Empire Company Limited

Thank you, Joanna. Good afternoon and thank you all for joining us for our third quarter conference call.

Today, we will provide summary comments on our results and an update on the pending changes related to the new IFRS 16 leasing standard. We will 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 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 and Quebec. 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. Last quarter, we said we are gaining traction; now, we are gathering speed.

We are again pleased with our results, especially in terms of sales and margin, all while going through a very busy, potentially disruptive period of transformation. Our sales momentum continued this quarter.

Same store sales were 3.3%, which is the highest we've seen in 38 quarters. Food same-store sales, which exclude pharmacy and fuel, were 3.9%.

Internal inflation was 1.8%. Our overall tonnage of 1.5% was the strongest we’ve reported in 34 quarters.

Perhaps best of all same-store sales momentum was across the board in Q3. Customer count is up, basket size is up, all regions, all banners; we are especially strong in FreshCo, Safeway, IGA and Sobeys Ontario.

Farm Boy posted excellent results but their eight weeks of results in the quarter had a minimal effect on our sales. The majority of the improvement in our sales numbers can be attributed to sharper execution.

We are seeing improvements in our stores through better in-stock, shrink levels, customer experience, merchandising and marketing. While sales were strong, we were not discounting margin to drive sales growth.

Gross margin rates were up 20 basis points from Q3 last year and up 30 basis points over Q2. This improvement was due to good margin management by our merchants, the beginning of Project Sunrise category reset results and the addition of Farm Boy.

However, margins could have even been higher. First, although we're passing on inflationary cost increases to the greatest degree possible, there is an inevitable lag when costs are increasing so swiftly, especially in produce.

Second, the sales mix between banners also had some impact on the gross margin rate. And third, pharmacy gross margin was lower due to health care reform.

Although we continued to accelerate our Project Sunrise cost reductions and costs were held tight in Q3, SG&A appear higher than last year for reasons Mike will explain in a moment. We are pleased with our EPS of $0.27 after adjusting for some of the noise in our SG&A, most notably, our previously announced buyouts of B.C.

Safeway employees and related store closure costs of Safeway as we prepared to convert to FreshCo. Our EPS would have been $0.39.

The results this quarter show again that we are on the right track to completely turn around Empire Company. The team is starting to fire on all cylinders and collaborating across all functions.

We are especially proud of our merchants who are working hard to negotiate improved terms with our supplier partners while refining our assortment to ensure our shelves are stocked with the items customers want most. Category resets will drive a large portion of our Sunrise savings.

Early results have been encouraging. And we are more confident than ever before in our ability to bring home Sunrise savings of at least $500 million.

We saw the early start of category reset margin improvement in Q3, they will slowly amp up over the next five quarters. Our store operators and teammates in our stores have done a great job realigning our stores tranche by tranche as categories are reset.

We are especially cognizant of the customer experience in the store as we realign our aisles. All of our reporting and customer feedback to date indicates that in store execution of resets has been well-received.

Category resets are just one of the ways we are improving our stores. We will continue to improve our stores through better execution and investing capital to revitalize our existing discount and full-service store network.

We are especially optimistic about the multipronged turnarounds we are seeing in the Western Ontario. In the west, we are already seeing improved results through better in-store execution, merchandising and marketing.

We have closed some of our worst performing stores. We have a labor arrangement in B.C.

that provides us for the first time with a level playing field, labor buyouts will lower our costs in B.C., and we will be converting 25% of our Sobeys and Safeway stores in the west to FreshCo in markets which are better suited to discount. We will remain on track to open our first FreshCo stores, two in Winnipeg and five in British Columbia in the next few months.

In Ontario, we have historically had a low market share, especially in key urban and suburban markets, like the fast growing GTA. We are now seeing much stronger results in our existing Sobeys, FreshCo and Foodland banners.

And we continue to see improved sales and customer metrics as we convert FreshCo stores to the FreshCo 2.0 model. We are gaining market share in Ontario, even before we factor in the Farm Boy acquisition and the growth we know we will be getting at Farm Boy and Ocado.

The evolved FreshCo 2.0 branding performed so well in our London pilot stores that not only will we be leveraging it in the west but in Ontario as well. We opened our first Greenfield FreshCo store, showcasing the evolved branding in January in Downtown Toronto.

We plan to roll out the rebranding to all of our Ontario FreshCo stores over the next year. Our acquisition of Farm Boy gives us a winning format that will allow us to accelerate our growth in urban and suburban markets in Ontario.

Farm Boy efficiently joined the Empire family partway through the quarter, and the early results are even stronger than we had modeled. The team at Farm Boy is making progress on its growth plan, opening two new stores in the GTA since we closed the transaction on December 10th.

We will continue to build on Farm Boy's industry-leading operational and customer metrics and progress against our plan to double the size of the business in the next five years. Much of the growth will be in the heart of Toronto where Farm Boy is expected to be a homerun.

The combination of Farm Boy's existing real estate pipeline with our Empire real estate prowess will allow us to place Farm Boy stores in key nodes over the next three years. We are really going to cover the city well.

Our Farm Boy strategy plus our game-changing Ocado powered e-commerce solution will position us beautifully to expand our presence in the GTA. We are pleased with the momentum we're seeing in our business.

We continue to improve our execution quarter by quarter and as we lay the strategic building blocks for our future success. But, we are cognizant that we still have a ways to go to extract the Company's full sales and earnings potential.

And with that, over to Mike.

Thanks, Michael. Good afternoon, everyone.

I'll provide some additional color on some key areas, Sunrise progress, gross margin, SG&A, capital expenditures, free cash flow and taxes, and then, I'll end with an update on how IFRS 16 will impact our numbers when the standard is adopted in our first quarter of 2020. Firstly, Project Sunrise is on track, category reset changes, albeit small, began to show up in our stores beginning in February.

We are seeing the start of these savings appear in our gross margin percentage this quarter. As we noted last quarter, we expect most of the fiscal 2019 Sunrise category reset benefits in the fourth quarter.

Strong results in discount and Quebec which do have lower gross margin percentages, again had a small downwards impact on our average gross margin rate. As mentioned, we saw some positive effect of the category resets in the third quarter, most of that store rollout started in the fourth however, and will be ramping up as we implemented in the staged and controlled manner.

Although, as outlined previously, we expect to see tangible results in the fourth quarter. The exact timing and value of these benefits phasing in is highly dependent on our own execution and completing a significant plan without any incremental labor cost or product breakdowns.

We are planning to minimizing such costs, which would in any case, be one-time in nature as we execute on each category. Gross margin dollars increased in line with our stronger sales performance and also from the positive effect of those category reset benefits, coupled with eight weeks of Farm Boy results.

These positive effects were partly offset by store closures previously in Western Canada and lower pharmacy gross margins due to healthcare reform. Sunrise savings were also a positive effect on SG&A this quarter, most notably from our indirect sourcing cost reductions.

There are however some other items in SG&A that have an offsetting effect of these positive Sunrise-related cost reductions. During the quarter, we announced voluntary buyouts to eligible long service Safeway employees in British Columbia.

Buyouts like these provide flexibility and stability for the Company to better manage labor and operational costs as they permanently reduce average wage rates. We have charged the estimated costs of $35 million before tax for these buyouts to SG&A during the quarter.

This equates to about $0.09 per share after tax. The benefit of the lower labor costs related to these buyouts will be reflected as these employees transition out of the business and will enable us to remain competitive in the market.

We also announced plans to close five more stores in BC that will be converted to the FreshCo discount format. We recorded $10 million before tax of costs related to severance, inventory and asset write-downs also to SG&A expense, representing about $0.03 per share after tax.

In total, our adjusted selling and administration expenses as a percent of sales was 23% for the quarter, impacted by all of these significant expenses and also to some extent by the inclusion of Farm Boy whose business model has a higher labor cost. Our labor cost in the quarter has also been impacted by minimum wage increases enacted in Ontario.

Excluding the effect of labor buyouts and store closing expenses, SG&A as a percent of sales for the quarter would have been 22.3%, consistent with the prior year and 21.6% for the year-to-date, a 70 basis-point improvement over last year. We continue to find ways to reduce our SG&A as a percent of sales, and we are so far pleased with the progress that we've made.

With our Farm Boy and FreshCo store announcements this quarter, we think it is helpful to give you an update on our capital expenditure for the rest of fiscal 2019. We believe we are still on track to spend approximately $425 million for fiscal 2019, excluding Farm Boy.

Year-to-date, we have spent approximately $20 million on the FreshCo expansion but then the further $20 million estimated for the fourth quarter. We also expect some significant expenditures related to the Ocado warehouse build and a ramp-up in store renovations and rollout of the new FreshCo branding and store formats in Ontario in the fourth quarter.

Our full-year estimate is dependent on a lot of work being completed on a tight schedule and then maybe some impact on this estimate, if construction schedules are delayed. In addition to this, we expect the Farm Boy capital spend to be approximately $6 million in the fourth quarter.

We are still in the process of confirming our total capital spend and plans for fiscal 2020, and we will formally update our estimates for 2020 when we issue our fourth quarter. However, based on what we know now, we continue to believe that our 2020 capital will be upwards of $500 million, excluding Farm Boy.

We are still working to firm up the fiscal 2020 development schedule with Farm Boy management. And depending on the rate of new store rollout, Farm Boy capital could represent an additional $50 million to $70 million for next year.

Our cash flow generation continues to be strong. This quarter our cash flows from operations were lower than the prior year due to lower distributions from Genstar real estate partnerships and also higher working capital balances.

For the year-to-date, our free cash flow of $380 million reflects the many improvements in our operations that have begun to generate strong recurring cash flow. We expect to sustain and grow this cash performance with a high level of confidence that the Company will return to its investment grade rating in the near future.

The effective income tax rate for the quarter of 22.1% is below our estimated range of 27% to 29%. This was primarily due to higher capital gains on property dispositions and a decrease in tax liabilities related to unrecognized tax benefits.

Taking into account the year-to-date mix of real estate gains and operating earnings, we estimate that the average tax rate for the full year will fall between 26% and 28%. Before I finish, two more points.

Firstly, our partnership with Ocado continues to progress as we bring their game-changing e-commerce solution to Canada. The unfortunate fire experienced at their Andover facility in the UK is not expected to impact the design or the launch timing of our e-commerce platform, which remains on track to begin shipping to customers in the GTA in the spring of 2020.

Second, we do have an update on our IFRS 16, which is in our financial statements and MD&A. This is a new industry-wide leasing standard that will be adopted in our first quarter financial statements beginning on May 5.

This standard will not impact Empire's strategy, business operations or cash flow generation, but it will have a meaningful impact on the presentation of our financial statements and some key metrics. We continue to finalize and validate the key estimates and calculations but we understand this will have a large impact on investor and analyst models and we have provided some early clarity in our third quarter financial statements.

At this time and subject to finalization in the fourth quarter, the expected impact on our balance sheet is a $4.2 billion to $4.5 billion of additional assets, primarily right-of-use assets and an inclusion of $3.6 billion to $3.9 billion of liabilities, which are largely new lease liabilities. A key assumption in arriving at these amounts is the discount rate used.

The rate will be finalized on our transition date, which is May 5, 2019, and any change in discount rates may affect these estimates significantly. In the statement of earnings, current rent expense will be replaced by depreciation on the right-of-use assets and interest expense on the new lease liabilities.

As you can imagine, this will have a material effect on the calculation of metrics such as EBITDA and free cash flow. Once again, however, I’ll stress that these are accounting and measurement changes only and will have no effect on our cash generating ability.

And we do not expect any material change related to debt ratings or financing costs. Also, based on current estimates and available information, we do not expect the application of IFRS 16 to have a material impact on fiscal 2020 earnings per share.

We do intend to host the conference call in the upcoming months to further discuss the impact IFRS 16 adoption on Empire which I suspect will be sold out because as it's so exciting. All-in-all we continue to be very satisfied with the momentum in Empire.

There is still heavy lifting to be done but our execution is getting stronger throughout the whole Company, and we're showing good results. As Michael noted, we continue to make great strides in returning the company to its full earnings potential.

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

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

Good afternoon. With regard to SG&A, and thanks for the color on that, Mike, but didn’t seem like there were any sort of significant new inflationary drivers, just kind of ones that we’ve heard about before.

But, the leverage was more modest than what was reported in the first half of the year. So, is that simply Sunrise benefit’s now playing out and anticipating, and I guess shifting to cost of goods or were there other factors?

And maybe you could just sort of give us a sense of how to think about SG&A growth into Q4 and into fiscal 2020.

I think, the way to answer that is that yes, Sunrise benefits were still significant in the quarter. But, they tend to be a little less even now because they are mostly indirect cost savings and not necessary some of the headcount reductions that we’ve been seeing previously in addition to that.

We did have some cost increases here and there in other cost centers, which consulting a few other items, which are not necessarily indicative of future SG&A levels. Our marketing is up a little bit as we started to support the brand as well.

So, I would say that our intention over the next several years, including fourth quarter and beyond is to continue to drive our SG&A cost down. We think there is still room in those cost centers.

Having said that, as we start to roll out things like FreshCo and some of our new brand promises, we actually do expect to increase things like marketing investment. But, I wouldn't say that there would be a very material impact on our SG&A as a percent of sales.

So, we expect further benefits I think in those cost centers. I wouldn’t say that the third quarter is necessarily indicative of a trend.

Okay, thanks. That’s helpful.

And that sort of segues to a second question, which is, just in terms of organizational capabilities, Michael, I think, you’ve talked about wanting to build the marketing skill set. Are there other areas of the business where you feel like you need to sort of invest over the course of the next 12 to 18 months.

Yes. And I’m really happy -- I didn’t mention in my script today, Sandra Sanderson, I mentioned her last time.

The quick impact she is making across the enterprise is quite astounding actually. The other area where I think that we’re going to be putting a lot of emphasis and we will be talking a lot more is data and analytics.

I have often said that this company -- I was surprised that how much data we had and actually that we were pretty good at using it. But, I think there is a whole shift here that we will see over the next coming couple of years in terms of being able to use analytics to support our business.

And as many of you analysts know as well that we have some innovation up our sleeves as well in terms of being able to run our business and excite our customers and continue to evolve as a company. But, I would say it’s marketing, lot of data analytics and innovation as we go forward would be the areas which we -- you couldn’t really get to in the first couple of years, as much as you’d like to because you’re putting in an infrastructure.

You can’t build on sand as I like to say. We’ve got a really good infrastructure, team’s working well, we are pleased with the development, as Mike and tried to say in the last 15 minutes.

Now, we can go and really get going. At the same time, we are -- Mike and I and the team are quite cognizant about making sure that these Sunrise savings go to the bottom line, and we’ve always said the vast majority will go to the bottom line.

We are not about to start spending all the money that we've been -- that we are going to bank. So, that's the balance that we're having here and the balance will be to return us to the sort of profitability that you as our owners expect from us.

So, very good same store sales number, and I understand that Farm Boy is doing really well. But, is there any material difference, if you want to strip Farm Boy same store sales out of the consolidated same store sales?

Almost de minimis in that short period of a time. We ran in the rest of the business extremely, extremely strong across all the banners across all the regions, as I said.

So no, I mean, they certainly don't hurt your same store sales. But, given the number of stores is mostly around 25 for that period of time, they just don’t overwhelm that.

So, now, the vast, vast majority of that same store sales were from the other stores.

Okay. And when you look at those different regions and the performance, the economy is definitely showing some signs of weakness in certain areas of the country.

Are you seeing any signs of an imminent shift towards discounts in any of your markets?

No, we didn’t. Obviously, we were growing -- we really only at this point until couple months from now have discounted in Ontario.

Discount, as we’ve been saying for a number of quarters now, it’s performing extremely strongly, our FreshCo banner in Ontario. But, we -- with given these sales we saw, we have picked up absolutely no indications of weakness in any region that have affected our performance.

If there was any, then we would have just done better but we can't see it in our numbers.

And then, on the FreshCo rollout into Western Canada, a little bit of a different wording in terms of the timing. I think, last time, you said you are going to have all 12 by the end of the first half and now you are saying in calendar ‘19.

Is this just -- is this intentional or is this reflecting a slight delay or is this just not meaningless?

That was meaningless, Michael. No, that’s not an intention to indicate changes in timing.

But, probably ultimately we may try and just go to calendar years to explain the actual rollout dates, which make most sense to people and that was the major change which we are talking about our calendar ‘19 year as opposed to fiscal.

And can you just clarify? The $35 million in labor buyout charge, does this cover the future additional conversions that you might have in B.C., or is it just for the 10 already announced?

Actually, it’s neither. So, while these two actions that we announced are unlocked and enabled by the labor award in B.C., they are different.

So, the closure of the five stores that will now be converted to FreshCos is where we took the $10 million charge for severance is included in that in addition to some other write-downs et cetera. The labor buyout is for all of our B.C.

employees or eligible ones. And there are two separate initiatives.

In the future, as we convert other stores, other Safeway stores to FreshCo, we will have increased and further expenses related to severances write-downs et cetera for those stores as we progress along the conversion schedule.

And have you given us the capital requirements to convert stores?

We're going to provide better or more specific aggregate numbers for 2020 and in our fourth quarter. But, in terms of -- on a per store basis, which I think is what you're probably asking, it changes as we encounter each new store and we're in the early phases.

But right now, our estimate is that they'll run between $5 million and $6 million per store of capital expenditures.

All right. Thank you.

Thank you, and good afternoon. If I just follow-up on the FreshCo line of questioning, could you speak to beyond these first 12 stores you envisage sort of pace of conversions?

And what outside of managing it prudently will be some of the biggest barriers that helps accelerating the pace of conversions, should you be happy with the initial set of results, which certainly -- that appears to be the read on your commentary?

Yes. When we announced, we said over the next four years, we would convert 65 Sobeys, Safeway stores, predominantly Safeway stores.

And it depends on each quarter how many we'll be doing at a time. But mostly pretty consistent conversion over that time period.

That's about 25% of our Safeway and Sobeys network. And we think that is -- that timeline and that pace of conversion is the prudent one.

Great. Thanks a lot.

If I just switch gears quickly into category resets, could you sort speak to the evolution of the risk profile on these resets. Obviously good early traction here out the gate, but where are you on that sort of the risk continuum so to speak with respect to the resets?

And how should we think about peak risk on the resets to the extent there is peak risk barrier?

It's a good question. I think, in terms of the dollar numbers, peak risk is past, the merchants are -- today have more work to do but they’ve had very productive negotiations with their supplier partners.

We know that that's going to work out and merchants are ahead of that. The last piece of Sunrise, which will go on for a little bit of time here, will be to make those changes in our stores.

Someone very-smart, not me, decided to do it tranche by tranche, so then no to disturb the customers and to not disrupt the store in a material way. That decision is proved to be a very wise one.

And if you shop our stores, you will see different sections disrupting in different ways, but all the customer metrics that we have been watching very carefully are showing that our stores and our supply chain and our merchants are flowing those products through are doing an excellent job. Right now, we’re feeling highly confident about our ability to put these in the stores and that the incredible process our operators put in, the process and disciplines, which are more than any I’d ever seen in my carrier in retail, are working very, very well.

Some minor hiccup but so minor, well below what we ever expected at this point. The only reason I had that just because I’m a conservative person.

I think that this is a lot of work for our stores and merchants right now, and it still is a little -- takes our eye off a little bit in terms of the core business, but less and less with every day that passes. So, you’re hitting -- very confident as we see these tranches go into the stores and very, very pleased with our merchants and operators, as you can tell.

Hi. Thanks for taking my questions.

A few easy ones here. Farm Boy, you helped us with the contribution on the P&L.

Just wondering, it wasn’t profitable on a net income basis, just wondering given the strong margins that we understood that it had, maybe why that’s the case and when you anticipate it’ll be profitable.

The numbers are relatively small number of weeks, no necessarily hugely indicative. But, having been said that, we did pay a strong multiple for the business.

The future accretion will come from both the ongoing and very significant growth rate in the organic business of Farm Boy but predominantly from store expansion. So, we have two new stores that just went in.

There are some start-up costs related to those stores but they’ve been doing it very well and they will now annualize into the numbers. And as we roll out new stores, we expect that net earnings number to become accretive.

Okay. So, just to be clear, was the interest associated with that transaction, did you -- is that in the Farm Boy P&L or is that in the Empire P&L?

It’s in the Farm Boy P&L. I didn’t understand the question fully.

Yes. So, we are allocating all of the debt into the Farm Boy P&L that was used to acquire the business.

Okay. That’s helpful.

In terms of the CapEx associated with Farm Boy, a little bit higher intensity than I probably envisioned. And I know this is a new management team with new rigor around CapEx.

But, just given the multiple paid and given this CapEx, just wondering what controls management has to ensure that this CapEx is productive for shareholders.

Well, virtually, all of that CapEx is new store construction. And honestly, if we could spend more and be comfortable that we could actually ramp all of those stores up from an operational perspective, we do that.

So, we’re in a hurry. And in fact, both the Farm Boy management and ourselves, are pushing hard with our Empire real estate group to see what incremental real estate we could secure or reuse to accelerate that growth curve.

As we did say before, these stores are self funding. And so, the cash generated in the Farm Boy business, we will finance that capital program.

So, oddly enough, if we can find a way to spend more we are going to do that because they are very, very high returns. It’s a very well tried approach.

We know what the stores costs, we know what the switches costs, we know what the layouts are. The Farm Boy management team is very practiced in starting up these stores.

We saw that from our own eyes as we watched the numbers of the last two store builds and store openings. So, yes, we are pretty comfortable with it.

It’s Michael, I'll just add on couple things. We’ve never had a weapon like this to go in urban area like GTA.

This is the most productive sales per square feet in grocery you can have. These are fantastic stores.

And if you haven’t been -- I always put an ad in anything I would say, if you haven’t been down to the Leslie & Lakeshore store, that is one heck of a store. And you are going to see stores like that, as I said blanket the GTA.

So, Mike is absolutely right. We are only constraining the growth because we want to keep that brand strong.

We do not want to grow so fast that we deprive our customers of this fantastic experience and the quality that they come to expect. That’s the constraint.

And Mike is absolutely right, if we could put more up quicker, we do so. But it’s great question, Vishal.

Thank you.

Thanks for that color. And an easy one here.

On the Genstar business, and correct me if I'm wrong, in the past, I believe you indicated that that was winding down. And given the slowing real estate backdrop in Canada, just wanted to get your thoughts on why the value of the real estate partnerships in your materials was revised upward quarter-over-quarter?

Sorry. What was revised upward?

The equity value of those investments related to Genstar was revised up. Maybe it’s a question for offline?

Yes, I'll take it offline. But, I'll answer your first time question, which is, yes, they will take some time to roll out or wind down rather.

But particularly the ones we have in Western Canada are still active residential lot development. So, there is quite a bit of unserviced land, which is still being serviced and which will deliver cash flows for us, at least our share of it for some time into the future, just albeit at lower values.

I just wanted to go to Alberta, a number of retailers have been expressing concerns about weakness of the consumer there for obvious reasons. As you are working on the improvement of your merchandising and marketing, are you gaining the tonnage share in that market or how is that market performing versus some of your other markets?

We don't cut down publicly by province. But, I can tell you that we are seeing improved execution in the stores.

And so, we are very pleased with progress we are making in Alberta.

And with your strong comp store sales, with the momentum we have seen, do you believe your -- based on Nielsen or whatever reference you can use that you are gaining tonnage share in the Canadian market?

You got to be careful. Nielsen measures some things very, very well and the other things you got to be a little more careful, especially on fresh.

So, we look at our own numbers. We know a lot about what's going on in the market.

We look at Nielsen. Our belief is that we are gaining market share now, slowly.

I’m not -- I don’t want to overemphasize it, but we’ve gone from losing a lot of market share to stabilizing to beginning to gain some market share back, which is a big turn in short period of time. So, it gives us a lot of confidence.

And shifting to category resets, obviously you've been very prudent about the pace at which you've been going at this and kind of gaining confidence in the deployment and the minimization of risk. And no change to the expected Sunrise savings in this fiscal year.

So, I assume that we're going to see a fairly material ramp up in the deployment of category resets or do you realize the procurement savings regardless of whether you deploy the category reset?

It's complicated answer. The answer is, we do have to deploy the new planograms in the in-store displays to secure the benefits.

Having said that, there were some upfront payments, we're finalizing negotiations, et cetera. But, the rule of thumb here is, we need to execute them in store, to earn the monies.

And that's -- we have all of the waves scheduled, and we know when we're doing them, and it’s just going to be done on a phased basis. So, the benefits start to pile up, right, as you start to get a critical mass of execution in the stores.

And that's why, as Michael said, I think he used the word, slow amp up. So, it will just get larger every period.

And in fact, I think we have talked about when we first talked about the May 4th a couple of years ago, that we expect the most of the category reset moneys to show up in the third year. And I think, we're actually -- and we didn't break it down and didn't give you all the numbers and all the timing, but we're getting at it faster than we thought we would and maybe a little bit more successfully but there is still a ramp up period.

Sorry. My last question is just on sort of the next round of helping the Company be a better Company, and marketing obviously a focus in terms of messaging the consumer.

And then, in addition to that, whatever changes you might make to private label program. Can you give us some ideas as to how far along you feel you are in those two elements?

And I know you'll be a little bit sensitive about disclosing exact timing. But, can you give us some vagueness in terms of whether we should hold our breadth or not hold our breadth?

Yes, you're right. I'm not going to give you much, you’re going to be really disappointed.

But, I’d like to say that I think we are making a lot of progress on the private label. You're breaking up a little bit, so I think it was private label and marketing you are talking about…

Yes.

Private label, we’re making a lot of progress. And you'll see a lot of change in our stores over the next year.

And in terms of marketing, we have -- in fact, we just -- Sandra was just presenting to our Board, and we had a great presentation in terms of where marketing is going and what actions we're going to take in the short, medium and long term and where we're going to take our brands. So, I think it's early days for Sandra.

But, we already had a head start there, because Lyne had been leading marketing and we were in good shape there. And I think you're going to see some better and better, in fact, I've been looking at some of our marketing programs, plans for the next budgeted fiscal year.

And I'm very, very pleased. But, I'm not going to give any details.

That would ruin the surprise.

You alluded to or you spoke little earlier about sort of the amount of data and how you guys use that. So, I was wondering where you think you are on promotional efficiency, kind of margins that you’re getting on promotions and where would you like to take that, I guess?

So, maybe the first thing we did through capital reset is a deeper analysis in every single category. So, that will be -- that was very helpful for CMs.

So, I think we’re at better place than we were a year ago. So, CMs have a better knowledge on their category and profitability and leverage and everything.

So, the next layer will be too optimize what we did with capital reset and the work has already has started. And I think we’re already seeing good progress by that better knowledge, our sales increased and without investing more money in term of margin rates.

SO, that’s a good progress. And this is what’s coming to future quarters.

That’s really helpful. So, would you say that if you kind of look at the balance of your sales, sort of on shelf price versus promotion.

As you do the reset, are you starting to see sort of that shift that you wanted to drive in terms of better sales on shelf?

We’re just at the beginning of executing reset. So, it’s bit early.

I think it’s this tranche number six we’re executing this week. We have many tranches.

So, we are just at the beginning to conclude something. But so far, no major changes.

Okay. That’s very helpful.

And on the subject of market share and your service estimate that you are gaining tonnage share, who do you think you’re gaining it from or which channel?

I’ll leave it to you to figure that out. But I don’t want to make any more enemies than I already do in this industry.

I think we’re gaining it from a lot of different players honestly. If you think about it for a little while there, we were giving up market share across the country, particularly in the west.

And I think that our competitors, all of them were recipients of that. And I think it’s -- we’re starting to get a little bit of that market share back from all of them across the country.

So, I don’t think it’s any one competitor that we’re targeting or that is weak out there. I think it’s a competitive market and we’re having to fight and earn this tonnage.

And I think, the thing actually I’m proudest of right now is that we’re seeing that sales and tonnage growth and it’s coming earlier than we would have expected. I think it’s just -- it’s plainly good, better execution, a better strategy, and I think that the team’s to be commended for that.

And one final one, if I may. Now that it’s, what, three, almost four months that you’ve owned Farm Boy, what are your sort of the biggest surprises?

And where do you think, other than growing the Farm Boy's footprint itself, what kind of learnings do you think that you can leverage into the existing network, into legacy network?

I think there is -- it's going to be learnings from both sides. I think, that the Farm Boy -- although they have been so successful, we have spent a lot of time with them, and they are very open to learnings from us and we are very open to learnings from them.

I think that their ability to understand the customer experience in urban markets, they are just innate strength on brand and hammering that home, especially in that private label program, and the power of that brand. I mean, we are talking only really two -- three stores now surrounding the GTA area.

And the amount of buzz about these stores and the customer knowledge of this brand is very strong. I think, it's a -- and I used the word weapon before, I think it’s that plus the Ocado will give us a very, very strong sense that we can -- that we will triumph in the GTA and other urban markets.

And I think that what we are seeing now is you can do all you want when you’re acquiring and you’re doing your due diligence. But watching this operation and how they are customer focused, how they build their brand, how they stay focused on what they are trying to do and how they open stores successfully, I got to tell you, I'm learning things and I think our team is learning things.

But it's been -- it’s so far -- and it’s only three months as you point out it’s very smooth. And part of that is that we are not bugging them for $10,000 worth of synergies every day.

This is a growth platform to win in Ontario and in GTA, and that's how we are handling it. In fact, the way we set it up is and the Farm Boy's management comes to us and asks if there are certain synergies or learnings or ways of doing business they ask.

And they have made some certain requests but the emphasis on this side of it is to operate them as a separate company. Remember, we own 88%, management of Farm Boy owns 12% and it is operating beautifully that way so far.

I've got three quick questions here. So, the first one is, revisiting the topic of market share.

And I think, Michael, in your opening comments, you indicated that you are gaining market share in Ontario. And just a couple of things on that.

Is this the first quarter that you've seen share gains in Ontario? And then, secondly, what you attribute -- it's easy to understand how you are gaining share in Western Canada because of the share losses that you had.

But, is it simply the same thing that are leading to gain the share in Ontario, the better execution, et cetera, et cetera?

So, yes, I did -- this is not the first quarter we believe we gained market share in Ontario. It is -- I think, it’s the most material market share growth we’ve seen in Ontario.

And I think it's a lot of things. I think that our FreshCo banner is performing at a level that honestly it’s ever performed at before, that we're seeing customer results and sales, and just a very, very good execution and branding and marketing from our FreshCo division.

And I think that our Foodland division, which we don't talked a lot about and it's a very, very well operated by our dealers in the stores and has a great market presence in mostly, more outside the urban areas is performing well and I think it can even grow. But, some of the biggest surprise we're seeing is Sobeys, Ontario.

And I think it's just a sharper process, it's a better execution in the stores, better in-stock positions, better flyers. And the nice part is, I think we’ve just begun to fight there.

So, I think that there is -- and when I say market share, we're not counting the Farm Boy. We're just gaining market share by buying something.

That's on top of what I'm already talking about. And Farm Boy is going to grow, Ocado is going to grow.

So, Ontario, which has historically been our Achilles’ heel in terms of strength, where it’s something that we targeted two years ago in our strategic plan as we did the GTA. And we're just executing on it and it's early days.

We're not bragging. We're not -- you're going to hear any champagne corks flying around here.

But, I got to tell you, I'm really proud of the inroads we’re making in Ontario but it's across the board.

Okay, excellent. So, just on the Farm Boy and you've referenced Farm Boy several times in this call.

So, you probably answered my question indirectly if not directly. I'm just curious about the two stores that you opened in the quarter in the GTA area, curious whether they opened better than you had anticipated?

Yes. And one -- funny thing about Funny Boy -- and if you remember our first call we ever had, Jeff York said that they didn't have the greatest real estate.

So one of the sites is not the greatest real estate, the other one is pretty good real state. They’re both opened strongly.

And if you look at the one that I've been going into quite a bit lately and is the Leslie & Lakeshore store, which is I hope JL and Jeff don’t get mad at me, but already one of our best performing stores. And if you go in there on a weekend, it is -- you've never seen I think broader demographic of customers in terms of age, which I love to see.

And it is busy and the customers are being served and it’s like they are at Disney World, they are so happy. And so, I believe that given the demographics of Toronto and really the density of Toronto that these stores are going to drive.

And I think that we're more confident about that after seeing the [indiscernible] store, the Oakville store, and especially there is Leslie & Lakeshore store what we can do. I think it’s even I opening to Jeff and JL in terms of the power to brand and how it's resonating.

That product mix through very smart planning by JL and Jeff and just responding to customers, it’s built for these urban geographies.

Okay. Thank you, Michael.

And my final question is on Ocado. So, last week on the Kroger earnings call, the CEO, Rodney McMullen, noted that the time that you signed the agreement with the Ocado, he told them that they were not -- the Kroger was not signing that the partnership they somewhat Ocado has today.

But based on what they think Ocado will be in 3 to 5 years, and I'm just curious whether or not you -- this also gives you a pretty similar of view on Ocado and that the promise of the future on what they can bring is probably as important as what they're able to bring today. And if so, so the which -- what area then we can say exactly but where does Ocado have the chance to even do for your business in future than the initial CFC?

I think, I will answer the first part and kind of obviate a little bit on second part. But, the first part is I couldn’t agree more with Rodney, I couldn’t agree more with Kroger and what they estimated.

When we were making the decision as an executive team and then as our Board made the decision, we knew that this was the best-in-class killer technology in terms of growth for e-commerce and it was unquestionable. The concern that we had to -- not concern but what we were most interested in was, how entrepreneurial where they and would it continue to evolve and be the most innovative because as good as this is, there is always something that would like to beat it.

We’ve come to the conclusion and I think Kroger has come to same conclusion, I guess from what you said that this is one of the most entrepreneurial, innovative company, and that what we build today is outfitted so that it can -- on the supply chain it’s outfitted, so that it can accommodate the innovations that are going to come that Ocado is -- and the reason I won’t answer all your questions is confidential with Ocado, with have certain confidentiality agreements. But, there is a lot of innovation that’s going to put into our supply chain and into the services and algorithms and customer experience, which I think is even more important than the great robust run around in the CFCs.

So, I think that that is why Ocado was successful at the beginning and we’re seeing no slowdown in terms of their innovative spirit. And that’s what got us especially excited about this that this is going to keep generating more efficient ways to do business and more customer friendly ways to do business.

Just back on Farm Boy. And I can't recall, when you announced the acquisition, did you ever provide us with what the comp level is of Farm Boy?

No, I didn’t.

And like, given that it's a new acquisition and important part going forward, can you give us any indication of what this chain comps at?

The comp rates are and what we did say, and I’d test my memory little bit but we said that it comps way in excess of any of our banners. As Michael just said its productivity per square foot is the leader in the market.

So, the comps are in the low -- very low double-digit area on average. But, there is a wide dispersion, depending on whether it’s a mature store or a new store that just opened.

So, not just new stores but internal growth rate is what fills the growth there.

And Michael Medline, I'd like to ask you a question about the FreshCo rollout out at west. And could you maybe talk a little bit about, like how you're going to overcome the issue of -- you're just not going to have a lot of critical mass when you start.

You’re going to have a few stores in B.C., a few stores in Manitoba and you just don't have the critical mass for things like marketing, advertising dollars, the flyer, like how do you manage the chain when its infancy when you just have a few pinpoint stores?

That’s a great question. When we were facing this question two years ago, that was one of the biggest questions we faced.

First of all, we are trying to group the stores as much as we can in tight geographies. So, at the beginning, we are not going to have one in Winnipeg, we’ll have two stores in Winnipeg.

British Columbia is obviously going to be a focal point in certain areas of British Columbia where we group stores. So, one of it was group stores.

The second was, how do you make noise in a market when you are new to the market, when your brand is not well-known, when the great price perception that we should have is not as well known right away. And so even two years ago, we put together plans to overcome that.

And in the next couple of months, we’ll put that into place. At the same time -- two things should be kept in mind.

One is, it's like with any new banner going into new market, it’s going to ramp u. And in all of our modeling it shows it’s ramping up.

Very rare you open up a new banner and it does well right away. We expect this to do well because it’s a good concept that’s needed out there.

But, the other thing that -- while we are ramping up is we are not converting over our best stores, if you know what I mean. So, sometimes we get fixated on just talking about how are Safeway and Sobeys doing out west or how is FreshCo going to do.

I talk about a multipronged approach to turning around the west for a reason. It’s multipronged.

And we’ve been pretty clear on that strategy for almost two years now. And the fact that we are taking out stores which are underperforming and we've been clear on that which are really in discount markets.

So, we’re taking out our underperformers, putting in a lower cost, price fighting, relatively medium box format out there that’s not really there. We think it's going to be very successful.

The key to us is to make a big splash when we go in and then compete and grow our market share. It's not going to come overnight.

But, this is financially and strategically a good thing. But, your question is exactly the right question, exactly on.

And Michael, the last question I had on the category reset, it sounds like some of the categories you’ve touched already can -- if we were to visit a store in Toronto, like where can we look and see the reset in terms of the change of assortment? Is there any particular categories that are done at this point?

Well, if you go and look at paper, you are going to see paper has been reset, cold drinks is reset -- water is reset, analgesics; there is seven or eight. So, I'm giving you some places to look.

If you go on a store, you are going to see signage throughout the store which will help guide you. Some of the signage is going to be the kind of you see in stores all the time.

We are under construction, we are trying to serve you better, we are bringing in better brands, which we are. And so, you will see that signage and that will tell you that -- and you will see some promotions as we clear inventory out of those sections of the store.

So, you will see that. And there will be one or two of those going on at a time in the store.

You'll also see other signage which will announce exciting new changes in a category. And depending when you get there, we'll need to be filling the shelves or it’ll already be filled.

So, I think it's pretty obvious. Actually, for people like you on the line that you will be notice in the store we're under construction or where we're starting to fill in with the new categories.

We are now in our…

Confectionery.

Confectionery, thank you, Pierre. And what comps are we in right this second, Pierre.

Right now, we are doing confectionery.

Confectionery, you’ll see under construction. So, it will be -- so things will be coming out, going in, confectionery depending on which stores, it will be a tiny bit of different timings.

But, all stores across the country are basically on the same week in terms of converting over.

Great. Thank you, Joanna.

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 joined us for our fourth quarter fiscal 2019 conference call on June 27th. Talk soon.