking my questions and congrats on the quarter, guys. In terms of Project Sunrise, I think management said it's on track yet in the disclosure materials, management now says it's looking like it could be equal to or above $500 million.

Just wondering if you can give me some color on why management feels that it could be above $500 million now?

Well, we've said at least $500 million. So I guess we have always been positive about our ability to achieve the $500 million.

I think Michael said, and myself have said that we are competitive team. We are going to -- as we go along we anticipate and expect as we put improved systems, talent and people into our system, into our company rather, that there is probably other opportunity.

But at this point, we are holding from to $500 million number, and we feel more confident about that as our progress continues.

Okay. So, does management still anticipate that of that $500 million there will be a portion reinvested?

We've said that a majority will go to the bottom line and some proportion will be reinvested in the company, but we've also said that we reinvest in the company that will have to be accretive. And so, if we see opportunities to invest little bit of the money and make the company stronger, we will do so.

Okay. The company obviously has a lot on the go right now, many initiatives.

Is it reasonable as we model, I'm not sure how much color you guys will give me, but as Empire grows the discount banner and as Ocado starts to ramp up, as we look little longer term, that might be dilutive to margin percentage although accretive to dollars, is that a reasonable framework to think about it?

Well, I think that's -- I am just trying to figure out how to exactly answer that. So depending on which year you are looking at, as I mentioned to Chris, in the early days, the e-commerce online offering will not be immediately profitable.

So that would have an impact for sure on our average margins just as you factored in. But having said that, I think you need to remember that it's still a very small percentage of our ongoing business.

It's very important, because from a market share perspective and participating and what we anticipate to be are growing and vibrant channel for grocery, but still a relatively small impact if you look at the size of the company. On discount, as we drive multiple discount channels from an averaging perspective, I think you'll see higher growth rates, because we would be participating in the channel which has the higher growth rate on top line.

But on average, those margins are slightly lower than conventional.

Okay. Just in terms of -- you said it's going to be a small percentage there, I think you are referring to the Ocado partnership, what is the -- at least in the next two years, what is the capacity of one of those DCs in sales dollars?

Well, the only public information that's out there and that we have -- that people have picked up I guess is that Ocado quotes their new facility which is not entirely dissimilar to the size of the one we are putting into Toronto as having a capacity of if you translate the dollars to roughly about $500 million that doesn't mean that we anticipate that to be our sales number or our sales target, but that will give you a sense for the capacity of the facilities that Ocado is putting into the U.K.

Okay. And just going back to a comment you made earlier.

So, regarding the minimum wage and the drug reform, should investors anticipate that those challenges will be met in part from project Sunrise? And I might have gotten this wrong, but my earlier understanding was minimum wage would -- the initiatives to offset that were independent of sunrise.

So, on minimum wage the first year, we felt that we had enough flexibility and opportunity in our systems across the country to offset it. And obviously, Sunrise is also a potential to offset the larger and increasing cost of that as we get into second year.

So, yes, for fiscal '19, we anticipate, as I said, without any increases in prices in market or any recovery of those in the industry, we will likely require an element of our Sunrise savings to offset it.

Okay. And that goes for drug reform and…

Drug reform I think we have been pretty clear is going to impact our earnings. And we are fortunate in a way that it is not going to impact our earnings close to the amount that it will impact our competitors as we are not as penetrated in that areas as our competitors are.

But, yes, that is an impact on our earnings, and we anticipate that to recur.

And when drug reform kicks in, isn't it even cadence from that April date that we just assumed for the impact?

Yes, pretty well.

Okay. All right, thanks a lot.

Thanks, Vishal.

A question for, Pierre; Pierre, you were talking about that your IGA franchisees seemed open to the Ocado online distribution model in Quebec. And like how -- like what will happen to the click and collect business in Quebec where you discontinue that?

And are your franchisees like are they not unhappy that they are going to be losing that business or that empire at least at the least will be competing with that business through the centralized opportunity?

First of all, the business in Quebec is bit different. I mean it's in partnership with dealers in Quebec.

So, we own the wholesale business, and they own the retail business in general. So, it's our job to build that or at the same partnership model with them for ecommerce business.

So, it's what we are looking for. So, there is no danger for them.

As a good partner, they were with us in the last I would say 60 years. So, there is no reason that it won't work for ecommerce.

It's where we are now. And as we mentioned, it's growing quickly.

And it puts pressure on store cost and everything. So, they are more than open to find solution -- a win-win solution between us and them to run that business in the future.

But by definition, there is no store retail like bricks and mortar store retailing, so how -- how do your IGA partners participate in the Ocado model?

It's not defined yet. So, it's a work in progress that we are working with them.

Okay. And then, I just have one question for Michael or Michael, is like you talked -- earlier in your comments you talked about the competitive backdrop.

I believe you said that in Q3 and carrying into Q4, it was little more promotional particularly in discounts in Ontario. And I am just wondering how you reconcile that statement with the fact that both yourself and the entire industry is reporting pretty decent inflammation numbers.

I think Michael, you said your internal inflation was positive 1.6%?

No. Our internal at 1.6%; sorry, so your question is how are we saying it's more promotional and we are seeing inflation.

What we are seeing -- we are seeing some of the cost going up, but we are seeing our competitors in their flyers becoming - and I think if you looked at some of the flyers in Ontario over the last few weeks, the competitors you see a much more promotional you would at any time over the previous year. So, we haven't gone out and reconciled all those kinds of numbers.

Okay, thank you.

I have two questions. Michael and Mike, you both referenced in your opening remarks the fact that with respect to the organizational restructuring that you still have the merchandizing piece to complete.

And Mike, I think you said that depending on how quickly that gets done, it will impact the pace of some of the achievement of the benefits of project Sunrise. So, I am just curious about what exactly is left to do.

What are the particular challenges associated with restructuring and merchandising? And is there any specific risk associated with how that proceeds?

And just broadly, when do you think you will complete it?

So, I will have Lyne provide some color commentary on this, but the point we are making, Patricia, is that the organizational restricting is now done, everybody is their seats, everybody has their new jobs. They know what the task is.

And they know that they are accountable for a significant amount of benefit related to Sunrise, which is mostly going to come from improved cost of goods sold and better category management. So, we having now completed the first phase, that category group is now working through the rate and the pace at which they can accomplish these benefits.

So, Lyne, if you want to give a little bit of color to what that looks like, how you feel about it that would be great.

Yes, Patricia, good morning. It's obviously a really big transformation and impact to the entire company.

So, our category merchants have been now announced since the end of November. We transitioned to the new position few weeks ago.

So, we now have transitioned officially to a national merchandising team that went through extensive training and have been able to hit the ground running now with the transition. So they are working right now on our merchandizing transformation to harmonize our supplier price files and to begin to rationalize our categories across the company and to reduce the cost of goods sold obviously.

We are very pleased with the team's progress. We have seen some national buys and some good opportunity buys that has helped us with some of the margins that you are seeing.

And so, it's a complex time for the team obviously. But because we are simplifying the structure, it's actually making things progress well and our supplier partners are starting to see that simplification in our structures and the number of people that they deal with.

And this will continue to improve. So, we are pleased with the progress that we are making in that area.

Thank you very much, Lyne. That's very helpful.

Michael…

Patricia, so I will add one thing - so I just want to just say something. I was ruminating on Peter's question a little bit more than have to do.

Three quick things, Peter, on your question in terms of discount margin, I mean there is lot more going on in a margin than -- as you know than just a promotion. And I refer specifically to discount in Ontario and a little bit of discounting in the West.

And two or three is we are seeing if you don't think that people giving away some free groceries for whatever reason with gift cards impacts everybody in market, it does. To what extent?

Is you can't measure it. But, it would theoretically make sense.

So, there is a little bit of noise right now. But, I think what you are implying to is look, there is always promotion, there is always some competitiveness.

I would say in two - three quarters that I didn't see a lot of promotional intensity. We are trying to see a little bit of promotional intensity.

Sorry, Patricia?

Yes. Okay, Michael.

I have a question for you then, Michael. I'm just curious the location of the CXC in Vaughan, is there -- there may or may not be anything here, but is there any advantage for you having it located in Vaughan?

Yes. There is a big advantage especially in the start-up phase, where you can bring over some products from our automated DC in Vaughan over.

I think when we are up and running at any sort of capacity, you won't be using the Vaughan facility, per se, unless there were some sort of urgent need to do so, which we wouldn't foresee. The beauty of that site wasn't so much that it was near the Vaughan DC, the beauty was we were looking at 13 sites, this one was number one by a mile, and the reason being it was perfect size, it had been zoned and permitted already and the walls were already up.

But they weren't so far along in the building that we couldn't retrofit for the technology that we are putting in place. So, they have a great landlord there.

We are very pleased to be able to make that deal.

Okay, great. Thanks, Michael.

Thank you, Sherin. Ladies and gentlemen, we appreciate your continued interest in Empire.

If there are any unanswered questions, please contact me by phone or email. We look forward to having you join us for our fourth quarter fiscal 2018 conference call on June 28.

Goodbye.