Empire Company Limited

Katie Brine - Director, IR Michael Medline - President & CEO Michael Vels - CFO Lyne Castonguay - EVP, Merchandising

Irene Nattel - RBC Capital Markets Jim Durran - Barclays Capital Vishal Shreedhar - National Bank Mark Petrie - CIBC Capital Markets Chris Li - Macquarie Peter Sklar - BMO Capital Markets Patricia Baker - Scotiabank

Thank you, Brittany. Good afternoon, and thank you all for joining us for our fourth 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 website at www.empireco.ca.

As well, there is a short summary document outlining the points of our quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer; Michael Vels, Chief Financial Officer; Lyne Castonguay, Executive Vice President, Store Experience; and Pierre St-Laurent, Executive Vice President, Merchandising & 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.

Thanks, Katie, and good afternoon everyone. On May 4 last year, we set out to rewrite the fundamentals of our Company, and what a difference a year makes, we have found our bearings.

Our first year of Project Sunrise was a success, we have transformed our structure, sharpened our leadership team to stabilize our margins and taken cost out of the business. We also set our ecommerce and discount strategies.

In Q4, adjusted EPS was $0.35, up 94% from last year. Adjusted EBITDA margin was 4.1% this quarter, up 80 basis points over the prior year.

Against the backdrop of restructuring the Company and industry headwinds, for the fiscal 2018 year we have generated 81% more adjusted EPS and an additional 90 basis points of adjusted EBITDA margin. Same-store sales were flat this quarter, internal and external inflation have slowed down somewhat since last quarter, our internal inflation landed at 0.8% which is in line with CPI's food purchased from stores inflation of 0.9%.

However, when we take out sales from our related businesses and look at food sales in isolation, comps were up and tonnage was almost flat. That's not too bad given the environment we were facing.

We expected [indiscernible] same-store sales this quarter. First, an aggressive industry promotional environment.

This has been a reality for most of us in the industry but I think we may have been more affected as we were busy reorganizing and stabilizing our margins and were likely a tab slow in reacting to the increased promotional intensity of our competitors. Second, two of our competitors were giving out $25 gift cards.

And third, there were the negative 13 basis point impact on same-store sales of winding down the 10 stores that were closed in BC; this impact will cease very soon as 9 out of 10 stores will close on July 5 with the 10th store closing at the end of July. As I said before, the biggest challenge we faced in Q4 and continuing into Q1 has been the material organizational restructuring changes we have seen especially in merchandising.

Almost every single person in merchandising is in a new and/or expanded role. It is not reasonable to expect we would be on top of our game through this time.

However, this was all expected as we discussed with all of you [indiscernible] over the last 13 months. In fact, we were exceedingly proud of our people, in the midst of a great deal of disruption they grew food comps, improved margins and took out cost in this disruptive period.

In Q4, our gross margin was up 20 basis points and 40 basis points over fiscal '18. Our success on the bottom-line this year was in part due to a focus on stable margins and it was good to see them grow slightly in the period.

Michael Vels and I have taken a lot of time over the past year discussing with you the risks facing our business as a result of Sunrise. Well, we're almost out of that phase; it's not so much risk now as it is a distraction from a day-to-day sharp focus on the business fundamentals, we continue to see that type of distraction in Q1.

As we move into Q2, we expect our team to be more settled down from the restructuring, that's the process and the timing we expected when we started Sunrise and our new structure will now allow us to go for sales for tonnage and for market share. It's nice to stabilize the Company as we have accomplished over the past 18 months but it's time we go for the big prize sales.

We now have the strategy, tactics, and most importantly, the team to take back sales. We're improving our flyer promotions, we're investing capital to refresh many of the older stores in our network, we are closing and will -- if necessary, continue to close stores that are underperforming, we are revamping our customer value proposition through our category resets work to ensure that we carry the items the customers want most, we are redesigning our private label brands and enhancing our offering, we're expanding discount to the West to participate in this higher growth segment which is important to Canadian grocery shoppers, and we are building the finest ecommerce solution in Canada, we will take back our market share.

Our FreshCo expansion to the West is on-track, we expect to open our first stores in the West by the end of this calendar year. This conversion to a format that is a better fit to certain markets is one of the key to fixing our underperforming Safeway and Sobey stores in the West.

Back in Q2, I told you the Western FreshCo's will have evolved branding, product offering, look, feel and marketing to reflect the learning's we've had in Ontario. The new branding reflect the stronger discount tone while retaining our commitment to quality fresh foods.

It includes the change to our logo, our tagline, and our store décor. We launched four pilot stores in London, Ontario with the new branding on June 21, thereon Friday.

Two of the pilot bookstores have a more open concept and they look great sending a clear message on value and fresh. We're on-track to launch our game changing ecommerce solution in the GTA in the spring of calendar 2020.

Ecommerce is a key part of our strategy to win urban centers. We're also excited to see our friends at Kroger sign-on as the second North American company to partner with Ocado.

Last year this time we said we're putting capital spending under a microscope and we did, we came in at $288 million. In that vigor along with solid cash flow from operations help generate significant free cash flow of $857 million.

For fiscal 2019, we will increase our capital spending to $425 million to support our growth strategy. Now after having spent the last year's scrutinizing every dollar of capital we spend, we have now cemented at Sobey's a disciplined approach to capital allocation.

We're investing in better projects that generate solid returns for you, our shareholders. As we now look to the next phase of our transformation, we are sharpening our leadership focus.

A few weeks ago I announced a number of key changes to our executive leadership team. The change displays strong leaders in key operations and merchandising roles, create a truly national merchandising team and build Empire's ecommerce and discount leadership for the long-term.

Most importantly, I personally felt that putting Lyne Castonguay and Pierre St-Laurent in their new roles would make us more aggressive and act with greater velocity in improving our store sales and promotional sharpness. Lyne, our EVP of Store Experience is a passionate leader who will deliver an exceptional retail experience to our customers.

Pierre, our EVP of Merchandising & Québec, is a result-oriented leader who will bring best practices from our strong Québec business to our now, national merchandising team. Mike Venton, one of the most experienced discount leaders in Canada will focus on running our FreshCo business in Ontario, while Rob Adams, leverages his experience launching FreshCo in the West.

Finally, Sarah Joyce, our new SVP of Ecommerce joins our team this week. Sarah is a strategic new world retail leader.

We now have the right people in the right seats to drive growth. Today we announced an increase in Empire's quarterly dividend per share from $0.105 per share to $0.11 per share, commensurate with our significantly improved cash flows and our improving confidence in our business.

This marks the 23rd consecutive year of Empire dividend increases. I'm proud of what we have accomplished over the last year, we are laying the foundation for our future as we shift from the position of defense to one of offense.

The best days of Sobey's are yet to come. With that, over to Mike.

Thank you, Michael. Good afternoon everyone.

I'll focus some short remarks on a few key areas; Sunrise progress, cash flow, and thirdly, transaction this quarter that affected our tax rates and earnings per share. Firstly, some comments on the Sunrise transformation program.

Project Sunrise continues to be on-track. We booked the final costs of our organizational redesign this quarter including consulting fees and final provision for severances.

We've expensed $23.5 million this quarter, and a total of $209 million in fiscal 2018. For the first year, Sunrise benefits are mostly reflected in our selling and administration expenses.

For fiscal 2018, we realized about 20% of our total $500 million target. SG&A as a percentage of sales was 23.4% for the quarter, and 23.5% for the full year.

Included in SG&A are higher incentive accruals for our entire company including our store network reflecting the company's sharply increased results and also onetime cost mostly related to Sunrise. Excluding the onetime costs, SG&A for the year represented 22.4% of sales, a 50 basis points improvement over last year even after the effects of minimum wage increases which are also reflected on the SG&A line.

The incentive cost as I referred to are expected to normalize next year. We would not normally highlighted item such as this but the year-over-year effect is relatively higher because incentive payments in fiscal 2017 were quite low due to poorer results, and this year because of the good outcomes, higher than normal this year.

Reflecting the progress on Sunrise and also improvements to stabilizing margins and the positive effect of increased sales, adjusted EBITDA margin increased in fiscal 2018 by 90 basis points to 4.2% which we believe is a strong result considering that it also includes the early impacts of minimum wage increases. For fiscal 2019, we are focused with our new structures in place on continuing the early traction on operational improvements and starting to implement category changes that are expected to lower costs and improve sales through better category performance.

We believe that we can achieve approximately another 30% of our total $500 million Sunrise benefit before taking account of headwinds such as minimum wage and drug reform during 2019. These incremental benefits would mostly we realized later on in the fiscal year as that is when we will be implementing the first rounds of category changes, finalizing the initial rounds of negotiations with our supplier partners.

So at the end of fiscal 2019, two-thirds through Sunrise, we're estimating that we will have achieved about half of the Sunrise target confirming our prior comments that the third year is when most of the benefits become realized. Secondly, there are few transactions and impacts that I've drawn your attention to for the quarter.

In the fourth quarter, we sold 11 properties to Crombie REIT resulting in a pretax gain of $13.2 million, which is included in other income in the food segment, and that increased our earnings for the quarter by $0.03 per share. Previously we told you that we had announced the closure of 10 underperforming stores in British Columbia, the whine down of these stores as Michael said had 13 basis points impact on our same-store comps.

And as previously disclosed, we recorded $21.2 million in expenses related to these closures in prior periods, including asset and inventory write-offs and severances. The effective income tax rate for the quarter up 13.7% compared to 4.2% last year.

In this quarter taxation expense was impacted primarily by an internal reorganization that the company undertook to simplify our corporate structure. Excluding this adjustment, the effective tax rate for the quarter would have been 23.5%, and earnings per share would have $0.03 lower.

The effective income tax rate for the full year was 23.98% compared to 19.8% last year. For fiscal 2019, excluding the impact of any unusual transactions or differential tax rates on property sales, we're estimating that the effective tax rate for the next year will be between 27% and 29%.

And finally, some perspectives on cash flow and capital investment. For the quarter free cash flow was $350.6 million, a strong increase from last year.

Even after excluding the sale of those properties to Crombie, our free cash flow increased by $92 million as a result of strong earnings and lower capital investments. As Michael noted, we're anticipating our investment levels for next year to increase upto approximately $425 million; this will include approximately $30 million for launching our ecommerce solution in the GTA, and $40 million for the expansion of our discount banner [ph] to the West.

About 40% of our total spending will enhance and renovate existing stores to improve our brand image and customer proposition as we turn our focus towards increasing sales and market share. We're currently estimating that net square footage for food retailing will be flat to less than 1% increase in fiscal 2019.

As the fiscal year comes to an end, our balance sheet strengthened considerably driven by consistent operating cash flow improvements, and cash and investment controls. Liquidity continues to improve and all of our significant credit metrics are moving in the right direction; thus supports our expectation of re-establishing the company's investment grade credit rating overtime.

As we all know, minimum wage continues to be an impact in the retail industry. This quarter we had the full impact of minimum wage and one month impacted by the wage parity element of Bill 148 in Ontario.

We're monitoring ongoing developments and continue to work to develop plans to mitigate the full year impact of minimum wage and other Bill 148 increases that will arise in fiscal 2019. In summary, fiscal 2018 was a solid year, we're pleased with our results to-date and our traction on the Sunrise benefits.

With that said in Q1, we are up against the tough comp of Canada's 150th and 110th anniversary. We're comping [ph] our first better quarter of earnings per share last year, and there is still a significant amount of work in front of us as we continue to make strides in returning the company to it's full earnings potential.

And with that, I'll hand over to Katie for questions.

Thank you, Mike. Brittany, you may open the line for questions at this time.

Michael, in your prepared commentary you said that you guys are now going to be shifting from defense to offense; so what does that playbook look like from those of us who are outside in the marketplace? How should we be thinking about you coming to market, just really how does that all play out?

I'll answer as much as I can without giving our entire playbook to our competitors but -- I got to tell you in the first 16 months we had to get set in terms of our infrastructure. We said you can't build on sand -- with the work we've done in taking our cost restructuring our company -- absolutely sharpening our focus on running a retail organization, especially the grocer as big as we are, we have made immense and actually probably faster than I would have anticipated improvements.

We couldn't really do the kind of things we want to do in terms of exciting the customers and going for sales in a smart manner, so we can be in a smart banner [ph]. And now with the work we've done in terms of sharpening our -- for instance, our flyer focus, in terms of putting a new team in place in terms of the people we changed a year ago from us on being in the role longer time, we can now do all that.

So we're going to improve our flyer promotions, we're really going to invest capital in some more stores which -- touring so many of them across the country, outside of Quebec are getting too tired, some of them. And I really think that we can do a good job and portion our capital to be able to get better returns and better sales at those stores.

The category reset work that we talk about a lot as part of Project Sunrise is not just a cost cutting or winners and losers in terms of our supplier partners, the big prize at the end of the day in addition to the cost are that we are going to be over a period of time smartly resetting our stores, and we've been doing -- obviously doing work for over a year now in terms of what categories we want to expand in, which products we want to extenuate, and you're going to be seeing over the next 9 to 12 months significant changes in terms of exciting customers and stores in terms of our categories and our products. I really like the work although it's not all complete yet in terms of what we're doing in private label.

We're at a place where we can make all sorts of changes but I thought I'd always go back to -- we're doing all these things; what I'm seeing as a tour stores across the country, as I speak to our merchants, what we're seeing is just a company that is getting back to -- as I said the being, we're getting our bearings in terms of being able to run a great retailer. We're not where we will be but there is significant improvement over the last year from what I've seen in everything we're doing, and the way we measure our business and the way we question our business, and in making continuous improvements.

So this is the time now, that's what we mean by going from defense to offense, we had to get ourselves set; but it doesn't mean that we don't have a few defensive place off to go but we're not going to discontinue the way until everything is in place, I think we can be far more intelligent in ROE to our customers and grow sales in a smarter way and take back that market share that we lost.

And can you also just talk a little bit -- you alluded to sort of maybe not being on your front foot with regard to some of the promotional activity in the marketplace. What you actually are seeing in the marketplace, and where you think you may be sort of gave up a little bit of ground?

All of this was -- if you don't ever want to give up market share or -- and by the way, we didn't lose market share on food, we held it steady but what we saw is, when -- we're now on top of our business with a lot more than we were a year, a year and a half ago is that because we're going to through Project Sunrise and we had so many people in new jobs that in certain areas of the country we thought that our ability to offer the kind of products, especially on the front page of our flyers, and to be watching our competitors; I said it before we were tad slow [ph]. And I think that's extending until almost today.

From right now, I have the confidence we're mainly taking our merchants and where our peers are going to take them as well that we are quite cognizant of what's going in the market and we will -- as I said in a smart way, defend and grow and our market share. I also am becoming more and more pleased.

Also we have a long way to go in terms of the hand-offs between merchandising and operations to make sure that we're executing on many of our great programs than merchandising and marketing; and now with one of the reasons to put Lyne over in operations was he achieved such a great graph in terms of merchandising and marketing -- to be able to translate that into the stores and be able to communicate that to the stores. Lyne is on a miracle worker, she hasn't fixed all that now but she is getting at it.

I just wanted to sort of talk about magnitude of impact in terms of the changes you're going to bring to the market in your new fiscal year. So first of all, on stores like -- how you're planning on approaching this; is there a number of things you're trying to do across the broad-swat [ph] stores?

Are you trying to do like a prototype store and see how that traction takes place and then roll those initiatives out? So how are you planning on approaching what you see as the Sobey's of the future?

Well, Mike will start and then I'll take over if anything he hasn't said.

I think the easiest way to look at it Jim is that we have a necessity to improve our performance and our stores on a number of fronts. So at the most basic level, there is a very significant amount of refreshment and brand improvement that is probably not a significant investment per store but where we need to and will invest across network in a relatively short period of time.

Combined with some of the work we're doing on our categories, and also our strategy around our -- where we want to win and our -- in some of the other areas of the store. There is fixture redevelopment and capital changes and that sort of thing that over the long-term we will incorporate throughout the network; that is more capital, probably gross [ph] but more advanced planning and we'll get to that over the next several years.

I think off a shorter term to medium term, Jim you're going to see getting the basics right in the store is going to be key but we're also starting work, and you've known me for a while; I feel that we can make our stores -- many of our stores, some of them are quite really good, some of our stores are not as exciting as they can be. The [indiscernible] experience, you need to be a great retail and a great grocer can be sharpened and we've tasked the team to be able to do that.

And since you know me, and it will be a little longer until we do that but I want to see some lab stores where we're trying different things that we can extend across our -- all of our stores across the country.

And is that investment spend skewing to any one market or is it broadly distributed?

No, it's not. Except that the Quebec IGA stores would be probably in need of less investment on a prorata basis but the rest of it would skew right across the country.

And will there also be sort of a noticeable marketing initiative when you feel like you've got enough stores that are down sort of road ready?

Absolutely.

And do we have some idea about timeframe that you're able to disclose in the public market?

No.

Michael, in the past you had indicated you had several key priorities, one of them was fixing the West. Just wondering where you are on that and maybe some comments on the economic backdrop in the West and how you see that helping your business, if at all?

Look, it's a multi-pronged strategy, and we're doing what we said we would do to fix it and I like what we're doing, I'm becoming increasingly confident. We said we got to close underperforming stores, we have 9 closing next week with the 10th closing at the end of the month.

And if necessary, and we haven't identified those yet, we'll continue to close these stores and we don't think we'll be strong enough in the future. A key portion of this strategy was to take stores which are better for discount market, and convert them.

We believe that there is wide space in the West for what we're doing, FreshCo 2.0, and participate in this higher growth segment. And as well we've increased our local product offering at West, so I'm -- I think we made some really good gains out there on that or there are still ways to go.

And in addition to all that, though as I've noted, a lot of the things we're doing across the whole country are going to benefit the West. We're improving the flyers, we're investing capital, we're revamping our customer value propositions through the category resets, we're redesigning private labels, enhancing our offerings, and we're making changes in terms of how the operations team functions and empowering our multi-prong like progress which was faster, and -- but we're on the right track.

Maybe this isn't a question that you can slide [ph] much color on but as you look at your business, I guess my read on it is Quebec is pretty strong, but where would the most upside be for improvement? And just -- if you can give us some broad; is it the West or Ontario or…

Mike, you want to handle them?

Sure. I'm having a little trouble figuring out maybe exactly how to answer because you got to look at relative waitings.

One of our largest -- if you want to call it regions, is of course in the West; you referred to Quebec which is significant as well. So Quebec does very well, it's properly managed and relatively decent improvement there, playing with the needle because it's big business.

At the same time, our Western business is very large and is underperforming. So there we have the double impact, if you want to call it the large business that has lots of opportunity, and when we get that business back to it's full earnings potential, the combination of that significant improvement and the fact that it's larger business, I think you probably have to say that at least over the medium-term, that's where our more significant potential improvement will come from.

And just on that topic; given that Empire's challenge has emerged when it acquired Canada Safeway coincident with the declining oil price and declining consumer confidence. Is it too far of a jump to say that when the consumer confidence strengthens, one should anticipate the Western Canada business starting to get some benefit from that associated with more stably higher oil prices for the moment?

I'm not an economist but I think that any improvement there would be most welcome by us and all of our competitors. And also I think that there would be a slight shift, probably we can discount it little bit better for conventional which for our Safeway stores would be a good thing but I can't pick the price well [ph], and we're going to make all these changes, and if we get some wind in our sails, it's good for us.

Just a last one here, switching gears a little bit; inflation -- industry inflation seems pretty low, a bit surprising to me just given all the cost pressures that grocers have to face. Do you have any comments on that?

And is that -- more particularly, is that reflective of irrational competition in the marketplace?

I'm not sure it's reflective of irrational market competition but markets are definitely very promotional, there is -- nobody is willing to give up shares. There is a high level of promotion across the country.

I'd say that's probably having an impact. So beyond that I'm not sure we pointed any particular theme or any other particular reasoning.

I think what we're saying now is produce is a little less inflation than we would have -- we might have thought but that would be the only area we're pointing out.

I'm wondering if you could just comment about sort of the operational improvements that you've seen in the business to this point? And I guess specifically, you know, EBITDA dollars are up sort of -- little bit over $200 million in fiscal '18, Sunrise is about half of that, some of it's from sales improvement.

But in your view, what are the big drivers of that other bucket? And as we look forward into 2019, what do you feel like are the incremental opportunities for margin expansion beyond the savings from Sunrise, net of the other headwinds that you flagged?

I think we've done a reasonable job in 2018, Michael probably said very good job of stabilizing margins, and being smarter like to -- about how we promote and that has had a stabilizing and a strong and backed on [ph], many of the improvements that we're seeing, both on the sales margin and the margin line, particularly in the West. So that's been very helpful for us in 2018.

As we will forward to next year, you outlined the operational improvements; I really do have to just emphasize again that the work we doing in our categories does result in improvements in costs and costs of goods sold; and clearly we're going to be very sharp on that. And the fact that our suppliers will be participating in longer categories, they will have bigger opportunities.

We are -- for sure, going to be looking for lower costs in our purchasing and then our procurement. But at the same time the thing that we're very excited about as we reset and relook at all of our categories on a nationwide basis, is our category management is going to be better, and it's -- that doesn't entirely result at cost reductions, it's also going to drive margin enhancement and higher sales, and we're pretty excited about that.

So I wouldn't underestimate that potential [Technical Difficulty] and our merchandisers start to find their feet and have more miles in the saddle.

Is it fair to say that those opportunities are most material in the regions where your business maybe hasn't performed as higher level, so Ontario is an example?

I'd say, I'd look at improvements costs right across the entire country. Quebec will benefit from the consolidated categories as much as the rest of country but yes, there would be areas where we haven't been as quite sharp in our merchandising where we'll be better and Quebec has been very good, other regions maybe not so much on the merchandising side; so -- but I would say the improvements be across the country.

With regards to the timing of the savings from Sunrise in fiscal 2019, is it -- what's the timing of the non-merchandise procurement savings? Is that pretty much a spread throughout the year or is that also part of the second half waiting?

No, we'll annualize the organizational savings of course. On the operational savings which you're referring to, those are benefits that we've been accruing through '18 and we expect that number to keep increasing as our strategic sourcing group gets more traction and we add more addressable spend and we -- which has become more intentional [ph] business.

So I see those increasing on a fairly consistent trend all the way through the period, and would not be lumpy or skewed towards the backend.

With regards to the same-store sales results in the quarter, when you call out sort of excluding related business, could you just talk about the performance of the pharmacy business and the impact that that had on same-store sales?

Our pharmacy business -- it was impacted by some of the challenges we had in the West of course, because our pharmacies are all in-store in the West. There was certainly an effect -- a deflationary effect on our scripts, as a result no longer being able to incentivize customers in miles [ph] in Alberta.

And of course, we've had the early beginnings of the drug reform; so a combination of all of those had a market deflationary effect on our pharmacy sales to the extent that we felt we needed to call out open and provide little more visibility on our free grocery sales.

First, you call out the food tonnage is being stable in the quarter; I was wondering if you can tell us what tonnage was like the previous quarter -- just want to get a sense if there was any sequential improvement in food tonnage during the quarter?

It was a little better than recorded in the last quarter.

And then just on the savings for Sunrise; can you give a sense of what is the split between the cost of goods sold and SG&A expenses for this year?

Would you say this year, Chris?

So I meant for fiscal '19 as you guided for above -- I guess upto $150 million of incremental cost reduction from Project Sunrise. More from our modeling perspective, how much of that will be seen in cost of goods sold?

And how of that would be seen in the SG&A expenses?

I'm not sure I can give you a great split right now. If I was going to give you a directional number and it's absolutely directional, I'd probably say maybe 40% in cost of goods sold but that would be very directional.

That reflects the fact that towards the end of the year is where -- as I mentioned, the category improvements which would mostly show up in cost of goods sold are skewed towards the backend and so in a smart basis for giving you that percentage of…

On your capital expenditure, I think in the opening remarks you called out 40 million will be spend on expanding FreshCo to the West. I guess based on your previous guidance that it will cost about $4 million per store.

I guess that would imply as roughly 10 expansion that we can look forward to in the fiscal '19?

Yes, that wouldn't imply that we're opening all other stores in '19 because the spending and the investment begins before that but that would be a pretty good estimate.

And Michael, can you give us maybe a sense of the laborer negotiation at West, any updated or you wouldn't be able to provide?

The one's that West you're referring to?

Yes.

Sure. Let me first say that we're currently at various stages of negotiations with the unions in the West, and we need to make sure -- what's our bottom-line to make sure that the stores in the West are viable, profitable and that we're playing on a level playing field.

So, I don't think we're asking too much to being playing on a level playing field. We have reached that level with mutually beneficial agreements in [indiscernible] Saskatchewan, and we're still working out the deal in BC.

And I'm confident will come to a good accommodation up there. And these things take a little time but they're worth it because you're -- its key component as you know of our business and so we take this very seriously but I like where we ended in two provinces and I think we'll like where we are in BC as well.

And how about Alberta; is that also on the table as well or no?

No, right now we have more just [ph] in conversations with BC.

And my last question is just with respect to the tariffs that are coming on July 1st; I know some of them are food product related -- any material impact you expect from I guess, consumer perspective, will we see prices go up because [Technical Difficulty].

Alternatively and better still, ask them to manufacture in their Canadian locations. Yes, they are unable to do that and for some reason we have to continue to list their products because our consumers want them.

Any cost increases ultimately would have to be reflected at the price and retail but our view is, we need to find alternatives and we're not going to easily pass tariff price increases onto our customers.

First, I just wanted to clarify what you're saying about the grocery comps; so I think you're saying, if you look at the comp, and you carve out the pharmacy and you carve out wholesale, that tonnage is flat and you had some inflation; is that what you're saying?

Yes, that's right.

Michael, can you quantify the level of inflation you're seeing or saw?

Yes, we saw 0.8% inflation in the past quarter that we're reporting on.

Lyne, question for you. So Michael and Michael have been talking at a very high level about the changes that are going on but you as the Chief Merchant; could you may be describe how the merchandising strategies have changed the promotional and flyer strategies have changed since the new management came on and since you've become the Chief Merchant of the company?

It has been -- look, the fact that the team is now a national organization working as a functionally led business. It's obviously very different than where we were before, and we also looked at how we can consolidate our go-to-market strategies in two ways.

First, is around product portfolio and portfolio strategy, and ensuring that we're all aligned on the categories that we want to win in, we want to focus in. And then those that we really actually want to create traffic in our stores, etcetera.

So we have a really -- we took the last year to focus on that for all of our format. And then we're also working obviously as we've talked about on our marketing and our flyers.

We are a very traditionally -- from a marketing perspective, we tend to really focus on traditional approaches from a marketing perspective or traditional challenge or channels should I say which is really were very flyer driven and we're trying to actually do much more from a digital perspective and balance out the portfolio of how we go to market to our customers. You are liasoning the data we have from our loyalty program to cater and customize offers to them, to our customers.

So it has been a year of transformation on that end, and now that we have our category merchant see since March 5, we're actually work really, really well together, end-to-end to focus on -- starting with the category strategy all the way to store strategy. And how we want to present product to our customers, and you will feel that even more in our recess.

Very, very positive team and we're looking as well from a marketing perspective to consolidate flyers, we had a lot of different format, different drop dates, we've actually changed our flyers start date, being Thursday, and all aligned; and so just little things like that has been very transformational to our business and to alignment and to our results. There is so much I mean I could talk about the next hour which I won't but the team has done a phenomenal job.

And art a number of your merchants located or relocated in Stellarton, is that correct?

No, actually what we did was we wanted to make sure that we had a cross functional team in various locations. So the grocery team actually is in Stellarton, our Fresh team is Tahoe, I'm sorry, yes [indiscernible].

And we do have some team mates in Quebec as well. And then, we actually placed our field merchandising team for all of our local sourcing in Calgary.

So the merchandising team is really, really spread across the country.

I guess what I'm questing is [Technical Difficulty] is little awkward for suppliers to travel to Stellarton or if they just don't travel there?

We're $24 million -- one of the biggest retailers in the country, we're the second biggest grocer, we're proud to be in Pickto [ph] County and they will make that trip and I can tell you, it's a great place to go, you should actually holiday there, Peter. But we've had [Technical Difficulty] negative to our phase problems, we're having people get on a plane and go visit a portion of the country which is our home.

So, no -- and if they don't like it, that's the way it is anyway, so no problem. [Technical Difficulty].

Penetration and by province and by format, and we also measure on-cart and off-cart programs and transactions. And we have been doing what really -- honestly, really well, and it's great data that we're also utilizing.

If you have our mobile app -- for our customers, we actually do customize offers for them on the app which is a look-to-card [ph] model through air miles. So we not only do we offer them promotion -- we cater promotions to their buying habits based on what needs to be -- their card transaction to be; so if they get that on our low-to-card [ph] mobile app and Safeway in the West specifically, and they get extra miles as well through promotional activity on the store.

And we know from a fact that they are likely based on penetration of swaps, we know for a fact that they like it in the West. So, I think it's been good.

Can you talk a bit about what you're doing or what you have planned to do to mitigate the $40 million impact from healthcare reform?

We'd do anything we can within the comp plans of the business, which fact of the business, probably be doing anyway. I'm making sure that the mix of pharmacists [ph] and technicians is correct, being more efficient in our systems, finding ways to take cost out of the business, but that's what a well-run company would do anyway.

Beyond that this is a direct impact on pharmacy business as profit, so it is -- this is very little -- they are over and above normal good management that we can do to change or maturely impact that number.

With modest inflation and the headwinds you're facing on healthcare reform and minimum wage hikes; do you think you'd be able to grow earnings this year if you didn't have the incremental benefits from Project Sunrise -- that's for fiscal '19 I'm talking about?

I know the guidance can speculate on that. We're paid to improve the earnings of the business, so I guess hypothetically, if we didn't have the opportunity of Sunrise, we'd find a different way.

Michael, in your opening remarks you interestingly referred to -- now that you're on more firm footing, it's time to go after the bigger prize which you described as sales share tonnage? And if I recall, back a year ago when you first launched the Project Sunrise and you were very careful to caution us all that -- that everybody was very worried about share and sales but that eventually you would get there but there is a lot of stuff they had do, foundational work first before you attack sales.

It sounds a little bit today -- like, maybe I'm recalling things differently, but sounds like you might be enthusiastic about having plans and place to get out the sales a little quicker than the original plan. So I'm just curious if that is the case?

And then secondly, I've been pointing too and Lyne in her -- one of her answers sort of got at this a little bit but you're pointing to -- there is going to be changes to flyers, changes to private label, there is going to be store renovations and category reset; does that all come together at one time or do we phase these in? Is there a phasing of when the flyer will be done, when private label will be done?

What's the order of those things?

I'm going to let Lyne answer that but it isn't the way, it's obviously we got to make sure we do head in the profitable way. To answer the first question before I turn over to Lyne; yes, I think we're feeling more confident, that doesn't mean every day isn't a trial or that we're anywhere close to where we should be but I'm glad you were listening, I'd appreciate that but this was a process and the first process was to stabilize margins.

I don't want to be with a company that can't control it's margins and can't control it's business. Part of that was to put in place process disciplines and systems that were superior to what we had before.

I feel that we're on a good trajectory on that. And then it was to see how we could take off and restructure our organization from a regional to a functional structure which is incredibly difficult and I'm very pleased at the progress we're making.

The next was to assess all of our team from the top down as to whether we had a team that could not only stabilize margin, takeout cost and restructure and lead but could be innovative and grow sales and understand how to balance sales, and margins, and costs, and capital and I think we're getting there. All to say and I just want to -- you know me, I'm going to tamper expectations a little bit.

This is not -- you certainly go up or go off, and your sales are great, and I don't want to say that. I said that in Q1, which we're currently in, we're still in the midst of a lot of this heavy listing but my confidence level, Mike's confidence level, all of our levels of confidence are higher today than they've been in sometime; not because I'm trying to tell you that I'm seeing things that you wouldn't be seeing but because we get to see on a daily basis the improvements were making and the changing culture and more accountable culture we're putting in, results oriented.

And the fact that not doing well is not appropriate; and that winning is the only thing, winning within the rules and winning in the right way with our values is the way to go. So yes, we're confident but we're still now in the middle of a quarter where we are still transitioning, and as we get it into fiscal '19, then to '20, I think we're putting ourselves in a place where we have the most room to improve and we will take advantage of that.

I'm glad you brought up the point about culture because that's one of the critical underpinnings of being able to execute and get stuff done; so I'm certainly getting the impression that you feel that the cultural journey is very well underway and that's probably what's permitting you to be cautious but also more confident that you're going to be able to get to where you need to get to?

We know how to move these demand, we're going to do real well. It's just -- we've got a guess to that.

[Crosstalk's].

So let me take it in and give you three quick answers. First reset; resets are being done in three ways, and you will start seeing reset impact to our stores, more towards our Q3/Q4 timeframe.

And then for the first wave of product, and then the second wave of products, you will see it right after Christmas. The third wave of product we will actually have negotiated everything with our suppliers and we'll start seeing the transition end to our stores around Q1.

So that's the picture reset. Around flyers and flyer improvement; I would say two things.

First one is, current flyer format, as I talked about we aligned on just when the flyer Drop H [ph] were going to be. Michael and Mike touched on the improvements in our offering but also what we are doing and you've seen a glimpse of that this past weekend and the upcoming weekend for Canada Day is; we've actually done a better job at aligning offering and store excitement to create theater in the store as Michael talked about.

So I think we're excited about that and that's given the same format of our flyers, changed a little bit. And then the third part, is around the harmonization of the flyers and the reduction in format or the reduction in number of formats, not reduction in number of formats -- that is going, we have a roadmap and that you're going to start seeing that in those fall, into -- we've actually tried to make sure that we were looking at workload management and transition and what we could handle to do it accurately, and then not impact the stores as much as well from a workload project management perspective.

Just had a question on square footage growth; you talked about the zero to 1%, you've got 10 stores closing in BC and I guess of the 11 you sold to Crombie, 2 of those I presume are closing and that you're not leasing them back. If I'm right there, so we have 12 closures.

So I'm just wondering how we get to positive second quarter footage growth?

Firstly, the stores in Quebec, you're correct to closing but we hope to -- did I say Quebec, sorry. So it's still in the West, of course closing.

We do have a few new stores coming on and as Michael mentioned, we also plan to be in market with some new FreshCo stores this year. But on the Crombie sales, that's a financing structure where we sell the stores to the Crombie REIT but then we're leasing them back from the Crombie REIT on a long-term lease basis.

So those stores remain in our sales and now our same-store sales.

But you're only leasing back 9 of them I thought?

You're talking about the 2 that won't be; yes, those are two other properties that we've resold off, it will have a minimal impact on our square footage.

Thank you, Brittany. 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 first quarter fiscal 2019 conference call on September 30.

Goodbye.